-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FwaJM+I6saBwUCfFLc0GEeUqrT4F3QkJ8mvmuWhVMY1uXEjdKa91Fso2MZPZSSex RpqaHlWZQO3apD24DkrrYw== 0000009779-98-000017.txt : 19980406 0000009779-98-000017.hdr.sgml : 19980406 ACCESSION NUMBER: 0000009779-98-000017 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19980403 SROS: NYSE SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: FAIRCHILD CORP CENTRAL INDEX KEY: 0000009779 STANDARD INDUSTRIAL CLASSIFICATION: BOLTS, NUTS, SCREWS, RIVETS & WASHERS [3452] IRS NUMBER: 340728587 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-06560 FILM NUMBER: 98587451 BUSINESS ADDRESS: STREET 1: 45025 AVIATION DR STREET 2: STE 400 CITY: DULLAS STATE: VA ZIP: 20166 BUSINESS PHONE: 7034785800 FORMER COMPANY: FORMER CONFORMED NAME: BANNER INDUSTRIES INC /DE/ DATE OF NAME CHANGE: 19901118 10-K/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A2 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 THE FAIRCHILD CORPORATION (Exact name of Registrant as specified in its charter) Delaware 34-0728587 (State or other jurisdiction of (I.R.S. Employer Identification No.) Incorporation or organization) 45025 Aviation Drive, Suite 400 Dulles, VA 20166 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (703)478-5800 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered Class A Common Stock, par value $.10 per share New York and Pacific Stock Exchange 13 1/8% Subordinated Debentures due 2006 New York Stock Exchange 12% Intermediate Subordinated Debentures due 2001 New York Stock Exchange 13% Junior Subordinated Debentures due 2007 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days [X]. 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 March 2, 1998, 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 $295.2 million (excluding shares deemed beneficially owned by affiliates of the Registrant under Commission Rules). As of March 2, 1998, 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 18,150,227 Class B common stock, $.10 par value 2,624,716 AMENDMENT: The purpose of this amendment is to provide restated financial information and additional disclosure for (i) Item 6, "Selected Financial Data", (ii) Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition", (iii) Item 8, "Financial Statements and Supplementary Data", and (iv) Item 14, "Exhibits, Financial Statement Schedules and Reports on Form 8-K", as a result of the Company's adoption of a formal plan to discontinue Fairchild Technologies in February 1998. THE FAIRCHILD CORPORATION INDEX TO ANNUAL REPORT ON FORM 10-K/A2 FOR FISCAL YEAR ENDED JUNE 30, 1997 PART II Page Item 6. Selected Financial Data 4 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition 5 Item 8. Financial Statements and Supplementary Data 15 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 51 ITEM 6. SELECTED FINANCIAL DATA Five-Year Financial Summary (In thousands, except per share data)
For the years ended June 30, 1993 1994 1995 1996 1997 Summary of Operations: Net sales $247,080 $203,456 $220,351 $349,236 $680,763 Gross profit 42,609 28,415 26,491 74,101 181,344 Operating income (loss) (29,595) (46,845) (30,333) (11,286) 33,499 Net interest expense 67,162 66,670 64,113 56,459 47,681 Earnings (loss) from continuing operations (62,413) 4,834 (56,280) (32,186) 1,816 Earnings (loss) per share from continuing Operations: Basic $ (3.87) $ 0.30 $ (3.49) $ (1.98) $ 0.11 Diluted (3.87) 0.30 (3.49) (1.98) 0.11 Other Data: EBITDA 5,739 (7,471) (9,830) 12,078 57,806 EBITDA Margin 2.3% N.M N.M 3.5% 8.5% Cash used for operating activities (21,120) (33,271) (25,041) (48,951)(100,058) Cash provided by (used for) investing activities (9,290) 166,068 (19,156) 57,540 79,975 Cash provided by (used for) financing activities 57,431 (101,390) 12,345 (39,637) (1,455 Balance Sheet Data: Total assets 941,675 860,943 828,680 993,398 1,052,666 Long-term debt, less current maturities 566,491 518,718 508,225 368,589 416,922 Redeemable preferred stock of 17,732 17,552 16,342 -- -- subsidiary Stockholders' equity 53,754 69,494 39,378 230,861 232,424 per outstanding common share $ 3.34 $ 4.32 $ 2.50 $ 14.10 $ 13.81
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. 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 Corporation. 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 holds a significant equity interest in Nacanco Paketleme ("Nacanco"), and, during the period covered by this report, held a significant equity interest in Shared Technologies Fairchild Inc. ("STFI"). (See Item 8, Note 24 to Financial Statements, Subsequent Events, as to the disposition of the Company's interest in STFI.) GENERAL The Company is the largest aerospace fastener manufacturer and is one of the largest independent aerospace parts distributors in the world. Through internal growth and strategic acquisitions, the Company has become one of the leading aircraft parts suppliers to aircraft manufacturers such as Boeing, Airbus, Lockheed Martin, British Aerospace and Bombardier and to airlines such as Delta Airlines and US Airways. The Company's primary business focus is on the aerospace industry and its business consists primarily of two aerospace segments--aerospace fasteners and aerospace parts distribution. The aerospace fasteners segment, which accounted for approximately 51.4% of the Company's net sales in Fiscal 1997, pro forma for the Disposition, manufactures and markets fastening systems used in the manufacturing and maintenance of commercial and military aircraft. The aerospace distribution segment, which accounted for approximately 35.9% of the Company's net sales in Fiscal 1997, pro forma for the Disposition, stocks and distributes a wide variety of aircraft parts to commercial airlines and air cargo carriers, OEMs, other distributors, fixed- base operators, corporate aircraft operators and other aerospace and non- aerospace companies. The Company's aerospace distribution business is conducted through its 66% owned subsidiary, Banner. 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 The Company has effected a series of transactions designed to: (i) reduce its total indebtedness and annual interest expense; (ii) increase the number of publicly held shares of Class A Common Stock; and (iii) increase the Company's operating and financial flexibility. On November 20, 1997, Shared Technologies Fairchild Inc. ("STFI"), a corporation of which the Company owned approximately 42% of the outstanding common stock, executed a Merger Agreement with Intermedia Communications Inc. ("Intermedia"), pursuant to which holders of STFI common stock would receive $15.00 per share in cash (the "STFI Merger"). On March 10, 1998, the STFI Merger was consummated. In the quarter ended December 28, 1997 the Company was paid approximately $85,000 in cash (before tax and selling expenses) in exchange for preferred stock of STFI owned by the Company. The Company received an additional $93,000 in cash (before tax and selling expenses) in the third quarter of Fiscal 1998, in exchange for the 6,225,000 shares of common stock of STFI owned by the Company. On December 19, 1997, the Company completed a secondary offering of public securities. The offering consisted of an issuance of 3,000,000 shares of the Company's Class A Common Stock at $20.00 per share (the "Offering"). On December 19, 1997, immediately following the Offering, the Company restructured its FHC and RHI Credit Agreements by entering into a new six-and- a-half-year credit facility to provide the Company with a $300 million senior secured credit facility (the "Facility") consisting of (i) a $75 million revolving loan with a letter of credit sub-facility of $30 million and a $10 million swing loan sub-facility, and (ii) a $225 million term loan. On January 13, 1998, certain subsidiaries of Banner (the "Selling Subsidiaries") completed the disposition of substantially all of the assets and certain liabilities of the Selling Subsidiaries to two wholly-owned subsidiaries of AlliedSignal Inc. (the "Buyers"), in exchange for unregistered shares of AlliedSignal Inc. common stock with an aggregate value equal to $369 million (the "Banner Hardware Group Disposition"). The purchase price received by the Selling Subsidiaries was based on the consolidated net worth as reflected on an estimated closing date balance sheet for the assets (and liabilities) conveyed by the Selling Subsidiaries to the Buyers. Such estimated closing date balance sheet is subject to review by the parties, and the purchase price will be adjusted (up or down) based on the net worth as reflected on the final Closing Date Balance Sheet. The assets transferred to the Buyers consists primarily of Banner's hardware group, which includes the distribution of bearings, nuts, bolts, screws, rivets and other type of fasteners, and its PacAero Unit. Approximately $196 million of the common stock received from the Buyers was used to repay outstanding term loans of Banner's subsidiaries and related fees. Banner effected the Banner Hardware Group Disposition to concentrate its efforts on the rotables and jet engine businesses and because the Banner Hardware Group Disposition presented a unique opportunity to realize a significant return on the disposition of the hardware group. On March 2, 1998, the Company consummated the acquisition of Special-T, from the stockholders of Special-T, pursuant to an agreement and plan of merger dated as of January 28, 1998 as amended on February 20, 1998 and March 2, 1998. The purchase price for the acquisition was $46.5 million, of which $23.5 million was paid in shares of Class A Common Stock of the Company and the remainder was paid in cash. The purchase price is subject to certain post- closing adjustments. Special-T is a distributor of aerospace fasteners. On February 3, 1998, with the proceeds of the Offering, term loan borrowings under the Facility, and the after tax proceeds the Company has already received from the STFI Merger (collectively, the "Refinancing"), the Company refinanced substantially all of its existing indebtedness (other than indebtedness of Banner), consisting of (i) $63.0 million to redeem the 11 7/8% Senior Debentures due 1999; (ii) $117.6 million to redeem the 12% Intermediate Debentures due 2001; (iii) $35.9 million to redeem the 13 1/8% Subordinated Debentures due 2006; (iv) $25.1 million to redeem the 13% Junior Subordinated Debentures due 2007; and (vi) accrued interest of $10.6 million. On November 28, 1997, the Company acquired AS+C GmbH, Aviation Supply + Consulting ("AS&C") in a business combination accounted for as a purchase. The total cost of the acquisition was $13,245, which exceeded the fair value of the net assets of AS&C by approximately $7,350, which is preliminarily being allocated as goodwill and amortized using the straight-line method over 40 years. The Company purchased AS&C with cash borrowed. AS&C is an aerospace parts, logistics, and distribution company primarily servicing the European OEM market. Fiscal 1997 Transactions 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. Fiscal 1996 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 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.
