-----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, PZ/90oW7R3wxoRmfKaZGAZqgjgFWYbQU3FyRA6umhYfJsNLUJaPB2pfv1JC1LN6E Vj1XB2J3Mc5EjQNx/GVDzg== 0000009779-98-000044.txt : 19981113 0000009779-98-000044.hdr.sgml : 19981113 ACCESSION NUMBER: 0000009779-98-000044 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980927 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FAIRCHILD CORP CENTRAL INDEX KEY: 0000009779 STANDARD INDUSTRIAL CLASSIFICATION: BOLTS, NUTS, SCREWS, RIVETS & WASHERS [3452] IRS NUMBER: 340728587 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06560 FILM NUMBER: 98743666 BUSINESS ADDRESS: STREET 1: 45025 AVIATION DR STREET 2: STE 400 CITY: DULLAS STATE: VA ZIP: 20166 BUSINESS PHONE: 7034785800 MAIL ADDRESS: STREET 1: 45025 AVIATION DRIVE STREET 2: SUITE 400 CITY: DULLES STATE: VA ZIP: 20166 FORMER COMPANY: FORMER CONFORMED NAME: BANNER INDUSTRIES INC /DE/ DATE OF NAME CHANGE: 19901118 10-Q 1 27 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 27, 1998 Commission File Number 1-6560 THE FAIRCHILD CORPORATION (Exact name of Registrant as specified in its charter) Delaware 34-0728587 (State or other jurisdiction of (I.R.S. Employer Identification No.) Incorporation or organization) 45025 Aviation Drive, Suite 400 Dulles, VA 20166 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (703)478-5800 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days. YES X NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Title of Class October 30, 1998 Class A Common Stock, $0.10 Par Value 19,205,031 Class B Common Stock, $0.10 Par Value 2,624,662 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES INDEX Page PART I. FINANCIAL INFORMATION Item 1.Condensed Consolidated Balance Sheets as of June 30, 1998 and September 27, 1998 (Unaudited) 3 Consolidated Statements of Earnings for the Three Months ended September 27, 1998 and September 28, 1997 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows for the Three Months ended September 27, 1998 and September 28, 1997 (Unaudited) 7 Notes to Condensed Consolidated Financial Statements (Unaudited) 8 Item 2.Management's Discussion and Analysis of Results of Operations and Financial Condition 12 Item 3.Quantitative and Qualitative Disclosure About Market Risk 19 PART II. OTHER INFORMATION Item 1.Legal Proceedings 20 Item 2.Changes in Securities and Use of Proceeds 20 Item 5.Other Information 20 Item 6.Exhibits and Reports on Form 8-K 20 * For purposes of Part I and this Form 10-Q, the term "Company" means The Fairchild Corporation, and its subsidiaries, unless otherwise indicated. For purposes of Part II, the term "Company" means The Fairchild Corporation, unless otherwise indicated. PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 1998 and September 27, 1998 (Unaudited) (In thousands) ASSETS
June 30, Sept. 27, 1998 (*) 1998 CURRENT ASSETS: Cash and cash equivalents, $746 and $0 restricted $ 49,601 $ 49,428 Short-term investments 3,962 175,802 Accounts receivable-trade, less 120,284 110,191 allowances of $5,655 and $5,345 Inventories: Finished goods 187,205 208,999 Work-in-process 20,642 20,087 Raw materials 9,635 9,217 217,482 238,303 Net current assets of discontinued 11,613 1,540 operations Prepaid expenses and other current 53,081 42,493 assets Total Current Assets 456,023 617,757 Property, plant and equipment, net of accumulated depreciation of $82,968 and $86,840 118,963 124,331 Net assets held for sale 23,789 23,627 Net noncurrent assets of discontinued 8,541 9,117 operations Cost in excess of net assets acquired (Goodwill), less accumulated amortization of $42,079 168,307 170,783 and $43,304 Investments and advances, affiliated 27,568 27,361 companies Prepaid pension assets 61,643 61,961 Deferred loan costs 6,362 6,149 Long-term investments 235,435 19,240 Other assets 50,628 62,151 TOTAL ASSETS $1,157,259 $1,122,477 *Condensed from audited financial statements. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 1998 and September 27, 1998 (Unaudited) (In thousands) LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, Sept. 27, 1998 (*) 1998 CURRENT LIABILITIES: Bank notes payable and current maturities of long-term debt $ 20,665 $ 23,647 Accounts payable 53,859 52,569 Accrued salaries, wages and commissions 23,613 21,970 Accrued employee benefit plan costs 1,463 2,271 Accrued insurance 12,575 11,332 Accrued interest 2,303 4,226 Other accrued liabilities 52,789 43,401 Income taxes 28,311 11,057 Total Current Liabilities 195,578 170,473 LONG-TERM LIABILITES: Long-term debt, less current maturities 295,402 327,500 Other long-term liabilities 23,767 23,601 Retiree health care liabilities 42,103 43,418 Noncurrent income taxes 95,176 94,407 Minority interest in subsidiaries 31,674 31,977 TOTAL LIABILITIES 683,700 691,376 STOCKHOLDERS' EQUITY: Class A common stock, 10 cents par value per share; authorized 40,000 shares, 26,695 (26,679 in June) shares issued and 19,504 (20,429 in June) shares 2,667 2,669 outstanding Class B common stock, 10 cents par value per share; authorized 20,000 shares, 2,625 (2,625 in June) 263 263 shares issued and outstanding Paid-in capital 195,112 195,261 Retained earnings 311,039 312,229 Cumulative other comprehensive income 16,386 (8,756) (loss) Treasury Stock, at cost, 7,191 (6,250 in (51,908) (70,565) June) shares of Class A common stock TOTAL STOCKHOLDERS' EQUITY 473,559 431,101 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,157,259 $1,122,477 *Condensed from audited financial statements The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED STATEMENTS OF EARNINGS (Unaudited) For The Three (3) Months Ended September 28, 1997 and September 27, 1998 (In thousands, except per share data)
Three Months Ended 9/28/97 9/27/98 REVENUE: Net sales $194,362 $148,539 Other income, net 4,555 419 198,917 148,958 COSTS AND EXPENSES: Cost of goods sold 148,033 113,867 Selling, general & administrative 36,660 28,108 Research and development 49 66 Amortization of goodwill 1,219 1,278 185,961 143,319 OPERATING INCOME 12,956 5,639 Interest expense 12,975 7,436 Interest income (390) (583) Net interest expense 12,585 6,853 Investment income 1,897 1,861 Earnings from continuing operations before taxes 2,268 647 Income tax provision (1,006) (291) Equity in earnings of affiliates, net 1,100 1,037 Minority interest, net (1,133) (203) Earnings from continuing operations 1,229 1,190 Loss from discontinued operations, net (737) - NET EARNINGS $ 492 $ 1,190 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments $ 995 $ 5,246 Unrealized holding losses on securities arising during the period - (30,388) Other comprehensive income (loss) 995 (25,142) COMPREHENSIVE INCOME (LOSS) $ 1,487 $(23,952) The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED STATEMENTS OF EARNINGS (Unaudited) For The Three (3) Months Ended September 28, 1997 and September 27, 1998 (In thousands, except per share data)
