-----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, WNVLHmAUKw4MOhLylDV1qmSIZGB57efd/ShtsGm53TdTgqqg0pjH+kUYgEKh4F+b imLFaeCMTnpkvKow6mImAQ== 0000009779-01-500012.txt : 20010511 0000009779-01-500012.hdr.sgml : 20010511 ACCESSION NUMBER: 0000009779-01-500012 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 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: 1629042 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 q2yr2001qamended.txt YEAR 2001 QTR 2 10-Q AMENDED 24 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 December 31, 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 six months ended December 31, 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 FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES INDEX Page ---- PART I.FINANCIAL INFORMATION Item 1. Condensed Consolidated Balance Sheets as of December 31, 2000 (Unaudited) and June 30, 2000............................. 3 Consolidated Statements of Earnings (Unaudited) for the Three and Six Months ended December 31, 2000 and January 2, 2000..... 5 Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months ended December 31, 2000 and January 2, 2000..... 7 Notes to Condensed Consolidated Financial Statements (Unaudited) 8 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition........................................ 19 Item 3. Quantitative and Qualitative Disclosure About Market Risk..... 26 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 December 31, 2000 (Unaudited) and June 30, 2000 (In thousands) ASSETS December 31, June 30, 2000 2000 ------------------ ------------------ CURRENT ASSETS: (*) - --------------- Cash and cash equivalents, $500 and $14,287 restricted $ 16,603 $ 35,790 Short-term investments 11,097 9,054 Accounts receivable-trade, less allowances of $6,685 and $9,598 110,890 127,230 Inventories: Finished goods 148,000 138,330 Work-in-process 31,727 30,523 Raw materials 12,732 11,006 ------------------ ------------------ 192,459 179,859 Prepaid expenses and other current assets 85,372 74,231 ------------------ ------------------ Total Current Assets 416,421 426,164 Property, plant and equipment, net of accumulated depreciation of $149,598 and $142,938 162,701 174,137 Net assets held for sale 17,726 20,112 Cost in excess of net assets acquired (Goodwill), less accumulated amortization of $59,085 and $52,826 427,105 436,442 Investments and advances, affiliated companies 3,627 3,238 Prepaid pension assets 64,471 64,418 Deferred loan costs 13,836 14,714 Real estate investment 112,115 112,572 Long-term investments 8,867 10,084 Other assets 5,816 5,539 ------------------ ------------------ TOTAL ASSETS $ 1,232,685 $ 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 December 31, 2000 (Unaudited) and June 30, 2000 (In thousands) LIABILITIES AND STOCKHOLDERS' EQUITY December 31, June 30, 2000 2000 ------------------ ------------------ CURRENT LIABILITIES: (*) - -------------------- Bank notes payable and current maturities of long-term debt $ 27,881 $ 28,594 Accounts payable 50,995 62,494 Accrued liabilities: Salaries, wages and commissions 31,498 38,065 Employee benefit plan costs 5,970 5,608 Insurance 11,694 12,237 Interest 6,373 6,408 Other accrued liabilities 42,466 60,123 ------------------ ------------------ 98,001 122,441 ------------------ ------------------ Total Current Liabilities 176,877 213,529 LONG-TERM LIABILITES: Long-term debt, less current maturities 478,585 453,719 Fair market value of interest rate contract 3,545 - Other long-term liabilities 24,795 26,741 Retiree health care liabilities 43,761 42,803 Noncurrent income taxes 115,561 128,515 ------------------ ------------------ TOTAL LIABILITIES 843,124 865,307 STOCKHOLDERS' EQUITY: Class A common stock, $0.10 par value; authorized 40,000 shares, 30,320 (30,079 in June) shares issued and 22,513 (22,430 in June) shares outstanding 3,032 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 232,774 231,190 Treasury stock, at cost, 7,807 (7,649 in June) shares of Class A common stock (76,563) (75,506) Retained earnings 249,703 261,788 Notes due from stockholders (1,861) (1,867) Cumulative other comprehensive income (17,786) (16,762) ------------------ ------------------ TOTAL STOCKHOLDERS' EQUITY 389,561 402,113 ------------------ ------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,232,685 $ 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) And Six (6) Months Ended December 31, 2000 and January 2, 2000 (In thousands, except per share data) Three Months Ended Six Months Ended ----------------------------- ---------------------------- 12/31/00 1/2/00 12/31/00 1/2/00 -------------- ------------- ------------- ------------ REVENUE: Net sales $148,100 $152,244 $296,467 $316,753 Other income, net 3,860 2,782 6,376 7,610 -------------- ------------- ------------- ------------ 151,960 155,026 302,843 324,363 COSTS AND EXPENSES: Cost of goods sold 109,045 114,372 222,636 235,734 Selling, general & administrative 34,464 35,377 64,326 67,205 Amortization of goodwill 3,125 3,012 6,259 6,108 Restructuring - 3,040 - 6,057 -------------- ------------- ------------- ------------ 146,634 155,801 293,221 315,104 OPERATING INCOME 5,326 (775) 9,622 9,259 Interest expense 14,315 12,119 27,298 24,328 Interest income (244) (822) (768) (1,557) -------------- ------------- ------------- ------------ Net interest expense 14,071 11,297 26,530 22,771 Investment income 1,004 1,998 624 2,878 Decrease in fair market value of interest rate derivatives (3,075) - (3,545) - Nonrecurring gain - - - 28,003 -------------- ------------- ------------- ------------ Earnings (loss) from continuing operations before taxes (10,816) (10,074) (19,829) 17,369 Income tax benefit (provision) 3,990 3,866 7,564 (5,266) Equity in earnings (loss) of affiliates, net 187 (872) 181 (1,073) -------------- ------------- ------------- ------------ NET EARNINGS (LOSS) $ (6,639) $ (7,080) $ (12,084) $ 11,030 ============== ============= ============= ============ Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 1,510 (1,434) (2,570) (3,082) Unrealized holding changes on derivatives - - (528) - Unrealized holding gain on securities arising during the period 2,834 6,845 2,073 1,839 -------------- ------------- ------------- ------------ Other comprehensive loss 4,344 5,411 (1,025) (1,243) -------------- ------------- ------------- ------------ COMPREHENSIVE INCOME (LOSS) $ (2,295) $ (1,669) $ (13,109) $ 9,787 ============== ============= ============= ============ The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED STATEMENTS OF EARNINGS (Unaudited) For The Three (3) And Six (6) Months Ended December 31, 2000 and January 2, 2000 (In thousands, except per share data) Three Months Ended Six Months Ended ---------------------------- ----------------------------- 12/31/00 1/2/00 12/31/00 1/2/00 ------------- ------------- ------------- ------------- BASIC AND DILUTED EARNINGS PER SHARE: NET EARNINGS (LOSS) $ (0.26) $ (0.28) $ (0.48) $ 0.44 ============= ============= ============= ============= Other comprehensive income (loss), net of tax: Foreign currency translation adjustments $ 0.06 $ (0.06) $ (0.10) $ (0.12) Unrealized holding changes on derivatives - - (0.02) Unrealized holding gain on securities arising during the period 0.11 0.28 0.08 0.07 ------------- ------------- ------------- ------------- Other comprehensive loss 0.17 0.22 (0.04) (0.05) ------------- ------------- ------------- ------------- COMPREHENSIVE INCOME (LOSS) $ (0.09) $ (0.06) $ (0.52) $ 0.39 ============= ============= ============= ============= Weighted average shares outstanding: Basic 25,101 24,889 25,068 24,882 ============= ============= ============= ============= Diluted 25,101 24,889 25,068 24,977 ============= ============= ============= ============= The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For The Six (6) Months Ended December 31, 2000 and January 2, 2000 (In thousands) For the Six Months Ended ------------------------------------- 12/31/00 1/2/00 ------------------ ------------------ Cash flows from operating activities: - ------------------------------------- Net earnings (loss) $ (12,084) $ 11,030 Depreciation and amortization 21,975 19,738 Accretion of discount on long-term liabilities 689 1,923 Amortization of deferred loan fees 917 577 Unrealized holding (gain) loss on derivatives 4,356 - Net gain on divestiture of investment in affiliate - (25,747) Net gain on divestiture of subsidiary - (2,256) Gain on sale of investments (1,066) (2,851) Distributed (undistributed) earnings of affiliates, net (181) 1,651 Change in assets and liabilities (55,838) (50,810) Non-cash charges and working capital changes of discontinued operations - (12,049) ------------------ ------------------ Net cash used for operating activities (41,232) (58,794) Cash flows from investing activities: ------------------------------------- Purchase of property, plant and equipment (8,343) (16,575) Net proceeds received from (used for) investment securities 4,040 1,351 Net proceeds received from divestiture of investment in affiliate - 43,103 Net proceeds received from divestiture of subsidiaries - 61,906 Real estate investment (1,705) (11,087) Equity investment in affiliates (285) (2,441) Proceeds received from net assets held for sale 2,081 4,419 Other, net 132 - Investing activities of discontinued operations - 7,100 ------------------ ------------------ Net cash provided by (used for) investing activities (4,080) 87,776 Cash flows from financing activities: ------------------------------------- Proceeds from issuance of debt 31,269 161,846 Debt repayments (6,770) (161,178) Issuance of Class A common stock 551 168 Purchase of treasury stock - (622) Net loans to stockholders' 6 - ------------------ ------------------ Net cash provided by financing activities 25,056 214 Effect of exchange rate changes on cash 1,069 (244) ------------------ ------------------ Net change in cash and cash equivalents (19,187) 28,952 Cash and cash equivalents, beginning of the year 35,790 54,860 ------------------ ------------------ Cash and cash equivalents, end of the period $ 16,603 $ 83,812 ================== ================== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except share data) 1. FINANCIAL STATEMENTS The consolidated balance sheet as of December 31, 2000, and the consolidated statements of earnings and cash flows for the six months ended December 31, 2000 and January 2, 2000 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 December 31, 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 December 31, 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 and six months ended January 2, 2000 have been prepared to give effect to the dispositions of Dallas Aerospace (December 1999), Camoloc Gas Springs (September 1999) and the investment in Nacanco (July 1999), as if these transactions 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 July 1, 1999. Three Months Six Months Ended Ended 1/2/00 1/2/00 ----------------- ----------------- Net sales $ 141,694 $ 294,320 Gross profit 36,099 76,693 Net loss (7,825) (8,515) Net loss, per basic and diluted share $ (0.32) $ (0.34)
