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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the year ended June 30, 1997 Commission File Number: 1-6560
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THE FAIRCHILD CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 34-0728587
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Washington Dulles International Airport
300 West Service Road, P.O. Box 10803
Chantilly, Virginia 20153
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(Address of principal executive offices) (Zip Code)
(703) 478-5800
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(Registrant's Telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of exchange on
Title of each class which registered
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Class A Common Stock, par value
$.10 per share New York and Pacific Stock Exchange
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13 1/8% Subordinated Debentures
due 2006 New York Stock Exchange
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12% Intermediate Subordinated
Debentures due 2001 New York Stock Exchange
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13% Junior Subordinated
Debentures due 2007 New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
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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 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K [ ].
As of September 11, 1997, the aggregate market value of the common
shares (based upon the closing price of these shares on the New York Stock
exchange) of the Registrant held by nonaffiliates was approximately $195.7
million (excluding shares deemed beneficially owned by affiliates of the
Registrant under Commission Rules).
As of September 11, 1997, the number of shares outstanding of each of
the Registrant's classes of common stock were as follows:
Class A common stock, $.10 par value 14,004,317
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Class B common stock, $.10 par value 2,632,516
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DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement for the 1997
Annual Meeting of Stockholders' to be held on November 20, 1997 (the "1997
Proxy Statement"), which the Registrant intends to file within 120 days after
June 30, 1997, are incorporated by reference into Parts III and IV.
THE FAIRCHILD CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED JUNE 30, 1997
PART I Page
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . 12
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to
a Vote of Stockholders . . . . . . . . . . . . . . . . 13
PART II
Item 5. Market for the Company's
Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . 14
Item 6. Selected Financial Data . . . . . . . . . . . . . . . 15
Item 7. Management's Discussion and Analysis
of Results of Operations and
Financial Condition . . . . . . . . . . . . . . . . . 16
Item 8. Financial Statements and
Supplementary Data . . . . . . . . . . . . . . . . . . 25
Item 9. Disagreements on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . 66
PART III
Item 10. Directors and Executive Officers
of the Company . . . . . . . . . . . . . . . . . . . . 66
Item 11. Executive Compensation . . . . . . . . . . . . . . . . 66
Item 12. Security Ownership of Certain
Beneficial Owners and Management . . . . . . . . . . . 66
Item 13. Certain Relationships and
Related Transactions . . . . . . . . . . . . . . . . . 66
PART IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K . . . . . . . . . . 67
PART I
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ITEM 1. BUSINESS
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(a) General Development of Business
The Fairchild Corporation (the "Company") was incorporated in October
1969, under the laws of the State of Delaware. The Company changed its name
from Banner Industries, Inc. to The Fairchild Corporation on November 15,
1990. The Company is a holding company which owns all of the issued and
outstanding stock of RHI Holdings, Inc. ("RHI"), and through RHI all of the
issued and outstanding stock of Fairchild Holding Corporation ("FHC").
Through RHI, the Company is the majority stockholder of Banner Aerospace,
Inc. ("Banner").
The Company's principal operations are primarily conducted in three
distinct business units: Aerospace Fasteners, Aerospace Distribution, and
Technology Products. The Aerospace Fasteners unit designs, manufactures and
markets high performance, specialty fastening systems, primarily for
aerospace applications. The Aerospace Distribution unit is a leading
international distributor which provides a wide range of aircraft parts and
related support services. The Technology Products unit designs, manufactures,
and markets high performance production equipment and systems required for
the manufacture of semiconductor chips, compact discs, and flat panel
displays. For a comparison of the sales of each of the Company's business
segments for each of the last three fiscal years, see Item 7, "Management's
Discussion and Analysis of Results of Operations and Financial Condition",
which is herein incorporated by reference.
The Company also owns a significant equity interest in Shared
Technologies Fairchild Inc. ("STFI"), which provides telecommunications
services and systems domestically, and Nacanco Paketleme ("Nacanco"), which
manufactures customized cans for the beverage industry in Turkey.
Recent Developments
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Recent developments of the Company are incorporated herein by reference
from "Recent Developments and Significant Business Combinations" included in
Item 7 "Management's Discussion and Analysis of Results of Operations and
Financial Condition".
(b) Financial Information about Business Segments
The Company's business segment information is incorporated herein by
reference from Note 21 of the Company's consolidated financial statements
included in Item 8, "Financial Statements and Supplementary Data".
(c) Narrative Description of Business Segments
Aerospace Fasteners
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The Company, through its Aerospace Fasteners segment, is a leading
worldwide manufacturer and supplier of fastening systems used in the
construction and maintenance of commercial and military aircraft. The
Aerospace Fasteners segment accounted for 36.4% of total Company sales for
the year ended June 30, 1997.
Products
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In general, aerospace fasteners produced by the Company are used to join
materials in applications that are not of themselves critical to flight.
Products range from standard aerospace screws, to more complex systems that
fasten airframe structures, and sophisticated latching or quick disconnect
mechanisms that allow efficient access to internal parts which require
regular servicing or monitoring. The Aerospace Fasteners segment also
manufactures and supplies fastening systems used in non-aerospace industrial
and electronic niche applications. The Aerospace Fasteners segment produces
and sells products under various trade names and trademarks including Voi-
Shan7 (fasteners for aerospace structures), Screwcorp7 (standard externally
threaded products for aerospace applications), RAM7 (custom designed
mechanisms for aerospace applications), Camloc7 (components for the
industrial, electronic, automotive and aerospace markets), and Tridair7 and
Rosan7 (fastening systems for highly-engineered aerospace, military and
industrial applications).
Principal product lines of the Aerospace Fasteners segment include:
Standard Aerospace Airframe Fasteners - These fasteners consist of
standard externally threaded fasteners used in non-critical airframe
applications on a wide variety of aircraft. These fasteners include Hi-
Torque Speed Drive7, Tri-Wing7, Torq-Set7, Phillips7 and Hex Heads7.
Commercial Aerospace Structural and Engine Fasteners - These fasteners
consist of more highly engineered, permanent or semi-permanent fasteners used
in non-critical but more sophisticated airframe and engine applications,
which could involve joining more than two materials. These fasteners are
generally engineered to specific customer requirements or manufactured to
specific customer specifications for special applications, often involving
exacting standards. These fasteners include Hi-Lok7, Veri-Lite7, Eddie-
Bolt72 and customer proprietary engine nuts.
Proprietary Products and Fastening Systems - These very highly
engineered, proprietary fasteners are designed by the Company for specific
customer applications and include high performance structural latches and
hold down mechanisms. These fasteners are usually proprietary in nature and
are used primarily in either commercial aerospace or military applications.
These fasteners include Visu-Lok7, Composi-Lok7, Keen-serts7, Mark IVJ,
FlatbeamJ and RinglockJ.
Highly Engineered Fastening Systems for Industrial Applications - These
highly engineered fasteners are designed by the Company for specific niche
applications in the electronic, automotive and durable goods markets and are
sold under the Camloc7 trade name.
Sales and Markets
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The products of the Aerospace Fasteners segment are sold primarily to
domestic and foreign original equipment manufacturers ("OEMs"), and to the
maintenance and repair market through distributors. Sixty-six percent of its
sales are domestic. Major customers include original equipment manufacturers
("OEMs") such as Boeing, McDonnell Douglas and Airbus, and their
subcontractors, as well as major distributors such as Burbank Aircraft
Supply, Special-T and Wesco. Recently, OEMs have significantly increased
their production levels. In addition, OEMs have implemented programs to
reduce inventories and pursue just-in-time relationships. This has allowed
parts distributors to significantly expand their business due to their
ability to better meet OEM objectives. In response, the Company, which
formerly supplied the OEMs directly, is expanding efforts to provide parts
through distributors, by establishing master distributorship agreements, with
Special-T, Wesco and others. No single customer accounts for more than 10%
of the Company's consolidated sales.
Products are marketed by a direct sales force team, which coordinates
efforts with an internal technical sales force team. The direct sales force
team is organized by customer and region. The internal sales force is
organized by facility and product range and is focused on servicing customers
needs, identifying new product applications, and obtaining the approval of
new products. All the Company's products are marketed through centralized
advertising and promotional activities.
Revenues in the Aerospace Fasteners segment bear a strong relationship
to aircraft production. As OEMs searched for cost cutting opportunities
during the aerospace industry recession, parts manufacturers, including the
Company, accepted lower-priced and/or smaller orders to maintain market
share, at lower profit margins. However, during the last two years, this
situation has improved as build rates in the aerospace industry have
increased and resulted in capacity constraints. As lead times have
increased, the Company has been able to negotiate contracts with its major
customers at more favorable pricing as well as larger minimum lot sizes that
are more economic to manufacture. In addition, the Company has eliminated
"make and hold" contracts under which large volume buyers would require
current production of parts for long-term unspecified dates of delivery.
Overall, existing backlog is anticipated to result in higher margins due to
larger and more efficient lot sizes.
Fasteners also have applications in the automotive/industrial markets,
where numerous special fasteners are required (such as engine bolts, wheel
bolts and turbo charger tension bolts). The Company is actively targeting
the automotive market as a hedge against any potential downturn in the
aerospace industry.
Manufacturing and Production
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The Aerospace Fasteners segment has seven primary manufacturing
facilities, of which three are located in the United States and four are
located in Europe. Each facility has virtually complete production
capability, and subcontracts only those orders which exceed capacity. Each
plant is designed to produce a specified product or group of products,
determined by production process involved and certification requirements. The
Company's largest customers have recognized its quality and operational
controls by conferring D1-9000A status at all of its U.S. facilities, and D1-
9000 status at all of its European facilities. All of its facilities are
"preferred suppliers" and have received all SPC and NADCAP approvals from
OEMs. The Company is the first and only aerospace fastener manufacturing
company with all facilities holding ISO-9000 approval.
The Company has a fully operational modern information system at all of
its U.S. facilities and will expand this information system to all its
European operations in Fiscal 1998. The new system performs detailed and
timely cost analysis of production by product and facility. Updated MIS
systems also help the Company to better service its customers. OEMs require
each product to be produced in a OEM-qualified/OEM-approved facility.
Competition
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Despite intense competition in the industry, the Company remains the
dominant manufacturer of aerospace fasteners. The worldwide aerospace
fastener market is estimated to be $1.3 billion (before distributor resales).
The Company holds approximately 20% of the market and competes with SPS
Technologies, Hi-Shear, and Huck, which the company believes hold
approximately 13%, 11% and 10% of the market, respectively. In Europe, its
largest competitors are Blanc Aero and Southco Fasteners.
The Company competes primarily in the highly-engineered "systems"
segment where its broad product range allow it to more fully serve each OEM
and distributor. The Company's product array is diverse and offers customers
a large selection to address various production needs. In addition, roughly
45% of the Company's output is unique or is in a market where the Company has
a small number of competitors. The Company seeks to maintain its
technological edge and competitive advantage over its competitors, and has
historically demonstrated its innovative production methods and new products
to meet customer demands at fair price levels.
Aerospace Distribution
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The Company increased its ownership of Banner to a majority interest
level in February 1996. The Company, through Banner (its Aerospace
Distribution segment), distributes a wide variety of aircraft parts, which it
carries in inventory. In addition to selling products that it has purchased
on the open market, Banner also acts as a non-exclusive, authorized
distributor of many different aerospace related product lines. No single
distributor arrangement is material to the Company's financial condition.
Through Banner, the Aerospace Distribution segment accounted for 55.8% of
total Company sales in Fiscal 1997.
Products
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Banner believes it is the world's largest independent stocking
distributor of aircraft hardware, including bearings, nuts, bolts, screws,
rivets and other types of fasteners that are used on aircraft. Banner
purchases its inventory of hardware principally from manufacturers. An
extensive inventory of products and a quick response time are essential in
providing service to its customers. Another key factor in selling to its
customers is Banner's ability to maintain a system that provides traceable
parts back to the manufacturer.
Products of the Aerospace Distribution segment are divided into three
groups: hardware, rotables and engines. Hardware includes bearings, nuts,
bolts, screws, rivets and other types of fasteners. Rotables include flight
data recorders, radar and navigation systems, instruments, landing gear and
hydraulic and electrical components. Engines include jet engines and engine
parts for use on both narrow and wide body aircraft and smaller engines for
corporate and commuter aircraft. Banner provides a number of services such
as immediate shipment of parts in aircraft-on-ground situations. The
Aerospace Distribution segment also provides products to OEMs in the
aerospace industry under just-in-time and inventory management programs.
Banner also buys and sells commercial aircraft from time to time.
Hardware is purchased new from manufacturers, but may also be purchased
from other distributors. Hardware is sold only in new condition. Rotable
parts are sometimes purchased as new parts, but are generally purchased as
used parts which are then overhauled for the Company by outside contractors,
including the original manufacturers and FAA-licensed facilities. Rotables
are sold in a variety of conditions such as new, overhauled, serviceable and
"as is". Rotables may also be exchanged instead of sold. An exchange occurs
when an overhauled aircraft part in inventory is exchanged for a used part
from the customer and the customer is charged an exchange fee plus the actual
cost to overhaul the part. Engines and engine components are sold "as is",
overhauled or disassembled for resale as parts.
Sales and Markets
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Subsidiaries of the Aerospace Distributions segment sell their products
in the United States and abroad to most of the world's commercial airlines
and to air cargo carriers, as well as many OEMs, other distributors, fixed-
base operators, corporate aircraft operators and other aerospace and non-
aerospace companies. Approximately 70.7% of its sales are to domestic
purchasers, some of whom may represent offshore users.
The Aerospace Distributions segment markets its products and services
through direct sales forces, outside representatives and, for some product
lines, overseas sales offices. Sales in the aviation aftermarket depend on
price, service, quality and reputation. The Aerospace Distribution segment's
business does not experience significant seasonal fluctuations nor depend on
a single customer. No single customer accounts for more than 10% of the
Company's consolidated revenue.
Competition
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The hardware product group competes with OEMs such as Boeing, which
supports the fleet of Boeing-produced aircraft; fastener manufacturers, as
well as independent distributors such as Wesco Aircraft Hardware Corp., M&M
Aerospace Hardware, Tri-Star Aerospace, Inc. and many other large and small
companies. Banner believes it generally has a price advantage over
manufacturers in the smaller quantities that it usually deals, and can
generally provide more expeditious service. In the rotable group, the major
competitors are AAR Corp., Air Ground Equipment Services ("AGES"), Aviation
Sales Company, The Memphis Group and other large and small companies in a
very fragmented industry. The major competitors for Banner's engine group
are OEMs such as General Electric Company and Pratt and Whitney, as well as
the engine parts division of AAR Corp., AGES, and many smaller companies.
Technology Products
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Acquired by the Company in June 1994, Fairchild Technologies ("FT") is
a global organization that manufactures, markets and services capital
equipment for recordable compact disc ("CD-R") and advanced semiconductor
manufacturing. FT's products are used worldwide to produce CD-Rs, CDs and CD-
ROMs, as well as integrated circuits for the data processing, communications,
transportation, automotive and consumer electronic industries, as well as for
the military.
Products
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FT is a leader in microlithography manufacturing in Europe and has four
product lines, the first being equipment for wafer microlithography
processing. This includes the mainstay Series 6000 Flexible Wafer Process
Line, consisting of lithographic processing systems with flexible material
flow, modular design and high throughput, and the recently designed Falcon
Modular Microlithography System for 0.25 micron (65/256 Mbit DRAM) device
manufacturing. The Falcon system has a fully modular design and is
expandable to accommodate expected technological advancements and specific
customer configurations.
FT has combined new and proven technology and a number of leading edge
components and systems in compact disc processing to recently develop its
Compact Disc Recordable ("CD-R10X") manufacturing system. The CD-R10X system
is a state of the art design for producing cost effective recordable CDs by
combining a high quality injection molding machine with scanning, inspection,
and pneumatic handling systems.
A third line is modular process equipment for use by the fabricators of
liquid crystal displays. FT supplies advanced modular solutions with high
throughput, small footprint and minimum cost of ownership. FT is also a
leading manufacturer of photolithography processing equipment for photomask
and thinfilm products.
FT specializes in providing system solutions, and in coating,
developing, priming, etching, stripping, cleaning and thermal processing of
wafers, substrates and related semiconductor products.
Sales and Markets
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With a strong base of controls/clean room technology and
software/services engineering, FT is able to provide systems with multiple
modular designs for a variety of customer applications. Today, more than
1,000 FT wafer production systems are in operation worldwide. Approximately
60% of the Company's Fiscal 1997 business was derived from wafer related
products and services. The remaining 40% was divided between LCD and CD
related systems, products, and services. Major customers in the wafer
product line include Motorola, Samsung, Siemens, GEC Plessey, Texas
Instruments, National Semiconductor, Macronix, and Erso. Other major
customers include Philips and Litton for the LCD product line, Sonopress
(Bertelsmann), and Krauss Maffei for the CD product line and Hyundai, NEC and
Canon for the photomask product line. Approximately 76.3% of FT's sales were
to foreign customers.
Manufacturing and Production
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FT has two manufacturing facilities consisting of Fairchild Technologies
GmbH, located in Vaihingen, Germany and Fairchild Technologies USA, Inc.
located in Fremont, California.
Competition
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The wafer product line compete with Tokyo Electron, Dai Nippon Screen
and the Silicon Valley Group. Competitors in the CD product line consist of
Robi Systems, Leybold and Marubeni. Competition in the photomask product
line is provided by Mitsubishi Toyo, Tasmo and Solid State Equipment.
Communication Services
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On March 13, 1996, the Company's Fairchild Communications Services
Company ("FCSC") was merged with STI. As a result of the Merger, the Company
is accounting for its investment in STFI using the equity method. Prior to
March 13, 1996, the Company consolidated the results of FCSC.
Other Operations
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Other operations consists primarily of two distinct companies operating
under the trade names Fairchild Gas Springs Division ("Gas Springs") and
Fairchild Scandinavian Bellyloading Company ("SBC").
A Fiscal 1995 start-up operation, Gas Springs manufactures gas load
springs and other devices used in raising, lowering or moving of heavy loads.
Its products have numerous consumer and industrial applications, including in
fitness equipment, sunbeds, furniture, automotive, and agricultural and
construction equipment.
SBC produces a sliding carpet loading system for installation in the
cargo area of commercial aircraft. SBC was recently sold (see Note 2 in Item
8, "Financial Statements and Supplementary Data").
Foreign Operations
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The Company's operations are located primarily in the United States and
Europe. Inter-area sales are not significant to the total revenue of any
geographic area. Export sales are made by U.S. subsidiaries and divisions to
customers in non-U.S. countries, whereas foreign sales are made by the
Company's non-U.S. subsidiaries. For the Company's sales results by
geographic area and export sales, see Note 22 of the Company's consolidated
financial statements included in Item 8, Financial Statements and
Supplementary Data.