Three Months Ended 9/28/97 9/27/98 BASIC EARNINGS PER SHARE: Earnings from continuing operations $ 0.07 $ 0.05 Loss from discontinued operations, net (0.04) - NET EARNINGS $ 0.03 $ 0.05 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments $ 0.06 $ 0.23 Unrealized holding losses on securities arising during the period - (1.36) Other comprehensive income (loss) 0.06 (1.13) COMPREHENSIVE INCOME (LOSS) $ 0.09 $(1.07) DILUTED EARNINGS PER SHARE: Earnings from continuing operations $ 0.07 $ 0.05 Loss from discontinued operations, net (0.04) - NET EARNINGS $ 0.03 $ 0.05 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments $ 0.06 $ 0.23 Unrealized holding losses on securities arising during the period - (1.32) Other comprehensive income (loss) 0.06 (1.09) COMPREHENSIVE INCOME (LOSS) $ 0.09 $(1.04) Weighted average shares outstanding: Basic 16,633 22,401 Diluted 17,588 23,001 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For The Three (3) Months Ended September 28, 1997 and September 27, 1998 (In thousands)
For the Three Months Ended 9/28/97 9/27/98 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 492 $ 1,190 Depreciation and amortization 5,907 4,699 Accretion of discount on long-term liabilities 34 1,072 Loss on sale of property, plant, and equipment 323 46 Distributed earnings of affiliates, net 715 226 Minority interest 788 203 Change in assets and liabilities (27,840) (10,109) Non-cash charges and working capital changes of discontinued operations (15,695) (6,523) Net cash used for operating activities (35,276) (9,196) CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds received from (used for) investments 7,815 (3,113) Purchase of property, plant and equipment (9,091) (6,551) Changes in net assets held for sale (139) 288 Other, net 45 156 Investing activities of discontinued operations (1,115) (165) Net cash used for investing activities (2,485) (9,385) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt 95,109 41,362 Debt repayments and repurchase of debentures, net (67,631) (6,282) Issuance of Class A common stock 149 158 Purchase of treasury stock - (18,657) Financing activities of discontinued operations (67) (15) Net cash provided by financing activities 27,560 16,566 Effect of exchange rate changes on cash (170) 1,842 Net decrease in cash and cash equivalents (10,371) (173) Cash and cash equivalents, beginning of the year 19,420 49,601 Cash and cash equivalents, end of the period $ 9,049 $ 49,428 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except share data) 1. FINANCIAL STATEMENTS The consolidated balance sheet as of September 27, 1998 and the consolidated statements of earnings and cash flows for the three months ended September 28, 1997 and September 27, 1998 have been prepared by the Company, without audit. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at September 27, 1998, and for all periods presented, have been made. The balance sheet at June 30, 1998 was condensed from the audited financial statements as of that date. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's June 30, 1998 Form 10-K and the Banner Aerospace, Inc. ("Banner") March 31, 1998 Form 10-K. The results of operations for the period ended September 27, 1998 are not necessarily indicative of the operating results for the full year. Certain amounts in the prior year's quarterly financial statements have been reclassified to conform to the current presentation. The financial statements for the periods ended September 28, 1997 have been restated to present the results of Shared Technologies Fairchild Inc. and Fairchild Technologies as discontinued operations. 2. BUSINESS COMBINATIONS The Company has accounted for the following acquisitions by using the purchase method. The respective purchase price is assigned to the net assets acquired based on the fair value of such assets and liabilities at the respective acquisition dates. On November 28, 1997, the Company acquired AS+C GmbH, Aviation Supply + Consulting ("AS+C") in a business combination accounted for as a purchase (the "AS+C Acquisition"). The total cost of the acquisition was $13,630, which exceeded the fair value of the net assets of AS+C by approximately $7,735, which is preliminarily being allocated as goodwill and amortized using the straight-line method over 40 years. The Company purchased AS+C with cash borrowings. AS+C is an aerospace parts, logistics, and distribution company primarily servicing the European original equipment manufacturers ("OEM's") market. On March 2, 1998, the Company consummated the acquisition of Edwards and Lock Management Corporation, doing business as Special-T Fasteners ("Special-T"), in a business combination accounted for as a purchase (the "Special-T Acquisition"). The contractual purchase price for the acquisition was valued at approximately $49,055, of which 50.1% was paid in shares of Class A Common Stock of the Company and 49.9% was paid in cash. The total cost of the acquisition exceeded the fair value of the net assets of Special-T by approximately $23,360, which is preliminarily being allocated as goodwill, and amortized using the straight-line method over 40 years. Special-T manages the logistics of worldwide distribution of Company manufactured precision fasteners to customers in the aerospace industry, government agencies, OEM's, and other distributors. On January 13, 1998, Banner completed the disposition of substantially all of the assets and certain liabilities of certain subsidiaries to two wholly-owned subsidiaries of AlliedSignal Inc. (the "Buyers"), in exchange for shares of AlliedSignal Inc. common stock with an aggregate value equal to $369,000 (the "Banner Hardware Group Disposition"). The assets transferred to the Buyers consist primarily of Banner's hardware group, which includes the distribution of bearings, nuts, bolts, screws, rivets and other types of fasteners, and its PacAero unit. Approximately $196,000 of the common stock received from the Buyers was used to repay outstanding term loans of Banner's subsidiaries and related fees. The Company accounts for its remaining investment in AlliedSignal Inc. common stock as an available-for-sale security. 3. DISCONTINUED OPERATIONS For the Company's fiscal years ended June 30, 1996, 1997, 1998, and for the first quarter of Fiscal 1999, Fairchild Technologies ("Technologies") had pre-tax operating losses of approximately $1.5 million, $3.6 million, $48.7 million, and $8.2 million, respectively. The remaining provision for operating losses over the next four months at Technologies is $2,892 (net of an income tax benefit of $1,735). Additional information regarding discontinued operations is set forth in Footnote 4 of the Consolidated Financial Statements of the Company's June 30, 1998 Form 10-K. 4. PRO FORMA FINANCIAL STATEMENTS The unaudited pro forma consolidated financial information for the three months ended September 28, 1997, provide the results of the Company's operations as though the Banner Hardware Group Disposition, the Special-T Acquisition, and the AS+C Acquisition had been in effect since the beginning of the Fiscal 1998 period. The pro forma information is based on the historical financial statements of the Company, Banner, Special-T, and AS+C giving effect to the aforementioned transactions. In preparing the pro forma data, certain assumptions and adjustments have been made, including reduced interest expense for revised debt structures and estimates of changes to goodwill amortization. The following unaudited pro forma information are not necessarily indicative of the results of operations that actually would have occurred if the transactions had been in effect since the beginning of the three month period ended September 28, 1997, nor are they indicative of future results of the Company.
