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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended September 29, 2002 Commission File Number 1-6560
THE FAIRCHILD CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 34-0728587
(State of incorporation or organization) (I.R.S. Employer Identification No.)
45025 Aviation Drive, Suite 400, Dulles, VA 20166
(Address of principal executive offices)
(703) 478-5800
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Title of Class September 30, 2002
Class A Common Stock, $0.10 Par Value 22,541,021
Class B Common Stock, $0.10 Par Value 2,621,502
--------------------------------------------------------------------------------
THE FAIRCHILD CORPORATION INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 29, 2002
Page
PART I.FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of
September 29, 2002 (Unaudited) and June 30, 2002 .......... 3
Condensed Consolidated Statements of Earnings
(Unaudited) for the Three Months Ended
September 29, 2002 and September 30, 2001 ................. 5
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Three Months Ended
September 29, 2002 and September 30, 2001 ................. 6
Notes to Condensed Consolidated Financial Statements
(Unaudited) ............................................... 7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition ........................ 17
Item 3. Quantitative and Qualitative Disclosure About Market Risk . 23
Item 4. Controls and Procedures ................................... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................... 25
Item 5. Other Information ......................................... 25
Item 6. Exhibits and Reports on Form 8-K .......................... 25
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
September 29, 2002 (Unaudited) and June 30, 2002
(In thousands)
ASSETS
9/29/02 6/30/02
------------------ -----------------
CURRENT ASSETS:
Cash and cash equivalents $ 15,782 $ 15,283
Short-term investments 502 581
Accounts receivable-trade, less allowances of $7,702 and $7,635 100,732 109,520
Inventories:
Finished goods 144,622 143,235
Work-in-process 28,730 28,841
Raw materials 8,590 8,955
------------------ -----------------
181,942 181,031
Prepaid expenses and other current assets 37,194 34,985
------------------ -----------------
TOTAL CURRENT ASSETS 336,152 341,400
------------------ -----------------
Property, plant and equipment, net of accumulated
depreciation of $192,054 and $186,172 123,272 129,218
Net assets held for sale 19,116 19,406
Goodwill 274,549 274,549
Investments and advances, affiliated companies 3,356 3,261
Prepaid pension assets 64,780 64,693
Deferred loan costs 10,487 10,907
Real estate investment 109,028 108,184
Long-term investments 5,041 5,360
Notes receivable 8,003 7,155
Other assets 6,936 6,513
------------------ -----------------
TOTAL ASSETS $ 960,720 $ 970,646
------------------ -----------------
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 29, 2002 (Unaudited) and June 30, 2002
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
9/29/02 6/30/02
------------------ -----------------
CURRENT LIABILITIES:
Bank notes payable and current maturities of long-term debt $ 52,256 $ 53,879
Accounts payable 40,423 38,717
Accrued liabilities:
Salaries, wages and commissions 27,226 27,934
Employee benefit plan costs 3,071 3,134
Insurance 14,694 13,764
Interest 12,732 6,514
Other accrued liabilities 31,432 31,274
------------------ -----------------
TOTAL CURRENT LIABILITIES 181,834 175,216
------------------ -----------------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities 430,001 437,917
Fair value of interest rate contract 17,764 10,989
Other long-term liabilities 16,806 17,789
Retiree health care liabilities 42,465 42,651
Noncurrent deferred income taxes 4,277 4,277
Noncurrent income taxes 48,279 53,791
------------------ -----------------
TOTAL LIABILITIES 741,426 742,630
------------------ -----------------
STOCKHOLDERS' EQUITY:
Class A common stock, $0.10 par value; 40,000 shares authorized,
30,348 (30,347 in June) shares issued and 22,541 (22,540 in June);
shares outstanding; entitled to one vote per share 3,035 3,035
Class B common stock, $0.10 par value; 20,000 shares authorized,
2,622 shares issued and outstanding; entitled to ten votes per share 262 262
Paid-in capital 232,799 232,797
Treasury stock, at cost, 7,807 shares of Class A common stock (76,532) (76,532)
Retained earnings 84,656 91,947
Notes due from stockholders (1,831) (1,831)
Cumulative other comprehensive income (23,095) (21,662)
------------------ -----------------
TOTAL STOCKHOLDERS' EQUITY 219,294 228,016
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 960,720 $ 970,646
------------------ -----------------
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) For The
Three (3) Months Ended September 29, 2002 and September 30, 2001
(In thousands, except per share data)
REVENUE: 09/29/02 09/30/01
----------------- -----------------
Net sales $ 137,228 $ 165,073
Rental revenue 1,765 1,733
Other income (expense), net 849 1,337
----------------- -----------------
139,842 168,143
COSTS AND EXPENSES:
Cost of goods sold 105,291 124,403
Cost of rental revenue 1,232 1,234
Selling, general & administrative 27,994 31,756
----------------- -----------------
134,517 157,393
OPERATING INCOME 5,325 10,750
Interest expense 11,784 12,909
Interest income (786) (482)
----------------- -----------------
Net interest expense 10,998 12,427
Investment income (loss) (52) (386)
Decrease in fair market value of interest rate contract (6,776) (5,249)
----------------- -----------------
Loss from continuing operations before taxes (12,501) (7,312)
Income tax benefit 5,210 3,680
Equity in earnings of affiliates, net - 33
----------------- -----------------
Loss from continuing operations (7,291) (3,599)
Cumulative effect of change in accounting for goodwill - (144,600)
----------------- -----------------
NET LOSS $ (7,291) $ (148,199)
----------------- -----------------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (1,238) 12,677
Unrealized holding changes on derivatives 15 19
Unrealized periodic holding changes on securities (210) (152)
----------------- -----------------
Other comprehensive loss (1,433) 12,544
----------------- -----------------
COMPREHENSIVE LOSS $ (8,724) $ (135,655)
----------------- -----------------
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Loss from continuing operations $ (0.29) $ (0.14)
Cumulative effect of change in accounting for goodwill - (5.75)
