-----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, BCBtHy/hTqgFtsXx7qT6VSJKAU151E2AkWrxoeMMJO/yoQBu/ke3SADOtAls5AF1 rV5rJt4TCAkXVcn+QCGYfQ== 0000009779-01-500011.txt : 20010511 0000009779-01-500011.hdr.sgml : 20010511 ACCESSION NUMBER: 0000009779-01-500011 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001001 FILED AS OF DATE: 20010510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FAIRCHILD CORP CENTRAL INDEX KEY: 0000009779 STANDARD INDUSTRIAL CLASSIFICATION: BOLTS, NUTS, SCREWS, RIVETS & WASHERS [3452] IRS NUMBER: 340728587 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-06560 FILM NUMBER: 1629031 BUSINESS ADDRESS: STREET 1: 45025 AVIATION DR STREET 2: STE 400 CITY: DULLES STATE: VA ZIP: 20166 BUSINESS PHONE: 7034785800 MAIL ADDRESS: STREET 1: 45025 AVIATION DRIVE STREET 2: SUITE 400 CITY: DULLES STATE: VA ZIP: 20166 FORMER COMPANY: FORMER CONFORMED NAME: BANNER INDUSTRIES INC /DE/ DATE OF NAME CHANGE: 19901118 10-Q/A 1 q12001amended.txt 10-Q AMENDED - Q1 2001 26 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended October 1, 2000 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 April 1, 2001 -------------- ------------- Class A Common Stock, $0.10 Par Value 22,527,801 Class B Common Stock, $0.10 Par Value 2,621,502
AMENDMENT: The purpose of this amendment is to provide restated financial information and additional disclosure for Part I, Financial Information. The Company is improving its results for the three months ended October 1, 2000, by restating a $0.5 million loss, or $0.02 per share, previously recognized from the cumulative effect of change in accounting for derivatives to other comprehensive income. See Note 8 of Part I, Item 1 "Financial Information." The Company is also enhancing its segment disclosure to reflect the addition of our real estate segment. THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES INDEX Page ---- PART I.FINANCIAL INFORMATION Item 1. Condensed Consolidated Balance Sheets as of October 1, 2000 (Unaudited) and June 30, 2000.............................. 3 Consolidated Statements of Earnings (Unaudited)for the Three Months ended October 1, 2000 and October 3, 1999........... 5 Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months ended October 1, 2000 and October 3, 1999 7 Notes to Condensed Consolidated Financial Statements (Unaudited) 8 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition.................................... 18 Item 3. Quantitative and Qualitative Disclosure About Market Risk.. 24 All references in this Quarterly Report on Form 10-Q to the terms "we," "our," "us," the "Company" and "Fairchild" refer to The Fairchild Corporation and its subsidiaries. All references to "fiscal" in connection with a year shall mean the 12 months ended June 30. PART I. FINANCIAL INFORMATION ----------------------------- ITEM 1. FINANCIAL STATEMENTS ----------------------------
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS October 1, 2000 (Unaudited) and June 30, 2000 (In thousands) ASSETS October 1, June 30, 2000 2000 ------------------ ------------------ (*) CURRENT ASSETS: Cash and cash equivalents, $13,907 and $14,287 restricted $ 32,816 $ 35,790 Short-term investments 4,024 9,054 Accounts receivable-trade, less allowances of $10,554 and $9,598 112,908 127,230 Inventories: Finished goods 136,169 138,330 Work-in-process 30,271 30,523 Raw materials 12,539 11,006 ------------------ ------------------ 178,979 179,859 Prepaid expenses and other current assets 84,393 74,231 ------------------ ------------------ Total Current Assets 413,120 426,164 Property, plant and equipment, net of accumulated depreciation of $143,496 and $142,938 164,841 174,137 Net assets held for sale 17,590 20,112 Cost in excess of net assets acquired (Goodwill), less accumulated amortization of $55,921 and $52,826 430,324 436,442 Investments and advances, affiliated companies 3,325 3,238 Prepaid pension assets 64,510 64,418 Deferred loan costs 14,278 14,714 Real estate investment 113,578 112,572 Long-term investments 9,271 10,084 Other assets 5,948 5,539 ------------------ ------------------ TOTAL ASSETS $ 1,236,785 $ 1,267,420 ================== ================== *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 October 1, 2000 (Unaudited) and June 30, 2000 (In thousands) LIABILITIES AND STOCKHOLDERS' EQUITY October 1, June 30, 2000 2000 ------------------ ------------------ CURRENT LIABILITIES: (*) - -------------------- Bank notes payable and current maturities of long-term debt $ 26,963 $ 28,594 Accounts payable 50,838 62,494 Accrued liabilities: Salaries, wages and commissions 32,999 38,065 Employee benefit plan costs 6,080 5,608 Insurance 11,523 12,237 Interest 12,203 6,408 Other accrued liabilities 48,429 60,123 ------------------ ------------------ Total Current Liabilities 189,035 213,529 LONG-TERM LIABILITES: Long-term debt, less current maturities 473,537 453,719 Fair market value of interest rate contract 470 - Other long-term liabilities 25,592 26,741 Retiree health care liabilities 42,597 42,803 Noncurrent income taxes 113,969 128,515 ------------------ ------------------ TOTAL LIABILITIES 845,200 865,307 STOCKHOLDERS' EQUITY: Class A common stock, $0.10 par value; authorized 40,000 shares, 30,290 (30,079 in June) shares issued and 22,430 (22,430 in June) shares outstanding 3,029 3,008 Class B common stock, $0.10 par value; authorized 20,000 Shares, 2,622 shares issued and outstanding 262 262 Paid-in capital 232,494 231,190 Treasury stock, at cost, 7,807 (7,649 in June) shares of Class A common stock (76,545) (75,506) Retained earnings 256,343 261,788 Notes due from stockholders (1,867) (1,867) Cumulative other comprehensive income (22,131) (16,762) ------------------ ------------------ TOTAL STOCKHOLDERS' EQUITY 391,585 402,113 ------------------ ------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,236,785 $ 1,267,420 ================== ================== *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 October 1, 2000 and October 3, 1999 (In thousands, except per share data) Three Months Ended ------------------------------------- 10/01/00 10/03/99 ----------------- ----------------- REVENUE: Net sales $148,367 $164,509 Other income, net 2,516 4,828 ----------------- ----------------- 150,883 169,337 COSTS AND EXPENSES: Cost of goods sold 113,591 121,362 Selling, general & administrative 29,862 31,828 Amortization of goodwill 3,134 3,096 Restructuring - 3,017 ----------------- ----------------- 146,587 159,303 OPERATING INCOME 4,296 10,034 Interest expense 12,983 12,209 Interest income (524) (735) ----------------- ----------------- Net interest expense 12,459 11,474 Investment income (loss) (380) 880 Decrease in fair market value of interest rate contract (470) - Nonrecurring gain - 28,003 ----------------- ----------------- Earnings (loss) from continuing operations before taxes (9,013) 27,443 Income tax benefit (provision) 3,574 (9,132) Equity in earnings (loss) of affiliates, net (6) (201) ----------------- ----------------- NET EARNINGS (LOSS) $ (5,445) $ 18,110 ================= ================= Other comprehensive income (loss), net of tax: Foreign currency translation adjustments (4,080) (1,648) Unrealized holding changes on derivatives arising during the period (528) - Unrealized holding changes on securities arising during the period (761) (5,006) ----------------- ----------------- Other comprehensive loss (5,369) (6,654) ----------------- ----------------- COMPREHENSIVE INCOME (LOSS) $ (10,814) $ 11,456 ================= ================= 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 October 1, 2000 and October 3, 1999 (In thousands, except per share data) Three Months Ended ------------------------------------- 10/01/00 10/03/99 ----------------- ----------------- BASIC EARNINGS PER SHARE: NET EARNINGS (LOSS) $ (0.22) $ 0.73 ================= ================= Other comprehensive income (loss), net of tax: Foreign currency translation adjustments $ (0.16) $ (0.07) Unrealized holding changes on derivatives arising during