Major Customers
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No single customer accounted for more than 10% of consolidated sales in
any of the Company's business segments for the year ended June 30, 1997.
Backlog of Orders
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Backlog is significant to all the Company's operations, due to long-term
production requirements of its customers. The Company's backlog of orders as
of June 30, 1997 in the Aerospace Fasteners segment, Aerospace Distribution
segment, and Fairchild Technologies amounted to $195.7 million, $90.9
million, and $63.1 million, respectively, with a "Book-to-Bill" ratio of 1.3,
1.1, and 1.8, respectively. The Company anticipates that approximately 94.8%
of the aggregate backlog at June 30, 1997 will be delivered by June 30, 1998.
Suppliers
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The Company does not consider itself to be materially dependent upon any
one supplier, but is dependent upon a wide range of subcontractors, vendors
and suppliers of materials to meet its commitments to its customers.
Research and Patents
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The Company's research and development activities have included: applied
research; development of new products; testing and evaluation of, and
improvements to existing products; improvements in manufacturing techniques
and processes; development of product innovations designed to meet government
safety and environmental requirements; and development of technical services
for manufacturing and marketing. The Company's sponsored research and
development expenditures amounted to $7.8 million, $.1 million, and $1.0
million for the years ended June 30, 1997, 1996, and 1995, respectively. The
Company owns patents relating to the design and manufacture of certain of its
products and is a licensee of technology covered by the patents of other
companies. The Company does not believe that any of its business segments
are dependent upon any single patent.
Personnel
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As of June 30, 1997, the Company had approximately 3,900 employees.
Approximately 5% of these employees were covered by collective bargaining
agreements. The Company believes that its relations with its employees are
good.
Environmental Matters
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A discussion of Environmental Matters is included in Note 20 to the
Company's Consolidated Financial Statements, included in Item 8, "Financial
Statements and Supplementary Data" and is herein incorporated by reference.
ITEM 2. PROPERTIES
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As of June 30, 1997, the Company owned or leased properties totaling
approximately 1,644,000 square feet, approximately 831,000 square feet of
which was owned and 813,000 square feet was leased. The Aerospace Fasteners
segment's properties consisted of approximately 632,000 square feet, with
principal operating facilities of approximately 516,000 square feet
concentrated in Southern California and Germany. The Aerospace Distribution
segment's properties consisted of approximately 703,000 square feet, with
principal operating facilities of approximately 473,000 square feet located
in California, Florida, Missouri, Texas and Utah. Corporate and Other
operating properties consisted of approximately 117,000 square feet, with
principal operating facilities of approximately 82,000 square feet located in
California and Germany. The Company owns its corporate headquarters at
Washington-Dulles International Airport.
The Company has several parcels of property which it is attempting to
market, lease and/or develop, including: (i) a sixty-eight acre parcel
located in Farmingdale, New York, (ii) a six acre parcel in Temple City,
California, (iii) an eight acre parcel in Chatsworth, California, and (iv)
several other parcels of real estate, primarily located throughout the
continental United States.
The following table sets forth the location of the larger properties
used in the continuing operations of the Company, their square footage, the
business segment or groups they serve and their primary use. Each of the
properties owned or leased by the Company is, in management's opinion,
generally well maintained, is suitable to support the Company's business and
is adequate for the Company's present needs. All of the Company's occupied
properties are maintained and updated on a regular basis.
Owned or Square Business Segment/ Primary
Location Leased Footage Group Use
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Torrance, California Owned 284,000 Aerospace Fasteners Manufacturing
Carrollton, Texas Leased 173,000 Aerospace Distribution Distribution
Sun Valley, California Leased 143,000 Aerospace Distribution Distribution
City of Industry, California Owned 140,000 Aerospace Fasteners Manufacturing
Chantilly, Virginia Owned 125,000 Corporate Office
West Valley City, Utah Owned 81,000 Aerospace Distribution Distribution
Suffield, Connecticut Owned 66,000 Aerospace Distribution Distribution
Lakeland, Florida Leased 65,000 Aerospace Distribution Distribution
Ft. Lauderdale, Florida Leased 57,000 Aerospace Distribution Distribution
El Segundo, California Leased 51,000 Aerospace Distribution Distribution
Santa Ana, California Owned 50,000 Aerospace Fasteners Manufacturing
Earth City, Missouri Leased 50,000 Aerospace Distribution Distribution
Vaihingen Germany Leased 49,000 Technology Products Manufacturing
Kelkheim, Germany Leased 42,000 Aerospace Fasteners Manufacturing
Fremont, California Leased 31,000 Technology Products Manufacturing
Information concerning long-term rental obligations of the Company at
June 30, 1997, is set forth in Note 19 to the Company's consolidated
financial statements, included in Item 8, "Financial Statements and
Supplementary Data", and is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
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A discussion of legal proceedings is included in Note 20 to the
Company's Consolidated Financial Statements, included in Item 8, "Financial
Statements and Supplementary Data" and is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
- --------------------------------------------------------
None.
PART II
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ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
- ----------------------------------------------------------------------
MATTERS
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(a) Market Information
The Company's Class A Common Stock is traded on the New York Stock
Exchange and Pacific Stock Exchange under the symbol FA. The Company's Class
B Common Stock is not listed on any exchange and is not publicly traded.
Class B Common Stock can be converted to Class A Common Stock at any time.
Information regarding the quarterly price range of the Company's Class
A Common Stock is incorporated herein by reference from Note 23 of the
Company's consolidated financial statements included in Item 8 Financial
Statements and Supplementary Data.
(b) Holders
The Company had approximately 1,300 and 66 record holders of its Class
A and Class B Common Stock, respectively, at September 11, 1997.
(c) Dividends
The Company's current policy is to retain earnings to support the growth
of its present operations and to reduce its outstanding debt. Any future
payment of dividends will be determined at the discretion of the Company's
Board of Directors and will depend on the Company's financial condition,
results of operations and restrictive covenants from the Company's indentures
and credit agreements. At June 30, 1997, the Company is restricted from
paying dividends. (See Note 10 of the Company's consolidated financial
statements included in Item 8 Financial Statements and Supplementary Data).
(d) Sale of Unregistered Securities
On April 25, 1997, the Company issued warrants to purchase 100,000
shares of Class A Common Stock, at $12.25 per share, to Dunstan Ltd. as
incentive remuneration for the performance of certain investment banking
services. The warrants are earned on a pro-rata basis over a six-month
period ending October 31, 1997. The warrants become exercisable on November
1, 1997 and expire on November 8, 2000. The warrants were sold in reliance
of the private placement exemptions under Section 4(2) of the Act.
Stinbes Limited (an affiliate of Jeffrey Steiner) holds a warrant
(originally acquired by Stinbes Limited on January 4, 1989) to purchase
375,000 shares of Class A or Class B Common Stock, at $7.67 per share. The
exercise period was due to expire on March 13, 1997. Effective as of
February 21, 1997, the Company approved a continuation of the warrant, with
the following modifications: (i) the exercise period was extended to March
13, 2002, (ii) the exercise price was increased by two tenths of one cent
($.002) for each day subsequent to March 13, 1997, but fixed at $7.80 per
share after June 30, 1997, and (iii) the exercise period was modified to
provide that the warrant may not be exercised except within the following
window periods: (a) within 365 days after the merger of STFI with AT&T
Corporation, MCI Communications, Worldcom Inc., Tel-Save Holdings,
Inc., or Teleport Communications Group Inc., (b) within 365 days after
a change of control of the Company, as defined in the FHC Credit Agreement,
or (c) within 365 days after a change of control of Banner, as defined in
the Banner Credit Agreement. In no event may the warrant be exercised after
March 13, 2002.
ITEM 6. SELECTED FINANCIAL DATA
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Five-Year Financial Summary
(In thousands, except per share data)
For the years ended June 30, 1997 1996 1995 1994 1993
- --------------------------- ---------- ---------- ---------- ---------- ---------
Summary of Operations:
Net sales........................ $ 738,460 $ 500,810 $ 365,550 $ 277,646 $315,118
Gross profit..................... 205,123 116,891 65,703 50,281 62,241
Operating income (loss).......... 30,517 5,445 (13,419) (30,362) (14,907)
Net interest expense............. 47,798 59,040 67,716 69,676 70,338
Earnings (loss) from continuing
operations..................... 1,331 137,370 (47,914) 13,594 (54,930)
Earnings (loss) per share from
continuing operations:
Primary...................... .08 8.28 (2.97) .84 (3.41)
Fully diluted................ .08 8.03 (2.97) .84 (3.41)
Balance Sheet Data:
Total assets..................... $1,067,333 $1,009,938 $ 850,294 $ 866,621 $941,675
Long-term debt, less current
maturities..................... 416,922 368,589 509,715 522,406 566,491
Redeemable preferred stock of
subsidiary..................... -- -- 16,342 17,552 17,732
Stockholders' equity............. 229,625 231,168 40,180 69,494 53,754
per outstanding common share... 13.81 14.10 2.50 4.32 3.34
The results of Banner Aerospace, Inc. are included in the periods since
February 25, 1996, when Banner became a majority-owned subsidiary. Prior to
February 25, 1996, the Company's investment in Banner was accounted for using
the equity method. The nonrecurring gain resulting from the merger of Fairchild
Communications Services Company into Shared Technologies Inc. is included in the
Fiscal 1996 results. Fiscal 1994 includes the gain on the sale of Rexnord
Corporation stock. These transactions materially affect the comparability
of the information reflected in the selected financial data.
ITEM 7. MANAGEMENT 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
Corpration. RHI Holdings, Inc. ("RHI") is a direct subsidiary of the
Company. RHI is the owner of 100% of Fairchild Holding Corp. ("FHC") and the
majority owner of Banner Aerospace, Inc. ("Banner"). The Company's principal
operations are conducted through RHI and FHC. The Company also holds
significant equity interests in Shared Technologies Fairchild Inc. ("STFI")
and Nacanco Paketleme ("Nacanco").
CAUTIONARY STATEMENT
Certain statements in the financial discussion and analysis by
management contain forward-looking information that involves risk and
uncertainty, including current trend information, projections for deliveries,
backlog, and other trend projections. Actual future results may differ
materially depending on a variety of factors, including product demand;
performance issues with key suppliers; customer satisfaction and
qualification issues; labor disputes; governmental export and import
policies; worldwide political stability and economic growth; and legal
proceedings.
RECENT DEVELOPMENTS AND SIGNIFICANT BUSINESS COMBINATIONS
In January 1997, Banner, through its subsidiary, Dallas Aerospace, Inc.,
acquired PB Herndon Company ("PB Herndon") in a business combination
accounted for as a purchase. PB Herndon is a distributor of specialty
fastener lines and similar aerospace related components. The total cost of
the acquisition was $16.0 million, which exceeded the fair value of the net
assets of PB Herndon by approximately $3.5 million. The excess is being
amortized using the straight-line method over 40 years.
In February 1997, the Company completed a transaction (the "Simmonds
Acquisition") pursuant to which the Company acquired common shares and
convertible debt representing an 84.2% interest, on a fully diluted basis, of
Simmonds S.A. ("Simmonds"). The Company initiated a tender offer to purchase
the remaining shares and convertible debt held by the public. By Fiscal
year-end, the Company had purchased, or placed sufficient cash in escrow to
purchase, all the remaining shares and convertible debt of Simmonds. The
total purchase price of Simmonds, including the assumption of debt, was
approximately $62.0 million, which the Company funded with available cash.
The Company recorded approximately $13.0 million in goodwill as a result of
this acquisition. Simmonds is one of Europe's leading manufacturers and
distributors of aerospace and automotive fasteners.
On June 30, 1997, the Company sold all the patents of Fairchild
Scandinavian Bellyloading Company ("SBC") to Teleflex Incorporated
("Teleflex") for $5.0 million, and immediately thereafter sold all the stock
of SBC to a wholly-owned subsidiary of Teleflex for $2.0 million. The
Company may also receive an additional amount of up to $7.0 million based on
future net sales of the patented products and services. In Fiscal 1997, the
Company recorded a $2.5 million nonrecurring gain as a result of these
transactions.
The Company, RHI and Fairchild Industries, Inc. ("FII"), the Company's
former subsidiary, entered into an Agreement and Plan of Merger dated as of
November 9, 1995 (as amended, the "Merger Agreement") with Shared
Technologies Inc. ("STI"). On March 13, 1996, in accordance with the Merger
Agreement, STI succeeded to the telecommunications systems and services
business operated by the Company's Fairchild Communications Services Company
("FCSC"). The transaction was effected by a Merger of FII with and into STI
(the "Merger") with the surviving company renamed STFI. Prior to the Merger,
FII transferred all of its assets to, and all of its liabilities were assumed
by FHC, except for the assets and liabilities of FCSC, and $223.5 million of
FII's existing debt and preferred stock. As a result of the Merger, the
Company received shares of Common Stock and Preferred Stock of STFI,
representing approximately a 41% ownership interest in STFI.
On February 22, 1996, pursuant to the Asset Purchase Agreement dated
January 26, 1996, the Company, through its subsidiaries, completed the sale
of certain assets, liabilities and the business of the D-M-E Company ("DME")
to Cincinnati Milacron Inc. ("CMI"), for a sales price of approximately
$244.3 million, as adjusted. The sales price consisted of $74.0 million in
cash, and two 8% promissory notes in the aggregate principal amount of $170.3
million (together, the "8% CMI Notes"). On July 29, 1996, CMI paid in full
the 8% CMI Notes.
On January 27, 1996, FII completed the sale of Fairchild Data
Corporation ("Data") to SSE Telecom, Inc. ("SSE") for book value of
approximately $4.4 million and 100,000 shares of SSE's common stock valued at
$9.06 per share, or $.9 million, at January 26, 1996, and warrants to
purchase an additional 50,000 shares of SSE's common stock at $11.09 per
share.
Accordingly, DME and Data have been accounted for as discontinued
operations. The combined net sales of DME and Data totaled $108.1 million
(through January 26, 1996) and $180.8 million for Fiscal 1995. Net earnings
from discontinued operations were $9.2 million (through January 26, 1996) and
$14.0 million for Fiscal 1995.
Effective February 25, 1996, the Company completed the transfer of Harco
to Banner in exchange for 5,386,477 shares of Banner common stock. The
exchange has increased the Company's ownership of Banner common stock from
approximately 47.2% to 59.3%, resulting in the Company becoming the majority
shareholder of Banner. Accordingly, the Company has consolidated the results
of Banner since February 25, 1996. In June 1997, the Company purchased $28.0
million of newly issued Series A Convertible Paid-in-Kind Preferred Stock of
Banner. The Company now controls 64.0% of Banner's voting stock. Banner is
a leading international supplier to the aerospace industry as a distributor,
providing a wide range of aircraft parts and related support services.
RESULTS OF OPERATIONS
The Company currently reports in two principal business segments:
Aerospace Fasteners and Aerospace Distribution. The Company consolidated pre
March 13, 1996 operating results from the Communications Services segment
and, effective February 25, 1996, began to consolidate the operating results
of the Aerospace Distribution segment. The results of Fairchild Technologies
("FT"), together with the results of Gas Springs and SBC are included in
Corporate and Other. The following table illustrates the historical sales
and operating income of the Company's operations for the past three years.
For the years ended June 30,
(In thousands) --------------------------------
1997 1996 1995
-------- -------- --------
Sales by Segment:
Aerospace Fasteners............... $269,026 $218,059 $215,364
Aerospace Distribution (a)........ 411,765 129,973 --
Communications Services (b)....... -- 91,290 108,710
Corporate and Other(e)............ 72,882 67,330 41,476
Eliminations (c).................. (15,213) (5,842) --
------- ------- -------
Sales............................... $738,460 $500,810 $365,550
======= ======= =======
Operating Income (Loss) by Segment:
Aerospace Fasteners (d)........... $ 17,390 $ 135 $(11,497)
Aerospace Distribution (a)........ 30,891 5,625 --
Communications Services (b)....... -- 14,561 18,498
Corporate and Other (e)........... (17,764) (14,876) (20,420)
------- ------- -------
Operating income (loss)............. $ 30,517 $ 5,445 $(13,419)
======= ======= =======
(a) Effective February 25, 1996, the Company became the majority shareholder of
Banner Aerospace, Inc. and, accordingly, began consolidating their results as of
that date.
(b) Effective March 13, 1996, the Company began recording its investment in the
Communications Services segment using the equity method.
c) Represents intersegment sales from the Aerospace Fasteners segment to the
Aerospace Distribution segment.
(d) Includes restructuring charges of $2.3 million in Fiscal 1996.
(e) Includes sales from Fairchild Technologies of $57.7 million, $60.3 million,
and $38.0 million in 1997, 1996 and 1995, respectively, and gross margin from
Fairchild Technologies of $23.8 million, $20.8 million, and $11.1 million,
respectively.
The following unaudited pro forma table illustrates sales and operating
income of the Company's operations by segment, on a pro forma basis, as if
the Company had operated in a consistent manner for the past three years. The
pro forma results are based on the historical financial statements of the
Company, FCSC and Banner, giving effect as though (i) the Merger of FCSC,
(ii) the transfer of Harco from the Aerospace Fasteners Segment to the
Aerospace distribution segment, and (iii) the consolidation of Banner, had
been in effect since the beginning of each period. The pro forma information
is not necessarily indicative of the results of operations that would
actually have occurred if the transactions had been in effect since the
beginning of each period, nor is it necessarily indicative of future results
of the Company.
For the years ended June 30,
(In thousands) --------------------------------
1997 1996 1995
-------- -------- --------
Pro Forma Sales by Segment:
Aerospace Fasteners (a)........... $269,026 $197,099 $190,287
Aerospace Distribution............ 411,765 342,483 255,722
Corporate and Other............... 72,882 67,330 41,476
Eliminations...................... (15,213) (9,505) (5,494)
------- ------- -------
$738,460 $597,407 $481,991
======= ======= =======
Pro Forma Operating Income (Loss)
by Segment:
Aerospace Fasteners (a)........... $ 17,390 $ (2,639) $(15,736)
Aerospace Distribution ........... 30,891 17,455 9,349
Corporate and Other............... (17,764) (14,876) (20,420)
------- ------- -------
Operating income (loss)............. $ 30,517 $ (60) $(26,807)
======= ======= =======
(a) Fiscal 1997 results include sales of $27.2 million and operating income of
$1.2 million provided by Simmonds since its acquisition in February 1997.
