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 October 1, 2000
Commission File Number 1-6560
THE FAIRCHILD CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 34-0728587
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
45025 Aviation Drive, Suite 400
Dulles, VA 20166
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code(703) 478-5800
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Outstanding at
Title of ClassOctober 1, 2000
Class A Common Stock, $0.10 Par Value 22,482,688
Class B Common Stock, $0.10 Par Value 2,621,652
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of October 1, 2000 (Unaudited) and
June 30, 2000 . 3
Consolidated Statements of Earnings (Unaudited) for the Three
Months ended October 1, 2000 and October 3, 1999 5
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three
Months ended October 1, 2000 and October 3, 1999..7
Notes to Condensed Consolidated Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition 16
Item 3. Quantitative and Qualitative Disclosure About Market Risk 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds. . 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information. 23
Item 6. Exhibits and Reports on Form 8-K 23
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
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 1, 2000 (Unaudited) and June 30, 2000
(In thousands)
<CAPTION>
ASSETS
October 1, | June 30, | |
2000 | 2000 | |
(*) | ||
<S> | <C> | <C> |
CURRENT ASSETS: | ||
Cash and cash equivalents, $13,907 and $14,287 restricted | $ 32,816 | $ 35,790 |
Short-term investments | 4,024 | 9,054 |
Accounts receivable-trade, less allowances of $10,554 and $9,598 | 112,908 | 127,230 |
Inventories: | ||
Finished goods | 136,169 | 138,330 |
Work-in-process | 30,271 | 30,523 |
Raw materials | 12,539 | 11,006 |
178,979 | 179,859 | |
Prepaid expenses and other current assets | 84,677 | 74,231 |
Total Current Assets | 413,404 | 426,164 |
Property, plant and equipment, net of accumulated | ||
depreciation of $143,496 and $142,938 | 164,841 | 174,137 |
Net assets held for sale | 17,590 | 20,112 |
Cost in excess of net assets acquired (Goodwill), less | ||
accumulated amortization of $55,921 and $52,826 | 430,324 | 436,442 |
Investments and advances, affiliated companies | 3,325 | 3,238 |
Prepaid pension assets | 64,510 | 64,418 |
Deferred loan costs | 14,278 | 14,714 |
Real estate investment | 113,578 | 112,572 |
Long-term investments | 9,271 | 10,084 |
Other assets | 5,948 | 5,539 |
TOTAL ASSETS | $ 1,237,069 | $ 1,267,420 |
*Condensed from audited financial statements.
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 1, 2000 (Unaudited) and June 30, 2000
(In thousands)
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
October 1, | June 30, | |
2000 | 2000 | |
<S> | <C> | <C> |
CURRENT LIABILITIES: | (*) | |
Bank notes payable and current maturities of long-term debt | $ 26,963 | $ 28,594 |
Accounts payable | 50,838 | 62,494 |
Accrued liabilities: | ||
Salaries, wages and commissions | 32,999 | 38,065 |
Employee benefit plan costs | 6,080 | 5,608 |
Insurance | 11,523 | 12,237 |
Interest | 12,203 | 6,408 |
Other accrued liabilities | 48,429 | 60,123 |
111,234 | 122,441 | |
Total Current Liabilities | 189,035 | 213,529 |
LONG-TERM LIABILITES: | ||
Long-term debt, less current maturities | 474,007 | 453,719 |
Other long-term liabilities | 25,592 | 26,741 |
Retiree health care liabilities | 42,597 | 42,803 |
Noncurrent income taxes | 114,253 | 128,515 |
TOTAL LIABILITIES | 845,484 | 865,307 |
STOCKHOLDERS' EQUITY: | ||
Class A common stock, $0.10 par value; authorized | ||
40,000 shares, 30,290 (30,079 in June) shares issued and | ||
22,430 (22,430 in June) shares outstanding | 3,029 | 3,008 |
Class B common stock, $0.10 par value; authorized 20,000 | ||
Shares, 2,622 shares issued and outstanding | 262 | 262 |
Paid-in capital | 232,494 | 231,190 |