(In thousands) For the years ended June 30, 1995 1996 1997 Sales by Segment: Aerospace Fasteners $215,364 $218,059 $269,026 Aerospace Distribution(a) - 129,973 411,765 Corporate and Other 4,987 7,046 15,185 Eliminations (b) - (5,842) (15,213) Total Sales $220,351 $349,236 $680,763 Operating Income (Loss) by Segment: Aerospace Fasteners(c) $(11,497) $ 135 $ 17,390 Aerospace Distribution(a) - 5,625 30,891 Corporate and Other(b) (18,836) (17,046) (14,782) Total Operating Income $(30,333) $(11,286)$33,499 (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) Represents intersegment sales from the Aerospace Fasteners segment to the Aerospace Distribution segment. (c) Includes restructuring charges of $2.3 million in Fiscal 1996.
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 ended June 30, 1995, 1996 and 1997. The pro forma results are based on the historical financial statements of the Company and Banner as though the Banner Hardware Group Disposition and 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, Sales by Segment: 1995 1996 1997 Aerospace Fasteners $190,287 $197,099 $269,026 Aerospace Distribution(a) 108,359 153,830 187,768 Corporate and Other 5,462 7,046 15,185 Eliminations (b) - - (29) Total Sales $304,108 $357,975 $471,950 Operating Income (Loss)by Segment: Aerospace Fasteners(c) $(15,736) $ (2,639) $ 17,390 Aerospace Distribution(a) (9,995) 5,431 8,272 Corporate and Other(b) (16,260) (17,047) (14,782) Total Operating Income $(41,991) $(14,255) $ 10,880 (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 $680.8 million in Fiscal 1997 improved significantly by $331.5 million, or 94.9%, compared to sales of $349.2 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 58.5% from Fiscal 1995 reflecting strong sales performances from the Aerospace Fasteners segment and the inclusion of four months of sales from the Aerospace Distribution segment. On a pro forma basis, net sales increased 26.7% and 20.4% in Fiscal 1997 and 1996, respectively, as compared to the previous Fiscal periods. Gross Margin as a percentage of sales was 12.0%, 21.2%, and 26.6% in Fiscal 1995, 1996, and 1997, 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 24.0%, 22.7%, and 21.2% in Fiscal 1995, 1996, and 1997, 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 $30.3 million in Fiscal 1997 increased $44.8 million compared to operating loss of $11.3 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 $19.0 million over Fiscal 1995 due primarily to improved cost efficiencies applied in the Aerospace Fasteners segment. On a pro forma basis, operating income increased $32.5 million in Fiscal 1997, as compared to Fiscal 1996, and $20.4 million in Fiscal 1996, as compared to Fiscal 1995. Net interest expense decreased 15.5% in Fiscal 1997 compared to Fiscal 1996, and decreased 11.9% 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 $5.7 million, $4.6 million and $6.7 million in Fiscal 1995, 1996, and 1997, respectively. The 45.4% increase in Fiscal 1997 is due primarily to gains realized 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 decreased $0.2 million in Fiscal 1997, compared to Fiscal 1996, and increased $3.2 million in Fiscal 1996, compared to Fiscal 1995. The current year's decrease is attributable to the lower earnings of Nacanco. 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. Income Taxes included a $5.7 million tax benefit in Fiscal 1997 on a pre- tax loss of $7.1 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 was $29.8 million. Earnings from discontinued operations, net, include the earnings, net of tax, from Fairchild Technologies in Fiscal 1995, 1996 and 1997, STFI in Fiscal 1996 and 1997, and FCS, DME and Data in Fiscal 1995 and 1996. The $53.6 million gain on disposal of discontinued operations resulted primarily from the sale of DME to CMI in Fiscal 1996. Fiscal 1996 also includes a $163.1 million nontaxable gain resulting from the Merger. 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 gain on sale of discontinued operations of $163.1 million from the Merger and the $53.6 million gain on sale of discontinued operations in 1996 from the sale of DME, improved $28.3 million, reflecting a $41.6 million improvement in operating profit. The net earnings increased $223.5 million in Fiscal 1996, compared to Fiscal 1995, due primarily to the 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, 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, 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 $33.9 million, or 22.1%, and operating income was up $2.8 million, or 52.3%. 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. Corporate and Other The Corporate and Other segment includes Gas Springs Division and Fairchild Scandinavian Bellyloading Co. AB (SBC) (formerly the Technology Products segment). Sales improved at SBC which, was sold effective as of Fiscal 1997 year-end. Over the past three years, corporate administrative expense as a percentage of sales has decreased from 7.0% in 1995 to 4.5% in 1996 to 2.8% in 1997. Backlog of Orders Backlog is significant to all of 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 and Aerospace Distribution segment amounted to $195.7 million and $90.9 million, respectively, with a "Book-to-Bill" ratio of 1.3 and 1.1, respectively. The Company anticipates that approximately 94.8% of the aggregate backlog at June 30, 1997 will be delivered by June 30, 1998. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Net cash used by operating activities for the fiscal years ended June 30, 1997 and 1996 amounted to $100.1 million and $49.0 million, respectively. The primary use of cash for operating activities in fiscal 1997 was an increase in accounts receivable of $48.7 million and inventories of $36.9 million which was mainly to support the Company's sales growth. The primary use of cash for operating activities in fiscal 1996 was a decrease in accounts payable, accrued liabilities and other long-term liabilities of $37.5 million. Net cash provided from investing activities for the fiscal years ended June 30, 1997 and 1996 amounted to $80.0 million and $57.5 million, respectively. The primary source of cash from investing activities in fiscal 1997 was the sale of discontinued operations, including DME, of $173.7 million, which was slightly offset by the acquisition of subsidiaries in the amount of $55.9 million. The primary source of cash from investing activities in fiscal 1996 was the sale of discontinued operations of $71.6 million. Net cash used for financing activities for the fiscal years ended June 30, 1997 and 1996 amounted to $1.5 million and $39.6 million, respectively. The primary use of cash for financing activities in fiscal 1997 was the repayment of debt and the repurchase of debentures of $155.6 million offset by proceeds from the issuance of additional debt of $154.3 million. The primary use of cash for financing activities in fiscal 1996 was the repayment of debt and the repurchase of debentures of $195.4 million which was partially offset by proceeds from the issuance of additional debt of $156.5 million. The Company's principal cash requirements include debt service, capital expenditures, acquisitions, and payment of other liabilities. Other liabilities that require the use of cash include 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. With the proceeds of the Offering, borrowings under the Facility and the after tax proceeds the Company has already received from the STFI Merger, the Company refinanced substantially all of its existing indebtedness (other than indebtedness at Banner), consisting of the 11 7/8% Senior Debentures due 1999, the 12% Intermediate Debentures due 2001, the 13 1/8% Subordinated Debentures due 2006, the 13% Junior Subordinated debentures due 2007 and its existing bank indebtedness. The Refinancing reduced the Company's total net indebtedness by approximately $132 million and reduced the Company's annual interest expense, on a pro forma basis, by approximately $21 million. The completion of the STFI Merger will reduce the Company's annual interest expense by approximately $3 million. In addition, a portion of the proceeds from the Banner Hardware Group Disposition were used to repay all of Banner's outstanding bank indebtedness, which will further reduce the Company's annual interest expense by an additional $14 million. The increase in the Company's shareholders' equity is expected to be approximately $40 million resulting a projected gain of $90 million to be recorded at the closing of the Banner Hardware Group Disposition, and an estimated tax provision of $39 million and a minority interest effect of $20 million. The operating income of the subsidiaries included in the Banner Hardware Group Disposition was $6.1 million and $14.1 million for the three and six months ended December 28, 1997, respectively. Whereas the Company will no longer benefit from the operations of the disposed Banner subsidiaries it expects to benefit from lower interest expense and dividends paid on the AlliedSignal stock. For the Company's fiscal years 1995, 1996, and 1997, and for the first six months of