Consolidated Results
- --------------------
Net sales of $738.5 million in Fiscal 1997 improved significantly by $237.7
million, or 47.5%, compared to sales of $500.8 million in Fiscal 1996. Sales
growth was stimulated by the resurgent commercial aerospace industry, together
with the effects of several strategic business combinations over the past 18
months. Net sales in Fiscal 1996 were up 37.0% from Fiscal 1995 reflecting
strong sales performances from the Aerospace Fasteners segment and FT,
included in the Corporate and Other business segment, and the inclusion of
four months of sales from the Aerospace Distribution segment. On a pro forma
basis, net sales increased 23.6% and 23.9% in Fiscal 1997 and 1996,
respectively, as compared to the previous Fiscal periods.
Gross Margin as a percentage of sales was 27.8%, 23.3%, and 18.0% in Fiscal
1997, 1996, and 1995, respectively. The increase in the current year was
attributable to higher revenues combined with continued productivity
improvements achieved during Fiscal 1997. The increase in Fiscal 1996 compared
to Fiscal 1995 was due to consolidation of plants, elimination of product lines,
substantial downsizing and new productivity programs put in place.
Selling, General & Administrative expense as a percentage of sales was
21.8%, 21.0%, and 20.5% in Fiscal 1997, 1996, and 1995, respectively. The
increase in the current year was attributable primarily to the increase in
selling and marketing costs incurred to support the increase in sales. The
decrease in Fiscal 1996 compared to Fiscal 1995 was due primarily to the
positive results obtained from restructuring and downsizing programs put in
place earlier.
Operating income of $30.5 million in Fiscal 1997 increased $25.1 million,
or 461%, compared to operating income of $5.4 million in Fiscal 1996. The
increase in operating income was due primarily to the current year's growth in
sales and increased operational efficiencies. Operating income in Fiscal 1996
improved by $18.9 million over Fiscal 1995 due primarily to improved cost
efficiencies applied in the Aerospace Fasteners segment and the sales increase
from FT in the Corporate and Other business segment. On a pro forma basis,
operating income increased $30.6 million in Fiscal 1997, as compared to Fiscal
1996, and $26.7 million in Fiscal 1996, as compared to Fiscal 1995.
Net interest expense decreased 19.0% in Fiscal 1997 compared to Fiscal
1996, and decreased 12.8% in Fiscal 1996 compared to Fiscal 1995. The decreases
are due to lower borrowings as a result of the sale of DME and the Merger, both
of which significantly reduced the Company's total debt.
Investment income, net, was $6.7 million, $4.6 million and $5.7 million in
Fiscal 1997, 1996, and 1995, respectively. The 45.4% increase in Fiscal 1997 is
due primarily to realized gains from the sale of investments in Fiscal 1997. The
19.8% decrease in Fiscal 1996 resulted from losses realized on the write-off of
two foreign investments.
Equity in earnings of affiliates increased $2.9 million in Fiscal 1997,
compared to Fiscal 1996, and increased $3.3 million in Fiscal 1996, compared to
Fiscal 1995. The current year's increase is attributable to the amortization
of undervalued investments in STFI as a result of the Merger. The prior year's
increase was due primarily to higher earnings from Nacanco, which improved the
Company's equity in earnings by $2.6 million.
Nonrecurring income in Fiscal 1997 includes the $2.5 million gain from the
sale of SBC. Nonrecurring income in Fiscal 1996 includes a $163.1 million
nontaxable gain resulting from the Merger.
Income Taxes included a $5.2 million tax benefit in Fiscal 1997 on a pre-
tax loss of $3.9 million from continuing operations. The tax benefit was due
primarily to reversing Federal income taxes previously provided due to a change
in the estimate of the required tax accruals. In Fiscal 1996, the tax benefit
from the loss from continuing operations, excluding the nontaxable nonrecurring
gain, was $22.1 million.
Earnings from discontinued operations, net, include the earnings, net of
tax, from DME and Data in Fiscal 1996 and 1995.
The $53.6 million gain on disposal of discontinued operations resulted
primarily from the sale of DME to CMI in Fiscal 1996.
Extraordinary items, net, resulted from premiums paid for, and redemption
costs and consent fees associated with, the retirement of the Senior Notes and
the write off of deferred loan fees, related primarily to Senior Notes and bank
debt extinguished prior to maturity. This totaled $10.4 million, net of a tax
benefit, in Fiscal 1996.
Net earnings in Fiscal 1997, compared to Fiscal 1996, after excluding the
nonrecurring merger gain of $163.1 million and the $53.6 million gain on sale
of discontinued operations in 1996, improved $28.3 million, reflecting a $25.1
million improvement in operating profit. The net earnings increased $223.5
million in Fiscal 1996, compared to Fiscal 1995, due primarily to the $163.1
million nonrecurring pre-tax gain recorded from the Merger, and the $53.6
million gain, net of tax, from the sale of discontinued operations.
Segment Results
- ---------------
Aerospace Fasteners Segment
- ---------------------------
Sales in the Aerospace Fasteners segment increased by $51.0 million to
$269.0 million, up 23.4% in Fiscal 1997, compared to the Fiscal 1996 period,
reflecting significant growth in the commercial aerospace industry combined with
the Simmonds acquisition. New orders have been strong in recent months
resulting in a backlog of $195.7 million at June 30, 1997, up from $109.9
million at June 30, 1996. Sales increased slightly in Fiscal 1996 compared to
Fiscal 1995. The Harco division was transferred to the Aerospace Distribution
segment on February 25, 1996. On a pro forma basis, excluding Harco's sales,
sales increased 36.5% in Fiscal 1997, compared to Fiscal 1996 and 3.6% in Fiscal
1996, compared to Fiscal 1995.
Operating income improved from breakeven to $17.4 million during Fiscal
1997, compared to Fiscal 1996. This improvement was achieved as a result of
accelerated growth in the commercial aerospace industry, particularly in the
second half of the year. Certain efficiencies achieved during Fiscal 1997
continued to have positive effects on operating income. Operating income was
positive in the Aerospace Fasteners segment, which was an $11.6 million
improvement in the Fiscal 1996 period over the corresponding Fiscal 1995 period.
During Fiscal 1996, operating losses decreased significantly in the Aerospace
Fasteners segment, due primarily to the cost of management changes,
consolidation of plants, eliminating unprofitable product lines, pricing
adjustments, substantial work force downsizing and new productivity, quality and
marketing programs. A restructuring charge of $2.3 million was recorded in
Fiscal 1996, primarily for severance pay to employees terminated as a result of
further downsizing. On a pro forma basis, excluding Harco, operating income
increased $20.0 million in Fiscal 1997, as compared to Fiscal 1996, and $13.1
million in Fiscal 1996, as compared to Fiscal 1995.
Aerospace Distribution Segment
- ------------------------------
Aerospace Distribution sales were up $281.8 million and operating income
was up $25.3 million, primarily the result of reporting twelve months in Fiscal
1997 versus four months in Fiscal 1996. On a twelve-month pro forma basis sales
were up $69.3 million, or 20.2%, and operating income was up $13.4 million, or
77.0%. Sales increases in all three groups, hardware, rotables and engines
contributed to these strong results. This segment has benefited from the
extended service lives of existing aircraft, growth from acquisitions and
internal growth, which has increased market share.
In Fiscal 1996, as a result of the transfer of Harco to Banner effective
February 25, 1996, the Company recorded four months of sales and operating
income of Banner, including Harco as part of the Aerospace Distribution
segment. This segment reported $130.0 million in sales and $5.6 million in
operating income for this four-month period ended June 30, 1996. In Fiscal
1996, the first eight months of Harco's sales and operating income were
included in the Aerospace Fasteners segment.
Communications Services Segment
- -------------------------------
As a result of the Merger of the Communications Services segment on March
13, 1996, the Company is accounting for its current investment in STFI, the
merged company, using the equity method. Sales of $91.3 million were reported
for the Communications Services segment in Fiscal 1996 for 8 1/2 months,
compared to a full 12 months sales of $108.7 million in Fiscal 1995. Operating
income of $14.6 million was reported for the Communications Services segment in
Fiscal 1996 for the 8 1/2 months prior to the Merger, as compared to $18.5
million in Fiscal 1995.
Corporate and Other
- -------------------
The Corporate and Other segment includes Fairchild Technologies, Camloc Gas
Springs Division and Fairchild Scandinavian Bellyloading Co. AB (SBC) (formerly
the Technology Products segment). Sales were up at SBC and stable at the other
operations. The group reported an increase in sales of 8.2% in Fiscal 1997, as
compared to Fiscal 1996, and 62.3% in Fiscal 1996, as compared to Fiscal 1995.
Operating loss increased by $2.9 million in Fiscal 1997, compared to Fiscal
1996. Operating income increased $5.5 million in Fiscal 1996, as compared to
Fiscal 1995. SBC was sold at Fiscal 1997 year-end. Over the past three years,
corporate administrative expense as a percentage of sales has decreased from
3.6% in 1995 to 2.9% in 1996 to 2.2% in 1997.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Working capital at June 30, 1997, was $346.1 million, which was $6.7
million lower than at June 30, 1996. The principal reasons for this change
included a $175.5 million decrease in cash, investments and notes receivable,
offset by a $71.6 million increase in inventory, a $69.5 million increase in
accounts receivable, a $14.4 million increase in prepaid and other current
assets, and a $13.3 million decrease in current liabilities.
The Company's principal cash requirements include debt service, capital
expenditures, acquisitions, and payment of other liabilities. Other liabilities
that require the use of cash include post-employment benefits for retirees,
environmental investigation and remediation obligations, and litigation
settlements and related costs. The Company expects that cash on hand, cash
generated from operations, and cash from borrowings and asset sales will be
adequate to satisfy cash requirements.
The Company maintains credit agreements with a consortium of banks, which
provide revolving credit facilities to RHI, FHC and Banner, and term loans to
Banner. At June 30, 1997, $54 million was available to be borrowed from the
Company's credit agreements. As of June 30, 1997, the Company and Banner were
in compliance with all covenants under their respective credit agreements. The
Company's management intends to take appropriate action to refinance portions
of its debt, if necessary, to meet cash requirements. On July 18, 1997, the FHC
Credit Agreement was restructured to provide FHC with a $150 million senior
credit facility consisting of (i) up to $75 million in revolving loans, with a
letter of credit sub-facility of $12 million, and (ii) a $75 million term loan.
(See Note 10 in Item 8, Financial Statements and Supplementary Data).
The Company also expects to generate cash from the sale of certain assets
and liquidation of investments. At June 30, 1997, net assets held for sale had
a carrying value of $26.1 million and included two parcels of real estate in
California, two landfill limited partnership projects in Pennsylvania, a real
estate joint venture in California, and several other parcels elsewhere, which
the Company plans to sell, lease or develop, subject to market conditions or,
with respect to certain of the parcels, the resolution of environmental matters.
The Company has reclassified its Farmingdale property, with a book value of
$28.9 million, from net assets held for sale to other assets as the Company has
established and pursued a plan to develop this property as commercial real
estate.
Property, plant and equipment increased $40.8 million from June 30, 1996,
primarily as a result of the Simmonds Acquisition. Goodwill increased by $14.6
million as a result of the Company's acquisitions in the current Fiscal year.
On July 16, 1997, STFI entered into a definitive merger agreement (the
"STFI/Tel-Save Merger") with Tel-Save Holdings, Inc. ("Tel-Save"), pursuant to
which Tel-Save will acquire STFI in a business combination accounted for as a
pooling of interests. Upon consummation of the STFI/Tel-Save Merger, the
Company will receive shares of Tel-Save's common stock, in exchange for its
shares of STFI common stock and STFI cumulative convertible preferred stock, as
well as approximately $22.0 million cash in redemption of its shares of STFI
special preferred stock. As a result of the transaction, the Company will
recognize an estimated gain in excess of $100 million. (See Note 24 in Item 8,
"Financial Statements and Supplementary Data").
Management believes it has successfully restructured and repositioned the
Company from a diversified industrial company to a focused Aerospace Industry
player. As worldwide airlines and aircraft manufacturers increase capacity to
meet demand, the Company plans to benefit through internal growth, external
growth, and improved productivity. This bodes well for additional improvement
of the Company's net income.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
- -----------------------------------------
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position 96-1 ("SOP 96-1") "Environmental Remediation
Liabilities". SOP 96-1 provides authoritative guidance on specific accounting
issues related to the recognition, measurement, and display and disclosure of
environmental remediation liabilities. The Company is required to implement SOP
96-1 in Fiscal 1998. The Company's present policy is similar to the policy
prescribed by SOP 96-1, therefore, there will be no effect from implementation.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
two pronouncements, Statement of Financial Accounting Standards No. 128 ("SFAS
128") "Earnings Per Share", and Statement of Financial Accounting Standards No.
129 ("SFAS 129") "Disclosure of Information about Capital Structure". SFAS 128
establishes accounting standards for computing and presenting earnings per share
("EPS"). SFAS 128 is effective for periods ending after December 15, 1997,
including interim periods, and requires restatement of all prior period EPS data
presented. Results from the calculation of simple and diluted earnings per
share, as prescribed by SFAS 128, would not be materially different from the
calculations for primary and fully diluted earnings per share for years ending
June 30, 1997 and June 30, 1996. SFAS 129 establishes standards for disclosure
of information about the Company's capital structure and becomes effective for
periods ending after December 15, 1997.
In June 1997, FASB issued two pronouncements, Statement of Financial
Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive Income",
and Statement of Financial Accounting Standards No. 131 ("SFAS 131")
"Disclosures about Segments of an Enterprise and Related Information". SFAS
130 establishes standards for reporting and display of comprehensive income
and its components in the financial statements. 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 operating segments in annual and interim
financial reports. The Company will adopt SFAS 130 and SFAS 131 in Fiscal
1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The following consolidated financial statements of the Company and the
report of the Company's independent public accountants with respect thereto,
are set forth below.