Treasury stock, at cost, 7,807 (7,649 in June) shares of Class A common stock | (76,545) | (75,506) |
Retained earnings | 255,815 | 261,788 |
Notes due from stockholders | (1,867) | (1,867) |
Cumulative other comprehensive income | (21,603) | (16,762) |
TOTAL STOCKHOLDERS' EQUITY | 391,585 | 402,113 |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ 1,237,069 | $ 1,267,420 |
*Condensed from audited financial statements
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF EARNINGS (Unaudited)
For The Three (3) Months Ended October 1, 2000 and October 3, 1999
(In thousands, except per share data)
<CAPTION>
Three Months Ended | ||
10/01/00 | 10/03/99 | |
<S> | <C> | <C> |
REVENUE: | ||
Net sales | $ 148,367 | $ 164,509 |
Other income, net | 2,516 | 4,828 |
150,883 | 169,337 | |
COSTS AND EXPENSES: | ||
Cost of goods sold | 113,591 | 121,362 |
Selling, general & administrative | 29,862 | 31,828 |
Amortization of goodwill | 3,134 | 3,096 |
Restructuring | - | 3,017 |
146,587 | 159,303 | |
OPERATING INCOME | 4,296 | 10,034 |
Interest expense | 13,453 | 12,209 |
Interest income | (524) | (735) |
Net interest expense | 12,929 | 11,474 |
Investment income (loss) | (380) | 880 |
Nonrecurring gain | - | 28,003 |
Earnings (loss) from continuing operations before taxes | (9,013) | 27,443 |
Income tax benefit (provision) | 3,574 | (9,132) |
Equity in earnings (loss) of affiliates, net | (6) | (201) |
Earnings (loss) from continuing operations | (5,445) | 18,110 |
Cumulative effect of change in accounting for derivatives | (528) | - |
NET EARNINGS (LOSS) | $ (5,973) | $ 18,110 |
Other comprehensive income (loss), net of tax: | ||
Foreign currency translation adjustments | (4,080) | (1,648) |
Unrealized holding changes on securities arising during the period | (761) | (5,006) |
Other comprehensive loss | (4,841) | (6,654) |
COMPREHENSIVE INCOME (LOSS) | $ (10,814) | $ 11,456 |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF EARNINGS (Unaudited)
For The Three (3) Months Ended October 1, 2000 and October 3, 1999
(In thousands, except per share data)
<CAPTION>
Three Months Ended | ||
10/01/00 | 10/03/99 | |
<S> | <C> | <C> |
BASIC EARNINGS PER SHARE: | ||
Earnings (loss) from continuing operations | $ (0.22) | $ 0.73 |
Cumulative effect of change in accounting for derivatives | (0.02) | - |
NET EARNINGS (LOSS) | $ (0.24) | $ 0.73 |
Other comprehensive income (loss), net of tax: | ||
Foreign currency translation adjustments | $ (0.16) | $ (0.07) |
Unrealized holding changes on securities arising during the period | (0.03) | (0.20) |
Other comprehensive loss | (0.19) | (0.27) |
COMPREHENSIVE INCOME (LOSS) | $ (0.43) | $ 0.46 |
DILUTED EARNINGS PER SHARE: | ||
Earnings (loss) from continuing operations | $ (0.22) | $ 0.72 |
Cumulative effect of change in accounting for derivatives | (0.02) | - |
NET EARNINGS (LOSS) | $ (0.24) | $ 0.72 |
Other comprehensive income (loss), net of tax: | ||
Foreign currency translation adjustments | $ (0.16) | $ (0.07) |
Unrealized holding changes on securities arising during the period | (0.03) | (0.20) |
Other comprehensive loss | (0.19) | (0.27) |
COMPREHENSIVE INCOME (LOSS) | $ (0.43) | $ 0.45 |
Weighted average shares outstanding: | ||
Basic | 25,068 | 24,862 |
Diluted | 25,068 | 25,026 |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For The Three (3) Months Ended October 1, 2000 and October 3, 1999
(In thousands)
<CAPTION>
For the Three Months Ended | ||
10/1/00 | 10/3/99 | |
<S> | <C> | <C> |
Cash flows from operating activities: | ||
Net earnings (loss) | $ (5,973) | $ 18,110 |
Depreciation and amortization | 10,950 | 9,968 |
Accretion of discount on long-term liabilities | 205 | 897 |
Amortization of deferred loan fees | 456 | 413 |
Net gain on divestiture of investment in affiliate | - | (25,747) |
Net gain on divestiture of subsidiary | - | (2,256) |
Distributed (undistributed) earnings of affiliates, net | 9 | 310 |