the period (0.02) - Unrealized holding changes on securities arising during the period (0.03) (0.20) ----------------- ----------------- Other comprehensive loss (0.21) (0.27) ----------------- ----------------- COMPREHENSIVE INCOME (LOSS) $ (0.43) $ 0.46 ================= ================= DILUTED EARNINGS PER SHARE: NET EARNINGS (LOSS) $ (0.22) $ 0.72 ================= ================= Other comprehensive income (loss), net of tax: Foreign currency translation adjustments $ (0.16) $ (0.07) Unrealized holding changes on derivatives arising during the period (0.02) - Unrealized holding changes on securities arising during the period (0.03) (0.20) ----------------- ----------------- Other comprehensive loss (0.21) (0.27) ----------------- ----------------- COMPREHENSIVE INCOME (LOSS) $ (0.43) $ 0.45 ================= ================= Weighted average shares outstanding: Basic 25,068 24,862 Diluted 25,068 25,026 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 October 1, 2000 and October 3, 1999 (In thousands) For the Three Months Ended ------------------------------------- 10/1/00 10/3/99 ------------------ ------------------ Cash flows from operating activities: Net earnings (loss) $ (5,445) $ 18,110 Depreciation and amortization 10,950 9,968 Accretion of discount on long-term liabilities 205 897 Amortization of deferred loan fees 456 413 Net gain on divestiture of investment in affiliate - (25,747) Net gain on divestiture of subsidiary - (2,256) Distributed (undistributed) earnings of affiliates, net 9 310 Change in assets and liabilities (31,280) (12,064) Non-cash charges and working capital changes of discontinued operations - (10,930) ------------------ ------------------ Net cash used for operating activities (25,105) (21,299) Cash flows from investing activities: Purchase of property, plant and equipment (3,861) (11,879) Net proceeds received from (used for) investment securities 4,759 (3,933) Net proceeds received from divestiture of investment in affiliate - 43,103 Net proceeds received from divestiture of subsidiary - 4,906 Real estate investment (1,601) (5,329) Proceeds received from net assets held for sale 2,211 1,346 Investing activities of discontinued operations - 7,100 ------------------ ------------------ Net cash provided by investing activities 1,508 35,314 Cash flows from financing activities: Proceeds from issuance of debt 23,453 126,691 Debt repayments (2,608) (142,279) Issuance of Class A common stock 194 90 Purchase of treasury stock - (624) ------------------ ------------------ Net cash provided by (used for) financing activities 21,039 (16,122) Effect of exchange rate changes on cash (416) 437 ------------------ ------------------ Net change in cash and cash equivalents (2,974) (1,670) Cash and cash equivalents, beginning of the year 35,790 54,860 ------------------ ------------------ Cash and cash equivalents, end of the period $ 32,816 $ 53,190 ================== ================== 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 October 1, 2000, and the consolidated statements of earnings and cash flows for the three months ended October 1, 2000 and October 3, 1999 have been prepared by us, 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 October 1, 2000, and for all periods presented, have been made. The balance sheet at June 30, 2000 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 our June 30, 2000 Annual Report on Form 10-K. The results of operations for the period ended October 1, 2000 are not necessarily indicative of the operating results for the full year. Certain amounts in the prior year's quarterly financial statements have been reclassified to conform to the current presentation. 2. PRO FORMA FINANCIAL STATEMENTS The unaudited pro forma consolidated statement of earnings for the three months ended October 3, 1999 have been prepared to give effect to the dispositions of Dallas Aerospace (December 1999) and the investment in Nacanco (July 1999), as if these transaction had occurred on July 1, 1999. The unaudited pro forma information is not intended to be indicative of future results of our operations or results that might have been achieved if these transactions had been in effect since the beginning of the three months ended October 3, 1999.
For the three months ended: October 3, 1999 ----------------- Net sales $ 153,365 Gross profit 40,864 Net earnings 786 Net earnings, per basic share $ 0.03 Net earnings, per diluted share $ 0.03
3. EQUITY SECURITIES We had 22,482,688 shares of Class A common stock and 2,621,652 shares of Class B common stock outstanding at October 1, 2000. 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. The shares of Class A common stock are entitled to one vote per share and cannot be exchanged for shares of Class B common stock. The 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 October 1, 2000, 52,966 shares of Class A common stock were issued as a result of the exercise of stock options. During the three months ended October 1, 2000, we issued 132,394 deferred compensation units pursuant to our stock option deferral plan, as a result of the exercise of 291,050 stock options. Each deferred compensation unit is represented by one share of our treasury stock and is convertible into one share of our Class A common stock after a specified period of time. 4. RESTRICTED CASH On October 1, 2000 and June 30, 2000, we had restricted cash of $13,907 and $14,287, respectively, all of which is maintained as collateral for certain debt facilities and escrow arrangements. 5. 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 ----------------------------------- 10/1/00 10/3/99 ---------------- --------------- Basic earnings per share: Net earnings (loss) from continuing operations $ (5,445) $ 18,110 ================ =============== Weighted average common shares outstanding 25,068 24,862 ================ =============== Basic earnings (loss) from continuing operations per share $ (0.22) $ 0.73 ================ =============== Diluted earnings per share: Net earnings (loss) from continuing operations $ (5,445) $ 18,110 ================ =============== Weighted average common shares outstanding 25,068 24,862 Options antidilutive 10 Warrants antidilutive 154 ---------------- --------------- Total shares outstanding 25,068 25,026 ================ =============== Diluted earnings (loss) from continuing operations per share $ (0.22) $ 0.72 ================ ===============
Stock options entitled to purchase 2,283,011 and 1,767,986 shares of Class A common stock were antidilutive and not included in the earnings per share calculation for the three months ended October 1, 2000 and October 3, 1999, respectively. Stock warrants entitled to purchase 650,000 shares of Class A common stock were antidilutive and not included in the earnings per share calculation for the three months ended October 1, 2000. These shares could be dilutive in subsequent periods. 