3. EQUITY SECURITIES We had 22,512,688 shares of Class A common stock and 2,621,652 shares of Class B common stock outstanding at December 31, 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 six months ended December 31, 2000, 82,966 shares of Class A common stock were issued as a result of the exercise of stock options. During the six months ended December 31, 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 December 31, 2000 and June 30, 2000, we had restricted cash of $500 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: Three Months Ended Six Months Ended --------------------------------- -------------------------------- 12/31/00 1/2/00 12/31/00 1/2/00 ---------------- --------------- -------------- -------------- Basic earnings per share: Earnings from continuing operations $ (6,639) $ (7,080) $ (12,085) $ 11,030 ================ =============== ============== ============== Common shares outstanding 25,101 24,889 25,068 24,882 ================ =============== ============== ============== Basic earnings from continuing operations per share $ (0.26) $ (0.28) $ (0.48) $ 0.44 ================ =============== ============== ============== Diluted earnings per share: Earnings from continuing operations $ (6,639) $ (7,080) $ (12,085) $ 11,030 ================ =============== ============== ============== Common shares outstanding 25,133 24,889 25,101 24,882 Options antidilutive antidilutive antidilutive 2 Warrants antidilutive antidilutive antidilutive 93 ---------------- --------------- -------------- -------------- Total shares outstanding 25,133 24,889 25,101 24,977 ================ =============== ============== ============== Diluted earnings from continuing operations per share $ (0.26) $ (0.28) $ (0.48) $ 0.44 ================ =============== ============== ==============
Stock options entitled to purchase 1,855,960 shares of Class A common stock were antidilutive and not included in the diluted earnings per share calculation for the six months ended January 2, 2000. Stock options entitled to purchase 2,197,055, 2,251,014 and 2,750,203 shares of Class A common stock were antidilutive and not included in the earnings per share calculation for the three and six months ended December 31, 2000, and the three months ended January 2, 2000, respectively. Stock warrants entitled to purchase 504,396, 577,989 and 9000,000 shares of Class A common stock were antidilutive and not included in the earnings per share calculation for the three and six months ended December 31, 2000, and the three months ended January 2, 2000, respectively. 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 December 31, 2000, the consolidated total of our recorded liabilities for environmental matters was approximately $12.6 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. 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 and six months ended December 31, 2000 and January 2, 2000, respectively. Three Months Ended Six Months Ended -------------------------- -------------------------- 12/31/00 1/2/00 12/31/00 1/2/00 -------------------------- -------------------------- Sales by Segment: Aerospace Fasteners Segment $ 128,010 $ 124,143 $ 253,456 $ 258,563 Aerospace Distribution Segment 20,090 28,101 43,011 57,451 Corporate and Other Segment - - - 739 -------------------------- -------------------------- TOTAL SALES $ 148,100 $ 152,244 $ 296,467 $ 316,753 -------------------------- -------------------------- Operating Results by Segment: Aerospace Fasteners Segment (a) $ 9,853 $ 2,915 $ 16,852 $ 11,790 Aerospace Distribution Segment 712 2,082 1,699 4,339 Real Estate Segment (b) (481) 333 83 434 Corporate and Other Segment (4,758) (6,105) (9,012) (7,304) -------------------------- -------------------------- TOTAL OPERATING INCOME $ 5,326 $ (775) $ 9,622 $ 9,259 -------------------------- -------------------------- Earnings (loss) from continuing operations before taxes: Aerospace Fasteners Segment (a) $ 9,264 $ 2,599 $ 15,703 $ 10,723 Aerospace Distribution Segment (67) 4,574 1,661 4,340 Real Estate Segment (b) (1,339) 333 (1,604) 434 Corporate and Other Segment (18,674) (17,580) (35,589) 1,872 -------------------------- -------------------------- Total earnings (loss) from continuing operations before taxes: $ (10,816) $ (10,074) $ (19,829) $ 17,369 -------------------------- -------------------------- Total Assets: 12/31/00 6/30/00 -------------------------- Aerospace Fasteners Segment $ 623,226 $ 632,152 Aerospace Distribution Segment 49,662 90,918 Real Estate Segment 115,671 120,092 Corporate and Other Segment 444,126 424,258 -------------------------- TOTAL ASSETS $ 1,232,685 $1,267,420 -------------------------- (a) - Includes restructuring charges of $3.0 million and $6.1 million in the three and six months ended January 2, 2000, respectively. (b) - Includes rental revenue of $1.9 million and $0.4 million for the three months ended December 31, 2000 and January 2, 2000, respectively, and $3.5 million and $0.8 million for the six months ended December 31, 2000 and January 2, 2000, respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS 8. 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 $3.1 million and $3.5 million in the second quarter and first six months of fiscal 2001, respectively, 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 interest rate curve decreases, the fair market value of the interest hedge contract will increase and we will record an additional charge. As 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 December 31, 2000, we accounted for the hybrid contract, comprised of variable rate note and the embedded interest rate cap as a single debt instrument. 9. CONSOLIDATING FINANCIAL STATEMENTS The following unaudited consolidating 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 provides the results of The Fairchild Corporation on an unconsolidated basis. The guarantors are composed primarily of our domestic subsidiaries, excluding Fairchild Technologies, a real estate development venture, and certain other subsidiaries.