Change in assets and liabilities | (30,752) | (12,064) |
Non-cash charges and working capital changes of discontinued operations | - | (10,930) |
Net cash used for operating activities | (25,105) | (21,299) |
Cash flows from investing activities: | ||
Purchase of property, plant and equipment | (3,861) | (11,879) |
Net proceeds received from (used for) investment securities | 4,759 | (3,933) |
Net proceeds received from divestiture of investment in affiliate | - | 43,103 |
Net proceeds received from divestiture of subsidiary | - | 4,906 |
Real estate investment | (1,601) | (5,329) |
Proceeds received from net assets held for sale | 2,211 | 1,346 |
Investing activities of discontinued operations | - | 7,100 |
Net cash provided by investing activities | 1,508 | 35,314 |
Cash flows from financing activities: | ||
Proceeds from issuance of debt | 23,453 | 126,691 |
Debt repayments | (2,608) | (142,279) |
Issuance of Class A common stock | 194 | 90 |
Purchase of treasury stock | - | (624) |
Net cash provided by (used for) financing activities | 21,039 | (16,122) |
Effect of exchange rate changes on cash | (416) | 437 |
Net change in cash and cash equivalents | (2,974) | (1,670) |
Cash and cash equivalents, beginning of the year | 35,790 | 54,860 |
Cash and cash equivalents, end of the period | $ 32,816 | $ 53,190 |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except share data)
- FINANCIAL STATEMENTS
- PRO FORMA FINANCIAL STATEMENTS
- EQUITY SECURITIES
- RESTRICTED CASH
- EARNINGS PER SHARE
- CONTINGENCIES
- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
- CONSOLIDATING FINANCIAL STATEMENTS
The consolidated balance sheet as of October 1, 2000, and the consolidated statements of earnings and cash flows for the three months ended October 1, 2000 and October 3, 1999 have been prepared by us, without audit. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at October 1, 2000, and for all periods presented, have been made. The balance sheet at June 30, 2000 was condensed from the audited financial statements as of that date.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our June 30, 2000 Annual Report on Form 10-K. The results of operations for the period ended October 1, 2000 are not necessarily indicative of the operating results for the full year. Certain amounts in the prior year's quarterly financial statements have been reclassified to conform to the current presentation.
The unaudited pro forma consolidated statement of earnings for the three months ended October 3, 1999 have been prepared to give effect to the dispositions of Dallas Aerospace (December 1999) and the investment in Nacanco (July 1999), as if these transaction had occurred on July 1, 1999. The unaudited pro forma information is not intended to be indicative of future results of our operations or results that might have been achieved if these transactions had been in effect since the beginning of the three months ended October 3, 1999.
<TABLE>
<CAPTION>
For the three months ended: | October 3, |
1999 | |
<S> | <C> |
Net sales | $ 153,365 |
Gross profit | 40,864 |
Net earnings | 786 |
Net earnings, per basic share | $ 0.03 |
Net earnings, per diluted share | $ 0.03 |
</TABLE>
We had 22,482,688 shares of Class A common stock and 2,621,652 shares of Class B common stock outstanding at October 1, 2000. Class A common stock is traded on both the New York and Pacific Stock Exchanges. There is no public market for the Class B common stock. The shares of Class A common stock are entitled to one vote per share and cannot be exchanged for shares of Class B common stock. The shares of Class B common stock are entitled to ten votes per share and can be exchanged, at any time, for shares of Class A common stock on a share-for-share basis. For the three months ended October 1, 2000, 52,966 shares of Class A common stock were issued as a result of the exercise of stock options.
