-----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, Uuj2qMkiUySi1Bfd2oKb95eDtOBgamadIUt0S70cXojc/i0znADEdMpvCLOFEk3/ 0177N7U1QXt5Z57IEObDkw== 0000009779-97-000024.txt : 19971216 0000009779-97-000024.hdr.sgml : 19971216 ACCESSION NUMBER: 0000009779-97-000024 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970630 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-K/A SEC ACT: SEC FILE NUMBER: 001-06560 FILM NUMBER: 97737972 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-K/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION?? Washington, DC 20549 -------------------- FORM 10-K/A -------------------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended June 30, 1997 Commission File Number: 1-6560 ------------- ------ THE FAIRCHILD CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 34-0728587 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Washington Dulles International Airport 300 West Service Road, P.O. Box 10803 Chantilly, Virginia 20153 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (703) 478-5800 ---------------------------------------------------- (Registrant's Telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of exchange on Title of each class which registered - ------------------- ------------------- Class A Common Stock, par value $.10 per share New York and Pacific Stock Exchange - ------------------------------- ----------------------------------- 13 1/8% Subordinated Debentures due 2006 New York Stock Exchange - ------------------------------- ----------------------------------- 12% Intermediate Subordinated Debentures due 2001 New York Stock Exchange - ------------------------------- ----------------------------------- 13% Junior Subordinated Debentures due 2007 New York Stock Exchange - ------------------------------- ----------------------------------- Securities registered pursuant to Section 12(g) of the Act: None ---- Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. As of November 21, 1997, the aggregate market value of the common shares (based upon the closing price of these shares on the New York Stock exchange) of the Registrant held by nonaffiliates was approximately $190.7 million (excluding shares deemed beneficially owned by affiliates of the Registrant under Commission Rules). As of November 23, 1997, the number of shares outstanding of each of the Registrant's classes of common stock were as follows: Class A common stock, $.10 par value 14,035,767 ------------ Class B common stock, $.10 par value 2,625,616 ------------ AMENDMENT: The purpose of this amendment is to revise and provide additional disclosure for (i) Item 1, "Business", (ii) Item 2, "Properties", (iii) Item 6, "Selected Financial Data", (iv) Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition", (v) Item 8, "Financial Statements and Supplementary Data" and (vi) Item 14, "Exhibits, Financial Statement Schedules and Reports on Form 8-K", as suggested by the SEC staff from their review of the Company's filing. THE FAIRCHILD CORPORATION INDEX TO ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED JUNE 30, 1997 PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . PART II Item 6. Selected Financial Data. . . . . . . . . . . . . . . . Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . . . . . . . 4 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . 14 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . 70 PART I ------ ITEM 1. BUSINESS - ----------------- (a) General Development of Business The Fairchild Corporation (the "Company") was incorporated in October 1969, under the laws of the State of Delaware. The Company changed its name from Banner Industries, Inc. to The Fairchild Corporation on November 15, 1990. The Company is a holding company which owns all of the issued and outstanding stock of RHI Holdings, Inc. ("RHI"), and through RHI all of the issued and outstanding stock of Fairchild Holding Corporation ("FHC"). Through RHI, the Company is the majority stockholder of Banner Aerospace, Inc. ("Banner"). The Company is the largest aerospace fastener manufacturer and is one of the largest independent aerospace parts distributors in the world. Through internal growth and strategic acquisitions, the Company has become one of the leading aircraft parts suppliers to aircraft manufacturers such as Boeing, Airbus, Lockheed Martin, British Aerospace and Bombardier and to airlines such as Delta Airlines and US Airways. The Company's primary business focus is on the aerospace industry and its business consists primarily of two segments--fasteners and aerospace partsdistribution. The aerospace fasteners segment, which accounted for approximately 51.4% of the Company's net sales in Fiscal 1997, pro forma for the Disposition, manufactures and markets fastening systems used in themanufacturing and maintenance of commercial and military aircraft. The aerospace distribution segment, which accounted for approximately 35.9% of the Company's net sales in Fiscal 1997, pro forma for the Disposition, stocks and distributes a wide variety of aircraft parts to commercial airlines and air cargo carriers, OEMs, other distributors, fixed-base operators, corporate aircraft operators and other aerospace and non- aerospace companies. The Company's aerospace distribution business is conducted through its 64% owned subsidiary, Banner. Recent Developments - ------------------- Recent developments of the Company are incorporated herein by reference from "Recent Developments and Significant Business Combinations" included in Item 7 "Management's Discussion and Analysis of Results of Operations and Financial Condition". (b) Financial Information about Business Segments The Company's business segment information is incorporated herein by reference from Note 21 of the Company's consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data". (c) Narrative Description of Business Segments INDUSTRY OVERVIEW The aerospace parts industry currently is enjoying favorable trends driven by strong growth in new commercial aircraft orders, an increase in miles flown by existing aircraft, the need to modify older aircraft to comply with noise regulations and increased orders for wide bodied aircraft. Demand for aerospace fasteners and other aerospace parts is closely related to delivery and use rates for commercial and military aircraft. Delivery and use rates are in turn directly related to the actual and projected volume of passenger and freight traffic, average aircraft age, global fleet size and government defense expenditures. According to the Boeing 1997 Current Market Outlook (the "Boeing Market Outlook"), world air traffic grew 6.7% from 1995 to 1996, following a 6.6% increase from 1994 to 1995. Industry sources forecast that world air traffic will grow by more than 5% per year for the next ten years. Boeing also projects that during this period domestic and international airlines will lease or purchase over 7,000 new aircraft, thereby increasing the worldwide commercial fleet from approximately 11,500 aircraft at the end of 1996 to approximately 17,000 aircraft (net of retirements) at the end of 2006. Boeing, Airbus and McDonnell Douglas delivered over 277 new aircraft in the first six months of 1997 compared to 184 in the comparable period of the prior year. Orders for new aircraft at these manufacturers remained stable, with 313 orders in the first six months of 1997 compared to 291 in the comparable period of 1996. Cancellations, however, were greatly reduced- - -Boeing experienced only five cancellations in the first six months of 1997 as compared to 77 in the first six months of 1996. The Company believes that the world's airlines must continue to add capacity and order new airplanes to be able to meet the anticipated demand. The Company believes that over the next five years airlines will be required to replace a significant portion of their existing fleets as the large number of airplanes delivered in the 1960s become increasingly uneconomical to operate and the deadlines for compliance with the stringent noise regulations adopted in the United States and Europe approach. The Company's fastener business benefits from noise reduction modifications because modifying an airplane to comply with the noise regulations and remain serviceable requires a substantial number of fasteners. The Boeing Market Outlook reports that 560 airplanes in the U.S. fleet had been modified to meet the new noise standards and projects that 1,080 planes in the U.S. fleet will be noise modified. The Boeing Market Outlook projects that average airplane size should rise worldwide over the next ten years. As airlines seek to serve a growing number of air travelers with existing restrictions on arrival and departure slots, airport gates and ramp capacity, commercial aircraft OEMs are experiencing increased orders for heavier, widebodied aircraft of intermediate size. Widebodied aircraft generally require a greater number of fasteners than smaller aircraft. AEROSPACE FASTENERS The Company, through its Aerospace Fasteners segment, is a leading worldwide manufacturer and supplier of fastening systems used in the construction and maintenance of commercial and military aircraft. The Aerospace Fasteners segment accounted for 36.4% and 35.2% of total Company sales for the year ended June 30, 1997 and for the three months ended September 28, 1997, respectively. PRODUCTS In general, aerospace fasteners produced by the Company are used to join materials in applications that are not of themselves critical to flight. Products range from standard aerospace screws, to more complex systems that fasten airframe structures, and sophisticated latching or quick disconnect mechanisms that allow efficient access to internal parts which require regular servicing or monitoring, The Aerospace Fasteners segment also manufactures and supplies fastening systems used in non- aerospace industrial and electronic niche applications. The Aerospace Fasteners segment produces and sells products under various trade names and trademarks including Voi-Shan(R) (fasteners for aerospace structures), Screwcorp(R) (standard externally threaded products for aerospace applications), RAM(R) (custom designed mechanisms for aerospace applications), Camloc(R) (components for the industrial, electronic, automotive and aerospace markets), Tridair(R) and Rosan(R) (fastening systems for highly-engineered aerospace, military and industrial applications). Principal product lines of the Aerospace Fasteners segment include: Standard Aerospace Airframe Fasteners--These fasteners consist of standard externally threaded fasteners used in non-critical airframe applications on a wide variety of aircraft. These fasteners include Hi- Torque Speed Drive(R), Tri-Wing(R), Torq-Set(R), Phillips(R) and Hex Heads(R). Commercial Aerospace Structural and Engine Fasteners--These fasteners consist of more highly engineered permanent or semi-permanent fasteners used in non-critical but more sophisticated airframe and engine applications, which could involve joining more than two materials. These fasteners are generally engineered to specific customer requirements or manufactured to specific customer specifications for special applications, often involving exactingstandards. These fasteners include Hi-Lok(R), Veri- Lite(R), Eddie-Bolt2(R) and customer proprietary engine nuts. Proprietary Products and Fastening Systems--These very highly engineered proprietary fasteners are designed by the Company for specific customer applications and include high performance structural latches and hold down mechanisms. These fasteners are usually proprietary in nature and are primarily used in either commercial aerospace or military applications. These fasteners include Visu-Lok(R), Composi-Lok(R), Keen-serts(R), Mark IV(TM), Flatbeam(TM) and Ringlock(TM). Highly Engineered Fastening Systems for Industrial Applications-- Thesehighly engineered fasteners are designed by the Company for specific niche applications in the electronic, automotive and durable goods markets and are sold under the Camloc(R) trade name. SALES AND MARKETS The products of the Aerospace Fasteners segment are sold primarily to domestic and foreign OEMs, and to the maintenance and repair market throughdistributors. Sixty-six percent of its sales are domestic. Major customers include OEMs such as Boeing, McDonnell Douglas and Airbus and their subcontractors, as well as major distributors such as Burbank Aircraft Supply, Special-T and Wesco. In addition, OEMs have implemented programs to reduce inventories and pursue just-in-time relationships. This has allowed parts distributors to significantly expand their business due to their ability to better meet OEM objectives. In response, the Company, which formerly supplied the OEMs directly, is expanding efforts to provide parts through distributors, by establishing master distributorship agreements, with Special-T, Wesco and others. No single customer accounts for more than 10% of consolidated sales. The Company's backlog of orders in the Aerospace Fasteners segment as of September 28, 1997 was $201 million. The Company anticipates that approximately 95% of such backlog will be delivered by September 28, 1998. Products are marketed by a direct sales force team which coordinates efforts with an internal technical sales force team. The direct sales force team is organized by customer and region. The internal sales force is organized by facility and product range and is focused on servicing customers needs, identifying new product applications, and obtaining the approval of new products. All the Company's products are leveraged through centralized advertising and promotional activities. Revenues in the Aerospace Fasteners segment bear a strong relationship to aircraft production. As OEMs searched for cost cutting opportunities during the aerospace industry recession, parts manufacturers, including the Company, accepted lower-priced and/or smaller orders to maintain market share, at lower profit margins. However, during the last two years, this situation has improved as build rates in the aerospace industry have increased and resulted in capacity constraints. As lead times have increased, the Company has been able to negotiate contracts with its major customers at more favorable pricing as well as larger minimum lot sizes that are more economic to manufacture. In addition, the Company has eliminated "make and hold" contracts under which large volume buyers require current production of parts for long-term unspecified dates of delivery. Overall, the Company believes existing backlog will result in higher margins due to larger and more efficient lot sizes. Fasteners also have applications in the automotive/industrial markets, where numerous special fasteners are required (such as engine bolts, wheel bolts and turbocharger tension bolts). The Company is actively targeting the automotive market as a hedge against any potential downturn in the aerospace industry. MANUFACTURING AND PRODUCTION The Aerospace Fasteners segment has seven primary manufacturing facilities, of which three are located in the United States and four are located in Europe. Each facility has virtually complete production capability, and subcontracts only those orders which exceed capacity. Each plant is designed to produce a specified product or group of products, determined by production process involved and certification requirements. The Company's largest customers have recognized its quality and operational controls by conferring ISO D1-9000A status at all of its U.S. facilities, and ISO D1-9000 status at all of its European facilities. The Company is the first and only aerospace fasteners manufacturing company with all facilities holding ISO-9000 approval. The Company has a fully operational modern information system at all of its U.S. facilities and will expand this information system to all its European operations in Fiscal 1998. The new system performs detailed and timely cost analysis of production by product and facility. Updated MIS systems also help the Company to better service its customers. OEMs require each product to be produced in an OEM-qualified/OEM-approved facility. COMPETITION Despite intense competition in the industry, the Company remains the dominant manufacturer of aerospace fasteners. The worldwide aerospace fastener market is estimated to be $1.3 billion (before distributor resales). The Company holds approximately 20% of the market and competes with SPS Technologies, Hi-Shear and Huck, which the Company believes hold approximately 13%, 11% and 10% of the market, respectively. In Europe, its largest competitors are Blanc Aero and Southco Fasteners. The Company competes primarily in the highly engineered "systems" segment, where its broad product range allows it to more fully serve each OEM and distributor. The Company's product array is diverse and offers customers a large selection to address various production needs. In addition, roughly 45% of the Company's output is unique or is in a market where the Company has a small number of competitors. The Company seeks to maintain its technological edge and competitive advantage over its competitors, and has historically demonstrated its innovative production methods and new products to meet customer demands at fair price levels. AEROSPACE DISTRIBUTION The Company conducts its aerospace parts distribution through Banner. In February 1996, the Company increased its ownership of Banner from 47.2% to 59.3%, and further increased such ownership interest to 64% in June 1997. The Company, through its Aerospace Distribution segment, distributes a wide variety of aircraft parts, which it carries in inventory. In addition to selling products that it has purchased on the open market, the Company also acts as a non-exclusive authorized distributor of several different aerospace related product lines. No single distributor arrangement is material to the Company's financial condition. The Aerospace Distribution segment accounted for 35.9% of total Company sales in Fiscal 1997, pro forma for the Disposition. 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 Allied for approximately $345 million of common stock of Allied. The assets transferred to Allied consists primarily of Banner's hardware group, which includes the distribution of bearings, nuts, bolts, screws, rivets and other types of fasteners. PRODUCTS Following consummation of the Disposition, the products of the Aerospace Distribution segment will be divided into two groups: rotables and engines. Rotables include flight data recorders, radar and navigation systems, instruments, landing gear and hydraulic and electrical components. Engines include jet engines and engine parts for use on both narrow and wide body aircraft and smaller engines for corporate and commuter aircraft. The Aerospace Distribution segment provides a number of services such as immediate shipment of parts in aircraft-on-ground situations. The Aerospace Distribution segment also provides products to OEMs to airlines under inventory management programs. The Aerospace Distribution segment also buys and sells commercial aircraft from time to time. Rotable parts are sometimes purchased as new parts, but are generally purchased as used parts which are then overhauled for the Company by outside contractors, including the original manufacturers and FAA-licensed facilities. Rotables are sold in a variety of conditions such as new, overhauled, serviceable and "as is" Rotables may also be exchanged instead of sold. An exchange occurs when an overhauled aircraft part in inventory is exchanged for a used part from the customer and the customer is charged an exchange fee plus the actual cost to overhaul the part. Engines and engine components are sold as is, overhauled or disassembled for resale as parts. SALES AND MARKETS Subsidiaries of the Aerospace Distribution segment sell their products in the United States and abroad to most of the world's commercial airlines and to air cargo carriers, as well as OEMs, other distributors, fixed base operators, corporate aircraft operators and other aerospace and nonaerospace companies. Approximately 76% of its sales, pro forma for the Disposition, are to domestic purchasers, some of whom may represent offshore users. The Aerospace Distribution segment markets its products and services through direct sales forces, outside representatives and, for some product lines, overseas sales offices. Sales in the aviation aftermarket depend on price, service, quality and reputation. The Aerospace Distribution segment's business does not experience significant seasonal fluctuations or depend on a single customer. No single customer accounts for more than 10% of the Company's consolidated revenue, pro forma for the Disposition. The Company's backlog of orders in the Aerospace Distribution segment as of September 28, 1997 was $22 million, pro forma for the Disposition. The Company anticipates that approximately 90% of such backlog will be delivered by September 28, 1998. COMPETITION In the rotable group the major competitors are AAR Corp., Air Ground Equipment Services ("AGES"), Aviation Sales Company, The Memphis Group and other large and small companies in a very fragmented industry. The major competitors for Banner's engine group are OEMs such as General Electric Company and Pratt and Whitney, as well as the engine parts division of AAR Corp., AGES, and many smaller companies. TECHNOLOGIES Acquired by the Company in June 1994, Fairchild Technologies ("Technologies") is a global organization that manufactures, markets and services capital equipment for recordable compact disc ("CD-R") and advanced semiconductor manufacturing. Technologies' products are used to produce CD-Rs, CDs and CD-ROMs, as well as integrated circuits for the data processing, communications, transportation, automotive and consumer electronic industries,as well as for the military. PRODUCTS Technologies is a leader in microlithography manufacturing in Europe and has four product lines, the first being equipment for wafer microlithography processing. This includes the mainstay Series 6000 Flexible Wafer Process Line, consisting of lithographic processing systems with flexible material flow, modular design and high throughput, and the recently designed Falcon Modular Microlithography System for 0.25 micron (65/256 Mbit DRAM) device manufacturing. The Falcon system has a fully modular design and is expandable to accommodate expected technological advancements and specific customer configurations. Technologies has combined new and proven technology and a number of leading edge components and systems in compact disc processing to recently develop its Compact Disc Recordable ("CD-R10X") manufacturing system. The CD-R10X system is a state of the art design for producing cost effective recordable CDs by combining a high quality injection molding machine with scanning, inspection, and pneumatic handling systems. A third line is modular process equipment for use by the fabricators of liquid crystal displays. Technologies supplies advanced modular solutions with high throughput, small footprint and minimum cost of ownership. Technologies is also a leading manufacturer of photolithography processing equipment for photomask and thinfilm products. Technologies specializes in providing system solutions, and in coating, developing, priming, etching, stripping, cleaning and thermal processing of wafers, substrates and related semiconductor products. SALES AND MARKETS With a strong base of controls/clean room technology and software/services engineering, Technologies is able to provide systems with multiple modular designs for a variety of customer applications. Today, more than 1,000 Technologies wafer production systems are in operation worldwide. Approximately 60% of the Company's Fiscal 1997 business was derived from wafer related products and services. The remaining 40% was divided between LCD and CD related systems, products, and services. Major customers in the wafer product line include Motorola, Samsung, Siemens, GEC Plessey, Texas Instruments, National Semiconductor, Macronix, and Erso. Other major customers include Philips and Litton for the LCD product line, Sonopress (Bertelsmann), and Krauss Maffei for the CD product line, and Hyundai, NEC and Canon for the photomask product line. Approximately 76.3% of Technologies' sales were to foreign customers. MANUFACTURING AND PRODUCTION Technologies has two manufacturing facilities consisting of Fairchild Technologies GmbH, located in Vaihingen, Germany, and Fairchild Technologies USA, Inc. located in Fremont, California. COMPETITION The wafer product line competes with Tokyo Electron, Dai Nippon Screen and the Silicon Valley Group. Competitors in the CD product line consist of Robi Systems, Leybold and Marubeni. Competition in the photomask product line is provided by Mitsubishi Toyo, Tasmo and Solid State Equipment. NACANCO PAKETLEME Established in 1987, Nacanco is the largest manufacturer of aluminum cans for soft drinks and beer in Turkey with an estimated 80% market share. Nacanco generated EBITDA of approximately $39 million on annual sales of $107 million for the fiscal year ended December 31, 1996. The Company owns 31.9% of the common stock, with Pechiney International SA and its subsidiaries holding substantially all of the balance. The Company received from Nacanco cash dividends in excess of $3 million in each of the past two fiscal years. REAL ESTATE The Company has significant real estate holdings having a book value of approximately $54.1 million as of June 30, 1997. The Company's real estate holdings consist of (i) 80 acres on Long Island, New York which are currently being developed into retail centers; (ii) various industrial buildings from which the Company receives rental income; and (iii) property to be used as landfills upon the receipt of necessary licenses and government approvals. RESEARCH AND PATENTS The Company's research and development activities have included: applied research; development of new products; testing and evaluation of, and improvements to, existing products; improvements in manufacturing techniques and processes; development of product innovations designed to meet government safety and environmental requirements; and development of technical services for manufacturing and marketing. The Company's sponsored research and development expenditures amounted to $7.8 million, $0.1 million and $1.0 million for the years ended June 30, 1997, 1996, and 1995, and $0.6 million for the three months ended September 28, 1997, respectively, substantially all of such expenditures being attributable to Fairchild Technologies. The Company owns patents relating to the design and manufacture of certain of its products and is a licensee of technology covered by the patents of other companies. The Company does not believe that any of its business segments are dependent upon any single patent. PERSONNEL As of June 30, 1997, pro forma for the Disposition, the Company had approximately 3,400 employees. Approximately 5% of these employees were covered by collective bargaining agreements. The Company believes that its relations with its employees are satisfactory. ITEM 2. PROPERTIES - ------------------ As of June 30, 1997, pro forma for the Disposition, the Company owned or leased properties totaling approximately 1,631,000 square feet, approximately 1,046,000 square feet of which was owned and 585,000 square feet was leased. The Aerospace Fasteners segment's properties consisted of approximately 1,020,000 square feet, with principal operating facilities concentrated in Southern California, France and Germany. The Aerospace Distribution segment's properties consisted of approximately 380,000 square feet, with principal operating facilities of approximately 295,000 square feet located in Florida, and Texas. Corporate and other operating properties consisted of approximately 117,000 square feet, with principal operating facilities of approximately 82,000 square feet located in California and Germany. The Company owns its corporate headquarters at Washington-Dulles International Airport. The Company has several parcels of property which it is attempting to market, lease and/or develop, including: (i) an eighty acre parcel located in Farmingdale, New York; (ii) a six acre parcel in Temple City, California; (iii) an eight acre parcel in Chatsworth, California; and (iv) several other parcels of real estate, primarily located throughout the continental United States. The following table sets forth the location of the larger properties used in the continuing operations of the Company, their square footage, the business segment or groups they serve and their primary use. Each of the properties owned or leased by the Company is, in management's opinion, generally well maintained, suitable to support the Company's business and adequate for the Company's present needs. All of the Company's occupied properties are maintained and updated on a regular basis. OWNED OR SQUARE PRIMARY LOCATION LEASED FOOTAGE BUSINESS SEGMENT/GROUP USE -------- -------- ------- ---------------------- -------- - ----- Saint Cosme, France... Owned 304,000 Aerospace Fasteners Manufacturing Torrance, California.. Owned 284,000 Aerospace Fasteners Manufacturing Carrollton, Texas..... Leased 173,000 Aerospace Distribution Distribution City of Industry, California........... Owned 140,000 Aerospace Fasteners Manufacturing Chantilly, Virginia... Owned 125,000 Corporate Office Lakeland, Florida..... Leased 65,000 Aerospace Distribution Distribution Ft. Lauderdale, Florida.............. Leased 57,000 Aerospace Distribution Distribution Toulouse, France...... Owned 56,000 Aerospace Fasteners Manufacturing Fremont, California... Leased 54,000 Technology Products Manufacturing Santa Ana, California........... Owned 50,000 Aerospace Fasteners Manufacturing Vaihingen, Germany.... Leased 49,000 Technology Products Manufacturing Kelkheim, Germany..... Leased 42,000 Aerospace Fasteners Manufacturing Fremont, California... Leased 31,000 Technology Products Manufacturing ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- Five-Year Financial Summary (In thousands, except per share data)
For the years ended June 30, 1997 1996 1995 1994 1993 - --------------------------- ---------- ---------- ---------- ------- - --- ---------- Summary of Operations: Net sales........................ $ 731,960 $ 409,520 $ 256,840 $ 203,456 $ 247,080 Gross profit..................... 205,123 94,911 37,614 28,415 42,609 Operating income (loss).......... 30,517 (9,115) (31,917) (46,845) (29,595) Net interest expense............. 47,798 56,586 64,371 66,670 67,162 Earnings (loss) from continuing operations..................... (1,818) (33,661) (57,763) 4,834 (62,413) Earnings (loss) per share from continuing operations: Primary...................... (.10) (2.03) (3.59) .30 (3.87) Fully diluted................ (.10) (1.97) (3.59) .30 (3.87) Balance Sheet Data: Total assets..................... $1,067,333 $1,009,938 $ 850,294 $ 866,621 $ 941,675 Long-term debt, less current maturities..................... 416,922 368,589 509,715 522,406 566,491 Redeemable preferred stock of subsidiary..................... -- -- 16,342 17,552 17,732 Stockholders' equity............. 229,625 231,168 40,180 69,494 53,754 per outstanding common share... 13.81 14.10 2.50 4.32 3.34
The results of Banner Aerospace, Inc. are included in the periods since February 25, 1996, when Banner became a majority-owned subsidiary. Prior to February 25, 1996, the Company's investment in Banner was accounted for using the equity method. Fiscal 1994 includes the gain on the sale of Rexnord Corporation stock. These transactions materially affect the comparability of the information reflected in the selected financial data. ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND - ------------------------------------------------------------------------ FINANCIAL CONDITION ------------------- The Fairchild Corporation (the "Company") was incorporated in October 1969, under the laws of the State of Delaware. On November 15, 1990, the Company changed its name from Banner Industries, Inc. to The Fairchild Corporation. RHI Holdings, Inc. ("RHI") is a direct subsidiary of the Company. RHI is the owner of 100% of Fairchild Holding Corp. ("FHC") and the majority owner of Banner Aerospace, Inc. ("Banner"). The Company's principal operations are conducted through RHI and FHC. The Company also holds significant equity interests in Shared Technologies Fairchild Inc. ("STFI") and Nacanco Paketleme ("Nacanco"). GENERAL The Company is the largest aerospace fastener manufacturer and is one of the largest independent aerospace parts distributors in the world. Through internal growth and strategic acquisitions, the Company has become one of the leading aircraft parts suppliers to aircraft manufacturers such as Boeing, Airbus, Lockheed Martin, British Aerospace and Bombardier and to airlines such as Delta Airlines and US Airways. The Company's primary business focus is on the aerospace industry and its business consists primarily of two aerospace segments--aerospace fasteners and aerospace parts distribution. The aerospace fasteners segment, which accounted for approximately 51.4% of the Company's net sales in Fiscal 1997, pro forma for the Disposition, manufactures and markets fastening systems used in the manufacturing and maintenance of commercial and military aircraft. The aerospace distribution segment, which accounted for approximately 35.9% of the Company's net sales in Fiscal 1997, pro forma for the Disposition, stocks and distributes a wide variety of aircraft parts to commercial airlines and air cargo carriers, OEMs, other distributors, fixed-base operators, corporate aircraft operators and other aerospace and non-aerospace companies. The Company's aerospace distribution business is conducted through its 64% owned subsidiary, Banner. CAUTIONARY STATEMENT Certain statements in the financial discussion and analysis by management contain forward-looking information that involves risk and uncertainty, including current trend information, projections for deliveries, backlog, and other trend projections. Actual future results may differ materially depending on a variety of factors, including product demand; performance issues with key suppliers; customer satisfaction and qualification issues; labor disputes; governmental export and import policies; worldwide political stability and economic growth; and legal proceedings. RECENT DEVELOPMENTS AND SIGNIFICANT BUSINESS COMBINATIONS 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. In January 1997, Banner, through its subsidiary, Dallas Aerospace, Inc., acquired PB Herndon Company ("PB Herndon") in a business combination accounted for as a purchase. PB Herndon is a distributor of specialty fastener lines and similar aerospace related components. The total cost of the acquisition was $16.0 million, which exceeded the fair value of the net assets of PB Herndon by approximately $3.5 million. The excess is being amortized using the straight-line method over 40 years. In February 1997, the Company completed a transaction (the "Simmonds Acquisition") pursuant to which the Company acquired common shares and convertible debt representing an 84.2% interest, on a fully diluted basis, of Simmonds S.A. ("Simmonds"). The Company initiated a tender offer to purchase the remaining shares and convertible debt held by the public. By Fiscal year-end, the Company had purchased, or placed sufficient cash in escrow to purchase, all the remaining shares and convertible debt of Simmonds. The total purchase price of Simmonds, including the assumption of debt, was approximately $62.0 million, which the Company funded with available cash. The Company recorded approximately $13.0 million in goodwill as a result of this acquisition. Simmonds is one of Europe's leading manufacturers and distributors of aerospace and automotive fasteners. On June 30, 1997, the Company sold all the patents of Fairchild Scandinavian Bellyloading Company ("SBC") to Teleflex Incorporated ("Teleflex") for $5.0 million, and immediately thereafter sold all the stock of SBC to a wholly-owned subsidiary of Teleflex for $2.0 million. The Company may also receive an additional amount of up to $7.0 million based on future net sales of the patented products and services. In Fiscal 1997, the Company recorded a $2.5 million nonrecurring gain as a result of these transactions. The Company, RHI and Fairchild Industries, Inc. ("FII"), the Company's former subsidiary, entered into an Agreement and Plan of Merger dated as of November 9, 1995 (as amended, the "Merger Agreement") with Shared Technologies Inc. ("STI"). On March 13, 1996, in accordance with the Merger Agreement, STI succeeded to the telecommunications systems and services business operated by the Company's Fairchild Communications Services Company ("FCSC"). The transaction was effected by a Merger of FII with and into STI (the "Merger") with the surviving company renamed STFI. Prior to the Merger, FII transferred all of its assets to, and all of its liabilities were assumed by FHC, except for the assets and liabilities of FCSC, and $223.5 million of FII's existing debt and preferred stock. As a result of the Merger, the Company received shares of Common Stock and Preferred Stock of STFI, representing approximately a 41% ownership interest in STFI. On February 22, 1996, pursuant to the Asset Purchase Agreement dated January 26, 1996, the Company, through its subsidiaries, completed the sale of certain assets, liabilities and the business of the D-M-E Company ("DME") to Cincinnati Milacron Inc. ("CMI"), for a sales price of approximately $244.3 million, as adjusted. The sales price consisted of $74.0 million in cash, and two 8% promissory notes in the aggregate principal amount of $170.3 million (together, the "8% CMI Notes"). On July 29, 1996, CMI paid in full the 8% CMI Notes. On January 27, 1996, FII completed the sale of Fairchild Data Corporation ("Data") to SSE Telecom, Inc. ("SSE") for book value of approximately $4.4 million and 100,000 shares of SSE's common stock valued at $9.06 per share, or $.9 million, at January 26, 1996, and warrants to purchase an additional 50,000 shares of SSE's common stock at $11.09 per share. Accordingly, DME and Data have been accounted for as discontinued operations. The combined net sales of DME and Data totaled $108.1 million (through January 26, 1996) and $180.8 million for Fiscal 1995. Net earnings from discontinued operations were $9.2 million (through January 26, 1996) and $14.0 million for Fiscal 1995. Effective February 25, 1996, the Company completed the transfer of Harco to Banner in exchange for 5,386,477 shares of Banner common stock. The exchange has increased the Company's ownership of Banner common stock from approximately 47.2% to 59.3%, resulting in the Company becoming the majority shareholder of Banner. Accordingly, the Company has consolidated the results of Banner since February 25, 1996. In June 1997, the Company purchased $28.0 million of newly issued Series A Convertible Paid-in-Kind Preferred Stock of Banner. The Company now controls 64.0% of Banner's voting stock. Banner is a leading international supplier to the aerospace industry as a distributor, providing a wide range of aircraft parts and related support services. RESULTS OF OPERATIONS The Company currently reports in two principal business segments: Aerospace Fasteners and Aerospace Distribution. The Company consolidated pre March 13, 1996 operating results from the Communications Services segment and, effective February 25, 1996, began to consolidate the operating results of the Aerospace Distribution segment. The results of FT, together with the results of Gas Springs and SBC are included in Corporate and Other. The following table illustrates the historical sales and operating income of the Company's operations for the past three years.
For the years ended June 30, (In thousands) -------------------------------- 1997 1996 1995 Sales by Segment: -------- -------- -------- Aerospace Fasteners............... $269,026 $218,059 $215,364 Aerospace Distribution (a)........ 411,765 129,973 -- Corporate and Other(b)............ 66,382 67,330 41,476 Eliminations (c).................. (15,213) (5,842) -- ------- ------- ------- Sales............................... $731,960 $409,520 $256,840 ======= ======= ======= Operating Income (Loss) by Segment: Aerospace Fasteners (d)........... $ 17,390 $ 135 $(11,497) Aerospace Distribution (a)........ 30,891 5,625 -- Corporate and Other (b)........... (17,764) (14,877) (20,420) ------- ------- ------- Operating income (loss)............. $ 30,517 $ (9,115) $(31,917) ======= ======= ======= (a) Effective February 25, 1996, the Company became the majority shareholder of Banner Aerospace, Inc. and, accordingly, began consolidating their results as of that date. (b) Includes sales from Fairchild Technologies of $57.7 million, $60.3 million, and $38.0 million in 1997, 1996 and 1995, respectively, and gross margin from Fairchild Technologies of $23.8 million, $20.8 million, and $11.1 million, respectively. (c) Represents intersegment sales from the Aerospace Fasteners segment to the Aerospace Distribution segment. (d) Includes restructuring charges of $2.3 million in Fiscal 1996.
The following unaudited pro forma table illustrates sales and operating income of the Company's operations by segment, on a pro forma basis, as if the Company had operated in a consistent manner for the past three years ended June 30, 1997, 1996 and 1995. The pro forma results are based on the historical financial statements of the Company and Banner as though the Disposition and consolidation of Banner had been in effect since the beginning of each period. The pro forma information is not necessarily indicative of the results of operations that would actually have occurred if the transactions had been in effect since the beginning of each period, nor is it necessarily indicative of future results of the Company.
For the years ended June 30, (In thousands) -------------------------------- 1997 1996 1995 Pro Forma Sales by Segment: -------- -------- -------- Aerospace Fasteners (a)........... $269,026 $197,099 $190,287 Aerospace Distribution............ 187,768 153,830 108,359 Corporate and Other............... 66,382 67,330 41,476 Eliminations...................... (29) -- -- ------- ------- ------- $523,147 $418,259 $340,122 ======= ======= ======= Pro Forma Operating Income (Loss) by Segment: Aerospace Fasteners (a)........... $ 17,390 $ (2,639) $(15,736) Aerospace Distribution ........... 8,272 5,431 (9,995) Corporate and Other............... (17,764) (14,876) (20,420) ------- ------- ------- Operating income (loss)............. $ 7,898 $(12,084) $(46,151) ======= ======= ======= (a) Fiscal 1997 results include sales of $27.2 million and operating income of $1.2 million provided by Simmonds since its acquisition in February 1997.