CONSOLIDATING BALANCE SHEET DECEMBER 31, 2000 Parent Non Fairchild Company Guarantors Guarantors Eliminations Historical ------------ ------------ ------------ -------------- ------------ Cash $ 204 $ 9,090 $ 7,309 $ - $ 16,603 Marketable securities 71 3,100 7,926 - 11,097 Accounts Receivable (including intercompany), less allowances 1,696 333,712 4,925 (229,443) 110,890 Inventory, net - 142,281 50,178 - 192,459 Prepaid and other current assets 385 28,271 8,443 48,273 85,372 ------------ ------------ ------------ -------------- ------------ Total current assets 2,356 516,454 78,781 (181,170) 416,421 Investment in Subsidiaries 888,795 - - (888,795) - Net fixed assets 458 122,326 39,917 - 162,701 Net assets held for sale - 17,726 - - 17,726 Investments in affiliates 945 2,682 - - 3,627 Goodwill 16,124 383,232 30,758 (3,009) 427,105 Deferred loan costs 12,626 22 1,188 - 13,836 Prepaid pension assets - 64,471 - - 64,471 Real estate investment - - 112,115 - 112,115 Long-term investments 415 5,504 3,436 (488) 8,867 Other assets 17,531 (13,696) 1,981 - 5,816 ------------ ------------ ------------ -------------- ------------ Total assets $939,250 $1,098,721 $ 268,176 $(1,073,462) $ 1,232,685 ============ ============ ============ ============== ============ Bank notes payable & current maturities of debt $ 2,250 $ 1,770 $ 23,861 $ - $ 27,881 Accounts payable (including intercompany) 93 579,333 77,060 (605,491) 50,995 Other accrued expenses (33,363) 58,232 33,843 39,289 98,001 ------------ ------------ ------------ -------------- ------------ Total current liabilities (31,020) 639,335 134,764 (566,202) 176,877 Long-term debt, less current maturities 436,703 7,569 34,313 - 478,585 Fair market value of interest rate contract 3,545 - - - 3,545 Other long-term liabilities 406 18,939 5,451 - 24,796 Noncurrent income taxes 121,013 (941) 1,989 (6,500) 115,561 Retiree health care liabilities - 38,782 4,979 - 43,761 ------------ ------------ ------------ -------------- ------------ Total liabilities 530,647 703,684 181,496 (572,702) 843,125 Class A common stock 3,032 - 53 (53) 3,032 Class B common stock 262 - - - 262 Notes due from stockholders (520) (1,341) - - (1,861) Paid-in-capital 232,774 463,459 157,314 (620,773) 232,774 Retained earnings 249,703 (58,115) (63,345) 121,460 249,703 Cumulative other comprehensive income (573) (8,848) (7,342) (1,024) (17,787) Treasury stock, at cost (76,075) (118) - (370) (76,563) ------------ ------------ ------------ -------------- ------------ Total stockholders' equity 408,603 395,037 86,680 (500,760) 389,560 ------------ ------------ ------------ -------------- ------------ Total liabilities & stockholders' equity $939,250 $1,098,721 $ 268,176 $(1,073,462) $ 1,232,685 ============ ============ ============ ============== ============
CONSOLIDATING STATEMENTS OF EARNINGS FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 Parent Non Fairchild Company Guarantors Guarantors Eliminations Historical ------------ ------------ ------------ ------------- ------------ Net Sales $ - $ 227,996 $ 72,020 $ (3,549) $ 296,467 Costs and expenses Cost of sales - 175,249 50,937 (3,549) 222,637 Selling, general & administrative 3,439 45,425 9,085 - 57,949 Amortization of goodwill 404 2,128 3,727 - 6,259 ------------ ------------ ------------ ------------- ------------ 3,843 222,802 63,749 (3,549) 286,845 ------------ ------------ ------------ ------------- ------------ Operating income (loss) (3,843) 5,194 8,271 - 9,622 Net interest expense (including intercompany) (3,991) 24,899 5,623 - 26,531 Investment (income) loss, net - 181 (805) - (624) Decrease in fair market value of interest rate contract (3,545) - - - (3,545) ------------ ------------ ------------ ------------- ------------ Earnings (loss) before taxes (3,397) (19,886) 3,453 - (19,830) Income tax (provision) benefit 1,668 9,898 (4,002) - 7,564 Equity in earnings of affiliates and subsidiaries (10,355) 181 - 10,355 181 ------------ ------------ ------------ ------------- ------------ Earnings (loss) from continuing operations (12,084) (9,807) (549) 10,355 (12,085) Cumulative Effect in Change in Accounting - - - - - ------------ ------------ ------------ ------------- ------------ Net earnings (loss) $ (12,084) $ (9,807) $ (549) $ 10,355 $ (12,085) ============ ============ ============ ============= ============
CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 Parent Non Fairchild Company Guarantors Guarantors Eliminations Historical ------------ ------------ ------------ ------------- ------------ Cash Flows from Operating Activities: Net earnings (loss) $ (12,084) $ (9,807) $ (549) $ 10,355 $ (12,085) Depreciation & amortization 455 13,073 8,447 - 21,975 Accretion of discount on long-term liabilities - 689 - - 689 Amortization of deferred loan fees 690 1 226 - 917 Unrealized holding (gain) loss on derivatives 4,356 - - - 4,356 Change in assets and liabilities (18,841) (16,896) (10,992) (10,355) (57,084) ------------ ------------ ------------ ------------- ------------ Net cash (used for) provided by operating activities (25,424) (12,940) (2,868) - (41,232) Cash Flows from Investing Activities: Purchase of PP&E (158) (5,908) (2,277) - (8,343) Investment securities, net - 3,755 - - 3,755 Change in real estate investment - - (1,705) - (1,705) Change in net assets held for sale - 2,081 - - 2,081 Other changes - 132 - - 132 ------------ ------------ ------------ ------------- ------------ Net cash (used for) provided by investing activities (158) 60 (3,982) - (4,080) Cash Flows from Financing Activities: Proceeds from issuance of debt 25,200 130 5,939 - 31,269 Debt repayments, net - (1,229) (5,541) - (6,770) Issuance of Class A common stock 551 - - - 551 Loans to stockholders - 6 - - 6 ------------ ------------ ------------ ------------- ------------ Net cash (used for) provided by financing activities 25,751 (1,093) 398 - 25,056 Effect of exchange rate changes on cash - - 1,069 - 1,069 ------------ ------------ ------------ ------------- ------------ Net change in cash 169 (13,973) (5,383) - (19,187) Cash, beginning of the year 35 23,063 12,692 - 35,790 ------------ ------------ ------------ ------------- ------------ Cash, end of the year $ 204 $ 9,090 $ 7,309 $ - $ 16,603 ============ ============ ============ ============= ============
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 ------------- ------------ ------------ ------------- ------------ 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 6,474 - 26,718 Noncurrent income taxes 145,847 (17,525) 193 - 128,515 Retiree health care liabilities - 38,196 4,607 - 42,803 Minority interest in subsidiaries - - 23 - 23 ------------- ------------ ------------ ------------- ------------ 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 SIX MONTHS ENDED JANUARY 2, 2000 CONSOLIDATING STATEMENTS OF EARNINGS For the Six Months Ended January 2, 2000 Parent Non Fairchild Company Guarantors Guarantors Eliminations Historical ------------- -------------- ------------- ------------- -------------- Net Sales $ - $ 234,852 $ 83,451 $ (1,550) $ 316,753 Costs and expenses Cost of sales - 175,728 61,556 (1,550) 235,734 Selling, general & administrative 2,380 45,577 11,638 - 59,595 Restructuring - 6,057 - - 6,057 Amortization of goodwill 257 5,345 506 - 6,108 ------------- -------------- ------------- ------------- -------------- 2,637 232,707 73,700 (1,550) 307,494 ------------- -------------- ------------- ------------- -------------- Operating income (loss) (2,637) 2,145 9,751 - 9,259 Net interest expense 24,888 (5,907) 3,790 - 22,771 Investment (income) loss, net - (2,878) - - (2,878) Intercompany dividends - - 714 (714) - Nonreucrring income on disposition of subsidiary - - (28,003) - (28,003) ------------- -------------- ------------- ------------- -------------- Earnings (loss) before taxes (27,525) 10,930 33,250 714 17,369 Income tax (provision) benefit (4,644) (120) (502) - (5,266) Equity in earnings of affiliates and subsidiaries 43,199 (1,073) - (43,199) (1,073) ------------- -------------- ------------- ------------- -------------- Earnings (loss) from continuing operations 11,030 9,737 32,748 (42,485) 11,030 Earnings (loss) from disposal of discontinued operations - - 374 (374) - ------------- -------------- ------------- ------------- -------------- Net earnings (loss) $ 11,030 $ 9,737 $ 33,122 $ (42,859) $ 11,030 ============= ============== ============= ============= ==============
CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JANUARY 2, 2000 CONSOLIDATING STATEMENTS OF CASH FLOWS For the Six Months Ended January 2, 2000 Parent Non Fairchild Company Guarantors Guarantors Eliminations Historical ------------- -------------- ------------- ------------- -------------- Cash Flows from Operating Activities: - ------------------------------------- Net earnings (loss) $ 11,030 $ 9,737 $ 33,122 $ (42,859) $ 11,030 Depreciation and amortization 349 15,175 4,214 - 19,738 Amortization of deferred loan fees 577 - - - 577 Accretion of discount on long-term liabilities 1,923 - - - 1,923 (Gain) on sale of affiliate investment and divestiture of subsidiary - - (28,003) - (28,003) (Gain) on sale of investments - (2,851) - - (2,851) Undistributed loss (earnings) of affiliates - 1,651 - - 1,651 Change in assets and liabilities (15,046) (72,871) (5,752) 42,859 (50,810) Non-cash charges and working capital changes of discontinued operations - - (12,049) - (12,049) ------------- -------------- ------------- ------------- -------------- Net cash (used for) provided by operating activities (1,167) (49,159) (8,468) - (58,794) ------------- -------------- ------------- ------------- -------------- Cash Flows from Investing Activities: - ------------------------------------- Net proceeds from (used for) investments - 1,351 - - 