September 28, 1997 Net sales $143,621 Gross profit 29,609 Loss from continuing operations (1,206) Loss from continuing operations per $ (0.03)
The pro forma financial information has not been adjusted for non- recurring income and gains from disposal of discontinued operations that have occurred or are expected to occur from these transactions within the ensuing year. 5. EQUITY SECURITIES The Company had 19,504,256 shares of Class A common stock and 2,624,662 shares of Class B common stock outstanding at September 27, 1998. Class A common stock is traded on both the New York and Pacific Stock Exchanges. There is no public market for the Class B common stock. Shares of Class A common stock are entitled to one vote per share and cannot be exchanged for shares of Class B common stock. Shares of Class B common stock are entitled to ten votes per share and can be exchanged, at any time, for shares of Class A common stock on a share-for-share basis. For the three months ended September 27, 1998, 6,500 shares of Class A Common Stock were issued as a result of the exercise of stock options, and shareholders converted 54 shares of Class B common stock into Class A common stock. In accordance with terms of the Special-T Acquisition, as amended, the Company issued 9,911 restricted shares of the Company's Class A Common Stock for additional merger consideration during the three months ended September 27, 1998. Additionally, the Company's Class A common stock outstanding was effectively reduced as a result of 940,800 shares purchased by Banner during the three months ended September 27, 1998. The shares purchased by Banner are considered as treasury stock for accounting purposes. 6. RESTRICTED CASH On September 27, 1998, the Company did not have any restricted cash. On June 30, 1998, the Company had restricted cash of approximately $746, all of which was maintained as collateral for certain debt facilities. 7. SUMMARIZED STATEMENT OF EARNINGS INFORMATION The following table presents summarized historical financial information, on a combined 100% basis, of the Company's principal investments, which are accounted for using the equity method.
For the Three Months Ended September 28, September 27, 1997 1998 Net sales $ 34,234 $ 29,416 Gross profit 13,387 11,492 Earnings from continuing operations 5,330 5,728 Net earnings 5,330 5,728
The Company owns approximately 31.9% of Nacanco Paketleme common stock. The Company recorded equity earnings of $1,100 (net of an income tax provision of $592) and $1,182 (net of an income tax provision of $636) from this investment for the three months ended September 28, 1997 and September 27, 1998, respectively. 8. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES On September 27, 1998, the Company had $31,977 of minority interest, of which $31,968 represents Banner. Minority shareholders hold approximately 17% of Banner's outstanding common stock. 9. EARNINGS PER SHARE The following table illustrates the computation of basic and diluted earnings per share:
(In thousands, except per share data) For the Three Months Ended 9/28/97 9/27/98 Basic earnings per share: Earnings from continuing operations $ 1,229 $ 1,190 Weighted average common shares outstanding 16,633 22,401 Basic earnings per share: Basic earnings from continuing operations per share $ 0.07 $ 0.05 Diluted earnings per share: Earnings from continuing operations $ 1,229 $ 1,190 Weighted average common shares outstanding 16,633 22,401 Options 588 416 Warrants 367 184 Total shares outstanding 17,588 23,001 Diluted earnings from continuing operations per share $ 0.07 $ 0.05
10. CONTINGENCIES Government Claims The Corporate Administrative Contracting Officer (the "ACO"), based upon the advice of the United States Defense Contract Audit Agency, has made a determination that Fairchild Industries, Inc. ("FII"), a former subsidiary of the Company, did not comply with Federal Acquisition Regulations and Cost Accounting Standards in accounting for (i) the 1985 reversion to FII of certain assets of terminated defined benefit pension plans, and (ii) pension costs upon the closing of segments of FII's business. The ACO has directed FII to prepare cost impact proposals relating to such plan terminations and segment closings and, following receipt of such cost impact proposals, may seek adjustments to contract prices. The ACO alleges that substantial amounts will be due if such adjustments are made, however, an estimate of the possible loss or range of loss from the ACO's assertion cannot be made. The Company believes it has properly accounted for the asset reversions in accordance with applicable accounting standards. The Company has held discussions with the government to attempt to resolve these pension accounting issues. Environmental Matters The Company's operations are subject to stringent Government imposed environmental laws and regulations concerning, among other things, the discharge of materials into the environment and the generation, handling, storage, transportation and disposal of waste and hazardous materials. To date, such laws and regulations have not had a material effect on the financial condition, results of operations, or net cash flows of the Company, although the Company has expended, and can be expected to expend in the future, significant amounts for investigation of environmental conditions and installation of environmental control facilities, remediation of environmental conditions and other similar matters, particularly in the Aerospace Fasteners segment. In connection with its plans to dispose of certain real estate, the Company must investigate environmental conditions and may be required to take certain corrective action prior or pursuant to any such disposition. In addition, management has identified several areas of potential contamination at or from other facilities owned, or previously owned, by the Company, that may require the Company either to take corrective action or to contribute to a clean-up. The Company is also a defendant in certain lawsuits and proceedings seeking to require the Company to pay for investigation or remediation of environmental matters and has been alleged to be a potentially responsible party at various "Superfund" sites. Management of the Company believes that it has recorded adequate reserves in its financial statements to complete such investigation and take any necessary corrective actions or make any necessary contributions. No amounts have been recorded as due from third parties, including insurers, or set off against, any liability of the Company, unless such parties are contractually obligated to contribute and are not disputing such liability. As of September 27, 1998, the consolidated total recorded liabilities of the Company for environmental matters approximated $8,861, which represented the estimated probable exposures for these matters. It is reasonably possible that the Company's total exposure for these matters could be approximately $15,000 if execution would be required in accordance with the current application of legislation. 