-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, FbYLS03AaQ86hW9CyaOJp1QGPscwKJc3LK3445413VCbpZlMOCXN/WVQBR7klpKj uHwFT6DmqSGIK1b3suVmdQ== 0000009779-95-000002.txt : 19950515 0000009779-95-000002.hdr.sgml : 19950515 ACCESSION NUMBER: 0000009779-95-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950101 FILED AS OF DATE: 19950210 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FAIRCHILD CORP CENTRAL INDEX KEY: 0000009779 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MACHINERY, EQUIPMENT & SUPPLIES [5080] IRS NUMBER: 340728587 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06560 FILM NUMBER: 95508633 BUSINESS ADDRESS: STREET 1: 300 W SERVICE RD STREET 2: PO BOX 10803 CITY: CHANTILLY STATE: VA ZIP: 22021 BUSINESS PHONE: 7034785800 FORMER COMPANY: FORMER CONFORMED NAME: BANNER INDUSTRIES INC /DE/ DATE OF NAME CHANGE: 19901118 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 -------------------- FORM 10-Q -------------------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended January 1, 1995 Commission File Number: 1-6560 THE FAIRCHILD CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 34-0728587 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Washington Dulles International Airport 300 West Service Road, P.O. Box 10803 Chantilly, Virginia 22021 ---------------------------------------- (Address of principal executive offices) (Zip Code) (703) 478-5800 ---------------------------------------------------- (Registrant's telephone number, including area code) 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 ---- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class January 1, 1995 - ----- --------------- Class A Common Stock, $.10 Par Value 13,406,109 Class B Common Stock, $.10 Par Value 2,696,886 ---------- 16,102,995 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES* INDEX PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Condensed Consolidated Balance Sheets as of January 1, 1995 (Unaudited) and June 30, 1994 3 Consolidated Statements of Earnings for the Three and Six Months Ended January 1, 1995 and January 2, 1994 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended January 1, 1995 and January 2, 1994 (Unaudited) 7 Notes to Condensed Consolidated Financial Statements (Unaudited) 8 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings 21 Item 6. Exhibits and Reports on Form 8-K 21 *For purposes of Part I of this Form 10-Q, the term "Company" means The Fairchild Corporation, and its subsidiaries, unless otherwise indicated. For purposes of Part II, the term "Company" means The Fairchild Corporation unless otherwise indicated. PART 1. FINANCIAL INFORMATION Item 1. Financial Statements THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
January 1, June 30, ASSETS 1995 1994 - ------ ----------- ----------- (Unaudited) (*) Current Assets: Cash and cash equivalents, $4,745 restricted. $ 68,569 $ 102,368 Short-term investments....................... 4,028 6,649 Accounts receivable-trade, less allowances of $3,600 and $3,468....................... 75,091 74,196 Inventories: Finished goods............................ 59,859 47,120 Work-in-process........................... 27,864 30,907 Raw materials............................. 13,436 11,988 --------- --------- 101,159 90,015 Prepaid expenses and other current assets.... 25,917 20,128 --------- --------- Total Current Assets......................... 274,764 293,356 Property, plant and equipment, net of accumulated depreciation of $103,142 and $89,688.................................... 177,497 174,147 Net assets held for sale..................... 37,037 36,375 Cost in excess of net assets acquired, (Goodwill) less accumulated amortization of $32,702 and $29,622......................... 207,102 205,395 Investments and advances - affiliated companies................................... 73,268 71,532 Prepaid pension assets....................... 60,921 61,628 Long-term investments........................ 12,280 15,458 Other assets................................. 55,124 55,638 --------- --------- Total Assets................................. $ 897,993 $ 913,529 ========= ========= *Condensed from audited financial statements The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