During the three months ended October 1, 2000, we issued 132,394 deferred compensation units pursuant to our stock option deferral plan, as a result of the exercise of 291,050 stock options. Each deferred compensation unit is represented by one share of our treasury stock and is convertible into one share of our Class A common stock after a specified period of time.
On October 1, 2000 and June 30, 2000, we had restricted cash of $13,907 and $14,287, respectively, all of which is maintained as collateral for certain debt facilities and escrow arrangements.
The following table illustrates the computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
(In thousands, except per share data) | For the Three Months Ended | |
10/1/00 | 10/3/99 | |
<S> | <C> | <C> |
Basic earnings per share: | ||
Net earnings (loss) from continuing operations | $ (5,445) | $ 18,110 |
Weighted average common shares outstanding | 25,068 | 24,862 |
Basic earnings (loss) from continuing operations per share | $ (0.22) | $ 0.73 |
Diluted earnings per share: | ||
Net earnings (loss) from continuing operations | $ (5,445) | $ 18,110 |
Weighted average common shares outstanding | 25,068 | 24,862 |
Options | antidilutive | 10 |
Warrants | antidilutive | 154 |
Total shares outstanding | 25,068 | 25,026 |
Diluted earnings (loss) from continuing operations per share | $ (0.22) | $ 0.72 |
</TABLE>
Stock options entitled to purchase 2,283,011 and 1,767,986 shares of Class A common stock were antidilutive and not included in the earnings per share calculation for the three months ended October 1, 2000 and October 3, 1999, respectively. Stock warrants entitled to purchase 650,000 shares of Class A common stock were antidilutive and not included in the earnings per share calculation for the three months ended October 1, 2000. These shares could be dilutive in subsequent periods.
Environmental Matters
Our operations are subject to stringent government imposed environmental laws and regulations concerning, among other things, the discharge of materials into the environment and the generation, handling, storage, transportation and disposal of waste and hazardous materials. To date, such laws and regulations have not had a material effect on our financial condition, results of operations, or net cash flows, although we have expended, and can be expected to expend in the future, significant amounts for the investigation of environmental conditions and installation of environmental control facilities, remediation of environmental conditions and other similar matters, particularly in our aerospace fasteners segment.
In connection with our plans to dispose of certain real estate, we must investigate environmental conditions and we may be required to take certain corrective action prior or pursuant to any such disposition. In addition, we have identified several areas of potential contamination related to other facilities owned, or previously owned, by us, that may require us either to take corrective action or to contribute to a clean-up. We are also a defendant in certain lawsuits and proceedings seeking to require us to pay for investigation or remediation of environmental matters and we have been alleged to be a potentially responsible party at various "superfund" sites. We believe that we have recorded adequate reserves in our financial statements to complete such investigation and take any necessary corrective actions or make any necessary contributions. No amounts have been recorded as due from third parties, including insurers, or set off against, any environmental liability, unless such parties are contractually obligated to contribute and are not disputing such liability.
As of October 1, 2000, the consolidated total of our recorded liabilities for environmental matters was approximately $13.1 million, which represented the estimated probable exposure for these matters. It is reasonably possible that our total exposure for these matters could be approximately $19.7 million.
Other Matters
AlliedSignal (now Honeywell International) had asserted indemnification claims against us in an aggregate amount of $38.8 million, arising from the disposition of Banner Aerospace's hardware business to AlliedSignal. We claimed that AlliedSignal owed us approximately $6.8 million. In October 2000, we reached an agreement with AlliedSignal to settle these claims and as a result of the settlement no cash changed hands.
We are involved in various other claims and lawsuits incidental to our business. We, either on our own or through our insurance carriers, are contesting these matters. In the opinion of management, the ultimate resolution of the legal proceedings, including those mentioned above, will not have a material adverse effect on our financial condition, future results of operations or net cash flows.
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. We adopted SFAS 133 on July 1, 2000 and recognized a cumulative loss of approximately $0.5 million.
The following unaudited financial statements separately show The Fairchild Corporation and the subsidiaries of The Fairchild Corporation. These financial statements are provided to fulfill public reporting requirements, and separately present guarantors of the 10 3/4% senior subordinated notes due 2009 issued by The Fairchild Corporation (the "Parent Company"). The guarantors are composed primarily of our domestic subsidiaries, excluding Fairchild Technologies, a real estate development venture, and certain other subsidiaries.
