-----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, D9K/6F6s/+oVdmRWHnhumuMFRcPkK6+HsFSkMooQ/MiGVVd/Op7ABSyMrnmlTJgy p/Ce2av/vbnmNhz6I/f/Qg== 0000009779-97-000023.txt : 19971216 0000009779-97-000023.hdr.sgml : 19971216 ACCESSION NUMBER: 0000009779-97-000023 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970928 FILED AS OF DATE: 19971215 SROS: NYSE SROS: PSE 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/A SEC ACT: SEC FILE NUMBER: 001-06560 FILM NUMBER: 97737970 BUSINESS ADDRESS: STREET 1: 300 W SERVICE RD STREET 2: PO BOX 10803 CITY: CHANTILLY STATE: VA ZIP: 22021 BUSINESS PHONE: 7034785800 FORMER COMPANY: FORMER CONFORMED NAME: BANNER INDUSTRIES INC /DE/ DATE OF NAME CHANGE: 19901118 10-Q/A 1 18 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 28, 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) Washington Dulles International Airport 300 West Service Road, PO Box 10803 Chantilly, VA 20153 (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 September 28, 1997 Class A Common Stock, $0.10 Par Value 14,030,717 Class B Common Stock, $0.10 Par Value 2,625,616 AMENDMENT: The purpose of this amendment is to revise and provide additional disclosure for (i) Part I, "Financial Information", and (ii) Part II, Item 6, "Exhibits and Reports on Form 8-K", as suggested by the SEC staff from their review of the Company's filing. THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES INDEX Page PART 1. FINANCIAL INFORMATION Item 1.Condensed Consolidated Balance Sheets as of September 28, 1997 (Unaudited) and June 30, 1997 . 3 Consolidated Statements of Earnings for the Three Months ended September 28, 1997 and September 29, 1996 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows for the Three Months ended September 28, 1997 and September 29, 1996 (Unaudited) 6 Notes to Condensed Consolidated Financial Statements (Unaudited) 7 Item 2.Management's Discussion and Analysis of Results of Operations and Financial Condition 11 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 16 * For purposes of Part 1 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 September 28, 1997 (Unaudited) and June 30, 1997 ASSETS
(In thousands) September 28, June 30, 28, 1997 1997 (*) CURRENT ASSETS: Cash and cash equivalents, $4,725 and $ 9,049 $ 19,420 $4,839 restricted Short-term investments 18,403 25,647 Accounts receivable-trade, less 172,239 168,163 allowances of $9,157 and $8,103 Inventories: Finished goods 305,048 297,223 Work-in-progress 29,812 26,887 Raw materials 24,807 18,626 359,667 342,736 Prepaid expenses and other current 39,595 33,631 assets Total Current Assets 598,953 589,597 Property, plant and equipment, net of 132,195 128,712 accumulated depreciation of $127,538 and $134,032 Net assets held for sale 26,262 26,147 Cost in excess of net assets acquired, 154,233 154,808 (Goodwill) less accumulated amortization of $37,895 and $36,672 Investments and advances, 55,337 55,678 affiliated companies Prepaid pension assets 59,512 59,742 Deferred loan costs 11,489 9,252 Other assets 45,135 43,397 TOTAL ASSETS $ 1,083,116 $ 1,067,333 *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 September 28, 1997 (Unaudited) and June 30, 1997 LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands) September June 30, 28, 1997 (*) 1997 CURRENT LIABILITIES: Bank notes payable and current $ 79,781 $ 47,422 maturities of long-term debt Accounts payable 84,797 84,953 Other accrued liabilities 91,289 105,199 Income taxes -- 5,881 255,867 243,455 Total Current Liabilities LONG-TERM LIABILITIES: Long-term debt, less current 412,261 416,922 maturities Other long-term liabilities 22,381 23,622 Retiree health care liabilities 43,284 43,387 Noncurrent income taxes 48,939 42,013 Minority interest in subsidiaries 69,178 68,309 TOTAL LIABILITIES 851,910 837,708 STOCKHOLDERS' EQUITY: Class A common stock, $0.10 par value; 2,027 2,023 authorized 40,000 shares, 20,272 shares issued (20,234 in June) and 14,031 shares outstanding (13,992 in June) Class B common stock, $0.10 par value; 263 263 authorized 20,000 shares, 2,626 shares issued and outstanding (2,633 in June) Paid-in capital 71,105 71,015 Retained earnings 210,441 209,949 Cumulative translation adjustment (865 ) (1,860 ) Net unrealized holding loss on (46 ) (46 ) available-for-sale securities Treasury Stock, at cost, 6,242 shares (51,719 ) (51,719 ) of Class A common stock TOTAL STOCKHOLDERS' EQUITY 231,206 229,625 TOTAL LIABILITIES AND STOCKHOLDERS' $ 1,083,116 $ 1,067,333 EQUITY *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) Months Ended September 28, 1997 and September 29, 1996