January 1, June 30, LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994 - ------------------------------------- ----------- ---------- (Unaudited) (*) Current Liabilities: Bank notes payable and current maturities of long-term debt........................... $ 15,297 $ 14,978 Accounts payable............................. 40,010 35,271 Other accrued liabilities.................... 86,713 84,622 Income taxes payable......................... -- 12,713 --------- --------- Total Current Liabilities.................... 142,020 147,584 Long-term debt, less current maturities...... 511,222 522,406 Other long-term liabilities.................. 22,934 25,116 Retiree health care liabilities.............. 49,900 51,189 Noncurrent income taxes...................... 74,958 53,162 Minority interest in subsidiaries............ 24,644 24,552 Redeemable preferred stock of subsidiary..... 17,169 17,552 --------- --------- Total Liabilities............................ 842,847 841,561 Stockholders' Equity: Class A common stock, 10 cents par value; authorized 40,000,000 shares, 19,647,705 shares issued and 13,406,109 shares outstanding................................ 1,965 1,965 Class B common stock, 10 cents par value; authorized 20,000,000 shares, 2,696,886 shares issued and outstanding.............. 270 270 Paid-in capital.............................. 66,850 66,775 Retained earnings............................ 35,338 52,736 Cumulative translation adjustment............ 3,847 3,346 Additional minimum liability for pensions, net of tax................................ (1,405) (1,405) Treasury Stock, at cost, 6,241,596 shares of Class A Common Stock....................... (51,719) (51,719) --------- --------- Total Stockholders' Equity................... 55,146 71,968 --------- --------- Total Liabilities and Stockholders' Equity... $ 897,993 $ 913,529 ========= ========= *Condensed from audited financial statements. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (In thousands, expect per share data)
Three Months Ended Six Months Ended January 1, January 2, January 1, January 2, 1995 1994 1995 1994 ---------- ---------- ---------- ---------- (*) (*) Revenue: Sales............................. $125,929 $108,830 $247,322 $219,321 Other income, net................. 501 102 330 1,877 ------- ------- ------- ------- 126,430 108,932 247,652 221,198 Costs and Expenses: Cost of sales..................... 97,532 82,955 186,672 170,484 Selling, general & administrative. 25,438 20,347 48,439 42,498 Research and development.......... 913 971 1,881 2,037 Amortization of goodwill.......... 1,549 1,519 3,079 3,076 Restructuring..................... -- 9,903 -- 9,903 ------- ------- ------- ------- 125,432 115,695 240,071 227,998 Operating income (loss)............. 998 (6,763) 7,581 (6,800) Interest expense.................... 17,399 17,644 35,153 37,303 Interest income..................... (910) 49 (2,049) (620) ------- ------- ------- ------- Net interest expense................ 16,489 17,693 33,104 36,683 Investment income, net.............. 2,293 5,282 2,635 7,025 Equity in earnings of affiliates.... (219) 1,940 2,161 3,988 Minority interest................... (615) (584) (1,273) (1,189) Non-recurring income................ -- 129,107 -- 129,107 ------- ------- ------- ------- Earnings (loss) from continuing operations before taxes........... (14,032) 111,289 (22,000) 95,448 Income tax benefit (provision)...... 3,367 (40,822) 4,675 (36,132) ------- ------- ------- ------- Earnings (loss) from continuing operations......................... (10,665) 70,467 (17,325) 59,316 Loss on disposal of discontinued operations, net................... (25) (29) (50) (58) ------- ------- ------- ------- Earnings (loss) before extraordinary items and accounting changes...... (10,690) 70,438 (17,375) 59,258 Extraordinary items, net............ (23) -- (23) -- Cumulative effect of change in accounting for postretirement benefits, net..................... -- -- -- (8,015) Cumulative effect of change in accounting for income taxes, net.. -- -- -- (2,935) ------- ------- ------- ------- Net earnings (loss)................. $(10,713) $ 70,438 $(17,398) $ 48,308 ======= ======= ======= ======= * Restated for the inclusion of a division previously included in net assets held for sale. (See Note 1). The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (In thousands, except per share data)
Three Months Ended Six Months Ended January 1, January 2, January 1, January 2, 1995 1994 1995 1994 ---------- ---------- ---------- ---------- (*) (*) Earnings Per Share Primary and Fully Diluted: Loss from continuing operations before the cumulative effect of accounting changes............................. $ (.67) $ 4.37 $ (1.08) $ 3.68 Cumulative effect of change in accounting for postretirement benefits, net....................... -- -- -- (.50) Cumulative effect of change in accounting for income taxes, net.... -- -- -- (.18) ------- ------- ------- ------- Net Loss.............................. $ (.67) $ 4.37 $ (1.08) $ 3.00 ======= ======= ======= ======= Weighted average number of shares used in computing earnings per share: Primary............................. 16,103 16,103 16,103 16,103 Fully diluted....................... 16,103 16,103 16,103 16,103 * Restated for the inclusion of a division included in net assets held for sale. (See Note 1). The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Six Months Ended January 1, January 2, 1995 1994 ----------- ----------- (*) Cash provided by (used for) Operations: Net earnings (loss)..................... $(17,398) $ 48,308 Cumulative effect of accounting changes, net................................... -- 10,950 Depreciation and amortization........... 