-----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, Du7M2M1re3cuO3nCJeKuk8V1xAZpqesVdiLka2ZavBR+u31qZ4lIQzzQohKJh/EP IdIDONss+dZ2OiK7rcnldw== 0000009779-99-000004.txt : 19990208 0000009779-99-000004.hdr.sgml : 19990208 ACCESSION NUMBER: 0000009779-99-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981227 FILED AS OF DATE: 19990205 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-Q SEC ACT: SEC FILE NUMBER: 001-06560 FILM NUMBER: 99522253 BUSINESS ADDRESS: STREET 1: 45025 AVIATION DR STREET 2: STE 400 CITY: DULLES STATE: VA ZIP: 20166 BUSINESS PHONE: 7034785800 MAIL ADDRESS: STREET 1: 45025 AVIATION DRIVE STREET 2: SUITE 400 CITY: DULLES STATE: VA ZIP: 20166 FORMER COMPANY: FORMER CONFORMED NAME: BANNER INDUSTRIES INC /DE/ DATE OF NAME CHANGE: 19901118 10-Q 1 36 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 27, 1998 Commission File Number 1-6560 THE FAIRCHILD CORPORATION (Exact name of Registrant as specified in its charter) Delaware 34-0728587 (State or other jurisdiction of (I.R.S. Employer Identification No.) Incorporation or organization) 45025 Aviation Drive, Suite 400 Dulles, VA 20166 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (703) 478-5800 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days. YES X NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Title of Class January 31, 1998 Class A Common Stock, $0.10 Par Value 19,222,606 Class B Common Stock, $0.10 Par Value 2,624,062 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES INDEX Page PART I. FINANCIAL INFORMATION Item 1.Condensed Consolidated Balance Sheets as of June 30, 1998 and December 27, 1998 (Unaudited) 3 Consolidated Statements of Earnings for the Three and Six Months ended December 28, 1997 and December 27, 1998 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows for the Six Months ended December 28, 1997 and December 27, 1998 (Unaudited) 7 Notes to Condensed Consolidated Financial Statements (Unaudited) 8 Item 2.Management's Discussion and Analysis of Results of Operations and Financial Condition 13 Item 3.Quantitative and Qualitative Disclosure About Market Risk 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings 23 Item 2 Changes in Securities and Use of Proceeds 23 Item 4.Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 24 Item 6. Exhibits and Reports on Form 8-K 24 * For purposes of Part I and this Form 10-Q, the term "Company" means The Fairchild Corporation, and its subsidiaries, unless otherwise indicated. For purposes of Part II, the term "Company" means The Fairchild Corporation, unless otherwise indicated. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 1998 and December 27, 1998 (Unaudited) (In thousands) ASSETS
June 30, Dec. 27, 1998 1998 CURRENT ASSETS: (*) Cash and cash equivalents, $746 and $0 restricted $ 49,601 $ 16,063 Short-term investments 3,962 216,260 Accounts receivable-trade, less 120,284 95,435 allowances of $5,655 and $3,079 Inventories: Finished goods 187,205 146,466 Work-in-process 20,642 19,074 Raw materials 9,635 9,142 217,482 174,682 Net current assets of discontinued 11,613 1,670 operations Prepaid expenses and other current 53,081 52,870 assets Total Current Assets 456,023 556,980 Property, plant and equipment, net of accumulated depreciation of $82,968 and $98,382 118,963 124,446 Net assets held for sale 23,789 20,794 Net noncurrent assets of discontinued 8,541 10,945 operations Cost in excess of net assets acquired (Goodwill), less accumulated amortization of $42,079 168,307 167,262 and $43,581 Investments and advances, affiliated 27,568 28,416 companies Prepaid pension assets 61,643 62,246 Deferred loan costs 6,362 5,879 Long-term investments 235,435 36,398 Other assets 50,628 70,275 TOTAL ASSETS $1,157,259 $1,083,641 *Condensed from audited financial statements. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 1998 and December 27, 1998 (Unaudited) (In thousands) LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, Dec. 27, 1998 1998 CURRENT LIABILITIES: (*) Bank notes payable and current maturities of long-term debt $ 20,665 $ 25,287 Accounts payable 53,859 36,511 Accrued salaries, wages and commissions 23,613 19,837 Accrued employee benefit plan costs 1,463 1,741 Accrued insurance 12,575 12,234 Accrued interest 2,303 1,581 Other accrued liabilities 52,789 56,424 Income taxes 28,311 8,397 Total Current Liabilities 195,578 162,012 LONG-TERM LIABILITES: Long-term debt, less current maturities 295,402 278,229 Other long-term liabilities 23,767 24,707 Retiree health care liabilities 42,103 43,127 Noncurrent income taxes 95,176 107,871 Minority interest in subsidiaries 31,674 28,075 TOTAL LIABILITIES 683,700 644,021 STOCKHOLDERS' EQUITY: Class A common stock, $0.10 par value; authorized 40,000 shares, 26,709 (26,679 in June) shares issued and 19,219 (20,429 in June) shares outstanding 2,667 2,671 Class B common stock, $0.10 par value; authorized 20,000 shares, 2,624 (2,625 in June) shares issued issued and outstanding 263 263 Paid-in capital 195,112 195,291 Retained earnings 311,039 294,222 Cumulative other comprehensive income 16,386 21,183 Treasury Stock, at cost, 7,490 (6,250 in June) shares of Class A common stock (51,908) (74,009) TOTAL STOCKHOLDERS' EQUITY 473,559 439,620 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,157,259 $1,083,641 *Condensed from audited financial statements The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED STATEMENTS OF EARNINGS (Unaudited) For The Three (3) and Six (6) Months Ended December 28, 1997 and December 27, 1998 (In thousands, except per share data)
Three Months Ended Six Months Ended 12/28/97 12/27/98 12/28/97 12/27/98 REVENUE: Net sales $208,616 $151,181 $402,978 $299,720 Other income, net 49 350 4,604 769 208,665 151,531 407,582 300,489 COSTS AND EXPENSES: Cost of goods sold 151,794 113,799 299,827 227,666 Selling, general & administrative 42,259 27,272 78,968 55,446 Amortization of goodwill 1,387 1,360 2,606 2,638 195,440 142,431 381,401 285,750 OPERATING INCOME 13,225 9,100 26,181 14,739 Interest expense 15,683 7,770 28,658 15,206 Interest income (524) (476) (914) (1,059) Net interest expense 15,159 7,294 27,744 14,147 Investment income (loss) (7,077) (1,027) (5,180) 834 Non-recurring loss on disposition of subsidiary - (19,320) - (19,320) Loss from continuing operations before taxes (9,011) (18,541) (6,743) (17,894) Income tax benefit 4,869 6,724 3,863 6,433 Equity in earnings of affiliates, net 279 652 1,379 1,689 Minority interest, net (742) 2,338 (1,875) 2,135 Loss from continuing operations (4,605) (8,827) (3,376) (7,637) Loss from discontinued operations, net (1,945) - (2,682) - Gain (loss) on disposal of discontinued operations, net 29,974 (9,180) 29,974 (9,180) Extraordinary items, net (3,024) - (3,024) - NET EARNINGS (LOSS) $ 20,400 $(18,007) $20,892 $(16,817) Other comprehensive income (loss), net of tax: Foreign currency translation adjustments (2,567) 2,306 (1,572) 7,552 Unrealized holding gains (losses) on securities - 27,633 - (2,755) Other comprehensive income (loss) (2,567) 29,939 (1,572) 4,797 COMPREHENSIVE INCOME (LOSS) $ 17,833 $ 11,932 $ 19,320 $(12,020) The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED STATEMENTS OF EARNINGS (Unaudited) For The Three (3) and Six (6) Months Ended December 28, 1997 and December 27, 1998 (In thousands, except per share data)
Three Months Ended Six Months Ended 12/28/97 12/27/98 12/28/97 12/27/98 BASIC EARNINGS PER SHARE: Loss from continuing operations $ (0.27) $(0.40) $(0.20) $(0.35) Loss from discontinued operations, net (0.11) - (0.16) - Gain (loss) on disposal of discontinued operations, net 1.75 (0.42) 1.78 (0.41) Extraordinary items, net (0.18) - (0.18) - NET EARNINGS (LOSS) $ 1.19 $(0.82) $ 1.24 $(0.76) Other comprehensive income (loss), net of tax: Foreign currency translation adjustments $(0.15) $ 0.11 $(0.09) $ 0.34 Unrealized holding losses on securities arising during the period - 1.26 - (0.12) Other comprehensive income (loss) (0.15) 1.37 (0.09) 0.22 COMPREHENSIVE INCOME (LOSS) $1.04 $ 0.55 $ 1.15 $ (0.54) DILUTED EARNINGS PER SHARE: Loss from continuing operations $(0.27) $ (0.40) $ (0.20) $ (0.35) Loss from discontinued operations, net (0.11) - (0.16) - Gain (loss) on disposal of discontinued operations, net 1.75 (0.42) 1.78 (0.41) Extraordinary items, net (0.18) - (0.18) - NET EARNINGS (LOSS) $1.19 $ (0.82) $ 1.24 $(0.76) Other comprehensive income (loss), net of tax: Foreign currency translation adjustments $(0.15) $ 0.11 $ (0.09) $ 0.34 Unrealized holding losses on securities arising during the period - 1.26 - (0.12) Other comprehensive income (loss) (0.15) 1.37 (0.09) 0.22 COMPREHENSIVE INCOME (LOSS) $ 1.04 $ 0.55 $1.15 $(0.54) Weighted average shares outstanding: Basic 17,088 21,872 16,864 22,129 Diluted 17,088 21,872 16,864 22,129 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For The Six (6) Months Ended December 28, 1997 and December 27, 1998 (In thousands)