----------------- -----------------
NET LOSS $ (0.29) $ (5.89)
----------------- -----------------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments $ (0.05) $ 0.50
Unrealized holding changes on derivatives - -
Unrealized periodic holding changes on securities (0.01) (0.01)
----------------- -----------------
Other comprehensive loss (0.06) 0.49
----------------- -----------------
COMPREHENSIVE LOSS $ (0.35) $ (5.40)
----------------- -----------------
Weighted average shares outstanding:
Basic 25,162 25,149
----------------- -----------------
Diluted 25,162 25,149
----------------- -----------------
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For The
Three (3) Months Ended September 29, 2002 and September 30, 2001
(In thousands)
9/29/02 9/30/01
----------------- -----------------
Cash flows from operating activities:
Net loss $ (7,291) $ (148,199)
Depreciation and amortization 7,873 7,511
Amortization of deferred loan fees 557 503
Unrealized holding loss on interest rate contract 6,776 5,249
Paid-in kind interest income (338) -
Cumulative effect of change in accounting for goodwill - 144,600
Undistributed (earnings) loss of affiliates, net - (33)
Net change in operating assets and liabilities 5,781 (2,368)
----------------- -----------------
Net cash provided by operating activities 13,358 7,263
Cash flows from investing activities:
Purchase of property, plant and equipment (1,655) (4,235)
Net proceeds received from the sale of property, plant, and equipment 317 3,710
Changes in investment securities 15 (53)
Equity investment in affiliates (95) (394)
Changes in real estate investment (1,526) (211)
Changes in net assets held for sale (73) 4,358
Changes in notes receivable (510) -
----------------- -----------------
Net cash provided by (used for) investing activities (3,527) 3,175
Cash flows from financing activities:
Proceeds from issuance of debt 27,622 35,896
Debt repayments (36,901) (47,394)
Issuance of Class A common stock 2 -
----------------- -----------------
Net cash used for financing activities (9,277) (11,498)
Effect of exchange rate changes on cash (55) 444
----------------- -----------------
Net change in cash and cash equivalents 499 (616)
Cash and cash equivalents, beginning of the year 15,283 14,951
----------------- -----------------
Cash and cash equivalents, end of the period $ 15,782 $ 14,335
----------------- -----------------
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except share data)
1. FINANCIAL STATEMENTS
The consolidated balance sheet as of September 29, 2002, and the
consolidated statements of earnings and cash flows for the three months ended
September 29, 2002 and September 30, 2001 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 September 29, 2002, and for all periods
presented, have been made. The balance sheet at June 30, 2002 was condensed from
the audited financial statements as of that date.
The condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and the Securities and Exchange Commission's instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, certain information and
footnote disclosures normally included in complete 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 2002
Annual Report on Form 10-K, as amended. The results of operations for the period
ended September 29, 2002 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. PENDING SALE OF OUR AEROSPACE FASTENERS BUSINESS
On July 17, 2002 we announced that we signed a definitive agreement to
sell our aerospace fasteners business for approximately $657 million in cash to
Alcoa Inc. The actual cash to be received from Alcoa is dependent upon a
post-closing adjustment based on the change in net working capital between March
31, 2002 and the closing date. We may also receive from Alcoa additional cash
proceeds up to $12.5 million per year, in an earnout formula based on the number
of Boeing and Airbus commercial aircraft deliveries during each of the calendar
years 2003-2006, inclusive. The sale, which is expected to close before November
30, 2002, is subject to customary conditions, including the approval of our
shareholders. We will use a portion of the proceeds from the sale to repay our
bank debt and to acquire all of our outstanding $225 million, 10.75% senior
subordinated notes, due in April, 2009, which are tendered to us. The remaining
proceeds from the sale will provide funds for new acquisitions.
3. EQUITY SECURITIES
We had 22,541,021 shares of Class A common stock and 2,621,502 shares of
Class B common stock outstanding at September 29, 2002. 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. During the three months ended September 29, 2002, we
issued 1,000 shares of Class A common stock as a result of the exercise of stock
options.
4. RESTRICTED CASH
On September 29, 2002 and June 30, 2002, we had restricted cash of $501 and
$472, 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
-----------------------------
9/29/02 9/30/01
-------------- --------------
Basic earnings per share:
Loss from continuing operations $ (7,291) $ (3,599)
-------------- --------------
Weighted average common shares outstanding 25,162 25,149
-------------- --------------
Basic loss from continuing operations per share $ (0.29) $ (0.14)
-------------- --------------
Diluted earnings per share:
Loss from continuing operations $ (7,291) $ (3,599)
-------------- --------------
Weighted average common shares outstanding 25,162 25,149
Options antidilutive antidilutive
Warrants N/A antidilutive
-------------- --------------
Total shares outstanding 25,162 25,149
-------------- --------------
Diluted loss from continuing operations per share $ (0.29) $ (0.14)
-------------- --------------
Stock options entitled to purchase 2,032,400 and 1,976,226 shares of Class
A common stock were antidilutive and not included in the earnings per share
calculation for the three months ended September 29, 2002 and September 30,
2001, respectively. Stock warrants entitled to purchase 400,000 shares of Class
A common stock were antidilutive and not included in the earnings per share
calculation for the three months ended September 30, 2001. The stock warrants
expired during fiscal 2002. The stock options could be dilutive in future
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 September 29, 2002, the consolidated total of our recorded
liabilities for environmental matters was approximately $13.9 million, which
represented the estimated probable exposure for these matters. It is reasonably
possible that our total exposure for these matters could be approximately $18.2
million.