17,970 18,126 Accretion of discount on long-term liabilities........................... 1,942 1,596 Adjustments for other non-cash charges.. 2,182 8,959 Adjustments for non-cash credits........ (2,161) (3,988) Gain on sale of Rexnord................. -- (129,107) Loss (gain) on sale of fixed assets..... 221 (25) Changes in assets and liabilities....... (9,198) 40,527 ------- ------- Cash used for operations................ (6,442) (4,654) Investments: Capital expenditures.................... (8,534) (5,758) Proceeds received from sale of Rexnord.. -- 178,115 Equity investments of affiliates........ (520) (2,700) Proceeds received from (used for) investment securities, net............ 5,799 (208) Business acquisitions................... (12,061) -- Proceeds from sale of fixed assets...... 365 6,555 Other, net.............................. (895) (2,147) ------- ------- Cash provided by (used for) investments. (15,846) 173,857 Financing: Issuance of debt........................ 2,893 58,702 Debt repayments, net.................... (14,301) (122,661) ------- ------- Cash used for financing................. (11,408) (63,959) Effect of exchange rate changes on cash..... (103) (931) Net increase (decrease) in cash............. (33,799) 104,313 Cash, beginning of period................... 102,368 70,099 ------- ------- Cash, end of period......................... $ 68,569 $174,412 ======= ======= * Restated for the inclusion of a division previously included in net assets held for sale. (See Note 1). The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - Financial Statements The consolidated balance sheet as of January 1, 1995 and the consolidated statements of earnings and cash flows for the six months ended January 1, 1995 and January 2, 1994 have been prepared by the Company, without audit. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at January 1, 1995 and for all periods presented have been made. The balance sheet at June 30, 1994 was condensed from the audited financial statements as of that date. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's June 30, 1994 Form 10-K. The results of operations for the period ended January 1, 1995 are not necessarily indicative of the operating results for the full year. Certain amounts in prior years' quarterly financial statements have been reclassified to conform to the current presentation. The Fiscal 1994 first six months data presented vary from the amounts previously reported in the Form 10-Q dated January 2, 1994, and have been restated due to the Company's decision not to sell a division, which was previously included in net assets held for sale, and not included in the results of operations. Sales from the division were $7,579,000 in the first six months of Fiscal 1994. Earnings from the division had no material effect during this period. Note 2 - Acquisitions On June 10, 1994, the Company acquired 100% of the Common Stock of Convac GmbH ("Convac")for approximately $4,700,000. Convac is a leading designer and manufacturer of high precision state-of-the-art wet processing tools, equipment and systems required for the manufacture of semiconductor chips and related products, compact and optical storage discs and liquid crystal displays. The Company reports the results of Convac as part of its Industrial Products segment. On September 9, 1994, the Company acquired all of the outstanding Common Stock of Scandinavian Bellyloading Company AB ("SBC"). SBC is the designer and manufacturer of patented cargo loading systems which are installed in the cargo area of commercial aircraft. Several major airlines are expected to equip existing fleets with the SBC system over the next three to four years. The Company reports the results of SBC as part of its Industrial Products segment. On November 28, 1994 Fairchild Communications Services Company ("Fairchild Communications"), a partnership whose partners are indirect subsidiaries of the Company, completed the acquisition of substantially all of the telecommunications assets of JWP Telecom, Inc. ("JWP") for approximately $11,000,000 plus the assumption of approximately $3,000,000 of liabilities. JWP is a telecommunications system integrator, specializing in manufacturing, distribution, design, installation and maintenance of voice and data communications equipment. In the first quarter of Fiscal 1995, Fairchild Communications acquired all the shared telecommunications assets of Eaton & Lauth Co., Inc., for approximately $550,000. Note 3 - Restricted Cash The Company had approximately $4,745,000 of restricted cash on January 1, 1995 and June 30, 1994, all of which is maintained as collateral for certain debt facilities. Note 4 - Summarized Statement of Earnings Information The following table presents summarized statement of earnings information on a combined 100% basis of Banner Aerospace, Inc. ("Banner") and Nacanco Paketleme ("Nacanco"), the Company's principal investments, which are accounted for using the equity method.