Page
----
Consolidated Balance Sheets as of June 30, 1997 and 1996...... 26
Consolidated Statements of Earnings For The Three Years Ended
June 30, 1997, 1996, and 1995................................. 28
Consolidated Statements of Stockholders' Equity For The Three
Years Ended June 30, 1997, 1996, and 1995..................... 30
Consolidated Statements of Cash Flows For The Three Years
Ended June 30, 1997, 1996, and 1995........................... 31
Notes to Consolidated Financial Statements.................... 32
Report of Independent Public Accountants...................... 65
Supplementary data regarding "Quarterly Financial Information (Unaudited)"
is set forth under Item 8 in Note 23 to Consolidated Financial Statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, June 30,
ASSETS 1997 1996
- ------ -------- --------
Current Assets:
Cash and cash equivalents..................... $ 19,420 $ 39,649
(of which $4,839 and $8,224 is restricted)
Short-term investments........................ 25,647 10,498
Accounts receivable-trade, less allowances
of $8,103 and $6,327........................ 168,163 98,694
Notes receivable.............................. -- 170,384
Inventories:
Finished goods............................. 297,223 236,263
Work-in-process............................ 26,887 16,294
Raw materials.............................. 18,626 18,586
--------- ---------
342,736 271,143
Prepaid expenses and other current assets..... 33,631 19,275
--------- ---------
Total Current Assets.......................... 589,597 609,643
Property, plant and equipment, net............ 128,712 87,956
Net assets held for sale...................... 26,147 45,405
Cost in excess of net assets acquired,
(Goodwill) less accumulated amortization of
$36,672 and $31,912.......................... 154,808 140,201
Investments and advances, affiliated companies 55,678 53,471
Deferred loan costs........................... 9,252 7,825
Prepaid pension assets........................ 59,742 57,660
Long-term investments......................... 4,120 585
Notes receivable and other assets............. 39,277 7,192
--------- ---------
Total Assets.................................. $1,067,333 $1,009,938
========= =========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
/TABLE
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- ------------------------------------ -------- --------
Current Liabilities:
Bank notes payable and current maturities
of long-term debt........................... $ 47,422 $ 84,892
Accounts payable............................. 84,953 65,478
Accrued salaries, wages and commissions...... 19,166 17,367
Accrued insurance............................ 15,397 16,340
Accrued interest............................. 16,011 10,748
Other........................................ 54,625 37,302
Income taxes................................. 5,881 24,635
--------- ---------
Total Current Liabilities.................... 243,455 256,762
Long-term debt............................... 416,922 368,589
Other long-term liabilities.................. 23,622 18,605
Retiree health care liabilities.............. 43,387 44,452
Noncurrent income taxes...................... 42,013 31,737
Minority interest in subsidiaries............ 68,309 58,625
--------- ---------
Total Liabilities............................ 837,708 778,770
Stockholders' Equity:
Class A common stock, 10 cents par value;
authorized 40,000,000 shares, 20,233,879,
(19,997,756 in 1996) shares issued, and
13,992,283 (13,756,160 in 1996) shares
outstanding................................ 2,023 2,000
Class B common stock, 10 cents par value;
authorized 20,000,000 shares, 2,632,516
shares issued and outstanding (2,633,704 in
1996)...................................... 263 263
Paid-in capital.............................. 71,015 69,366
Retained earnings............................ 209,949 208,618
Cumulative translation adjustment............ (1,860) 2,760
Net unrealized holding loss on available-for-
sale securities............................ (46) (120)
Treasury stock, at cost, 6,241,596 shares of
Class A common stock....................... (51,719) (51,719)
--------- ---------
Total Stockholders' Equity................... 229,625 231,168
--------- ---------
Total Liabilities and Stockholders' Equity... $1,067,333 $1,009,938
========= =========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
/TABLE
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
For the Years Ended June 30,
--------------------------------
1997 1996 1995
-------- -------- --------
Revenue:
Net sales of products...................... $738,460 $445,990 $287,817
Revenues from services..................... -- 54,820 77,733
Other income (expense)..................... (658) 635 1,169
------- ------- -------
737,802 501,445 366,719
Costs and expenses:
Cost of goods sold......................... 533,337 344,914 245,094
Cost of services........................... -- 39,005 54,753
Selling, general & administrative.......... 161,309 104,981 74,797
Research and development................... 7,807 94 974
Amortization of goodwill................... 4,832 4,687 4,520
Restructuring.............................. -- 2,319 --
------- ------- -------
707,285 496,000 380,138
Operating income (loss)...................... 30,517 5,445 (13,419)
Interest expense............................. 52,493 67,112 71,087
Interest income.............................. (4,695) (8,072) (3,371)
------- ------- -------
Net interest expense......................... 47,798 59,040 67,716
Investment income, net....................... 6,651 4,575 5,705
Equity in earnings of affiliates............. 7,747 4,871 1,607
Minority interest............................ (3,514) (1,952) (2,293)
------- ------- -------
Loss from continuing operations before
nonrecurring income and taxes.............. (6,397) (46,101) (76,116)
Nonrecurring income.......................... 2,528 161,406 --
------- ------- -------
Earnings (loss) from continuing
operations before taxes.................... (3,869) 115,305 (76,116)
Income tax benefit........................... 5,200 22,065 28,202
------- ------- -------
Earnings (loss) from continuing operations... 1,331 137,370 (47,914)
Earnings from discontinued operations, net... -- 9,186 13,994
Gain (loss) on disposal of discontinued
operations, net............................ -- 53,586 (259)
------- ------- -------
Earnings (loss) before extraordinary items... 1,331 200,142 (34,179)
Extraordinary items, net..................... -- (10,436) 355
------- ------- -------
Net earnings (loss).......................... $ 1,331 $189,706 $(33,824)
======= ======= =======
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
/TABLE
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
For the Years Ended June 30,
--------------------------------
1997 1996 1995
-------- -------- --------
Primary Earnings (Loss) Per Share:
Earnings (loss) from continuing
operations........................... $ .08 $ 8.28 $ (2.97)
Earnings from discontinued operations,
net.................................. -- .55 .87
Gain (loss) on disposal of discontinued
operations, net...................... -- 3.23 (.02)
------- ------- -------
Earnings (loss) before extraordinary
items................................ .08 12.06 (2.12)
Extraordinary items, net............... -- (.63) .02
------- ------- -------
Net earnings (loss) per share.......... $ .08 $ 11.43 $ (2.10)
======= ======= =======
Fully Diluted Earnings (Loss) Per Share:
Earnings (loss) from continuing
operations........................... $ .08 $ 8.03 $ (2.97)
Earnings from discontinued operations,
net.................................. -- .54 .87
Gain (loss) on disposal of discontinued
operations, net...................... -- 3.13 (.02)
------- ------- -------
Earnings (loss) before extraordinary
items................................ .08 11.70 (2.12)
Extraordinary items, net............... -- (.61) .02
------- ------- -------
Net earnings (loss) per share.......... $ .08 $ 11.09 $ (2.10)
======= ======= =======
Weighted Average Number of Shares used
in Computing Earnings Per Share:
Primary.................................. 17,230 16,600 16,103
Fully diluted............................ 17,321 17,100 16,103
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Class A Class B Cumulative
Common Common Paid-in Retained Translation Treasury
Stock Stock Capital Earnings Adjustment Stock Other Total
----- ----- ------- -------- ----------- ------- ------ -------
Balance, July 1, 1994 $1,965 $ 270 $66,775 $52,736 $ 872 $(51,719) $(1,405) $69,494
Net loss.............. - - - (33,824) - - - (33,824)
Cumulative translation
adjustment, net...... - - - - 2,989 - - 2,989
Gain on purchase of
preferred stock of
subsidiary........... - - 236 - - - - 236
Reduction of minimum
liability for pensions - - - - - - 1,405 1,405
Net unrealized holding
loss on available-for-
sale securities...... - - - - - - (120) (120)
----- ---- ------ ------ ------ ------- ------ -------
Balance, June 30, 1995 1,965 270 67,011 18,912 3,861 (51,719) (120) 40,180
Net earnings.......... - - - 189,706 - - - 189,706
Cumulative translation
adjustment, net...... - - - - (1,101) - - (1,101)
Fair market value of
stock warrants issued - - 1,148 - - - - 1,148
Proceeds received from
options exercised.... 28 - 1,481 - - - - 1,509
Exchange of Class B
for Class A common
stock................ 7 (7) - - - - - -
Gain realized on
retirement of
preferred stock of
subsidiary........... - - (274) - - - -
(274)
----- ---- ------ ------- ------ ------- ------ -------
Balance, June 30, 1996 2,000 263 69,366 208,618 2,760 (51,719) (120) 231,168
Net earnings.......... - - - 1,331 - - - 1,331
Cumulative translation
adjustment, net...... - - - - (4,620) - -
(4,620)
Fair market value of
stock warrants issued - - 546 - - - -
546
Proceeds received from
options exercised.... 23 - 1,103 - - - - 1,126
Net unrealized holding
gain on available-for-
sale securities...... - - - - - - 74
74
----- ---- ------ ------- ------ ------- ------ -------
Balance, June 30, 1997 $2,023 $ 263 $71,015 $209,949 $(1,860) $(51,719) $ (46) $229,625
===== ==== ====== ======= ====== ======= ====== =======
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
/TABLE
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended June 30,
--------------------------------
1997 1996 1995
-------- -------- --------
Cash flows from operating activities:
Net earnings (loss)................................... $ 1,331 $ 189,706 $ (33,824)
Adjustments to reconcile net earnings (loss) to net
cash used for operating activities:
Depreciation and amortization..................... 25,935 29,717 31,208
Accretion of discount on long-term liabilities.... 4,963 4,686 4,773
Net gain on the merger of subsidiaries............ -- (162,703) --
Net gain on the sale of discontinued operations... -- (53,942) --
Extraordinary items, net of cash payments......... -- 4,501 --
Provision for restructuring (excluding cash
payments of $777 in 1996)....................... -- 1,542 --
(Gain) loss on sale of property, plant and
equipment....................................... (72) (9) 655
Undistributed earnings of affiliates.............. (1,055) (3,857) (500)
Minority interest................................. 3,514 1,952 2,293
Change in trading securities...................... (5,733) (5,346) 1,879
Change in receivables............................. (55,965) (5,999) (14,414)
Change in inventories............................. (46,389) (10,744) (9,611)
Change in other current assets.................... (14,237) (615) (2,928)
Change in other non-current assets................ (17,859) (1,089) 4,469
Change in accounts payable, accrued liabilities,
and other long-term liabilities................. 8,610 (36,537) (13,093)
Non-cash charges and working capital changes of
discontinued operations......................... -- -- 3,568
-------- -------- --------
Net cash used for operating activities................ (96,957) (48,737) (25,525)
Cash flows from investing activities:
Proceeds received from (used for) investment
securities, net..................................... (12,951) 265 12,281
Purchase of property, plant and equipment............. (22,116) (15,122) (16,260)
Proceeds from sale of property, plant and equipment... 213 122 151
Equity investments in affiliates...................... (1,749) (2,361) (1,051)
Minority interest in subsidiaries..................... (1,610) (2,817) --
Acquisition of subsidiaries, net of cash acquired..... (55,916) -- (12,157)
Net proceeds from the sale of discontinued operations. 173,719 71,559 --
Changes in net assets held for sale................... 385 5,894 1,441
Investing activities of discontinued operations....... -- -- (3,561)
-------- -------- --------
Net cash (used for) provided by investing activities. 79,975 57,540 (19,156)
Cash flows from financing activities:
Proceeds from issuance of debt........................ 154,394 157,877 71,712
Debt repayments and repurchase of debentures.......... (156,975) (198,761) (59,367)
Issuance of Class A common stock...................... 1,126 1,509 --
-------- -------- --------
Net cash provided by (used for) financing activities.. (1,455) (39,375) 12,345
Effect of exchange rate changes on cash............... (1,792) (961) 1,150
Net decrease in cash and cash equivalents............. (20,229) (31,533) (31,186)
Cash and cash equivalents, beginning of the year...... 39,649 71,182 102,368
-------- -------- --------
Cash and cash equivalents, end of the year............ $ 19,420 $ 39,649 $ 71,182
======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these
statements.
/TABLE
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Corporate Structure: The Fairchild Corporation (the "Company") was
incorporated in October 1969, under the laws of the State of Delaware. RHI
Holdings, Inc. ("RHI") is a direct subsidiary of the Company. RHI is the owner
of 100% of Fairchild Holding Corp. ("FHC") and the majority owner of Banner
Aerospace, Inc., ("Banner"). The Company's principal operations are conducted
through FHC and Banner. The Company also holds significant equity interests
in Shared Technologies Fairchild Inc. ("STFI") and Nacanco Paketleme
("Nacanco").
Fiscal Year: The fiscal year ("Fiscal") of the Company ends June 30. All
references herein to "1997", "1996", and "1995" mean the fiscal years ended June
30, 1997, 1996 and 1995, respectively.
Consolidation Policy: The accompanying consolidated financial statements
are prepared in accordance with generally accepted accounting principles and
include the accounts of the Company and all of its wholly-owned and majority-
owned subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation. Investments in companies in which ownership
interest range from 20 to 50 percent are accounted for using the equity method
(see Note 9).
Cash Equivalents/Statements of Cash Flows: For purposes of the Statements
of Cash Flows, the Company considers all highly liquid investments with original
maturity dates of three months or less as cash equivalents. Total net cash
disbursements (receipts) made by the Company for income taxes and interest were
as follows:
1997 1996 1995
-------- -------- --------
Interest....................... $ 48,684 $ 66,843 $ 66,262
Income Taxes................... (1,926) 9,279 (3,056)
Restricted Cash: On June 30, 1997 and 1996, the Company had restricted
cash of $4,839 and $8,224, respectively, all of which is maintained as
collateral for certain debt facilities. Cash investments are in short-term
certificates of deposit.
Investments: Management determines the appropriate classification of its
investments at the time of acquisition and reevaluates such determination at
each balance sheet date. Trading securities are carried at fair value, with
unrealized holding gains and losses included in earnings. Available-for-sale
securities are carried at fair value, with unrealized holding gains and losses,
net of tax, reported as a separate component of stockholders' equity.
Investments in equity securities and limited partnerships that do not have
readily determinable fair values are stated at cost and are categorized as other
investments. Realized gains and losses are determined using the specific
identification method based on the trade date of a transaction. Interest on
corporate obligations, as well as dividends on preferred stock, are accrued at
the balance sheet date.
Inventories: Inventories are stated at the lower of cost or market. Cost
is determined using the last-in, first-out ("LIFO") method at principal domestic
aerospace manufacturing operations and using the first-in, first-out ("FIFO")
method elsewhere. If the FIFO inventory valuation method had been used
exclusively, inventories would have been approximately $4,868 and $4,756 higher
at June 30, 1997 and 1996, respectively. Inventories from continuing operations
are valued as follows:
June 30, June 30,
(In thousands) 1997 1996
-------- --------
First-in, first-out (FIFO)................. $ 312,840 $ 239,800
Last-in, first-out (LIFO).................. 29,896 31,343
-------- --------
Total inventories.......................... $ 342,736 $ 271,143
======== ========
Properties and Depreciation: The cost of property, plant and equipment is
depreciated over estimated useful lives of the related assets. The cost of
leasehold improvements is depreciated over the lesser of the length of the
related leases or the estimated useful lives of the assets. Depreciation is
computed using the straight-line method for financial reporting purposes and
using accelerated depreciation methods for Federal income tax purposes. No
interest costs were capitalized in any of the years presented. Property, plant
and equipment consisted of the following:
June 30, June 30,
1997 1996
-------- --------
Land....................................... $ 13,438 $ 10,408
Buildings and improvements................. 56,124 40,853
Machinery and equipment.................... 158,944 94,406
Transportation vehicles.................... 899 767
Furniture and fixtures..................... 26,815 18,466
Construction in progress................... 6,524 2,329
------- -------
262,744 167,229
Less: Accumulated depreciation............ (134,032) (79,273)
------- -------
Net property, plant and equipment.......... $128,712 $ 87,956
======= =======
Amortization of Goodwill: Goodwill, which represents the excess of the
cost of purchased businesses over the fair value of their net assets at dates
of acquisition, is being amortized on a straight-line basis over 40 years.
Deferred Loan Costs: Deferred loan costs associated with various debt
issues are being amortized over the terms of the related debt, based on the
amount of outstanding debt, using the effective interest method. Amortization
expense for these loan costs for 1997, 1996 and 1995 was $2,847, $3,827, and
$3,794, respectively.
Impairment of Long-Lived Assets: In Fiscal 1997, the Company adopted
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". SFAS 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. The Company reviews its long-lived assets,
including property, plant and equipment, identifiable intangibles and goodwill,
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable. To determine
recoverability of its long-lived assets the Company evaluates the probability
that future undiscounted net cash flows will be less than the carrying amount
of the assets. Impairment is measured based on the difference between the
carrying amount of the assets and fair value. The implementation of SFAS 121
did not have a material effect on the Company's consolidated results of
operations.
Foreign Currency Translation: For foreign subsidiaries whose functional
currency is the local foreign currency, balance sheet accounts are translated
at exchange rates in effect at the end of the period and income statement
accounts are translated at average exchange rates for the period. The resulting
translation gains and losses are included as a separate component of
stockholders' equity. Foreign transaction gains and losses are included in
other income and were insignificant in Fiscal 1997, 1996 and 1995.
Research and Development: The Company capitalizes software development
costs upon the establishment of technological feasibility. The establishment
of technological feasibility and the ongoing assessment of recoverability
require considerable judgment by management with respect to certain external
factors, including anticipated future revenues, estimated economic life and
changes in software and hardware technologies. Software development costs are
amortized on a straight-line basis over the lesser of five years or the expected
life of the product. All other Company-sponsored research and development
expenditures are expensed as incurred. Capitalized software development costs
were $3,651 at June 30, 1997.
Capitalization of interest and taxes: The Company capitalizes interest
expense and property taxes relating to property being developed.
Nonrecurring Income: Nonrecurring income in 1997 resulted from the $2,528
gain recorded from the sale of Fairchild Scandinavian Bellyloading Company
("SBC"), (See Note 2). Nonrecurring income for 1996 was $161,406 and includes
a $163,130 nontaxable gain resulting from the merger of Fairchild Communications
Services Company into Shared Technologies Inc. (See Note 3). Expenses incurred
in 1996 in connection with other, alternative transactions considered but not
consummated were netted against the above gain in 1996.
Earnings Per Share: Primary and fully diluted earnings per share are
computed by dividing net income available to holders of the Company's common
stock, by the weighted average number of shares and share equivalents
outstanding during the period. To compute the incremental shares resulting from
stock options and warrants for primary earnings per share, the average market
price of the Company's stock during the period is used. To compute the
incremental shares resulting from stock options and warrants for fully diluted
earnings per share, the greater of the ending market price or the average market
price of the Company's stock is used. In computing primary and fully diluted
earnings per share for 1997 and in computing fully diluted earnings per share
for 1996, the conversion of options and warrants was assumed, as the effect was
dilutive. In computing primary earnings per share for Fiscal 1996, only the
dilutive effect from the conversion of options was assumed, as the effect from
the conversion of warrants alone was antidilutive. In computing primary and
fully diluted earnings per share for Fiscal 1995, the conversion of options and
warrants was not assumed, as the effect was antidilutive.
Stock-Based Compensation: In Fiscal 1997, the Company implemented
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation". SFAS 123 establishes financial accounting
standards for stock-based employee compensation plans and for transactions in
which an entity issues equity instruments to acquire goods or services from non-
employees. As permitted by SFAS 123, the Company will continue to use the
intrinsic value based method of accounting prescribed by APB Opinion No. 25, for
its stock-based employee compensation plans. Fair market disclosures required
by SFAS 123 are included in Note 15.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassifications: Certain amounts in prior years' financial statements
have been reclassified to conform to the 1997 presentation.
Recently Issued Accounting Pronouncements: In October 1996, the American
Institute of Certified Public Accountants issued Statement of Position 96-1
("SOP 96-1") "Environmental Remediation Liabilities". SOP 96-1 provides
authoritative guidance on specific accounting issues related to the recognition,
measurement, and the display and disclosure of environmental remediation
liabilities. The Company is required to implement SOP 96-1 in Fiscal 1998. The
Company's present policy is similar to the policy prescribed by SOP 96-1;
therefore there will be no effect from implementation.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
two pronouncements, Statement of Financial Accounting Standards No. 128 ("SFAS
128") "Earnings Per Share", and Statement of Financial Accounting Standards No.
129 ("SFAS 129") "Disclosure of Information about Capital Structure". SFAS 128
establishes accounting standards for computing and presenting earnings per share
("EPS"). SFAS 128 is effective for periods ending after December 15, 1997,
including interim periods, and requires restatement of all prior period EPS data
presented. Results from the calculation of simple and diluted earnings per
share, as prescribed by SFAS 128, would not differ materially from the
calculations for primary and fully diluted earnings per share for the years
ending June 30, 1997, 1996 and 1995. SFAS 129 establishes standards for
disclosure of information about the Company's capital structure and becomes
effective for periods ending after December 15, 1997.
In June 1997, FASB issued two pronouncements, Statement of Financial
Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive Income", and
Statement of Financial Accounting Standards No. 131 ("SFAS 131") "Disclosures
about Segments of an Enterprise and Related Information". SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in the financial statements. 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 operating segments in annual and interim financial reports. The Company
will adopt SFAS 130 and SFAS 131 in Fiscal 1998.
2. ACQUISITIONS
------------
The Company's acquisitions described in this section have been accounted
for using the purchase method. The purchase prices assigned to the net assets
acquired were based on the fair value of such assets and liabilities at the
respective acquisition dates.
In January 1997, Banner, through its subsidiary, Dallas Aerospace, Inc.,
acquired PB Herndon Company ("PB Herndon") in a business combination accounted
for as a purchase. PB Herndon is a distributor of specialty fastener lines and
similar aerospace related components. The total cost of the acquisition was
$16,000, which exceeded the fair value of the net assets of PB Herndon by
approximately $3,451. The excess is being amortized using the straight-line
method over 40 years. The Company purchased PB Herndon with available cash.
In February 1997, the Company completed a transaction (the "Simmonds
Acquisition") pursuant to which the Company acquired common shares and
convertible debt representing an 84.2% interest, on a fully diluted basis, of
Simmonds S.A. ("Simmonds"). The Company initiated a tender offer to purchase
the remaining shares and convertible debt held by the public. By Fiscal year-
end, the Company had purchased, or placed sufficient cash in escrow to purchase,
all the remaining shares and convertible debt of Simmonds. The total purchase
price of Simmonds, including the assumption of debt, was approximately $62,000,
which the Company funded with available cash. The Company recorded
approximately $13,000 in goodwill as a result of this acquisition. Simmonds is
one of Europe's leading manufacturers and distributors of aerospace and
automotive fasteners.
In September 1994, the Company acquired all of the outstanding common stock
of Fairchild Scandinavian Bellyloading Company AB ("SBC") for the assumption of
a minimal amount of debt. SBC is a designer and manufacturer of a patented
cargo loading system, which is installed in the cargo area of commercial
aircraft. On June 30, 1997, the Company sold all the patents of SBC to Teleflex
Incorporated ("Teleflex") for $5,000, and immediately thereafter sold all the
stock of SBC to a wholly owned subsidiary of Teleflex for $2,000. The Company
may also receive an additional amount of up to $7,000 based on future net sales
of SBC's patented products and services. In Fiscal 1997, the Company recorded
a $2,528 nonrecurring gain as a result of these transactions.