(In thousands, except per share data) Three Months Ended September September 29, 28, 1996 1997 REVENUE: Net sales $ 213,761 $ 146,090 Other income, net 5,357 223 219,118 146,313 COSTS AND EXPENSES: Cost of goods sold 161,699 106,280 Selling, general & administrative 45,479 35,846 Research and development 605 23 Amortization of goodwill 1,223 1,116 209,006 143,265 OPERATING INCOME 10,112 3,048 Interest expense 12,988 14,672 Interest income (398 ) (2,192 ) Net interest expense 12,590 12,480 1,897 (375 ) Investment income (loss), net Equity in earnings of affiliates 1,692 1,877 Minority interest (788 ) (785 ) 323 (8,715 ) EARNINGS (LOSS) BEFORE TAXES 110 3,663 Income tax benefit Earnings (loss) before discontinued 433 (5,052 ) operations Earnings from discontinued operations 59 434 NET EARNINGS (LOSS) $ 492 $ (4,618 ) Primary earnings (loss) per share $ .03 $ (.28) Fully diluted earnings (loss) per .03 (.28) share Weighted average number of shares used in computing earnings per share: Primary 17,457 16,425 Fully Diluted 17,588 16,425 The accompanying notes to summarized financial information are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For The Three (3) Months Ended September 28, 1997 and September 29, 1996
(In thousands) Three Months Ended September September 28, 29, 1997 1997 (*) Cash flows provided by (used for) Operations: Net earnings (loss) 492 (4,618 ) $ $ Depreciation and amortization 6,857 5,268 Accretion of discount on long-term 34 1,100 liabilities Distributed earnings of 715 1,499 affiliates, net Minority interest 788 785 Changes in assets and liabilities (45,729 ) (49,923 ) (36,843 ) (45,889 ) Net cash used for operations Investments: Net proceeds from the sale of -- 173,719 discontinued operations Purchase of property, plant and (10,206 ) (2,131 ) equipment Net proceeds received from 7,815 15 investments Changes in net assets held for (139 ) (1,230 ) sale Other, net 45 5 (2,485 ) 170,378 Net cash provided by (used for) investments Financing: Proceeds from issuance of debt 95,109 33,627 Debt repayments and repurchase of (67,698 ) (77,783 ) debentures, net Issuance of Class A common stock 149 522 27,560 (43,634 ) Net cash provided by (used for) financing 1,397 594 Effects of exchange rate changes on cash Net increase (decrease) in cash and (10,371 ) 81,449 cash equivalents Cash and cash equivalents, beginning 19,420 39,649 of period Cash and cash equivalents, end of $ 9,049 $ 121,098 period 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 per share data) 1. FINANCIAL STATMENTS The consolidated balance sheet as of September 28, 1997 and the consolidated statements of earnings and cash flows for the three months ended September 28, 1997 and September 29, 1996 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 September 28, 1997, and for all periods presented, have been made. The balance sheet at June 30, 1997 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, 1997 Form 10-K and Banner Aerospace, Inc.'s March 31, 1997 Form 10-K. The results of operations for the period ended September 28, 1997 are not necessarily indicative of the operating results for the full year. Certain amounts in prior years' quarterly financial statements have been reclassified to conform to the current presentation. 2. BUSINESS COMBINATIONS The Company's acquisitions described in this section have been accounted for using the purchase method. The respective purchase price assigned to the net assets acquired were based on the fair value of such assets and liabilities at the respective acquisition dates. 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 June 30, 1997, 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 $13,750 in goodwill as a result of this acquisition, which will be amortized using the straight-line method over 40 years. Simmonds is one of Europe's leading manufacturers and distributors of aerospace and automotive fasteners. In January 1997, Banner Aerospace, Inc. ("Banner"), a majority-owned subsidiary of the Company, acquired PB Herndon Company ("PB Herndon") in a business combination accounted for as a purchase. The total cost of the acquisition was $16,000, including the assumption of $1,300 in debt, which exceeded the fair value of the net assets of PB Herndon by approximately $3,500, which is being amortized using the straight-line method over 40 years. The Company purchased PB Herndon with available cash. PB Herndon is a distributor of specialty fastener lines and similar aerospace related components. On June 30, 1997, the Company sold all the patents of Fairchild Scandinavian Bellyloading Company ("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 additional proceeds of up to $7,000 based on future net sales of SBC's patented products and services. 3. RESTRICTED CASH The Company had approximately $4,725 and $4,839 of restricted cash on September 28, 1997 and June 30, 1997, respectively, all of which is maintained as collateral for certain debt facilities. 4. 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.