For the Six Months Ended 12/28/97 12/27/98 Cash flows from operating activities: Net earnings (loss) $ 20,892 $(16,817) Depreciation and amortization 11,632 9,503 Accretion of discount on long-term liabilities 1,686 2,578 Net loss on divestiture of subsidiary - 13,500 Net gain on disposal of discontinued operations (29,974) - Extraordinary items, net of cash payments 3,024 - Distributed (undistributed) earnings of affiliates, net 344 (777) Minority interest 1,875 (2,135) Change in assets and liabilities (96,975) (34,110) Non-cash charges and working capital changes of discontinued operations (4,349) (8,559) Net cash used for operating activities (91,845) (36,817) Cash flows from investing activities: Purchase of property, plant and equipment (15,964) (13,574) Acquisition of subsidiaries, net of cash acquired (11,774) - Proceeds received from (used for) investment securities, net 5,786 (15,648) Net proceeds received from the divestiture - 60,397 of subsidiary Net proceeds received from the disposal of 84,733 - discontinued operations Changes in net assets held for sale (324) 3,335 Other, net 179 238 Investing activities of discontinued operations (3,119) (223) Net cash provided by investing activities 59,517 34,525 Cash flows from financing activities: Proceeds from issuance of debt 143,712 55,777 Debt repayments and repurchase of debentures, net (145,130) (69,375) Issuance of Class A common stock 53,921 182 Purchase of treasury stock - (22,101) Financing activities of discontinued operations - 121 Net cash provided by (used for) financing activities 52,503 (35,396) Effect of exchange rate changes on cash (688) 4,150 Net change in cash and cash equivalents 19,487 (33,538) Cash and cash equivalents, beginning of the year 19,420 49,601 Cash and cash equivalents, end of the period $ 38,907 $ 16,063 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except share data) 1. FINANCIAL STATEMENTS The consolidated balance sheet as of December 27, 1998 and the consolidated statements of earnings and cash flows for the six months ended December 28, 1997 and December 27, 1998 have been prepared by the Company, without audit. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at December 27, 1998, and for all periods presented, have been made. The balance sheet at June 30, 1998 was condensed from the audited financial statements as of that date. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's June 30, 1998 Annual Report on Form 10-K and the Banner Aerospace, Inc. ("Banner") March 31, 1998 Annual Report on Form 10-K. The results of operations for the period ended December 27, 1998 are not necessarily indicative of the operating results for the full year. Certain amounts in the prior year's quarterly financial statements have been reclassified to conform to the current presentation. 2. BUSINESS COMBINATIONS The Company has accounted for the following acquisitions by using the purchase method. The respective purchase price is assigned to the net assets acquired based on the fair value of such assets and liabilities at the respective acquisition dates. On November 28, 1997, the Company acquired AS+C GmbH, Aviation Supply + Consulting ("AS+C") in a business combination accounted for as a purchase. The total cost of the acquisition was $14.0 million, which exceeded the fair value of the net assets of AS+C by approximately $8.1 million, which is allocated as goodwill and amortized using the straight-line method over 40 years. The Company purchased AS+C with cash borrowings. AS+C is an aerospace parts, logistics, and distribution company primarily servicing the European original equipment manufacturers ("OEM's") market. On March 2, 1998, the Company consummated the acquisition of Edwards and Lock Management Corporation, doing business as Special-T Fasteners ("Special- T"), in a business combination accounted for as a purchase. The cost of the acquisition was approximately $50.0 million, of which 50.1% of the contractual purchase price was paid in shares of Class A Common Stock of the Company and 49.9% was paid in cash. The total cost of the acquisition exceeded the fair value of the net assets of Special-T by approximately $23.6 million, which is preliminarily being allocated as goodwill, and amortized using the straight-line method over 40 years. Special-T manages the logistics of worldwide distribution of Company manufactured precision fasteners to customers in the aerospace industry, government agencies, OEM's, and other distributors. On January 13, 1998, Banner completed the disposition of substantially all of the assets and certain liabilities of certain subsidiaries to AlliedSignal Inc., in exchange for shares of AlliedSignal Inc. common stock with an aggregate value equal to $369 million. The assets transferred to AlliedSignal Inc. consisted primarily of Banner's hardware group, which included the distribution of bearings, nuts, bolts, screws, rivets and other types of fasteners, and its PacAero unit. Approximately $196 million of the common stock received from AlliedSignal Inc. was used to repay outstanding term loans of Banner's subsidiaries and related fees. The Company accounts for its remaining investment in AlliedSignal Inc. common stock as an available-for-sale security. On December 31, 1998, Banner consummated the sale of Solair, Inc., it's largest subsidiary in the rotables group, to Kellstrom Industries, Inc. (''Kellstrom''), in exchange for approximately $57.0 million in cash and a warrant to purchase 300,000 shares of common stock of Kellstrom. As a result of this transaction, the Banner recorded a non-recurring pre-tax loss of approximately $19.3 million in the current quarter. 3. DISCONTINUED OPERATIONS For the Company's fiscal years ended June 30, 1996, 1997, 1998, and for the first six months of fiscal 1999, Fairchild Technologies ("Technologies") had pre-tax operating losses of approximately $1.5 million, $3.6 million, $48.7 million,and $16.1 million, respectively. The after-tax operating loss from Technologies exceeded the previous recorded estimate for expected losses on disposal by $2.9 million through December 1998. An additional after-tax charge of $6.2 million was recorded in the six months ended December 27, 1998, based on the current estimate of the remaining losses in connection with the disposition of Technologies. While the Company believes that $6.2 million is a reasonable charge for the remaining expected losses in connection with the disposition of Technologies, there can be no assurance that this estimate is adequate. Additional information regarding discontinued operations is set forth in Footnote 4 of the Consolidated Financial Statements of the Company's June 30, 1998 Annual Report on Form 10-K. 4. PRO FORMA FINANCIAL STATEMENTS The unaudited pro forma consolidated financial information for the six months ended December 28, 1997, present the results of the Company's operations as though the divestitures of Banner's hardware group and Solair, and the acquisitions of Special-T and AS+C, had been in effect since the beginning of fiscal 1998. The unaudited pro forma consolidated financial information for the six months ended December 27, 1998 provide the results of the Company's operations as though the divestiture of Solair had been in effect since the beginning of fiscal 1999. The pro forma information is based on the historical financial statements of the Company, Banner, Special-T, and AS+C giving effect to the aforementioned transactions. In preparing the pro forma data, certain assumptions and adjustments have been made, including reduced interest expense for revised debt structures and estimates of changes to goodwill amortization. The following unaudited pro forma information are not necessarily indicative of the results of operations that actually would have occurred if the transactions had been in effect since the beginning of each period, nor are they indicative of future results of the Company.