Consolidated Results - -------------------- Net sales of $731.9 million in Fiscal 1997 improved significantly by $322.4 million, or 78.7%, compared to sales of $409.5 million in Fiscal 1996. Sales growth was stimulated by the resurgent commercial aerospace industry, together with the effects of several strategic business combinations over the past 18 months. Net sales in Fiscal 1996 were up 59.3% from Fiscal 1995 reflecting strong sales performances from the Aerospace Fasteners segment and Fairchild Technologies ("FT"), included in the Corporate and Other business segment, and the inclusion of four months of sales from the Aerospace Distribution segment. On a pro forma basis, net sales increased 25.1% and 23.0% in Fiscal 1997 and 1996, respectively, as compared to the previous Fiscal periods. Gross Margin as a percentage of sales was 28.0%, 23.2%, and 14.6% in Fiscal 1997, 1996, and 1995, respectively. The increase in the current year was attributable to higher revenues combined with continued productivity improvements achieved during Fiscal 1997. The increase in Fiscal 1996 compared to Fiscal 1995 was due to consolidation of plants, elimination of product lines, substantial downsizing and new productivity programs put in place. Selling, General & Administrative expense as a percentage of sales was 21.8%, 23.9%, and 25.6% in Fiscal 1997, 1996, and 1995, respectively. The increase in the current year was attributable primarily to the increase in selling and marketing costs incurred to support the increase in sales. The decrease in Fiscal 1996 compared to Fiscal 1995 was due primarily to the positive results obtained from restructuring and downsizing programs put in place earlier. Operating income of $30.5 million in Fiscal 1997 increased $39.6 million compared to operating income of $9.1 million in Fiscal 1996. The increase in operating income was due primarily to the current year's growth in sales and increased operational efficiencies. Operating income in Fiscal 1996 improved by $22.8 million over Fiscal 1995 due primarily to improved cost efficiencies applied in the Aerospace Fasteners segment and the sales increase from FT in the Corporate and Other business segment. On a pro forma basis, operating income increased $20.0 million in Fiscal 1997, as compared to Fiscal 1996, and $34.1 million in Fiscal 1996, as compared to Fiscal 1995. Net interest expense decreased 15.5% in Fiscal 1997 compared to Fiscal 1996, and decreased 12.1% in Fiscal 1996 compared to Fiscal 1995. The decreases are due to lower borrowings as a result of the sale of DME and the Merger, both of which significantly reduced the Company's total debt. Investment income, net, was $6.7 million, $4.6 million and $5.7 million in Fiscal 1997, 1996, and 1995, respectively. The 45.4% increase in Fiscal 1997 is due primarily to realized gains from the sale of investments in Fiscal 1997. The 19.8% decrease in Fiscal 1996 resulted from losses realized on the write-off of two foreign investments. Equity in earnings of affiliates decreased $0.2 million in Fiscal 1997, compared to Fiscal 1996, and increased $3.2 million in Fiscal 1996, compared to Fiscal 1995. The current year's decrease is attributable to the lower earnings of Nacanco. The prior year's increase was due primarily to higher earnings from Nacanco, which improved the Company's equity in earnings by $2.6 million. Nonrecurring income in Fiscal 1997 includes the $2.5 million gain from the sale of SBC. Income Taxes included a $5.2 million tax benefit in Fiscal 1997 on a pre-tax loss of $7.0 million from continuing operations. The tax benefit was due primarily to reversing Federal income taxes previously provided due to a change in the estimate of the required tax accruals. In Fiscal 1996, the tax benefit from the loss from continuing operations was $26.3 million. Earnings from discontinued operations, net, include the earnings, net of tax, from STFI in Fiscal 1997 and 1996, and FCS, DME and Data in Fiscal 1996 and 1995. The $53.6 million gain on disposal of discontinued operations resulted primarily from the sale of DME to CMI in Fiscal 1996. Fiscal 1996 also includes a $163.1 million nontaxable gain resulting from the Merger. Extraordinary items, net, resulted from premiums paid for, and redemption costs and consent fees associated with, the retirement of the Senior Notes and the write off of deferred loan fees, related primarily to Senior Notes and bank debt extinguished prior to maturity. This totaled $10.4 million, net of a tax benefit, in Fiscal 1996. Net earnings in Fiscal 1997, compared to Fiscal 1996, after excluding the gain on sale of discontinued operations of $163.1 million from the Merger and the $53.6 million gain on sale of discontinued operations in 1996 from the sale of DME, improved $28.3 million, reflecting a $39.6 million improvement in operating profit. The net earnings increased $223.5 million in Fiscal 1996, compared to Fiscal 1995, due primarily to the gain, net of tax, from the sale of discontinued operations. Segment Results - --------------- Aerospace Fasteners Segment - --------------------------- Sales in the Aerospace Fasteners segment increased by $51.0 million to $269.0 million, up 23.4% in Fiscal 1997, compared to the Fiscal 1996 period, reflecting significant growth in the commercial aerospace industry combined with the Simmonds acquisition. New orders have been strong in recent months resulting in a backlog of $195.7 million at June 30, 1997, up from $109.9 million at June 30, 1996. Sales increased slightly in Fiscal 1996 compared to Fiscal 1995. The Harco division was transferred to the Aerospace Distribution segment on February 25, 1996. On a pro forma basis, sales increased 36.5% in Fiscal 1997, compared to Fiscal 1996 and 3.6% in Fiscal 1996, compared to Fiscal 1995. Operating income improved from breakeven to $17.4 million during Fiscal 1997, compared to Fiscal 1996. This improvement was achieved as a result of accelerated growth in the commercial aerospace industry, particularly in the second half of the year. Certain efficiencies achieved during Fiscal 1997 continued to have positive effects on operating income. Operating income was positive in the Aerospace Fasteners segment, which was an $11.6 million improvement in the Fiscal 1996 period over the corresponding Fiscal 1995 period. During Fiscal 1996, operating losses decreased significantly in the Aerospace Fasteners segment, due primarily to the cost of management changes, consolidation of plants, eliminating unprofitable product lines, pricing adjustments, substantial work force downsizing and new productivity, quality and marketing programs. A restructuring charge of $2.3 million was recorded in Fiscal 1996, primarily for severance pay to employees terminated as a result of further downsizing. On a pro forma basis, operating income increased $20.0 million in Fiscal 1997, as compared to Fiscal 1996, and $13.1 million in Fiscal 1996, as compared to Fiscal 1995. Aerospace Distribution Segment - ------------------------------ Aerospace Distribution sales were up $281.8 million and operating income was up $25.3 million, primarily the result of reporting twelve months in Fiscal 1997 versus four months in Fiscal 1996. On a twelve-month pro forma basis sales were up $33.9 million, or 22.1%, and operating income was up $2.8 million, or 52.3%. Sales increases in all three groups, hardware, rotables and engines contributed to these strong results. This segment has benefited from the extended service lives of existing aircraft, growth from acquisitions and internal growth, which has increased market share. In Fiscal 1996, as a result of the transfer of Harco to Banner effective February 25, 1996, the Company recorded four months of sales and operating income of Banner, including Harco as part of the Aerospace Distribution segment. This segment reported $130.0 million in sales and $5.6 million in operating income for this four-month period ended June 30, 1996. In Fiscal 1996, the first eight months of Harco's sales and operating income were included in the Aerospace Fasteners segment. Corporate and Other - ------------------- The Corporate and Other segment includes Fairchild Technologies, Camloc Gas Springs Division and Fairchild Scandinavian Bellyloading Co. AB (SBC) (formerly the Technology Products segment). Sales improved at SBC which, was sold effective as of Fiscal 1997 year-end. Over the past three years, corporate administrative expense as a percentage of sales has decreased from 5.1% in 1995 to 3.5% in 1996 to 2.2% in 1997. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Net cash used by operating activities for the fiscal years ended June 30, 1997 and 1996 amounted to $97.0 million and $48.7 million, respectively. The primary use of cash for operating activities in fiscal 1997 was an increase in accounts receivable of $56.0 million and inventories of $46.4 million which was mainly to support the Company's sales growth. The primary use of cash for operating activities in fiscal 1996 was a decrease in accounts payable, accrued liabilities and other long- term liabilities of $36.5 million. Net cash provided from investing activities for the fiscal years ended June 30, 1997 and 1996 amounted to $80.0 million and $57.5 million, respectively. The primary source of cash from investing activities in fiscal 1997 was the sale of discontinued operations, including DME, of $173.7 million, which was slightly offset by the acquisition of subsidiaries in the amount of $55.9 million. The primary source of cash from investing activities in fiscal 1996 was the sale of discontinued operations of $71.6 million. Net cash used for financing activities for the fiscal years ended June 30, 1997 and 1996 amounted to $1.5 million and $39.4 million, respectively. The primary use of cash for financing activities in fiscal 1997 was the repayment of debt and the repurchase of debentures of $157.0 million offset by proceeds from the issuance of additional debt of $154.4 million. The primary use of cash for financing activities in fiscal 1996 was the repayment of debt and the repurchase of debentures of $198.8 million which was partially offset by proceeds from the issuance of additional debt of $157.9 million. 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. The Company's principal cash requirements include debt service, capital expenditures, acquisitions, and payment of other liabilities. Other liabilities that require the use of cash include post-employment benefits for retirees, environmental investigation and remediation obligations, and litigation settlements and related costs. The Company expects that cash on hand, cash generated from operations, and cash from borrowings and asset sales will be adequate to satisfy cash requirements. 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 October 1996, the American Institute of Certified Public Accountants issued Statement of Position 96-1 ("SOP 96-1") "Environmental Remediation Liabilities". SOP 96-1 provides authoritative guidance on specific accounting issues related to the recognition, measurement, and display and disclosure of environmental remediation liabilities. The Company is required to implement SOP 96-1 in Fiscal 1998. The Company's present policy is similar to the policy prescribed by SOP 96-1, therefore, there will be no effect from implementation. In February 1997, the Financial Accounting Standards Board ("FASB") issued two pronouncements, Statement of Financial Accounting Standards No. 128 ("SFAS 128") "Earnings Per Share", and Statement of Financial Accounting Standards No. 129 ("SFAS 129") "Disclosure of Information about Capital Structure". SFAS 128 establishes accounting standards for computing and presenting earnings per share ("EPS"). SFAS 128 is effective for periods ending after December 15, 1997, including interim periods, and requires restatement of all prior period EPS data presented. Results from the calculation of simple and diluted earnings per share, as prescribed by SFAS 128, would not be materially different from the calculations for primary and fully diluted earnings per share for years ending June 30, 1997 and June 30, 1996. SFAS 129 establishes standards for disclosure of information about the Company's capital structure and becomes effective for periods ending after December 15, 1997. In June 1997, FASB issued two pronouncements, Statement of Financial Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive Income", and Statement of Financial Accounting Standards No. 131 ("SFAS 131") "Disclosures about Segments of an Enterprise and Related Information". SFAS 130 establishes standards for reporting and display of comprehensive income and its components in the financial statements. SFAS 131 supersedes Statement of Financial Accounting Standards No. 14 "Financial Reporting for Segments of a Business Enterprise" and requires that a public company report certain information about its operating segments in annual and interim financial reports. The Company will adopt SFAS 130 and SFAS 131 in Fiscal 1998. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- The following consolidated financial statements of the Company and the report of the Company's independent public accountants with respect thereto, are set forth below. Page ---- Consolidated Balance Sheets as of June 30, 1997 and 1996...... 28 Consolidated Statements of Earnings For The Three Years Ended June 30, 1997, 1996, and 1995................................. 30 Consolidated Statements of Stockholders' Equity For The Three Years Ended June 30, 1997, 1996, and 1995..................... 32 Consolidated Statements of Cash Flows For The Three Years Ended June 30, 1997, 1996, and 1995........................... 33 Notes to Consolidated Financial Statements.................... 35 Report of Independent Public Accountants...................... 69 Supplementary data regarding "Quarterly Financial Information (Unaudited)" is set forth under Item 8 in Note 23 to Consolidated Financial Statements. THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
June 30, June 30, ASSETS 1997 1996 - ------ -------- -------- Current Assets: Cash and cash equivalents..................... $ 19,420 $ 39,649 (of which $4,839 and $8,224 is restricted) Short-term investments........................ 25,647 10,498 Accounts receivable-trade, less allowances of $8,103 and $6,327........................ 168,163 98,694 Notes receivable.............................. -- 170,384 Inventories: Finished goods............................. 297,223 236,263 Work-in-process............................ 26,887 16,294 Raw materials.............................. 18,626 18,586 --------- --------- 342,736 271,143 Prepaid expenses and other current assets..... 33,631 19,275 --------- --------- Total Current Assets.......................... 589,597 609,643 Property, plant and equipment, net............ 128,712 87,956 Net assets held for sale...................... 26,147 45,405 Cost in excess of net assets acquired, (Goodwill) less accumulated amortization of $36,672 and $31,912.......................... 154,808 140,201 Investments and advances, affiliated companies 55,678 53,471 Deferred loan costs........................... 9,252 7,825 Prepaid pension assets........................ 59,742 57,660 Long-term investments......................... 4,120 585 Notes receivable and other assets............. 39,277 7,192 --------- --------- Total Assets.................................. $1,067,333 $1,009,938 ========= ========= The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
June 30, June 30, LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 - ------------------------------------ -------- -------- Current Liabilities: Bank notes payable and current maturities of long-term debt........................... $ 47,422 $ 84,892 Accounts payable............................. 84,953 65,478 Accrued salaries, wages and commissions...... 19,166 17,367 Accrued insurance............................ 15,397 16,340 Accrued interest............................. 16,011 10,748 Other........................................ 54,625 37,302 Income taxes................................. 5,881 24,635 --------- --------- Total Current Liabilities.................... 243,455 256,762 Long-term debt............................... 416,922 368,589 Other long-term liabilities.................. 23,622 18,605 Retiree health care liabilities.............. 43,387 44,452 Noncurrent income taxes...................... 42,013 31,737 Minority interest in subsidiaries............ 68,309 58,625 --------- --------- Total Liabilities............................ 837,708 778,770 Stockholders' Equity: Class A common stock, 10 cents par value; authorized 40,000,000 shares, 20,233,879, (19,997,756 in 1996) shares issued, and 13,992,283 (13,756,160 in 1996) shares outstanding................................ 2,023 2,000 Class B common stock, 10 cents par value; authorized 20,000,000 shares, 2,632,516 shares issued and outstanding (2,633,704 in 1996)...................................... 263 263 Paid-in capital.............................. 71,015 69,366 Retained earnings............................ 209,949 208,618 Cumulative translation adjustment............ (1,860) 2,760 Net unrealized holding loss on available-for- sale securities............................ (46) (120) Treasury stock, at cost, 6,241,596 shares of Class A common stock....................... (51,719) (51,719) --------- --------- Total Stockholders' Equity................... 229,625 231,168 --------- --------- Total Liabilities and Stockholders' Equity... $1,067,333 $1,009,938 ========= ========= The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share data)
For the Years Ended June 30, -------------------------- - ------ 1997 1996 1995 -------- -------- -- - ------ Revenue: Net sales of products...................... $731,960 $409,520 $256,840 Other income (expense)..................... (658) 635 1,169 ------- ------- - - ------ 731,302 410,155 258,009 Costs and expenses: Cost of goods sold......................... 526,837 314,609 219,226 Selling, general & administrative.......... 161,309 98,075 65,830 Research and development................... 7,807 94 974 Amortization of goodwill................... 4,832 4,173 3,896 Restructuring.............................. -- 2,319 - -- ------- ------- - - ------ 700,785 419,270 289,926 Operating income (loss)...................... 30,517 (9,115) (31,917) Interest expense............................. 52,493 64,658 67,742 Interest income.............................. (4,695) (8,072) (3,371) ------- ------- - - ------ Net interest expense......................... 47,798 56,586 64,371 Investment income, net....................... 6,651 4,575 5,705 Equity in earnings of affiliates............. 4,598 4,821 1,607 Minority interest............................ (3,514) (1,952) (2,293) Nonrecurring income.......................... 2,528 (1,724) - -- ------- ------- - - ------ Earnings (loss) from continuing operations before taxes.................... (7,018) (59,981) (91,269) Income tax benefit........................... 5,200 26,320 33,506 ------- ------- - - ------ Earnings (loss) from continuing operations... (1,818) (33,661) (57,763) Earnings from discontinued operations, net... 3,149 17,087 23,843 Gain (loss) on disposal of discontinued operations, net............................ -- 216,716 (259) ------- ------- - - ------ Earnings (loss) before extraordinary items... 1,331 200,142 (34,179) Extraordinary items, net..................... -- (10,436) 355 ------- ------- - - ------ Net earnings (loss).......................... $ 1,331 $189,706 $(33,824) ======= ======= ======= The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share data)
For the Years Ended June 30, ------------------------------- - - 1997 1996 1995 -------- -------- ------- - - Primary Earnings (Loss) Per Share: Earnings (loss) from continuing operations........................... $ (.10) $ (2.03) $ (3.59) Earnings from discontinued operations, net.................................. .18 1.03 1.48 Gain (loss) on disposal of discontinued operations, net...................... -- 13.06 (.01) ------- ------- ------ - - Earnings (loss) before extraordinary items................................ .08 12.06 (2.12) Extraordinary items, net............... -- (.63) .02 ------- ------- ------ - - Net earnings (loss) per share.......... $ .08 $ 11.43 $ (2.10) ======= ======= ======= Fully Diluted Earnings (Loss) Per Share: Earnings (loss) from continuing operations........................... $ (.10) $ (1.97) $ (3.59) Earnings from discontinued operations, net.................................. .18 1.00 1.48 Gain (loss) on disposal of discontinued operations, net...................... -- 12.67 (.01) ------- ------- ------ - - Earnings (loss) before extraordinary items................................ .08 11.70 (2.12) Extraordinary items, net............... -- (.61) .02 ------- ------- ------ - - Net earnings (loss) per share.......... $ .08 $ 11.09 $ (2.10) ======= ======= ======= Weighted Average Number of Shares used in Computing Earnings Per Share: Primary.................................. 17,230 16,600 16,103 Fully diluted............................ 17,321 17,100 16,103 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
Class A Class B Cumulative Common Common Paid-in Retained Translation Treasury Stock Stock Capital Earnings Adjustment Stock Other Total ----- ----- ------- -------- ----------- ------- -- - ---- ------- Balance, July 1, 1994 $1,965 $ 270 $66,775 $52,736 $ 872 $(51,719) $(1,405) $69,494 Net loss.............. - - - (33,824) - - - - (33,824) Cumulative translation adjustment, net...... - - - - 2,989 - - - 2,989 Gain on purchase of preferred stock of subsidiary........... - - 236 - - - - - 236 Reduction of minimum liability for pensions - - - - - - 1,405 1,405 Net unrealized holding loss on available-for- sale securities...... - - - - - - (120) (120) ----- ---- ------ ------ ------ ------- -- - ---- ------- Balance, June 30, 1995 1,965 270 67,011 18,912 3,861 (51,719) (120) 40,180 Net earnings.......... - - - 189,706 - - - - 189,706 Cumulative translation adjustment, net...... - - - - (1,101) - - - (1,101) Fair market value of stock warrants issued - - 1,148 - - - - - 1,148 Proceeds received from options exercised.... 28 - 1,481 - - - - - 1,509 Exchange of Class B for Class A common stock................ 7 (7) - - - - - - - Gain realized on retirement of preferred stock of subsidiary........... - - (274) - - - - - (274) ----- ---- ------ ------- ------ ------- -- - ---- ------- Balance, June 30, 1996 2,000 263 69,366 208,618 2,760 (51,719) (120) 231,168 Net earnings.......... - - - 1,331 - - - - 1,331 Cumulative translation adjustment, net...... - - - - (4,620) - - - (4,620) Fair market value of stock warrants issued - - 546 - - - - - 546 Proceeds received from options exercised.... 23 - 1,103 - - - - - 1,126 Net unrealized holding gain on available-for- sale securities...... - - - - - - 74 74 ----- ---- ------ ------- ------ ------- -- - ---- ------- Balance, June 30, 1997 $2,023 $ 263 $71,015 $209,949 $(1,860) $(51,719) $ (46) $229,625 ===== ==== ====== ======= ====== ======= ====== ======= The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