Other Matters
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 October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets," which supersedes SFAS No. 121. Though it retains
the basic requirements of SFAS 121 regarding when and how to measure an
impairment loss, SFAS 144 provides additional implementation guidance. SFAS 144
applies to long-lived assets to be held and used or to be disposed of, including
assets under capital leases of lessees; assets subject to operating leases of
lessors; and prepaid assets. SFAS 144 also expands the scope of a discontinued
operation to include a component of an entity, and eliminates the current
exemption to consolidation when control over a subsidiary is likely to be
temporary. This statement is effective for our fiscal year beginning on July 1,
2002. Accordingly, we will account for the sale of the fastener business as a
discontinued operation as of the date of the sale.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections as of April 2002". SFAS No. 145
eliminates the requirement to report material gains or losses from debt
extinguishments as an extraordinary item, net of tax, in an entity's statement
of earnings. SFAS No. 145 instead requires that a gain or loss recognized from a
debt extinguishment be classified as an extraordinary item only when the
extinguishment meets the criteria of both "unusual in nature" and "infrequent in
occurrence" as prescribed under Accounting Principles Bulletin No. 30,
"Reporting the Result of Operations - Reporting the Effects of Disposal of a
Segment of Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". This statement is effective for our fiscal year
beginning on July 1, 2002.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This standard requires costs
associated with exit or disposal activities to be recognized when they are
incurred and applies prospectively to such activities initiated after December
31, 2002.
8. NOTES RECEIVABLE
At September 29, 2002, $7.6 million of promissory notes were due to us from
an unaffiliated third party and are recorded in notes receivable. The promissory
notes earn $1.5 million of annual cash interest and are being accreted to a face
value of $14.3 million through interest income. The promissory notes are secured
by $14.3 million face value of our outstanding 10.75% senior subordinated notes
due 2009 acquired by the third party.
9. BUSINESS SEGMENT INFORMATION
We currently report in three principal business segments: aerospace
fasteners, aerospace distribution and real estate operations. The following
table provides the historical results of our operations for the three months
ended September 29, 2002 and September 30, 2001, respectively.
Three Months Ended
-------------------------------
9/29/02 9/30/01
--------------- ---------------
SALES BY SEGMENT:
Aerospace Fasteners Segment $ 122,251 $ 147,090
Aerospace Distribution Segment 14,977 17,983
--------------- ---------------
TOTAL SALES $ 137,228 $ 165,073
--------------- ---------------
OPERATING RESULTS BY SEGMENT:
Aerospace Fasteners Segment $ 8,795 $ 14,866
Aerospace Distribution Segment 648 454
Real Estate Segment (a) 472 438
Corporate and Other Segment (4,590) (5,008)
--------------- ---------------
TOTAL OPERATING INCOME $ 5,325 $ 10,750
--------------- ---------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES:
Aerospace Fasteners Segment $ 8,469 $ 14,392
Aerospace Distribution Segment 626 431
Real Estate Segment (41) (229)
Corporate and Other Segment (21,555) (21,906)
--------------- ---------------
Total loss from continuing operations before taxes $(12,501) $ (7,312)
--------------- ---------------
ASSETS BY SEGMENT: 9/29/02 6/30/02
--------------- ---------------
Aerospace Fasteners Segment $ 658,899 $ 671,909
Aerospace Distribution Segment 48,068 49,358
Real Estate Segment 114,557 116,020
Corporate and Other Segment 139,196 133,359
--------------- ---------------
TOTAL ASSETS $ 960,720 $ 970,646
--------------- ---------------
(a) - Includes rental revenue of $1,765 and $1,733 for the three months ended
September 29, 2002 and September 30, 2001, respectively.
10. CONSOLIDATING FINANCIAL STATEMENTS
The following unaudited consolidating financial statements show separately
The Fairchild Corporation and the subsidiaries of The Fairchild Corporation.
These financial statements are provided to fulfill public reporting
requirements, and present separately the 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 our shopping center in Farmingdale New York, and certain other
subsidiaries.
CONSOLIDATING BALANCE SHEET
SEPTEMBER 29, 2002
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
---------------------------------------------------------------------------
Cash and cash equivalents $ 6,237 $ 2,888 $ 6,657 $ - $ 15,782
Short-term investments 54 362 86 - 502
Accounts receivable (including intercompany), less
allowances 986 650,439 110,017 (660,710) 100,732
Inventory, net - 128,697 53,245 - 181,942
Prepaid expenses and other current assets 11,937 18,803 6,454 - 37,194
---------------------------------------------------------------------------
Total current assets 19,214 801,189 176,459 (660,710) 336,152
Investment in subsidiaries 722,272 - - (722,272) -
Net fixed assets 593 88,428 34,251 - 123,272
Net assets held for sale - 19,116 - - 19,116
Investments and advances in affiliates 93 3,263 - - 3,356
Goodwill - 241,560 32,989 - 274,549
Deferred loan costs 10,067 - 420 - 10,487
Prepaid pension assets - 64,780 - - 64,780
Real estate investment - - 109,028 - 109,028
Long-term investments 60 2,033 3,436 (488) 5,041
Notes receivable and other assets 3,208 10,264 1,467 - 14,939
---------------------------------------------------------------------------
Total assets $ 755,822 $1,230,633 $ 358,050 $ (1,383,785) $ 960,720
===========================================================================
Bank notes payable & current maturities of debt $ 2,280 $ 1,467 $ 48,509 $ - $ 52,256
Accounts payable (including intercompany) - 876,882 203,209 (1,039,668) 40,423
Other accrued expenses 13,174 52,833 23,149 (1) 89,155
---------------------------------------------------------------------------
Total current liabilities 15,454 931,182 274,867 (1,039,669) 181,834
Long-term debt, less current maturities 424,490 2,966 2,545 - 430,001
Fair market value of interest rate contract 17,764 - - - 17,764
Other long-term liabilities 405 12,464 3,937 - 16,806
Noncurrent deferred income taxes 4,277 - - - 4,277
Noncurrent income taxes 48,867 (736) 148 - 48,279
Retiree health care liabilities - 37,429 5,036 - 42,465
---------------------------------------------------------------------------
Total liabilities 511,257 983,305 286,533 (1,039,669) 741,426