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. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The Fairchild Corporation (the "Company") was incorporated in October 1969, under the laws of the State of Delaware. On November 15, 1990, the Company changed its name from Banner Industries, Inc. to The Fairchild Corporation. The Company is the owner of 100% of RHI Holdings, Inc. ("RHI") and the majority owner of Banner Aerospace, Inc. ("Banner"). RHI is the owner of 100% of Fairchild Holding Corp. ("FHC"). The Company's principal operations are conducted through Banner and FHC. The Company holds a significant equity interest in Nacanco Paketleme ("Nacanco"), and, during the period covered by this report, held a significant equity interest in Shared Technologies Fairchild Inc. ("STFI"). (See Note 4 to the June 30, 1998 Form 10-K Consolidated Financial Statements, as to the disposition of the Company's interest in STFI.) The following discussion and analysis provide information which management believes is relevant to assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto. GENERAL The Company is the largest aerospace fastener manufacturer in the world and an international supplier to the aerospace industry, distributing a wide range of aircraft parts and related support services. Through internal growth and strategic acquisitions, the Company is 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 Air Lines and US Airways. The Company's primary business focus is on the aerospace industry and its business consists primarily of two segments: aerospace fasteners and aerospace parts distribution. The aerospace fasteners segment manufactures and markets high performance fastening systems used in the manufacturing and maintenance of commercial and military aircraft. The aerospace distribution segment stocks and distributes a wide variety of aircraft parts to commercial airlines and air cargo carriers, original equipment manufacturers ("OEMs"), other distributors, fixed-base operators, corporate aircraft operators and other aerospace companies. The Company's aerospace distribution business is conducted through its 83% owned subsidiary, Banner. CAUTIONARY STATEMENT Certain statements in the financial discussion and analysis by management contain forward-looking information that involve risk and uncertainty, including current trend information, projections for deliveries, backlog, and other trend projections. Actual future results may differ materially depending on a variety of factors, including product demand; performance issues with key suppliers; customer satisfaction and qualification issues; labor disputes; governmental export and import policies; worldwide political stability and economic growth; and legal proceedings. RESULTS OF OPERATIONS Business Combinations The following business combinations completed by the Company over the past twelve months significantly effect the comparability of the results from the current period to the prior period. On November 20, 1997, STFI entered into a merger agreement with Intermedia Communications Inc. ("Intermedia") pursuant to which holders of STFI common stock received $15.00 per share in cash (the "STFI Merger"). The Company was paid approximately $178.0 million in cash (before tax and selling expenses) in exchange for the common and preferred stock of STFI owned by the Company. The results of STFI have been accounted for as discontinued operations. On November 28, 1997, the Company acquired AS+C GmbH, Aviation Supply + Consulting ("AS+C") in a business combination accounted for as a purchase. The total cost of the acquisition was $13.6 million, which exceeded the fair value of the net assets of AS+C by approximately $7.7 million, which is preliminarily being allocated as goodwill and amortized using the straight-line method over 40 years. The Company purchased AS+C with cash borrowed. AS+C is an aerospace parts, logistics, and distribution company primarily servicing the European OEM market. On January 13, 1998, Banner completed the disposition of substantially all of the assets and certain liabilities of certain subsidiaries to two wholly-owned subsidiaries of AlliedSignal Inc. (the "Buyers"), in exchange for shares of AlliedSignal Inc. common stock with an aggregate value equal to $369 million (the "Banner Hardware Group Disposition"). The assets transferred to the Buyers consist primarily of Banner's hardware group, which includes the distribution of bearings, nuts, bolts, screws, rivets and other types of fasteners, and its PacAero unit. Approximately $196 million of the common stock received from the Buyers was used to repay outstanding term loans of Banner's subsidiaries and related fees. The Company accounts for its remaining investment in AlliedSignal Inc. common stock as an available-for-sale security. On March 2, 1998, the Company consummated the acquisition of Edwards and Lock Management Corporation, doing business as Special-T Fasteners ("Special-T"), in a business combination accounted for as a purchase (the "Special-T Acquisition"). The contractual purchase price for the acquisition was valued at approximately $49.1 million, of which 50.1% was paid in shares of Class A Common Stock of the Company and 49.9% was paid in cash according to terms specified in the acquisition agreement. The total cost of the acquisition exceeded the fair value of the net assets of Special-T by approximately $23.4 million, which is preliminarily being allocated as goodwill, and amortized using the straight-line method over 40 years. Special-T manages the logistics of worldwide distribution of Company manufactured precision fasteners to customers in the aerospace industry, for government agencies, original equipment manufacturers, and other distributors. Consolidated Results The Company currently reports in two principal business segments: Aerospace Fasteners and Aerospace Distribution. The results of the Gas Springs Division are included in the Corporate and Other classification. The following table illustrates the historical sales and operating income of the Company's operations for the three months ended September 27, 1998 and September 28, 1997, respectively.