For the Years Ended June 30, ------------------ - -------------- 1997 1996 1995 Cash flows from operating activities: -------- ------ - -- -------- Net earnings (loss)................................... $ 1,331 $ 189,706 $ (33,824) Adjustments to reconcile net earnings (loss) to net cash used for operating activities: Depreciation and amortization..................... 25,935 21,653 20,879 Accretion of discount on long-term liabilities.... 4,963 4,686 4,773 Net gain on the merger of subsidiaries............ -- (162,703) -- Net gain on the sale of discontinued operations... -- (53,942) -- Extraordinary items, net of cash payments......... -- 4,501 -- Provision for restructuring (excluding cash payments of $777 in 1996)....................... -- 1,542 -- (Gain) loss on sale of property, plant and equipment....................................... (72) (9) 655 Undistributed earnings of affiliates.............. (2,329) (3,829) (500) Minority interest................................. 3,514 1,952 2,293 Change in trading securities...................... (5,733) (5,346) 1,879 Change in receivables............................. (55,965) (7,677) (3,623) Change in inventories............................. (46,389) (10,747) (8,578) Change in other current assets.................... (14,237) (1,468) (3,039) Change in other non-current assets................ (17,859) 1,030 3,492 Change in accounts payable, accrued liabilities, and other long-term liabilities................. 8,610 (41,255) (21,541) Non-cash charges and working capital changes of discontinued operations......................... 1,274 13,169 11,609 -------- ------ - -- -------- Net cash used for operating activities................ (96,957) (48,737) (25,525) Cash flows from investing activities: Proceeds received from (used for) investment securities, net..................................... (12,951) 265 12,281 Purchase of property, plant and equipment............. (22,116) (6,622) (5,911) Proceeds from sale of property, plant and equipment... 213 122 151 Equity investments in affiliates...................... -- (2,361) (1,051) Minority interest in subsidiaries..................... (1,610) (2,817) -- Acquisition of subsidiaries, net of cash acquired..... (55,916) -- (607) Net proceeds from the sale of discontinued operations. 173,719 71,559 -- Changes in net assets held for sale................... 385 5,894 1,441 Investing activities of discontinued operations....... (1,749) (8,500) (25,460) -------- ------ - -- -------- Net cash (used for) provided by investing activities. 79,975 57,540 (19,156) Cash flows from financing activities: Proceeds from issuance of debt........................ 154,394 157,877 71,712 Debt repayments and repurchase of debentures.......... (156,975) (197,825) (57,417) Issuance of Class A common stock...................... 1,126 1,509 -- Financing activities of discontinued operations....... -- (936) (1,950) -------- ------ - -- -------- Net cash provided by (used for) financing activities.. (1,455) (39,375) 12,345 Effect of exchange rate changes on cash............... (1,792) (961) 1,150 Net decrease in cash and cash equivalents............. (20,229) (31,533) (31,186) Cash and cash equivalents, beginning of the year...... 39,649 71,182 102,368 -------- ------ - -- -------- Cash and cash equivalents, end of the year............ $ 19,420 $ 39,649 $ 71,182 ======== ======== ======== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ------------------------------------------ Corporate Structure: The Fairchild Corporation (the "Company") was incorporated in October 1969, under the laws of the State of Delaware. RHI Holdings, Inc. ("RHI") is a direct subsidiary of the Company. RHI is the owner of 100% of Fairchild Holding Corp. ("FHC") and the majority owner of Banner Aerospace, Inc., ("Banner"). The Company's principal operations are conducted through FHC and Banner. The Company also holds significant equity interests in Shared Technologies Fairchild Inc. ("STFI") and Nacanco Paketleme ("Nacanco"). The Company's investment in STFI resulted from a March 13, 1996 Merger of the Communications Services Segment of the Company with Shared Technologies, Inc. (See Note 3). The proposed sale of STFI to Intermedia Communications Inc., as discussed in Note 24, completes the disposition of the Communications Services Segment. The Company's financial statements have been restated to present the results of the Communications Services Segment and STFI as discontinued operations. Fiscal Year: The fiscal year ("Fiscal") of the Company ends June 30. All references herein to "1997", "1996", and "1995" mean the fiscal years ended June 30, 1997, 1996 and 1995, respectively. Consolidation Policy: The accompanying consolidated financial statements are prepared in accordance with generally accepted accounting principles and include the accounts of the Company and all of its wholly- owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in companies in which ownership interest range from 20 to 50 percent are accounted for using the equity method (see Note 9). Cash Equivalents/Statements of Cash Flows: For purposes of the Statements of Cash Flows, the Company considers all highly liquid investments with original maturity dates of three months or less as cash equivalents. Total net cash disbursements (receipts) made by the Company for income taxes and interest were as follows:
1997 1996 1995 -------- -------- -------- Interest....................... $ 48,684 $ 66,843 $ 66,262 Income Taxes................... (1,926) 9,279 (3,056)
Restricted Cash: On June 30, 1997 and 1996, the Company had restricted cash of $4,839 and $8,224, respectively, all of which is maintained as collateral for certain debt facilities. Cash investments are in short-term certificates of deposit. Investments: Management determines the appropriate classification of its investments at the time of acquisition and reevaluates such determination at each balance sheet date. Trading securities are carried at fair value, with unrealized holding gains and losses included in earnings. Available-for-sale securities are carried at fair value, with unrealized holding gains and losses, net of tax, reported as a separate component of stockholders' equity. Investments in equity securities and limited partnerships that do not have readily determinable fair values are stated at cost and are categorized as other investments. Realized gains and losses are determined using the specific identification method based on the trade date of a transaction. Interest on corporate obligations, as well as dividends on preferred stock, are accrued at the balance sheet date. Inventories: Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out ("LIFO") method at principal domestic aerospace manufacturing operations and using the first- in, first-out ("FIFO") method elsewhere. If the FIFO inventory valuation method had been used exclusively, inventories would have been approximately $4,868 and $4,756 higher at June 30, 1997 and 1996, respectively. Inventories from continuing operations are valued as follows:
June 30, June 30, (In thousands) 1997 1996 -------- -------- First-in, first-out (FIFO)................. $ 312,840 $ 239,800 Last-in, first-out (LIFO).................. 29,896 31,343 -------- -------- Total inventories.......................... $ 342,736 $ 271,143 ======== ========
Properties and Depreciation: The cost of property, plant and equipment is depreciated over estimated useful lives of the related assets. The cost of leasehold improvements is depreciated over the lesser of the length of the related leases or the estimated useful lives of the assets. Depreciation is computed using the straight-line method for financial reporting purposes and using accelerated depreciation methods for Federal income tax purposes. No interest costs were capitalized in any of the years presented. Property, plant and equipment consisted of the following:
June 30, June 30, 1997 1996 -------- -------- Land....................................... $ 13,438 $ 10,408 Buildings and improvements................. 56,124 40,853 Machinery and equipment.................... 158,944 94,406 Transportation vehicles.................... 899 767 Furniture and fixtures..................... 26,815 18,466 Construction in progress................... 6,524 2,329 ------- ------- 262,744 167,229 Less: Accumulated depreciation............ (134,032) (79,273) ------- ------- Net property, plant and equipment.......... $128,712 $ 87,956 ======= =======
Amortization of Goodwill: Goodwill, which represents the excess of the cost of purchased businesses over the fair value of their net assets at dates of acquisition, is being amortized on a straight-line basis over 40 years. Deferred Loan Costs: Deferred loan costs associated with various debt issues are being amortized over the terms of the related debt, based on the amount of outstanding debt, using the effective interest method. Amortization expense for these loan costs for 1997, 1996 and 1995 was $2,847, $3,827, and $3,794, respectively. Impairment of Long-Lived Assets: In Fiscal 1997, the Company adopted Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used, and for long-lived assets and certain identifiable intangibles to be disposed of. The Company reviews its long-lived assets, including property, plant and equipment, identifiable intangibles and goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine recoverability of its long- lived assets the Company evaluates the probability that future undiscounted net cash flows will be less than the carrying amount of the assets. Impairment is measured based on the difference between the carrying amount of the assets and fair value. The implementation of SFAS 121 did not have a material effect on the Company's consolidated results of operations. Foreign Currency Translation: For foreign subsidiaries whose functional currency is the local foreign currency, balance sheet accounts are translated at exchange rates in effect at the end of the period and income statement accounts are translated at average exchange rates for the period. The resulting translation gains and losses are included as a separate component of stockholders' equity. Foreign transaction gains and losses are included in other income and were insignificant in Fiscal 1997, 1996 and 1995. Research and Development: The Company capitalizes software development costs upon the establishment of technological feasibility. The establishment of technological feasibility and the ongoing assessment of recoverability require considerable judgment by management with respect to certain external factors, including anticipated future revenues, estimated economic life and changes in software and hardware technologies. Software development costs are amortized on a straight-line basis over the lesser of five years or the expected life of the product. All other Company- sponsored research and development expenditures are expensed as incurred. Capitalized software development costs were $3,651 at June 30, 1997. Capitalization of interest and taxes: The Company capitalizes interest expense and property taxes relating to property being developed. Nonrecurring Income: Nonrecurring income in 1997 resulted from the $2,528 gain recorded from the sale of Fairchild Scandinavian Bellyloading Company ("SBC"), (See Note 2). Nonrecurring expense in 1996 resulted from expenses incurred in 1996 in connection with other, alternative transactions considered but not consummated. Earnings Per Share: Primary and fully diluted earnings per share are computed by dividing net income available to holders of the Company's common stock, by the weighted average number of shares and share equivalents outstanding during the period. To compute the incremental shares resulting from stock options and warrants for primary earnings per share, the average market price of the Company's stock during the period is used. To compute the incremental shares resulting from stock options and warrants for fully diluted earnings per share, the greater of the ending market price or the average market price of the Company's stock is used. In computing primary and fully diluted earnings per share for 1997 and in computing fully diluted earnings per share for 1996, the conversion of options and warrants was assumed, as the effect was dilutive. In computing primary earnings per share for Fiscal 1996, only the dilutive effect from the conversion of options was assumed, as the effect from the conversion of warrants alone was antidilutive. In computing primary and fully diluted earnings per share for Fiscal 1995, the conversion of options and warrants was not assumed, as the effect was antidilutive. Stock-Based Compensation: In Fiscal 1997, the Company implemented Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation". SFAS 123 establishes financial accounting standards for stock-based employee compensation plans and for transactions in which an entity issues equity instruments to acquire goods or services from non-employees. As permitted by SFAS 123, the Company will continue to use the intrinsic value based method of accounting prescribed by APB Opinion No. 25, for its stock-based employee compensation plans. Fair market disclosures required by SFAS 123 are included in Note 15. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications: Certain amounts in prior years' financial statements have been reclassified to conform to the 1997 presentation. Recently Issued Accounting Pronouncements: In October 1996, the American Institute of Certified Public Accountants issued Statement of Position 96-1 ("SOP 96-1") "Environmental Remediation Liabilities". SOP 96- 1 provides authoritative guidance on specific accounting issues related to the recognition, measurement, and the display and disclosure of environmental remediation liabilities. The Company is required to implement SOP 96-1 in Fiscal 1998. The Company's present policy is similar to the policy prescribed by SOP 96-1; therefore there will be no effect from implementation. In February 1997, the Financial Accounting Standards Board ("FASB") issued two pronouncements, Statement of Financial Accounting Standards No. 128 ("SFAS 128") "Earnings Per Share", and Statement of Financial Accounting Standards No. 129 ("SFAS 129") "Disclosure of Information about Capital Structure". SFAS 128 establishes accounting standards for computing and presenting earnings per share ("EPS"). SFAS 128 is effective for periods ending after December 15, 1997, including interim periods, and requires restatement of all prior period EPS data presented. Results from the calculation of simple and diluted earnings per share, as prescribed by SFAS 128, would not differ materially from the calculations for primary and fully diluted earnings per share for the years ending June 30, 1997, 1996 and 1995. SFAS 129 establishes standards for disclosure of information about the Company's capital structure and becomes effective for periods ending after December 15, 1997. In June 1997, FASB issued two pronouncements, Statement of Financial Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive Income", and Statement of Financial Accounting Standards No. 131 ("SFAS 131") "Disclosures about Segments of an Enterprise and Related Information". SFAS 130 establishes standards for reporting and display of comprehensive income and its components in the financial statements. SFAS 131 supersedes Statement of Financial Accounting Standards No. 14 "Financial Reporting for Segments of a Business Enterprise" and requires that a public company report certain information about its operating segments in annual and interim financial reports. The Company will adopt SFAS 130 and SFAS 131 in Fiscal 1998. 2. ACQUISITIONS ------------ The Company's acquisitions described in this section have been accounted for using the purchase method. The purchase prices assigned to the net assets acquired were based on the fair value of such assets and liabilities at the respective acquisition dates. In January 1997, Banner, through its subsidiary, Dallas Aerospace, Inc., acquired PB Herndon Company ("PB Herndon") in a business combination accounted for as a purchase. PB Herndon is a distributor of specialty fastener lines and similar aerospace related components. The total cost of the acquisition was $16,000, which exceeded the fair value of the net assets of PB Herndon by approximately $3,451. The excess is being amortized using the straight-line method over 40 years. The Company purchased PB Herndon with available cash. In February 1997, the Company completed a transaction (the "Simmonds Acquisition") pursuant to which the Company acquired common shares and convertible debt representing an 84.2% interest, on a fully diluted basis, of Simmonds S.A. ("Simmonds"). The Company initiated a tender offer to purchase the remaining shares and convertible debt held by the public. By Fiscal year-end, the Company had purchased, or placed sufficient cash in escrow to purchase, all the remaining shares and convertible debt of Simmonds. The total purchase price of Simmonds, including the assumption of debt, was approximately $62,000, which the Company funded with available cash. The Company recorded approximately $13,000 in goodwill as a result of this acquisition. Simmonds is one of Europe's leading manufacturers and distributors of aerospace and automotive fasteners. In September 1994, the Company acquired all of the outstanding common stock of Fairchild Scandinavian Bellyloading Company AB ("SBC") for the assumption of a minimal amount of debt. SBC is a designer and manufacturer of a patented cargo loading system, which is installed in the cargo area of commercial aircraft. On June 30, 1997, the Company sold all the patents of SBC to Teleflex Incorporated ("Teleflex") for $5,000, and immediately thereafter sold all the stock of SBC to a wholly owned subsidiary of Teleflex for $2,000. The Company may also receive an additional amount of up to $7,000 based on future net sales of SBC's patented products and services. In Fiscal 1997, the Company recorded a $2,528 nonrecurring gain as a result of these transactions. On November 28, 1994, the Company's former Communications Services segment completed the acquisition of substantially all of the telecommunications assets of JWP Telecom, Inc. ("JWP") for approximately $11,000, plus the assumption of approximately $3,000 of liabilities. JWP is a telecommunications system integrator, specializing in the distribution, installation and maintenance of voice and data communications equipment. Pro forma information is not required for these acquisitions. 3. MERGER AGREEMENT ---------------- The Company, RHI and Fairchild Industries, Inc. ("FII"), RHI's subsidiary, entered into an Agreement and Plan of Merger dated as of November 9, 1995 (as amended, the "Merger Agreement") with Shared Technologies Inc. ("STI"). On March 13, 1996, in accordance with the Merger Agreement, STI succeeded to the telecommunications systems and services business operated by the Company's Fairchild Communications Services Company ("FCSC"). The transaction was effected by a Merger of FII with and into STI (the "Merger") with the surviving company renamed STFI. Prior to the Merger, FII transferred all of its assets to, and all of its liabilities were assumed by FHC, except for the assets and liabilities of FCSC, and $223,500 of the FII's existing debt and preferred stock. As a result of the Merger, the Company received shares of Common Stock and Preferred Stock of STFI representing approximately a 41% ownership interest in STFI. The Merger was structured as a reorganization under section 386(a)(1)(A) of the Internal Revenue Code of 1986, as amended. In 1996, the Company recorded a $163,130 gain from this transaction. Subsequent to year- end the Company entered into an agreement to sell its investment in STFI. See Note 24 for further discussion. 4. MAJORITY INTEREST BUSINESS COMBINATION -------------------------------------- Effective February 25, 1996, the Company completed a transfer of the Company's Harco Division ("Harco") to Banner in exchange for 5,386,477 shares of Banner common stock. The exchange increased the Company's ownership of Banner common stock from approximately 47.2% to 59.3%, resulting in the Company becoming the majority shareholder of Banner. Accordingly, the Company has consolidated the results of Banner since February 25, 1996. The Company recorded a $427 nonrecurring loss from outside expenses incurred for this transaction in 1996. Banner is a leading international supplier to the aerospace industry as a distributor, providing a wide range of aircraft parts and related support services. Harco is a distributor of precision fasteners to the aerospace industry. In May 1997, Banner granted all of its stockholders certain rights to purchase Series A Convertible Paid-in-Kind Preferred Stock. In June 1997, Banner received net proceeds of $33,876 and issued 3,710,955 shares of preferred stock. The Company purchased $28,390 of the preferred stock issued by Banner, increasing its voting percentage to 64.0%. In connection with the Company's December 23, 1993 sale of its interest in Rexnord Corporation to BTR Dunlop Holdings, Inc. ("BTR"), the Company placed shares of Banner, with a fair market value of $5,000, in escrow to secure the Company's remaining indemnification of BTR against a contingent liability. Once the contingent liability is resolved, the escrow will be released. 5. DISCONTINUED OPERATIONS AND NET ASSETS HELD FOR SALE ---------------------------------------------------- On February 22, 1996, pursuant to an Asset Purchase Agreement dated January 26, 1996, the Company, through one of its subsidiaries, completed the sale of certain assets, liabilities and the business of the D-M-E Company ("DME") to Cincinnati Milacron Inc. ("CMI"), for a sales price of approximately $244,331, as adjusted. The sales price consisted of $74,000 in cash, and two 8% promissory notes in the aggregate principal amount of $170,331 (together, the "8% CMI Notes"). On July 29, 1996, CMI paid in full the 8% CMI Notes. As a result of the sale of DME in 1996, the Company recorded a gain on disposal of discontinued operations of approximately $54,012, net of a $61,929 tax provision. On January 27, 1996, FII completed the sale of Fairchild Data Corporation ("Data") to SSE Telecom, Inc. ("SSE") for book value of approximately $4,400 and 100,000 shares of SSE's common stock valued at $9.06 per share, or $906, at January 26, 1996, and warrants to purchase an additional 50,000 shares of SSE's common stock at $11.09 per share. Accordingly, the results of DME and Data have been accounted for as discontinued operations. The combined net sales of DME and Data totaled $108,131 and $180,773 for 1996 and 1995, respectively. Net earnings from discontinued operations was $9,186, net of $5,695 for taxes in 1996, and $13,994, net of $10,183 for taxes in 1995. Net assets held for sale at June 30, 1997, includes two parcels of real estate in California, and several other parcels of real estate located primarily throughout the continental United States, which the Company plans to sell, lease or develop, subject to the resolution of certain environmental matters and market conditions. Also included in net assets held for sale are limited partnership interests in (i) a real estate development joint venture, and (ii) a landfill development partnership. Net assets held for sale are stated at the lower of cost or at estimated net realizable value, which reflect anticipated sales proceeds, and other carrying costs to be incurred during the holding period. Interest is not allocated to net assets held for sale. See Note 24 for discontinuance of STFI. 6. PRO FORMA FINANCIAL STATEMENTS (UNAUDITED) ----------------------------------------- The following unaudited pro forma information for the twelve months ended June 30, 1996 and June 30, 1995, provides the results of the Company's operations as though (i) the disposition of DME and Data, (ii) the Merger of FCSC, and (iii) the transfer of Harco to Banner, resulting in the consolidation of Banner, had been in effect since the beginning of each period. The pro forma information is based on the historical financial statements of the Company, DME, FCSC and Banner, giving effect to the aforementioned transactions. In preparing the pro forma data, certain assumptions and adjustments have been made which (i) reduce interest expense for revised debt structures, (ii) increase interest income for notes receivable, (iii) reduce minority interest from Series C Preferred Stock of FII being redeemed, and (iv) adjust equity in earnings of affiliates to include the estimated results of STFI. The following unaudited pro forma financial information is not necessarily indicative of the results of operations that actually would have occurred if the transactions had been in effect since the beginning of each period, nor is it necessarily indicative of future results of the Company.