1,351 Purchase of property, plant and equipment (5) (11,932) (4,638) - (16,575) Equity investment in affiliates - (2,441) - - (2,441) Net proceeds from sale of affiliate investment and divestiture of subsidiaries - 57,000 48,009 - 105,009 Real estate investment - - (11,087) - (11,087) Change in net assets held for sale - 4,419 - - 4,419 Investing activities of discontinued operations - - 7,100 - 7,100 ------------- -------------- ------------- ------------- -------------- Net cash (used for) provided by investing activities (5) 48,397 39,384 - 87,776 ------------- -------------- ------------- ------------- -------------- Cash Flows from Financing Activities: - ------------------------------------- Proceeds from issuance of debt 45,600 110,459 5,787 - 161,846 Debt repayment and repurchase of debentures (including intercompany), net (44,557) (77,208) (39,413) - (161,178) Issuance of Class A common stock 168 - - - 168 Purchase of treasury stock - (622) - - (622) ------------- -------------- ------------- ------------- -------------- Net cash provided by financing activities 1,211 32,629 (33,626) - 214 ------------- -------------- ------------- ------------- -------------- Effect of exchange rate changes on cash - 33 (277) - (244) ------------- -------------- ------------- ------------- -------------- Net change in cash and cash equivalents 39 31,900 (2,987) - 28,952 Cash and cash equivalents, beginning of the year 27 41,793 13,040 - 54,860 ------------- -------------- ------------- ------------- -------------- Cash and cash equivalents, end of the year $ 66 $ 73,693 $ 10,053 $ - $ 83,812 ============= ============== ============= ============= ==============
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 aerospace 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 located 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 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. 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. On July 29, 1999, we sold our 31.9% interest in Nacanco Paketleme to American National Can Group, Inc. for approximately $48.2 million. In the six months ended January 2, 2000, we recognized a $25.7 million nonrecurring gain from this divestiture. We used the net proceeds from the disposition to reduce our indebtedness. We also agreed to provide consulting services over a three-year period, at an annual fee of approximately $1.5 million. 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 and six months ended December 31, 2000 and January 2, 2000, respectively. The following table also illustrates sales and operating income of our operations by segment, on an unaudited pro forma basis, for the three and six months ended January 2, 2000, as if we had operated in a consistent manner in each of the reported periods. The pro forma results represent the impact of our dispositions of Dallas Aerospace in December 1999, and Camoloc Gas Springs in September 1999, as if these transactions had occurred at the beginning of the six-month period ended January 2, 2000. 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 these transactions had been in effect since the beginning of fiscal 2000, nor is it necessarily indicative of our future results. Three Months Ended Six Months Ended ---------------------------------------- ----------------------------------------- 12/31/00 1/2/00 1/2/00 12/31/00 1/2/00 1/2/00 Actual Actual Pro Forma Actual Actual Pro Forma ---------------------------------------- ----------------------------------------- Sales by Segment: Aerospace Fasteners Segment $128,010 $124,143 $124,143 $253,456 $258,563 $258,563 Aerospace Distribution Segment 20,090 28,101 17,551 43,011 57,451 35,757 Corporate and Other Segment - - - - 739 - ---------------------------------------- ----------------------------------------- TOTAL SALES $148,100 $152,244 $141,694 $296,467 $316,753 $294,320 ---------------------------------------- ----------------------------------------- Operating Results by Segment: Aerospace Fasteners Segment (a) $ 9,853 $ 2,915 $ 2,915 $ 16,852 $ 11,790 $ 11,790 Aerospace Distribution Segment 712 2,082 909 1,699 4,339 2,261 Real Estate Operations Segment (b) (481) 333 333 83 434 434 Corporate and Other Segment (4,758) (6,105) (6,078) (9,012) (7,304) (7,290) ---------------------------------------- ----------------------------------------- TOTAL OPERATING INCOME $ 5,326 $ (775) $ (1,921) $ 9,622 $ 9,259 $ 7,195 ---------------------------------------- ----------------------------------------- (a) - Includes restructuring charges of $3.0 million and $6.1 million in the three and six months ended January 2, 2000, respectively. (b) - Includes rental revenue of $1.9 million and $0.4 million for the three months ended December 31, 2000 and January 2, 2000, respectively, and $3.5 million and $0.8 million for the six months ended December 31, 2000 and January 2, 2000, respectively.