On November 28, 1994, the Company's former Communications Services segment
completed the acquisition of substantially all of the telecommunications assets
of JWP Telecom, Inc. ("JWP") for approximately $11,000, plus the assumption of
approximately $3,000 of liabilities. JWP is a telecommunications system
integrator, specializing in the distribution, installation and maintenance of
voice and data communications equipment.
Pro forma information is not required for these acquisitions.
3. MERGER AGREEMENT
----------------
The Company, RHI and Fairchild Industries, Inc. ("FII"), RHI's subsidiary,
entered into an Agreement and Plan of Merger dated as of November 9, 1995 (as
amended, the "Merger Agreement") with Shared Technologies Inc. ("STI"). On
March 13, 1996, in accordance with the Merger Agreement, STI succeeded to the
telecommunications systems and services business operated by the Company's
Fairchild Communications Services Company ("FCSC").
The transaction was effected by a Merger of FII with and into STI (the
"Merger") with the surviving company renamed STFI. Prior to the Merger, FII
transferred all of its assets to, and all of its liabilities were assumed by
FHC, except for the assets and liabilities of FCSC, and $223,500 of the FII's
existing debt and preferred stock. As a result of the Merger, the Company
received shares of Common Stock and Preferred Stock of STFI representing
approximately a 41% ownership interest in STFI.
The Merger was structured as a reorganization under section 386(a)(1)(A)
of the Internal Revenue Code of 1986, as amended. In 1996, the Company recorded
a $163,130 nonrecurring gain from this transaction.
4. MAJORITY INTEREST BUSINESS COMBINATION
--------------------------------------
Effective February 25, 1996, the Company completed a transfer of the
Company's Harco Division ("Harco") to Banner in exchange for 5,386,477 shares
of Banner common stock. The exchange increased the Company's ownership of
Banner common stock from approximately 47.2% to 59.3%, resulting in the Company
becoming the majority shareholder of Banner. Accordingly, the Company has
consolidated the results of Banner since February 25, 1996. The Company
recorded a $427 nonrecurring loss from outside expenses incurred for this
transaction in 1996. Banner is a leading international supplier to the
aerospace industry as a distributor, providing a wide range of aircraft parts
and related support services. Harco is a distributor of precision fasteners to
the aerospace industry.
In May 1997, Banner granted all of its stockholders certain rights to
purchase Series A Convertible Paid-in-Kind Preferred Stock. In June 1997,
Banner received net proceeds of $33,876 and issued 3,710,955 shares of preferred
stock. The Company purchased $28,390 of the preferred stock issued by Banner,
increasing its voting percentage to 64.0%.
In connection with the Company's December 23, 1993 sale of its interest in
Rexnord Corporation to BTR Dunlop Holdings, Inc. ("BTR"), the Company placed
shares of Banner, with a fair market value of $5,000, in escrow to secure the
Company's remaining indemnification of BTR against a contingent liability. Once
the contingent liability is resolved, the escrow will be released.
5. DISCONTINUED OPERATIONS AND NET ASSETS HELD FOR SALE
----------------------------------------------------
On February 22, 1996, pursuant to an Asset Purchase Agreement dated January
26, 1996, the Company, through one of its subsidiaries, completed the sale of
certain assets, liabilities and the business of the D-M-E Company ("DME") to
Cincinnati Milacron Inc. ("CMI"), for a sales price of approximately $244,331,
as adjusted. The sales price consisted of $74,000 in cash, and two 8%
promissory notes in the aggregate principal amount of $170,331 (together, the
"8% CMI Notes"). On July 29, 1996, CMI paid in full the 8% CMI Notes.
As a result of the sale of DME in 1996, the Company recorded a gain on
disposal of discontinued operations of approximately $54,012, net of a $61,929
tax provision.
On January 27, 1996, FII completed the sale of Fairchild Data Corporation
("Data") to SSE Telecom, Inc. ("SSE") for book value of approximately $4,400 and
100,000 shares of SSE's common stock valued at $9.06 per share, or $906, at
January 26, 1996, and warrants to purchase an additional 50,000 shares of SSE's
common stock at $11.09 per share.
Accordingly, the results of DME and Data have been accounted for as
discontinued operations. The combined net sales of DME and Data totaled
$108,131 and $180,773 for 1996 and 1995, respectively. Net earnings from
discontinued operations was $9,186, net of $5,695 for taxes in 1996, and
$13,994, net of $10,183 for taxes in 1995.
Net assets held for sale at June 30, 1997, includes two parcels of real
estate in California, and several other parcels of real estate located primarily
throughout the continental United States, which the Company plans to sell, lease
or develop, subject to the resolution of certain environmental matters and
market conditions. Also included in net assets held for sale are limited
partnership interests in (i) a real estate development joint venture, and (ii)
a landfill development partnership.
Net assets held for sale are stated at the lower of cost or at estimated
net realizable value, which reflect anticipated sales proceeds, and other
carrying costs to be incurred during the holding period. Interest is not
allocated to net assets held for sale.
6. PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
-----------------------------------------
The following unaudited pro forma information for the twelve months ended
June 30, 1996 and June 30, 1995, provides the results of the Company's
operations as though (i) the disposition of DME and Data, (ii) the Merger of
FCSC, and (iii) the transfer of Harco to Banner, resulting in the consolidation
of Banner, had been in effect since the beginning of each period. The pro forma
information is based on the historical financial statements of the Company, DME,
FCSC and Banner, giving effect to the aforementioned transactions. In preparing
the pro forma data, certain assumptions and adjustments have been made which (i)
reduce interest expense for revised debt structures, (ii) increase interest
income for notes receivable, (iii) reduce minority interest from Series C
Preferred Stock of FII being redeemed, and (iv) adjust equity in earnings of
affiliates to include the estimated results of STFI.
The following unaudited pro forma financial information is not necessarily
indicative of the results of operations that actually would have occurred if the
transactions had been in effect since the beginning of each period, nor is it
necessarily indicative of future results of the Company.
1996 1995
---------- ----------
Sales................................... $597,407 $481,991
Loss from continuing operations......... (15,766) (32,972)
Primary loss from continuing operations
per share............................. (.96) (2.05)
Net loss................................ (15,766) (32,876)
Primary net loss per share............ (.96) (2.04)
The pro forma financial information has not been adjusted for nonrecurring
income and gains from disposal of discontinued operations that have occurred
from these transactions.
7. EXTRAORDINARY ITEMS
-------------------
During Fiscal 1996, the Company used the Merger transaction and cash
available to retire fully all of the FII's 12 1/4% senior notes ("Senior
Notes"), FII's 9 3/4% subordinated debentures due 1998, and bank loans under a
credit agreement of a former subsidiary of the Company, VSI Corporation. The
redemption of the Senior Notes at a premium, consent fees paid to holders of the
Senior Notes, the write-off of the original issue discount on FII 9 3/4%
subordinated debentures and the write off of the remaining deferred loan fees
associated with the issuance of the debt retired, resulted in an extraordinary
loss of $10,436, net of a tax benefit, in 1996.
During Fiscal 1995, the Company recognized extraordinary gains and losses
from the early extinguishment of debt resulting from repurchases of
its debentures on the open market or in negotiated transactions, and the write-
offs of certain deferred costs associated with the issuance of securities
repurchased. Early extinguishment of the Company's debt resulted in an
extraordinary gain of $355, net of a tax provision, in 1995.
8. INVESTMENTS
-----------
Short-term investments at June 30, 1997, consist primarily of common stock
investments in public corporations which are classified as trading securities.
All other short-term investments and all long-term investments do not have
readily determinable fair values and primarily consist of investments in
preferred and common stocks of private companies and limited partnerships. A
summary of investments held by the Company consists of the following:
1997 1996
------------------- ------------------
Aggregate Aggregate
Name of Issuer or Fair Cost Fair Cost
Type of Each Issue Value Basis Value Basis
- ------------------- --------- ------- ---------- --------
Short-term investments:
- -----------------------
Trading securities:
Common stock.................... $16,094 $ 7,398 $10,362 $ 5,954
Other investments................. 9,553 9,553 136 136
------ ------ ------ ------
$25,647 $16,951 $10,498 $ 6,090
====== ====== ====== ======
Other long-term investments:
- ----------------------------
Other investments................. $ 4,120 $ 4,120 $ 585 $ 585
====== ====== ====== ======
Investment income is summarized as follows:
1997 1996 1995
------- ------- -------
Gross realized gain (loss) from sales.. $ 1,673 $ (1,744) $ 3,948
Change in unrealized holding gain
(loss) from trading securities....... 4,289 5,527 (36)
Gross realized loss from impairments... -- -- (652)
Dividend income........................ 689 792 2,445
------- ------- -------
$ 6,651 $ 4,575 $ 5,705
======= ======= =======
9. INVESTMENTS AND ADVANCES, AFFILIATED COMPANIES
-----------------------------------------------
The following table presents summarized historical financial information
on a combined 100% basis of the Company's principal investments, which are
accounted for using the equity method.
1997 1996 1995
-------- -------- --------
Statement of Earnings:
Net sales............................ $292,049 $351,695 $313,888
Gross profit......................... 133,734 114,248 100,644
Earnings from continuing operations.. 10,216 15,183 9,623
Discontinued operations, net......... (1) -- --
Net earnings......................... 10,215 15,183 9,623
Balance Sheet at June 30,:
Current assets....................... $ 89,408 $ 93,925
Non-current assets................... 369,464 377,547
Total assets......................... 458,872 471,472
Current liabilities.................. 75,090 87,858
Non-current liabilities.............. 281,301 275,025
The Company owns approximately 31.9% of Nacanco common stock. The Company
recorded equity earnings of $4,673, $5,487, and $2,859 from this investment for
1997, 1996 and 1995, respectively.
Since March 13, 1996, as a result of the Merger in which the Company
received a 41% interest in STFI, the Company has accounted for its investment
in STFI using the equity method. Prior to March 13, 1996, the Company
consolidated the results of FCSC, which was merged into STFI (see Note 3). The
Company recorded equity earnings of $3,149 and $50 from this investment in 1997
and 1996, respectively.
On June 30, 1997, the Company's investments in STFI consisted of (i)
$21,985 carrying value for the $25,000 face value 6% cumulative Convertible
Preferred Stock, (ii) $11,156 carrying value for the $20,000 face value Special
Preferred Stock, and (iii) $(1,163) carrying value for 6,225,000 shares of
common stock of STFI. At the close of trading on June 30, 1997, STFI's common
stock was quoted at $7.75 per share. Based on this price, the Company's 39.3%
investment in STFI common stock had an approximate market value of $48,244. The
Company is amortizing its discounted investment in each issuance of STFI over
the 11 and 12 year life of such issuance. Included in 1997 and 1996 equity
earnings was $4,104 and $939, respectively, from such amortization. (See Note
24 for subsequent events).
Effective February 25, 1996, the Company increased its percentage of
ownership of Banner common stock from 47.2% to approximately 59.3%. Since
February 25, 1996, the Company has consolidated Banner's results. Prior to
February 25, 1996, the Company accounted for its investment in Banner using the
equity method and held its investment in Banner as part of investments and
advances, affiliated companies. The Company recorded equity in earnings of $363
and $138 from this investment for 1996 and 1995, respectively.
The Company is accounting for an investment in a public fund, which is
controlled by an affiliated investment group of the Company, at market value.
The amortized cost basis of the investment was $923 and had been written down
by $71, before tax, to market value. The Company recorded a gross unrealized
holding gain (loss) of $114 and $(120) from this investment in 1997 and 1995,
respectively.
The Company's share of equity in earnings of all unconsolidated affiliates
for 1997, 1996 and 1995 was $7,747, $4,871, and $1,607, respectively. The
carrying value of investments and advances, affiliated
companies consists of the following:
June 30, June 30,
1997 1996
-------- --------
Nacanco............................ $ 20,504 $ 20,886
STFI............................... 31,978 30,559
Others............................. 3,196 2,026
------- -------
$ 55,678 $ 53,471
======= =======
On June 30, 1997, approximately $9,056 of the Company's $209,949
consolidated retained earnings was from undistributed earnings of 50 percent or
less currently owned affiliates accounted for by the equity method.
10. NOTES PAYABLE AND LONG-TERM DEBT
--------------------------------
At June 30, 1997 and 1996, notes payable and long-term debt consisted of
the following:
June 30, June 30,
1997 1996
-------- --------
Bank credit agreements....................... $ 100 $ 73,500
Other short-term notes payable............... 15,529 3,035
------- -------
Short-term notes payable (weighted average
interest rates of 7.8% and 8.6% in 1997
and 1996, respectively)..................... $ 15,629 $ 76,535
======= =======
Bank credit agreements....................... $177,250 $112,500
11 7/8% RHI Senior debentures due 1999....... 85,852 85,769
12% Intermediate debentures due 2001......... 115,359 114,495
13 1/8% Subordinated debentures due 2006..... 35,188 35,061
13% Junior Subordinated debentures due 2007.. 24,834 24,800
10.65% Industrial revenue bonds.............. 1,500 1,500
Capital lease obligations, interest from
4.4% to 10.5%.............................. 1,897 65
Other notes payable, collateralized by
property, plant and equipment, interest
from 4.3% to 10.0%......................... 6,835 2,756
------- -------
448,715 376,946
Less: Current maturities..................... (31,793) (8,357)
------- -------
Net long-term debt........................... $416,922 $368,589
======= =======
Bank Credit Agreements: The Company maintains credit agreements (the
"Credit Agreements") with a consortium of banks, which provide revolving credit
facilities to RHI, FHC and Banner, and term loans to Banner (collectively the
"Credit Facilities").
On July 26, 1996, the Company amended and restated the terms and provisions
of FHC's credit agreement, in their entirety (the "FHC Credit Agreement"). The
FHC Credit Agreement extends to July 28, 2000, the maturity of FHC's revolving
credit facility (the "FHC Revolver"). The FHC Revolver has a borrowing limit
of $52,000, however, availability is determined monthly by calculation of a
borrowing base comprised of specified percentages of FHC's accounts receivable,
inventories and the appraised value of equipment and real property. The FHC
Revolver generally bears interest at a base rate of 1 1/2% over the greater of
(i) Citibank New York's base rate, or (ii) the Federal Funds Rate plus 1 1/2%
for domestic borrowings and at 2 1/2% over Citibank London's base rate for
foreign borrowings. FHC's Revolver is subject to a non-use commitment fee of
1/2% on the average unused availability; and outstanding letters of credit are
subject to fees of 2 3/4% per annum. The FHC Credit Agreement was further
amended on February 21, 1997 to permit the Simmonds Acquisition. Terms modified
by the February 21, 1997 amendment included a provision in which the borrowing
rate on the FHC Revolver will increase by 1/4% on each of September 30, 1997 and
December 31, 1997, in the event that the FHC Credit Agreement is not
restructured or refinanced by such date.
The FHC Credit Agreement requires FHC to comply with certain financial and
non-financial loan covenants, including maintaining a minimum net worth of
$150,000 and maintaining certain interest and fixed charge coverage ratios at
the end of each Fiscal Quarter. Additionally, the FHC Credit Agreement
restricts annual capital expenditures of FHC to $12,000. Substantially all of
FHC's assets are pledged as collateral under the FHC Credit Agreement. At June
30, 1997, FHC was in compliance with all the covenants under the FHC Credit
Agreement. FHC may transfer available cash as dividends to the Company.
However, the FHC Credit Agreement restricts the Company from paying any
dividends to stockholders.
On July 18, 1997, the FHC Credit Agreement was restructured to provide FHC
with a $150,000 senior secured credit facility (the "FHC Facility") consisting
of (i) up to $75,000 in revolving loans, with a letter of credit sub-facility
of $12,000, and (ii) a $75,000 term loan. Advances made under the FHC Facility
would generally bear interest at a rate of, at the Company's option, (i) 2% over
the Citibank N.A. base rate, or (ii) 3 1/4% over the Eurodollar Rate ("LIBOR").
The FHC Facility is subject to a non-use commitment fee of 1/2% of the aggregate
unused availability; and outstanding letters of credit are subject to fees of
3 1/2% per annum. A borrowing base is calculated monthly to determine the
amounts available under the FHC Facility. The borrowing base is determined
monthly based upon specified percentages of (i) FHC's accounts receivable,
inventories, and the appraised value of equipment and real property, and (ii)
assets pledged by RHI to secure the facility. The FHC Facility matures on July
28, 2000. The FHC Facility provides that on December 31, 1998, the Company must
repay the term loan, in full, together with an amount necessary to reduce the
outstanding revolving loans to $52,000, if the Company has not complied with
certain financial covenant requirements as of September 30, 1998.
The Credit Agreements provide RHI with a $4,250 revolving credit facility
(the "RHI Credit Agreement") which (i) generally bears a base interest rate of
1/2% over the prime rate, (ii) requires a commitment fee of 1/2%, and (iii)
matures on August 12, 1998. RHI's Credit Agreement requires RHI to comply with
specified covenants and maintain a consolidated net worth of $175,000.
Additionally, RHI's capital expenditures are restricted, except for certain
leasehold improvements, to $2,000 per annum plus the selling price of fixed
assets for such Fiscal Year. The Company was in compliance with all the
covenants under RHI's Credit Agreement at June 30, 1997.
Banner has a credit agreement (the "Banner Credit Agreement") which
provides Banner and its subsidiaries with funds for working capital and
potential acquisitions. The facilities under the Banner Credit Agreement consist
of (i) a $55,000 six-year term loan (the "Banner Term Loan"), (ii) a $30,000
seven-year term loan (the "Tranche B Loan"), (iii) a $40,000 six-year term loan
(the "Tranche C Loan"), and (iv) a $71,500 revolving credit facility (the
"Banner Revolver"). The Banner Credit Agreement requires certain semiannual
term loan payments. The Banner Term Loan and the Banner Revolver bear interest
at prime plus 1 1/4% or LIBOR plus 2 1/2% and may increase by 1/4% or decrease
by up to 1% based upon certain performance criteria. As a result of Banner's
performance level through March 31, 1997, borrowings under the Banner Term Loan
and the Banner Revolver bore an interest rate of prime plus 3/4% and LIBOR plus
2% for the quarter ending June 30, 1997. The Tranche B Loan bears interest at
prime plus 1 3/4% or LIBOR plus 3%. The Tranche C Loan initially bears interest
at prime plus 1 1/2% or LIBOR plus 2 3/4% and may decrease by 1/4% based upon
certain performance criteria. The Banner Credit Agreement requires that loans
made to Banner can not exceed a defined borrowing base, which is based upon a
percentage of eligible inventories and accounts receivable. Banner's revolving
credit facility is subject to a non-use fee of 55 basis points of the unused
availability.