For the Six Months Ended December 28, December 27, 1997 1998 Net sales $259,672 $271,401 Gross profit 59,039 66,081 Earnings (loss) from continuing operations (6,313) 4,960 Earnings (loss) from continuing operations, per share $ (0.37) $ 0.22
The pro forma financial information has not been adjusted for non-recurring gains from disposal of discontinued operations, reductions in interest expense and investment income that have occurred or are expected to occur from these transactions within the ensuing year. 5. EQUITY SECURITIES The Company had 19,219,006 shares of Class A common stock and 2,624,662 shares of Class B common stock outstanding at December 27, 1998. Class A common stock is traded on both the New York and Pacific Stock Exchanges. There is no public market for the Class B common stock. Shares of Class A common stock are entitled to one vote per share and cannot be exchanged for shares of Class B common stock. Shares of Class B common stock are entitled to ten votes per share and can be exchanged, at any time, for shares of Class A common stock on a share-for-share basis. For the six months ended December 27, 1998, 13,825 shares of Class A Common Stock were issued as a result of the exercise of stock options, and shareholders converted 54 shares of Class B common stock into Class A common stock. In accordance with terms of the Special-T Acquisition, as amended, during the six months ended December 27, 1998, the Company issued 9,911 restricted shares of the Company's Class A Common Stock for additional merger consideration. Additionally, the Company's Class A common stock outstanding was effectively reduced as a result of 1,239,750 shares purchased by Banner. The shares purchased by Banner are considered as treasury stock for accounting purposes. 6. RESTRICTED CASH On December 27, 1998, the Company did not have any restricted cash. On June 30, 1998, the Company had restricted cash of approximately $746, all of which was maintained as collateral for certain debt facilities. 7. SUMMARIZED STATEMENT OF EARNINGS INFORMATION The following table presents summarized historical financial information, on a combined 100% basis, of the Company's principal investments, which are accounted for using the equity method.
For the Six Months Ended December 28, December 27, 1997 1998 Net sales $ 48,841 $ 40,226 Gross profit 18,191 15,236 Earnings from continuing operations 8,132 8,929 Net earnings 8,132 8,929
The Company owns approximately 31.9% of Nacanco Paketleme common stock. The Company recorded equity earnings of $1,680 (net of an income tax provision of $904) and $1,841 (net of an income tax provision of $991) from this investment for the six months ended December 28, 1997 and December 27, 1998, respectively. 8. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES On December 27, 1998, the Company had $28,075 of minority interest, of which $28,066 represents Banner. Minority shareholders hold approximately 17% of Banner's outstanding common stock. For additional information regarding the Company's proposal to acquire all the remaining stock in Banner it does not already own, please refer to Note 11. 9. EARNINGS PER SHARE The following table illustrates the computation of basic and diluted earnings per share:
Three Months Ended Six Months Ended 12/28/97 12/27/98 12/28/97 12/27/98 Basic earnings per share: Loss from continuing operations $ (4,605) $ (8,827) $ (3,376) $ (7,637) Common shares outstanding 17,088 21,872 16,864 22,129 Basic loss per share: Basic loss from continuing operations per share $ (0.27) $ (0.40) $ (0.20) $ (0.35) Diluted earnings per share: Loss from continuing operations $ (4,605) $ (8,827) $ (3,376) $ (7,637) Common shares outstanding 17,088 21,872 16,864 22,129 Options antidilutive antidilutive antidilutive antidilutive Warrants antidilutive antidilutive antidilutive antidilutive Total shares outstanding 17,088 21,872 16,864 22,129 Diluted loss from continuing operations per share $ (0.27) $(0.40) $ (0.20) $ (0.35)
For the three-month and six-month periods ended December 28, 1997 and December 27, 1998, the computation of diluted loss from continuing operations per share exclude the effect of incremental common shares attributable to the potential exercise of common stock options outstanding and warrants outstanding, because their effect was antidilutive. No adjustments were made to earnings per share calculations for discontinued operations and extraordinary items. 10. CONTINGENCIES Government Claims The Corporate Administrative Contracting Officer (the "ACO"), based upon the advice of the United States Defense Contract Audit Agency, has made a determination that Fairchild Industries, Inc. ("FII"), a former subsidiary of the Company, did not comply with Federal Acquisition Regulations and Cost Accounting Standards in accounting for (i) the 1985 reversion to FII of certain assets of terminated defined benefit pension plans, and (ii) pension costs upon the closing of segments of FII's business. The ACO has directed FII to prepare cost impact proposals relating to such plan terminations and segment closings and, following receipt of such cost impact proposals, may seek adjustments to contract prices. The ACO alleges that substantial amounts will be due if such adjustments are made, however, an estimate of the possible loss or range of loss from the ACO's assertion cannot be made. The Company believes it has properly accounted for the asset reversions in accordance with applicable accounting standards. The Company has held discussions with the government to attempt to resolve these pension accounting issues. Environmental Matters The Company's operations are subject to stringent government imposed environmental laws and regulations concerning, among other things, the discharge of materials into the environment and the generation, handling, storage, transportation and disposal of waste and hazardous materials. To date, such laws and regulations have not had a material effect on the financial condition, results of operations, or net cash flows of the Company, although the Company has expended, and can be expected to expend in the future, significant amounts for investigation of environmental conditions and installation of environmental control facilities, remediation of environmental conditions and other similar matters, particularly in the Aerospace Fasteners segment. In connection with its plans to dispose of certain real estate, the Company must investigate environmental conditions and may be required to take certain corrective action prior or pursuant to any such disposition. In addition, management has identified several areas of potential contamination at or from other facilities owned, or previously owned, by the Company, that may require the Company either to take corrective action or to contribute to a clean-up. The Company is also a defendant in certain lawsuits and proceedings seeking to require the Company to pay for investigation or remediation of environmental matters and has been alleged to be a potentially responsible party at various "Superfund" sites. Management of the Company believes that it has recorded adequate reserves in its financial statements to complete such investigation and take any necessary corrective actions or make any necessary contributions. No amounts have been recorded as due from third parties, including insurers, or set off against, any liability of the Company, unless such parties are contractually obligated to contribute and are not disputing such liability. As of December 27, 1998, the consolidated total recorded liabilities of the Company for environmental matters was approximately $8.9 million, which represented the estimated probable exposures for these matters. It is reasonably possible that the Company's total exposure for these matters could be approximately $15.0 million. Other Matters In connection with the disposition of Banner's hardware business, the Company received notice on January 12, 1999 from AlliedSignal making indemnification claims against the Company for $18.9 million. Although the Company believes that the amount of the claim is far in excess of any amount that AlliedSignal is entitled to recover from the Company, the Company is in the process of reviewing such claims and is unable to predict the ultimate outcome of such matter. The Company is involved in various other claims and lawsuits incidental to its business, some of which involve substantial amounts. The Company, either on its own or through its insurance carriers, is contesting these matters. In the opinion of management, the ultimate resolution of the legal proceedings, including those mentioned above, will not have a material adverse effect on the financial condition, or future results of operations or net cash flows of the Company. 