Class A common stock 3,035 - - - 3,035
Class B common stock 262 - - - 262
Notes due from stockholders (446) (1,385) - - (1,831)
Paid-in capital 232,799 478,501 126,419 (604,920) 232,799
Retained earnings 84,656 (211,334) (50,272) 261,606 84,656
Cumulative other comprehensive loss (11) (18,454) (4,630) - (23,095)
Treasury stock, at cost (76,045) - - (487) (76,532)
---------------------------------------------------------------------------
Total stockholders' equity 244,250 247,328 71,517 (343,801) 219,294
---------------------------------------------------------------------------
Total liabilities & stockholders' equity $ 755,507 $1,230,633 $ 358,050 $ (1,383,470) $ 960,720
===========================================================================
CONSOLIDATING STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED SEPTEMBER 29, 2002
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
---------------------------------------------------------------------------
Revenue:
Net sales $ - $ 104,586 $ 37,870 $ (5,228) $ 137,228
Rental revenue - - 1,765 - 1,765
Other income, net - 447 402 - 849
---------------------------------------------------------------------------
- 105,033 40,037 (5,228) 139,842
Costs and expenses:
Cost of goods sold - 81,981 28,538 (5,228) 105,291
Cost of rental revenue - - 1,232 - 1,232
Selling, general & administrative 1,605 19,877 6,512 - 27,994
---------------------------------------------------------------------------
1,605 101,858 36,282 (5,228) 134,517
---------------------------------------------------------------------------
Operating income (loss) (1,605) 3,175 3,755 - 5,325
Net interest expense (including intercompany) (2,564) 11,991 1,571 - 10,998
Investment (income) loss, net - 52 - - 52
Intercompany dividends - 2,315 - (2,315) -
Decrease in market value of interest rate contract 6,776 - - - 6,776
---------------------------------------------------------------------------
Earnings (loss) from continuing operations before taxes (5,817) (11,183) 2,184 2,315 (12,501)
Income tax (provision) benefit 2,046 3,932 (768) 5,210
Equity in earnings of affiliates and subsidiaries, net (3,520) - - 3,520 -
---------------------------------------------------------------------------
Net earnings (loss) $ (7,291) $ (7,251) $ 1,416 $ 5,835 $ (7,291)
===========================================================================
CONSOLIDATING CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 29, 2002
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
---------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net earnings (loss) $ (7,291) $ (7,251) $ 1,416 $ 5,835 $ (7,291)
Depreciation & amortization 14 5,073 2,786 - 7,873
Amortization of deferred loan fees 545 - 12 - 557
Unrealized holding loss on interest rate contract 6,776 - - - 6,776
Paid-in kind interest income - (338) - - (338)
Change in assets and liabilities 14,135 3,528 (6,047) (5,835) 5,781
---------------------------------------------------------------------------
Net cash provided by (used for) operating activities 14,179 1,012 (1,833) - 13,358
Cash Flows from Investing Activities:
--------------------------------------
Proceeds received from (used for):
Capital expenditures (66) (1,197) (392) - (1,655)
Sale of property, plant and equipment - 293 24 - 317
Unrealized holding loss on available-for-sale
securities - 15 - - 15
Equity investment in affiliates (95) - - - (95)
Real estate investment - - (1,526) - (1,526)
Changes in net assets held for sale - (73) - - (73)
Changes in notes receivable 14 (524) - - (510)
---------------------------------------------------------------------------
Net cash used for investing activities (147) (1,486) (1,894) - (3,527)
Cash Flows from Financing Activities:
Proceeds from issuance of debt 12,800 14,822 - - 27,622
Debt repayments (20,607) (16,294) - - (36,901)
Proceeds from exercised options 2 - - - 2
---------------------------------------------------------------------------
Net cash used for financing activities (7,805) (1,472) - - (9,277)
Effect of exchange rate changes on cash - - (55) - (55)
---------------------------------------------------------------------------
Net change in cash 6,227 (1,946) (3,782) - 499
Cash and cash equivalents, beginning of the year 10 4,834 10,439 - 15,283
---------------------------------------------------------------------------
Cash and cash equivalents, end of the period $ 6,237 $ 2,888 $ 6,657 $ - $ 15,782
===========================================================================
CONSOLIDATING BALANCE SHEET
JUNE 30, 2002
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
---------------------------------------------------------------------------
Cash and cash equivalents $ 10 $ 4,834 $ 10,439 $ - $ 15,283
Short-term investments 55 439 87 - 581
Accounts receivable (including intercompany), less
allowances 940 654,638 107,283 (653,341) 109,520
Inventory, net - 126,874 54,157 - 181,031
Prepaid expenses and other current assets 12,229 17,334 5,422 - 34,985
---------------------------------------------------------------------------
Total current assets 13,234 804,119 177,388 (653,341) 341,400
Investment in subsidiaries 735,342 - - (735,342) -
Net fixed assets 541 92,240 36,437 - 129,218
Net assets held for sale - 19,406 - - 19,406
Investments and advances in affiliates 93 3,168 - - 3,261
Goodwill - 241,560 32,989 - 274,549
Deferred loan costs 10,475 - 432 - 10,907
Prepaid pension assets - 64,693 - - 64,693
Real estate investment - - 108,184 - 108,184
Long-term investments 60 2,352 3,436 (488) 5,360
Notes receivable and other assets 3,223 9,367 1,078 - 13,668
---------------------------------------------------------------------------
Total assets $ 762,968 $1,236,905 $ 359,944 $ (1,389,171) $ 970,646
===========================================================================
Bank notes payable & current maturities of debt $ 2,279 $ 1,607 $ 49,993 $ - $ 53,879
Accounts payable (including intercompany) 27 874,413 202,958 (1,038,681) 38,717
Other accrued expenses 6,845 52,402 23,373 - 82,620
---------------------------------------------------------------------------
Total current liabilities 9,151 928,422 276,324 (1,038,681) 175,216
Long-term debt, less current maturities 432,297 3,211 2,409 - 437,917
Fair market value of interest rate contract 10,989 - - - 10,989
Other long-term liabilities 407 13,263 4,119 - 17,789
Noncurrent income taxes 54,310 (669) 150 - 53,791
Noncurrent deferred income taxes 4,277 - - - 4,277
Retiree health care liabilities - 37,619 5,032 - 42,651
---------------------------------------------------------------------------
Total liabilities 511,431 981,846 288,034 (1,038,681) 742,630
Class A common stock 3,035 - - - 3,035
Class B common stock 262 - - - 262