(In thousands) Three Months Ended Sept. 28 Sept. 27 1997 1998 Sales by Segment: Aerospace Fasteners $ 76,847 $ 96,558 Aerospace Distribution 122,914 50,528 Corporate and Other 1,362 1,453 Intersegment Eliminations (a) (6,761) - TOTAL SALES $194,362 $148,539 Operating Results by Segment: Aerospace Fasteners $ 2,510 $ 7,830 Aerospace Distribution 9,371 1,718 Corporate and Other 1,075 (3,909) OPERATING INCOME $ 12,956 $ 5,639 (a) Represents intersegment sales from the Aerospace Fasteners segment to the Aerospace Distribution segment.
The following table illustrates sales and operating income of the Company's operations by segment, on an unaudited pro forma basis, as though the Banner Hardware Group Disposition, the Special-T Acquisition, and the AS+C Acquisition had been in effect for the three months ended September 28, 1997. The pro forma information is based on the historical financial statements of the Company, Banner, Special-T, and AS+C giving effect to the aforementioned transactions. The pro forma information is not necessarily indicative of the results of operations that would actually have occurred if the transactions had been in effect since the beginning of each period, nor is it necessarily indicative of future results of the Company.
(In thousands) Sept. 28 1997 Sales by Segment: Aerospace Fasteners $ 85,824 Aerospace Distribution 56,435 Corporate and Other 1,362 TOTAL SALES $143,621 Operating Results by Segment: Aerospace Fasteners $ 4,469 Aerospace Distribution 3,372 Corporate and Other 1,240 OPERATING INCOME $ 9,081
Net sales of $148.5 million in the first quarter of Fiscal 1999 decreased by $45.8 million, or 23.6%, compared to sales of $194.4 million in the first quarter of Fiscal 1998. This decrease is primarily attributable to the loss of revenues resulting from the Banner Hardware Group Disposition. Approximately 7.2% of the current three months sales growth was stimulated by the commercial aerospace industry. Recent acquisitions contributed approximately 3.4% to the sales growth, while divestitures decreased growth by approximately 34.2%. On a pro forma basis, net sales increased 3.4% for the three months ended September 27, 1998 compared to the three months ended September 28, 1997. Gross margin as a percentage of sales was 23.8% and 23.3% in the first quarter of Fiscal 1998 and 1999, respectively. The lower margins in the Fiscal 1999 period is attributable to a change in product mix in the Aerospace Distribution segment as a result of the Banner Hardware Group Disposition. Partially offsetting overall lower margins were improved margins within the Aerospace Fasteners segment resulting from efficiencies associated with increased production, improved skills of the work force, and reduction in the payment of overtime. Selling, general & administrative expense as a percentage of sales remained stable at 18.9% in both the first quarter of Fiscal 1998 and 1999. Other income decreased $4.1 million in the first quarter of Fiscal 1999, compared to the first quarter of Fiscal 1998. The Company recognized $4.4 million of income in the prior period from the sale of air rights over a portion of the property the Company owns and is developing in Farmingdale, New York. Operating income of $5.6 million in the first quarter of Fiscal 1999 decreased 56.5%, compared to operating income of $13.0 million in the first quarter of Fiscal 1998. This decrease is primarily attributable to the loss of operating income resulting from the Banner Hardware Group Disposition and the decrease in other income. Net interest expense decreased $5.7 million, or 45.5%, in first quarter of Fiscal 1999 compared to the first quarter of Fiscal 1998. The decreases were due to a series of transactions that significantly reduced the Company's total debt. Minority interest decreased by $0.9 million in the first quarter of Fiscal 1998, as a result of lower earnings contributed by Banner and the increase in the Company's ownership of Banner as a result of the Exchange Offer. An income tax provision of $0.3 million in the first three months of Fiscal 1999 represented a 45.0% effective tax rate on pre-tax earnings from continuing operations (excluding equity in earnings of affiliates and minority interest) of $0.6 million. The tax provision was higher than the statutory rate because amortization of goodwill is not deductible for income tax purposes. Included in loss from discontinued operations for the three months ended September 28, 1997, are the results of Fairchild Technologies ("Technologies") and the Company's equity in earnings of STFI prior to the STFI Merger. Net earnings of $1.2 million in the first three months ended September 27, 1998, improved by $0.7 million compared to the $0.5 million net earnings recorded in the three months ended September 28, 1997. Comprehensive income (loss) includes foreign currency translation adjustments and unrealized holding changes in the fair market value of available-for-sale investment securities. The fair market value of unrealized holding securities declined by $30.4 million in the three months ended September 27, 1998, primarily as a result of a decrease in the value of AlliedSignal common stock which was received from the Banner Hardware Group Disposition. Segment Results Aerospace Fasteners Segment Sales in the Aerospace Fasteners segment increased by $19.7 million, or 25.6%, in the first quarter of Fiscal 1999, compared to the first quarter of Fiscal 1998, reflecting growth experienced in the commercial aerospace industry combined with the effect of acquisitions. Approximately 17.0% of the increase in sales in the current three-month period resulted from internal growth, while acquisitions contributed approximately 8.6% to the increase. New orders have leveled off in recent months. Backlog was reduced to $166 million at September 27, 1998, down from $177 million at June 30, 1998. On a pro forma basis, including the results from acquisitions in the prior period, sales increased 12.5% in the first quarter of Fiscal 1999, compared to the same period in the prior year. Operating income improved by $5.3 million, or 212%, in the first quarter of Fiscal 1999, compared to the first quarter of Fiscal 1998. Acquisitions and marketing changes were contributors to this improvement. Approximately 101.8% of the increase in operating income during the first quarter of Fiscal 1999 reflected internal growth, while acquisitions contributed approximately 110.2% to the increase. The Company anticipates that manufacturing and productivity efficiencies will further improve operating income in the coming months. On a pro forma basis, operating income increased $3.4 million, or 75.2%, for the three months ended September 27, 1998, compared to the three months ended September 28, 1997. Aerospace Distribution Segment Aerospace Distribution sales decreased by $72.4 million, or 58.9% in the first quarter Fiscal 1999, compared to the first quarter Fiscal 1998, due primarily to the loss of revenues as a result of the Banner Hardware Group Disposition. Of the decrease in sales in the current three-month period approximately 54.1% resulted from divestitures, and approximately 4.8% resulted from a decrease in internal growth. On a pro forma basis, excluding sales contributed by dispositions, sales