11. SUBSEQUENT EVENTS On December 28, 1998, the Company announced that it had signed a definitive merger agreement to acquire Kaynar Technologies Inc. (''Kaynar''), an aerospace and industrial fastener manufacturer and tooling company, through a merger of Kaynar with a wholly-owned subsidiary of the Company. The purchase price is $239 million for Kaynar common and preferred stock, $28 million for a covenant not to compete from the majority Kaynar shareholder, and the Company will assume approximately $98 million of Kaynar's debt. A majority of the holders of all classes of Kaynar stock have agreed to vote in favor of the merger. The transaction is subject to certain conditions, including financing and regulatory approval. On January 11, 1999, the Company reached an agreement and plan of merger to acquire all of the remaining stock of Banner not already owned by the Company. Currently, the Company owns approximately 85% of Banner's capital stock, consisting of Banner common stock and Banner preferred stock, and public shareholders own the remainder. The merger agreement is subject to approval by Banner stockholders, and certain other conditions being satisfied or waived. Pursuant to the merger agreement, each outstanding share of Banner's common stock, other than shares owned by the Company and its affiliates, will be converted into the right to receive $11.00 in market value of newly issued shares of the Company's Class A Common Stock. The merger consideration is subject to adjustments based on the price of the Company's Class A Common Stock and the value of certain shares of AlliedSignal common stock owned by Banner. The Company and Banner believe that combining will more closely coordinate the activities of the two companies. In addition, the Company expects that the merger will provide opportunities for reducing expenses, including saving the costs of operating Banner as a separate public company. After the merger, Banner will be a wholly-owned subsidiary of Fairchild. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The Fairchild Corporation (the "Company") was incorporated in October 1969, under the laws of the State of Delaware. On November 15, 1990, the Company changed its name from Banner Industries, Inc. to The Fairchild Corporation. The Company is the owner of 100% of RHI Holdings, Inc. ("RHI") and the majority owner of Banner Aerospace, Inc. ("Banner"). RHI is the owner of 100% of Fairchild Holding Corp. ("FHC"). The Company's principal operations are conducted through Banner and FHC. The Company holds a significant equity interest in Nacanco Paketleme ("Nacanco"), and, during the period covered by this report, held a significant equity interest in Shared Technologies Fairchild Inc. ("STFI"). (See Note 4 to the June 30, 1998 Form 10-K Consolidated Financial Statements, as to the disposition of the Company's interest in STFI.) The following discussion and analysis provide information which management believes is relevant to assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto. GENERAL The Company is a leading worldwide aerospace and industrial fastener manufacturer and distributor. Through its 83% owned subsidiary, Banner, the Company is also an international supplier to the aerospace industry, distributing a wide range of aircraft parts and related support services. Through internal growth and strategic acquisitions, the Company has become one of the leading aircraft parts suppliers to aircraft manufacturers and aerospace hardware distributors. The Company's aerospace business consists of two segments: aerospace fasteners and aerospace parts distribution. The aerospace fasteners segment manufactures and markets high performance fastening systems used in the manufacture and maintenance of commercial and military aircraft. The aerospace distribution segment stocks and distributes a wide variety of aircraft parts to commercial airlines and air cargo carriers, fixed-base operators, corporate aircraft operators and other aerospace companies. CAUTIONARY STATEMENT Certain statements in the financial discussion and analysis by management contain forward-looking information that involve risk and uncertainty, including current trend information, projections for deliveries, backlog, and other trend projections. Actual future results may differ materially depending on a variety of factors, including product demand; performance issues with key suppliers; customer satisfaction and qualification issues; labor disputes; governmental export and import policies; worldwide political stability and economic growth; and legal proceedings. RESULTS OF OPERATIONS Business Combinations The following business combinations completed by the Company over the past twelve months significantly effect the comparability of the results from the current period to the prior period. On November 20, 1997, STFI entered into a merger agreement with Intermedia Communications Inc. ("Intermedia") pursuant to which holders of STFI common stock received $15.00 per share in cash (the "STFI Merger"). The Company was paid approximately $178.0 million in cash (before tax and selling expenses) in exchange for the common and preferred stock of STFI owned by the Company. The results of STFI have been accounted for as discontinued operations. On November 28, 1997, the Company acquired AS+C GmbH, Aviation Supply + Consulting ("AS+C") in a business combination accounted for as a purchase. The total cost of the acquisition was $14.0 million, which exceeded the fair value of the net assets of AS+C by approximately $8.1 million, which is allocated as goodwill and amortized using the straight-line method over 40 years. The Company purchased AS+C with cash borrowings. AS+C is an aerospace parts, logistics, and distribution company primarily servicing the European original equipment manufacturers ("OEMs") market. On March 2, 1998, the Company consummated the acquisition of Edwards and Lock Management Corporation, doing business as Special-T Fasteners ("Special- T"), in a business combination accounted for as a purchase. The cost of the acquisition was approximately $50.0 million, of which 50.1% of the contractual purchase price for the acquisition was paid in shares of Class A Common Stock of the Company and 49.9% was paid in cash. The total cost of the acquisition exceeded the fair value of the net assets of Special-T by approximately $23.6 million, which is preliminarily being allocated as goodwill, and amortized using the straight-line method over 40 years. Special-T manages the logistics of worldwide distribution of Company manufactured precision fasteners to customers in the aerospace industry, government agencies, OEMs, and other distributors. On January 13, 1998, Banner completed the disposition of substantially all of the assets and certain liabilities of certain subsidiaries to AlliedSignal Inc., in exchange for shares of AlliedSignal Inc. common stock with an aggregate value equal to $369 million. The assets transferred to AlliedSignal Inc. consisted primarily of Banner's hardware group, which included the distribution of bearings, nuts, bolts, screws, rivets and other types of fasteners, and its PacAero unit. Approximately $196 million of the common stock received from AlliedSignal Inc. was used to repay outstanding term loans of Banner's subsidiaries and related fees. The Company accounts for its remaining investment in AlliedSignal Inc. common stock as an available-for-sale security. On December 31, 1998, Banner consummated the sale of Solair, Inc., it's largest subsidiary in the rotable group, to Kellstrom Industries, Inc. (''Kellstrom''), in exchange for approximately $57 million in cash and a warrant to purchase 300,000 shares of common stock of Kellstrom. As a result of this transaction, the Company recorded a non-recurring loss of approximately $19.3 million in the quarter ended December 27, 1998. Consolidated Results The Company currently reports in two principal business segments: Aerospace Fasteners and Aerospace Distribution. The results of the Gas Springs Division are included in the Corporate and Other classification. The following table illustrates the historical sales and operating income of the Company's operations for the three and six months ended December 27, 1998 and December 28, 1997, respectively. (In thousands) Three Months Ended Six Months Ended 12/28/97 12/27/98 12/28/97 12/27/98 Sales by Segment: Aerospace Fasteners $ 91,014 $102,764 $167,861 $ 199,322 Aerospace Distribution 119,614 46,838 242,528 97,366 Corporate and Other 1,362 1,579 2,724 3,032 Intersegment Eliminations(a) (3,374) - (10,135) - TOTAL SALES $ 208,616 $151,181 $402,978 $ 299,720 Operating Results by Segment: Aerospace Fasteners $ 6,382 $ 10,647 $ 8,892 $ 18,477 Aerospace Distribution 7,714 2,035 17,085 3,753 Corporate and Other (871) (3,582) 204 (7,491) OPERATING INCOME $ 13,225 $ 9,100 $ 26,181 $ 14,739 (a) Represents intersegment sales from the Aerospace Fasteners segment to the Aerospace Distribution segment. The following table illustrates sales and operating income of the Company's operations by segment, on an unaudited pro forma basis, as though the divestitures of Banner's hardware group and Solair, and the acquisitions of Special-T and AS+C had been in effect for the three and six months ended December 28, 1997, and the divestiture of Solair had been in effect for the three and six months ended December 27, 1998. The pro forma information is based on the historical financial statements of the Company, Banner, Special-T, and AS+C giving effect to the aforementioned transactions. The pro forma information is not necessarily indicative of the results of operations that would actually have occurred if the transactions had been in effect since the beginning of each period, nor is it necessarily indicative of future results of the Company. (In thousands) Three Mnths Ended Six Months Ended 12/28/97 12/27/98 12/28/97 12/27/98 Sales by Segment: Aerospace Fasteners $ 98,391 $102,764 $184,215 $199,322 Aerospace Distribution 34,710 34,946 72,733 69,047 Corporate and Other 1,362 1,579 2,724 3,032 TOTAL SALES $134,463 $139,289 $259,672 $271,401 Operating Results by Segment: Aerospace Fasteners $ 8,011 $ 10,647 $ 12,480 $ 18,477 Aerospace Distribution 1,849 1,652 5,574 3,575 Corporate and Other (1,505) (3,582) (265) (7,491) OPERATING INCOME $ 8,355 $ 8,717 $ 17,789 $ 14,561 Net sales of $151.2 million in the second quarter of fiscal 1999 decreased by $57.4 million, or 27.5%, compared to sales of $208.6 million in the second quarter of fiscal 1998. Net sales of $299.7 million in the first six months of fiscal 1999 decreased by $103.3 million, or 25.6%, compared to sales of $403.0 million in the first six months of fiscal 1998. This decrease is primarily attributable to the loss of revenues resulting from the disposition of Banner's hardware group. Approximately 2.3% of the fiscal 1999 second quarter and 2.9% of the current six months sales growth was stimulated by the commercial aerospace industry. Recent acquisitions contributed approximately 3.5% and 4.1% to sales growth in the fiscal 1999 second quarter and six-month periods, respectively. While divestitures decreased growth by approximately 33.4% and 32.6% in the fiscal 1999 second quarter and six-month periods, respectively. On a pro forma basis, net sales increased 3.6% and 4.5% for the three and six months ended December 27, 1998, respectively, compared to the same periods ended December 28, 1997. Gross margin as a percentage of sales was 20.3% and 24.7% in the second quarter of fiscal 1998 and 1999, respectively, and 25.6% and 24.0% in the first six months of fiscal 1998 and 1999, respectively. The lower margins in the fiscal 1999 period are attributable to a change in product mix in the Aerospace Distribution segment as a result of the disposition of Banner's hardware group. Partially offsetting the overall lower margins was an improvement in margins within the Aerospace Fasteners segment resulting from acquisitions, efficiencies associated with increased production, improved skills of the work force, and reduction in the payment of overtime. Selling, general & administrative expense as a percentage of sales was 20.3% and 18.0% in the second quarter of fiscal 1998 and 1999, respectively, and 19.6% and 18.5% in the six month period of fiscal 1998 and 1999, respectively. The improvement in the fiscal 1999 periods is attributable primarily to administrative efficiencies of the Company's ongoing operations. Other income decreased $3.8 million in the first six months of fiscal 1999, compared to the first six months of fiscal 1998. The Company recognized $4.4 million of income in the prior period from the involuntary conversion of air rights over a portion of the property the Company owns and is developing in Farmingdale, New York. Operating income of $9.1 million in the second quarter of fiscal 1999 decreased 31.2%, compared to operating income of $13.2 million in the second quarter of fiscal 1998. Operating income of $14.7 million in the first six months of fiscal 1999 decreased 43.7%, compared to operating income of $26.2 million in the fiscal 1998 six-month period. The decreases are primarily attributable to the loss of operating income resulting from the disposition of Banner's hardware group and the decrease in other income. Net interest expense decreased $7.9 million, or 51.9%, in second quarter of fiscal 1999, compared to the second quarter of fiscal 1998. Net interest expense decreased $13.6 million, or 49.0%, in first six months of fiscal 1999, compared to the same period of fiscal 1998. The decreases in the current year were due to a series of transactions completed in fiscal 1998, which significantly reduced the Company's total debt. Investment income (loss) improved by $6.0 million in the first six months of fiscal 1999, compared to the same period of fiscal 1998, due to recognizing realized gains in the fiscal 1999 period while recording unrealized holding losses on fair market adjustments of trading securities in the fiscal 1998 period. The Company recognized a $19.3 million non-recurring loss in the second quarter and first six months of fiscal 1999 as a result of its recent divestiture Solair, Inc. Minority interest improved by $4.0 million in the first six months of fiscal 1999 due to losses reported by Banner in the fiscal 1999 periods primarily resulting from the divestiture of Solair, Inc. An income tax benefit of $6.4 million in the first six months of fiscal 1999 represented a 36.0% effective tax rate on pre-tax losses from continuing operations. The tax provision was slightly higher than the statutory rate because amortization of goodwill is not deductible for income tax purposes. Included in loss from discontinued operations for the six months ended December 28, 1997, are the results of Fairchild Technologies ("Technologies") and the Company's equity in earnings of STFI prior to the STFI Merger. The Company reported a $30.0 million after-tax gain on disposal of discontinued operations in the fiscal 1998 periods resulting from the disposition of a portion of its investment in STFI. The Company reported a $9.2 million loss on disposal of discontinued operations in the fiscal 1999 periods. This charge is the result of the after-tax operating loss from Technologies exceeding the previous estimate for expected losses from disposal by $2.9 million through December 1998, and the Company taking an additional $6.2 million after-tax charge based on the current estimate of remaining losses in connection with the disposition. While the Company believes that $6.2 million is a reasonable charge for the remaining expected losses in connection with the disposition of Technologies, there can be no assurance that this estimate is adequate. In the fiscal 1998 periods ended December 28, 1997, the Company recorded a $3.0 million extraordinary loss, net, from the write-off of deferred loan fees associated with the early extinguishment of credit facilities that were significantly modified and replaced as part of a refinancing. Comprehensive income (loss) includes foreign currency translation adjustments and unrealized holding changes in the fair market value of available for-sale investment securities. Foreign currency translation adjustments increased by $2.3 million and $7.6 million in the three and six months ended December 27, 1998. The fair market value of unrealized holding securities increased by $27.6 million in the second quarter and declined by $2.8 million in the six months ended December 27, 1998. The changes reflect primarily market fluctuations in the value of AlliedSignal common stock, which the Company received from the disposition of Banner's hardware group. Segment Results Aerospace Fasteners Segment Sales in the Aerospace Fasteners segment increased by $11.8 million in the second quarter of fiscal 1999 and $31.5 million in the first six months of fiscal 1999, compared to same periods of fiscal 1998, reflecting growth experienced in the commercial aerospace industry combined with the effect of acquisitions. Approximately 4.8% and 9.0% of the increase in sales resulted from internal growth in the current quarter and six-month period, respectively, while acquisitions contributed approximately 8.1% and 9.7% of the increase in the current quarter and six-month period, respectively. New orders have leveled off in recent months. Backlog was reduced to $158 million at December 27, 1998, down from $177 million at June 30, 1998. On a pro forma basis, including the results from acquisitions in the prior period, sales increased by 4.4% and 8.2% in the second quarter and first six months of fiscal 1999, respectively, compared to the same periods of the prior year. Operating income improved by $4.3 million, or 66.8%, in the second quarter and $9.6 million, or 108%, in the first six months of fiscal 1999, compared to the fiscal 1998 periods. Acquisitions and marketing changes contributed to this improvement. Approximately 67.4% of the increase in operating income during the first six months of fiscal 1999 reflected internal growth, while acquisitions contributed approximately 40.4% to the increase. On a pro forma basis, operating income increased by 32.9% and 48.1%, for the quarter and six months ended December 27, 1998, respectively, compared to the quarter and six months ended December 28, 1997. Aerospace Distribution Segment Aerospace Distribution sales decreased by $72.8 million, or 60.8% in the second quarter and $145.2 million, or 59.9%, for the fiscal 1999 six-month period, compared to the fiscal 1998 periods, due primarily to the loss of revenues as a result of the disposition of Banner's hardware group. Approximately 58.4% of the decrease in sales in the current six-month period resulted from divestitures, and approximately 1.5% resulted from a decrease in internal growth. On a pro forma basis, excluding sales contributed by dispositions, sales increased 0.7% in the second quarter and decreased 5.1% in the first six months of fiscal 1999, compared to the same periods in the prior year. Operating income decreased $5.7 million in the second quarter and $13.3 million in the first six months of fiscal 1999, compared to the same periods of the prior year, due primarily to the disposition of Banner's hardware group. On a pro forma basis, excluding results from dispositions, operating income decreased $0.2 million in the second quarter and $2.0 million in the first six months of fiscal 1999, compared to the same periods of the prior year. Corporate and Other The Corporate and Other classification includes the Gas Springs Division and corporate activities. The group reported a slight improvement in sales in the fiscal 1999 periods, compared to fiscal 1998 periods. An operating loss of $7.5 million in the first six months of fiscal 1999 was $7.7 million lower than operating income of $0.2 million reported in the first six months of fiscal 1998. The comparable period in the prior year included other income of $4.4 million realized as a result of the sale of air rights over a portion of the property the Company owns and is developing in Farmingdale, New York and a decline in legal expenses. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Total capitalization as of June 30, 1998 and December 27, 1998 amounted to $789.6 million and $743.1 million, respectively. The changes in capitalization included an decrease in debt of $12.6 million and a decrease in equity of $33.9 million. The decrease in debt was the result proceeds received from the divestiture of Solair used to reduce debt, offset partially from additional borrowings for investment purposes and the purchase of some of the Company's common stock. The decrease in equity was due primarily to a $22.1 million purchase of treasury stock and the $16.8 million reported loss, offset partially by a $4.8 million increase in cumulative other comprehensive income. The Company maintains a portfolio of investments classified as available- for-sale securities, which had a fair market value of $252.7 million at December 27, 1998. The market value of these investments decreased $2.8 million in the first six months of fiscal 1999. While there is risk associated with market fluctuations inherent to stock investments, and because the Company's portfolio is small and predominately consists of a large position in AlliedSignal common stock, large swings in the value of the portfolio should be expected. In the six months ended December 27, 1998, the Company reclassified a large portion of its investment portfolio to current assets as a result of an increased probability that these investments will be liquidated during the next twelve months, subject to market conditions. Net cash used by operating activities for the six months ended December 28, 1997 and December 27, 1998 was $91.8 million and $36.8 million, respectively. The primary use of cash for operating activities in the first six months of fiscal 1999 was a decrease of $47.5 million in accounts payable and accrued liabilities, and increases in inventories of $20.1 million and other non-current assets of $17.6 million. Partially offsetting the use of cash from operating activities was a $30.2 increase in other non-current liabilities and a $13.6 million decrease in accounts receivable. In the first six months of fiscal 1998 the primary use of cash for operating activities was a $33.7 million increase in inventories, $16.6 million increase in other current assets and accounts receivable of $7.3 million and a $35.0 million decrease in accounts payable and other accrued liabilities. Net cash provided from investing activities for the six months ended December 27, 1998 and December 28, 1997, amounted to $59.5 million and $34.5 million, respectively. In the first six months of fiscal 1999, the primary source of cash from investing activities was $57.0 million of net proceeds received from disposition of Solair, Inc., offset partially by $16.0 million of capital expenditures and $15.6 million used to purchase investments. In the first six months of fiscal 1998, the primary source of cash from investing activities were $84.7 million of net proceeds received from investment liquidations in STFI, offset partially by $16.0 million of capital expenditures. Net cash provided by (used for) financing activities for the six months ended December 27, 1998 and December 28, 1997, amounted to $52.5 million and $(35.4) million, respectively. Cash used for financing activities in the first six months of fiscal 1999 included a $69.4 million repayment of debt and the $22.1 million purchase of treasury stock, offset partially by a $55.8 million net increase from the issuance of additional debt. The primary source of cash provided by financing activities in the first six months of fiscal 1998 was the net proceeds received from the issuance of additional stock of $53.7 million. The Company's principal cash requirements include debt service, capital expenditures, acquisitions, and payment of other liabilities. Other liabilities that require the use of cash include postretirement benefits, environmental investigation and remediation obligations, and litigation settlements and related costs. The Company expects that cash on hand, cash generated from operations, and cash from borrowings and asset sales will be adequate to satisfy cash requirements. Proposed Mergers On December 28, 1998, the Company announced that it had signed a definitive merger agreement to acquire Kaynar Technologies Inc. (''Kaynar''), an aerospace and industrial fastener manufacturer and tooling company, through a merger of Kaynar with a wholly-owned subsidiary of the Company. The purchase price is $239 million for Kaynar common and preferred stock, $28 million for a covenant not to compete from the majority Kaynar shareholder, and the Company will assume approximately $98 million of Kaynar's debt. A majority of the holders of all classes of Kaynar stock have agreed to vote in favor of the merger. The transaction is subject to certain conditions, including financing and regulatory approval. On January 11, 1999, the Company reached an agreement and plan of merger to acquire all of the remaining stock of Banner not already owned by the Company. Currently, the Company owns approximately 85% of Banner's capital stock, consisting of Banner common stock and Banner preferred stock, and public shareholders own the remainder. The merger agreement is subject to approval by Banner stockholders, and certain other conditions being satisfied or waived. Pursuant to the merger agreement, each outstanding share of Banner's common stock, other than shares owned by the Company and its affiliates, will be converted into the right to receive $11.00 in market value of newly issued shares of the Company's Class A Common Stock. The merger consideration is subject to adjustments based on the price of the Company's Class A Common Stock and the value of certain shares of AlliedSignal common stock owned by Banner. The Company and Banner believe that combining will more closely coordinate the activities of the two companies. In addition, the Company expects that the merger will provide opportunities for reducing expenses, including saving the costs of operating Banner as a separate public company. After the merger, Banner will be a wholly-owned subsidiary of Fairchild. Discontinued Operations For the Company's fiscal years ended June 30, 1996, 1997, 1998, and for the first six months of fiscal 1999, Fairchild Technologies ("Technologies") had pre-tax operating losses of approximately $1.5 million, $3.6 million, $48.7 million, and $16.1 million, respectively. In response, in February 1998, the Company adopted a formal plan to enhance the opportunities for disposition of Technologies, while improving the ability of Technologies to operate more efficiently. The plan includes a reduction in production capacity, work force, and the pursuit of potential vertical and horizontal integration with peers and competitors of Technologies. The Company believes that it may be required to contribute substantial additional resources to provide Technologies with the liquidity necessary to continue operating before such integration is completed. Uncertainty of the Spin-Off In order to focus its operations on the aerospace industry, the Company has been considering for some time distributing (the ''Spin-Off'') to its stockholders certain of its assets via distribution of all of the stock of Fairchild Industrial Holdings Corp. (''FIHC''), which may own all or a substantial part of the Company's non-aerospace operations. The Company is still in the process of deciding the exact composition of the assets and liabilities to be included in FIHC, but such assets would be likely to include certain real estate interests and the Company's 31.9% interest in Nacanco Paketleme (the largest producer of aluminum cans in Turkey). The ability of the Company to consummate the Spin-Off, if it should choose to do so, would be contingent, among other things, on obtaining consents and waivers under the Company's credit facility and all necessary governmental and third party approvals. There is no assurance that the Company will be able to obtain the necessary consents and waivers from its lenders. In addition, the Company may encounter unexpected delays in effecting the Spin-Off, and the Company can make no assurance as to the timing thereof. There can be no assurance that the Spin-Off will occur. Depending on the ultimate structure and timing of the Spin-Off, it may be a taxable transaction to stockholders of the Company and could result in a material tax liability to the Company and its stockholders. The amount of the tax to the Company and the shareholders is uncertain, and if the tax is material to the Company, the Company may elect not to consummate the Spin-Off. Because circumstances may change and provisions of the Internal Revenue Code of 1986, as amended, may be further amended from time to time, the Company may, depending on various factors, restructure or delay the timing of the Spin-Off to minimize the tax consequences thereof to the Company and its stockholders, or elect not to consummate the Spin-Off. Pursuant to the Spin-Off, it is expected that FIHC may assume certain liabilities (including contingent liabilities) of the Company and may indemnify the Company for such liabilities. In the event that FIHC is unable to satisfy the liabilities, which it will assume in connection with the Spin- Off, the Company may have to satisfy such liabilities. Year 2000 As the end of the century nears, there is a widespread concern that many existing computer programs that use only the last two digits