Notes due from stockholders (446) (1,385) - - (1,831)
Paid-in capital 232,797 478,500 127,148 (605,648) 232,797
Retained earnings 91,947 (204,758) (50,888) 255,646 91,947
Cumulative other comprehensive loss (14) (17,298) (4,350) - (21,662)
Treasury stock, at cost (76,044) - - (488) (76,532)
---------------------------------------------------------------------------
Total stockholders' equity 251,537 255,059 71,910 (350,490) 228,016
---------------------------------------------------------------------------
Total liabilities & stockholders' equity $ 762,968 $1,236,905 $ 359,944 $ (1,389,171) $ 970,646
===========================================================================
CONSOLIDATING STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
---------------------------------------------------------------------------
Net sales $ - $ 128,954 $ 40,634 $ (4,515) $ 165,073
Rental revenue - - 1,733 - 1,733
Other income, net (5) 1,057 285 - 1,337
---------------------------------------------------------------------------
(5) 130,011 42,652 (4,515) 168,143
Costs and expenses:
Cost of goods sold - 99,619 29,299 (4,515) 124,403
Cost of rental revenue - - 1,234 - 1,234
Selling, general & administrative 1,992 23,818 5,946 - 31,756
---------------------------------------------------------------------------
1,992 123,437 36,479 (4,515) 157,393
---------------------------------------------------------------------------
Operating income (loss) (1,997) 6,574 6,173 - 10,750
Net interest expense (including intercompany) (4,390) 15,441 1,376 - 12,427
Investment (income) loss, net - 386 - - 386
Intercompany dividends - 27 - (27) -
Decrease in market value of interest rate contract 5,249 - - - 5,249
---------------------------------------------------------------------------
Earnings (loss) before taxes (2,856) (9,280) 4,797 27 (7,312)
Income tax (provision) benefit 1,431 4,654 (2,405) - 3,680
Equity in earnings of affiliates and subsidiaries, net (146,774) 51 - 146,756 33
Minority interest - - - - -
---------------------------------------------------------------------------
Earnings (loss) from continuing operations (148,199) (4,575) 2,392 146,783 (3,599)
Cumulative effect in change in accounting for goodwill - (144,600) - - (144,600)
---------------------------------------------------------------------------
Net earnings (loss) $(148,199) $(149,175) $ 2,392 $ 146,783 $ (148,199)
===========================================================================
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
---------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net earnings (loss) $(148,199) $(149,175) $ 2,392 $ 146,783 $ (148,199)
Depreciation & amortization 12 4,955 2,544 - 7,511
Amortization of deferred loan fees 377 1 125 - 503
Change in Accounting - 144,600 - - 144,600
Unrealized holding (gain) loss on derivatives 5,249 - - - 5,249
Undistributed (distributed) earnings of affiliates 18 (51) - - (33)
Change in assets and liabilities 151,209 (4,458) (2,336) (146,783) (2,368)
---------------------------------------------------------------------------
Net cash (used for) provided by operating activities 8,666 (4,128) 2,725 - 7,263
Cash Flows from Investing Activities:
Proceeds received from (used for):
Purchase of property, plant and equipment (14) (3,029) (1,192) - (4,235)
Investment securities, net - (53) - - (53)
Sale of property, plant and equipment - 3,693 17 - 3,710
Equity investment in affiliates (394) - - - (394)
Changes in real estate investment - - (211) - (211)
Changes in net assets held for sale - 4,358 - - 4,358
---------------------------------------------------------------------------
Net cash (used for) provided by investing activities (408) 4,969 (1,386) - 3,175
Proceeds from issuance of debt 22,700 12,299 897 - 35,896
Debt repayments, net (31,000) (13,196) (3,198) - (47,394)
---------------------------------------------------------------------------
Net cash used for financing activities (8,300) (897) (2,301) - (11,498)
Effect of exchange rate changes on cash - - 444 - 444
---------------------------------------------------------------------------
Net change in cash (42) (56) (518) - (616)
Cash, beginning of the year 562 6,546 7,843 - 14,951
---------------------------------------------------------------------------
Cash, end of the period $ 520 $ 6,490 $ 7,325 $ - $ 14,335
===========================================================================
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 supply chain services provider 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 located in Farmingdale, New York.
CAUTIONARY STATEMENT
Certain statements in this financial discussion and analysis by management
contain "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 financial discussion and analysis by management. 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; our ability to achieve and
execute internal business plans; worldwide political instability and economic
growth; reduced airline revenues as a result of the September 11, 2001 terrorist
attacks on the United States, and their aftermath; 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 the forward-looking statements included in this Quarterly Report, even if
new information, future events or other circumstances have made them incorrect
or misleading.
RESULTS OF OPERATIONS
Consolidated Results
We currently report in three principal business segments: aerospace
fasteners, aerospace distribution and real estate operations. The following
table provides the historical sales and operating income of our segments for the
three months ended September 29, 2002 and September 30, 2001, respectively.
Three Months Ended
-------------------------------
9/29/02 9/30/01
--------------- --------------
SALES BY SEGMENT:
Aerospace Fasteners Segment $ 122,251 $ 147,090
Aerospace Distribution Segment 14,977 17,983
--------------- --------------
TOTAL SALES $ 137,228 $ 165,073
--------------- --------------
OPERATING RESULTS BY SEGMENT:
Aerospace Fasteners Segment $ 8,795 $ 14,866
Aerospace Distribution Segment 648 454
Real Estate Segment (a) 472 438
Corporate and Other Segment (4,590) (5,008)
--------------- --------------
TOTAL OPERATING INCOME $ 5,325 $ 10,750
--------------- --------------
(a) - Includes rental revenue of $1,765 and $1,733 for the three months ended
September 29, 2002 and September 30, 2001, respectively.
Net sales of $137.2 million in the first quarter of fiscal 2003 decreased
by $27.8 million, or 16.9%, compared to sales of $165.1 million in the first
quarter of fiscal 2002. Sales in the first quarter of fiscal 2003 were adversely
affected by the overall conditions in the aerospace industry, resulting
primarily from the events of September 11, 2001.