Net sales of $148.1 million in the second quarter of fiscal 2001 decreased by $4.1 million, or 2.7%, compared to sales of $152.2 million in the second quarter of fiscal 2000. Net sales of $296.5 million in the first six months of fiscal 2001 decreased by $20.3 million, or 6.4%, compared to sales of $316.8 million in the first six months of fiscal 2000. The results for the three and six months ended January 2, 2000, included revenue of $10.6 million and $22.4 million, respectively, from Dallas Aerospace and the Camloc Gas Springs division prior to their respective dispositions. Additionally, the second quarter and first six months of fiscal 2001 sales were adversely affected by approximately $10.7 million and $17.2 million, respectively, 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 $17.1 million and $19.4 million for the three and six months ended December 31, 2000, respectively, as compared to the three and six months ended January 2, 2000. Gross margin as a percentage of sales was 26.4% and 24.9% in the second quarter of fiscal 2001 and fiscal 2000 and 24.9% and 25.6% for the first six months of fiscal 2001 and fiscal 2000, respectively. The reduced margins in the fiscal 2001 six-month period are attributable to lower prices and a change in product mix. Selling, general & administrative expense as a percentage of sales was 23.3% and 23.2% in the second quarter of fiscal 2001 and 2000, respectively, and 21.7% and 21.2% in the first six months of fiscal 2001 and 2000, respectively. The increase for the six months of fiscal 2001 is due primarily to higher operating costs of our Farmingdale shopping center as a result of increased rental income. Other income decreased $2.4 million in the first six months of fiscal 2001, compared to the first six 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 six months ended January 2, 2000, the write-off of approximately $1.0 million of tenant improvements and a $0.7 million loss recognized from the disposition of non-core property during the six months ended December 31, 2000, offset partially by a $1.3 million increase in rental income on our Farmingdale shopping center. In the six months ended January 2, 2000, we recorded $6.1 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 January 2, 2000. 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 three and six months ended December 31, 2000 improved by $6.1 million and $0.3 million, respectively, as compared to the same periods of the prior year. The results for the six months ended January 2, 2000, included $2.1 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 $6.1 million. Operating income in the second quarter and first six months of fiscal 2001 was adversely affected by approximately $1.1 million and $2.1 million, respectively, due to the foreign currency impact on our European operations. Additionally, operating income in the current quarter and first six months of fiscal 2001 was affected by write-off of $1.0 million of tenant improvements. On a pro forma basis and excluding the period-to-period foreign currency effect, operating income increased by $7.7 million and $3.9 million for the three and six months ended December 31, 2000, respectively, as compared to the three and six months ended January 2, 2000. Net interest expense increased $3.8 million in the first six months of fiscal 2001, compared to the first six months of fiscal 2000. We recognized interest expense of $1.8 million in the first six months of fiscal 2001, while we capitalized $3.8 million of interest expense in the first six months of fiscal 2000 from real estate development at our shopping center in Farmingdale, New York. The increase in interest rates during the first six months of fiscal 2001 was offset by higher average debt outstanding in the first six months of fiscal 2000. In the first six months of fiscal 2001, we recognized a $3.5 million of non-cash decrease on the fair market value adjustment of interest rate derivatives of a ten-year $100 million interest rate hedge agreement. We recognized investment income of $0.6 million in the first six months of fiscal 2001, and $2.9 million in the first six months of fiscal 2000, due primarily to recognizing realized gains on investments liquidated. Nonrecurring pre-tax income of $28.0 million in the six months ended January 2, 2000 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 $7.6 million in the first six months of fiscal 2001 represented a 38.1% effective tax rate on pre-tax losses from continuing operations. The tax benefit approximated the statutory rate. An income tax provision of $5.3 million in the first six months of fiscal 2000 represented a 30.3% effective tax rate on pre-tax earnings from continuing operations. The tax provision was slightly lower than the statutory rate because of lower tax rates at some of our foreign operations. 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 six months ended December 31, 2000, foreign currency translation adjustments decreased by $2.6 million, the fair market value of unrealized holding gains on investment securities we own increased by $2.1 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 in our Aerospace Fasteners segment increased by $3.9 million, or 3.1%, in the second quarter of fiscal 2001 and decreased by $5.1 million, or 2.0%, in the first six months of fiscal 2001, as compared to the same periods of fiscal 2000. Sales from our European operations were adversely affected by approximately $10.7 million in the second quarter and $17.2 million in the first six months of fiscal 2001, as compared to the same periods of the prior year, due to the foreign currency impact from the U.S. dollar strengthening against the Euro. However, our book-to-bill ratio continues to remain positive, which we believe indicates an improving market place as compared to the sluggish conditions we have experienced over the past twelve months. Operating income increased by $6.9 million in the second quarter and $5.1 million in the first six months of fiscal 2001, compared to the same periods of fiscal 2000. The increase was due primarily to productivity improvements from cost reduction efforts completed in fiscal 2000 and restructuring charges recorded in the first six months of fiscal 2000, offset partially by reduced gross margins resulting from pricing pressures. Operating income for the second quarter and first six months of fiscal 2001 was adversely affected by approximately $1.1 million and $2.1 million, respectively, as compared to the same periods of the prior year, due to the foreign currency impact on our European operations. Included in our prior six months results are restructuring charges of $6.1 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. Our Aerospace Fasteners segment has several manufacturing facilities located in California, which are affected by an electric power shortage. We are cautiously optimistic that the electric power shortage in California will be resolved without any major business interruption; however, unless current tariffs are revised or their continued implementation stayed, our manufacturing costs may be