Three Months Ended September September 28, 29, 1997 1996 Net sales 82,025 80,037 $ $ Gross profit 35,686 34,997 Earnings from continuing operations 2,501 4,052 Net earnings 2,501 4,052
The Company owns approximately 31.9% of Nacanco Paketleme common stock. The Company recorded equity earnings of $1,692 and $1,877 from this investment for the three months ended September 28, 1997 and September 29, 1996, respectively. On September 28, 1997, the Company's investments in Shared Technologies Fairchild Inc. ("STFI") consisted of (i) $22,703 carrying value for $25,000 face value of 6% cumulative Convertible Preferred Stock, (ii) $11,666 carrying value for $20,000 face value of Special Preferred Stock, and (iii) $(2,332) carrying value for 6,225,000 shares of common stock. At the close of trading on September 26, 1997, STFI's common stock was quoted at $11.56 per share. Based on this price, the Company's investment in STFI common stock had an approximate market value of $71,977. Earnings from discontinued operations includes the Company's equity earnings of $59 and $434 from the STFI investments during the three months ended September 28, 1997 and September 29, 1996, respectively. (See Note 10). 5. CREDIT AGREEMENTS 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) a $75,000 revolver loan, 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 Company was in compliance with all of its credit agreements on September 28, 1997. FHC may transfer available cash to the Company. However, the FHC Credit Agreement restrict the Company from paying any dividends to stockholders. In August 1997, the Company entered into a delayed-start swap interest rate lock hedge agreement (the "FHC Hedge Agreement") to reduce its exposure to increases in interest rates on variable rate debt. Beginning on December 15, 1997, the FHC Hedge Agreement will provide interest rate protection on $100,000 of variable rate debt for ten years, with interest being calculated based on a fixed LIBOR rate of 6.696%. 6. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES On September 28, 1997, the Company had $69,178 of minority interest, of which $68,856 represents approximately 40.7% of Banner's common stock outstanding on a consolidated basis. 7. EQUITY SECURITIES The Company had 14,030,717 shares of Class A common stock and 2,625,616 shares of Class B common stock outstanding at September 28, 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. For the three months ended September 28, 1997, 31,534 shares of Class A Common Stock were issued as a result of the exercise of stock options, and shareholders converted 6,900 shares of Class B common stock into Class A common stock. 8. EARNINGS PER SHARE Primary and fully diluted earnings per share are computed by dividing net income by the weighted average number of shares and share equivalents outstanding during the period. To compute the incremental shares resulting from stock options and warrants for primary earnings per share, the average market price of the Company's stock during the period is used. To compute the incremental shares resulting from stock options and warrants for fully diluted earnings per share, the greater of the ending market price or the average market price of the Company's stock is used. In computing primary and fully diluted earnings per share for the three months ended September 28, 1997, the conversion of options and warrants was assumed, as the effect was dilutive. In computing primary and fully diluted earnings per share for the three months ended September 29, 1996, the conversion of options and warrants was not assumed, as the effect was antidilutive. 9. 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 September 28, 1997, the consolidated total recorded liabilities of the Company for environmental matters approximated $8,300, 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 $13,000 on an undiscounted cash flow 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. 