6. CONTINGENCIES Environmental Matters Our 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 our financial condition, results of operations, or net cash flows, although we have expended, and can be expected to expend in the future, significant amounts for the investigation of environmental conditions and installation of environmental control facilities, remediation of environmental conditions and other similar matters, particularly in our aerospace fasteners segment. In connection with our plans to dispose of certain real estate, we must investigate environmental conditions and we may be required to take certain corrective action prior or pursuant to any such disposition. In addition, we have identified several areas of potential contamination related to other facilities owned, or previously owned, by us, that may require us either to take corrective action or to contribute to a clean-up. We are also a defendant in certain lawsuits and proceedings seeking to require us to pay for investigation or remediation of environmental matters and we have been alleged to be a potentially responsible party at various "superfund" sites. We believe that we have recorded adequate reserves in our 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 environmental liability, unless such parties are contractually obligated to contribute and are not disputing such liability. As of October 1, 2000, the consolidated total of our recorded liabilities for environmental matters was approximately $13.1 million, which represented the estimated probable exposure for these matters. It is reasonably possible that our total exposure for these matters could be approximately $19.7 million. Other Matters AlliedSignal (now Honeywell International) had asserted indemnification claims against us in an aggregate amount of $38.8 million, arising from the disposition of Banner Aerospace's hardware business to AlliedSignal. We claimed that AlliedSignal owed us approximately $6.8 million. In October 2000, we reached an agreement with AlliedSignal to settle these claims and as a result of the settlement no cash changed hands. We are involved in various other claims and lawsuits incidental to our business. We, either on our own or through our insurance carriers, are contesting these matters. In the opinion of management, the ultimate resolution of the legal proceedings, including those mentioned above, will not have a material adverse effect on our financial condition, future results of operations or net cash flows. 7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement of Financial Accounting Standards No. 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 derivative instruments 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. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137 to defer the required effective date of implementing SFAS 133 from fiscal years beginning after June 15, 1999 to fiscal years beginning after June 15, 2000. In fiscal 1998, we entered into a ten-year interest rate swap agreement to reduce our cash flow exposure to increases in interest rates on variable rate debt. The ten-year interest rate swap agreement provides us with interest rate protection on $100 million of variable rate debt, with interest being calculated based on a fixed LIBOR rate of 6.24% to February 17, 2003. On February 17, 2003, the bank will have a one-time option to elect to cancel the agreement or to do nothing and proceed with the transaction, using a fixed LIBOR rate of 6.715% for the period February 17, 2003 to February 19, 2008. We adopted SFAS 133 on July 1, 2000. At adoption, we recorded a decrease of $0.5 million in the fair market value of our $100 million interest rate swap agreement within other comprehensive income. The $0.5 million decrease will be amortized over the remaining life of the interest rate swap agreement using the effective interest method. The offsetting interest rate swap liability is separately being reported as a "fair market value of interest rate contract" within other long-term liabilities. In the statement of earnings we have recorded the net swap interest accrual as part of interest expense. Unrealized changes in the fair value of the Swap are recorded net of the current interest accrual on a separate line entitled "decrease in fair market value of interest rate derivatives." We did not elect to pursue hedge accounting for the interest rate swap agreement, which was executed to provide an economic hedge against cash flow variability on the floating rate note. When evaluating the impact of SFAS No. 133 on this hedge relationship, we assessed the key characteristics of the interest rate swap agreement and the note. Based on this assessment, we determined that the hedging relationship would not be highly effective. The ineffectiveness is caused by the existence of the embedded written call option in the interest rate swap agreement, and the absence of a mirror option in the hedged item. As such, pursuant to SFAS No. 133, we designated the interest rate swap agreement in the no hedging designation category. Accordingly, we have recognized a non-cash decrease in fair market value of interest rate derivatives of $0.4 million in the first quarter of fiscal 2001 as a result of the fair market value adjustment for our interest rate swap agreement. The fair market value adjustment of these agreements will generally fluctuate based on the implied forward interest rate curve for 3-month LIBOR. As the implied forward interest rate curve decreases, the fair market value of the interest hedge contract will increase and we will record an additional charge. As the implied forward interest rate curve increases, the fair market value of the interest hedge contract will decrease, and we will record income. In March 2000, the Company issued a floating rate note with a principal amount of $30,750,000. Embedded within the promissory note agreement is an interest rate cap. The embedded interest rate cap limits the 1-month LIBOR interest rate that we must pay on the note to 8.125%. At execution of the promissory note, the strike rate of the embedded interest rate cap of 8.125% was above the 1-month LIBOR rate of 6.61%. Under SFAS 133, the embedded interest rate cap is considered to be clearly and closely related to the debt of the host contract and is not required to be separated and accounted for separately from the host contract. For the quarterly period ended October 1, 2000, we accounted for the hybrid contract, comprised of variable rate note and the embedded interest rate cap as a single debt instrument. 8. SEGMENT INFORMATION We currently report in three principal business segments: aerospace fasteners, aerospace distribution and real estate operations. Since our last annual report, we are now reporting the results of the real estate operations as a separate segment. Previously, the results for our real estate operations were included within the corporate and other classification. The following table provides the historical results of our operations for the three months ended October 1, 2000 and October 2, 1999, respectively. Three Months Ended -------------------------- 10/1/00 10/3/99 -------------------------- SALES BY SEGMENT: Aerospace Fasteners Segment $125,446 $ 134,420 Aerospace Distribution Segment 22,921 29,350 Corporate and Other Segment - 739 -------------------------- TOTAL SALES $148,367 $ 164,509 -------------------------- OPERATING RESULTS BY SEGMENT: Aerospace Fasteners Segment (a) $ 6,999 $ 8,875 Aerospace Distribution Segment 1,287 2,257 Real Estate Segment (b) 564 101 Corporate and Other Segment (4,554) (1,199) -------------------------- TOTAL OPERATING INCOME $ 4,296 $ 10,034 -------------------------- EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES: Aerospace Fasteners Segment (a) $ 6,439 $ 8,124 Aerospace Distribution Segment 1,728 (234) Real Estate Segment (b) (265) 101 Corporate and Other Segment (16,915) 19,452 -------------------------- TOTAL EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES $ (9,013) $ 27,443 -------------------------- TOTAL ASSETS: 10/1/00 6/30/00 -------------------------- Aerospace Fasteners Segment $599,115 $632,152 Aerospace Distribution Segment 50,404 90,918 Real Estate Segment 117,220 120,092 Corporate and Other Segment 470,046 424,258 -------------------------- TOTAL ASSETS $1,236,785 $1,267,420 -------------------------- (a) - Includes restructuring charges of $3.0 million in the three October 3, 1999. (b) - Includes rental revenue of $1.7 million and $0.3 million for the three months ended October 1, 2000 and October 3, 1999, respectively.
9. CONSOLIDATING FINANCIAL STATEMENTS The following unaudited financial statements separately show The Fairchild Corporation and the subsidiaries of The Fairchild Corporation. These financial statements are provided to fulfill public reporting requirements, and separately present guarantors of the 10 3/4% senior subordinated notes due 2009 issued by The Fairchild Corporation (the "Parent Company"). The guarantors are composed primarily of our domestic subsidiaries, excluding Fairchild Technologies, a real estate development venture, and certain other subsidiaries.