<TABLE>
CONSOLIDATING BALANCE SHEET
OCTOBER 1, 2000
<CAPTION>
Parent | Non | Fairchild | |||
Company | Guarantors | Guarantors | Eliminations | Historical | |
<S> | <C> | <C> | <C> | <C> | <C> |
Cash | $ 167 | $ 26,311 | $ 6,338 | $ - | $ 32,816 |
Marketable securities | 71 | 3,953 | - | - | 4,024 |
Accounts Receivable (including intercompany), less Allowances | 2,127 | 199,009 | 1,694 | (89,922) | 112,908 |
Inventory, net | - | 132,116 | 46,863 | - | 178,979 |
Prepaid and other current assets | 351 | 31,747 | 7,828 | 44,751 | 84,677 |
Total current assets | 2,716 | 393,136 | 62,723 | (45,171) | 413,404 |
Investment in Subsidiaries | 868,388 | - | - | (868,388) | - |
Net fixed assets | 479 | 125,597 | 38,765 | - | 164,841 |
Net assets held for sale | - | 17,590 | - | - | 17,590 |
Investments in affiliates | 945 | 2,380 | - | - | 3,325 |
Goodwill | 16,325 | 382,690 | 33,969 | (2,660) | 430,324 |
Deferred loan costs | 12,957 | 22 | 1,299 | - | 14,278 |
Prepaid pension assets | - | 64,510 | - | - | 64,510 |
Real estate investment | - | - | 113,578 | - | 113,578 |
Long-term investments | 355 | 9,404 | - | (488) | 9,271 |
Other assets | 17,562 | (13,453) | 1,840 | (1) | 5,948 |
Total assets | $ 919,727 | $ 981,876 | $ 252,174 | $ (916,708) | $ 1,237,069 |
Bank notes payable & current maturities of debt | $ 2,250 | $ 1,791 | $ 22,922 | $ - | $ 26,963 |
Accounts payable (including intercompany) | 221 | 539,434 | 67,615 | (556,432) | 50,838 |
Other accrued expenses | (27,580) | 65,789 | 33,614 | 39,411 | 111,234 |
Total current liabilities | (25,109) | 607,014 | 124,151 | (517,021) | 189,035 |
Long-term debt, less current maturities | 431,773 | 8,066 | 34,168 | - | 474,007 |
Other long-term liabilities | 405 | 19,607 | 5,580 | - | 25,592 |
Noncurrent income taxes | 121,073 | (664) | 179 | (6,335) | 114,253 |
Retiree health care liabilities | - | 38,258 | 4,339 | - | 42,597 |
Total liabilities | 528,142 | 672,281 | 168,417 | (523,356) | 845,484 |
Class A common stock | 3,029 | - | 53 | (53) | 3,029 |
Class B common stock | 262 | - | - | - | 262 |
Notes due from stockholders | (520) | (1,347) | - | - | (1,867) |
Paid-in-capital | 209,105 | 372,455 | 160,416 | (509,482) | 232,494 |
Retained earnings | 255,815 | (52,192) | (63,991) | 116,183 | 255,815 |
Cumulative other comprehensive income | (46) | (8,836) | (12,721) | - | (21,603) |
Treasury stock, at cost | (76,060) | (485) | - | - | (76,545) |
Total stockholders' equity | 391,585 | 309,595 | 83,757 | (393,352) | 391,585 |
Total liabilities & stockholders' equity | $ 919,727 | $ 981,876 | $ 252,174 | $ (916,708) | $ 1,237,069 |
</TABLE>
<TABLE>
CONSOLIDATING STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED OCTOBER 1, 2000
<CAPTION>
Parent | Non | Fairchild | |||
Company | Guarantors | Guarantors | Eliminations | Historical | |
<S> | <C> | <C> | <C> | <C> | <C> |
Net Sales | $ - | $ 116,058 | $ 34,146 | $ (1,837) | $ 148,367 |
Costs and expenses: | |||||
Cost of sales | - | 90,824 | 24,604 | (1,837) | 113,591 |
Selling, general & administrative | 1,362 | 22,250 | 3,734 | - | 27,346 |
Amortization of goodwill | 202 | 2,683 | 249 | - | 3,134 |