10. SUBSEQUENT EVENTS 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 $85 million in cash (before tax) in exchange for certain preferred stock of STFI and expects to receive an additional $93 million in cash (before tax) in the first three months of 1998 in exchange for the 6,225,000 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. On December 8, 1997, Banner and eight of its subsidiaries entered into an Asset Purchase Agreement pursuant to which such subsidiaries have agreed to transfer substantially all of their assets to AlliedSignal Inc. ("Allied") for approximately $345 million of common stock of Allied (the "Disposition"). The assets transferred to Allied consists primarily of Banner's hardware group, which includes the distribution of bearings, nuts, bolts, screws, rivets and other type of fasteners. Approximately $170 million of the common stock received from Allied will be used to repay outstanding term loans of Banner's subsidiaries and related fees. 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. RHI Holdings, Inc. ("RHI") is a direct subsidiary of the Company. RHI is the 100% owner of Fairchild Holding Corp. ("FHC") and the majority owner of Banner Aerospace, Inc. ("Banner"). The Company's principal operations are conducted through RHI and FHC. The Company also holds significant equity interests in Shared Technologies Fairchild Inc. ("STFI") and Nacanco Paketleme ("Nacanco"). 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. 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; legal proceedings; business combinations; investment risks; and acts of nature. RECENT DEVELOPMENTS On November 20, 1997, 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. In connection with the STFI Sale, the Company has received approximately $85 million in cash (before tax) in Exchange for certain preferred stock of STFI and expects to receive an additional $93 million in cash (before tax) in the first three months of 1998 in exchange for the 6,225,000 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. Consummation of the STFI Sale is subject to certain conditions. On December 8, 1997, Banner and eight of its subsidiaries entered into an Asset Purchase Agreement pursuant to which such subsidiaries have agreed to transfer substantially all of their assets to AlliedSignal Inc. ("Allied") for approximately $345 million of common stock of Allied (the "Disposition"). The assets sold to Allied consist primarily of Banner's hardware group, which includes the distribution of bearings, nuts, bolts, screws, rivets and other type of fasteners. Approximately $170 million of the common stock received from Allied will be used to repay outstanding term loans of Banner's subsidiaries and related fees. Consummation of the Disposition is subject to certain conditions. The Company is effecting the Disposition to concentrate its efforts on the rotables and jet engine businesses and because the Disposition presented a unique opportunity to realize a significant return on the sale of the hardware group. 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 additional proceeds of up to $7.0 million based on future net sales of SBC's patented products and services. 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 June 30, 1997, 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 $13.7 million in goodwill as a result of this acquisition, which will be amortized using the straight-line method over 40 years. Simmonds is one of Europe's leading manufacturers and distributors of aerospace and automotive fasteners. 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. The total cost of the acquisition was $16.0 million, including the assumption of $1.3 million in debt, 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. The Company purchased PB Herndon with available cash. PB Herndon is a distributor of specialty fastener lines and similar aerospace related components. RESULTS OF OPERATIONS The Company currently reports in two principal business segments: Aerospace Fasteners and Aerospace Distribution. The results of Fairchild Technologies, together with the results of Gas Springs and SBC (for the prior year period) 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 months ended September 28, 1997 and September 29, 1996.
(In thousands) For the Quarter Ended September September 28, 1997 29, 1996 Sales by Segment: Aerospace Fasteners 76,847 55,047 $ $ Aerospace Distribution 122,914 84,107 Corporate and Other 18,847 9,654 Eliminations (a) (4,847 ) (2,718 ) 213,761 146,090 Total Sales $ $ Operating Income (Loss) by Segment: Aerospace Fasteners $ 2,510 $ 2,108 Aerospace Distribution 9,371 5,981 Corporate and Other (1,769 ) (5,041 ) 10,112 Total Operating Income $ $ 3,048 (a) Represents intersegment sales from the Aerospace Fasteners segment to the Aerospace Distribution segment.