Six Months Ended (In thousands) ---------------------------- January 1, January 2, 1995 1994 ------------ ------------ Net sales................................. $143,251 $141,497 Gross profit.............................. 49,476 49,167 Earnings from continuing operations....... 7,434 12,442 Net earnings.............................. 7,434 11,838
On January 1, 1995, the Company owned approximately 47.2% of Banner common stock, which is included in investments and advances-affiliated companies. The Company recorded equity earnings of $970,000 and $907,000 from this investment for the six months ended January 1, 1995 and January 2, 1994, respectively. At the close of trading on December 30, 1994, Banner stock was quoted at $4.50 per share. Based on this price the Company's equity investment in Banner had an approximate market value of $38,250,000 versus a carrying value of $51,320,000. The Company does not believe that this decline in market value is a permanent impairment. On January 1, 1995, the Company owned approximately 33.0% of Nacanco common stock. The Company recorded equity earnings of $1,516,000 and $3,754,000 from this investment for the six months ended January 1, 1995 and January 2, 1994, respectively. On December 23, 1993, the Company completed a sale of its 43.9% stock interest in Rexnord Corporation ("Rexnord") to BTR Dunlop Holdings, Inc. ("BTR")for $22.50 per share. Accordingly, the Company received $181,873,000 in gross proceeds and realized a pre-tax gain on the sale of $129,107,000 for the quarter ended January 2, 1994. Prior to the sale of Rexnord, the Company recorded an equity loss of $905,000 on this investment for the six month period ended January 2, 1994. In connection with the sale of its interest in Rexnord, the Company has placed shares of Banner, with a fair market value of $25,000,000, in escrow to secure the Company's indemnification of BTR against a contingent liability. Once the contingent liability is resolved, the escrow will be released. Note 5 - Revolving Credit Facility On August 18, 1994, VSI Corporation's (an indirect subsidiary of the Company) revolving credit facility was reduced by $9,250,000 to provide a total available facility of $50,250,000, of which $42,357,000 was available on January 1, 1995. In addition, (1) the borrowing rate was increased by 1.0% to generally bear interest at 3.75% over the London Interbank Offer Rate, and (2) the commitment fee charged on the unused portion of the revolving credit facility was increased to 1.0%. Note 6 - Early Extinguishment of Debt During the quarter ended January 1, 1995, the Company used cash available to purchase at a discount $7,600,000 of its 12.25% Senior Subordinated Notes originally due in 1996. The purchase and write off of certain deferred costs associated with the issuance of the securities repurchased resulted in an extraordinary charge of $23,000, net of tax. Note 7 - Minority Interests in Consolidated Subsidiaries The Company includes $23,981,000 of minority interest on its balance sheet at January 1, 1995 and June 30, 1994, which is represented by the Series C Preferred Stock of Fairchild Industries, Inc. ("FII"), a majority owned subsidiary. The Series C Preferred Stock has an annual dividend requirement of $4.25 per share through July 21, 1999 and $7.00 per share thereafter. Note 8 - Redeemable Preferred Stock of Subsidiary The Company has classified the outstanding shares of Series A Preferred Stock of FII as a long-term liability. The Series A Preferred Stock has a mandatory redemption value of $45.00 per share and an annual dividend requirement of $3.60 per share. During the six months ended January 1, 1995, the Company repurchased 8,500 shares of FII's Series A Preferred Stock. Effectively, there were 412,201 and 420,701 shares authorized, issued and outstanding at January 1, 1995 and June 30, 1994, respectively. Note 9 - Equity Securities The Company had 13,406,109 shares of Class A Common Stock and 2,696,886 shares of Class B Common Stock outstanding at January 1, 1995. Class A Common Stock is traded on both the New York and Pacific Stock Exchange while 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 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. Note 10 - Earnings Per Share Primary and fully diluted earnings per share are computed by dividing net income available to common stockholders 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 the three and six months ended January 1, 1995 and January 2, 1994, the conversion of options and warrants was not assumed, as the effect was anti-dilutive. Note 11 - Commitments and Contingencies Lease Guaranties - ---------------- In connection with the sale of Metro Credit Corporation, the Company remained contingently liable as a guarantor of the payment and performance of obligations of third party lessees under aircraft leases, which call for aggregate annual base lease payments of approximately $3,454,000 in Fiscal 1995, and approximately $9,669,000 over the remaining 4-year guaranty period. In each case, the Company has been indemnified by the purchasers and lessees from any losses related to such guaranties. CL Motor Freight Claim - ---------------------- The Workers Compensation Bureau of the State of Ohio is seeking reimbursement from the Company for approximately $5,400,000 for CL Motor Freight Inc. ("CL") workers compensation claims which were insured under a self-insured workers compensation program of CL. The Company has contested a significant portion of this claim. Government Claims - ----------------- Following an investigation by the Inspector General of NASA, the civil division of the United States Department of Justice alleged improprieties in years 1982 and 1984 through 1986, in indirect costs rates and labor charging practices of a former subsidiary of the Company. The Company settled these claims with the Department of Justice and agreed to pay $5,000,000, payable in six equal semi-annual installments, with interest at 6.0% per year. The first installment was made in the current second quarter period. The unpaid balance is collateralized by certain excess real estate. 