Gross margin as a percentage of sales was 23.3% and 24.6% in the first
quarter of fiscal 2003 and fiscal 2002, respectively. The higher gross margin in
the fiscal 2002 period is attributable primarily to a higher volume of sales and
a higher margin product mix.
Selling, general & administrative expense as a percentage of sales was
20.4% and 19.2% in the first three months of fiscal 2003 and 2002, respectively.
The change in the fiscal 2003 period was attributable primarily to the volume of
sales and the related economies of scale.
Rental revenue remained stable in the first three months of fiscal 2003,
compared to the first three months of fiscal 2002.
Other income decreased $0.5 million in the first three months of fiscal
2003, compared to the first three months of fiscal 2002. Other income for the
three months ended September 30, 2001, included $0.5 million of royalty income
prior to the royalty contracts being sold in the second quarter of fiscal 2002.
Operating income for the three months ended September 29, 2002, decreased
by $5.4 million, as compared to the same period of the prior year. The decrease
reflects the downturn in the aerospace industry, resulting from a significant
reduction in air travel following September 11, 2001.
Net interest expense decreased by $1.4 million, or 11.5%, and cash interest
expense decreased by $0.8 million in the first three months of fiscal 2003, as
compared to the first three months of fiscal 2002, due primarily to lower
interest rates.
We recognized a $0.1 million and $0.4 million of investment loss in three
months ended September 29, 2002 and September 30, 2001, respectively, due to the
decrease in the fair market value of trading securities.
We recognized an expense of $6.8 million and $5.2 million in the first
quarter of 2003 and 2002, respectively, from the fair market value adjustment of
a ten-year $100 million interest rate contract. Declining interest rates over
the remaining period of the interest rate contract has caused the change in fair
market value of the contract.
An income tax benefit of $5.2 million and $3.7 million in the first three
months of fiscal 2003 and fiscal 2002, respectively, was higher than the
statutory rate, due primarily to the reversal of tax accruals, net of valuation
allowances, which are no longer required.
Comprehensive income includes foreign currency translation adjustments and
unrealized holding changes in the fair market value of available-for-sale
investment securities. For the three months ended September 29, 2002, the
foreign currency translation adjustment decreased by $1.2 million and the fair
market value of unrealized holding gains on investment securities decreased by a
$0.2 million. For the three months ended September 30, 2001, the foreign
currency translation adjustment resulted in a $12.7 million increase, and was
offset partially by a $0.2 million decrease in the fair market value of
unrealized holding gains on investment securities.
Segment Results
Aerospace Fasteners Segment
Sales in our Aerospace Fasteners segment decreased by $24.8 million, or
16.9%, in the first three months of fiscal 2003, as compared to the same periods
of fiscal 2002. The change reflected a reduction in shipments in the current
period due to an overall lower level of demand in the aerospace industry
resulting from the September 11, 2001 terrorist attacks. Our backlog decreased
by $2.7 million in the first quarter of fiscal 2003, to $175.1 million at
September 29, 2002. Our book-to-bill ratio was 98.8% for the first three months
of fiscal 2003, which was a substantial improvement from the book-to-bill ratio
in the previous two quarters.
Operating income decreased by $6.1 million, or 40.8%, in the first three
months of fiscal 2003, as compared to the same periods of fiscal 2002. The
change primarily reflects the marginal decrease in sales as a result of the
downturn in the aerospace industry. Operating expenses are continually monitored
as management attempts to balance the production requirements of short-term
customer demand with its ongoing operating costs.
Announcements by our major customers have reinforced our view that
projected aircraft build rates will continue to be adversely affected by
decreased worldwide demand for travel following September 11, 2001. Accordingly,
we believe overall demand for aerospace fasteners will decrease during the
remainder of calendar 2002, and our business will be affected by this decreased
demand. Nevertheless, we also believe the impact on our business will be
partially offset by certain supply chain service programs we entered into during
the past several years and by the overall decrease in fastener inventory
available to OEMs and distributors.
We have decided to sell our Fairchild Fasteners business for approximately
$657 million in cash to Alcoa Inc. The sale, which is expected to close before
November 30, 2002, is subject to customary conditions, including the approval of
our shareholders. (See Note 2 to the Consolidated Financial Statements).
Aerospace Distribution Segment
Our aerospace distribution segment is an international supplier to airlines
and general aviation businesses, distributing a wide range of aircraft parts and
related support services and has five operations in the United States. The
aerospace distribution segment specializes in the distribution of flight data
recorder, radar and navigation systems, instruments, and other components to
commercial airlines, commuter and regional airlines, fixed-base operators, air
cargo carriers, general aviation customers and the military. Sales in our
aerospace distribution segment decreased by $3.0 million, in the first quarter
of fiscal 2003, compared to the first quarter of fiscal 2002. Sales in the three
months ended September 29, 2002, were adversely affected due to the terrorist
attacks on September 11, 2001 and have been sluggish since then.
Operating income increased by $0.2 million in the first three months of
fiscal 2003, as compared to the same period in fiscal 2002. The results for the
three months ended September 29, 2002, reflect an increase in gross margin as a
percentage of sales.
Real Estate Operations Segment
Our real estate operations segment owns and operates a 456,000 square foot
shopping center located in Farmingdale, New York. We have two tenants that each
occupy more than 10% of the rentable space of the shopping center. Rental
revenue increased slightly in the three months ended September 29, 2002, due to
a slight increase in the amount of space leased to tenants, as compared to the
three months ended September 30, 2001. The weighted average occupancy rate of
the shopping center was 78.3% and 77.1% in the first quarter of 2003 and 2002,
respectively. The average effective annual rental rate per square foot was
$19.96 and $19.91 the first quarter of 2003 and 2002, respectively. As of
September 29, 2002, approximately 92% of the shopping center was leased. We
anticipate that rental income will increase during the remainder of fiscal 2003,
as a result of us entering agreements, to lease approximately 66,000 square
feet.
Operating income increased slightly in the first quarter of fiscal 2003,
as compared to the first quarter of 2002. The improvement in the first quarter
of fiscal 2003 reflected an increase in the weighted-average portion of the
shopping center occupied during fiscal 2003.