1,564 | 115,757 | 28,587 | (1,837) | 144,071 | |
Operating income (loss) | (1,564) | 301 | 5,559 | - | 4,296 |
Net interest expense (including intercompany) | (1,989) | 12,387 | 2,531 | - | 12,929 |
Investment (income) loss, net | - | 380 | - | - | 380 |
Earnings (loss) before taxes | 425 | (12,466) | 3,028 | - | (9,013) |
Income tax (provision) benefit | (169) | 4,944 | (1,201) | 3,574 | |
Equity in earnings of affiliates and subsidiaries | (5,701) | (6) | - | 5,701 | (6) |
Earnings (loss) from continuing operations | (5,445) | (7,528) | 1,827 | 5,701 | (5,445) |
Cumulative Effect in Change in Accounting | (528) | - | - | - | (528) |
Net earnings (loss) | $ (5,973) | $ (7,528) | $ 1,827 | $ 5,701 | $ (5,973) |
</TABLE>
<TABLE>
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED OCTOBER 1, 2000
<CAPTION>
Parent | Non | Fairchild | |||
Company | Guarantors | Guarantors | Eliminations | Historical | |
<S> | <C> | <C> | <C> | <C> | <C> |
Cash Flows from Operating Activities: | |||||
Net earnings (loss) | $ (5,973) | $ (7,528) | $ 1,827 | $ 5,701 | $ (5,973) |
Depreciation & amortization | 232 | 8,124 | 2,594 | - | 10,950 |
Accretion of discount on long-term liabilities | - | 205 | - | - | 205 |
Amortization of deferred loan fees | 343 | 2 | 111 | - | 456 |
Undistributed (distributed) earnings of affiliates | - | 9 | - | - | 9 |
Change in assets and liabilities | (15,716) | (920) | (8,415) | (5,701) | (30,752) |
Net cash (used for) provided by operating activities | (21,114) | (108) | (3,883) | - | (25,105) |
Cash Flows from Investing Activities: | |||||
Purchase of PP&E | (30) | (3,034) | (797) | - | (3,861) |
Proceeds receive from investment securities, net | - | 4,759 | - | - | 4,759 |
Change in real estate investment | - | - | (1,601) | - | (1,601) |
Change in net assets held for sale | - | 2,211 | - | - | 2,211 |
Net cash (used for) provided by investing activities | (30) | 3,936 | (2,398) | - | 1,508 |
Cash Flows from Financing Activities: | |||||
Proceeds from issuance of debt | 21,082 | 14 | 2,357 | - | 23,453 |
Debt repayments, net | - | (594) | (2,014) | - | (2,608) |
Issuance of Class A common stock | 194 | - | - | - | 194 |
Net cash (used for) provided by financing activities | 21,276 | (580) | 343 | - | 21,039 |
Effect of exchange rate changes on cash | - | - | (416) | - | (416) |
Net change in cash | 132 | 3,248 | (6,354) | - | (2,974) |
Cash, beginning of the year | 35 | 23,063 | 12,692 | - | 35,790 |
Cash, end of the year | $ 167 | $ 26,311 | $ 6,338 | $ - | $ 32,816 |
</TABLE>
<TABLE>
CONSOLIDATING BALANCE SHEET
JUNE 30, 2000
<CAPTION>
Parent | Non | Fairchild | |||
Company | Guarantors | Guarantors | Eliminations | Historical | |
<S> | <C> | <C> | <C> | <C> | <C> |
Cash | $ 35 | $ 23,063 | $ 12,692 | $ - | $ 35,790 |
Short-term investments | 71 | 8,983 | - | - | 9,054 |
Accounts Receivable (including intercompany), less allowances | 2,079 | 82,054 | 43,097 | - | 127,230 |
Inventory, net | - | 130,634 | 49,225 | - | 179,859 |
Prepaid and other current assets | 141 | 67,624 | 6,466 | - | 74,231 |
Total current assets | 2,326 | 312,358 | 111,480 | - | 426,164 |