materially higher. We are pursuing both long term and short term alternatives to our current electric power purchasing commitments. We anticipate that the overall demand for aerospace fasteners in calendar 2001 will continue to improve as OEMs inventory reduction programs subside and the announced increase in aircraft build rates favorably affect the demand for our products. If the Euro to U.S. Dollar exchange rate maintains the same ratio that existed on December 31, 2000, we would expect the second six months of fiscal 2001 to experience little affects from the foreign currency fluctuations that adversely affected the results of the first six months of fiscal 2001. Aerospace Distribution Segment Sales in our aerospace distribution segment decreased by $8.0 million, or 28.5%, in the second quarter and $14.4 million, or 25.1%, in the first six months of fiscal 2001, compared to the fiscal 2000 periods. The prior period results included revenue of $10.6 million in the second quarter and $21.7 million in the six months ended January 2, 2000, from Dallas Aerospace, prior to its disposition. On a pro forma basis, sales in our aerospace distribution segment increased by $2.5 million, or 14.5%, in the second quarter and $7.3 million, or 20.3%, in the first six months of fiscal 2001, reflecting an overall improvement in demand for our products. Operating income decreased by $1.4 million in the second quarter and $2.6 million in the first six months of fiscal 2001, compared to the same periods in fiscal 2000. The results for the three and six months ended January 2, 2000, included operating income from Dallas Aerospace, prior to its disposition, of $1.2 million and $2.1 million, respectively. 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 $1.9 million and $0.4 million for the three months ended December 31, 2000 and January 2, 2000, respectively, and $3.5 million and $0.8 million for the six months ended December 31, 2000 and January 2, 2000, respectively. Rental revenue was higher in the fiscal 2001 periods due to an increase in the amount of retail space leased to tenants. As of December 31, 2000, approximately 73% of the developed shopping center was leased. We reported an operating loss of $0.5 million for the second quarter of fiscal 2001 and operating income of $0.1 million for the six months ended December 31, 2000, compared to operating income of $0.3 million in the second quarter and $0.4 million in the first six months of fiscal 2000. In the second quarter of fiscal 2001, we recorded a charge of $1.0 million to write-off specialized tenant improvements associated with an eviction of a non-paying tenant. The results of the periods ended December 31, 2000, were also affected by an increase in administrative and depreciation expenses 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 $1.7 million in the first six months of fiscal 2001, compared to the first six months of fiscal 2000. The first six months of fiscal 2000 included $3.1 million of income recognized from the disposition of non-core property, while the first six months of fiscal 2001 included a $0.3 million loss recognized from the disposition of non-core property. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Total capitalization as of December 31, 2000 and June 30, 2000 amounted to $889.6 million and $884.4 million, respectively. The changes in capitalization included an $27.7 million increase in debt reflecting cash used to support our operations, offset partially by a $12.6 million decrease in equity in the six months ended December 31, 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 $20.0 million at December 31, 2000. The market value of these investments increased by $2.0 million in the six months ended December 31, 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 six months ended December 31, 2000 and January 2, 2000 was $41.2 million and $58.8 million, respectively. The primary use of cash for operating activities in the first six months of fiscal 2001 was a $35.9 million decrease in accounts payable and other accrued liabilities, a $12.6 million increase in inventories, and a $11.4 million increase in other current assets, offset partially by a $16.3 million decrease in accounts receivable. The primary use of cash for operating activities in the first six months of fiscal 2000 was a $43.3 million increase in inventories and a $22.9 million decrease in accounts payable and other accrued liabilities, offset partially by a $15.0 million decrease in accounts receivable. Net cash used for investing activities for the six months ended December 31, 2000 was $4.1 million and net cash provided by investing activities for the six months ended January 2, 2000, was $87.8 million. In the first six months of fiscal 2001, the primary use of cash included capital expenditures of $8.3 million and costs of $1.7 million for real estate development at our Farmingdale shopping center, offset partially by $6.1 million of cash provided from the sale of investments and dispositions of non-core real estate. In the first six months of fiscal 2000, the primary source of cash from investing activities was $105.0 million of net proceeds received from the dispositions of Dallas Aerospace, Nacanco and the Camloc Gas Springs division, offset partially by capital expenditures of $16.5 million. Net cash provided by financing activities for the six months ended December 31, 2000 and January 2, 2000 was $25.1 million and $0.2 million, respectively. Cash provided by financing activities in the first quarter of fiscal 2001, included $24.4 million of net proceeds from the issuance of additional debt. Cash provided by financing activities in the first six months of fiscal 2000 included $161.9 million of proceeds from the issuance of debt, and $0.2 million from the issuance of stock, offset by $161.2 million repayment of debt and a $0.6 million purchase of treasury stock. Our working capital requirement has increased in the second quarter of fiscal 2001, as our aerospace fasteners segment engaged in a new inventory supply program with a customer, requiring a significant investment in inventory. Under this program, we must maintain a certain level of inventory to fulfill the customer's monthly requirements. Sales under the program are expected to increase in the third quarter of fiscal 2001. Our principal cash requirements include debt service, capital expenditures, 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 available 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 may 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 December 31, 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 $3.1 million and $3.5 million in the second quarter and first six months of fiscal 2001, respectively 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 six months ended December 31, 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. 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 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% 6.04% Fair Market Value at April 1, 2001 (in thousands) $37 $(4,356) (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-----