fiscal 1998, Fairchild Technologies ("Technologies") had operating losses of approximately $1.5 million, $1.5 million, $3.6 million, and $5 million, respectively. In addition, as a result of the downturn in the Asian markets, Technologies has experienced delivery deferrals, reduction in new orders, lower margins and increased price competition. In response, in February, 1998, the Company adopted a formal plan to enhance the opportunities for disposition of Technologies, while improving the ability of Technologies to operate more efficiently. The plan includes a reduction in production capacity and headcount at Technologies, and the pursuit of potential vertical and horizontal integration with peers and competitors of the two divisions that constitute Technologies, or the inclusion of those divisions in the Spin-Off. If the Company elects to include Technologies in the Spin-Off, the Company believes that it would be required to contribute substantial additional resources to allow Technologies the liquidity necessary to sustain and grow both the Fairchild Technologies' operating divisions. In connection with the adoption of such plan, the Company will take an after-tax reserve of approximately $22 million in discontinued operations in the third fiscal quarter ending March 29, 1998, of which $14 million (net of income tax benefit of $4 million) relates to an estimated loss on the disposal of certain assets of Technologies, and $8 million relates to a provision for expected operating losses over the next twelve months at Technologies. While the Company believes that $22 million is a sufficient charge for the expected losses in connection with the disposition of Technologies, there can be no assurance that the reserve is adequate. In order to focus its operations on the aerospace industry, the Company is considering distributing (the "Spin-Off") to its shareholders all of the stock of a subsidiary to be formed ("Spin-Co"), which may own substantially all of the Company's non-aerospace assets. Although the Company's ability to effect the Spin-Off is uncertain, the Company may effect a spin-off of certain non-aerospace assets as soon as it is reasonably practicable following receipt of a solvency opinion relating to Spin-Co and all necessary governmental and third party approvals. In order to effect the Spin-Off, approval is required from the board of directors of the Company, however, shareholder approval is not required. The composition of the assets and liabilities to be included in Spin-Co, and accordingly the ability of the Company to consummate the Spin-Off, is contingent, among other things, on obtaining consents and waivers under the Company's New Credit Facility. In addition, the Company may encounter unexpected delays in effecting the Spin- Off, and the Company can make no assurance as to the timing thereof. In addition, prior to the consummation of the Spin-Off, the Company may sell, restructure or otherwise change the assets and liabilities that will be in Spin-Co, or for other reasons elect not to consummate the Spin-Off. Consequently, there can be no assurance that the Spin-Off will occur. In connection with the possible Spin-Off, it is anticipated that the Company will enter into an indemnification agreement pursuant to which Spin- Co will assume and be solely responsible for all known and unknown past, present and future claims and liabilities of any nature relating to the pension matter described under "Legal Proceedings"; certain environmental liabilities currently recorded as $7.5 million, but for which it is reasonably possible the total expense could be $12.3 million on an undiscounted basis; certain retiree medical cost and liabilities related to discontinued operations for which the Company has accrued approximately $31.3 million as of December 28, 1997 (see Note 11 to the Company's Consolidated Financial Statements); and certain tax liabilities. In addition, the Spin-Co would also be responsible for all liabilities relating to the Technologies business and an allocation of corporate expenses. Responsibility for such liabilities would require significant commitments. Should the Spin-Off, as presently contemplated, occur prior to June of 1999, the Spin-Off will be a taxable transaction to shareholders of the Company and could result in a material tax liability to the Company and its shareholders. The amount of the tax to the Company and its shareholders is uncertain, and if the tax is material to the Company, the Company may elect not to consummate the Spin-Off. Because circumstances may change and because provisions of the Internal Revenue Code of 1986, as amended, may be further amended from time to time, the Company may, depending on various factors, restructure or delay the timing of the Spin-Off to minimize the tax consequences thereof to the Company and its shareholders. With the year 2000 approaching, the Company is preparing all of its computer systems to be Year 2000 compliant. Substantially all of the systems within the Aerospace Fasteners segment are currently Year 2000 compliant. The Company expects to replace and upgrade some systems, which are not Year 2000 compliant, within the Aerospace Distribution segment and at Fairchild Technologies. The Company expects all of its systems will be Year 2000 compliant on a timely basis. However, there can be no assurance that the systems of other companies, on which the Company's systems rely, will also be timely converted. Management is currently evaluating the cost of ensuring that all of its systems are Year 2000 compliant. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS 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 1999. 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 Report of Independent Public Accountants 16 Consolidated Balance Sheets as of June 30, 1996 and 1997 17 Consolidated Statements of Earnings For The Three Years Ended June 30, 1995, 1996, and 1997 19 Consolidated Statements of Stockholders' Equity For The Three Years Ended June 30, 1995, 1996, and 1997 20 Consolidated Statements of Cash Flows For The Three Years Ended June 30, 1995, 1996, and 1997 21 Notes to Consolidated Financial Statements 22 Supplementary data regarding "Quarterly Financial Information (Unaudited)" is set forth under Item 8 in Note 23 to Consolidated Financial Statements. 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, 1996 and 1997, and the related consolidated statements of earnings, stockholders' equity and cash flows for the years ended June 30, 1995, 1996 and 1997. 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, 1996 and 1997, and the results of their operations and their cash flows for the years ended June 30, 1995, 1996 and 1997, in conformity with generally accepted accounting principles. Arthur Andersen LLP Washington, D.C. September 5, 1997 (except with respect to the matter discussed in Note 24, as to which the date is February 28, 1998) THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
June 30 June 30, ASSETS 1996 1997 Current Assets: Cash and cash equivalents (of which $8,224 and $4,839 is restricted) $ 39,649 $ 19,420 Short-term investments 10,498 25,647 Accounts receivable-trade, less 89,164 151,361 allowances of $5,449 and $6,905 Notes Receivable 170,384 -- Inventories: Finished goods 234,395 292,441 Work-in-process 12,909 20,357 Raw materials 13,989 10,567 261,293 323,365 Net current assets of discontinued 2,179 17,884 operations Prepaid expenses and other current assets 20,283 34,490 Total Current Assets 593,450 572,167 Property, plant and equipment, net of accumulated depreciation of $78,593 and $131,646 86,645 121,918 Net assets held for sale 45,405 26,147 Net noncurrent assets of discontinued 4,622 14,495 operations Cost in excess of net assets acquired (Goodwill), less accumulated amortization of $31,885 and 139,504 154,129 $36,627 Investments and advances, affiliated 53,018 55,678 companies Prepaid pension assets 57,660 59,742 Deferred loan costs 7,825 9,252 Long-term investments 585 4,120 Notes receivable and other assets 4,684 35,018 Total Assets $993,398 $1,052,666 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
June 30, June 30, LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997 Current Liabilities: Bank notes payable and current maturities of long-term debt $ 83,517 $ 47,322 Accounts payable 59,894 75,522 Accrued liabilities: Salaries, wages and commissions 15,407 17,138 Employee benefit plan costs 6,342 1,764 Insurance 15,863 15,021 Interest 10,732 11,213 Other accrued liabilities 24,179 52,182 72,523 97,318 Income taxes 24,635 5,863 Total Current Liabilities 240,569 226,025 Long-term debt, less current maturities 368,589 416,922 Other long-term liabilities 18,605 23,622 Retiree health care liabilities 44,412 43,351 Noncurrent income taxes 31,737 42,013 Minority interest in subsidiaries 58,625 68,309 Total Liabilities 762,537 820,242 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) 2,000 2,023 shares outstanding Class B common stock, 10 cents par value; authorized 20,000,000 shares, 2,632,516 (2,633,704 in 1996) shares issued and outstanding 263 263 Paid-in capital 69,366 71,015 Retained earnings 208,618 209,949 Cumulative translation adjustment 2,453 939 Net unrealized holding loss on available- (120) (46) for-sale securities Treasury Stock, at cost, 6,241,596 shares (51,719)(51,719) of Class A common stock Total Stockholders' Equity 230,861 232,424 Total Liabilities and Stockholders' Equity $993,398 $1,052,666 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share data)