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 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 entered into discussions with the government to attempt to resolve these pension accounting issues. Civil Litigation - ---------------- Maurice Bidermann Litigation ---------------------------- The Company commenced an action in the United States District for the Southern District of New York, following the breach by Maurice Bidermann ("Bidermann") of an agreement under which Bidermann was to have paid the Company an aggregate sum of approximately $22,500,000, of which Bidermann paid $10,000,000. Additional installments, of $5,000,000 each, were due from Bidermann on December 31, 1992, and June 30, 1993, both of which Bidermann failed to pay. On July 7, 1993, the United States District Court ordered Bidermann to pay the Company the full amount of its claim, $12,947,000, plus interest. Following receipt of the Court's order, Bidermann filed for protection under Chapter 11 of the United States Bankruptcy Code; however, in the first quarter of Fiscal 1995, on motion of the Company, the Bankruptcy Court dismissed Bidermann's Chapter 11 proceedings. Prior to Bidermann's filing for protection under Chapter 11, and continuing subsequent to the Bankruptcy Court's dismissal of those proceedings, the Company attached substantially all assets of Bidermann. In addition, the Company holds shares and warrants of Bidermann Industries, USA, Inc., all of which shares and warrants Bidermann had originally agreed to purchase from the Company for $22,500,000. The collectibility of this judgement, which has been affirmed by the United States Court of Appeals, will depend in part upon the Company's ability to realize sufficient amounts from its attachments, and the value of the shares and warrants held. Environmental Matters - --------------------- The Company and other aerospace fastener and industrial product manufacturers 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 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. 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 discussed above, will not have a material adverse effect on the financial condition or the future operating results of the Company. ITEM 2. 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 Corporation, RHI Holdings, Inc. ("RHI") is a direct subsidiary of the Company. RHI is the majority owner of Fairchild Industries, Inc. ("FII") which, in turn, is the 100% owner of VSI Corporation ("VSI"). The Company's operations are conducted through VSI and RHI. The Company also holds significant equity interests in Banner Aerospace, Inc. and Nacanco Paketleme ("Nacanco"). RESULTS OF OPERATIONS The Company currently operates in three principal business segments: Aerospace Fasteners, Industrial Products and Communications Services. The following table illustrates the historical sales and operating income of the Company's continuing operations for the three month periods ended January 1, 1995 and January 2, 1994.
(In thousands) Three Months Ended Six Months Ended January 1 January 2, January 1, January 2, 1995 1994 1995 1994 ---------- ---------- ---------- ---------- (*) (*) Sales by Business Segment: Aerospace Fasteners................ $ 53,273 $ 50,446 $105,405 $102,024 Industrial Products................ 50,088 39,944 99,407 80,714 Communications Services............ 22,568 18,440 42,510 36,583 ------- ------- ------- ------- Total................................. $125,929 $108,830 $247,322 $219,321 ======= ======= ======= ======= Operating Income (loss) by Business Segment: Aerospace Fasteners................ $ (3,320) $(11,654) $ (2,149) $(18,031) Industrial Products................ 4,039 4,903 8,950 9,897 Communications Services............ 3,829 4,114 8,251 8,045 ------- ------- ------- ------- Total................................. 4,548 (2,637) 15,052 (89) Corporate administrative expense... (3,603) (3,725) (6,761) (8,185) Other corporate income (expense)... 53 (401) (710) 1,474 ------- ------- ------- ------- Operating income (loss)............... 998 (6,763) 7,581 (6,800) Net interest expense.................. (16,489) (17,693) (33,104) (36,683) Investment income, net................ 2,293 5,282 2,635 7,025 Equity in earnings of affiliates...... (219) 1,940 2,161 3,988 Minority interest..................... (615) (584) (1,273) (1,189) Non-recurring items................... -- 129,107 -- 129,107 ------- ------- ------- ------- Earnings (loss) from continuing operations before income taxes..... (14,032) 111,289 (22,000) 95,448 Income tax benefit (provision)........ 3,367 (40,822) 4,675 (36,132) ------- ------- ------- ------- Earnings (loss) from continuing operations......................... $(10,665) $ 70,467 $(17,325) $ 59,316 ======= ======= ======= ======= * Restated for the inclusion of a division which was previously included in net assets held for sale. (See Note 1).