CONSOLIDATED RESULTS Net sales of $213.8 million in the first quarter of Fiscal 1998 improved significantly by $67.7 million, or 46.3%, compared to sales of $146.1 million in the first quarter of Fiscal 1997. Sales growth was stimulated by the resurgent commercial aerospace industry, together with the effects that recent acquisitions contributed in the current quarter. Gross Margin as a percentage of sales was 24.4% and 27.3% in the first quarter of Fiscal 1998 and 1997, respectively. The lower margin in the current quarter is attributable to inefficiencies associated with increased production rates requiring the addition of new employees and the payment of overtime to existing employees within the Aerospace Fasteners segment, and a change in product mix and increased price competition in the Aerospace Distribution segment. Selling, General & Administrative expense as a percentage of sales was 21.3% and 24.5% in the first quarter of Fiscal 1998 and 1997, respectively. The improvement in the current quarter was attributable primarily to administrative efficiencies in correlation to the increase in sales. Research and Development expense increased in the current quarter, compared to the prior year quarter, as a result of product development within Fairchild Technologies. Additional research and development expenses will be incurred in the future. Other income increased $5.1 million in the current quarter, compared to the prior year quarter, due primarily to the sale of air rights over a portion of the property the Company owns and is developing in Farmingdale, New York. Operating income of $10.1 million in the first quarter of Fiscal 1998 increased $7.1 million, or 232%, compared to operating income of $3.0 million in the first quarter of Fiscal 1997. The increase in operating income was due primarily to the improved results provided by the Company's aerospace operations and the aforementioned increase in other income. Investment income, net, increased $2.3 million in the first quarter of Fiscal 1998, due primarily to recording unrealized gains on the fair market adjustments of trading securities in the first quarter of Fiscal 1998 while recording unrealized losses from trading securities in the first quarter of Fiscal 1997. Equity in earnings of affiliates decreased $.6 million in the first quarter of Fiscal 1998, compared to the first quarter of Fiscal 1997, due to slightly lower earnings by STFI and Nacanco. Income Taxes included a $.1 million tax benefit in the first quarter of Fiscal 1998, on pre-tax earnings of $.4 million. The tax benefit was due primarily to losses generated by domestic operations. Net earnings of $.5 million in the three months ended September 28, 1997, improved by $5.1 million compared to the $4.6 million net loss recorded in the three months ended September 29, 1996. This improvement is attributable to (i) the $7.1 million increase in operating income, and (ii) the $2.3 million increase in investment income, offset partially by a $3.6 million decrease in income tax benefit. SEGMENT RESULTS: AEROSPACE FASTENERS SEGMENT Sales in the Aerospace Fasteners segment increased by $21.8 million to $76.8 million, up 39.6% the first quarter of Fiscal 1998, compared to the first quarter of Fiscal 1997, reflecting significant growth in the commercial aerospace industry combined with the effect of the Simmonds acquisition. New orders have continued to exceed reported sales, resulting in a backlog of $201 million at September 28, 1997, up from $196 million at June 30, 1997. Excluding current quarter sales of $14.6 million contributed by Simmonds, sales increased 13.1% in Fiscal 1997, compared to the same quarter of the prior year. Operating income improved by $.4 million, or 19.1%, during the first quarter of Fiscal 1998, compared to the first quarter of Fiscal 1997. This improvement was attributable to the results of Simmonds. Excluding current quarter results of Simmonds, operating income would have decreased by $1.1 million in the first quarter of Fiscal 1998, compared to the same quarter of the prior year, reflecting inefficiencies associated with increased production rates which required the addition of employees and substantial overtime work. The Company anticipates that the productivity inefficiencies will gradually improve in the coming months. AEROSPACE DISTRIBUTION SEGMENT Aerospace Distribution sales were up $38.8 million, or 46.1%, for the first three months of Fiscal 1998, compared to the same period of the prior year. The improvement in the current period is due to increased sales to commercial airlines, original equipment manufacturers, and other distributors and increased sales of turbine parts and engine management services. In addition, incremental sales of $5.2 million by PB Herndon also contributed to the increase. Operating income was up $3.4 million, or 56.7%, for the first three months of Fiscal 1998, compared to the same period of the prior year, due primarily to the increase in sales and the related economies of scale. Lower gross margins, as a percentage of sales, resulting from a change in product mix together with increased price competition were offset by improved efficiencies of selling, general and administrative expenses, as