1996 1995 ---------- ---------- Sales................................... $597,407 $481,991 Loss from continuing operations......... (15,766) (32,972) Primary loss from continuing operations per share............................. (.96) (2.05) Net loss................................ (15,766) (32,876) Primary net loss per share............ (.96) (2.04)
The pro forma financial information has not been adjusted for nonrecurring income and gains from disposal of discontinued operations that have occurred from these transactions. 7. EXTRAORDINARY ITEMS ------------------- During Fiscal 1996, the Company used the Merger transaction and cash available to retire fully all of the FII's 12 1/4% senior notes ("Senior Notes"), FII's 9 3/4% subordinated debentures due 1998, and bank loans under a credit agreement of a former subsidiary of the Company, VSI Corporation. The redemption of the Senior Notes at a premium, consent fees paid to holders of the Senior Notes, the write-off of the original issue discount on FII 9 3/4% subordinated debentures and the write off of the remaining deferred loan fees associated with the issuance of the debt retired, resulted in an extraordinary loss of $10,436, net of a tax benefit, in 1996. During Fiscal 1995, the Company recognized extraordinary gains and losses from the early extinguishment of debt resulting from repurchases of its debentures on the open market or in negotiated transactions, and the write-offs of certain deferred costs associated with the issuance of securities repurchased. Early extinguishment of the Company's debt resulted in an extraordinary gain of $355, net of a tax provision, in 1995. 8. INVESTMENTS ----------- Short-term investments at June 30, 1997, consist primarily of common stock investments in public corporations which are classified as trading securities. All other short-term investments and all long-term investments do not have readily determinable fair values and primarily consist of investments in preferred and common stocks of private companies and limited partnerships. A summary of investments held by the Company consists of the following: 1997 1996 ------------------- ------------------ Aggregate Aggregate Name of Issuer or Fair Cost Fair Cost Type of Each Issue Value Basis Value Basis - ------------------- --------- ------- ---------- -------- Short-term investments: - ----------------------- Trading securities: Common stock.................... $16,094 $ 7,398 $10,362 $ 5,954 Other investments................. 9,553 9,553 136 136 ------ ------ ------ ------ $25,647 $16,951 $10,498 $ 6,090 ====== ====== ====== ====== Other long-term investments: - ---------------------------- Other investments................. $ 4,120 $ 4,120 $ 585 $ 585 ====== ====== ====== ======
Investment income is summarized as follows:
1997 1996 1995 ------- ------- ------- Gross realized gain (loss) from sales.. $ 1,673 $ (1,744) $ 3,948 Change in unrealized holding gain (loss) from trading securities....... 4,289 5,527 (36) Gross realized loss from impairments... -- -- (652) Dividend income........................ 689 792 2,445 ------- ------- ------- $ 6,651 $ 4,575 $ 5,705 ======= ======= =======
9. INVESTMENTS AND ADVANCES, AFFILIATED COMPANIES ----------------------------------------------- The following table presents summarized historical financial information on a combined 100% basis of the Company's principal investments, which are accounted for using the equity method.
1997 1996 1995 Statement of Earnings: -------- -------- -------- Net sales............................ $292,049 $351,695 $313,888 Gross profit......................... 133,734 114,248 100,644 Earnings from continuing operations.. 10,216 15,183 9,623 Discontinued operations, net......... (1) -- -- Net earnings......................... 10,215 15,183 9,623 Balance Sheet at June 30,: Current assets....................... $ 89,408 $ 93,925 Non-current assets................... 369,464 377,547 Total assets......................... 458,872 471,472 Current liabilities.................. 75,090 87,858 Non-current liabilities.............. 281,301 275,025
The Company owns approximately 31.9% of Nacanco common stock. The Company recorded equity earnings of $4,673, $5,487, and $2,859 from this investment for 1997, 1996 and 1995, respectively. Effective February 25, 1996, the Company increased its percentage of ownership of Banner common stock from 47.2% to approximately 59.3%. Since February 25, 1996, the Company has consolidated Banner's results. Prior to February 25, 1996, the Company accounted for its investment in Banner using the equity method and held its investment in Banner as part of investments and advances, affiliated companies. The Company recorded equity in earnings of $363 and $138 from this investment for 1996 and 1995, respectively. The Company is accounting for an investment in a public fund, which is controlled by an affiliated investment group of the Company, at market value. The amortized cost basis of the investment was $923 and had been written down by $71, before tax, to market value. The Company recorded a gross unrealized holding gain (loss) of $114 and $(120) from this investment in 1997 and 1995, respectively. The Company's share of equity in earnings of all unconsolidated affiliates for 1997, 1996 and 1995 was $7,747, $4,871, and $1,607, respectively. The carrying value of investments and advances, affiliated companies consists of the following:
June 30, June 30, 1997 1996 -------- -------- Nacanco............................ $ 20,504 $ 20,886 STFI............................... 31,978 30,559 Others............................. 3,196 2,026 ------- ------- $ 55,678 $ 53,471 ======= =======
On June 30, 1997, approximately $9,056 of the Company's $209,949 consolidated retained earnings was from undistributed earnings of 50 percent or less currently owned affiliates accounted for by the equity method. 10. NOTES PAYABLE AND LONG-TERM DEBT -------------------------------- At June 30, 1997 and 1996, notes payable and long-term debt consisted of the following:
June 30, June 30, 1997 1996 -------- -------- Bank credit agreements....................... $ 100 $ 73,500 Other short-term notes payable............... 15,529 3,035 ------- ------- Short-term notes payable (weighted average interest rates of 7.8% and 8.6% in 1997 and 1996, respectively)..................... $ 15,629 $ 76,535 ======= ======= Bank credit agreements....................... $177,250 $112,500 11 7/8% RHI Senior debentures due 1999....... 85,852 85,769 12% Intermediate debentures due 2001......... 115,359 114,495 13 1/8% Subordinated debentures due 2006..... 35,188 35,061 13% Junior Subordinated debentures due 2007.. 24,834 24,800 10.65% Industrial revenue bonds.............. 1,500 1,500 Capital lease obligations, interest from 4.4% to 10.5%.............................. 1,897 65 Other notes payable, collateralized by property, plant and equipment, interest from 4.3% to 10.0%......................... 6,835 2,756 ------- ------- 448,715 376,946 Less: Current maturities..................... (31,793) (8,357) ------- ------- Net long-term debt........................... $416,922 $368,589 ======= =======
Bank Credit Agreements: The Company maintains credit agreements (the "Credit Agreements") with a consortium of banks, which provide revolving credit facilities to RHI, FHC and Banner, and term loans to Banner (collectively the "Credit Facilities"). On July 26, 1996, the Company amended and restated the terms and provisions of FHC's credit agreement, in their entirety (the "FHC Credit Agreement"). The FHC Credit Agreement extends to July 28, 2000, the maturity of FHC's revolving credit facility (the "FHC Revolver"). The FHC Revolver has a borrowing limit of $52,000, however, availability is determined monthly by calculation of a borrowing base comprised of specified percentages of FHC's accounts receivable, inventories and the appraised value of equipment and real property. The FHC Revolver generally bears interest at a base rate of 1 1/2% over the greater of (i) Citibank New York's base rate, or (ii) the Federal Funds Rate plus 1 1/2% for domestic borrowings and at 2 1/2% over Citibank London's base rate for foreign borrowings. FHC's Revolver is subject to a non-use commitment fee of 1/2% on the average unused availability; and outstanding letters of credit are subject to fees of 2 3/4% per annum. The FHC Credit Agreement was further amended on February 21, 1997 to permit the Simmonds Acquisition. Terms modified by the February 21, 1997 amendment included a provision in which the borrowing rate on the FHC Revolver will increase by 1/4% on each of September 30, 1997 and December 31, 1997, in the event that the FHC Credit Agreement is not restructured or refinanced by such date. The FHC Credit Agreement requires FHC to comply with certain financial and non-financial loan covenants, including maintaining a minimum net worth of $150,000 and maintaining certain interest and fixed charge coverage ratios at the end of each Fiscal Quarter. Additionally, the FHC Credit Agreement restricts annual capital expenditures of FHC to $12,000. Substantially all of FHC's assets are pledged as collateral under the FHC Credit Agreement. At June 30, 1997, FHC was in compliance with all the covenants under the FHC Credit Agreement. FHC may transfer available cash as dividends to the Company. However, the FHC Credit Agreement restricts the Company from paying any dividends to stockholders. On July 18, 1997, the FHC Credit Agreement was restructured to provide FHC with a $150,000 senior secured credit facility (the "FHC Facility") consisting of (i) up to $75,000 in revolving loans, with a letter of credit sub-facility of $12,000, and (ii) a $75,000 term loan. Advances made under the FHC Facility would generally bear interest at a rate of, at the Company's option, (i) 2% over the Citibank N.A. base rate, or (ii) 3 1/4% over the Eurodollar Rate ("LIBOR"). The FHC Facility is subject to a non-use commitment fee of 1/2% of the aggregate unused availability; and outstanding letters of credit are subject to fees of 3 1/2% per annum. A borrowing base is calculated monthly to determine the amounts available under the FHC Facility. The borrowing base is determined monthly based upon specified percentages of (i) FHC's accounts receivable, inventories, and the appraised value of equipment and real property, and (ii) assets pledged by RHI to secure the facility. The FHC Facility matures on July 28, 2000. The FHC Facility provides that on December 31, 1998, the Company must repay the term loan, in full, together with an amount necessary to reduce the outstanding revolving loans to $52,000, if the Company has not complied with certain financial covenant requirements as of September 30, 1998. The Credit Agreements provide RHI with a $4,250 revolving credit facility (the "RHI Credit Agreement") which (i) generally bears a base interest rate of 1/2% over the prime rate, (ii) requires a commitment fee of 1/2%, and (iii) matures on August 12, 1998. RHI's Credit Agreement requires RHI to comply with specified covenants and maintain a consolidated net worth of $175,000. Additionally, RHI's capital expenditures are restricted, except for certain leasehold improvements, to $2,000 per annum plus the selling price of fixed assets for such Fiscal Year. The Company was in compliance with all the covenants under RHI's Credit Agreement at June 30, 1997. RHI may pay dividends to the Company if the purpose of such dividends is to provide the Company with funds necessary to meet its debt service requirements under specified notes and debentures. However, all other dividends are subject to certain limitations, which was $10,000 in Fiscal 1997. Banner has a credit agreement (the "Banner Credit Agreement") which provides Banner and its subsidiaries with funds for working capital and potential acquisitions. The facilities under the Banner Credit Agreement consist of (i) a $55,000 six-year term loan (the "Banner Term Loan"), (ii) a $30,000 seven-year term loan (the "Tranche B Loan"), (iii) a $40,000 six- year term loan (the "Tranche C Loan"), and (iv) a $71,500 revolving credit facility (the "Banner Revolver"). The Banner Credit Agreement requires certain semiannual term loan payments. The Banner Term Loan and the Banner Revolver bear interest at prime plus 1 1/4% or LIBOR plus 2 1/2% and may increase by 1/4% or decrease by up to 1% based upon certain performance criteria. As a result of Banner's performance level through March 31, 1997, borrowings under the Banner Term Loan and the Banner Revolver bore an interest rate of prime plus 3/4% and LIBOR plus 2% for the quarter ending June 30, 1997. The Tranche B Loan bears interest at prime plus 1 3/4% or LIBOR plus 3%. The Tranche C Loan initially bears interest at prime plus 1 1/2% or LIBOR plus 2 3/4% and may decrease by 1/4% based upon certain performance criteria. The Banner Credit Agreement requires that loans made to Banner can not exceed a defined borrowing base, which is based upon a percentage of eligible inventories and accounts receivable. Banner's revolving credit facility is subject to a non-use fee of 55 basis points of the unused availability. The Banner Credit Agreement requires quarterly compliance with various financial and non-financial loan covenants, including maintenance of minimum net worth, and minimum ratios of interest coverage, fixed charge coverage, and debt to earnings before interest, taxes, depreciation and amortization. Banner also has certain limitations on the incurrence of additional debt. As of June 30, 1997, Banner was in compliance with all covenants under the Banner Credit Agreement. Substantially all of Banner's assets are pledged as collateral under the Banner Credit Agreement. The Banner Credit Agreement substantially limits the amount of dividends that can be paid to its shareholders, including the Company. Banner's current policy is to retain earnings to support the growth of its present operations and to reduce its outstanding debt. In September 1995, Banner entered into several interest rate hedge agreements ("Hedge Agreements") to manage its exposure to increases in interest rates on its variable rate debt. The Hedge Agreements provide interest rate protection on $60,000 of debt through September 2000, by providing an interest rate cap of 7% if the 90-day LIBOR rate exceeds 7%. If the 90-day LIBOR rate drops below 5%, Banner will be required to pay interest at a floor rate of approximately 6%. In November 1996, Banner entered into an additional hedge agreement ("Additional Hedge Agreement") with one of its major lenders to provide interest rate protection on $20,000 of debt for a period of three years. Effectively, the Additional Hedge Agreement provides for a cap of 7 1/4% if the 90-day LIBOR exceeds 7 1/4%. If the 90-day LIBOR drops below 5%, Banner will be required to pay interest at a floor rate of approximately 6%. No cash outlay was required to obtain the Additional Hedge Agreement as the cost of the cap was offset by the sale of the floor. The Company recognizes interest expense under the provisions of the Hedge Agreements and the Additional Hedge Agreement based on the fixed rate. The Company is exposed to credit loss in the event of non-performance by the lenders; however, such non-performance is not anticipated. The following table summarizes the Credit Facilities under the Credit Agreements at June 30, 1997: [CAPTION] Revolving Term Total Credit Loan Available Facilities Facilities Facilities RHI Holdings, Inc. ---------- ---------- --------- - - Revolving credit facility........... $ 100 $ -- $ 4,250 Fairchild Holding Corp. Revolving credit facility........... 30,900 -- 52,000 Banner Aerospace, Inc. Revolving credit facility........... 32,000 -- 71,500 Term Loan........................... -- 44,500 44,500 Tranche B Loan...................... -- 29,850 29,850 Tranche C Loan...................... -- 40,000 40,000 ------- ------- ------- Total $ 63,000 $114,350 $242,100 ======= ======= =======
At June 30, 1997, the Company had outstanding letters of credit of $10,811, which were supported by the Credit Agreement and other bank facilities on an unsecured basis. At June 30, 1997, the Company had unused bank lines of credit aggregating $53,939, at interest rates slightly higher than the prime rate. The Company also has short-term lines of credit relating to foreign operations, aggregating $9,350, against which the Company owed $5,967 at June 30, 1997. Summarized below are certain items and other information relating to the debt outstanding at June 30, 1997:
12% 13% 11 7/8% 13 1/8% Intermediate Junior RHI Senior Subordinated Subordinated Subordinated Subordinated Debentures Debentures Debentures Debentures ------------ ------------ ------------ ------------ Date Issued March 1986 Oct. 1986 March 1987 March 1987 Face Value $ 75,000 $160,000 $102,000 $126,000 Balance June 30, 1997 $ 35,188 $115,359 $ 24,834 $ 85,852 Percent Issued at 95.769 93.470 98.230 99.214 Bond Discount $ 3,173 $ 10,448 $ 1,805 $ 990 Amortization 1997 $ 127 $ 864 $ 34 $ 82 1996 $ 118 $ 761 $ 30 $ 82 1995 $ 103 $ 687 $ 27 $ 94 Yield to Maturity 13.80% 13.06% 13.27% 12.01% Interest Payments Semi-Annual Semi-Annual Semi-Annual Semi-Annual Sinking Fund Start Date 3/15/97 10/15/97 3/1/98 3/1/97 Sinking Fund Installments $ 7,500 $ 32,000 $ 10,200 $ 31,500 Fiscal Year Maturity 2006 2002 2007 1999 Callable Option on 3/15/89 10/15/89 3/1/92 3/1/92
Under the most restrictive covenants of the above indentures, the Company's consolidated net worth, as defined, must not be less than $35,000. RHI's consolidated net worth must not be less than $125,000. At June 30, 1997, consolidated net worth was $229,625 at the Company and $438,830 at RHI. At the present time, none of the Company's consolidated retained earnings are available for capital distributions due to a cumulative earnings restriction. The indentures also provide restrictions on the amount of additional borrowings by the Company. The annual maturity of long-term debt obligations (exclusive of capital lease obligations) for each of the five years following June 30, 1997, are as follows: $31,207 for 1998, $93,544 for 1999, $42,288 for 2000, $77,407 for 2001, and $77,772 for 2002. 11. PENSIONS AND POSTRETIREMENT BENEFITS ------------------------------------ Pensions -------- The Company and its subsidiaries have defined benefit pension plans covering most of its employees. Employees in foreign subsidiaries may participate in local pension plans, which are in the aggregate insignificant. The Company's funding policy is to make the minimum annual contribution required by applicable regulations. The following table provides a summary of the components of net periodic pension expense (income) for the plans:
1997 1996 1995 -------- -------- -------- Service cost (current period attribution).. $ 2,521 $ 3,513 $ 3,917 Interest cost of projected benefit obligation............................... 15,791 14,499 14,860 Actual return on plan assets............... (31,400) (39,430) (14,526) Amortization of prior service cost......... (180) 81 81 Net amortization and deferral.............. 11,157 21,495 (4,341) ------- ------- ------- (2,111) 158 (9) Net periodic pension expense (income) for other plans including foreign plans...... 142 (118) 78 ------- ------- ------- Net periodic pension expense (income)...... $ (1,969) $ 40 $ 69 ======= ======= =======
Assumptions used in accounting for the plans were:
1997 1996 1995 -------- -------- -------- Discount rate............................ 7.75% 8.5% 8.5% Expected rate of increase in salaries.... 4.5% 4.5% 4.5% Expected long-term rate of return on plan assets............................ 9.0% 9.0% 9.0%
In Fiscal 1996, the Company recognized one-time charges of $857 from the divestiture of subsidiaries, which resulted in a recognition of prior service costs, and $84 from the early retirement window program at the Company's corporate office. The reduction in liabilities due from the cessation of future salary increases is not immediately recognizable in income, but will be used as an offset against existing unrecognized losses. The Company will have a future savings benefit from a lower net periodic pension cost due to the amortization of a smaller unrecognized loss. The following table sets forth the funded status and amounts recognized in the Company's consolidated balance sheets at June 30, 1997, and 1996, for the plans:
June 30, June 30, 1997 1996 Actuarial present value of benefit obligations: -------- -------- Vested................................................ $183,646 $164,819 Nonvested............................................. 7,461 6,169 ------- ------- Accumulated benefit obligation........................ 191,107 170,988 Effect of projected future compensation increases..... 683 905 ------- ------- Projected benefit obligation............................ 191,790 171,893 Plan assets at fair value............................... 237,480 224,692 ------- ------- Plan assets in excess of projected benefit obligations.. 45,690 52,799 Unrecognized net loss................................... 29,592 20,471 Unrecognized prior service cost......................... (571) (354) Unrecognized net transition assets...................... (315) (608) ------- ------- Prepaid pension cost prior to SFAS 109 implementation... 74,396 72,308 Effect of SFAS 109 implementation....................... (14,654) (14,648) ------- ------- Prepaid pension cost.................................... $ 59,742 $ 57,660 ======= =======