For the Years Ended June 30, 1995 1996 1997 Revenue: Net sales $220,351 $349,236 $680,763 Other income 942 300 28 221,293 349,536 680,791 Costs and expenses: Cost of goods sold 193,860 275,135 499,419 Selling, general & administrative 52,975 79,295 142,959 Research and development 974 94 100 Amortization of goodwill 3,817 3,979 4,814 Restructuring -- 2,319 -- 251,626 360,822 647,292 Operating income (loss) (30,333) (11,286) 33,499 Interest expense 67,462 64,521 52,376 Interest income (3,349) (8,062) (4,695) Net interest expense 64,113 56,459 47,681 Investment income, net 5,705 4,575 6,651 Equity in earnings of affiliates 1,607 4,821 4,598 Minority interest (2,293) (1,952) (3,514) Non-recurring income (loss) -- (1,724) 2,528 Loss from continuing operations (89,427) (62,025) (3,919) before taxes Income tax benefit 33,147 29,839 5,735 Earnings (loss) from continuing (56,280) (32,186) 1,816 operations Earnings (loss) from discontinued 22,360 15,612 (485) operations, net Gain (loss) on disposal of (259) 216,716 -- discontinued operations, net Extraordinary items, net 355 (10,436) -- Net earnings (loss) $(33,824)$189,706 $1,331 Basic and Diluted Earnings Per Share (see Note 24): Earning (loss) from continuing operations $ (3.49)$ (1.98) $ 0.11 Earnings from discontinued operations, net 1.39 0.96 (0.03) Gain (loss) on disposal of discontinued operations, net (0.02) 13.37 -- Extraordinary items, net 0.02 (0.64) -- Net earnings (loss) $ (2.09) $ 11.71 $ 0.08 Weighted average shares outstanding 16,103 16,206 16,539 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 Class Cumulative A B Common Common Paid- Retai Transla Treasu n n in ned tion ry Stock Stock Capital Earni Adjustm Stock Other Total ngs ent Balance, July 1, 1994 $ $ $ $ $ $ $ $ 1,965 270 66,775 52,73 872 (51,71 (1,40 69,494 6 9) 5) Net loss - (33,8 -- - (33,82 -- -- - 24) - -- 4) Cumulative translation - 2,187 - 2,187 adjustment, net -- -- - -- - -- Gain on purchase of 236 -- - 236 preferred stock of -- -- -- - -- subsidiary Reduction of minimum - -- - 1,405 1,405 liability for pensions -- -- - -- - Net unrealized holding - -- - (120) (120) loss on available-for- -- -- - -- - sale securities Balance, June 30, 1995 1,965 270 67,011 18,91 3,059 (51,71 (120) 39,378 2 9) Net earnings - 189,7 -- - 189,70 -- -- - 06 - -- 6 Cumulative translation - (606) - (606) adjustment -- -- - -- - -- Fair market value of 1,148 -- - 1,148 stock warrants issued -- -- -- - -- Proceeds received from 28 1,481 -- - 1,509 stock options exercised -- -- - -- Exchange of Class B for 7 (7) - -- - - Class A common stock - -- - -- - Gain realized on (274) -- - (274) retirement of preferred -- -- -- - -- stock of subsidiary Balance, June 30, 1996 2,000 263 69,366 208,6 2,453 (51,71 (120) 230,86 18 9) 1 Net earnings - 1,331 -- - 1,331 -- -- - - -- Cumulative translation - (1,514) - (1,514 adjustment -- -- - -- - -- ) Fair market value of 546 -- - 546 stock warrants issued -- -- -- - -- Proceeds received from 23 1,103 -- - 1,126 options exercised -- -- - -- Net unrealized holding - -- - 74 74 gain on available-for- -- -- - -- - sale securities Balance, June 30, 1997 $ $ $ $209, $ $ $ $ 2,023 263 71,015 949 939 (51,71 (46) 232,42 9) 4 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
For the Twelve Months Ended 1995 1996 1997 Cash flows from operating activities: Net earnings (loss) (33,824) 189,706 1,331 Depreciation and amortization 20,503 21,045 24,307 Accretion of discount on long-term liabilities 4,773 4,686 4,963 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 649 (9) (72) Undistributed earnings of affiliates, net (500) (3,857) (1,055) Minority interest 2,293 1,952 3,514 Change in trading securities 1,879 (5,346) (5,733) Change in receivables (3,909) (5,566) (48,693) Change in inventories 1,063 (16,088) (36,868) Change in other current assets (3,256) (2,989) (14,088) Change in other non-current assets 4,590 3,609 (16,565) Change in accounts payable, accrued liabilities and other long-term liabilities (25,184)(37,477) 6,102 Non-cash charges and working capital changes of discontinued operations 5,883 11,985 (17,201) Net cash used for operating activities (25,040)(48,951)(100,058) Cash flows from investing activities: Proceeds received from (used for) investment securities, net 12,281 265 (12,951) Purchase of property, plant and equipment (5,383) (5,680) (15,014) Proceeds from sale of plant, property and equipment 126 98 213 Equity investment in affiliates (1,051) (2,361) (1,749) Minority interest in subsidiaries -- (2,817) (1,610) Acquisition of subsidiaries, net of (511) -- (55,916) cash acquired Net proceeds received from the sale of -- 71,559 173,719 discontinued operations Changes in net assets held for sale 1,441 5,894 385 Investing activities of discontinued operations (26,059) (9,418) (7,102) Net cash provided by (used for) investing activities (19,156) 57,540 79,975 Cash flows from financing activities: Proceeds from issuance of debt 71,339 156,501 154,294 Debt repayments and repurchase of debentures, net (55,311) (195,420) (155,600) Issuance of Class A common stock -- 1,509 1,126 Financing activities of discontinued operations (3,683) (2,227) (1,275) Net cash provided by (used for) financing activities 12,345 (39,637) (1,455) Effect of exchange rate changes on cash 665 (485) 1,309 Net decrease in cash and cash equivalents (31,186) (31,533) (20,229) Cash and cash equivalents, beginning of the year 102,368 71,182 39,649 Cash and cash equivalents, end of the year $ 71,182 $39,649 $ 19,420 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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"). The Company's investment in STFI resulted from a March 13, 1996 Merger of the Communications Services Segment of the Company with Shared Technologies, Inc. (See Note 3). The proposed sale of STFI to Intermedia Communications Inc., as discussed in Note 24, completes the disposition of the Communications Services Segment. In February 1998, the Company adopted a formal plan to sell its interest in the Fairchild Technologies segment. Accordingly, the Company's financial statements have been restated to present the results of the Communications Services Segment, STFI and Fairchild Technologies as discontinued operations. Fiscal Year: The fiscal year ("Fiscal") of the Company ends June 30. All references herein to "1995", "1996", and "1997" mean the fiscal years ended June 30, 1995, 1996 and 1997, 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:
1995 1996 1997 Interest $ 66,004 $ 66,716 $48,567 Income Taxes (3,056) 9,279 (1,926)
Restricted Cash: On June 30, 1996 and 1997, the Company had restricted cash of $8,224 and $4,839, 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 $4,756 and $4,868 higher at June 30, 1996 and 1997, respectively. Inventories from continuing operations are valued as follows:
June 30, June 30, 1996 1997 First-in, first-out (FIFO) $229,950 $293,469 Last-in, Last-out (LIFO) 31,343 29,896 Total inventories $261,293 $323,365
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, 1996 1997 Land $ 10,408 $ 13,438 Building and improvements 40,597 54,907 Machinery and equipment 93,495 152,430 Transportation Vehicles 737 864 Furniture and fixtures 17,672 25,401 Construction in progress 2,329 6,524 Property, plant and equipment at 165,238 253,564 cost Less: Accumulated depreciation (78,593) (131,646) Net property, plant and equipment $ 86,645 $121,918
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 1995, 1996 and 1997 was $3,794, $3,827, and $2,847, 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 1995, 1996 and 1997. Research and Development: Company-sponsored research and development expenditures are expensed as incurred. 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 expense in 1996 resulted from expenses incurred in 1996 in connection with other, alternative transactions considered but not consummated. 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 (see Note 24). 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 gain from this transaction. Subsequent to year-end the Company entered into an agreement to sell its investment in STFI. See Note 24 for further discussion. 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 $180,773 and $108,131 for 1995 and 1996, respectively. Net earnings from discontinued operations was $13,994, net of $10,183 for taxes in 1995, and $9,186, net of $5,695 for taxes in 1996. 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. See Note 24 for discontinuance of STFI and Fairchild Technologies. 6. PRO FORMA FINANCIAL STATEMENTS (UNAUDITED) The following unaudited pro forma information for the twelve months ended June 30, 1995 and June 30, 1996, 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.