a percentage of sales. This segment has benefited from the extended service lives of existing aircraft, growth from acquisitions and internal growth, which has increased its overall market share. CORPORATE AND OTHER The Corporate and Other classification includes Fairchild Technologies, Gas Springs Division and corporate activities. The results of SBC, which was sold at Fiscal 1997 year-end, are included in the prior period results. The group reported an increase in sales of $9.2 million, or 95.2%, in the first quarter of Fiscal 1998, as compared to the same period in Fiscal 1997, due primarily to an improvement in sales of Fairchild Technologies advanced semiconductor manufacturing equipment line. The operating loss decreased by $3.3 million in the first quarter of Fiscal 1998, compared to the first quarter of Fiscal 1997, as a result of an increase in other income, partially offset by increased losses at Fairchild Technologies. The operating results classified under Corporate and Other are affected by the operations of Fairchild Technologies Division ("The Division"), which may fluctuate because of industry cyclicality, the volume and timing of orders, the timing of new product shipments, customer's capital spending, and pricing changes by The Division and its competition. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES At September 28, 1997, cash and cash equivalents decreased to $9.0 million from $19.4 million at June 30, 1997, due to cash used for operations of $36.8 million and net capital expenditures of $10.2 million, offset partially by cash of $27.4 million provided from the increased borrowings from revolving debt and $10.2 million received from the sale of investments. 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 maintains credit agreements with a consortium of banks, which provide revolving credit facilities to RHI and FHC, and a separate revolving credit facility and term loans to Banner. At September 28, 1997, the Company had available credit lines of $86.9 million. The Company anticipates that existing capital resources, cash generated from operations, and cash from borrowings and asset sales will be adequate to maintain the Company's current level of operations. The Company's management intends to take appropriate action to refinance portions of its debt, if necessary to meet long-term cash requirements. The Company intends to issue three million shares of common stock (the "Offering") and enter into a New Credit Facility that will provide for total lending commitments of up to $300 million. The New Credit Facility will be comprised of a revolving credit facility and a term loan facility. With the proceeds of the Offering, borrowings under the New Credit Facility and the after tax proceeds the Company has already received from the STFI Sale, the Company will refinance 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 will reduce the Company's total net indebtedness by approximately $132 million and will reduce the Company's annual interest expense, on a pro forma basis, by approximately $21 million. The completion of the STFI Sale will reduce the Company's annual interest expense by approximately $3 million. In addition, a portion of the proceeds from the Disposition will be 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. On November 20, 1997, STFI, a corporation of which the Company owns approximately 42% of the outstanding common stock, entered into a merger agreement with Intermedia pursuant to which holders of STFI common stock will receive $15.00 per share in cash. In connection with the STFI Sale the Company has received approximately $85 million in cash (before tax) in exchange for certain preferred stock of STFI and expects to receive an additional $93 million in cash (before tax) during the first three months of 1998 in exchange for the 6,225,000 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. On December 8, 1997, Banner and eight of its subsidiaries entered into an Asset Purchase Agreement pursuant to which such subsidiaries have agreed to transfer substantially all of their assets to AlliedSignal Inc. ("Allied") for approximately $345 million of common stock of Allied. The assets to be transferred to Allied pursuant to the Asset Purchase Agreement consist primarily of Banner's hardware group, which includes the distribution of bearings, nuts bolts, screws, rivets and other type of fasteners. Approximately $170 million of the consideration received from the Disposition will be used to repay outstanding term loans of Banner's subsidiaries and related fees. Consummation of the Disposition is subject to certain conditions. The Company is effecting the Disposition to concentrate its efforts on the rotables and jet engine businesses and because the Disposition presented a unique opportunity to realize a significant return on the sale of the hardware group. The increase in the Company's shareholder's equity is expected to be approximately $36,501 resulting from the gain on sale projected to be recorded at the closing of the Disposition of $103,379 and an estimated tax provision of $41,826 and a minority interest effect of $25,052. The operating income (loss) of the subsidiaries included in the Disposition was $22,619 and $6,049 for fiscal year 1997 and the three months ended September 28, 1997. 