Plan assets include Class A Common Stock of the Company valued at a fair market value of $26,287 and $11,094 at June 30, 1997 and 1996, respectively. Substantially all of the plan assets are invested in listed stocks and bonds. Postretirement Health Care Benefits ----------------------------------- The Company provides health care benefits for most retired employees. Postretirement health care expense from continuing operations totaled $642, $779, and $701 for 1997, 1996 and 1995, respectively. The Company has accrued approximately $34,965 and $36,995 as of June 30, 1997 and 1996, respectively, for postretirement health care benefits related to discontinued operations. This represents the cumulative discounted value of the long-term obligation and includes interest expense of $3,349, $3,877, and $3,872 for the years ended June 30, 1997, 1996 and 1995, respectively. The components of expense in Fiscal 1997, 1996 and 1995 are as follows:
1997 1996 1995 ------ ------ ------ Service cost of benefits earned............ $ 140 $ 281 $ 321 Interest cost on liabilities............... 3,940 4,377 4,385 Net amortization and deferral.............. (89) (2) (133) ------ ------ ------ Net periodic postretirement benefit cost... $3,991 $4,656 $4,573 ====== ====== ======
A one-time credit of $3,938, resulting from the divestitures of subsidiaries, was offset by $4,361 from DME's accumulated postretirement benefit obligation for active employees, which was transferred to CMI as part of the sale. The Company recognized the net effect of $423 as an expense in 1996. The following table sets forth the funded status for the Company's postretirement health care benefit plans at June 30,:
1997 1996 ------- ------- Accumulated postretirement benefit obligations: Retirees........................................ $ 48,145 $ 46,846 Fully eligible active participants.............. 390 347 Other active participants....................... 2,335 1,887 ------- ------- Accumulated postretirement benefit obligation..... 50,870 49,080 Unrecognized net loss............................. 6,173 2,086 ------- ------- Accrued postretirement benefit liability.......... $ 44,697 $ 46,994 ======= =======
The accumulated postretirement benefit obligation was determined using a discount rate of 7.75%, and a health care cost trend rate of 7.0% for pre- age-65 and post-age-65 employees, respectively, gradually decreasing to 5.5% in the year 2003 and thereafter. Increasing the assumed health care cost trend rates by 1% would increase the accumulated postretirement benefit obligation as of June 30, 1997, by approximately $1,871, and increase the net periodic postretirement benefit cost by approximately $132 for Fiscal 1997. 12 INCOME TAXES ------------ The provision (benefit) for income taxes from continuing operations is summarized as follows:
1997 1996 1995 -------- -------- -------- Current: Federal.......................... $ 6,143 $ (41,595) $ (8,315) State............................ 1,197 1,203 424 Foreign.......................... (45) 669 1,191 -------- -------- -------- 7,295 (39,723) (6,700) Deferred: Federal......................... (15,939) 17,060 (24,754) State........................... 3,444 (3,657) (2,052) -------- -------- -------- (12,495) 13,403 (26,806) -------- -------- -------- Net tax benefit.................... $ (5,200) $ (26,320) $ (33,506) ======== ======== ========
The income tax provision (benefit) for continuing operations differs from that computed using the statutory Federal income tax rate of 35%, in Fiscal 1997, 1996 and 1995, for the following reasons:
1997 1996 1995 -------- -------- -------- Computed statutory amount.......... $ (1,354) $ (20,993) $ (31,944) State income taxes, net of applicable federal tax benefit... 778 782 (1,794) Nondeductible acquisition valuation items.................. 1,064 1,329 1,420 Tax on foreign earnings, net of tax credits...................... (1,938) 1,711 2,965 Difference between book and tax basis of assets acquired and liabilities assumed.............. (1,102) 1,040 1,366 Revision of estimate for tax accruals......................... (5,335) (3,500) (5,000) Other.............................. 2,687 (6,689) (519) --------- --------- -------- Net tax benefit.................... $ (5,200) $ (26,320) $ (33,506) ========= ========= ========
The following table is a summary of the significant components of the Company's deferred tax assets and liabilities, and deferred provision or benefit for the following periods:
1997 1996 1995 Deferred Deferred Deferred June 30, (Provision) June 30, (Provision) (Provision) 1997 Benefit 1996 Benefit Benefit -------- ---------- -------- -------- - --- ----------- Deferred tax assets: Accrued expenses................... $ 6,440 $ 504 $ 5,936 $ (1,643) $ (2,218) Asset basis differences............ 572 (1,492) 2,064 1,787 (7,292) Inventory.......................... 2,198 2,198 -- -- - -- Employee compensation and benefits. 5,141 (267) 5,408 (26) 106 Environmental reserves............. 3,259 (1,253) 4,512 (737) (1,202) Loss and credit carryforward....... -- (8,796) 8,796 (23,229) 17,991 Postretirement benefits............ 19,472 138 19,334 (1,273) 514 Other.............................. 7,598 2,079 5,519 2,186 1,530 ------- ------- ------- ------ - - ------- 44,680 (6,889) 51,569 (22,935) 9,429 Deferred tax liabilities: Asset basis differences............ (26,420) (3,855) (22,565) 16,602 4,129 Inventory.......................... -- 2,010 (2,010) 4,684 3,176 Pensions........................... (19,281) (1,038) (18,243) 1,516 1,074 Other.............................. (7,240) 22,267 (29,507) (17,525) 3,694 ------- ------- ------- ------ - - ------- (52,941) 19,384 (72,325) 5,277 12,073 ------- ------- ------- ------ - - ------- Net deferred tax liability........... $ (8,261) $ 12,495 $(20,756) $(17,658) $ 21,502 ======= ======= ======= ======= =======
The amounts included in the balance sheet are as follows:
June 30, June 30, 1997 1996 -------- -------- Prepaid expenses and other current assets: Current deferred..................... $ 11,307 $ 8,012 ======= ======= Income taxes payable: Current deferred..................... $ (2,735) $ 20,797 Other current........................ 8,616 3,838 ------- ------- $ 5,881 $ 24,635 ======= ======= Noncurrent income tax liabilities: Noncurrent deferred.................. $ 22,303 $ 7,971 Other noncurrent..................... 19,710 23,766 ------- ------- $ 42,013 $ 31,737 ======= =======
The 1997, 1996 and 1995 net tax benefits include the results of reversing $5,335, $3,500 and $5,000, respectively, of federal income taxes previously provided for due to a change in the estimate of required tax accruals. Domestic income taxes, less available credits, are provided on the unremitted income of foreign subsidiaries and affiliated companies, to the extent that such earnings are intended to be repatriated. No domestic income taxes or foreign withholding taxes are provided on the undistributed earnings of foreign subsidiaries and affiliates, which are considered permanently invested, or which would be offset by allowable foreign tax credits. At June 30, 1997, the amount of domestic taxes payable upon distribution of such earnings was not significant. In the opinion of management, adequate provision has been made for all income taxes and interest, and any liability that may arise for prior periods will not have a material effect on the financial condition or results of operations of the Company. 13. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES ---------------------------------------------- Included in the Company's $68,309 of minority interest at June 30, 1997, is $67,649, representing approximately 40.7% of Banner's common stock effectively outstanding on a consolidated basis. 14. EQUITY SECURITIES ----------------- The Company had 13,992,283 shares of Class A common stock and 2,632,516 shares of Class B common stock outstanding at June 30, 1997. Class A common stock is traded on both the New York and Pacific Stock Exchanges. There is no public market for the Class B common stock. Shares of Class A common stock are entitled to one vote per share and cannot be exchanged for shares of Class B common stock. Shares of Class B common stock are entitled to ten votes per share and can be exchanged, at any time, for shares of Class A common stock on a share-for-share basis. In Fiscal 1997, 234,935 shares of Class A Common Stock were issued as a result of the exercise of stock options and shareholders converted 1,188 shares of Class B common stock into Class A common stock. RHI holds an investment of 4,319,423 shares of the Company's Class A common stock. At June 30, 1997, RHI's market value was approximately $78,649. The Company accounts for the Class A common stock held by RHI as Treasury Stock. 15. STOCK OPTIONS AND WARRANTS -------------------------- Stock Options ------------- The Company's 1986 Non-Qualified and Incentive Stock Option Plan (the "1986 Plan"), authorizes the issuance of 4,320,000 shares of Class A Common Stock upon the exercise of stock options issued under the 1986 Plan. The purpose of the 1986 Plan is to encourage continued employment and ownership of Class A Common Stock by officers and key employees of the Company and its subsidiaries, and provide additional incentive to promote the success of the Company. At the Company's 1996 annual meeting, the Company's stockholders approved an extension of the expiration date of the 1986 Plan from April 9, 1996 to April 9, 2006. The 1986 Plan authorizes the granting of options at not less than the market value of the common stock at the time of the grant. The option price is payable in cash or, with the approval of the Company's Compensation and Stock Option Committee of the Board of Directors, in shares of common stock, valued at fair market value at the time of exercise. The options normally terminate five years from the date of grant, subject to extension of up to 10 years or for a stipulated period of time after an employee's death or termination of employment. At the Company's 1996 annual meeting, the Company's stockholders approved the 1996 Non-Employee Directors Stock Option Plan (the "1996 NED Plan"). The ten-year 1996 NED Plan authorizes the issuance of 250,000 shares of Class A Common Stock upon the exercise of stock options issued under the 1996 NED Plan. The 1996 NED Plan authorizes the granting of options at the market value of the common stock on the date of grant. An initial stock option grant for 30,000 shares of Class A Common Stock will be made to each person who becomes a new non-employee Director, on such date, with the options to vest 25% each year from the date of grant. On the date of each annual meeting, each person elected as a non-employee Director at such meeting will be granted an option for 1,000 shares of Class A Common Stock, which will vest immediately. The exercise price is payable in cash or, with the approval of the Stock Option Committee, in shares of Class A or Class B Common Stock, valued at fair market value at the date of exercise. All options issued under the 1996 NED Plan will terminate five years from the date of grant or a stipulated period of time after a Non-Employee Director ceases to be a member of the Board. The 1996 NED Plan is designed to maintain the Company's ability to attract and retain highly qualified and competent persons to serve as outside directors of the Company. On November 17, 1994, the Company's stockholders approved the grant of stock options of 190,000 shares to outside Directors of the Company to replace expired stock options. These stock options expire five years from the date of the grant. Summaries of stock option transactions under the 1986 Plan, the 1996 NED Plan, and prior plans are presented in the following tables:
Weighted Average Exercise Shares Price ----------- -------- Outstanding at July 1, 1994 1,520,706 $ 5.57 Granted 356,600 3.78 Expired (116,875) 5.44 Forfeited (60,650) 5.94 ----------- -------- Outstanding at June 30, 1995 1,699,781 5.14 Granted 540,078 4.33 Exercised (286,869) 5.26 Expired (659,850) 6.06 Forfeited (19,653) 4.30 ----------- -------- Outstanding at June 30, 1996 1,273,487 4.27 Granted 457,350 14.88 Exercised (234,935) 4.79 Expired (1,050) 4.59 Forfeited (9,412) 3.59 ----------- -------- Outstanding at June 30, 1997 1,485,440 $ 7.46 =========== ======== Exercisable at June 30, 1995 1,159,306 $ 5.68 Exercisable at June 30, 1996 399,022 $ 4.59 Exercisable at June 30, 1997 486,855 $ 4.95
A summary of options outstanding at June 30, 1997 is presented as follows:
Options Outstanding Options Exercisable -------------------------------- --------------------- Weighted Average Weighted Average Remaining Average Range of Number Exercise Contract Number Exercise Exercise Prices Outstanding Price Life Exercisable Price - --------------- ----------- -------- --------- ----------- -------- $ 3.50 - 8.625 1,022,700 $ 4.10 2.6 years 452,509 $ 4.10 $13.625 - 16.25 462,740 $14.89 4.4 years 34,346 $16.19 - --------------- ----------- -------- --------- ----------- -------- $ 3.50 - 16.25 1,485,440 $ 7.46 3.2 years 486,855 $ 4.95 =============== =========== ======== ========= =========== ========
The weighted average grant date fair value of options granted during 1997 and 1996 was $6.90 and $1.95, respectively. The fair value of each option granted is estimated on the grant date using the Black-Scholes option pricing model. The following significant assumptions were made in estimating fair value:
Assumption 1997 1996 - ---------- ----------- ----------- Risk-free interest rate 6.0% - 6.7% 5.5% - 6.6% Expected life in years 4.65 4.27 Expected volatility 43% - 45% 46% - 47% Expected dividends none none
The Company applies APB Opinion 25 in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for the stock option plans in 1997 or 1996. If stock options granted in 1997 and 1996 were accounted for based on their fair value as determined under SFAS 123, pro forma earnings would be as follows:
1997 1996 -------- -------- Net earnings: As reported $ 1,331 $189,706 Pro forma 283 189,460 Primary earnings per share: As reported $ .08 $ 11.43 Pro forma .02 11.41 Fully diluted earnings per share: As reported $ .08 $ 11.09 Pro forma .02 11.08
The pro forma effects of applying SFAS 123 are not representative of the effects on reported net earnings for future years. SFAS 123 does not apply to awards made prior to 1996, and additional awards in future years are expected. Stock Warrants -------------- On April 25, 1997, the Company issued warrants to purchase 100,000 shares of Class A Common Stock, at $12.25 per share, to Dunstan Ltd. as incentive remuneration for the performance of certain investment banking services. The warrants may be earned on a pro-rata basis over a six-month period ending October 31, 1997. The warrants become exercisable on November 1, 1997 and expire on November 8, 2000. The Company recorded a selling, general & administrative expense of $191 in 1997 for stock warrants earned in 1997 based on a grant-date fair value of $5.46. Effective as of February 21, 1997, the Company approved the continuation of an existing warrant to Stinbes Limited (an affiliate of Jeffrey Steiner) to purchase 375,000 shares of the Company's Class A or Class B Common Stock at $7.67 per share. The warrant was modified to extend the exercise period from Mach 13, 1997, to March 13, 2002, and to increase the exercise price per share by $.002 for each day subsequent to March 13, 1997, but fixed at $7.80 per share after June 30, 1997. In addition, the warrant was modified to provide that the warrant may not be exercised except within the following window periods: (i) within 365 days after the merger of STFI with AT&T Corporation, MCI Communications, Worldcom Inc., Tel-Save Holdings, Inc., or Teleport Communications Group, Inc.; (ii) within 365 days after a change of control of the Company, as defined in the FHC Credit Agreement; or (iii) within 365 days after a change of control of Banner, as defined in the Banner Credit Agreement. In no event may the warrant be exercised after March 13, 2002. On November 9, 1995, the Company issued warrants to purchase 500,000 shares of Class A Common Stock, at $9.00 per share, to Peregrine Direct Investments Limited ("Peregrine"), in exchange for a standby commitment it received on November 8, 1995, from Peregrine. The Company elected not to exercise its rights under the Peregrine commitment. The warrants are immediately exercisable and will expire on November 8, 2000. On February 21, 1996, the Company issued warrants to purchase 25,000 shares of Class A Common Stock, at $9.00 per share, to a non-employee for services provided in connection with the Company's various dealings with Peregrine. The warrants issued are immediately exercisable and will expire on November 8, 2000. The Company recorded nonrecurring expenses of $1,148 for the grant date fair value of the stock warrants issued in 1996. The warrants issued in 1996 were outstanding at June 30, 1997. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS ----------------------------------- Statement of Financial Accounting Standards No. 107, ("SFAS 107") "Disclosures about Fair Value of Financial Instruments", requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: The carrying amount reported in the balance sheet approximates the fair value for cash and cash equivalents, short-term borrowings, current maturities of long-term debt, and all other variable rate debt (including borrowings under the Credit Agreements). Fair values for equity securities, and long-term public debt issued by the Company are based on quoted market prices, where available. For equity securities not actively traded, fair values are estimated by using quoted market prices of comparable instruments or, if there are no relevant comparable instruments, on pricing models or formulas using current assumptions. The fair value of limited partnerships, other investments, and notes receivable are estimated by discounting expected future cash flows using a current market rate applicable to the yield, considering the credit quality and maturity of the investment. The fair value for the Company's other fixed rate long-term debt is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Fair values for the Company's off-balance-sheet instruments (letters of credit, commitments to extend credit, and lease guarantees) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counter parties' credit standing. The fair value of the Company's off-balance-sheet instruments at June 30, 1997, was not material. The carrying amounts and fair values of the Company's financial instruments at June 30, 1997 and 1996, are as follows:
June 30, 1997 June 30, 1996 --------------------- ------------ - --------- Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- - -------- Cash and cash equivalents......... $ 19,420 $ 19,420 $ 39,649 $ 39,649 Investment securities: Short-term equity securities.... 16,094 16,122 10,362 10,362 Short-term other investments.... 9,553 9,592 136 167 Long-term other investments..... 4,120 4,617 585 1,451 Notes receivable: Current......................... -- -- 170,384 170,384 Long-term....................... 1,300 1,300 3,702 3,702 Short-term debt................... 15,629 15,629 76,535 76,535 Long-term debt: Bank credit agreement........... 177,250 177,250 112,500 112,500 Senior notes and subordinated debentures.................... 261,233 270,995 260,125 264,759 Industrial revenue bonds........ 1,500 1,500 1,500 1,500 Capitalized leases.............. 1,897 1,897 65 65 Other........................... 6,835 6,835 2,756 2,756
17. RESTRUCTURING CHARGES --------------------- In Fiscal 1996, the Company recorded restructuring charges in the Aerospace Fasteners segment in the categories shown below. All costs classified as restructuring were the direct result of formal plans to close plants, to terminate employees, or to exit product lines. Substantially all of these plans have been executed. Other than a reduction in the Company's existing cost structure and manufacturing capacity, none of the restructuring charges resulted in future increases in earnings or represented an accrual of future costs. The costs included in restructuring were predominately nonrecurring in nature and consisted of the following significant components:
Write down of inventory to net realizable value related to discontinued product lines (a)...... $ 156 Write down of fixed assets related to discontinued product lines..................... 270 Severance benefits for terminated employees (substantially all paid within twelve months).. 1,368 Plant closings facility costs (b)............... 389 Contract termination claims..................... 136 ------ $ 2,319 ====== (a) Write down was required because product line was discontinued. (b) Includes lease settlements, write-off of leasehold improvements, maintenance, restoration and clean up costs.