Corporate
The operating loss at corporate was reduced by $0.4 million in the first
three months of fiscal 2003, compared to the first three months of fiscal 2002.
This improvement was due primarily to a reduction of legal expenses in the first
three months of fiscal 2003.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total capitalization as of September 29, 2002 and June 30, 2002 amounted to
$701.5 million and $719.8 million, respectively. The three-month change in
capitalization included a $9.5 million decrease in debt reflecting cash provided
by our operations, and a decrease in equity of $8.7 million which was due
primarily to our reported net loss and a $1.4 million unfavorable decrease in
other comprehensive income.
We maintain a portfolio of investments classified primarily as
available-for-sale securities, which had a fair market value of $5.5 million at
September 29, 2002. The market value of these investments decreased by $0.4
million in the three months ended September 29, 2002. There is risk associated
with market fluctuations inherent in stock investments, and because our
portfolio is not diversified, changes in its value may occur.
Net cash provided by operating activities for the three months ended
September 29, 2002, was $13.4 million. The working capital sources of cash in
the first three months of fiscal 2002 included an $8.2 million increase in
accounts payable and other accrued liabilities and an $8.7 million decrease in
accounts receivable, offset partially by a $0.9 million increase in inventory
and a $2.2 million increase in prepaid and other current assets. Net cash
provided by operating activities for the three months ended September 30, 2001,
was $7.3 million. The primary source of cash from operating activities in the
first three months of fiscal 2002 included $9.7 million of earnings after
deducting non-cash expenses of $144.6 million for the cumulative effect of
change in accounting for goodwill, $7.5 million for depreciation, $5.2 million
from the reduction in the fair market value of an interest rate contract, and
$0.5 million from the amortization of deferred loan fees.
Net cash used for investing activities was $3.5 million for the three
months ended September 29, 2002. In the first three months of fiscal 2003, the
primary use of cash was capital expenditures of $1.7 million at our aerospace
businesses and $1.5 million for our real estate investment. Net cash provided by
investing activities was $3.2 million for the three months ended September 30,
2001. In the first three months of fiscal 2002, the primary source of cash was
$8.1 million provided from the dispositions of non-core real estate and net
assets held for sale, partially offset by $4.2 million of capital expenditures.
Net cash used by financing activities was $9.3 million and $11.5 million
for the three months ended September 29, 2002 and September 30, 2001,
respectively. Cash provided by operations was used to reduce debt in the both
periods.
At September 29, 2002, $7.6 million of promissory notes were due to us from
an unaffiliated third party and are recorded in notes receivable. The promissory
notes earn $1.5 million of annual cash interest and are being accreted to a face
value of $14.3 million through interest income. The promissory notes are secured
by $14.3 million face value of our outstanding 10.75% senior subordinated notes
due 2009 acquired by the third party. The third party has tendered the notes to
us and we intend to acquire them in conjunction with the anticipated sale of our
aerospace fasteners business. This will satisfy the obligation of the third
party to us under its promissory notes due to us.
Our principal cash requirements include debt service, capital expenditures,
and the payment of other liabilities including 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
proceeds received from dispositions of assets will be adequate to satisfy our
cash requirements during the next twelve months.
We are required under the credit agreement with our senior lenders, 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. One
restrictive covenant is the interest coverage ratio, which represents the ratio
of EBITDA to interest expense, as defined in the credit agreement. At September
29, 2002, the interest coverage ratio was 2.33, which exceeded the minimum
requirement of 2.0. Our interest rates vary in part based upon the consolidated
indebtedness to EBITDA covenant, which represents the ratio of total debt to
EBITDA, as defined in the credit agreement. On September 29, 2002, our
indebtedness to EBITDA ratio was 5.55, which was below the maximum permitted
ratio of 5.7. Additionally, the credit agreement restricts annual capital
expenditures to $40 million during the life of the facility. For the three
months ended September 29, 2002, capital expenditures were $1.7 million. Except
for assets of our subsidiaries that are not guarantors of the credit agreement,
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 September 29, 2002, we were in compliance with
the covenants under the credit agreement.
Recent Developments
On July 17, 2002 we announced that we signed a definitive agreement to sell
our aerospace fasteners business to Alcoa Inc., for approximately $657 million
in cash. The actual cash to be received from Alcoa is dependent upon a
post-closing adjustment based on the difference in net working capital between
March 31, 2002 and the closing date. We may also receive from Alcoa additional
cash proceeds up to $12.5 million per year, in an earnout formula based on the
number of Boeing and Airbus commercial aircraft deliveries during each of the
calendar years 2003-2006, inclusive. The sale, which is expected to close before
November 30, 2002, is subject to customary conditions, including the approval of
our shareholders. We will use a portion of the proceeds from the sale to repay
our bank debt and to acquire all of our outstanding $225 million, 10.75% senior
subordinated notes, due in April, 2009, which are tendered to us. This tender
offer will close concurrently with the closing of the sale to Alcoa. The
remaining proceeds from the sale will provide funds for new acquisitions.
The Pension Benefit Guaranty Corporation has contacted us to understand the
impact of the sale of our aerospace fasteners business on our ability to fund
our long-term pension obligations. The PBGC has expressed concern that our
retirement plan will be underfunded by $86 million after the sale of our
aerospace fasteners business. We have provided the PBGC with information which
represented the underfunding to be $42 million, using the PBGC plan termination
assumptions. We currently anticipate that we will be required to make $17
million of plan contributions over the next five years, in the aggregate. We
have ongoing discussions with the PBGC and believe we will be able to resolve
this matter without any significant impact on our financial condition, although
we cannot make any assurances to you of that.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets," which supersedes SFAS No. 121. Though it retains
the basic requirements of SFAS 121 regarding when and how to measure an
impairment loss, SFAS 144 provides additional implementation guidance. SFAS 144
applies to long-lived assets to be held and used or to be disposed of, including
assets under capital leases of lessees; assets subject to operating leases of
lessors; and prepaid assets. SFAS 144 also expands the scope of a discontinued
operation to include a component of an entity, and eliminates the current
exemption to consolidation when control over a subsidiary is likely to be
temporary. This statement is effective for our fiscal year beginning on July 1,
2002. Accordingly, we will account for the sale of the fastener business as a
discontinued operation as of the date of the sale.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections as of April 2002". SFAS No. 145
eliminates the requirement to report material gains or losses from debt
extinguishments as an extraordinary item, net of tax, in an entity's statement
of earnings. SFAS No. 145 instead requires that a gain or loss recognized from a
debt extinguishment be classified as an extraordinary item only when the
extinguishment meets the criteria of both "unusual in nature" and "infrequent in
occurrence" as prescribed under Accounting Principles Bulletin No. 30,
"Reporting the Result of Operations - Reporting the Effects of Disposal of a
Segment of Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". This statement is effective for our fiscal year
beginning on July 1, 2002.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This standard requires costs
associated with exit or disposal activities to be recognized when they are
incurred and applies prospectively to such activities initiated after December
31, 2002.