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 Allied stock. The Company may effect a spin-off of certain non-aerospace assets as soon as is reasonably practicable following receipt of a solvency opinion relating to these assets and all necessary governmental and third party approvals (the "Spin-Off"). The solvency opinion with respect to the Spin- Off is required by the Company's lenders and board of directors. In order to effect a Spin-Off, approval is required from the board of directors of the Company, however, shareholder approval is not required. The ability of the Company to consummate a Spin-Off is contingent, among other things, on the ability of the Company to obtain consents and waivers under the Company's existing indebtedness and the New Credit Facility. The Company is presently in negotiations with its lenders regarding obtaining such consents and waivers and at the present time the Company has not reached an agreement with its lenders that will allow the Company to consummate a Spin- Off. There is no assurance that the Company will be able to obtain the necessary consents and waivers from its lenders and consequently there is no assurance that the Company will be able to consummate a Spin-Off. In addition, the Company may encounter unexpected delays in effecting a Spin- Off, and the Company can make no assurance as to the timing thereof. In addition, prior to the consummation of a Spin-Off, the Company may sell, restructure or otherwise change the assets and liabilities that will be in Spin-Off, or for other reasons elect not to consummate a Spin-Off. Consequently, there can be no assurance that a Spin-Off will occur. In connection with the Spin-Off, it is anticipated that the Company will enter into an indemnification agreement pursuant to which the resulting Spin-Off company 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 Reversion Case (as described under "Business- - -Legal Proceedings"); certain environmental liabilities currently recorded as $8.3 million, but for which it is reasonably possible the total expense could be $13.0 million; certain retiree medical cost and liabilities related to discontinued operations for which the Company has accrued approximately $31.3 million as of September 28, 1997 (see Note 11 to the Company's Consolidated Financial Statements); and certain tax liabilities. In addition, the Spin-Off company would also be responsible for all liabilities relating to the Technologies business. Responsibility for such liabilities would require significant commitments. Should a Spin-Off, as presently contemplated, occur prior to June of 1999, a 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 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 a 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 a Spin-Off to minimize the tax consequences thereof to the Company and its stockholders. 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 systems are Year 2000 compliant. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board ("FASB") issued two pronouncements, Statement of Financial Accounting Standards No. 128 ("SFAS 128") "Earnings Per Share", and Statement of Financial Accounting Standards No. 129 ("SFAS 129") "Disclosure of Information about Capital Structure". SFAS 128 establishes accounting standards for computing and presenting earnings per share ("EPS"). SFAS 128 is effective for periods ending after December 15, 1997, including interim periods, and requires restatement of all prior period EPS data presented. Results from the calculation of simple and diluted earnings per share, as prescribed by SFAS 128, would not be materially different from the calculations for primary and fully diluted earnings per share for years ending June 30, 1997 and June 30, 1996. SFAS 129 establishes standards for disclosure of information about the Company's capital structure and becomes effective for periods ending after December 15, 1997. In June 1997, FASB issued two pronouncements, Statement of Financial Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive Income", and Statement of Financial Accounting Standards No. 131 ("SFAS 131") "Disclosures about Segments of an Enterprise and Related Information". SFAS 130 establishes standards for reporting and display of comprehensive income and its components in the financial statements. SFAS 131 supersedes Statement of Financial Accounting Standards No. 14 "Financial Reporting for Segments of a Business Enterprise" and requires that a public company report certain information about its operating segments in annual and interim financial reports. The Company will adopt SFAS 130 and SFAS 131 in Fiscal 1999. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 99(d) Financial statements, related notes thereto and Auditors' Report of Shared Technologies Fairchild, Inc. for the quarter and nine months ended September 30, 1997 (incorporated by reference to the Registrant's Form 8-K filed on December 8, 1997). (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended September 28, 1997. 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: December 15, 1997 -----END PRIVACY-ENHANCED MESSAGE-----