1995 1996 Sales $445,502 $537,123 Loss from continuing operations (31,489) (14,291) Basic and diluted loss from continuing operations per share (1.96) (0.88) Net loss (32,876) (15,766) Basic and diluted net loss per share (2.04) (0.97)
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:
1996 1997 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 $10,362 $ 5,954 $16,094 $ 7,398 Other investments 136 136 9,553 9,553 $10,498 $ 6,090 $25,647 $16,951 Long-term investments: Other investments $ 585 $ 585 $ 4,120 $ 4,120
Investment income is summarized as follows:
1995 1996 1997 Gross realized gain (loss) from sales $3,948 $(1,744) $ 1,673 Change in unrealized holding gain (36) 5,527 4,289 (loss) from trading securities Gross realized loss from impairments (652) -- -- Dividend income 2,445 792 689 $5,705 $4,575 $6,651
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.
1995 1996 1997 Statement of Earnings: Net sales $313,888 $295,805 $102,962 Gross profit 100,644 89,229 39,041 Earnings from continuing operations 9,623 18,289 14,812 Discontinued operations, net - - - Net earnings 9,623 18,289 14,812 Balance Sheet at June 30: Current assets $53,843 $47,546 Non-current assets 37,201 40,878 Total assets 91,044 88,424 Current liabilities 27,392 26,218 Non-current liabilities 1,194 740
The Company owns approximately 31.9% of Nacanco common stock. The Company recorded equity earnings of $2,859, $5,487, and $4,673 from this investment for 1995, 1996 and 1997, respectively. 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 $138 and $363 from this investment for 1995 and 1996, 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 $(120) and $114 from this investment in 1995 and 1997, respectively. The Company's share of equity in earnings of all unconsolidated affiliates for 1995, 1996 and 1997 was $1,607, $4,271, and $4,598, respectively. The carrying value of investments and advances, affiliated companies consists of the following:
June 30, June 30, 1996 1997 Nacanco $20,886 $20,504 STFI 30,559 31,978 Others 1,573 3,196 $53,018 $55,678
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, 1996 1997 Bank credit agreements $ 73,500 $ 100 Other short-term notes payable 2,821 15,429 Short-term notes payable (weighted average interest rates of 8.6% and 7.8% in 1996 and 1997, respectively) $ 76,321 $15,529 Bank credit agreements $ 112,500 $177,250 11 7/8% RHI Senior debentures due 1999 85,769 85,852 12% Intermediate debentures due 2001 114,495 115,359 13 1/8% Subordinated debentures due 2006 35,061 35,188 13% Junior Subordinated debentures due 2007 24,800 24,834 10.65% Industrial revenue bonds 1,500 1,500 Capital lease obligations, interest from 4.4% to 10.5% 65 1,897 Other notes payable, collateralized by property, plant and 1,595 6,835 equipment, interest from 4.3% to 10.0% 375,785 448,715 Less: Current maturities (7,196) (31,793) Net long-term debt $368,589 $416,922
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. RHI may pay 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. However, all other dividends are subject to certain limitations, which was $10,000 in Fiscal 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. The Banner Credit Agreement substantially limits the amount of dividends that can be paid to its shareholders, including the Company. Banner's current policy is to retain earnings to support the growth of its present operations and to reduce its outstanding debt. 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 letters of credit outstanding 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 1995 $ 103 $ 687 $ 27 $ 94 1996 $ 118 $ 761 $ 30 $ 82 1997 $ 127 $ 864 $ 34 $ 82 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:
1995 1996 1997 Service cost (current period attribution) $ 3,917 $ 3,513 $ 2,521 Interest cost of projected benefit obligation 14,860 14,499 15,791 Actual return on plan assets (14,526)(39,430)(31,400) Amortization of prior service cost 81 81 (180) Net amortization and deferral (4,341) 21,495 11,157 (9) 158 (2,111) Net periodic pension expense (income) for other plans 78 (118) 142 including foreign plans Net periodic pension expense (income) $ 69 $ 40 $(1,969)
Assumptions used in accounting for the plans were:
1995 1996 1997 Discount rate 8.5% 8.5% 7.75% Expected rate of increase in 4.5% 4.5% 4.5% salaries Expected long-term rate of return 9.0% 9.0% 9.0% on plan assets
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, 1996, and 1997, for the plans:
June 30,June 30, 1996 1997 Actuarial present value of benefit obligations: Vested $164,819 $183,646 Nonvested 6,169 7,461 Accumulated benefit obligation 170,988 191,107 Effect of projected future compensation increases 905 683 Projected benefit obligation 171,893 191,790 Plan assets at fair value 224,692 237,480 Plan assets in excess of projected benefit obligations 52,799 45,690 Unrecognized net loss 20,471 29,592 Unrecognized prior service cost (354) (571) Unrecognized net transition assets (608) (315) Prepaid pension cost prior to SFAS 109 implementation 72,308 74,396 Effect of SFAS 109 implementation (14,648) (14,654) Prepaid pension cost $ 57,660 $ 59,742
Plan assets include Class A Common Stock of the Company valued at a fair market value of $11,094 and $26,287 at June 30, 1996 and 1997, 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 $701, $779, and $642 for 1995, 1996 and 1997, respectively. The Company has accrued approximately $36,995 and $34,965 as of June 30, 1996 and 1997, 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 $3,872, $3,877, and $3,349 for the years ended June 30, 1995, 1996 and 1997, respectively. The components of expense in Fiscal 1995, 1996 and 1997 are as follows:
1995 1996 1997 Service cost of benefits earned $ 321 $ 281 $ 140 Interest cost on liabilities 4,385 4,377 3,940 Net amortization and deferral (133) (2) (89) Net periodic postretirement benefit cost $ 4,573 $ 4,656 $ 3,991
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,:
1996 1997 Accumulated postretirement benefit obligations: Retirees $46,846 $48,145 Fully eligible active participants 347 390 Other active participants 1,887 2,335 Accumulated postretirement benefit obligation 49,080 50,870 Unrecognized net loss 2,086 6,173 Accrued postretirement benefit liability $46,994 $44,697
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:
1995 1996 1997 Current: Federal $(7,956) $(40,640) $ 5,612) ) State 424 1,203 1,197 Foreign 1,191 (3,805) (49) (6,341) (43,242) 6,760 Deferred: Federal (24,754) 17,060 (15,939) State (2,052) (3,657) 3,444 (26,806) 13,403 (12,495) Net tax benefit $(33,147) $(29,839)$(5,735)
The income tax provision (benefit) for continuing operations differs from that computed using the statutory Federal income tax rate of 35%, in Fiscal 1995, 1996 and 1997, for the following reasons:
1995 1996 1997 Computed statutory amount $(31,299) $(21,709) $(1,372) State income taxes, net of applicable federal tax benefit (1,794) 782 778 Nondeductible acquisition valuation items 1,420 1,329 1,064 Tax on foreign earnings, net of tax credits 2,965 1,711 (1,938) Difference between book and tax basis of assets acquired and 1,366 1,040 (1,102) liabilities assumed Revision of estimate for tax accruals (5,000) (3,500) (5,335) Other (805) (9,492) 2,170 Net tax benefit $(33,147) $(29,839 $(5,735)
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:
1995 1996 1997 Deferred Deferred Deferred (Provision) (Provision) June 30,(Provision) June 30, Benefit Benefit 1996 Benefit 1997 Deferred tax assets: Accrued expenses $(2,218) $(1,643) $5,936 $ 504 $ 6,440 Asset basis differences (7,292) 1,787 2,064 (1,492) 572 Inventory - - - 2,198 2,198 Employee compensation and benefits 106 (26) 5,408 (267) 5,141 Environmental reserves (1,202) (737) 4,512 (1,253) 3,259 Loss and credit carryforward 17,991 (23,229) 8,796 (8,796) - Postretirement benefits 514 (1,273) 19,334 138 19,472 Other 1,530 2,186 5,519 2,079 7,598 9,429 (22,935) 51,569 (6,889) 44,680 Deferred tax liabilities: Asset basis differences 4,129 16,602 (22,565) (3,855) (26,420) Inventory 3,176 4,684 (2,010) 2,010 - Pensions 1,074 1,516 (18,243) (1,038) (19,281) Other 8,998 (13,270) (29,507) 22,267 (7,240) 17,377 9,532 (72,325) 19,384 (52,941) Net deferred tax liability $26,806 $(13,403)$(20,756) $ 12,495 $ (8,261)
The amounts included in the balance sheet are as follows:
June 30, June 30, 1996 1997 Prepaid expenses and other current assets: Current deferred $ 8,012 $ 11,307 Income taxes payable: Current deferred 20,797 (2,735) Other current 3,838 8,598 $ 24,635 $ 5,863 Noncurrent income tax liabilities: Noncurrent deferred $ 7,971 $ 22,303 Other noncurrent 23,766 19,710 $ 31,737 $ 42,013