decreased 10.5% in the first quarter of Fiscal 1999, compared to the same period in the prior year. Operating income decreased $7.6 million, in the first quarter of Fiscal 1999, compared to the same period of the prior year, due primarily to the Banner Hardware Group Disposition. On a pro forma basis, excluding results contributed by dispositions, operating income decreased $1.7 million in the first quarter of Fiscal 1999, compared to the first quarter of Fiscal 1998. Corporate and Other The Corporate and Other classification includes the Gas Springs Division and corporate activities. The group reported a slight increase in sales in the first quarter of Fiscal 1999, compared to first quarter in Fiscal 1998. An operating loss of $4.0 million in the first quarter of Fiscal 1999 was $5.0 million lower than operating income of $1.0 million reported in the first quarter of Fiscal 1998. The comparable period in the prior year included other income of $4.4 million realized as a result the sale of air rights over a portion of the property the Company owns and is developing in Farmingdale, New York. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Total capitalization as of September 27, 1998 and June 30, 1998 amounted to $782.2 million and $789.6 million, respectively. The changes in capitalization included an increase in debt of $35.1 million and a decrease in equity of $42.5 million. The increase in debt was primarily the result of additional borrowings for investment purposes and the purchase of the Company's common stock. The decrease in equity was primarily due to an $18.7 million increase in the Company's treasury stock and a $30.4 million net unrealized loss recorded from the decline in the market value of available-for-sale securities, partially offset by a $5.2 million increase in foreign currency translation adjustment. The Company maintains a portfolio of investments classified as available-for-sale securities, which had a fair market value of $193.9 million at September 27, 1998. The market value of these investments depreciated $49.7 million in the first quarter of Fiscal 1999 and there is risk associated with market fluctuations inherent to stock investments. Additionally, because the Company's portfolio is small and predominately consists of a large position in AlliedSignal Inc. common stock, large swings in the value of the portfolio should be expected. In the quarter ended September 27, 1998, the Company reclassified a large portion of its investment portfolio to current assets as a result of an increased probability that these investments will be liquidated during the next twelve months, subject to market conditions. Net cash used by operating activities for the three months ended September 27, 1998 and September 28, 1997 was $9.2 million and $35.3 million, respectively. The primary use of cash for operating activities in the first quarter of Fiscal 1999 was an increase in inventories of $20.8 million and a decrease in accounts payable and accrued liabilities of $10.8 million, which were partially offset by a $20.7 decrease in accounts receivable and other current assets. The primary use of cash for operating activities in the first quarter of Fiscal 1998 was an increase in inventories of $16.9 million and accounts receivable of $4.1 million and a decrease in accounts payable and other accrued liabilities of $14.1 million. Net cash provided from investing activities for the three months ended September 27, 1998 and September 28, 1997, amounted to $9.4 million and $2.5 million, respectively. In the first quarter of Fiscal 1999, capital expenditures were the primary use of cash from investing activities. In the first quarter of Fiscal 1998, the primary use of cash from investing activities were capital expenditures of $9.1 million partially offset by $7.8 million of net proceeds received from investment liquidations. Net cash provided by financing activities for the three months ended September 27, 1998 and September 28, 1997, amounted to $16.6 million and $27.6 million, respectively. Cash provided by financing activities in the first quarter of Fiscal 1999 included $41.4 million net increase from the issuance of additional debt, partially offset by the repayment of debt and the $18.7 million purchase of treasury stock. The primary source of cash provided by financing activities in the first quarter of Fiscal 1998 was the net proceeds received from the issuance of additional debt of $95.1 million, partially offset by cash used for the repayment of debt and the repurchase of debentures of $67.6 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. For the Company's fiscal years ended June 30, 1996, 1997, 1998, and for the first quarter of Fiscal 1999, Fairchild Technologies ("Technologies") had pre-tax operating losses of approximately $1.5 million, $3.6 million, $48.7 million, and $8.2 million, respectively. In addition, as a result of the downturn in the Asian markets, Technologies has experienced delivery deferrals, reduction in new orders, lower margins and increased price competition. In response, in February 1998, the Company adopted a formal plan to enhance the opportunities for the disposition of Technologies, while improving the ability of Technologies to operate more efficiently. The plan includes a reduction in production capacity, work force, and the pursuit of potential vertical and horizontal integration with peers and competitors of the two divisions that constitute Technologies, or the inclusion of those divisions in a spin-off. If the Company elects to include Technologies in a spin-off, the Company believes that it would be required to contribute substantial additional resources to allow Technologies the liquidity necessary to sustain and grow both the Fairchild Technologies' operating divisions. The Company is considering a transaction designed to separate the aerospace fasteners business of the Company from the aerospace distribution and other businesses of the Company. The transaction would consist of distributing (the "Spin-Off") to its shareholders all of the stock of a subsidiary to be formed ("Spin-Co"), consisting of the Company's aerospace fasteners segment. The Spin-Off would result in the formation of two publicly traded companies, each of which would be able to pursue an independent strategic path. The Company believes this separation would offer both companies the opportunity to pursue strategic objectives appropriate to different businesses and to create targeted incentives for their management and key employees. In addition, the Spin-Off would be expected to offer each entity greater financial flexibility in their respective capital raising strategies. The Company has conditioned the Spin-Off distribution upon, among other things, (i) approval of the Spin-Off by the Company's shareholders; (ii) receiving confirmation that the distribution will qualify as a tax- free transaction under Section 355 of the Internal Revenue Code of 1986, as amended; (iii) the transfer of assets and liabilities, contemplated by an agreement to be entered into between the Company and Spin-Co, having been consummated in all material respects; (iv) the Spin-Co Class A Common Stock having been approved for listing on the New York Stock Exchange; (v) a Form 10 registration