CONSOLIDATING BALANCE SHEET OCTOBER 1, 2000 Parent Non Fairchild Company Guarantors Guarantors Eliminations Historical ----------- ------------ ------------ ------------- -------------- Cash $ 167 $ 26,311 $ 6,338 $ - $ 32,816 Marketable securities 71 3,953 - - 4,024 Accounts Receivable (including intercompany), less allowances 2,127 199,009 1,694 (89,922) 112,908 Inventory, net - 132,116 46,863 - 178,979 Prepaid and other current assets 351 31,748 7,828 44,466 84,393 ----------- ------------ ------------ ------------- -------------- Total current assets 2,716 393,137 62,723 (45,456) 413,120 Investment in Subsidiaries 872,629 - - (872,629) - Net fixed assets 479 125,597 38,765 - 164,841 Net assets held for sale - 17,590 - - 17,590 Investments in affiliates 945 2,380 - - 3,325 Goodwill 16,325 382,690 33,969 (2,660) 430,324 Deferred loan costs 12,957 22 1,299 - 14,278 Prepaid pension assets - 64,510 - - 64,510 Real estate investment - - 113,578 - 113,578 Long-term investments 355 9,404 - (488) 9,271 Other assets 17,562 (13,453) 1,840 (1) 5,948 ----------- ------------ ------------ ------------- -------------- Total assets $923,968 $ 981,877 $ 252,174 $(921,234) $ 1,236,785 =========== ============ ============ ============= ============== Bank notes payable & current maturities of debt $ 2,250 $ 1,791 $ 22,922 $ - $ 26,963 Accounts payable (including intercompany) 221 539,434 63,373 (552,190) 50,838 Other accrued expenses (27,580) 65,789 33,614 39,411 111,234 ----------- ------------ ------------ ------------- -------------- Total current liabilities (25,109) 607,014 119,909 (512,779) 189,035 Long-term debt, less current maturities 431,299 8,066 34,168 - 473,533 Fair market value of interest rate contract 474 474 Other long-term liabilities 405 19,605 5,580 - 25,590 Noncurrent income taxes 120,953 (663) 179 (6,500) 113,969 Retiree health care liabilities - 38,258 4,339 - 42,597 ----------- ------------ ------------ ------------- -------------- Total liabilities 528,022 672,280 164,175 (519,279) 845,198 Class A common stock 3,029 - 53 (53) 3,029 Class B common stock 262 - - - 262 Notes due from stockholders (520) (1,347) - - (1,867) Paid-in-capital 209,104 372,455 164,658 (513,723) 232,494 Retained earnings 260,398 (52,192) (63,991) 112,128 256,343 Cumulative other comprehensive income (267) (8,834) (12,721) (307) (22,129) Treasury stock, at cost (76,060) (485) - - (76,545) ----------- ------------ ------------ ------------- -------------- Total stockholders' equity 395,946 309,597 87,999 (401,955) 391,587 ----------- ------------ ------------ ------------- -------------- Total liabilities & stockholders' equity $923,968 $ 981,877 $ 252,174 $(921,234) $1,236,785 =========== ============ ============ ============= ==============
CONSOLIDATING STATEMENTS OF EARNINGS FOR THE THREE MONTHS ENDED OCTOBER 1, 2000 Parent Non Fairchild Company Guarantors Guarantors Eliminations Historical ----------- ------------ ------------ ------------- -------------- Net Sales $ - $ 116,058 $ 34,146 $ (1,837) $ 148,367 Costs and expenses Cost of sales - 90,824 24,604 (1,837) 113,591 Selling, general & administrative 1,363 22,250 3,733 - 27,346 Amortization of goodwill 202 2,683 249 - 3,134 ----------- ------------ ------------ ------------- -------------- 1,565 115,757 28,586 (1,837) 144,071 ----------- ------------ ------------ ------------- -------------- Operating income (loss) (1,565) 301 5,560 - 4,296 Net interest expense (including intercompany) (2,460) 12,388 2,531 - 12,459 Investment (income) loss, net - 380 - - 380 Fair market value adjustment of Interest Rate Contract 470 - - - 470 ----------- ------------ ------------ ------------- -------------- Earnings (loss) before taxes 425 (12,467) 3,029 - (9,013) Income tax (provision) benefit (169) 4,944 (1,201) - 3,574 Equity in earnings of affiliates and subsidiaries (5,701) (6) - 5,701 (6) ----------- ------------ ------------ ------------- -------------- Net earnings (loss) $ (5,445) $ (7,529) $ 1,829 $ 5,701 $ (5,445) =========== ============ ============ ============= ==============
CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED OCTOBER 1, 2000 Parent Non Fairchild Company Guarantors Guarantors Eliminations Historical ----------- ------------ ------------ ------------- -------------- Cash Flows from Operating Activities: Net earnings (loss) $ (5,445) $ (7,529) $ 1,828 $ 5,701 $ (5,445) Depreciation & amortization 232 8,124 2,594 - 10,950 Accretion of discount on long-term liabilities - 205 - - 205 Amortization of deferred loan fees 343 2 111 - 456 Undistributed (distributed) earnings of affiliates - 9 - - 9 Change in assets and liabilities (16,244) (919) (8,416) (5,701) (31,280) ----------- ------------ ------------ ------------- -------------- Net cash (used for) provided by operating activities (21,114) (108) (3,883) - (25,105) Cash Flows from Investing Activities: Proceeds received from (used for): Purchase of PP&E (30) (3,034) (797) - (3,861) Investment securities, net - 4,759 - - 4,759 Change in real estate investment - - (1,601) - (1,601) Change in net assets held for sale - 2,211 - - 2,211 ----------- ------------ ------------ ------------- -------------- Net cash (used for) provided by investing activities (30) 3,936 (2,398) - 1,508 Cash Flows from Financing Activities: Proceeds from issuance of debt 21,082 14 2,357 - 23,453 Debt repayments, net - (594) (2,014) - (2,608) Issuance of Class A common stock 194 - - - 194 ----------- ------------ ------------ ------------- -------------- Net cash (used for) provided by financing activities 21,276 (580) 343 - 21,039 Effect of exchange rate changes on cash - - (416) - (416) ----------- ------------ ------------ ------------- -------------- Net change in cash 132 3,248 (6,354) - (2,974) Cash, beginning of the year 35 23,063 12,692 - 35,790 ----------- ------------ ------------ ------------- -------------- Cash, end of the year $ 167 $ 26,311 $ 6,338 $ - $ 32,816 =========== ============ ============ ============= ==============
CONSOLIDATING BALANCE SHEET JUNE 30, 2000 Parent Non Fairchild Company Guarantors Guarantors Eliminations Historical ----------- ------------ ------------ ------------- -------------- Cash $ 35 $ 23,063 $ 12,692 $ - $ 35,790 Short-term investments 71 8,983 - - 9,054 Accounts Receivable (including intercompany), less allowances 2,079 82,054 43,097 - 127,230 Inventory, net - 130,634 49,225 - 179,859 Prepaid and other current assets 141 67,624 6,466 - 74,231 ----------- ------------ ------------ ------------- -------------- Total current assets 2,326 312,358 111,480 - 426,164 Investment in Subsidiaries 869,958 - - (869,958) - Net fixed assets 493 131,029 42,615 - 174,137 Net assets held for sale - 20,112 - - 20,112 Investments and advances in affiliates 945 2,293 - - 3,238 Goodwill 16,528 385,156 34,758 - 436,442 Deferred loan costs 13,284 24 1,406 - 14,714 Prepaid pension assets - 64,418 - - 64,418 Real estate investment - - 112,572 - 112,572 Long-term investments 355 9,729 - - 10,084 Other assets 17,592 (13,418) 1,365 - 5,539 ----------- ------------ ------------ ------------- -------------- Total assets $921,481 $ 911,701 $ 304,196 $(869,958) $1,267,420 =========== ============ ============ ============= ============== Bank notes payable & current maturities of debt $ 2,250 $ 2,194 $ 24,150 $ - $ 28,594 Accounts payable (including intercompany) 2,954 46,105 13,435 - 62,494 Other accrued expenses (42,778) 129,106 36,113 - 122,441 Net current liabilities of discontinued operations - - - - - ----------- ------------ ------------ ------------- -------------- Total current liabilities (37,574) 177,405 73,698 - 213,529 Long-term debt, less current maturities 410,691 8,242 34,786 - 453,719 Other long-term liabilities 405 19,839 6,497 - 26,741 Noncurrent income taxes 145,847 (17,525) 193 - 128,515 Retiree health care liabilities - 38,196 4,607 - 42,803 ----------- ------------ ------------ ------------- -------------- Total liabilities 519,369 226,157 119,781 - 865,307 Class A common stock 3,008 - 2,090 (2,090) 3,008 Class B common stock 262 - - - 262 Notes due from stockholders (520) (1,347) - - (1,867) Paid-in-capital 5,158 226,032 249,301 (249,301) 231,190 Retained earnings 469,270 469,183 (58,098) (618,567) 261,788 Cumulative other comprehensive income (46) (7,838) (8,878) - (16,762) Treasury stock, at cost (75,020) (486) - - (75,506) ----------- ------------ ------------ ------------- -------------- Total stockholders' equity 402,112 685,544 184,415 (869,958) 402,113 ----------- ------------ ------------ ------------- -------------- Total liabilities & stockholders' equity $921,481 $ 911,701 $ 304,196 $(869,958) $1,267,420 =========== ============ ============ ============= ==============
CONSOLIDATING STATEMENTS OF EARNINGS FOR THE THREE MONTHS ENDED OCTOBER 3, 1999 Parent Non Fairchild Company Guarantors Guarantors Eliminations Historical ----------- ------------ ------------ ------------- -------------- Net Sales $ - $ 123,893 $ 41,645 $ (1,029) $ 164,509 Costs and expenses: Cost of sales - 91,623 30,768 (1,029) 121,362 Selling, general & administrative 1,008 20,357 5,635 - 27,000 Restructuring - 3,017 - - 3,017 Amortization of goodwill 128 2,680 288 - 3,096 ----------- ------------ ------------ ------------- -------------- 1,136 117,677 36,691 (1,029) 154,475 ----------- ------------ ------------ ------------- -------------- Operating income (loss) (1,136) 6,216 4,954 - 10,034 Net interest expense 12,425 (2,569) 1,618 - 11,474 Investment (income) loss, net - (880) - - (880) Intercompany dividends - - 117 (117) - Nonreucrring income - - (28,003) - (28,003) ----------- ------------ ------------ ------------- -------------- Earnings (loss) before taxes (13,561) 9,665 31,222 117 27,443 Income tax (provision) benefit (8,853) (117) (162) - (9,132) Equity in earnings of affiliates and subsidiaries 40,524 (201) - (40,524) (201) ----------- ------------ ------------ ------------- -------------- Earnings (loss) from continuing operations 18,110 9,347 31,060 (40,407) 18,110 Earnings (loss) from disposal of discontinued operations - 206) 206 - - ----------- ------------ ------------ ------------- -------------- Net earnings (loss) $ 18,110 $ 9,141 $ 31,266 $ (40,407) $ 18,110 =========== ============ ============ ============= ==============
CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED OCTOBER 3, 1999 Parent Non Fairchild Company Guarantors Guarantors Eliminations Historical ----------- ------------ ------------ ------------- -------------- Cash Flows from Operating Activities: Net earnings (loss) $18,110 $ 9,141 $ 31,266 $ (40,407) $ 18,110 Depreciation & amortization 137 6,980 2,851 - 9,968 Amortization of deferred loan fees 413 - - - 413 Accretion of discount on long-term liabilities 897 - - - 897 Net gain on divestiture of subsidiaries and affiliates - - (28,003) - (28,003) (Gain) loss on sale of investments - 1,009 - - 1,009 (Gain) loss on sale of PP&E - 70 20 - 90 Undistributed (distributed) earnings of affiliates - 310 - - 310 Change in assets and liabilities (4,638) (48,704) (434) 40,613 (13,163) Non-cash charges and working capital changes of discontinued operations - - (10,930) - (10,930) ----------- ------------ ------------ ------------- -------------- Net cash (used for) provided by operating activities 14,919 (31,194) (5,230) 206 (21,299) ----------- ------------ ------------ ------------- -------------- Cash Flows from Investing Activities: Proceeds received from (used for) Investment securities, net - (1,486) - - (1,486) Purchase of PP&E (5) (9,388) (2,486) - (11,879) Equity investment in affiliates - (2,447) - - (2,447) Proceeds from divestiture of subsidiaries and affiliates - - 48,009 - 48,009 Change in real estate investment - - (5,329) - (5,329) Change in net assets held for sale - 1,346 - - 1,346 Investing activities of discontinued operations - - 7,100 - 7,100 ----------- ------------ ------------ ------------- -------------- Net cash (used for) provided by investing activities (5) (11,975) 47,294 - 35,314 ----------- ------------ ------------ ------------- -------------- Cash Flows from Financing Activities: Proceeds from issuance of debt 14,500 110,459 1,732 - 126,691 Debt repayment and repurchase of debentures (including intercompany), net (29,457) (66,240) (46,582) - (142,279) Issuance of Class A common stock 90 - - - 90 Purchase of treasury stock - (624) - - (624) ----------- ------------ ------------ ------------- -------------- Net cash (used for) provided by financing activities (14,867) 43,595 (44,850) - (16,122) ----------- ------------ ------------ ------------- -------------- Effect of exchange rate changes on cash - 40 397 - 437 ----------- ------------ ------------ ------------- -------------- Net change in cash 47 466 (2,389) 206 (1,670) Cash, beginning of the year 27 41,793 13,040 - 54,860 ----------- ------------ ------------ ------------- -------------- Cash, end of the year $ 74 $ 42,259 $ 10,651 $ 206 $53,190 =========== ============ ============ ============= ==============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF ----------------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION --------------------------------------------- The Fairchild Corporation was incorporated in October 1969, under the laws of the State of Delaware, under the name of Banner Industries, Inc. On November 15, 1990, we changed our name from Banner Industries, Inc. to The Fairchild Corporation. We own 100% of RHI Holdings, Inc. and Banner Aerospace, Inc. RHI is the owner of 100% of Fairchild Holding Corp. Our principal operations are conducted through Fairchild Holding Corp. and Banner Aerospace. The following discussion and analysis provide information which management believes is relevant to the assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto. GENERAL We are a leading worldwide aerospace and industrial fastener manufacturer and distribution supply chain services manager and, through Banner Aerospace, an international supplier to airlines and general aviation businesses, distributing a wide range of aircraft parts and related support services. Through internal growth and strategic acquisitions, we have become one of the leading suppliers of fasteners to aircraft OEMs, such as Boeing, European Aeronautic Defense and Space Company, General Electric, Lockheed Martin, and Northrop Grumman. Our business consists of three segments: aerospace fasteners, aerospace distribution and real estate operations. The aerospace fasteners segment manufactures and markets high performance fastening systems used in the manufacture and maintenance of commercial and military aircraft. Our aerospace distribution segment stocks and distributes a wide variety of aircraft parts to commercial airlines and air cargo carriers, fixed-base operators, corporate aircraft operators and other aerospace