The 1995, 1996 and 1997 net tax benefits include the results of reversing $5,000, $3,500 and $5,335, 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 On June 30, 1997, the Company had $68,309 of minority interest, of which $67,649 represents Banner. Minority shareholders hold approximately 40.7% of Banner's outstanding common stock. 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 1996 and 1997 was $1.95and $6.90, 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: [CAPTION] 1996 1997 Risk-free interest rate 5.5%-6.6% 6.0%-6.7% Expected life in years 4.27 4.65 Expected volatility 46% - 47% 43% - 45% 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 1996 or 1997. If stock options granted in 1996 and 1997 were accounted for based on their fair value as determined under SFAS 123, pro forma earnings would be as follows:
1996 1997 Net earnings: As reported $189,706 $ 1,331 Pro forma 189,460 283 Basic earnings per share: As reported $ 11.71 $ 0.08 Pro forma 11.69 0.02 Diluted earnings per share: As reported $ 11.71 $ 0.08 Pro forma 11.69 0.02
The pro forma effects of applying SFAS 123 are not representative of the effects on reported net earnings for future years. SFAS 123 is not applicable 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 Stinbes Limited (an affiliate of Jeffrey Steiner) 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, 1996 and 1997, are as follows:
June 30, 1996 June 30, 1997 Carrying Fair Carrying Fair Amount Value Amount Value Cash and cash equivalents $ 39,649 $39,649 $19,420 $19,420 Investment securities: Short-term equity securities 10,362 10,362 16,094 16,122 Short-term other investments 136 167 9,553 9,592 Long-term other investments 585 1,451 4,120 4,617 Notes receivable: Current 170,384 170,384 - - Long-term 3,702 3,702 1,300 1,300 Short-term debt 76,321 76,321 15,529 15,529 Long-term debt: Bank credit agreement 112,500 112,500 177,250 177,250 Senior notes and subordinated debentures 260,125 264,759 261,233 270,995 Industrial revenue bonds 1,500 1,500 1,500 1,500 Capitalized leases 65 65 1,897 1,897 Other 1,595 1,595 6,835 6,835
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
(a) Write down was required because product line was discontinued. (b) 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 1995, 1996 and 1997. 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 $5,494 and $3,663 in Fiscal 1995, and 1996, 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 1995, 1996 and 1997 was $6,695, $6,197, and $4,928, 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, however, an estimate of the possible loss or range of loss from the ACO's assertion cannot be made. The Company believes it has properly accounted for the asset reversions in accordance with applicable accounting standards. The Company has held discussions with the government to attempt to resolve these pension accounting issues. Environmental Matters The Company's operations are subject to stringent 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, were previously reported under Corporate and Other, along with results two smaller operations. Fairchild Technologies is now recorded in discontinued operations. The Company's financial data by business segment is as follows:
1995 1996 1997 Sales: Aerospace Fasteners $215,364 $218,059 $269,026 Aerospace Distribution (a) - 129,973 411,765 Corporate and Other 4,987 7,046 15,185 Eliminations (b) - (5,842) (15,213) Total Sales $220,351 $349,236 $680,763 Operating Income (Loss): Aerospace Fasteners $(11,497)$ 135 $ 17,390 Aerospace Distribution (a) - 5,625 30,891 Corporate and Other (18,836) (17,046) (14,782) Operating Income (Loss) $(30,333)$(11,286)$ 33,499 Capital Expenditures: Aerospace Fasteners $ 4,974 $ 3,841 $ 8,964 Aerospace Distribution - 1,556 4,787 Corporate and Other 409 283 1,263 Total Capital Expenditures $ 5,383 $ 5,680 $ 15,014 Depreciation and Amortization: Aerospace Fasteners $ 15,619 $ 14,916 $ 16,112 Aerospace Distribution - 1,341 5,138 Corporate and Other 4,884 4,788 3,057 Total Depreciation and Amortization $ 20,503 $ 21,045 $ 24,307 Identifiable Assets at June 30: Aerospace Fasteners $290,465 $252,200 $346,533 Aerospace Distribution - 329,477 428,436 Corporate and Other 538,215 411,721 277,697 Total Identifiable Assets $828,680 $993,398 $1,052,666 (a) Effective February 25, 1996, the Company became the majority shareholder of Banner Aerospace, Inc. and, accordingly, began consolidating their results. (b) Represents intersegment sales from the Aerospace Fasteners segment to the Aerospace Distribution segment. (c) 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: [CAPTION] 1995 1996 1997 Sales by Geographic Area: United States $164,153 $292,136 $580,453 Europe 55,404 56,723 100,310 Other 794 377 - Total Sales $220,351 $349,236 $680,763 Operating Income by Geographic Area: United States $(30,537)$(12,175)$ 27,489 Europe 167 1,037 6,010 Other 37 (148) - Total Operating Income $(30,333)$(11,286)$ 33,499 Identifiable Assets by Geographic Area at June 30: United States $760,756 $929,649 $855,233 Europe 69,027 63,749 197,433 Other (1,103) - - Total Identifiable Assets $828,680 $993,398 $1,052,666
Export sales are defined as sales to customers in foreign countries by the Company's domestic operations. Export sales amounted to the following:
1995 1996 1997 Export Sales Europe $13,329 $27,330 $48,187 Asia (excluding Japan) 1,526 6,766 21,221 Japan 2,702 11,958 19,819 Canada 2,810 8,878 17,797 Other 911 8,565 15,907 Total Export Sales $21,278 $63,497 $122,931
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 1996 quarters ended Oct. 1 Dec. 31 March 31June 30 Net sales $ 53,015 $ 56,615 $92,973 $146,633 Gross profit 8,424 10,350 18,902 36,425 Earnings (loss) from continuing operations (16,150) (12,918) (8,368) (4,196) per share (0.82) (0.81) (0.50) (0.24) Earnings from discontinued operations, net 10,734 7,322 2,102 (4,546) per share 0.48 0.46 0.11 (0.27) Gain (loss) from disposal of discontinued operations, net (20) (7) 224,416 (7,673) per share - - 13.51 (0.45) Extraordinary items, net - - (10,436) - per share - - (0.62) - Net earnings (loss) (5,436) (5,603) 207,714 (6,969) per share (0.34) (0.35) 12.42 (0.41) Market price range of Class A Stock: High 6 8 _ 9 7/8 15 7/8 Low 2 7/8 4 _ 8 9 1/4 Close 5 1/8 8 1/2 9 3/8 14 5/8 Fiscal 1997 quarters ended Sept. 29 Dec. 29 March 30June 30 Net sales $ $ $ $ 137,613 151,842 179,480 211,828 Gross profit 37,092 36,785 47,552 59,915 Earnings (loss) from continuing operations (3,363) (1,299) (117) 6,595 per share (0.20) (0.08) (0.01) 0.40 Earnings from discontinued operations, net (1,255) (1,678) 157 2,291 per share (0.07) (0.09) 0.01 0.14 Net earnings (loss) (4,618) (2,977) 40 8,886 per share (0.27) (0.17) - 0.52 Market price of Class A Stock: High 17 17 _ 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
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, and (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. Gain on disposal of discontinued operations Includes $161,406 resulting primarily from the gain on the merger of FCSC with STI in the third quarter of Fiscal 1996 and the gain on the sale of DME. 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 Effective December 28, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). This statement replaces the previously reported primary and fully diluted earnings (loss) per share with basic and diluted earnings (loss) per share. Unlike primary earnings (loss) per share, basic earnings (loss) per share excludes any diluted effects of options. Diluted earnings (loss) per share is very similar to the previously reported fully diluted earnings (loss) per share. All earnings (loss) per share have been restated to conform to the requirements of SFAS 128. The computation of diluted earnings (loss) per share for Fiscal 1995 and 1996 excluded the effect of incremental common shares attributable to the potential exercise of common stock options outstanding and warrants outstanding, because their effect was antidilutive. These shares could potentially dilute basic earnings (loss) per share in the future. Subsequent to June 30, 1997, the Company issued three million shares of Class A common stock through an equity offering and also entered into a merger agreement which, as mentioned below, also increased the number of outstanding shares. On November 20, 1997, Shared Technologies Fairchild Inc. ("STFI"), a corporation of which the Company owns approximately 42% of the outstanding common stock, entered into a merger agreement with Intermedia Communications Inc. ("Intermedia") pursuant to which holders of STFI common stock will receive $15.00 per share in cash, (the "STFI Sale"). In connection with the STFI Sale, the Company has received approximately $108 million in cash (before tax) in exchange for certain preferred stock