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 with which we entered into the interest rate swap agreement, 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 $6.8 million and $5.2 million, in the three months ended
September 29, 2002 and September 30, 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. If
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.
If 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. We are accounting for the hybrid contract, comprised of the
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.
(In thousands)
Expected Fiscal Year Maturity Date 2003 2008
----------------------------------------------------------------------
Type of Interest Rate Contracts Interest Rate Cap Variable to Fixed
Variable to Fixed $30,750 $100,000
Fixed LIBOR rate N/A 6.24%
LIBOR cap rate 8.125% N/A
Average floor rate N/A N/A
Weighted average forward LIBOR rate 1.69% 3.36%
Fair Market Value at September 29, 2002 $0 $(17,764)
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The term "disclosure controls and procedures" is defined in Rules 13a-14(c)
and 15d-14(c) of the Securities Exchange Act of 1934. These rules refer to the
controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
under the Exchange Act is recorded, processed, summarized and reported within
required time periods. Our Chief Executive Officer and our Chief Financial
Officer have evaluated the effectiveness of our disclosure controls and
procedures as of a date within 90 days before the filing of this quarterly
report, which we refer to as the Evaluation Date. They have concluded that, as
of the Evaluation Date, such controls and procedures were effective at ensuring
that the required information was disclosed on a timely basis in our reports
filed under the Exchange Act.
Changes in Internal Controls
We maintain a system of internal accounting controls that are designed to
provide reasonable assurance that our books and records accurately reflect our
transactions and that our established policies and procedures are followed. For
the quarter ended September 29, 2002, there were no significant changes to our
internal controls or in other factors that could significantly affect our
internal controls.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required to be disclosed under this Item is set forth in
Footnote 6 (Contingencies) of the Consolidated Financial Statements (Unaudited)
included in this Report. The Pension Benefit Guaranty Corporation has contacted
us to understand the impact of the sale of our aerospace fasteners business on
our ability to fund our long-term pension obligations. Please see discussion
above under "Recent Developments." We are not aware of any legal proceedings
commenced by the PBGC at this point.
Item 5. Other Information
Beginning in the mid-1990's, articles have appeared in the French press
reporting an inquiry by a French magistrate into allegedly improper business
transactions involving Elf Acquitaine, a French petroleum company, its former
chairman and various third parties, including Maurice Bidermann. In connection
with this inquiry, the magistrate has made inquiry into allegedly improper
transactions between Mr. Jeffrey Steiner and that petroleum company. In response
to the magistrate's request, Mr. Steiner has submitted written statements
concerning the transactions and appeared in person, in France, before the
magistrate and others. The magistrate put Mr. Steiner under examination (mis en
examen) with respect to this matter and imposed a surety (caution) of ten
million French Francs, approximately $1.5 million at the time. The magistrate's
principal allegations are that, in 1990, Mr. Steiner improperly received or
dealt with others with respect to funds of Elf Acquitaine paid pursuant to a
written consulting agreement with Elf Acquitaine, and paid in connection with
the sale of a real estate company. The examining magistrate has notified Mr.
Steiner that he intends to transmit the dossier to the Republic prosecutor
(procureur de la Republique) for his evaluation. However, Mr. Steiner has not
been charged; and as of the date of this filing, the Company is not aware of any
developments involving Mr. Steiner and these matters, which are adverse to him.
We have provided the surety for Mr. Steiner and paid his legal expenses ($4.7
million) in connection with these matters, and will continue to do so, in
accordance with Delaware law. Mr. Steiner has undertaken to repay us the surety
and expenses paid by us on his behalf if it is ultimately determined that Mr.
Steiner was not entitled to indemnification under Delaware law. Delaware law
provides that Mr. Steiner would be entitled to indemnification if it is
determined that he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Company, and had no reasonable
cause to believe his conduct was unlawful.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
*12. Certifications required by Section 906 of the Sarbanes-Oxley
Act.
* Filed herewith.
(b) Reports on Form 8-K:
On July 18, 2002, we filed a Form 8-K to report the Acquisition
Agreement, dated as of July 16, 2002, between Fairchild and Alcoa Inc.,
pursuant to which Alcoa will acquire Fairchild's fasteners business for
approximately $657 million in cash and the assumption of certain
liabilities.
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/ JOHN L. FLYNN
-----------------
John L. Flynn
Chief Financial Officer and
Senior Vice President, Tax
Date: November 12, 2002
CERTIFICATION ACCOMPANYING PERIODIC REPORT
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, Jeffrey J. Steiner, Chief Executive Officer of The Fairchild
Corporation ("Company"), hereby certifies that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in this
quarterly report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit
committee of the Company's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002 /s/ JEFFREY J. STEINER
----------------------
Jeffrey J. Steiner
Chairman of the Board and
Chief Executive Officer
CERTIFICATION ACCOMPANYING PERIODIC REPORT
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, John L. Flynn, Chief Financial Officer of The Fairchild
Corporation ("Company"), hereby certifies that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in this
quarterly report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit
committee of the Company's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002 /s/ JOHN L. FLYNN
-----------------
John L. Flynn
Chief Financial Officer and
Senior Vice President, Tax