The Banner Credit Agreement requires quarterly compliance with various
financial and non-financial loan covenants, including maintenance of minimum net
worth, and minimum ratios of interest coverage, fixed charge coverage, and debt
to earnings before interest, taxes, depreciation and amortization. Banner also
has certain limitations on the incurrence of additional debt. As of June 30,
1997, Banner was in compliance with all covenants under the Banner Credit
Agreement. Substantially all of Banner's assets are pledged as collateral under
the Banner Credit Agreement.
In September 1995, Banner entered into several interest rate hedge
agreements ("Hedge Agreements") to manage its exposure to increases in interest
rates on its variable rate debt. The Hedge Agreements provide interest rate
protection on $60,000 of debt through September 2000, by providing an interest
rate cap of 7% if the 90-day LIBOR rate exceeds 7%. If the 90-day LIBOR rate
drops below 5%, Banner will be required to pay interest at a floor rate of
approximately 6%.
In November 1996, Banner entered into an additional hedge agreement
("Additional Hedge Agreement") with one of its major lenders to provide interest
rate protection on $20,000 of debt for a period of three years. Effectively,
the Additional Hedge Agreement provides for a cap of 7 1/4% if the 90-day LIBOR
exceeds 7 1/4%. If the 90-day LIBOR drops below 5%, Banner will be required to
pay interest at a floor rate of approximately 6%. No cash outlay was required
to obtain the Additional Hedge Agreement as the cost of the cap was offset by
the sale of the floor.
The Company recognizes interest expense under the provisions of the Hedge
Agreements and the Additional Hedge Agreement based on the fixed rate. The
Company is exposed to credit loss in the event of non-performance by the
lenders; however, such non-performance is not anticipated.
The following table summarizes the Credit Facilities under the Credit
Agreements at June 30, 1997:
Revolving Term Total
Credit Loan Available
Facilities Facilities Facilities
---------- ---------- ----------
RHI Holdings, Inc.
Revolving credit facility........... $ 100 $ -- $ 4,250
Fairchild Holding Corp.
Revolving credit facility........... 30,900 -- 52,000
Banner Aerospace, Inc.
Revolving credit facility........... 32,000 -- 71,500
Term Loan........................... -- 44,500 44,500
Tranche B Loan...................... -- 29,850 29,850
Tranche C Loan...................... -- 40,000 40,000
------- ------- -------
Total $ 63,000 $114,350 $242,100
======= ======= =======
At June 30, 1997, the Company had outstanding letters of credit of $10,811,
which were supported by the Credit Agreement and other bank facilities on an
unsecured basis. At June 30, 1997, the Company had unused bank lines of credit
aggregating $53,939, at interest rates slightly higher than the prime rate. The
Company also has short-term lines of credit relating to foreign operations,
aggregating $9,350, against which the Company owed $5,967 at June 30, 1997.
Summarized below are certain items and other information relating to the
debt outstanding at June 30, 1997:
12% 13% 11 7/8%
13 1/8% Intermediate Junior RHI Senior
Subordinated Subordinated Subordinated Subordinated
Debentures Debentures Debentures Debentures
------------ ------------ ------------ ------------
Date Issued March 1986 Oct. 1986 March 1987 March 1987
Face Value $ 75,000 $160,000 $102,000 $126,000
Balance June 30, 1997 $ 35,188 $115,359 $ 24,834 $ 85,852
Percent Issued at 95.769 93.470 98.230 99.214
Bond Discount $ 3,173 $ 10,448 $ 1,805 $ 990
Amortization 1997 $ 127 $ 864 $ 34 $ 82
1996 $ 118 $ 761 $ 30 $ 82
1995 $ 103 $ 687 $ 27 $ 94
Yield to Maturity 13.80% 13.06% 13.27% 12.01%
Interest Payments Semi-Annual Semi-Annual Semi-Annual Semi-Annual
Sinking Fund Start Date 3/15/97 10/15/97 3/1/98 3/1/97
Sinking Fund Installments $ 7,500 $ 32,000 $ 10,200 $ 31,500
Fiscal Year Maturity 2006 2002 2007 1999
Callable Option on 3/15/89 10/15/89 3/1/92 3/1/92
Under the most restrictive covenants of the above indentures, the Company's
consolidated net worth, as defined, must not be less than $35,000. RHI's
consolidated net worth must not be less than $125,000. At June 30, 1997,
consolidated net worth was $229,625 at the Company and $438,830 at RHI. At the
present time, none of the Company's consolidated retained earnings are available
for capital distributions due to a cumulative earnings restriction. The
indentures also provide restrictions on the amount of additional borrowings by
the Company.
The annual maturity of long-term debt obligations (exclusive of capital
lease obligations) for each of the five years following June 30, 1997, are as
follows: $31,207 for 1998, $93,544 for 1999, $42,288 for 2000, $77,407 for
2001, and $77,772 for 2002.
11. PENSIONS AND POSTRETIREMENT BENEFITS
------------------------------------
Pensions
--------
The Company and its subsidiaries have defined benefit pension plans
covering most of its employees. Employees in foreign subsidiaries may
participate in local pension plans, which are in the aggregate insignificant.
The Company's funding policy is to make the minimum annual contribution required
by applicable regulations. The following table provides a summary of the
components of net periodic pension expense (income) for the plans:
1997 1996 1995
-------- -------- --------
Service cost (current period attribution).. $ 2,521 $ 3,513 $ 3,917
Interest cost of projected benefit
obligation............................... 15,791 14,499 14,860
Actual return on plan assets............... (31,400) (39,430) (14,526)
Amortization of prior service cost......... (180) 81 81
Net amortization and deferral.............. 11,157 21,495 (4,341)
------- ------- -------
(2,111) 158 (9)
Net periodic pension expense (income) for
other plans including foreign plans...... 142 (118) 78
------- ------- -------
Net periodic pension expense (income)...... $ (1,969) $ 40 $ 69
======= ======= =======
Assumptions used in accounting for the plans were:
1997 1996 1995
-------- -------- --------
Discount rate............................ 7.75% 8.5% 8.5%
Expected rate of increase in salaries.... 4.5% 4.5% 4.5%
Expected long-term rate of return on
plan assets............................ 9.0% 9.0% 9.0%
In Fiscal 1996, the Company recognized one-time charges of $857 from the
divestiture of subsidiaries, which resulted in a recognition of prior service
costs, and $84 from the early retirement window program at the Company's
corporate office. The reduction in liabilities due from the cessation of future
salary increases is not immediately recognizable in income, but will be used as
an offset against existing unrecognized losses. The Company will have a future
savings benefit from a lower net periodic pension cost due to the amortization
of a smaller unrecognized loss.
The following table sets forth the funded status and amounts recognized in
the Company's consolidated balance sheets at June 30, 1997, and 1996, for the
plans:
June 30, June 30,
1997 1996
-------- --------
Actuarial present value of benefit obligation:
Vested................................................ $183,646 $164,819
Nonvested............................................. 7,461 6,169
------- -------
Accumulated benefit obligation........................ 191,107 170,988
Effect of projected future compensation increases..... 683 905
------- -------
Projected benefit obligation............................ 191,790 171,893
Plan assets at fair value............................... 237,480 224,692
------- -------
Plan assets in excess of projected benefit obligations.. 45,690 52,799
Unrecognized net loss................................... 29,592 20,471
Unrecognized prior service cost......................... (571) (354)
Unrecognized net transition assets...................... (315) (608)
------- -------
Prepaid pension cost prior to SFAS 109 implementation... 74,396 72,308
Effect of SFAS 109 implementation....................... (14,654) (14,648)
------- -------
Prepaid pension cost.................................... $ 59,742 $ 57,660
======= =======
Plan assets include Class A Common Stock of the Company valued at a fair
market value of $26,287 and $11,094 at June 30, 1997 and 1996, respectively.
Substantially all of the plan assets are invested in listed stocks and bonds.
Postretirement Health Care Benefits
-----------------------------------
The Company provides health care benefits for most retired employees.
Postretirement health care expense from continuing operations totaled $642,
$779, and $701 for 1997, 1996 and 1995, respectively. The Company has accrued
approximately $34,965 and $36,995 as of June 30, 1997 and 1996, respectively,
for postretirement health care benefits related to discontinued operations.
This represents the cumulative discounted value of the long-term obligation and
includes interest expense of $3,349, $3,877, and $3,872 for the years ended June
30, 1997, 1996 and 1995, respectively. The components of expense in Fiscal
1997, 1996 and 1995 are as follows:
1997 1996 1995
------ ------ ------
Service cost of benefits earned............ $ 140 $ 281 $ 321
Interest cost on liabilities............... 3,940 4,377 4,385
Net amortization and deferral.............. (89) (2) (133)
------ ------ ------
Net periodic postretirement benefit cost... $3,991 $4,656 $4,573
====== ====== ======
A one-time credit of $3,938, resulting from the divestitures of
subsidiaries, was offset by $4,361 from DME's accumulated postretirement benefit
obligation for active employees, which was transferred to CMI as part of the
sale. The Company recognized the net effect of $423 as an expense in 1996.
The following table sets forth the funded status for the Company's
postretirement health care benefit plans at June 30,:
1997 1996
------- -------
Accumulated postretirement benefit obligations:
Retirees........................................ $ 48,145 $ 46,846
Fully eligible active participants.............. 390 347
Other active participants....................... 2,335 1,887
------- -------
Accumulated postretirement benefit obligation..... 50,870 49,080
Unrecognized net loss............................. 6,173 2,086
------- -------
Accrued postretirement benefit liability.......... $ 44,697 $ 46,994
======= =======
The accumulated postretirement benefit obligation was determined using a
discount rate of 7.75%, and a health care cost trend rate of 7.0% for pre-age-65
and post-age-65 employees, respectively, gradually decreasing to 5.5% in the
year 2003 and thereafter.
Increasing the assumed health care cost trend rates by 1% would increase
the accumulated postretirement benefit obligation as of June 30, 1997, by
approximately $1,871, and increase the net periodic postretirement benefit cost
by approximately $132 for Fiscal 1997.
12 INCOME TAXES
------------
The provision (benefit) for income taxes from continuing operations is
summarized as follows:
1997 1996 1995
-------- -------- --------
Current:
Federal.......................... $ 6,143 $ (41,595) $ (8,315)
State............................ 1,197 1,203 424
Foreign.......................... (45) 669 1,191
-------- -------- --------
7,295 (39,723) (6,700)
Deferred:
Federal......................... (15,939) 21,315 (19,450)
State........................... 3,444 (3,657) (2,052)
-------- -------- --------
(12,495) 17,658 (21,502)
-------- -------- --------
Net tax benefit.................... $ (5,200) $ (22,065) $ (28,202)
======== ======== ========
The income tax provision (benefit) for continuing operations differs from
that computed using the statutory Federal income tax rate of 35%, in Fiscal
1997, 1996 and 1995, for the following reasons:
1997 1996 1995
-------- -------- --------
Computed statutory amount.......... $ (1,354) $ 40,357 $ (26,641)
State income taxes, net of
applicable federal tax benefit... 778 782 (1,794)
Nondeductible acquisition
valuation items.................. 1,064 1,329 1,420
Tax on foreign earnings, net of
tax credits...................... (1,938) 1,711 2,965
Difference between book and tax
basis of assets acquired and
liabilities assumed.............. (1,102) 1,040 1,366
Nontaxable gain related to the
Merger........................... -- (60,681) --
Revision of estimate for tax
accruals......................... (5,335) (3,500) (5,000)
Other.............................. 2,687 (3,103) (518)
--------- --------- --------
Net tax benefit.................... $ (5,200) $ (22,065) $ (28,202)
========= ========= ========
/TABLE
The following table is a summary of the significant components of the
Company's deferred tax assets and liabilities, and deferred provision or benefit
for the following periods:
1997 1996 1995
Deferred Deferred Deferred
June 30, (Provision) June 30, (Provision)(Provision)
1997 Benefit 1996 Benefit Benefit
-------- ---------- -------- ----------- -----------
Deferred tax assets:
Accrued expenses................... $ 6,440 $ 504 $ 5,936 $ (1,643) $ (2,218)
Asset basis differences............ 572 (1,492) 2,064 1,787 (7,292)
Inventory.......................... 2,198 2,198 -- -- --
Employee compensation and benefits. 5,141 (267) 5,408 (26) 106
Environmental reserves............. 3,259 (1,253) 4,512 (737) (1,202)
Loss and credit carryforward....... -- (8,796) 8,796 (23,229) 17,991
Postretirement benefits............ 19,472 138 19,334 (1,273) 514
Other.............................. 7,598 2,079 5,519 2,186 1,530
------- ------- ------- ------- -------
44,680 (6,889) 51,569 (22,935) 9,429
Deferred tax liabilities:
Asset basis differences............ (26,420) (3,855) (22,565) 16,602 4,129
Inventory.......................... -- 2,010 (2,010) 4,684 3,176
Pensions........................... (19,281) (1,038) (18,243) 1,516 1,074
Other.............................. (7,240) 22,267 (29,507) (17,525) 3,694
------- ------- ------- ------- -------
(52,941) 19,384 (72,325) 5,277 12,073
------- ------- ------- ------- -------
Net deferred tax liability........... $ (8,261) $ 12,495 $(20,756) $(17,658) $ 21,502
======= ======= ======= ======= =======
The amounts included in the balance sheet are as follows:
June 30, June 30,
1997 1996
-------- --------
Prepaid expenses and other current assets:
Current deferred..................... $ 11,307 $ 8,012
======= =======
Income taxes payable:
Current deferred..................... $ (2,735) $ 20,797
Other current........................ 8,616 3,838
------- -------
$ 5,881 $ 24,635
======= =======
Noncurrent income tax liabilities:
Noncurrent deferred.................. $ 22,303 $ 7,971
Other noncurrent..................... 19,710 23,766
------- -------
$ 42,013 $ 31,737
======= =======
The 1997, 1996 and 1995 net tax benefits include the results of
reversing $5,335, $3,500 and $5,000, respectively, of federal income taxes
previously provided for due to a change in the estimate of required tax
accruals.
Domestic income taxes, less available credits, are provided on the
unremitted income of foreign subsidiaries and affiliated companies, to the
extent that such earnings are intended to be repatriated. No domestic income
taxes or foreign withholding taxes are provided on the undistributed earnings
of foreign subsidiaries and affiliates, which are considered permanently
invested, or which would be offset by allowable foreign tax credits. At June
30, 1997, the amount of domestic taxes payable upon distribution of such
earnings was not significant.
In the opinion of management, adequate provision has been made for all
income taxes and interest, and any liability that may arise for prior periods
will not have a material effect on the financial condition or results of
operations of the Company.
13. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
----------------------------------------------
Included in the Company's $68,309 of minority interest at June 30, 1997,
is $67,649, representing approximately 40.7% of Banner's common stock
effectively outstanding on a consolidated basis.
14. EQUITY SECURITIES
-----------------
The Company had 13,992,283 shares of Class A common stock and 2,632,516
shares of Class B common stock outstanding at June 30, 1997. Class A common
stock is traded on both the New York and Pacific Stock Exchanges. There is
no public market for the Class B common stock. Shares of Class A common
stock are entitled to one vote per share and cannot be exchanged for shares
of Class B common stock. Shares of Class B common stock are entitled to ten
votes per share and can be exchanged, at any time, for shares of Class A
common stock on a share-for-share basis. In Fiscal 1997, 234,935 shares of
Class A Common Stock were issued as a result of the exercise of stock options
and shareholders converted 1,188 shares of Class B common stock into Class A
common stock.
RHI holds an investment of 4,319,423 shares of the Company's Class A
common stock. At June 30, 1997, RHI's market value was approximately
$78,649. The Company accounts for the Class A common stock held by RHI as
Treasury Stock.
15. STOCK OPTIONS AND WARRANTS
--------------------------
Stock Options
-------------
The Company's 1986 Non-Qualified and Incentive Stock Option Plan (the
"1986 Plan"), authorizes the issuance of 4,320,000 shares of Class A Common
Stock upon the exercise of stock options issued under the 1986 Plan. The
purpose of the 1986 Plan is to encourage continued employment and ownership
of Class A Common Stock by officers and key employees of the Company and its
subsidiaries, and provide additional incentive to promote the success of the
Company. At the Company's 1996 annual meeting, the Company's stockholders
approved an extension of the expiration date of the 1986 Plan from April 9,
1996 to April 9, 2006. The 1986 Plan authorizes the granting of options at
not less than the market value of the common stock at the time of the grant.
The option price is payable in cash or, with the approval of the Company's
Compensation and Stock Option Committee of the Board of Directors, in shares
of common stock, valued at fair market value at the time of exercise. The
options normally terminate five years from the date of grant, subject to
extension of up to 10 years or for a stipulated period of time after an
employee's death or termination of employment.
At the Company's 1996 annual meeting, the Company's stockholders
approved the 1996 Non-Employee Directors Stock Option Plan (the "1996 NED
Plan"). The ten year 1996 NED Plan authorizes the issuance of 250,000 shares
of Class A Common Stock upon the exercise of stock options issued under the
1996 NED Plan. The 1996 NED Plan authorizes the granting of options at the
market value of the common stock on the date of grant. An initial stock
option grant for 30,000 shares of Class A Common Stock will be made to each
person who becomes a new non-employee Director, on such date, with the
options to vest 25% each year from the date of grant. On the date of each
annual meeting, each person elected as a non-employee Director at such
meeting will be granted an option for 1,000 shares of Class A Common Stock,
which will vest immediately. The exercise price is payable in cash or, with
the approval of the Stock Option Committee, in shares of Class A or Class B
Common Stock, valued at fair market value at the date of exercise. All
options issued under the 1996 NED Plan will terminate five years from the
date of grant or a stipulated period of time after a Non-Employee Director
ceases to be a member of the Board. The 1996 NED Plan is designed to
maintain the Company's ability to attract and retain highly qualified and
competent persons to serve as outside directors of the Company.
On November 17, 1994, the Company's stockholders approved the grant of
stock options of 190,000 shares to outside Directors of the Company to
replace expired stock options. These stock options expire five years from
the date of the grant.