of STFI and expects to receive an additional $70 million in cash (before tax) in the first three months of 1998 in exchange for the 4,669,352 shares of common stock of STFI owned by the Company. The Intermedia transaction replaces an earlier merger agreement with the Tel-Save Holdings, Inc. under which the Company would have received consideration primarily in common stock of Tel-Save Holdings, Inc. The results of STFI have been accounted for as discontinued operations. The net sales of STFI totaled, $108,710 and $91,290 in 1995 and 1996, respectively. Net earnings from discontinued operations was, $9,849, $7,901 and $3,149, in 1995, 1996, and 1997, respectively. Gain on disposal of discontinued operations includes a $163,130 nontaxable gain resulting from the Merger (See Note 3). On December 19, 1997, the Company completed a secondary offering of public securities. The offering consisted of an issuance of 3,000,000 shares of the Company's Class A Common Stock at $20.00 per share (the "Offering"). Immediately following the Offering, the Company restructured its FHC and RHI Credit Agreements by entering into a new six-and-a-half-year credit facility to provide the Company with a $300,000 senior secured credit facility (the "Facility") consisting of (i) a $75,000 revolving loan with a letter of credit sub-facility of $30,000 and a $10,000 swing loan sub-facility, and (ii) a $225,000 term loan. On January 13, 1998, certain subsidiaries (the "Selling Subsidiaries"), of Banner Aerospace, Inc. ("Banner", a majority-owned subsidiary of the Registrant), completed the disposition of substantially all of the assets and certain liabilities of the Selling Subsidiaries to two wholly-owned subsidiaries of AlliedSignal Inc. (the "Buyers"), in exchange for unregistered shares of AlliedSignal Inc. common stock with an aggregate value equal to $369,000 (the "Banner Hardware Group Disposition"). The purchase price received by the Selling Subsidiaries was based on the consolidated net worth as reflected on an estimated closing date balance sheet for the assets (and liabilities) conveyed by the Selling Subsidiaries to the Buyers. Such estimated closing date balance sheet is subject to review by the parties, and the purchase price will be adjusted (up or down) based on the net worth as reflected on the final closing date balance sheet. The assets transferred to the Buyers consists primarily of Banner's hardware group, which includes the distribution of bearings, nuts, bolts, screws, rivets and other type of fasteners, and its PacAero unit. Approximately $196,000 of the common stock received from the Buyers was used to repay outstanding term loans of Banner's subsidiaries and related fees. Banner effected the Banner Hardware Group Disposition to concentrate its efforts on the rotables and jet engine businesses and because the Banner Hardware Group Disposition presented a unique opportunity to realize a significant return on the disposition of the hardware group. On February 3, 1998, with the proceeds of the Offering, term loan borrowings under the Facility, and the after tax proceeds the Company has already received from the STFI Merger (collectively, the "Refinancing"), the Company refinanced substantially all of its existing indebtedness (other than indebtedness of Banner), consisting of (i) $63,000 to redeem the 11 7/8% Senior Debentures due 1999; (ii) $117,600 to redeem the 12% Intermediate Debentures due 2001; (iii) $35,856 to redeem the 13 1/8% Subordinated Debentures due 2006; (iv) $25,063 to redeem the 13% Junior Subordinated Debentures due 2007; and (v) accrued interest of $10,562. On January 28, 1998, the Company entered into a merger agreement to acquire Edwards and Lock Management Corporation, doing business as Special-T Fasteners ("Special-T"), in a business combination to be accounted for as a purchase. Total cost of the acquisition will be approximately $46,500, and will be funded with $23,000 of available cash and $23,500 of unregistered shares of the Company's Class A Common Stock.. The purchase price is subject to certain post-closing adjustments. Special-T is a distributor of aerospace fasteners. Special-T distributes precision fasteners worldwide, utilized primarily in the aerospace industry, to both government and commercial manufacturers. Net sales of Fairchild Technologies ("Technologies") for 1995, 1996 and 1997 were $36,489, $60,284, and $51,197, respectively. For the Company's fiscal years 1995, 1996, and 1997, Technologies had operating losses of approximately of $1,483, $1,475, and $3,634, respectively. In February 1998, the Company adopted a formal plan to enhance the opportunities for disposition of Technologies, while improving the ability of Technologies to operate more efficiently. The plan includes a reduction in production capacity and headcount at Technologies, and the pursuit of potential vertical and horizontal integration with peers and competitors of the two divisions that constitute Technologies, or the inclusion of those divisions in the Spin-Off. If the Company elects to include Technologies in the Spin-Off, the Company believes that it would be required to contribute substantial additional resources to allow Technologies the liquidity necessary to sustain and grow both the Fairchild Technologies' operating divisions. In connection with the adoption of such plan, the Company will take an after-tax reserve of approximately $22 million in discontinued operations in the third fiscal quarter ending March 29, 1998, of which $14 million (net of income tax benefit of $4 million) relates to an estimated loss on the disposal of certain assets of Technologies, and $8 million relates to a provision for expected operating losses over the next twelve months at Technologies. While the Company believes that $22 million is a sufficient charge for the expected losses in connection with the disposition of Technologies, there can be no assurance that the reserve is adequate. 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 15). (a)(2) Financial Statement Schedules and Report of Independent Public Accountants. Schedule Number Description Page I Condensed Financial Information of Parent Company 53 II Valuation and Qualifying Accounts 57 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 (except with the matters discussed in Note 24 to those financial statements, as to which the date is February 28, 1998). Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules 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 (except with respect to the matter discussed in Note 24, as to which the date is February 28, 1998) SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT THE FAIRCHILD CORPORATION CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANY BALANCE SHEETS (NOT CONSOLIDATED)
(In thousands) June 30, June 30, 1997 1996 ASSETS Current assets: Cash and cash equivalents $ 234 $ 1,887 Accounts receivable 384 179 Prepaid expenses and other current assets 250 192 Total current assets 868 2,258 Property, plant and equipment, less accumulated 486 628 depreciation Investments in subsidiaries 390,355 391,958 Investments and advances, affiliated companies 1,435 3,047 Goodwill 4,133 4,263 Noncurrent tax assets 29,624 14,548 Other assets 2,403 3,510 Total assets $ 429,304 $ 420,212 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 8,315 $ 7,735 Total current liabilities 8,315 7,735 Long-term debt 190,567 180,141 Other long-term liabilities 797 1,168 Total liabilities 199,679 189,044 Stockholders' equity: Class A common stock 2,023 2,000 Class B common stock 263 263 Retained earnings and other equity 227,339 228,905 Total stockholders' equity 229,625 231,168 Total liabilities and stockholders' equity $ 429,304 $420,212 The accompanying notes are an integral part of these condensed financial statements.
Schedule I THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED FINANCIAL STATEMENTS OF THE COMPANY STATEMENT OF EARNINGS (NOT CONSOLIDATED) (In thousands)
For the Years Ended June 30, 1997 1996 1995 Costs and Expenses: Selling, general & administrative 3,925 5,148 3,920 Amortization of goodwill 130 130 130 4,055 5,278 4,050 Operating income (4,055) (5,278) (4,050) Net interest expense 25,252 28,387 29,027 Investment income, net 16 1 (434) Equity in earnings of affiliates 480 269 (409) Nonrecurring expense -- (1,064) -- Loss from continuing operations before (28,811) (34,459) (33,920) taxes Income tax provision (benefit) (15,076) (12,509) (18,838) Loss before equity in earnings of (13,735) (21,950) (15,082) subsidiaries Equity in earnings of subsidiaries 15,066 211,656 (18,742) Net earnings (loss) 1,331 189,706 (33,824) The accompanying notes are an integral part of these condensed financial statements.