to refer to a year will not properly recognize a year that begins with the digits "20" instead of "19." If not corrected, many computer applications could fail, create erroneous results, or cause unanticipated systems failures, among other problems. The Company has begun to take appropriate measures to ensure that its information processing systems, embedded technology and other infrastructure will be ready for the Year 2000. The Company has retained both technical review and modification consultants to help it assess its Year 2000 readiness. Working with these consultants and other advisors, the Company has formulated a plan to address Year 2000 issues. Under this plan, the Company's systems are being modified or replaced, or will be modified or replaced, as necessary, to render them, as far as possible, Year 2000 compliant. Substantially all of the material systems within the Aerospace Fasteners segment are currently Year 2000 compliant. At Technologies, the Company intends to replace and upgrade a number of important systems that are not Year 2000 compliant, and is assessing the extent to which current product inventories may include embedded technology that is not Year 2000 compliant. The Company expects to complete initial testing of its most critical information technology and related systems by June 30, 1999, and anticipates that it will complete its Year 2000 preparations by October 31, 1999. The Company could be subject to liability to customers and other third parties if its systems are not Year 2000 compliant, resulting in possible legal actions for breach of contract, breach or warranty, misrepresentation, unlawful trade practices and other harm. In addition, the Company is continually attempting to assess the level of Year 2000 preparedness of its key suppliers, distributors, customers and service providers. To this end, the Company has sent, and will continue to send, letters, questionnaires and surveys to its significant business partners inquiring about their Year 2000 efforts. If a significant business partner of the Company fails to Year 2000 compliant, the Company could suffer a material loss of business or incur material expenses. The Company is also developing and evaluating contingency plans to deal with events affecting the Company or one of its business partners arising from significant Year 2000 problems. These contingency plans include identifying alternative suppliers, distribution networks and service providers. Although the Company's Year 2000 assessment, implementation and contingency planning is not yet complete, the Company does not now believe that Year 2000 issues will materially affect its business, results of operations or financial condition. However, the Company's Year 2000 efforts may not be successful in every respect. To date, the Company has incurred approximately $0.8 million in costs that are directly attributable to addressing Year 2000 issues. Management currently estimates that the Company will incur between $2 million and $3 million in additional costs during the next 12 months relating to the Year 2000 problem. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 131 ("SFAS 131") "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 supersedes Statement of Financial Accounting Standards No. 14 "Financial Reporting for Segments of a Business Enterprise" and requires that a public company report certain information about its reportable operating segments in annual and interim financial reports. Generally, financial information is required to be reported on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. The Company will adopt SFAS 131 in fiscal 1999. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132 ("SFAS 132") "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS 132 revises and improves the effectiveness of current note disclosure requirements for employers' pensions and other retiree benefits by requiring additional information to facilitate financial analysis and eliminating certain disclosures which are no longer useful. SFAS 132 does not address recognition or measurement issues. The Company will adopt SFAS 132 in fiscal 1999. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes a new model for accounting for derivatives and hedging activities and supersedes and amends a number of existing accounting standards. It requires that all derivatives be recognized as assets and liabilities on the balance sheet and measured at fair value. The corresponding derivative gains or losses are reported based on the hedge relationship that exists, if any. Changes in the fair value of hedges that are not designated as hedges or that do not meet the hedge accounting criteria in SFAS 133 are required to be reported in earnings. Most of the general qualifying criteria for hedge accounting under SFAS 133 were derived from, and are similar to, the existing qualifying criteria in SFAS 80 "Accounting for Futures Contracts." SFAS 133 describes three primary types of hedge relationships: fair value hedge, cash flow hedge, and foreign currency hedge. The Company will adopt SFAS 133 in fiscal 1999 and is currently evaluating the financial statement impact. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The table below provides information about the Company's derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, which include interest rate swaps. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date.
Expected Fiscal year Maturity Date 1999 2000 2001 2002 2003 Thereafter Interest Rate Swaps: Variable to Fixed - 20,000 60,000 - - 100,000 Average cap rate - 7.25% 6.81% - - 6.49% Average floor rate - 5.84% 5.99% - - 6.24% Weighted average - 4.99% 4.80% - - 5.44% rate Fair Market Value - (88) (731) - - (9,828) PART II. OTHER INFORMATION Item 1. Legal Proceedings The information required to be disclosed under this Item is set forth in Footnote 10 (Contengencies) of the Consolidated Financial Statements (Unaudited) included in this Report. Item 2 Changes in Securities and Use of Proceeds On December 4, 1998, Banner Aerospace, Inc. (a subsidiary of the Company) donated 6,650 unregistered shares of the Company's Class A Common Stock to Brandeis University. Such shares were previously treated as Treasury Shares by the Company. As this was a charitable contribution, no proceeds were received either by the Company or its subsidiary in connection with the donation. Item 4. Submission of Matters to a vote of Security Holders The Annual Meeting of Stockholders of the Company was held on November 19, 1998. Seven matters of business were held to vote for the following purposes: (1) to elect fourteen directors of the Company for the ensuing year ("Proposal 1"); (2) to amend the Company's Stock Option Plan by increasing the number of shares issuable thereunder ("Proposal 2"); (3) to amend the Company's Stock Option Plan to permit plan participants to defer the gain that would otherwise be received by such participants upon the exercise of an option ("Proposal 3"); (4) to approve the grant of stock options to certain executive officers and employees under the Company's Stock Option ("Proposal 4"); (5) to approve the material terms of performance goals for fiscal 1999 incentive compensation award for the Company's President and Chief Operating Officer ("Proposal 5"); (6) to approve the material terms of performance goals for fiscal 1999 incentive compensation award for the Company's Chief Executive Officer ("Proposal 6"); and (7) to approve the amendment to a warrant issued to an affiliate of the Company's Chief Executive Officer ("Proposal 7"). The following tables provide the shareholder election results in number of shares: Proposal 1
Directors: Votes For Votes Withheld Michael T. Alcox 43,306,167 201,656 Melville R. Barlow 43,302,267 205,556 Mortimer M. Caplin 43,269,587 238,236 Colin M. Cohen 43,312,279 195,544 Philip David 43,305,592 202,231 Robert E. Edwards 43,307,212 200,611 Harold J. Harris 43,313,884 193,939 Daniel Lebard 43,308,789 199,034 Jacques S. Moskovic 43,280,157 227,666 Herbert S. Richey 43,281,494 226,329 Moshe Sanbar 43,310,784 197,039 Robert A. Sharpe 43,304,697 203,126 Eric I. Steiner 43,297,871 209,952 Jeffrey J. Steiner 43,298,870 208,953
Votes For Votes Abstain Non-Vote Against Proposal 2 40,363,495 3,082,510 61,818 2,235,142 Proposal 3 41,339,967 2,108,882 58,973 2,235,143 Proposal 4 41,139,504 2,284,684 83,635 2,235,142 Proposal 5 36,676,003 675,496 81,954 8,309,512 Proposal 6 36,652,364 681,247 99,842 8,309,512 Proposal 7 36,647,952 683,542 101,960 8,309,511