Summaries of stock option transactions under the 1986 Plan, the 1996 NED
Plan, and prior plans are presented in the following tables:
Weighted
Average
Exercise
Shares Price
----------- --------
Outstanding at July 1, 1994 1,520,706 $ 5.57
Granted 356,600 3.78
Expired (116,875) 5.44
Forfeited (60,650) 5.94
----------- --------
Outstanding at June 30, 1995 1,699,781 5.14
Granted 540,078 4.33
Exercised (286,869) 5.26
Expired (659,850) 6.06
Forfeited (19,653) 4.30
----------- --------
Outstanding at June 30, 1996 1,273,487 4.27
Granted 457,350 14.88
Exercised (234,935) 4.79
Expired (1,050) 4.59
Forfeited (9,412) 3.59
----------- --------
Outstanding at June 30, 1997 1,485,440 $ 7.46
=========== ========
Exercisable at June 30, 1995 1,159,306 $ 5.68
Exercisable at June 30, 1996 399,022 $ 4.59
Exercisable at June 30, 1997 486,855 $ 4.95
A summary of options outstanding at June 30, 1997 is presented as
follows:
Options Outstanding Options Exercisable
-------------------------------- ---------------------
Weighted Average Weighted
Average Remaining Average
Range of Number Exercise Contract Number Exercise
Exercise Prices Outstanding Price Life Exercisable Price
- --------------- ----------- -------- --------- ----------- --------
$ 3.50 - 8.625 1,022,700 $ 4.10 2.6 years 452,509 $ 4.10
$13.625 - 16.25 462,740 $14.89 4.4 years 34,346 $16.19
- --------------- ----------- -------- --------- ----------- --------
$ 3.50 - 16.25 1,485,440 $ 7.46 3.2 years 486,855 $ 4.95
=============== =========== ======== ========= =========== ========
The weighted average grant date fair value of options granted during
1997 and 1996 was $6.90 and $1.95, respectively. The fair value of each
option granted is estimated on the grant date using the Black-Scholes option
pricing model. The following significant assumptions were made in estimating
fair value:
Assumption 1997 1996
- ---------- ----------- -----------
Risk-free interest rate 6.0% - 6.7% 5.5% - 6.6%
Expected life in years 4.65 4.27
Expected volatility 43% - 45% 46% - 47%
Expected dividends none none
The Company applies APB Opinion 25 in accounting for its stock option
plans. Accordingly, no compensation cost has been recognized for the stock
option plans in 1997 or 1996. If stock options granted in 1997 and 1996 were
accounted for based on their fair value as determined under SFAS 123, pro
forma earnings would be as follows:
1997 1996
-------- --------
Net earnings:
As reported $ 1,331 $189,706
Pro forma 283 189,460
Primary earnings per share:
As reported $ .08 $ 11.43
Pro forma .02 11.41
Fully diluted earnings per share:
As reported $ .08 $ 11.09
Pro forma .02 11.08
The pro forma effects of applying SFAS 123 are not representative of the
effects on reported net earnings for future years. SFAS 123 does not apply
to awards made prior to 1996, and additional awards in future years are
expected.
Stock Warrants
--------------
On April 25, 1997, the Company issued warrants to purchase 100,000
shares of Class A Common Stock, at $12.25 per share, to Dunstan Ltd. as
incentive remuneration for the performance of certain investment banking
services. The warrants may be earned on a pro-rata basis over a six-month
period ending October 31, 1997. The warrants become exercisable on November
1, 1997 and expire on November 8, 2000. The Company recorded a selling,
general & administrative expense of $191 in 1997 for stock warrants earned in
1997 based on a grant-date fair value of $5.46.
Effective as of February 21, 1997, the Company approved the continuation
of an existing warrant to purchase 375,000 shares of the Company's Class A or
Class B Common Stock at $7.67 per share. The warrant was modified to extend
the exercise period from Mach 13, 1997, to March 13, 2002, and to increase
the exercise price per share by $.002 for each day subsequent to March 13,
1997, but fixed at $7.80 per share after June 30, 1997. In addition, the
warrant was modified to provide that the warrant may not be exercised except
within the following window periods: (i) within 365 days after the merger of
STFI with AT&T Corporation, MCI Communications, Worldcom Inc., Tel-Save
Holdings, Inc., or Teleport Communications Group,Inc.; (ii) within 365 days
after a change of control of the Company, as defined in the FHC Credit
Agreement; or (iii) within 365 days after a change of control of Banner,
as defined in the Banner Credit Agreement. In no event may the warrant be
exercised after March 13, 2002.
On November 9, 1995, the Company issued warrants to purchase 500,000
shares of Class A Common Stock, at $9.00 per share, to Peregrine Direct
Investments Limited ("Peregrine"), in exchange for a standby commitment it
received on November 8, 1995, from Peregrine. The Company elected not to
exercise its rights under the Peregrine commitment. The warrants are
immediately exercisable and will expire on November 8, 2000.
On February 21, 1996, the Company issued warrants to purchase 25,000
shares of Class A Common Stock, at $9.00 per share, to a non-employee for
services provided in connection with the Company's various dealings with
Peregrine. The warrants issued are immediately exercisable and will expire
on November 8, 2000.
The Company recorded nonrecurring expenses of $1,148 for the grant date
fair value of the stock warrants issued in 1996. The warrants issued in 1996
were outstanding at June 30, 1997.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
Statement of Financial Accounting Standards No. 107, ("SFAS 107")
"Disclosures about Fair Value of Financial Instruments", requires disclosures
of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used,
including discount rate and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS 107 excludes certain financial
instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
The carrying amount reported in the balance sheet approximates the fair
value for cash and cash equivalents, short-term borrowings, current
maturities of long-term debt, and all other variable rate debt (including
borrowings under the Credit Agreements).
Fair values for equity securities, and long-term public debt issued by
the Company are based on quoted market prices, where available. For equity
securities not actively traded, fair values are estimated by using quoted
market prices of comparable instruments or, if there are no relevant
comparable instruments, on pricing models or formulas using current
assumptions. The fair value of limited partnerships, other investments, and
notes receivable are estimated by discounting expected future cash flows
using a current market rate applicable to the yield, considering the credit
quality and maturity of the investment.
The fair value for the Company's other fixed rate long-term debt is
estimated using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
Fair values for the Company's off-balance-sheet instruments (letters of
credit, commitments to extend credit, and lease guarantees) are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counter parties' credit standing.
The fair value of the Company's off-balance-sheet instruments at June 30,
1997, was not material.
The carrying amounts and fair values of the Company's financial
instruments at June 30, 1997 and 1996, are as follows:
June 30, 1997 June 30, 1996
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Cash and cash equivalents......... $ 19,420 $ 19,420 $ 39,649 $ 39,649
Investment securities:
Short-term equity securities.... 16,094 16,122 10,362 10,362
Short-term other investments.... 9,553 9,592 136 167
Long-term other investments..... 4,120 4,617 585 1,451
Notes receivable:
Current......................... -- -- 170,384 170,384
Long-term....................... 1,300 1,300 3,702 3,702
Short-term debt................... 15,629 15,629 76,535 76,535
Long-term debt:
Bank credit agreement........... 177,250 177,250 112,500 112,500
Senior notes and subordinated
debentures.................... 261,233 270,995 260,125 264,759
Industrial revenue bonds........ 1,500 1,500 1,500 1,500
Capitalized leases.............. 1,897 1,897 65 65
Other........................... 6,835 6,835 2,756 2,756
17. RESTRUCTURING CHARGES
---------------------
In Fiscal 1996, the Company recorded restructuring charges in the
Aerospace Fasteners segment in the categories shown below. All costs
classified as restructuring were the direct result of formal plans to close
plants, to terminate employees, or to exit product lines. Substantially all
of these plans have been executed. Other than a reduction in the Company's
existing cost structure and manufacturing capacity, none of the restructuring
charges resulted in future increases in earnings or represented an accrual of
future costs. The costs included in restructuring were predominately
nonrecurring in nature and consisted of the following significant components:
Write down of inventory to net realizable value
related to discontinued product lines (a)...... $ 156
Write down of fixed assets related to
discontinued product lines..................... 270
Severance benefits for terminated employees
(substantially all paid within twelve months).. 1,368
Plant closings facility costs (b)............... 389
Contract termination claims..................... 136
------
$ 2,319
======
Write down was required because product line was discontinued.
Includes lease settlements, write-off of leasehold improvements, maintenance,
restoration and clean up costs.
18. RELATED PARTY TRANSACTIONS
--------------------------
Corporate office administrative expense recorded by FHC and its
predecessors was billed to the Company on a monthly basis during 1997, 1996
and 1995. These costs represent the cost of services incurred on behalf of
affiliated companies. Each of these affiliated companies has reimbursed FHC
for such services.
The Company and its wholly-owned subsidiaries are all parties to a tax
sharing agreement whereby the Company files a consolidated federal income tax
return. Each subsidiary makes payments to the Company based on the amount of
federal income taxes, if any, the subsidiary would have paid if it had filed
a separate tax return.
Prior to the consolidation of Banner on February 25, 1996, the Aerospace
Fasteners segment had sales to Banner of $3,663 and $5,494 in Fiscal 1996,
and 1995, respectively.
19. LEASES
------
The Company holds certain of its facilities and equipment under long-
term leases. The minimum rental commitments under non-cancelable operating
leases with lease-terms in excess of one year, for each of the five years
following June 30, 1997, are as follows: $5,182 for 1998, $4,127 for 1999,
$2,937 for 2000, $2,271 for 2001, and $1,732 for 2002. Rental expense on
operating leases from continuing operations for Fiscal 1997, 1996 and 1995
was $4,928, $6,197, and $6,695, respectively. Minimum commitments under
capital leases for each of the five years following June 30, 1997, was $651
for 1998, $693 for 1999, $262 for 2000, $210 for 2001, and $137 for 2002,
respectively. At June 30, 1997, the present value of capital lease
obligations was $1,897. At June 30, 1997, capital assets leased, included in
property, plant, and equipment consisted of:
Buildings and improvements....... $ 1,396
Machinery and equipment.......... 8,017
Furniture and fixtures........... 114
Less: Accumulated depreciation... (7,700)
------
$ 1,827
======
20. CONTINGENCIES
-------------
CL Motor Freight ("CL") Litigation
----------------------------------
The Workers Compensation Bureau of the State of Ohio is seeking
reimbursement from the Company for up to $5,400 for CL workers compensation
claims which were insured under a self-insured program of CL. The Company
has contested a significant portion of this claim and believes that the
ultimate disposition of this claim will not be material.
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 FII 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. 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 Federal, state and
local environmental laws and regulations concerning, among other things, the
discharge of materials into the environment and the generation, handling,
storage, transportation and disposal of waste and hazardous materials. To
date, such laws and regulations have not had a material effect on the
financial condition, results of operations, or net cash flows of the Company,
although the Company has expended, and can be expected to expend in the
future, significant amounts for investigation of environmental conditions and
installation of environmental control facilities, remediation of
environmental conditions and other similar matters, particularly in the
Aerospace Fasteners segment.
In connection with its plans to dispose of certain real estate, the
Company must investigate environmental conditions and may be required to take
certain corrective action prior or pursuant to any such disposition. In
addition, management has identified several areas of potential contamination
at or from other facilities owned, or previously owned, by the Company, that
may require the Company either to take corrective action or to contribute to
a clean-up. The Company is also a defendant in certain lawsuits and
proceedings seeking to require the Company to pay for investigation or
remediation of environmental matters and has been alleged to be a potentially
responsible party at various "Superfund" sites. Management of the Company
believes that it has recorded adequate reserves in its financial statements
to complete such investigation and take any necessary corrective actions or
make any necessary contributions. No amounts have been recorded as due from
third parties, including insurers, or set off against, any liability of the
Company, unless such parties are contractually obligated to contribute and
are not disputing such liability.
As of June 30, 1997, the consolidated total recorded liabilities of the
Company for environmental matters approximated $8,420, 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
$13,200 on an undiscounted basis.
Other Matters
-------------
The Company is involved in various other claims and lawsuits incidental
to its business, some of which involve substantial amounts. The Company,
either on its own or through its insurance carriers, is contesting these
matters. In the opinion of management, the ultimate resolution of the legal
proceedings, including those aforementioned, will not have a material adverse
effect on the financial condition, or future results of operations or net
cash flows of the Company.
21. BUSINESS SEGMENT INFORMATION
----------------------------
The Company reports in two principal business segments. The Aerospace
Fasteners segment includes the manufacture of high performance specialty
fasteners and fastening systems. The Aerospace Distribution segment
distributes a wide range of aircraft parts and related support services to
the aerospace industry. The results of Fairchild Technologies, which is
primarily engaged in the designing and manufacturing of capital equipment and
systems for recordable compact disc and advance semiconductor manufacturing,
are reported under Corporate and Other, along with results two smaller
operations. Prior to the Merger on March 13, 1996, the Company operated in
the Communications Services segment.
The Company's financial data by business segment is as follows:
1997 1996 1995
--------- --------- ---------
Sales:
Aerospace Fasteners.............. $ 269,026 $ 218,059 $ 215,364
Aerospace Distribution (a)....... 411,765 129,973 --
Communications Services (b)...... -- 91,290 108,710
Corporate and Other.............. 72,882 67,330 41,476
Eliminations (c)................. (15,213) (5,842) --
--------- --------- ---------
Total Sales........................ $ 738,460 $ 500,810 $ 365,550
========= ========= =========
Operating Income (Loss):
Aerospace Fasteners (d).......... $ 17,390 $ 135 $ (11,497)
Aerospace Distribution (a)....... 30,891 5,625 --
Communications Services (b)...... -- 14,561 18,498
Corporate and Other.............. (17,764) (14,876) (20,420)
--------- --------- ---------
Operating Income (Loss)............ $ 30,517 $ 5,445 $ (13,419)
========= ========= =========
Capital Expenditures:
Aerospace Fasteners.............. $ 8,964 $ 3,841 $ 4,974
Aerospace Distribution........... 4,787 1,556 --
Communications Services.......... -- 8,500 10,349
Corporate and Other.............. 8,365 1,225 937
--------- --------- ---------
Total Capital Expenditures......... $ 22,116 $ 15,122 $ 16,260
========= ========= =========
Depreciation and Amortization:
Aerospace Fasteners.............. $ 16,112 $ 14,916 $ 15,619
Aerospace Distribution........... 5,138 1,341 --
Communications Services.......... -- 8,064 10,329
Corporate and Other.............. 4,685 5,396 5,260
--------- --------- ---------
Total Depreciation and Amortization $ 25,935 $ 29,717 $ 31,208
========= ========= =========
Identifiable Assets at June 30,:
Aerospace Fasteners.............. $ 346,533 $ 252,200 $ 290,465
Aerospace Distribution........... 428,436 329,477 --
Communications Services.......... -- -- 108,666
Corporate and Other.............. 292,364 428,261 451,163
--------- --------- ---------
Total Identifiable Assets.......... $1,067,333 $1,009,938 $ 850,294
========= ========= =========
(a) Effective February 25, 1996, the Company became the majority shareholder of
Banner Aerospace, Inc. and, accordingly, began consolidating their results.
(b) Effective March 13, 1996, the Company's investment in the Communications
Services segment was recorded using the equity method.
(c) Represents intersegment sales from the Aerospace Fasteners segment to the
Aerospace Distribution segment.
(d) Includes restructuring charges of $2.3 million in Fiscal 1996.
22. FOREIGN OPERATIONS AND EXPORT SALES
-----------------------------------
The Company's operations are located primarily in the United States and
Europe. Inter-area sales are not significant to the total sales of any
geographic area. The Company's financial data by geographic area is as
follows:
1997 1996 1995
--------- --------- ---------
Sales by Geographic Area:
United States.................... $ 601,834 $ 393,247 $ 283,811
Europe........................... 136,626 107,186 80,945
Other............................ -- 377 794
--------- --------- ---------
Total Sales........................ $ 738,460 $ 500,810 $ 365,550
========= ========= =========
Operating Income by Geographic Area:
United States.................... $ 24,299 $ (342) $ (13,024)
Europe........................... 6,218 5,935 (432)
Other............................ -- (148) 37
--------- --------- ---------
Total Operating Income............. $ 30,517 $ 5,445 $ (13,419)
========= ========= =========
Identifiable Assets by Geographic
Area at June 30,:
United States.................... $ 857,943 $ 932,311 $ 763,734
Europe........................... 209,390 77,627 85,668
Other............................ -- -- 892
--------- --------- ---------
Total Identifiable Assets.......... $1,067,333 $1,009,938 $ 850,294
========= ========= =========
Export sales are defined as sales to customers in foreign countries by
the Company's domestic operations. Export sales amounted to the following:
1997 1996 1995
--------- --------- ---------
Export Sales
Europe........................... $ 48,490 $ 27,330 $ 13,329
Asia (excluding Japan)........... 29,145 8,920 1,526
Japan............................ 19,819 11,958 4,140
Canada........................... 17,955 8,878 2,810
Other............................ 15,907 8,565 911
--------- --------- ---------
Total Export Sales................. $ 131,316 $ 65,651 $ 22,716
========= ========= =========
/TABLE
23. QUARTERLY FINANCIAL DATA (UNAUDITED)
------------------------------------
The following table of quarterly financial data has been prepared from
the financial records of the Company without audit, and reflects all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results of operations for the interim periods presented:
- ---------------------------------------------------------------------------------------------
Fiscal 1997 quarters ended Sept. 29 Dec. 29 Mar. 30 June 30
- ---------------------------------------------------------------------------------------------
Net sales.......................... $146,090 $159,912 $190,782 $241,676
Gross profit....................... 39,810 38,775 52,788 73,750
Earnings (loss) from continuing
operations........................ (4,618) (2,977) 40 8,886
per share...................... (.28) (.18) -- .51
Net earnings (loss)................ (4,618) (2,977) 40 8,886
per share...................... (.28) (.18) -- .51
Market price of Class A Stock:
High............................. 17 17 3/4 15 3/8 18
Low.............................. 12 1/4 14 3/8 12 7/8 11 5/8
Close............................ 16 14 5/8 13 3/8 18
- ---------------------------------------------------------------------------------------------
Fiscal 1996 quarters ended Oct. 1 Dec. 31 March 31 June 30
- ---------------------------------------------------------------------------------------------
Net sales.......................... $107,926 $103,450 $135,451 $153,983
Gross profit....................... 23,591 23,036 29,846 40,418
Earnings (loss) from continuing
operations....................... (9,286) (9,016) 155,095 577
per share...................... (.58) (.56) 9.27 .03
Earnings from discontinued
operations, net.................. 3,870 3,420 1,769 127
per share...................... .24 .21 .11 .01
Gain (loss) from disposal of
discontinued operations, net..... (20) (7) 61,286 (7,673)
per share...................... -- -- 3.66 (.45)
Extraordinary items, net........... -- -- (10,436) --
per share...................... -- -- (.62) --
Net earnings (loss)................ (5,436) (5,603) 207,714 (6,969)
per share...................... (.34) (.35) 12.42 (.41)
Market price range of Class A Stock
High............................. 6 8 3/4 9 7/8 15 7/8
Low.............................. 2 7/8 4 3/4 8 9 1/4
Close............................ 5 1/8 8 1/2 9 3/8 14 5/8
Included in earnings (loss) from continuing operations are (i) a $2,528
nonrecurring gain from the sale of SBC in the fourth quarter of Fiscal 1997,
(ii) charges to reflect the cost of restructuring the Company's Aerospace
Fasteners segment, of $285, $959 and $1,075 in the second, third and fourth
quarters of Fiscal 1996, respectively, and (iii) nonrecurring income of
$161,406 resulting primarily from the gain on the merger of FCSC with STI
in the third quarter of Fiscal 1996. Earnings from discontinued operations,
net, includes the results of DME and Data in each Fiscal 1996 quarter.