statement with respect to Spin-Co Class A Common Stock becoming effective under the Securities Exchange Act of 1934, as amended; and (vi) receipt of a satisfactory solvency opinion for each entity. Although the Company's ability to effect the Spin-Off is uncertain, the Company may effect the Spin-Off as soon as it is reasonably practicable following receipt of the aforementioned items relating to Spin-Co and all necessary governmental and third party approvals. In order to effect the Spin-Off, approval is required from the board of directors of the Company. The composition of the assets and liabilities to be included in Spin-Co, and accordingly the ability of the Company to consummate the Spin-Off, is contingent, among other things, on obtaining consents and waivers under the Company's New Credit Facility. In addition, the Company may encounter unexpected delays in effecting the Spin-Off, and the Company can make no assurance as to the timing thereof. In addition, prior to the consummation of the Spin-Off, the Company may sell, restructure or otherwise change the assets and liabilities that will be in Spin-Co, or for other reasons elect not to consummate the Spin-Off. Because circumstances may change and because provisions of the Internal Revenue Code of 1986, as amended, may be further amended from time to time, the Company may, depending on various factors, restructure or delay the timing of the Spin-Off to minimize the tax consequences thereof to the Company and its shareholders. Consequently, there can be no assurance that the Spin-Off will ever occur. Year 2000 As the end of the century nears, there is a widespread concern that many existing computer programs that use only the last two digits to refer to a year will not properly recognize a year that begins with the digits "20" instead of "19." If not corrected, many computer applications could fail, create erroneous results, or cause unanticipated systems failures, among other problems. The Company has begun to take appropriate measures to ensure that its information processing systems, embedded technology and other infrastructure will be ready for the Year 2000. The Company has retained both technical review and modification consultants to help it assess its Year 2000 readiness. Working with these consultants and other advisors, the Company has formulated a plan to address Year 2000 issues. Under this plan, the Company's systems are being modified or replaced, or will be modified or replaced, as necessary, to render them, as far as possible, Year 2000 compliant. Substantially all of the material systems within the Aerospace Fasteners segment are currently Year 2000 compliant. Within the Aerospace Distribution segment and at Fairchild Technologies, the Company intends to replace and upgrade a number of important systems that are not Year 2000 compliant, and is assessing the extent to which current product inventories may include embedded technology that is not Year 2000 compliant. The Company expects to complete initial testing of its most critical information technology and related systems by June 30, 1999, and anticipates that it will complete its Year 2000 preparations by October 31, 1999. The Company could be subject to liability to customers and other third parties if its systems are not Year 2000 compliant, resulting in possible legal actions for breach of contract, breach or warranty, misrepresentation, unlawful trade practices and other harm. In addition, the Company is continually attempting to assess the level of Year 2000 preparedness of its key suppliers, distributors, customers and service providers. To this end, the Company has sent, and will continue to send, letters, questionnaires and surveys to its significant business partners inquiring about their Year 2000 efforts. If a significant business partner of the Company fails to be able to supply to, or accept from, the company, business services or products, for a material period, the Company could suffer a material loss of business or incur material expenses. The Company is also developing and evaluating contingency plans to deal with events affecting the Company or one of its business partners arising from significant Year 2000 problems. These contingency plans include identifying alternative suppliers, distribution networks and service providers. Although the Company's Year 2000 assessment, implementation and contingency planning is not yet complete, the Company does not now believe that Year 2000 issues will materially affect its business, results of operations or financial condition. However, the Company's Year 2000 efforts may not be successful in every respect. To date, the Company has incurred approximately $0.5 million in costs that are directly attributable to addressing Year 2000 issues. Management currently estimates that the Company will incur between $2 million and $3 million in additional costs during the next 15 months relating to the Year 2000 problem. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 131 ("SFAS 131") "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 supersedes Statement of Financial Accounting Standards No. 14 "Financial Reporting for Segments of a Business Enterprise" and requires that a public company report certain information about its reportable operating segments in annual and interim financial reports. Generally, financial information is required to be reported on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. The Company will adopt SFAS 131 in Fiscal 1999. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132 ("SFAS 132") "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS 132 revises and improves the effectiveness of current note disclosure requirements for employers' pensions and other retiree benefits by requiring additional information to facilitate financial analysis and eliminating certain disclosures which are no longer useful. SFAS 132 does not address recognition or measurement issues. The Company will adopt SFAS 132 in Fiscal 1999. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes a new model for accounting for derivatives and hedging activities and supersedes and amends a number of existing accounting standards. It requires that all derivatives be recognized as assets and liabilities on the balance sheet and measured at fair value. The corresponding derivative gains or losses are reported based on the hedge relationship that exists, if any. Changes in the fair value of hedges that are not designated as hedges or that do not meet the hedge accounting criteria in SFAS 133 are required to be reported in earnings. Most of the general qualifying criteria for hedge accounting under SFAS 133 were derived from, and are similar to, the existing qualifying criteria in SFAS 80 "Accounting for Futures Contracts." SFAS 133 describes three primary types of hedge relationships: fair value hedge, cash flow hedge, and foreign currency hedge. The Company will adopt SFAS 133 in Fiscal 1999 and is currently evaluating the financial statement impact. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The table below provides information about the Company's derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, which include interest rate swaps. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date.