18. RELATED PARTY TRANSACTIONS -------------------------- Corporate office administrative expense recorded by FHC and its redecessors was billed to the Company on a monthly basis during 1997, 1996 and 1995. These costs represent the cost of services incurred on behalf of affiliated companies. Each of these affiliated companies has reimbursed FHC for such services. The Company and its wholly-owned subsidiaries are all parties to a tax sharing agreement whereby the Company files a consolidated federal income tax return. Each subsidiary makes payments to the Company based on the amount of federal income taxes, if any, the subsidiary would have paid if it had filed a separate tax return. Prior to the consolidation of Banner on February 25, 1996, the Aerospace Fasteners segment had sales to Banner of $3,663 and $5,494 in Fiscal 1996, and 1995, respectively. 19. LEASES ------ The Company holds certain of its facilities and equipment under long- term leases. The minimum rental commitments under non-cancelable operating leases with lease-terms in excess of one year, for each of the five years following June 30, 1997, are as follows: $5,182 for 1998, $4,127 for 1999, $2,937 for 2000, $2,271 for 2001, and $1,732 for 2002. Rental expense on operating leases from continuing operations for Fiscal 1997, 1996 and 1995 was $4,928, $6,197, and $6,695, respectively. Minimum commitments under capital leases for each of the five years following June 30, 1997, was $651 for 1998, $693 for 1999, $262 for 2000, $210 for 2001, and $137 for 2002, respectively. At June 30, 1997, the present value of capital lease obligations was $1,897. At June 30, 1997, capital assets leased, included in property, plant, and equipment consisted of:
Buildings and improvements....... $ 1,396 Machinery and equipment.......... 8,017 Furniture and fixtures........... 114 Less: Accumulated depreciation... (7,700) ------ $ 1,827 ======
20. CONTINGENCIES ------------- CL Motor Freight ("CL") Litigation ---------------------------------- The Workers Compensation Bureau of the State of Ohio is seeking reimbursement from the Company for up to $5,400 for CL workers compensation claims which were insured under a self-insured program of CL. The Company has contested a significant portion of this claim and believes that the ultimate disposition of this claim will not be material. Government Claims ----------------- The Corporate Administrative Contracting Officer (the "ACO"), based upon the advice of the United States Defense Contract Audit Agency, has made a determination that FII did not comply with Federal Acquisition Regulations and Cost Accounting Standards in accounting for (i) the 1985 reversion to FII of certain assets of terminated defined benefit pension plans, and (ii) pension costs upon the closing of segments of FII's business. The ACO has directed FII to prepare cost impact proposals relating to such plan terminations and segment closings and, following receipt of such cost impact proposals, may seek adjustments to contract prices. The ACO alleges that substantial amounts will be due if such adjustments are made, however, an estimate of the possible loss or range of loss from the ACO's assertion cannot be made. The Company believes it has properly accounted for the asset reversions in accordance with applicable accounting standards. The Company has held discussions with the government to attempt to resolve these pension accounting issues. Environmental Matters --------------------- The Company's operations are subject to stringent Federal, state and local environmental laws and regulations concerning, among other things, the discharge of materials into the environment and the generation, handling, storage, transportation and disposal of waste and hazardous materials. To date, such laws and regulations have not had a material effect on the financial condition, results of operations, or net cash flows of the Company, although the Company has expended, and can be expected to expend in the future, significant amounts for investigation of environmental conditions and installation of environmental control facilities, remediation of environmental conditions and other similar matters, particularly in the Aerospace Fasteners segment. In connection with its plans to dispose of certain real estate, the Company must investigate environmental conditions and may be required to take certain corrective action prior or pursuant to any such disposition. In addition, management has identified several areas of potential contamination at or from other facilities owned, or previously owned, by the Company, that may require the Company either to take corrective action or to contribute to a clean-up. The Company is also a defendant in certain lawsuits and proceedings seeking to require the Company to pay for investigation or remediation of environmental matters and has been alleged to be a potentially responsible party at various "Superfund" sites. Management of the Company believes that it has recorded adequate reserves in its financial statements to complete such investigation and take any necessary corrective actions or make any necessary contributions. No amounts have been recorded as due from third parties, including insurers, or set off against, any liability of the Company, unless such parties are contractually obligated to contribute and are not disputing such liability. As of June 30, 1997, the consolidated total recorded liabilities of the Company for environmental matters approximated $8,420, which represented the estimated probable exposures for these matters. It is reasonably possible that the Company's total exposure for these matters could be approximately 13,200 on an undiscounted basis. Other Matters ------------- The Company is involved in various other claims and lawsuits incidental to its business, some of which involve substantial amounts. The Company, either on its own or through its insurance carriers, is contesting these matters. In the opinion of management, the ultimate resolution of the legal proceedings, including those aforementioned, will not have a material adverse effect on the financial condition, or future results of operations or net cash flows of the Company. 21. BUSINESS SEGMENT INFORMATION ---------------------------- The Company reports in two principal business segments. The Aerospace Fasteners segment includes the manufacture of high performance specialty fasteners and fastening systems. The Aerospace Distribution segment distributes a wide range of aircraft parts and related support services to the aerospace industry. The results of Fairchild Technologies, which is primarily engaged in the designing and manufacturing of capital equipment and systems for recordable compact disc and advance semiconductor manufacturing, are reported under Corporate and Other, along with results two smaller operations. Prior to the Merger on March 13, 1996, the Company operated in the Communications Services segment. The Company's financial data by business segment is as follows:
1997 1996 1995 Sales: --------- --------- --------- Aerospace Fasteners.............. $ 269,026 $ 218,059 $ 215,364 Aerospace Distribution (a)....... 411,765 129,973 -- Corporate and Other.............. 66,382 67,330 41,476 Eliminations (b)................. (15,213) (5,842) -- --------- --------- --------- Total Sales........................ $ 731,960 $ 409,520 $ 256,840 ========= ========= ========= Operating Income (Loss): Aerospace Fasteners (c).......... $ 17,390 $ 135 $ (11,497) Aerospace Distribution (a)....... 30,891 5,625 -- Corporate and Other.............. (17,764) (14,875) (20,420) --------- --------- --------- Operating Income (Loss)............ $ 30,517 $ (9,115) $ (31,917) ========= ========= ========= Capital Expenditures: Aerospace Fasteners.............. $ 8,964 $ 3,841 $ 4,974 Aerospace Distribution........... 4,787 1,556 -- Corporate and Other.............. 8,365 1,225 937 --------- --------- --------- Total Capital Expenditures......... $ 22,116 $ 6,622 $ 5,911 ========= ========= ========= Depreciation and Amortization: Aerospace Fasteners.............. $ 16,112 $ 14,916 $ 15,619 Aerospace Distribution........... 5,138 1,341 -- Corporate and Other.............. 4,685 5,396 5,260 --------- --------- --------- Total Depreciation and Amortization $ 25,935 $ 21,653 $ 20,879 ========= ========= ========= Identifiable Assets at June 30,: Aerospace Fasteners.............. $ 346,533 $ 252,200 $ 290,465 Aerospace Distribution........... 428,436 329,477 -- Corporate and Other.............. 292,364 428,261 559,829 --------- --------- --------- Total Identifiable Assets.......... $1,067,333 $1,009,938 $ 850,294 ========= ========= ========= (a) Effective February 25, 1996, the Company became the majority shareholder of Banner Aerospace, Inc. and, accordingly, began consolidating their results. (b) Represents intersegment sales from the Aerospace Fasteners segment to the Aerospace Distribution segment. (c) Includes restructuring charges of $2.3 million in Fiscal 1996.
22. FOREIGN OPERATIONS AND EXPORT SALES ----------------------------------- The Company's operations are located primarily in the United States and Europe. Inter-area sales are not significant to the total sales of any geographic area. The Company's financial data by geographic area is as follows:
1997 1996 1995 Sales by Geographic Area: --------- --------- --------- United States.................... $ 595,334 $ 301,957 $ 175,101 Europe........................... 136,626 107,186 80,945 Other............................ -- 377 794 --------- --------- --------- Total Sales........................ $ 731,960 $ 409,520 $ 256,840 ========= ========= ========= Operating Income by Geographic Area: United States.................... $ 24,299 $ (14,903) $ (31,522) Europe........................... 6,218 5,936 (432) Other............................ -- (148) 37 --------- --------- --------- Total Operating Income............. $ 30,517 $ (9,115) $ (31,917) ========= ========= =========
Identifiable Assets by Geographic
Area at June 30,: United States.................... $ 857,943 $ 932,311 $ 763,734 Europe........................... 209,390 77,627 85,668 Other............................ -- -- 892 --------- --------- --------- Total Identifiable Assets.......... $1,067,333 $1,009,938 $ 850,294 ========= ========= =========
Export sales are defined as sales to customers in foreign countries by the Company's domestic operations. Export sales amounted to the following:
1997 1996 1995 --------- --------- --------- Export Sales Europe........................... $ 48,490 $ 27,330 $ 13,329 Asia (excluding Japan)........... 29,145 8,920 1,526 Japan............................ 19,819 11,958 4,140 Canada........................... 17,955 8,878 2,810 Other............................ 15,907 8,565 911 --------- --------- --------- Total Export Sales................. $ 131,316 $ 65,651 $ 22,716 ========= ========= =========
23. QUARTERLY FINANCIAL DATA (UNAUDITED) ------------------------------------ The following table of quarterly financial data has been prepared from the financial records of the Company without audit, and reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim periods presented:
- ------------------------------------------------------------------------------- - --------------- Fiscal 1997 quarters ended Sept. 29 Dec. 29 Mar. 30 June 30 - ------------------------------------------------------------------------------- - --------------- Net sales.......................... $146,090 $159,912 $190,782 $241,676 Gross profit....................... 39,810 38,775 52,788 73,750 Earnings (loss) from continuing operations........................ (5,052) (3,638) 435 7,227 per share...................... (.31) (.22) .03 .42 Earnings from discontinued operations, net.................. 434 661 395 1,659 per share...................... .03 .04 .02 .10 Net earnings (loss)................ (4,618) (2,977) 40 8,886 per share...................... (.28) (.18) -- .51 Market price of Class A Stock: High............................. 17 17 3/4 15 3/8 18 Low.............................. 12 1/4 14 3/8 12 7/8 11 5/8 Close............................ 16 14 5/8 13 3/8 18
- ------------------------------------------------------------------------------- - --------------- Fiscal 1996 quarters ended Oct. 1 Dec. 31 March 31 June 30 - ------------------------------------------------------------------------------- - --------------- Net sales.......................... $ 74,929 $ 71,419 $109,189 $153,983 Gross profit....................... 15,502 15,134 23,856 40,418 Earnings (loss) from continuing operations....................... (13,219) (12,818) (8,151) 527 per share...................... (.82) (.80) 9.04 .03 Earnings from discontinued operations, net.................. 7,803 7,222 1,885 177 per share...................... .24 .21 .11 .01 Gain (loss) from disposal of discontinued operations, net..... (20) (7) 224,416 (7,673) per share...................... -- -- 3.66 (.45) Extraordinary items, net........... -- -- (10,436) - -- per share...................... -- -- (.62) - -- Net earnings (loss)................ (5,436) (5,603) 207,714 (6,969) per share...................... (.34) (.35) 12.42 (.41) Market price range of Class A Stock High............................. 6 8 3/4 9 7/8 15 7/8 Low.............................. 2 7/8 4 3/4 8 9 1/4 Close............................ 5 1/8 8 1/2 9 3/8 14 5/8
Included in earnings (loss) from continuing operations are (i) a $2,528 nonrecurring gain from the sale of SBC in the fourth quarter of Fiscal 1997, (ii) charges to reflect the cost of restructuring the Company's Aerospace Fasteners segment, of $285, $959 and $1,075 in the second, third and fourth quarters of Fiscal 1996, respectively, and (iii) nonrecurring income of $161,406 resulting primarily from the gain on the merger of FCSC with STI in the third quarter of Fiscal 1996. Earnings from discontinued operations, net, includes the results of DME and Data in each Fiscal 1996 quarter. Extraordinary items relate to the early extinguishment of debt by the Company. (See Note 7). 24. SUBSEQUENT EVENTS ----------------- On 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. The net sales of STFI totaled, $91,290 and $108,710 in 1996 and 1995, respectively. Net earnings from discontinued operations was $3,149, $9,849 and $7,901, in 1997, 1996, and 1995, respectively. Gain on disposal of discontinued operations includes a $163,130 nontaxable gain resulting from the Merger (See Note 3). 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. Report of Independent Public Accountants ---------------------------------------- To The Fairchild Corporation: We have audited the accompanying consolidated balance sheets of The Fairchild Corporation (a Delaware corporation) and subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of earnings, stockholders' equity and cash flows for the years ended June 30, 1997, 1996 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Fairchild Corporation and subsidiaries as of June 30, 1997 and 1996, and the results of their operations and their cash flows for the years ended June 30, 1997, 1996 and 1995, in conformity with generally accepted accounting principles. Arthur Andersen LLP Washington, D.C. September 5, 1997 (except with respect to the matter discussed in Note 24, as to which the date is December 8, 1997) PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - ------------------------------------------------------------------------- The following documents are filed as part of this Report: (a)(1) Financial Statements. All financial statements of the registrant as set forth under Item 8 of this report on Form 10-K (see index on Page 14). (a)(2) Financial Statement Schedules and Report of Independent Public Accountants. Schedule Number Description Page --------------- ----------- --- - - I Condensed Financial Information of Parent Company 80 II Valuation and Qualifying Accounts 83 All other schedules are omitted because they are not required. Report of Independent Public Accountants ---------------------------------------- To The Fairchild Corporation: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of The Fairchild Corporation and subsidiaries included in this Form 10-K and have issued our report thereon dated September 5, 1997. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index on the preceding page is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Washington, D.C. September 5, 1997 (except with respect to the matter discussed in Note 24, as to which the date is December 8, 1997) (a)(3) Exhibits. 3 (a) Registrant's Restated Certificate of Incorporation (incorporated by reference to Exhibit "C" of Registrant's Proxy Statement dated October 27, 1989). (b) Registrant's Amended and Restated By-Laws, as amended as of November 21, 1996 (incorporated by reference to the December 29, 1996 10-Q). 