General - ------- Overall sales increased by 15.7% in the second quarter and 12.8% for the six month period of Fiscal 1995 compared to sales for the same periods in Fiscal 1994, which reflected stronger sales performances from all three business segments. Operating income increased $7.8 million in the second quarter and $14.4 million for the six month period of Fiscal 1995 compared to operating income for the same periods in Fiscal 1994. During the Fiscal 1995 current quarter and six month periods, operating losses decreased significantly in the Aerospace Fasteners segment. The Fiscal 1994 second quarter and six month period included a restructuring charge in the Aerospace Fasteners segment of $9.9 million. Operating income was down in the Industrial Products segment in both current year periods and declined in the Communications Services segment in the current second quarter period as a result of recent acquisitions. (See discussion below). Aerospace Fasteners - ------------------- Sales in the Aerospace Fasteners segment increased 5.6% in the second quarter and 3.3% for the six month period ended January 1, 1995, compared to the corresponding Fiscal 1994 periods, primarily resulting from aggressive management efforts during the quarter to reduce backlog caused by quality problems and earthquake disruption, which are diminishing. Operating losses in the Aerospace Fasteners segment decreased $8.3 million in the second quarter and $15.9 million for the Fiscal 1995 six month period over the corresponding Fiscal 1994 periods; however this segment continues to be affected by soft demand and price erosion and higher quality control costs resulting from customers' intensified quality requirements. The Fiscal 1995 quarter loss resulted primarily from excess costs incurred to reduce the past due sales backlog, which includes many orders of small quantities at low profit margins. A restructuring charge of $9.9 million was recorded in the prior year second quarter and six month periods for nonrecurring costs related to exiting certain aircraft engine bolt lines. On January 17, 1994, the Company's Chatsworth, California Aerospace Fasteners manufacturing facility suffered extensive damage from the Southern California Earthquake. This disruption caused increased costs and reduced revenues in Fiscal 1994 and has negatively affected Fiscal 1995 as well. While the Company carries insurance for both business interruption and property damage caused by earthquakes, the policy has a 5% deductible. The Company recorded an unusual pretax loss in Fiscal 1994 of $4.0 million to cover the currently estimated net cost of the damages and business interruption caused by the earthquake. Included in prepaids and other current assets is an insurance claim receivable of $4.3 million for recoverability of costs related to business interruption and property damage. Industrial Products - ------------------- Sales in the Industrial Products segment increased 25.4% in the second quarter and 23.2% in the Fiscal 1995 first six months, compared to the same Fiscal 1994 periods. $8.2 million of the net increase in sales in the six month period was at the D-M-E Company ("D-M-E"), which provides tooling to the plastics industry, and reflects customer response to the fast delivery programs, new products, and growth of the domestic economy. Domestic demand for tooling for plastics has been strong while foreign demand has shown signs of improvement principally reflecting the strengthening European economy. Expansion into selected new foreign markets is being pursued and appears to have potential. Also included in the Industrial Products segment were sales from Fairchild Convac ("Convac"), a semiconductor equipment manufacturing company acquired at the end of Fiscal 1994, and Fairchild Data Corporation. The combined sales of these two companies was $8.7 million in the second quarter and $18.0 million in the Fiscal 1995 first six months. Operating income in the Industrial Products segment decreased 17.6% in the second quarter and 9.6% in the first six months of Fiscal 1995, compared to the same periods in Fiscal 1994. A 24.8% increase in operating income, during the first six months, at D-M-E was offset by the inclusion of Convac, two other operations recently added and Fairchild Data Corporation, which reported combined operating losses totaling $1.6 million in the second quarter, and $2.2 million in the first six months of Fiscal 1995. The improved results at D-M-E resulted from a higher sales volume and improved operating margins. In recent years D-M-E has implemented several cost savings steps, including overhead reduction and improved inventory management programs, which have contributed to the higher operating margins. In addition, D-M-E has continued to implement improved manufacturing methods that have reduced cycle time and costs. Communications Services - ----------------------- Sales in the Communications Services segment increased 22.4% in the second quarter and 16.2% in the Fiscal 1995 first six months, compared with the same periods in Fiscal 1994, primarily due to the inclusion of sales from acquisitions and to new customers, the addition of telecommunications franchises in new office buildings, and growth at existing sites. Operating