Extraordinary items relate to the early extinguishment of debt by the
Company. (See Note 7).
24. SUBSEQUENT EVENTS
-----------------
On July 16, 1997, STFI entered into a definitive merger agreement (the
"STFI/Tel-Save Merger") with Tel-Save Holdings, Inc. ("Tel-Save"), pursuant
to which Tel-Save plans to acquire STFI in a business combination accounted
for as a pooling of interests. Upon consummation of the STFI/Tel-Save
Merger, the Company will receive shares of Tel-Save's common stock in
exchange for its shares of STFI common stock and STFI cumulative convertible
preferred stock. The price to be paid by Tel-Save is $11.25 for each share
of STFI. This price may increase depending on the price of Tel-Save prior to
the effective date of the merger. In addition, the Company will receive
approximately $22,000 cash in redemption for its shares of STFI special
preferred stock. The Company expects the merger to be consummated prior to
December 31, 1997. As a result of the transaction, the Company will
recognize an estimated gain in excess of $100,000.
Report of Independent Public Accountants
----------------------------------------
To The Fairchild Corporation:
We have audited the accompanying consolidated balance sheets of The Fairchild
Corporation (a Delaware corporation) and subsidiaries as of June 30, 1997 and
1996, and the related consolidated statements of earnings, stockholders'
equity and cash flows for the years ended June 30, 1997, 1996 and 1995.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Fairchild Corporation
and subsidiaries as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for the years ended June 30, 1997, 1996 and
1995, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
September 5, 1997
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- -------------------------------------------------------------
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
- ---------------------------------------------------------
The information required by this Item is incorporated herein by
reference from the 1997 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information required by this Item is incorporated herein by
reference from the 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information required by this Item is incorporated herein by
reference from the 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this Item is incorporated herein by
reference from the 1997 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
The following documents are filed as part of this Report:
(a)(1) Financial Statements.
All financial statements of the registrant as set forth under Item 8 of
this report on Form 10-K (see index on Page 26).
(a)(2) Financial Statement Schedules and Report of Independent Public
Accountants.
Schedule Number Description Page Number
--------------- ----------- -----------
II Valuation and Qualifying Accounts 77
All other schedules are omitted because they are not required.
Report of Independent Public Accountants
----------------------------------------
To The Fairchild Corporation:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of The Fairchild Corporation and
subsidiaries included in this Form 10-K and have issued our report thereon
dated September 5, 1997. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule
listed in the index on the preceding page is the responsibility of the
Company's management and is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in
our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial
statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.
September 5, 1997
(a)(3) Exhibits.
3 (a) Registrant's Restated Certificate of Incorporation
(incorporated by reference to Exhibit "C" of Registrant's
Proxy Statement dated October 27, 1989).
(b) Registrant's Amended and Restated By-Laws, as amended as of
November 21, 1996 (incorporated by reference to the December 29,
1996 10-Q).
4 (a) Specimen of Class A Common Stock certificate (incorporated by
reference to Registration Statement No. 33-15359 on Form S-2).
(b) Specimen of Class B Common Stock certificate (incorporated by
reference from Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1989 (the "1989 10-K")).
(c) Form of Indenture between Registrant and J. Henry Schroder Bank
& Trust Company, pursuant to which Registrant's 13-1/8%
Subordinated Debentures due 2006 (the "Senior Debentures") were
issued (the "Debenture Indenture"), and specimen of Senior
Debenture (incorporated by reference to Registration Statement
No. 33-3521 on Form S-2).
(d) First Supplemental Indenture dated as of November 26, 1986, to
the Debenture Indenture (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1986 (the "December 1986 10-Q").
(e) Form of Indenture between Registrant and Manufacturers Hanover
Trust Company pursuant to which Registrant's 12-1/4% Senior
Subordinated Notes due 1996 (the "Senior Notes") were issued
(the"Note Indenture"), and specimen of Senior Note
(incorporated by reference to Registration Statement No.
33-03521 on Form S-2).
(f) First Supplemental Indenture dated as of November 26, 1986, to
the Note Indenture (incorporated by reference to the December
1986 10-Q).
(g) Indenture between Registrant and Connecticut National Bank (as
successor to National Westminster Bank) dated as of October 15,
1986, pursuant to which Registrant's Intermediate Subordinated
Debentures due 2001 (the "Intermediate Debentures") were
issued, and specimen of Intermediate Debenture (incorporated by
reference to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1986 (the "September 1986 10-Q")).
(h) Indenture between Rexnord Acquisition Corp. ("RAC") and Bank of
New York (as successor to Irving Trust Company) dated as of
March 2, 1987, pursuant to which RAC's Senior Subordinated
Debentures due 1999 (the "Rexnord Senior Debentures") were
issued (the "Rexnord Senior Indenture"), and specimen of
Rexnord Senior Debenture incorporated by reference from
Registrants Annual Report on Form 10-K for fiscal year ended
June 30, 1987 (the "1987 10-K").
(i) First Supplemental Indenture between Rexnord Inc. ("Rexnord")
(as successor to RAC) and Irving Trust Company dated as of July
1, 1987, to the Rexnord Senior Indenture (incorporated by
reference to Registration Statement No. 33-15359 on Form S-2).
(j) Second Supplemental Indenture between Rexnord Holdings Inc.,
now know as RHI Holdings, Inc. ("RHI") (as successor to
Rexnord) and Irving Trust Company dated as of August 16, 1988,
to the Rexnord Senior Indenture (incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1988 (the "1988 10-K")).
(k) Indenture between Registrant and Norwest Bank Minneapolis, N.A.
dated as of March 2, 1987, pursuant to which Registrant's
Junior Subordinated Debentures due 2007 (the "Junior
Debentures") were issued, and specimen of Junior Debenture
(incorporated by reference to Final Amendment to Tender Offer
Statement on Schedule 14D-1 of Banner Acquisition Corp. ("BAC")
dated March 9, 1987).
(l) First Supplemental Indenture between Registrant and Norwest
Bank, Minnesota Bank, N.A., dated as of February 28, 1991, to
Indenture dated as of March 2, 1987, relating to the Junior
Debentures (incorporated by reference to the 1991 10-K).
(m) Securities Purchase Agreement dated as of October 15, 1986, by
and among Registrant and each of the Purchasers of the
Intermediate Debentures (incorporated by reference to the
September 1986 10-Q).
(n) Securities Purchase Agreement dated as of March 2, 1987, by and
among Registrant, RAC and each of the Purchasers of the Junior
Debentures, the Rexnord Senior Debentures and other securities
(incorporated by reference to the 1987 10-K).
(o) Registration Rights Agreement dated as of October 15, 1986, by
and among Registrant and each of the purchasers of the
Intermediate Debentures (incorporated by reference to the
September 1986 10-Q).
(p) Registration Rights Agreement dated as of March 2, 1987, by and
among Registrant, RAC and each of the purchasers of the Junior
Debentures, the Rexnord Senior Debentures and other securities
(incorporated by reference to Registrant's Report on Form 8-K
dated March 17, 1987).
10 (a) Deferred Compensation Agreement between Registrant and Samuel J.
Krasney dated July 14, 1972, as amended November 17, 1978,
September 3, 1985 (the "Krasney Deferred Compensation Agreement")
(incorporated by reference to Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1985).
(b) Amendment to the Krasney Deferred Compensation Agreement dated
September 6, 1990 (incorporated by reference to 1991 10-K).
(c) Amended and Restated Employment Agreement between Registrant
and Samuel J. Krasney dated April 24, 1990 (incorporated by
reference to the 1990 10-K).
(d) Letter Agreements dated August 4, 1993 among Samuel J. Krasney,
The Fairchild Corporation and Jeffrey J. Steiner (incorporated
by reference to 1993 10-K).
(e) 1988 U.K. Stock Option Plan of Banner Industries, Inc.
(incorporated by reference to the 1988 10-K).
(f) Description of grants of stock options to non-employee
directors of Registrant (incorporated by reference to the 1988
10-K).
(g) Amended and Restated Employment Agreement between Registrant
and Jeffrey J. Steiner dated September 10, 1992 (incorporated
by reference to 1993 10-K).
(h) Letter Agreement dated October 23, 1991 between Registrant and
Eric Steiner (incorporated by reference to 1992 10-K).
(i) Letter Agreement dated October 23, 1991 between Registrant and
John D. Jackson (incorporated by reference to 1992 10-K).
(j) Letter Agreement dated October 23, 1991 between Registrant and
Michael T. Alcox (incorporated by reference to 1992 10-K).
(k) Letter Agreement dated October 23, 1991 between Registrant and
Donald E. Miller (incorporated by reference to 1992 10-K).
(l) Letter Agreement dated October 23, 1991 between Registrant and
John L. Flynn (incorporated by reference to 1992 10-K).
(m) Letter Agreement dated April 8, 1993 between Registrant and
Thomas Flaherty (incorporated by reference to 1993 10-K).
(n) Purchase Agreement by and between BTR Dunlop Holdings, Inc.,
RHI Holdings, Inc., and Registrant, dated as of December 2,
1993 (incorporated by reference to Registrant's current
report on Form 8-K dated December 23, 1993).
(o) Letter Agreement dated October 21, 1994, as amended December
21, 1994, between Registrant and Eric Steiner
(incorporated by reference to the 1995 10-K).
(p) Letter Agreement dated October 21, 1994, as amended December
21, 1994, between Registrant and Michael T. Alcox
(incorporated by reference to the 1995 10-K).
(q) Letter Agreement dated October 21, 1994, as amended December
21, 1994, between Registrant and Donald E. Miller
(incorporated by reference to the 1995 10-K).
(r) Letter Agreement dated October 21, 1994, as amended December
21, 1994, between Registrant and John L Flynn
(incorporated by reference to the 1995 10-K).
(s) Letter Agreement dated October 21, 1994, as amended December
21, 1994, between Registrant and Thomas J. Flaherty
(incorporated by reference to the 1995 10-K).
*(t) Letter Agreement dated September 9, 1996, between Registrant and
Colin M. Cohen.
(u)(i) Agreement and Plan of Merger dated as of November 9, 1995 by and
among The Fairchild Corporation, RHI, FII and Shared
Technologies, Inc. ("STI Merger Agreement") (incorporated by
reference from the Registrant's Form 8-K dated as of November 9,
1995).
(u)(ii) Amendment No. 1 to STI Merger Agreement dated as of February 2,
1996 (incorporated by reference from the Registrant's Form 8-K
dated as of March 13, 1996).
(u)(iii) Amendment No. 2 to STI Merger Agreement dated as of February
23, 1996 (incorporated by reference from the Registrant's Form
8-K dated as of March 13, 1996).
(u)(iv) Amendment No. 3 to STI Merger Agreement dated as of March 1,
1996 (incorporated by reference from the Registrant's Form 8-K
dated as of March 13, 1996).
(v) Asset Purchase Agreement dated as of January 23, 1996, between
The Fairchild Corporation, RHI and Cincinnati Milacron, Inc.
(incorporated by reference from the Registrant's Form 8-K dated
as of January 26, 1996).
(w) Credit Agreement dated as of March 13, 1996, among Fairchild
Holding Corporation ("FHC"), Citicorp USA, Inc. and certain
financial institutions (incorporated by reference to the 1996
10-K).
(x)(i) Restated and Amended Credit Agreement dated as of July 26, 1996,
(the "FHC Credit Agreement"), among FHC, Citicorp USA, Inc. and
certain financial institutions.
(x)(ii) Amendment No. 1, dated as of January 21, 1997, to the FHC Credit
Agreement dated as of March 13, 1996 (incorporated by reference
to the March 30, 1997 10-Q).
(x)(iii) Amendment No. 2 and Consent, dated as of February 21, 1997, to
the FHC Credit Agreement dated as of March 13, 1996 (incorporated
by reference to the March 30,1997 10-Q).
*(x)(iv) Amendment No. 3, dated as of June 30, 1997, to the FHC Credit
Agreement dated as of March 13, 1996.
*(x)(v) Second Amended And Restated Credit Agreement dated as of July 18,
1997, to the FHC Credit Agreement dated as of March 13, 1996.
(y)(i) Restated and Amended Credit Agreement dated as of May 27, 1996,
(the "RHI Credit Agreement"), among RHI, Citicorp USA, Inc. and
certain financial institutions. (incorporated by reference to the
1996 10-K).
(y)(ii) Amendment No. 1 dated as of July 29, 1996, to the RHI Credit
Agreement dated as of May 27, 1996 (incorporated by reference to
the 1996 10-K).
*(y)(iii) Amendment No. 2 dated as of April 7, 1997, to the RHI Credit
Agreement dated as of May 27, 1996.
(z)(i) 1986 Non-Qualified and Incentive Stock Option Plan (incorporated
by reference to Registrant's Proxy Statement dated November 15,
1990).
(z)(ii) 1986 Non-Qualified and Incentive Stock Option Plan (incorporated
by reference to Registrant's Proxy Statement dated November 21,
1997).
(aa) 1996 Non-Employee Directors Stock Option Plan (incorporated
by reference to Registrant's Proxy Statement dated November 21,
1997).
(ab) Stock Exchange Agreement between The Fairchild Corporation and
Banner Aerospace, Inc. pursuant to which the Registrant exchanged
Harco, Inc. for shares of Banner Aerospace, Inc. (incorporated
by reference to the Banner Aerospace, Inc. Definitive Proxy
Statement dated and filed with the SEC on February 23, 1996
with respect to the Special Meeting of Shareholders of
Banner Aerospace, Inc. held on March 12, 1996).
(ac)(i) Employment Agreement between RHI Holdings, Inc., and Jacques
Moskovic, dated as of December 29, 1994. (incorporated by
reference to the 1996 10-K/A).
(ac)(ii) Employment Agreement between Fairchild France, Inc., and Jacques
Moskovic, dated as of December 29, 1994. (incorporated by
reference to the 1996 10-K/A).
*(ac)(iii) Employment Agreement between Fairchild France, Inc., Fairchild
CDI, S.A., and Jacques Moskovic, dated as of April 18, 1997.
(ad) Voting Agreement dated as of July 16, 1997, between RHI Holdings,
Inc., and Tel-Save Holdings, Inc., (incorporated by reference to
the Registrant's Schedule 13D/A, Amendment No. 3, filed
July 22, 1997, regarding Registrant's stock ownership in Shared
Technologies Fairchild Inc.).
(ae) Allocation Agreement dated April 13, 1992 by and among The
Fairchild Corporation, RHI, Rex-PT Holdings, Rexnord
Corporation, Rexnord Puerto Rico, Inc. and Rexnord Canada
Limited (incorporate by reference to 1992 10-K).
(af) Form Warrant Agreement (including form of Warrant) originally
issued by the Company to Drexel Burnham Lambert on March
13, 1986, subsequently purchased by Jeffrey Steiner and
subsequently assigned to Stinbes limited (an affiliate of
Jeffrey Steiner), for the purchase of 200,000 shares (now
375,000 share after adjustment for June 1989 two-for-one
stock split) of Class A or Class B Common Stock (incorporated
herein by reference to Exhibit 4(c) of the Company's
Registration Statement No. 33-3521 on Form S-2).
11 Computation of earnings per share (found at Note 1 in Item 8 to
Registrant's Consolidated Financial Statements for the fiscal
year ended June 30, 1997).
*21 List of subsidiaries of Registrant.
*23 Consent of Arthur Andersen LLP, independent public
accountants.
*27 Financial Data Schedules
99(a) Financial statements, related notes thereto and Auditors'
Report of Banner Aerospace, Inc. for the fiscal year ended March
31, 1997 (incorporated by reference to the Banner Aerospace,
Inc. Form 10-K for fiscal year ended March 31, 1997).
99(b) Financial statements, related notes thereto and Auditors'
Report of Shared Technologies Fairchild, Inc. for the fiscal year
ended December 31, 1996 (incorporated by reference to the Shared
Technologies Fairchild, Inc. Form 10-K for fiscal year ended
December 31, 1996).
*Filed herewith.
(b) Reports on Form 8-K
Registrant filed no reports on Form 8-K during the last quarter of
Fiscal 1997.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE FAIRCHILD CORPORATION
By: Colin M. Cohen
Senior Vice President and
Chief Financial Officer
Date: September 23, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant, in their capacities and on the dates indicated.
Name, Title, Capacity Date
--------------------- ----
Jeffrey J. Steiner September 23, 1997
Chairman, Chief Executive
Officer, President and Director
Samuel J. Krasney September 23, 1997
Vice Chairman and Director
Michael T. Alcox September 23, 1997
Vice President and Director
Melville R. Barlow September 23, 1997
Director
Mortimer M. Caplin September 23, 1997
Director
Colin M. Cohen September 23, 1997
Senior Vice President, Chief
Financial Officer and Director
Philip David September 23, 1997
Director
Harold J. Harris September 23, 1997
Director
Daniel Lebard September 23, 1997
Director
Jacques S. Moskovic September 23, 1997
Senior Vice Pesident
Herbert S. Richey September 23, 1997
Director
Moshe Sanbar September 23, 1997
Director
Robert A. Sharpe, II September 23, 1997
Executive Vice President and
Chief Financial Officer, Fairchild
Fasteners, and Director
Eric I. Steiner September 23, 1997
Executive Vice President, Chief
Operating Officer and Director
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- -----------------------------------------------
Changes in the allowance for doubtful accounts are as follows:
For the Years Ended June 30,
(In thousands) ----------------------------------
1997 1996 1995
-------- -------- --------
Beginning balance................. $ 6,327 $ 3,971 $ 2,284
Charged to cost and expenses...... 1,999 2,099 1,868
Charges to other accounts (a)..... 491 1,970 (86)
Amounts written off............... (714) (1,713) (95)
------- ------- -------
Ending balance.................... $ 8,103 $ 6,327 $ 3,971
======= ======= =======
(a) Recoveries of amounts written off in prior periods, foreign currency
translation and the change in related noncurrent taxes.
Included in Fiscal 1996 is $2,348 relating to the consolidation of
Banner Aerospace, Inc. and $(309) from the deconsolidation of the Fairchild
Communications Services Company as a result of the Merger.