Expected Fiscal Year Maturity Date 1999 2000 2001 2002 2003 Thereafter Interest Rate Swaps: Variable to Fixed - 20,000 60,000 - - 100,000 Average cap rate - 7.25% 6.81% - - 6.49% Average floor rate - 5.84% 5.99% - - 6.24% Weighted average rate - 4.93% 4.86% - - 5.35% Fair Market Value - (157) (433) - - (10,763)
PART II. OTHER INFORMATION Item 1. Legal Proceedings The information required to be disclosed under this Item is set forth in Footnote 10 (Contengencies) of the Consolidated Financial Statements (Unaudited) included in this Report. Item 2. Changes in Securities and Use of Proceeds On September 25, 1998, in accordance with the terms of the Special-T Acquisition, the Company issued 9,911 restricted shares of the Company's Class A Common Stock to Robert E. Edwards, as additional merger consideration. Information regarding the Special-T Acquisition is set forth in Footnote 2 (Business Combinations) of the Consolidated Financial Statements (Unaudited) included in this Report. Item 5. Other Information Articles have appeared in the French press reporting an inquiry by a French magistrate into certain allegedly improper business transactions involving Elf Acquitaine, a French petroleum company, its former chairman and various third parties, including Maurice Bidermann. In connection with this inquiry, the magistrate has made inquiry into allegedly improper transactions between Mr. Steiner and that petroleum company. In response to the magistrate's request that Mr. Steiner appear in France as a witness, Mr. Steiner submitted written statements concerning the transactions and appeared in person before the magistrate and others. Mr. Steiner, who has been put under examination (mis en examen), by the magistrate, with respect to this matter, has not been charged. Mr. Steiner has been cited by a French prosecutor to appear on November 23, 1998, before the Tribunal de Grande Instance de Paris, to answer a charge of knowingly benefiting in 1990, from a misuse by Mr. Bidermann of corporate assets of Societe Generale Mobiliere et Immobiliere, a French corporation in which Mr. Bidermann is believed to have been the sole shareholder. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: *10.1 Third amendment dated September 25, 1998 to the Agreement and plan of Merger dated January 28, 1998, as amended on February 20, 1998, and March 2, 1998, between the Company and the shareholders' of Special-T Fasteners. *27 Financial Data Schedules. * - Filed herewith (b) Reports on Form 8-K: There have been no reports on Form 8-K filed during the quarter. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to the signed on its behalf by the undersigned hereunto duly authorized. For THE FAIRCHILD CORPORATION (Registrant) and as its Chief Financial Officer: By: Colin M. Cohen Senior Vice President and Chief Financial Officer Date: November 11, 1998 EX-10 2 THIRD AMENDMENT TO AGREEMENT AND PLAN OF MERGER This THIRD AMENDMENT TO AGREEMENT AND PLAN OF MERGER dated as of September 17, 1998 ("Third Amendment") is made by and among The Fairchild Corporation, a Delaware corporation ("Fairchild"), Special-T Fasteners, Inc., a Delaware corporation ("Fairchild Subsidiary") as the surviving corporation of the merger with Edwards & Lock Management Corp. ("Fasteners") and Robert Edwards, a California resident ("Edwards"), amending certain provisions of the Agreement and Plan of Merger dated as of January 28, 1998 (including the exhibits and schedules thereto, the "Merger Agreement"), as amended to date, by and among Fairchild, Fairchild Subsidiary, Fasteners and Edwards. Terms used but not otherwise defined herein shall have the respective meanings ascribed thereto in the Merger Agreement. WHEREAS, Fairchild, Fairchild Subsidiary and Edwards have agreed to modify certain terms and conditions as specifically set forth in this Third Amendment. NOW, THEREFORE, in consideration of the premises and mutual agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I AMENDMENTS TO THE MERGER AGREEEMENT 1.1 The first sentence of Section 3.3(a) of the Merger Agreement is revised in its entirety to read as follows: (a) During the period commencing on the Effective Date and ending upon the earlier of (a) the second anniversary of the Effective Date or (b) the date Edwards or an Edwards Affiliate (as defined below) no longer owns at least 50% of the 1,055,141 shares of Fairchild Common Stock received by Edwards in connection with the Merger (as adjusted for any stock split or reclassification) (the "Edwards' Shares"), Edwards will be paid the amount, if any, (the "Additional Merger Consideration") by which (i) 10% of the aggregate EBITD (as defined below) of the Surviving Corporation (the "Earnings Share") for the period commencing on the Effective Date and ending June 30, 1998 and thereafter for all completed fiscal quarters (for which Edwards or an Edwards Affiliate owned at least 50% of the Edwards' Shares for such entire fiscal quarter) exceeds (ii) $520,000 per year (the "Amount") (pro rated on a per diem basis for any period less than 12 calendar months); provided, however, that if during the period commencing on the Effective Date and ending one year later the Earnings Share accrued for such period is less than the Amount, then the difference between the Amount and the Earnings Share accrued for such period shall be subtracted from any Additional Merger Consideration accruable for the next fiscal quarter and thereafter from each subsequent fiscal quarter until such difference shall be consumed. 1.2 The next to last sentence of Section 3.3(b) is revised in its entirety to read as follows: The "Adjustment Date" shall be the last day of each fiscal year of the Surviving Corporation; provided that if Edwards or an Edwards Affiliate no longer owns at least 50% of the Edwards' Shares, the Adjustment Date shall be the date Edwards or an Edwards Affiliate no longer owns at least 50% of the Edwards' Shares. 1.3 An additional sentence is added to Section 3.3(b) as the last sentence of such section to read as follows: "For purposes of this Agreement, an Edwards Affiliate shall be any of Edwards' family members, any trust for the benefit of any of Edwards' family members, or any corporation, limited liability company or other entity controlled by Edwards, any of Edwards' family members or any such trust." 1.4 The last sentence of Section 3.3(a) is revised in its entirety to read as follows: "EBITD" means the consolidated net income of a person for any period plus, to the extent deducted in determining consolidated net income, the Amount, consolidated interest expense, federal, state, local and foreign income tax expense and depreciation expense of such person for such period, in each case as determined in accordance with generally accepted accounting principles in the United States as in effect from time to time. ARTICLE II AMENDMENT OF REGISTRATION RIGHTS AGREEMENT 2.1 Section 3 of the Registration Rights Agreement attached to the Merger Agreement as Exhibit A, shall be deleted in its entirety to read as follows: "INTENTIONALLY OMITTED." ARTICLE III PROVISIONS OF GENERAL APPLICATION 3.1 Except as otherwise expressly provided by this Third Amendment, all of the terms, conditions and provisions to the Merger Agreement remain unaltered. The Merger Agreement and this Third Amendment shall be read and construed as one agreement. 3.2 If any of the terms of this Third Amendment shall conflict in any respect with any of the terms of the Merger Agreement, the terms of this Third Amendment shall be controlling. This Third Amendment will be effective as of March 2, 1998. IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to be executed by their duly authorized officers, all as of the day and year first above written. THE FAIRCHILD CORPORATION By: John L. Flynn Title: Senior Vice President Tax SPECIAL-T FASTENERS, INC. By: John L. Flynn Title: Vice President Robert Edwards (i) (1) EX-27 3
5 1,000 3-MOS JUN-30-1999 SEP-27-1998 49,428 175,802 115,536 5,345 238,303 617,757 211,171 86,840 1,122,477 170,473 327,500 0 0 2,932 428,169 1,122,477 148,539 148,958 113,867 1,433,199 0 0 6,853 647 291 1,190 0 0 0 1,190 0.05 0.05
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