companies. Our real estate operations segment owns and operates a shopping center in Farmingdale, New York. CAUTIONARY STATEMENT Certain statements in this financial discussion and analysis by management contain certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operation and business. These statements relate to analyses and other information which are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies. These forward-looking statements are identified by their use of terms and phrases such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "will" and similar terms and phrases, including references to assumptions. These forward-looking statements involve risks and uncertainties, including current trend information, projections for deliveries, backlog and other trend estimates, that may cause our actual future activities and results of operations to be materially different from those suggested or described in this Quarterly Report on Form 10-Q. These risks include: product demand; our dependence on the aerospace industry; reliance on Boeing and European Aeronautic Defense and Space Company; customer satisfaction and quality issues; labor disputes; competition, including recent intense price competition; our ability to achieve and execute internal business plans; worldwide political instability and economic growth; the cost and availability of electric power to operate our plants; and the impact of any economic downturns and inflation. If one or more of these risks or uncertainties materializes, or if underlying assumptions prove incorrect, our actual results may vary materially from those expected, estimated or projected. Given these uncertainties, users of the information included in this financial discussion and analysis by management, including investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. We do not intend to update these forward-looking statements in this Quarterly Report, even if new information, future events or other circumstances have made them incorrect or misleading. RESULTS OF OPERATIONS Business Transactions The following summarizes certain business combinations and transactions that significantly affect the comparability of the period to period results presented in this Management's Discussion and Analysis of Results of Operations and Financial Condition. Fiscal 2000 Transactions On July 29, 1999, we sold our 31.9% interest in Nacanco Paketleme to American National Can Group, Inc. for approximately $48.2 million. Our investment in Nacanco began in November 1987, and throughout the years we invested approximately $6.2 million in Nacanco. Since the inception of our investment, we recorded equity earnings of $25.7 million and received cash dividends of $12.5 million from Nacanco. We recognized a $25.7 million nonrecurring gain from this divestiture in the nine months ended April 2, 2000. We also agreed to provide consulting services over a three-year period, at an annual fee of approximately $1.5 million. We used the net proceeds from the disposition to reduce our indebtedness. As a result of this disposition, our interest expense was reduced. However, our equity earnings and dividend proceeds also significantly decreased. In accordance with our plan to dispose of non-core assets, the opportunity to dispose of our interest in Nacanco Paketleme presented us with an excellent opportunity to realize a substantial return on our investment and allowed us to reduce our then outstanding indebtedness by approximately 8.6%. On September 3, 1999, we completed the disposal of our Camloc Gas Springs division to a subsidiary of Arvin Industries Inc. for approximately $2.7 million. In addition, we received $2.4 million from Arvin Industries for a covenant not to compete. We recognized a $2.3 million nonrecurring pre-tax gain from this disposition. We decided to dispose of the Camloc Gas Springs division in order to concentrate our focus on our operations in the aerospace industry. On December 1, 1999, we disposed of substantially all of the assets and certain liabilities of our Dallas Aerospace subsidiary to United Technologies Inc. for approximately $57.0 million. No gain or loss was recognized from this transaction, as the proceeds received approximated the net carrying value of these assets. Approximately $37.0 million of the proceeds from this disposition were used to reduce our term indebtedness and our interest expense. As a result of this transaction, we reported a reduction in revenues of $21.7 million and operating income of $2.1 million for the nine months ended April 1, 2001, as compared to the nine months ended April 2, 2000. We estimated that the market base for the older-type of engines that we were selling was shrinking, and that we would be required to invest a substantial amount of cash to purchase newer-type of engines to maintain market share. The opportunity to exit this business presented us with an opportunity to improve cash flows by reducing our indebtedness by $37.0 million, and by preserving our cash, which would otherwise have had to have been invested to upgrade our inventory. Consolidated Results We currently report in three principal business segments: aerospace fasteners, aerospace distribution and real estate operations. The results of Camloc Gas Springs division, prior to its disposition, were included in the Corporate and Other classification. The following table provides the historical sales and operating income of our operations for the three months ended October 1, 2000 and October 3, 1999, respectively. The following table also illustrates sales and operating income of our operations by segment, on an unaudited pro forma basis, for the three months ended October 3, 1999, as if we had operated in a consistent manner in each of the reported periods. The pro forma results represent the impact of our disposition of Dallas Aerospace in December 1999, as if this transaction had occurred at the beginning of the three-month period ended October 3, 1999. The pro forma information is based on the historical financial statements of these companies, 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 transaction had been in effect since the beginning of fiscal 2000, nor is it necessarily indicative of our future results.
(In thousands) Pro Forma Actual Segment Results Segment Results ------------------------------------- Three Months Ended Three Months Ended ------------------------------------- 10/1/2000 10/3/1999 10/3/1999 ------------------ ------------------ ----------------- Sales by Segment: Aerospace Fasteners $ 125,446 $ 134,420 $ 134,420 Aerospace Distribution 22,921 29,350 18,206 Corporate and Other - 739 739 ------------------ ------------------ ----------------- TOTAL SALES $ 148,367 $ 164,509 $ 153,365 ================== ================== ================= Operating Results by Segment: Aerospace Fasteners (a) $ 6,999 $ 8,875 $ 8,875 Aerospace Distribution 1,287 2,257 1,352 Real Estate Segment (b) 564 101 101 Corporate and Other (4,554) (1,199) (1,199) ------------------ ------------------ ----------------- OPERATING INCOME $ 4,296 $ 10,034 $ 9,129 ================== ================== ================= (a) - Includes restructuring charges of $3.0 million in the three months ended October 3, 1999, respectively. (b) - Includes rental revenue of $1.7 million and $0.3 million for the three months ended October 1, 2000 and October 3, 1999, respectively.