THE FAIRCHILD CORPORATION CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANY STATEMENT OF CASH FLOWS (NOT CONSOLIDATED) (IN THOUSANDS)
For the Years Ended June 30, 1997 1996 1995 Cash provided by (used for) operations $(14,271 $ 36,916 $(9,607) Investing activities: Equity investments in affiliates 2,092 (21) 1,356 2,092 (21) 1,356 Financing activities: Proceeds from issuance of 9,400 - 7,400 intercompany debt Debt repayments - (42,265) - Issuance of common stock 1,126 1,509 - 10,526 (40,756) 7,400 Net decrease in cash $(1,653) $(3,861) $ (851) The accompanying notes are an integral part of these condensed financial statements.
Schedule I THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED FINANCIAL STATEMENTS OF THE COMPANY NOTES TO FINANCIAL STATEMENTS (NOT CONSOLIDATED) (In thousands) 1. BASIS OF PRESENTATION In accordance with the requirements of Regulation S-X of the Securities and Exchange Commission, the financial statements of the Company are condensed and omit many disclosures presented in the consolidated financial statements and the notes thereto. 2. LONG-TERM DEBT
June 30, June 30, 1997 1996 12% Inter. Debentures Due 2001 $ 128,000 $ 123,600 13 1/8% Sub. Debentures Due 2006 35,856 35,856 13% Jr. Sub. Debenture Due 2007 30,063 25,063 $ 193,919 $ 184,519
Maturities of long-term debt for the next five years are as follows: no maturities in 1998, $30,335 in 1999, $31,520 in 2000, $31,713 in 2001, and $37,320 in 2002. 3. DIVIDENDS FROM SUBSIDIARIES Cash dividends paid to The Fairchild Corporation by its consolidated subsidiaries were $10,000, $42,100, and $10,000 in Fiscal 1997, 1996, and 1995, respectively. 4. CONTINGENCIES 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 will not have a material adverse effect on the financial condition, or future results of operations or net cash flows of the Company. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Changes in the allowance for doubtful accounts are as follows:
For the Years Ended June 30, 1995 1996 1997 Beginning balance $ 901 $2,738 $5,449 Charges to cost and expenses 1,569 1,766 1,978 Charges to other accounts (a) 410 2,405 445 Amounts written off (142) (1,460) (967) Ending Balance $2,738 $5,449 $6,905 (a) Recoveries of amounts written off in prior periods, foreign currency translation and the change in related noncurrent taxes.
(a)(3) Exhibits. 3.1 Registrant's Restated Certificate of Incorporation (incorporated by reference to Exhibit "C" of Registrant's Proxy Statement dated October 27, 1989). 3.2 Registrant's Amended and Restated By-Laws, as amended as of November 21, 1996 (incorporated by reference to the December 29, 1996 10-Q). 4.1 Specimen of Class A Common Stock certificate (incorporated by reference to Registration Statement No. 33-15359 on Form S-2). 4.2 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")). 4.3 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). 4.4 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"). 4.5 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). 4.6 First Supplemental Indenture dated as of November 26, 1986, to the Note Indenture (incorporated by reference to the December 1986 10-Q). 4.7 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")). 4.8 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"). 4.9 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). 4.10 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")). 4.11 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). 4.12 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). 4.13 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). 4.14 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). 4.15 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). 4.16 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). 10.1 Deferred Compensation Agreement between Registrant and Samuel J. Krasney dated July 14, 1972, as amended November17, 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). 10.2 Amendment to the Krasney Deferred Compensation Agreement dated September 6, 1990 (incorporated by reference to 1991 10-K). 10.3 Amended and Restated Employment Agreement between Registrant and Samuel J. Krasney dated April 24, 1990 (incorporated by reference to the 1990 10-K). 10.4 Letter Agreements dated August 4, 1993 among Samuel J. Krasney, The Fairchild Corporation and Jeffrey J. Steiner (incorporated by reference to 1993 10-K). 10.5 1988 U.K. Stock Option Plan of Banner Industries, Inc. (incorporated by reference to the 1988 10-K). 10.6 Description of grants of stock options to non-employee directors of Registrant (incorporated by reference to the 1988 10-K). 10.7 Amended and Restated Employment Agreement between Registrant and Jeffrey J. Steiner dated September 10, 1992 (incorporated by reference to 1993 10-K). 10.8 Letter Agreement dated October 23, 1991 between Registrant and Eric Steiner (incorporated by reference to 1992 10-K). 10.9 Letter Agreement dated October 23, 1991 between Registrant and John D. Jackson (incorporated by reference to 1992 10-K). 10.10 Letter Agreement dated October 23, 1991 between Registrant and Michael T. Alcox (incorporated by reference to 1992 10-K. 10.11 Letter Agreement dated October 23, 1991 between Registrant and Donald E. Miller (incorporated by reference to 1992 10- K). 10.12 Letter Agreement dated October 23, 1991 between Registrant and John L. Flynn (incorporated by reference to 1992 10-K). 10.13 Letter Agreement dated April 8, 1993 between Registrant and Thomas Flaherty (incorporated by reference to 1993 10-K). 10.14 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). 10.15 Letter Agreement dated October 21, 1994, as amended December 21, 1994, between Registrant and Eric Steiner (incorporated by reference to the 1995 10-K). 10.16 Letter Agreement dated October 21, 1994, as amended December 21, 1994, between Registrant and Michael T. (incorporated by reference to the 1995 10-K). 10.17 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). 10.18 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). 10.19 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). 10.20 Letter Agreement dated September 9, 1996, between Registrant and Colin M. Cohen (incorporated by reference to the 1997 10-K). 10.21 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). 10.22 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). 10.23 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). 10.24 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). 10.25 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). 10.26 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). 10.27 Restated and Amended Credit Agreement dated as of July 26, 1996, (the "FHC Credit Agreement"), among FHC, Citicorp USA, Inc. and certain financial institutions. 10.28 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). 10.29 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). 10.30 Amendment No. 3, dated as of June 30, 1997, to the FHC Credit Agreement dated as of March 13, 1996 (incorporated by reference to the 1997 10-K). 10.31 Second Amended And Restated Credit Agreement dated as of July 18, 1997, to the FHC Credit Agreement dated as of March 13, 1996 (incorporated by reference to the 1997 10-K). 10.32 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). 10.33 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). 10.34 Amendment No. 2 dated as of April 7, 1997, to the RHI Credit Agreement dated as of May 27, 1996 (incorporated by reference to the 1997 10-K). 10.35 1986 Non-Qualified and Incentive Stock Option Plan (incorporated by reference to Registrant's Proxy Statement dated November 15, 1990). 10.36 1986 Non-Qualified and Incentive Stock Option Plan (incorporated by reference to Registrant's Proxy Statement dated November 21, 1997). 10.37 1996 Non-Employee Directors Stock Option Plan (incorporated by reference to Registrant's Proxy Statement dated November 21, 1997). 10.38 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). 10.39 Employment Agreement between RHI Holdings, Inc., and Jacques Moskovic, dated as of December 29, 1994. (incorporated by reference to the 1996 10-K/A). 10.40 Employment Agreement between Fairchild France, Inc., and Jacques Moskovic, dated as of December 29, 1994. (incorporated by reference to the 1996 10-K/A). 10.41 Employment Agreement between Fairchild France, Inc., Fairchild CDI, S.A., and Jacques Moskovic, dated as of April 18, 1997 (incorporated by reference to the 1995 10-K). 10.42 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.). 10.43 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). 10.44 Form Warrant Agreement (including form of Warrant) 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 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). 22 List of subsidiaries of Registrant (incorporated by reference to the 1997 10-K). 23 Consent of Arthur Andersen LLP, independent public accountants (incorporated by reference to the 1997 10-K). *27 Financial Data Schedules. 99.1 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). 99.2 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 Registrant's Form 8-K filed on December 8, 1997). 99.3 Financial statements, related notes thereto and Auditors' Report of Nacanco Paketleme for the fiscal year ended December 31, 1997 (incorporated by reference to the Registrant's Form 8-K filed on December 8, 1997). *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: April 3, 1998 EX-27 2
5 12-MOS JUN-30-1997 JUN-30-1997 19,420 25,647 158,266 (6,905) 323,365 572,167 253,564 131,646 1,052,666 226,025 416,922 0 0 2,286 230,138 1,052,666 680,763 680,791 499,419 647,292 0 0 47,681 (3,919) (5,735) 1,816 (485) 0 0 1,331 0.08 0.08
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