Item 5. Other Information Articles have appeared in the French press reporting an inquiry by a French magistrate into certain allegedly improper business transactions involving Elf Acquitaine, a French petroleum company, its former chairman and various third parties, including Maurice Bidermann. In connection with this inquiry, the magistrate has made inquiry into allegedly improper transactions between Mr. Steiner and that petroleum company. In response to the magistrate's request that Mr. Steiner appear in France as a witness, Mr. Steiner submitted written statements concerning the transactions and appeared in person before the magistrate and others. Mr. Steiner, who has been put under examination (mis en examen), by the magistrate, with respect to this matter, has not been charged. Mr. Steiner appeared before the Tribunal de Grande Instance de Paris to answer a charge of knowingly benefiting in 1990 from a misuse by Mr. Bidermann of corporate assets of Societe Generale Mobiliere et Immobiliere, a French corporation in which Mr. Bidermann is believed to have been the sole shareholder. Mr. Steiner has paid a fine of two million French Francs in connection therewith. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: (Stinbes Warrants) *10.1 Amendment of Warrant Agreement dated December 12, 1998, effective retroactively as of September 17, 1998, between Registrant and Stinbes Limited. (Other Material Contracts) 10.2 Agreement and Plan of Merger by and between The Fairchild Corporation, MTA, Inc. and Banner Aerospace, Inc., dated as of January 11, 1999 (incorporated by reference to Registrants' Registration Statement on Form S-4, filed on January 15, 1999). 10.3 Agreement and Plan of Reorganization by and among The Fairchild Corporation, Dah Dah, Inc. and Kaynar Technologies Inc. dated as of December 26, 1998 (incorporated by reference to Registrant's Report on Form 8-K dated December 30, 1998). 10.4 Voting and Option Agreement by and among The Fairchild Corporation, Dah Dah, Inc., CFE Inc., and General Electric Capital Corporation dated as of December 26, 1998 (incorporated by reference to Registrant's Report on Form 8-K dated December 30, 1998). 10.5 Voting Agreement by and between The Fairchild Corporation and Jordan A. Law dated as of December 26, 1998 (incorporated by reference to Registrant's Report on Form 8-K dated December 30, 1998). 10.6 Voting Agreement by and between The Fairchild Corporation and David A. Werner dated as of December 26, 1998 (incorporated by reference to Registrant's Report on Form 8-K dated December 30, 1998). 10.7 Voting Agreement by and between The Fairchild Corporation and Robert L. Beers dated as of December 26, 1998 (incorporated by reference to Registrant's Report on Form 8-K dated December 30, 1998). 10.8 Voting Agreement by and between The Fairchild Corporation and LeRoy A. Dack dated as of December 26, 1998 (incorporated by reference to Registrant's Report on Form 8-K dated December 30, 1998). *27 Financial Data Schedules. * - Filed herewith (b) Reports on Form 8-K: There have been no reports on Form 8-K filed during the quarter. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to the signed on its behalf by the undersigned hereunto duly authorized. For THE FAIRCHILD CORPORATION (Registrant) and as its Chief Financial Officer: By: Colin M. Cohen Senior Vice President and Chief Financial Officer Date: February 5, 1999 EX-10 2 -3- AMENDMENT OF WARRANT AGREEMENT BETWEEN THE FAIRCHILD CORPORATION AND STINBES LIMITED FOR 375,000 SHARES OF CLASS A OR CLASS B COMMON STOCK This Amendment of Warrant Agreement (the "Amendment"), dated December 28, 1998, effective retroactively as of September 17, 1998, is made for the purpose of modifying (as provided below) the Warrant Agreement dated as of March 13, 1986 (the "Warrant Agreement"), between The Fairchild Corporation, p/k/a Banner Industries, Inc., a Delaware corporation (the "Company"), and Stinbes Limited. Capitalized terms used but not otherwise defined herein shall have the meaning ascribed to them in the Warrant Agreement. This amendment was approved (as a form of compensation to Jeffrey Steiner) by the Company's shareholders at the 1998 Annual Meeting held on November 19, 1998. RECITALS A. On March 13, 1986, the Company entered into the Warrant Agreement with Drexel Burnham Lambert ("DBL"), and (pursuant to the terms of the Warrant Agreement) issued to DBL warrants to purchase up to an aggregate of 200,000 shares of either Class A or Class B common stock of the Company (the "Warrants"). The Warrants were issued in conjunction with DBL acting as the underwriter for the public offering of certain of the Company's debentures. B. Pursuant to a Purchase and Sale Agreement dated as of January 4, 1989, Jeffrey J. Steiner ("Steiner"), DBL and the Company, Steiner purchased 187,500 Warrants from DBL (subject to all the benefits and obligations under the Warrant Agreement). C. Section 5.1 of the Warrant Agreement provides that the Warrant Price and the number of Warrant Shares are subject to adjustment upon the occurrence of certain events pursuant to the terms of Section 9 of the Warrant Agreement. In June, 1989, as a result of a two-for-one stock split (an adjustable event as defined in Section 9 of the Warrant Agreement) the number of Warrant Shares in favor of Steiner was increased to 375,000, and the Warrant Price was decreased to $7.67 per share. D. On September 12, 1991, the Board of Directors of the Company voted to renew the Warrants issued in favor of Steiner, which had expired on March 13, 1991, for an extended term to expire on March 13, 1993. On March 8, 1993, the Board of Directors of the Company voted to extend the Expiration Date of the Warrants to March 13, 1995. On February 16, 1995, the Board of Directors of the Company voted to extend the Expiration Date of the Warrants to March 13, 1997. E. On March 22, 1993, Steiner assigned the Warrants to Bestin Ltd. On May 31, 1993, Bestin Ltd. assigned the Warrants to Stinbes Limited. Stinbes Limited is an affiliate of Steiner. F. By Board action taken on February 21, 1997, and again on September 11, 1997, and September 26, 1997, the Board of Directors of the Company voted to extend the Expiration Date of the Warrants to March 13, 2002, subject to the following modifications: (i) effective as of February 21, 1997, the Expiration Date of any issued Warrants, outstanding and unexpired on that date, shall be March 13, 2002; (ii) effective as of February 21, 1997, the Warrant Price shall be $7.67 per share, increased by two tenths of one cent ($.002) for each day subsequent to March 13, 1997, but fixed at $7.80 per share after June 30, 1997. G. On February 9, 1998, the Board voted to modify the Warrant Agreement to: (i) revise the window periods during which the Warrants may be exercised; and (ii) to provide that the payment of the Warrant Price may be made in shares of the Company's Class A or Class B Common Stock. H. On September 17, 1998, subject to shareholder approval, in recognition of services performed by Mr. Steiner, the Compensation Committee and the Board voted to modify the Warrant Agreement to: (i) revise the window period during which the Warrants may be exercised; (ii) to revise the Warrant Price; and (iii) to provide that these amendments to the Warrants shall be deemed additional compensation to the Chief Executive Officer; I. Section 17 of the Warrant Agreement provides that the Company and the Holder may, from time to time, supplement or amend the Warrant Agreement in any manner which "the Company may deem necessary or desirable and which shall not be inconsistent with the provisions of the Warrants and which shall not adversely affect the interest of the Holders." NOW, THEREFORE, in consideration of the premises and the mutual agreements herein, and for other good and valuable consideration (the receipt and adequacy of which are hereby acknowledged), the parties hereto agree as follows: 1. Effective as of September 17, 1998, the Warrants may not be exercised except within any one of the following window periods: (a) Window Period One: at any time on or prior to March 9, 2000 (two years from the date of the merger of Shared Technologies Fairchild, Inc. with Intermedia Communications, Inc.); (b) Window Period Two: within 365 days after a change of control of the Company, as defined in the Fairchild Holding Corp. Credit Agreement with Citicorp et. al.; or (c) Window Period Three: within 365 days after a change of control of Banner Aerospace, Inc., as defined in the Banner Aerospace, Inc. Credit Agreement with Citicorp. et. al. In no event may the Warrants be exercised after March 13, 2002. 2. Effective as of September 17, 1998, the Warrant Price at which the Warrants may be exercised during Window Period One shall be $7.80 per share, plus two tenths of one cent ($.002) for each day subsequent to March 9, 1999. The Warrant Price at which the Warrants may be exercised during Window Periods Two and Three shall be $7.80 per share. 3. The amendments made to the Warrants effective as of September 17, 1998 (outlined above) are made in recognition of the services performed by Mr. Jeffrey Steiner in connection with the extraordinary transactions during fiscal 1998 and are intended to be deemed additional compensation. The amendments were approved by the Company's shareholders at the 1998 Annual Meeting (held on November 19, 1998). 4. Each reference in the Warrant Agreement to "this Agreement" "hereunder", "hereof", "herein", or words of like import shall mean and be a reference to the Warrant Agreement, as amended, extended or modified previously or hereby, and each reference to the Warrant Agreement and any other document, instrument or agreement executed and/or delivered in connection with the Warrant Agreement shall mean and be a reference to the Warrant Agreement as amended, extended, or modified previously or hereby. 5. Except as specifically modified herein, the Warrant Agreement shall remain in full force and effect and is hereby ratified and confirmed. 6. This Amendment may be executed in multiple counterparts. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the date first written above. THE FAIRCHILD CORPORATION By: ___________/s/_______________ Donald E. Miller Executive Vice President and Corporate Secretary STINBES LIMITED By: __________/s/___________________ David Faust Vice President EX-27 3
5 1,000 6-MOS JUN-30-1999 DEC-27-1998 16,063 216,260 98,514 3,079 174,682 556,980 222,828 98,382 1,083,641 162,012 278,229 0 0 2,933 436,687 1,083,641 299,720 300,489 227,666 285,750 19,320 0 14,147 (17,894) 6,433 (7,637) (9,180) 0 0 (16,817) (0.76) (0.76)
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