Net sales of $148.4 million in the first quarter of fiscal 2001 decreased by $16.1 million, or 9.8%, compared to sales of $164.5 million in the first quarter of fiscal 2000. The results for the three months ended October 3, 1999, included $11.8 million of revenue from Dallas Aerospace and Camloc Gas Springs division prior to their dispositions. Additionally, the first quarter of fiscal 2001 sales were adversely affected by approximately $6.5 million due to the foreign currency impact on our European operations. On a pro forma basis and excluding the period-to-period foreign currency effect, net sales increased by $2.2 million for the three months ended October 1, 2000, compared to the three months ended October 3, 1999. Gross margin as a percentage of sales was 23.4% and 26.2% for the first three months of fiscal 2001 and fiscal 2000, respectively. The reduced margins in the fiscal 2001 period are attributable to lower prices and a change in product mix. Selling, general & administrative expense as a percentage of sales was 20.1% and 19.3% in the first three months of fiscal 2001 and 2000, respectively. The increase is due primarily to $0.9 million of higher operating costs of our Farmingdale shopping center as a result of increased rental income. Other income decreased $2.4 million in the first three months of fiscal 2001, compared to the first three months of fiscal 2000. The decrease is due primarily to $3.1 million of income recognized from the disposition of non-core property during the three months ended October 3, 1999 and a $0.3 million loss recognized from the disposition of non-core property during the three months ended October 1, 2000, offset partially by a $1.3 million increase in rental income on our Farmingdale shopping center. In the three months ended October 3, 1999, we recorded $3.0 million of restructuring charges as a result of the continued integration of Kaynar Technologies, acquired in April 1999, into our aerospace fasteners segment. All of the charges recorded were a direct result of product integration costs incurred as of October 3, 1999. These costs were classified as restructuring and were the direct result of formal plans to close plants and to terminate employees. Such costs are nonrecurring in nature. Other than a reduction in our existing cost structure, none of the restructuring charges resulted in future increases in earnings or represented an accrual of future costs. Our integration process was completed by June 30, 2000. Operating income for the first quarter ended October 1, 2000 decreased by $5.7 million as compared to the first quarter of the prior year. The results for the three months ended October 3, 1999, included $0.9 million of operating income from Dallas Aerospace, prior to its disposition and $3.1 million of income recognized from the disposition of non-core property, offset partially by restructuring charges of $3.0 million. Operating income for the first quarter of fiscal 2001 was adversely affected by approximately $1.0 million due to the foreign currency impact on our European operations, and by a $0.3 million loss from the disposition of non-core property. Net interest expense increased $1.5 million in the first three months of fiscal 2001, compared to the first three months of fiscal 2000 due primarily to higher interest rates and $0.5 million of non-cash interest expense recognized on the fair market value adjustment of an interest rate hedge agreement. We recognized investment income of $0.9 million in the first three months of fiscal 2000, and an investment loss of $0.4 million in the first three months of fiscal 2001 due primarily to recognizing realized gains on investments liquidated. Nonrecurring pre-tax income of $28.0 million in the three months ended October 3, 1999 resulted from the disposition of our equity investment in Nacanco Paketleme and the disposition of our Camloc Gas Springs division. An income tax benefit of $3.6 million in the first three months of fiscal 2001 represented a 39.7% effective tax rate on pre-tax losses from continuing operations. The tax benefit approximated the statutory rate. Comprehensive income (loss) includes foreign currency translation adjustments, unrealized holding changes in the fair market value of available-for-sale investment securities, and the cumulative effect of adoption of SFAS 133, accounting for Derivatives. For the three months ended October 1, 2000, foreign currency translation adjustments decreased by $4.1 million, the fair market value of unrealized holding gains on investment securities we own decreased by $0.8 million, and we recorded a $0.5 million decrease in the fair market value of our $100 million interest rate swap agreement due to the cumulative effect of adoption of SFAS 133. We adopted SFAS 133 on July 1, 2000. At adoption, we recorded a decrease of $0.5 million in the fair market value of our $100 million interest rate swap agreement within other comprehensive income. The $0.5 million decrease will be amortized over the remaining life of the interest rate swap agreement using the effective interest method. The offsetting interest rate swap liability is separately being reported as a "fair market value of interest rate contract" within other long-term liabilities. In the statement of earnings we have recorded the net swap interest accrual as part of interest expense. Unrealized changes in the fair value of the Swap are recorded net of the current interest accrual on a separate line entitled "decrease in fair market value of interest rate derivatives." Segment Results Aerospace Fasteners Segment Sales by our Aerospace Fasteners segment decreased by $9.0 million, or 6.7%, in the first quarter of fiscal 2001, as compared to the same period of fiscal 2000. Sales from our European operations were adversely affected by approximately $6.5 million in the first quarter of fiscal 2001, compared to the first quarter of fiscal 2000, due to the foreign currency impact from the U.S. dollar strengthening against the Euro. Pricing pressures throughout the aerospace fasteners market continue to negatively affect revenues. However, our book-to-bill ratio continues to remain positive indicating an improving market place as compared to the sluggish conditions we have experienced over the past twelve months. Operating income decreased by $1.9 million in the first quarter of fiscal 2001, compared to the first quarter of fiscal 2000 due primarily to reduced gross margins resulting from pricing pressures, offset partially by cost reduction efforts in fiscal 2000. Operating income for the first quarter of fiscal 2001 was adversely affected by approximately $1.0 million due to the foreign currency impact on our European operations. Included in our prior quarter results are restructuring charges of $3.0 million due to the integration of Kaynar Technologies into our Aerospace Fasteners business. Operating expenses at all operations are being strictly controlled as management attempts to reduce operating costs to improve operating results in the short-term, without adversely affecting our future long-term performance. We believe that the integration savings from the Kaynar merger and production efficiency improvements will partially offset the current weakened demand for our products. We anticipate that the overall demand for aerospace fasteners in fiscal 2001 will improve as OEMs inventory reduction programs subside and the announced increase in aircraft build rates favorably affect the demand for our products. Aerospace Distribution Segment Sales in our aerospace distribution segment decreased by $6.4 million, or 21.9%, in the first three months of fiscal 2001, compared to the first three months of fiscal 2000. The results for the three months ended October 3, 1999, included $11.1 million of revenue from Dallas Aerospace, prior to its disposition. On a pro forma basis, sales in our aerospace distribution segment increased by $4.7 million, or 25.9%, in the current three-month period, reflecting an overall improvement in demand for its products. Operating income decreased by $1.0 million in the first quarter of fiscal 2001, compared to the first quarter of fiscal 2000. The results for the three months ended October 3, 1999, included $0.9 million of operating income from Dallas Aerospace, prior to its disposition. On a pro forma basis, operating income was flat in the first three months ended October 1, 2000, compared to the first three months ended October 3, 1999 and reflected a reduction in margins due primarily to the change in product mix. Real Estate Operations Segment Our real estate operations segment owns and operates a shopping center located in Farmingdale, New York. Included in operating income was rental revenue of $1.7 million and $0.3 million for the three months ended October 1, 2000 and October 3, 1999, respectively. Rental revenue was higher in the fiscal 2001 quarter due to an increase in the amount of retail space leased to tenants. We reported an operating income of $0.8 million for the first quarter of fiscal 2001, compared to operating income of $0.4 million in the first quarter of fiscal 2000. Operating income was higher in the fiscal 2001 quarter as a result of the increase in rental revenue. Corporate and Other The Corporate and Other classification included the Camloc Gas Springs division, prior to its disposition, and corporate activities. The group reported a decrease in sales as a result of the disposition of the Camloc Gas Springs division in September 1999. The operating loss increased by $2.9 million in the first three months of fiscal 2001, compared to the first three months of fiscal 2000. The first quarter of fiscal 2000 included $3.1 million of income recognized from the disposition of non-core property, while the first quarter of fiscal 2001 included a $0.3 million loss recognized from the disposition of non-core property. Rental income earned at our shopping center in Farmingdale, New York increased by $1.4 million in the first quarter of fiscal 2001, compared to the first quarter of fiscal 2000. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Total capitalization as of October 1, 2000 and June 30, 2000 amounted to $892.6 million and $884.4 million, respectively. The changes in capitalization included an $18.7 million increase in debt reflecting cash used to support our operations, offset partially by a $5.4 million decrease in equity in the three months ended October 1, 2000 due primarily to our reported net loss and a reduction in comprehensive income. We maintain a portfolio of investments classified primarily as available-for-sale securities, which had a fair market value of $13.3 million at October 1, 2000. The market value of these investments decreased by $0.8 million in the three months ended October 1, 2000. There is risk associated with market fluctuations inherent in stock investments, and because our portfolio is not diversified, large swings in its value may occur. Net cash used for operating activities for the three months ended October 1, 2000 and October 3, 1999 was $25.1 million and $21.3 million, respectively. The primary use of cash for operating activities in the first three months of fiscal 2001 was a $22.9 million decrease in accounts payable and other accrued liabilities, offset partially by a $14.3 million decrease in accounts receivable. The primary use of cash for operating activities in the first quarter of fiscal 2000 was an increase in inventories of $14.1 million. Net cash provided by investing activities for the three months ended October 1, 2000 and October 3, 1999, amounted to $1.5 million and $35.3 million, respectively. In the first three months of fiscal 2001, the primary source of cash from investing activities was $7.0 million of net proceeds received from the sale of investments and dispositions of non-core real estate, offset partially by capital expenditures of $4.2 million and investments in our Farmingdale shopping center of $1.0 million. In the first quarter of fiscal 2000, the primary source of cash from investing activities was $48.0 million of net proceeds received from the dispositions of Nacanco and the Camloc Gas Springs division, offset partially by capital expenditures of $11.9 million. Net cash provided by financing activities for the three months ended October 1, 2000 was $21.0 million and net cash used for financing activities for the three months ended October 3, 1999 was $16.1 million. Cash provided by financing activities in the first quarter of fiscal 2001, included $20.8 million of net proceeds from the issuance of additional debt. Cash used for financing activities in the first quarter of fiscal 2000 included a $15.0 million net reduction in debt and the $0.6 million purchase of treasury stock. Our principal cash requirements include debt service, capital expenditures, acquisitions, real estate development, and payment of other liabilities. Other liabilities that require the use of cash include postretirement benefits, environmental investigation and remediation obligations, and litigation settlements and related costs. We expect that cash on hand, cash generated from operations, cash from borrowings and additional financing and asset sales will be adequate to satisfy our cash requirements in fiscal 2001. We are required under the credit agreement to comply with certain financial and non-financial loan covenants, including maintaining certain interest and fixed charge coverage ratios and maintaining certain indebtedness to EBITDA ratios at the end of each fiscal quarter. Additionally, the credit agreement restricts annual capital expenditures to $40 million during the life of the facility. Except for non-guarantor assets, substantially all of our assets are pledged as collateral under the credit agreement. The credit agreement restricts the payment of dividends to our shareholders to an aggregate of the lesser of $0.01 per share or $0.4 million over the life of the agreement. Noncompliance with any of the financial covenants without cure or waiver would constitute an event of default under the credit agreement. An event of default resulting from a breach of a financial covenant can result, at the option of lenders holding a majority of the loans, in an acceleration of the principal and interest outstanding, and a termination of the revolving credit line. At October 1, 2000, we were in full compliance with all the covenants under the credit agreement. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK In fiscal 1998, we entered into a ten-year interest rate swap agreement to reduce our cash flow exposure to increases in interest rates on variable rate debt. The ten-year interest rate swap agreement provides us with interest rate protection on $100 million of variable rate debt, with interest being calculated based on a fixed LIBOR rate of 6.24% to February 17, 2003. On February 17, 2003, the bank will have a one-time option to elect to cancel the agreement or to do nothing and proceed with the transaction, using a fixed LIBOR rate of 6.715% for the period February 17, 2003 to February 19, 2008. We did not elect to pursue hedge accounting for the interest rate swap agreement, which was executed to provide an economic hedge against cash flow variability on the floating rate note. When evaluating the impact of SFAS No. 133 on this hedge relationship, we assessed the key characteristics of the interest rate swap agreement and the note. Based on this assessment, we determined that the hedging relationship would not be highly effective. The ineffectiveness is caused by the existence of the embedded written call option in the interest rate swap agreement, and the absence of a mirror option in the hedged item. As such, pursuant to SFAS No. 133, we designated the interest rate swap agreement in the no hedging designation category. Accordingly, we have recognized a non-cash decrease in fair market value of interest rate derivatives of $0.4 million in the first quarter of fiscal 2001 as a result of the fair market value adjustment for our interest rate swap agreement. The fair market value adjustment of these agreements will generally fluctuate based on the implied forward interest rate curve for 3-month LIBOR. As the implied forward interest rate curve decreases, the fair market value of the interest hedge contract will increase and we will record an additional charge. As the implied forward interest rate curve increases, the fair market value of the interest hedge contract will decrease, and we will record income. In March 2000, the Company issued a floating rate note with a principal amount of $30,750,000. Embedded within the promissory note agreement is an interest rate cap. The embedded interest rate cap limits the 1-month LIBOR interest rate that we must pay on the note to 8.125%. At execution of the promissory note, the strike rate of the embedded interest rate cap of 8.125% was above the 1-month LIBOR rate of 6.61%. Under SFAS 133, the embedded interest rate cap is considered to be clearly and closely related to the debt of the host contract and is not required to be separated and accounted for separately from the host contract. For the quarterly period ended October 1, 2000, we accounted for the hybrid contract, comprised of variable rate note and the embedded interest rate cap as a single debt instrument. The table below provides information about our derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, which include interest rate swaps and caps. For interest rate swaps and caps, 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 2003 2008 ------------------- ------------------- Type of Interest Rate Contracts Interest Rate Cap Variable to Fixed Variable to Fixed (in thousands) $30,750 $100,000 Fixed LIBOR rate N/A 6.24% (a) LIBOR cap rate 8.125% N/A Average floor rate N/A N/A Weighted average forward LIBOR rate 6.89% 6.81% Fair Market Value at October 1, 2000 (in thousands) $62 $(1,282) (a) - On February 17, 2003, the bank will have a one-time option to elect to cancel the agreement or to do nothing and proceed with the transaction, using a fixed LIBOR rate of 6.715% for the period February 17, 2003 to February 19, 2008.
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: /s/ MICHAEL T. ALCOX -------------------- Michael T. Alcox Senior Vice President and Chief Financial Officer Date: May 10, 2001 -----END PRIVACY-ENHANCED MESSAGE-----