income in the Communications Services segment decreased 6.9% in the second quarter and increased 2.6% in the Fiscal 1995 first six months, compared to the same periods in Fiscal 1994. The decrease in operating income in the Fiscal 1995 second quarter was primarily due to recognizing initial costs related to integrating the recent acquisition. These costs will likely affect the third quarter as well, after which management expects this acquisition to contribute to growth in sales and operating income. Other Expenses/Income - --------------------- Corporate Administrative Expense - Corporate administrative expense decreased by 3.3% in the second quarter and 17.4% in the six month period of Fiscal 1995, compared to the same Fiscal 1994 periods. This decline resulted primarily from cost controls, including a reduction in work force and wage and salary caps that were in effect for most corporate employees and sale of the Company airplane during Fiscal 1994. Other Corporate Income - Other corporate income increased $.5 million in the second quarter, largely due to increased royalty income received during the quarter, and decreased $2.2 million in the six months ended January 1, 1995, compared to the same period in the prior year, primarily due to recognizing gains on corporate real estate sold in the prior year six month period. Net Interest Expense - Net interest expense decreased 6.8% in the second quarter and 9.8% in the six month period ended January 1, 1995, compared to the prior year periods, primarily due to lower borrowings and significantly higher cash and cash equivalents average balances during the Fiscal 1995 first six month period. Investment income - net was lower in the second quarter and first six months, primarily as a result of recording larger gains realized on the settlement and liquidation of investments in Fiscal 1994, compared to Fiscal 1995. Also included in the Fiscal 1995 six month period were $.3 million of dividends realized on participating annuity contracts, compared to $2.8 million in the Fiscal 1994 corresponding period. Equity in earnings of affiliates decreased $2.2 million in the second quarter and $1.8 million in the six month period ended January 1, 1995, compared to the same periods of Fiscal 1994. Earnings from Nacanco, in which the Company holds a 33.0% interest, were down $1.2 million for the six months, primarily due to a large tax adjustment in the second quarter of Fiscal 1995. Minority interest expense includes dividend expense on FII's Series C Preferred Stock. Non-Recurring Income - Non-recurring income in Fiscal 1994 includes the net pre-tax gain of $129.1 million on the Company's 43.9% stock interest in Rexnord Corporation, which was sold to BTR Dunlop Holdings, Inc. for $22.50 per share on December 23, 1993. Income Taxes - In the second quarter of Fiscal 1995, the Company recorded a tax benefit of $3.4 million and for the six months a tax benefit of $4.7 million. The effective tax rate was lower than the Federal statutory rate, largely due to the amortization of goodwill, which is not deductible for tax purposes. Accounting Changes: 1) Postretirement Benefits - Using the immediate recognition method, the Fiscal 1994 first six months after-tax charge to earnings for the cumulative effect of this accounting change was $.5 million, which represents the unamortized portion of an overstated liability for discontinued operations which substantially offset the transition obligation for active employees and retirees of continuing operations. In addition, in the Fiscal 1994 first six months, a $7.5 million charge, net of the Company's related tax benefit, was recorded for the Company's share of Rexnord Corporation's cumulative charge resulting from this change in accounting. 2) Accounting for Income Taxes - The Company elected the immediate recognition method and recorded, in the Fiscal 1994 first six months, a $2.4 million charge, representing the cumulative effect on prior years. This charge represents deferred taxes related primarily to fixed assets, prepaid pension expenses, and inventory differences. In addition, a $.5 million charge was recorded for the Company's share of Rexnord Corporation's cumulative charge resulting from this change in accounting. Net Earnings (Loss) - The net earnings (loss) decreased $65.7 million in the first six months of Fiscal 1995, compared to the first six months of Fiscal 1994, primarily due to the $129.1 million net pre-tax gain recognized in the Fiscal 1994 six month period. Partially offsetting the decrease were: (1) the $14.4 million increase in operating income earned in the first six months of Fiscal 1995, (2) the $11.0 million charge, net of tax, for the cumulative effect of accounting changes, which was recorded in the first six months of Fiscal 1994, and (3) a decrease in taxes of $40.8 million. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Working capital at January 1, 1995, was $132.7 million, which was $13.0 million lower than at June 30, 1994. The primary reasons for this decrease included a $33.8 million reduction in cash, primarily required to service debt and meet operating cash requirements during the first six months, and a $4.7 million increase in accounts payable. These decreases were partially offset by an $11.1 million increase in inventory, reflecting acquisitions and efforts to reduce backlog, and a reduction in current income taxes payable of $12.7 million, which was reclassified to noncurrent income taxes. The Company's principal sources of liquidity are cash generated from operations and borrowings under its credit agreement. The Company also expects to generate cash from the sale of certain assets and liquidation of investments. Net assets held for sale at January 1, 1995 had a book value of $37.0 million and included several parcels of real estate in California and an 88 acre parcel of real estate located in Farmingdale, New York, which the Company plans to sell, lease or develop, subject to the resolution of certain environmental matters and market conditions. Included in long-term investments at January 1, 1995, is a contractual obligation for RHI to receive $15.9 million from an individual, which obligation has a net carrying amount of $9.2 million. The obligation in part, may be satisfied by 7.1% of the outstanding common stock of Bidermann Industries USA, Inc., a closely held company, held by RHI. In addition, the Company has attached substantially all of the individual's property. The individual filed for protection under Chapter 11 of the U.S. Bankruptcy Code on July 7, 1993. However, in the first quarter of Fiscal 1995, on motion of RHI, the Bankruptcy Court dismissed the Chapter 11 proceedings. The Company believes that liquidation of assets held or attached by RHI will be sufficient to recover the carrying amount of this investment. (See Note 10 to the Financial Statements). The Company's principal cash requirements include debt service, capital expenditures, acquisitions, payment of other liabilities and payment of dividends on preferred stock. The level of the Company's capital expenditures varies from year to year, depending upon the timing of capital spending for new production equipment, periodic plant and facility expansion, acquisition of high growth companies, as well as cost reduction and labor efficiency programs. For the six month period ended January 1, 1995, capital expenditures, including the cost of acquisitions, were $20.6 million. The Company anticipates that total capital expenditures for the fiscal year ending June 30, 1995 will be approximately $31.6 million. 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, borrowings and asset sales, and the ability to refinance portions of its debt, will be adequate to satisfy cash requirements. The Company's Credit Agreement requires the Company to comply with certain financial covenants, including achieving cumulative earnings before interest, taxes, depreciation and amortization, ("EBITDA Covenant"), and maintaining certain coverage ratios. The Company was in compliance with the Credit Agreement as of January 1, 1995. To comply with the minimum EBITDA Covenant requirements (as amended) the Company's subsidiary, VSI must earn for the cumulative total of the trailing four quarters, EBITDA as follows: $72.1 million for the third quarter of Fiscal 1995, $75.0 million for the fourth quarter of Fiscal 1995, $76.6 million for the first quarter of Fiscal 1996, and $78.4 million for the second quarter of Fiscal 1996. VSI's ability to meet the minimum requirements under the EBITDA Covenant in Fiscal 1995 is uncertain, and there can be no assurance that the Company will be able in the future to comply with the minimum requirements under the EBITDA Covenant and other financial covenants under the Credit Agreement. Noncompliance with any of the financial covenants, without cure or waiver, would constitute an event of default under the Credit Agreement. An event of default resulting from a breach of a financial covenant may result, at the option of lenders holding a majority of the loans, in acceleration of the principal and interest outstanding, and a termination of the revolving credit line. However, if necessary, management believes a waiver can be obtained. The Company's subsidiaries may transfer available cash as dividends to the Company if the purpose of such dividends is to provide the Company with funds necessary to meet its debt service requirements under specified notes and debentures. All other dividends from FII to RHI are subject to certain limitations under the Credit Agreement. As of January 1, 1995, FII was unable to provide dividends to RHI. The Credit Agreement also restricts FII from additional borrowings under the Credit Facilities for the payment of any dividends. PART II. OTHER INFORMATION Item 1. Legal Proceedings Reference is made to Note 11 of Notes to Consolidated Financial Statements. Item 6. Exhibits and Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. For THE FAIRCHILD CORPORATION (Registrant) and as its Chief Financial Officer: By: Michael T. Alcox Senior Vice President and Chief Financial Officer By: Christopher Colavito Vice President and Controller Date: February 10, 1995 EX-27 2
5 1,000 6-MOS JUN-30-1995 JAN-01-1995 68,569 3,638 78,691 3,600 101,159 274,764 280,639 103,142 897,993 142,020 511,222 2,235 17,169 0 52,911 897,993 247,322 247,652 186,672 240,071 0 0 33,104 (22,000) (4,675) (17,325) (50) (23) 0 (17,398) (1.08) (1.08)
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