4 (a) Specimen of Class A Common Stock certificate (incorporated by reference to Registration Statement No. 33-15359 on Form S-2). (b) Specimen of Class B Common Stock certificate (incorporated by reference from Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1989 (the "1989 10-K")). (c) Form of Indenture between Registrant and J. Henry Schroder Bank & Trust Company, pursuant to which Registrant's 13-1/8% Subordinated Debentures due 2006 (the "Senior Debentures") were issued (the "Debenture Indenture"), and specimen of Senior Debenture (incorporated by reference to Registration Statement No. 33-3521 on Form S-2). (d) First Supplemental Indenture dated as of November 26, 1986, to the Debenture Indenture (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1986 (the "December 1986 10-Q"). (e) Form of Indenture between Registrant and Manufacturers Hanover Trust Company pursuant to which Registrant's 12-1/4% Senior Subordinated Notes due 1996 (the "Senior Notes") were issued (the"Note Indenture"), and specimen of Senior Note (incorporated by reference to Registration Statement No. 33-03521 on Form S-2). (f) First Supplemental Indenture dated as of November 26, 1986, to the Note Indenture (incorporated by reference to the December 1986 10-Q). (g) Indenture between Registrant and Connecticut National Bank (as successor to National Westminster Bank) dated as of October 15, 1986, pursuant to which Registrant's Intermediate Subordinated Debentures due 2001 (the "Intermediate Debentures") were issued, and specimen of Intermediate Debenture (incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1986 (the "September 1986 10-Q")). (h) Indenture between Rexnord Acquisition Corp. ("RAC") and Bank of New York (as successor to Irving Trust Company) dated as of March 2, 1987, pursuant to which RAC's Senior Subordinated Debentures due 1999 (the "Rexnord Senior Debentures") were issued (the "Rexnord Senior Indenture"), and specimen of Rexnord Senior Debenture incorporated by reference from Registrants Annual Report on Form 10-K for fiscal year ended June 30, 1987 (the "1987 10-K"). (i) First Supplemental Indenture between Rexnord Inc. ("Rexnord") (as successor to RAC) and Irving Trust Company dated as of July 1, 1987, to the Rexnord Senior Indenture (incorporated by reference to Registration Statement No. 33-15359 on Form S-2). (j) Second Supplemental Indenture between Rexnord Holdings Inc., now know as RHI Holdings, Inc. ("RHI") (as successor to Rexnord) and Irving Trust Company dated as of August 16, 1988, to the Rexnord Senior Indenture (incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1988 (the "1988 10-K")). (k) Indenture between Registrant and Norwest Bank Minneapolis, N.A. dated as of March 2, 1987, pursuant to which Registrant's Junior Subordinated Debentures due 2007 (the "Junior Debentures") were issued, and specimen of Junior Debenture (incorporated by reference to Final Amendment to Tender Offer Statement on Schedule 14D-1 of Banner Acquisition Corp. ("BAC") dated March 9, 1987). (l) First Supplemental Indenture between Registrant and Norwest Bank, Minnesota Bank, N.A., dated as of February 28, 1991, to Indenture dated as of March 2, 1987, relating to the Junior Debentures (incorporated by reference to the 1991 10-K). (m) Securities Purchase Agreement dated as of October 15, 1986, by and among Registrant and each of the Purchasers of the Intermediate Debentures (incorporated by reference to the September 1986 10-Q). (n) Securities Purchase Agreement dated as of March 2, 1987, by and among Registrant, RAC and each of the Purchasers of the Junior Debentures, the Rexnord Senior Debentures and other securities (incorporated by reference to the 1987 10-K). (o) Registration Rights Agreement dated as of October 15, 1986, by and among Registrant and each of the purchasers of the Intermediate Debentures (incorporated by reference to the September 1986 10-Q). (p) Registration Rights Agreement dated as of March 2, 1987, by and among Registrant, RAC and each of the purchasers of the Junior Debentures, the Rexnord Senior Debentures and other securities (incorporated by reference to Registrant's Report on Form 8-K dated March 17, 1987). 10 (a) Deferred Compensation Agreement between Registrant and Samuel J. Krasney dated July 14, 1972, as amended November 17, 1978, September 3, 1985 (the "Krasney Deferred Compensation Agreement") incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1985). (b) Amendment to the Krasney Deferred Compensation Agreement dated September 6, 1990 (incorporated by reference to 1991 10-K). (c) Amended and Restated Employment Agreement between Registrant and Samuel J. Krasney dated April 24, 1990 (incorporated by reference to the 1990 10-K). (d) Letter Agreements dated August 4, 1993 among Samuel J. Krasney, The Fairchild Corporation and Jeffrey J. Steiner (incorporated by reference to 1993 10-K). (e) 1988 U.K. Stock Option Plan of Banner Industries, Inc. (incorporated by reference to the 1988 10-K). (f) Description of grants of stock options to non-employee directors of Registrant (incorporated by reference to the 1988 10-K). (g) Amended and Restated Employment Agreement between Registrant and Jeffrey J. Steiner dated September 10, 1992 (incorporated by reference to 1993 10-K). (h) Letter Agreement dated October 23, 1991 between Registrant and Eric Steiner (incorporated by reference to 1992 10-K). (i) Letter Agreement dated October 23, 1991 between Registrant and John D. Jackson (incorporated by reference to 1992 10-K). (j) Letter Agreement dated October 23, 1991 between Registrant and Michael T. Alcox (incorporated by reference to 1992 10-K). (k) Letter Agreement dated October 23, 1991 between Registrant and Donald E. Miller (incorporated by reference to 1992 10-K). (l) Letter Agreement dated October 23, 1991 between Registrant and John L. Flynn (incorporated by reference to 1992 10-K). (m) Letter Agreement dated April 8, 1993 between Registrant and Thomas Flaherty (incorporated by reference to 1993 10-K). (n) Purchase Agreement by and between BTR Dunlop Holdings, Inc., RHI Holdings, Inc., and Registrant, dated as of December 2, 1993 (incorporated by reference to Registrant's current report on Form 8-K dated December 23, 1993). (o) Letter Agreement dated October 21, 1994, as amended December 21, 1994, between Registrant and Eric Steiner (incorporated by reference to the 1995 10-K). (p) Letter Agreement dated October 21, 1994, as amended December 21, 1994, between Registrant and Michael T. Alcox (incorporated by reference to the 1995 10-K). (q) Letter Agreement dated October 21, 1994, as amended December 21, 1994, between Registrant and Donald E. Miller (incorporated by reference to the 1995 10-K). (r) Letter Agreement dated October 21, 1994, as amended December 21, 1994, between Registrant and John L Flynn (incorporated by reference to the 1995 10-K). (s) Letter Agreement dated October 21, 1994, as amended December 21, 1994, between Registrant and Thomas J. Flaherty (incorporated by reference to the 1995 10-K). (t) Letter Agreement dated September 9, 1996, between Registrant and Colin M. Cohen (incorporated by reference to the 1997 10-K). (u)(i) Agreement and Plan of Merger dated as of November 9, 1995 by and among The Fairchild Corporation, RHI, FII and Shared Technologies, Inc. ("STI Merger Agreement") (incorporated by reference from the Registrant's Form 8-K dated as of November 9, 1995). (u)(ii) Amendment No. 1 to STI Merger Agreement dated as of February 2, 1996 (incorporated by reference from the Registrant's Form 8-K dated as of March 13, 1996). (u)(iii) Amendment No. 2 to STI Merger Agreement dated as of February 23, 1996 (incorporated by reference from the Registrant's Form 8-K dated as of March 13, 1996). (u)(iv) Amendment No. 3 to STI Merger Agreement dated as of March 1, 1996 (incorporated by reference from the Registrant's Form 8-K dated as of March 13, 1996). (v) Asset Purchase Agreement dated as of January 23, 1996, between The Fairchild Corporation, RHI and Cincinnati Milacron, Inc. (incorporated by reference from the Registrant's Form 8-K dated as of January 26, 1996). (w) Credit Agreement dated as of March 13, 1996, among Fairchild Holding Corporation ("FHC"), Citicorp USA, Inc. and certain financial institutions (incorporated by reference to the 1996 10-K). (x)(i) Restated and Amended Credit Agreement dated as of July 26, 1996, (the "FHC Credit Agreement"), among FHC, Citicorp USA, Inc. and certain financial institutions. (x)(ii) Amendment No. 1, dated as of January 21, 1997, to the FHC Credit Agreement dated as of March 13, 1996 (incorporated by reference to the March 30, 1997 10-Q). (x)(iii) Amendment No. 2 and Consent, dated as of February 21, 1997, to the FHC Credit Agreement dated as of March 13, 1996 (incorporated by reference to the March 30,1997 10-Q). (x)(iv) Amendment No. 3, dated as of June 30, 1997, to the FHC Credit Agreement dated as of March 13, 1996 (incorporated by reference to the 1997 10-K). (x)(v) Second Amended And Restated Credit Agreement dated as of July 18, 1997, to the FHC Credit Agreement dated as of March 13, 1996 (incorporated by reference to the 1997 10-K). (y)(i) Restated and Amended Credit Agreement dated as of May 27, 1996, (the "RHI Credit Agreement"), among RHI, Citicorp USA, Inc. and certain financial institutions. (incorporated by reference to the 1996 10-K). (y)(ii) Amendment No. 1 dated as of July 29, 1996, to the RHI Credit Agreement dated as of May 27, 1996 (incorporated by reference to the 1996 10-K). (y)(iii) Amendment No. 2 dated as of April 7, 1997, to the RHI Credit Agreement dated as of May 27, 1996 (incorporated by reference to the 1997 10-K). (z)(i) 1986 Non-Qualified and Incentive Stock Option Plan (incorporated by reference to Registrant's Proxy Statement dated November 15, 1990). (z)(ii) 1986 Non-Qualified and Incentive Stock Option Plan (incorporated by reference to Registrant's Proxy Statement dated November 21, 1997). (aa) 1996 Non-Employee Directors Stock Option Plan (incorporated by reference to Registrant's Proxy Statement dated November 21, 1997). (ab) Stock Exchange Agreement between The Fairchild Corporation and Banner Aerospace, Inc. pursuant to which the Registrant exchanged Harco, Inc. for shares of Banner Aerospace, Inc. (incorporated by reference to the Banner Aerospace, Inc. Definitive Proxy Statement dated and filed with the SEC on February 23, 1996 with respect to the Special Meeting of Shareholders of Banner Aerospace, Inc. held on March 12, 1996). (ac)(i) Employment Agreement between RHI Holdings, Inc., and Jacques Moskovic, dated as of December 29, 1994. (incorporated by reference to the 1996 10-K/A). (ac)(ii) Employment Agreement between Fairchild France, Inc., and Jacques Moskovic, dated as of December 29, 1994. (incorporated by reference to the 1996 10-K/A). (ac)(iii) Employment Agreement between Fairchild France, Inc., Fairchild CDI, S.A., and Jacques Moskovic, dated as of April 18, 1997 (incorporated by reference to the 1995 10-K). (ad) Voting Agreement dated as of July 16, 1997, between RHI Holdings, Inc., and Tel-Save Holdings, Inc., (incorporated by reference to the Registrant's Schedule 13D/A, Amendment No. 3, filed July 22, 1997, regarding Registrant's stock ownership in Shared Technologies Fairchild Inc.). (ae) Allocation Agreement dated April 13, 1992 by and among The Fairchild Corporation, RHI, Rex-PT Holdings, Rexnord Corporation, Rexnord Puerto Rico, Inc. and Rexnord Canada Limited (incorporate by reference to 1992 10-K). (af) Form Warrant Agreement (including form of Warrant) issued by the Company to Drexel Burnham Lambert on March 13, 1986, subsequently purchased by Jeffrey Steiner and subsequently assigned to Stinbes Limited (an affiliate of Jeffrey Steiner), for the purchase of Class A or Class B Common Stock (incorporated herein by reference to Exhibit 4(c) of the Company's Registration Statement No. 33-3521 on Form S-2). 11 Computation of earnings per share (found at Note 1 in Item 8 to Registrant's Consolidated Financial Statements for the fiscal year ended June 30, 1997). 21 List of subsidiaries of Registrant (incorporated by reference to the 1997 10-K). 23 Consent of Arthur Andersen LLP, independent public accountants (incorporated by reference to the 1997 10-K). 27 Financial Data Schedules (incorporated by reference to the 1997 10-K). 99(a) Financial statements, related notes thereto and Auditors' Report of Banner Aerospace, Inc. for the fiscal year ended March 31, 1997 (incorporated by reference to the Banner Aerospace, Inc. Form 10-K for fiscal year ended March 31, 1997). 99(b) Financial statements, related notes thereto and Auditors' Report of Shared Technologies Fairchild, Inc. for the fiscal year ended December 31, 1996 (incorporated by reference to the Registrant's Form 8-K filed on December 8, 1997). 99(c) Financial statements, related notes thereto and Auditors' Report of Nacanco Paketleme for the fiscal year ended December 31, 1997 (incorporated by reference to the Registrant's Form 8-K filed on December 8, 1997). *Filed herewith. (b) Reports on Form 8-K Registrant filed no reports on Form 8-K during the last quarter of Fiscal 1997. SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE FAIRCHILD CORPORATION By: ------------------------ Colin M. Cohen Senior Vice President and Chief Financial Officer Date: December 15, 1997 SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE FAIRCHILD CORPORATION CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANY BALANCE SHEETS (NOT CONSOLIDATED) (In thousands) June 30, June 30, 1997 1996 ASSETS Current assets: Cash and cash equivalents $ 234 $ 1,887 Accounts receivable 384 179 Prepaid expenses and other current assets 250 192 Total current assets 868 2,258 Property, plant and equipment, less accumulated 486 628 depreciation Investments in subsidiaries 390,355 391,958 Investments and advances, affiliated companies 1,435 3,047 Goodwill 4,133 4,263 Noncurrent tax assets 29,624 14,548 Other assets 2,403 3,510 Total assets $ 429,304 $ 420,212 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 8,315 $ 7,735 Total current liabilities 8,315 7,735 Long-term debt 190,567 180,141 Other long-term liabilities 797 1,168 Total liabilities 199,679 189,044 Stockholders' equity: Class A common stock 2,023 2,000 Class B common stock 263 263 Retained earnings and other equity 227,339 228,905 Total stockholders' equity 229,625 231,168 Total liabilities and stockholders' equity $ 429,304 $ 420,212
The accompanying notes are an integral part of these condensed financial statements. Schedule I
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED FINANCIAL STATEMENTS OF THE COMPANY STATEMENT OF EARNINGS (NOT CONSOLIDATED) (In thousands) For the Years Ended June 30, 1997 1996 1995 Costs and Expenses: Selling, general & administrative 3,925 5,148 3,920 Amortization of goodwill 130 130 130 4,055 5,278 4,050 Operating income (4,055 ) (5,278 ) (4,050 ) Net interest expense 25,252 28,387 29,027 Investment income, net 16 1 (434 ) Equity in earnings of affiliates 480 269 (409 ) Nonrecurring expense -- (1,064 ) -- Loss from continuing operations before (28,811 ) (34,459 ) (33,920 ) taxes Income tax provision (benefit) (15,076 ) (12,509 ) (18,838 ) Loss before equity in earnings of (13,735 ) (21,950 ) (15,082 ) subsidiaries Equity in earnings of subsidiaries 15,066 211,656 (18,742 ) Net earnings (loss) 1,331 189,706 (33,824 )
The accompanying notes are an integral part of these condensed financial statements. THE FAIRCHILD CORPORATION CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANY STATEMENT OF CASH FLOWS (NOT CONSOLIDATED) (IN THOUSANDS)
For the Years Ended June 30, 1997 1996 1995 Cash provided by (used for) operations $(14,271 ) $ 36,916 $(9,607) Investing activities: Equity investments in affiliates 2,092 (21 ) 1,356 2,092 (21 ) 1,356 Financing activities: Proceeds from issuance of 9,400 7,400 intercompany debt - Debt repayments (42,265 ) - - Issuance of common stock 1,126 1,509 - 10,526 (40,756 ) 7,400 Net decrease in cash $(1,653 ) $(3,861 ) $ (851)
The accompanying notes are an integral part of these condensed financial statements. Schedule I THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED FINANCIAL STATEMENTS OF THE COMPANY NOTES TO FINANCIAL STATEMENTS (NOT CONSOLIDATED) (In thousands) 1. BASIS OF PRESENTATION In accordance with the requirements of Regulation S-X of the Securities and Exchange Commission, the financial statements of the Company are condensed and omit many disclosures presented in the consolidated financial statements and the notes thereto. 2. LONG-TERM DEBT
June 30, June 30, 1997 1996 12% Inter. Debentures Due 2001 $ 128,000 $ 123,600 13 1/8% Sub. Debentures Due 2006 35,856 35,856 13% Jr. Sub. Debenture Due 2007 30,063 25,063 $ 193,919 $ 184,519
Maturities of long-term debt for the next five years are as follows: no maturities in 1998, $30,335 in 1999, $31,520 in 2000, $31,713 in 2001, and $37,320 in 2002. 3. DIVIDENDS FROM SUBSIDIARIES Cash dividends paid to The Fairchild Corporation by its consolidated subsidiaries were $10,000, $42,100, and $10,000 in Fiscal 1997, 1996, and 1995, respectively. 4. CONTINGENCIES The Company is involved in various other claims and lawsuits incidental to its business, some of which involve substantial amounts. The Company, either on its own or through its insurance carriers, is contesting these matters. In the opinion of management, the ultimate resolution of the legal proceedings will not have a material adverse effect on the financial condition, or future results of operations or net cash flows of the Company. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS - ----------------------------------------------- Changes in the allowance for doubtful accounts are as follows:
For the Years Ended June 30, (In thousands) ---------------------------------- 1997 1996 1995 -------- -------- -------- Beginning balance................. $ 6,327 $ 3,971 $ 2,284 Charged to cost and expenses...... 1,999 2,099 1,868 Charges to other accounts (a)..... 491 1,970 (86) Amounts written off............... (714) (1,713) (95) ------- ------- ------- Ending balance.................... $ 8,103 $ 6,327 $ 3,971 ======= ======= ======= (a) Recoveries of amounts written off in prior periods, foreign currency translation and the change in related noncurrent taxes.
Included in Fiscal 1996 is $2,348 relating to the consolidation of Banner Aerospace, Inc. and $(309) from the deconsolidation of the Fairchild Communications Services Company as a result of the Merger. -----END PRIVACY-ENHANCED MESSAGE-----