Investment in Subsidiaries | 869,958 | - | - | (869,958) | - |
Net fixed assets | 493 | 131,029 | 42,615 | - | 174,137 |
Net assets held for sale | - | 20,112 | - | - | 20,112 |
Investments and advances in affiliates | 945 | 2,293 | - | - | 3,238 |
Goodwill | 16,528 | 385,156 | 34,758 | - | 436,442 |
Deferred loan costs | 13,284 | 24 | 1,406 | - | 14,714 |
Prepaid pension assets | - | 64,418 | - | - | 64,418 |
Real estate investment | - | - | 112,572 | - | 112,572 |
Long-term investments | 355 | 9,729 | - | - | 10,084 |
Other assets | 17,592 | (13,418) | 1,365 | - | 5,539 |
Total assets | $ 921,481 | $ 911,701 | $ 304,196 | $ (869,958) | $ 1,267,420 |
Bank notes payable & current maturities of debt | $ 2,250 | $ 2,194 | $ 24,150 | $ - | $ 28,594 |
Accounts payable (including intercompany) | 2,954 | 46,105 | 13,435 | - | 62,494 |
Other accrued expenses | (42,778) | 129,106 | 36,113 | - | 122,441 |
Net current liabilities of discontinued operations | - | - | - | - | - |
Total current liabilities | (37,574) | 177,405 | 73,698 | - | 213,529 |
Long-term debt, less current maturities | 410,691 | 8,242 | 34,786 | - | 453,719 |
Other long-term liabilities | 405 | 19,839 | 6,474 | - | 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 |
</TABLE>
<TABLE>
CONSOLIDATING STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED OCTOBER 3, 1999
<CAPTION>
Parent | Non | Fairchild | |||
Company | Guarantors | Guarantors | Eliminations | Historical | |
<S> | <C> | <C> | <C> | <C> | <C> |
Net Sales | $ - | $ 123,893 | $ 41,645 | $ (1,029) | $ 164,509 |
Costs and expenses: | |||||
Cost of sales | - | 91,623 | 30,768 | (1,029) | 121,362 |
Selling, general & administrative | 1,008 | 20,357 | 5,635 | - | 27,000 |
Restructuring | - | 3,017 | - | - | 3,017 |
Amortization of goodwill | 128 | 2,680 | 288 | - | 3,096 |
1,136 | 117,677 | 36,691 | (1,029) | 154,475 | |
Operating income (loss) | (1,136) | 6,216 | 4,954 | - | 10,034 |
Net interest expense | 12,425 | (2,569) | 1,618 | - | 11,474 |
Investment (income) loss, net | - | (880) | - | - | (880) |
Intercompany dividends | - | - | 117 | (117) | - |
Nonreucrring income | - | - | (28,003) | - | (28,003) |
Earnings (loss) before taxes | (13,561) | 9,665 | 31,222 | 117 | 27,443 |
Income tax (provision) benefit | (8,853) | (117) | (162) | - | (9,132) |
Equity in earnings of affiliates and subsidiaries | 40,524 | (201) | - | (40,524) | (201) |
Earnings (loss) from continuing operations | 18,110 | 9,347 | 31,060 | (40,407) | 18,110 |
Earnings (loss) from disposal of | |||||
discontinued operations | - | (206) | 206 | - | - |
Net earnings (loss) | $ 18,110 | $ 9,141 | $ 31,266 | $ (40,407) | $ 18,110 |
</TABLE>
<TABLE>
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED OCTOBER 3, 1999
<CAPTION>
Parent | Non | Fairchild | |||
Company | Guarantors | Guarantors | Eliminations | Historical | |
<S> | <C> | <C> | <C> | <C> | <C> |
Cash Flows from Operating Activities: | |||||
Net earnings (loss) | $ 18,110 | $ 9,141 | $ 31,266 | $ (40,407) | $ 18,110 |
Depreciation & amortization | 137 | 6,980 | 2,851 | - | 9,968 |
Amortization of deferred loan fees | 413 | - | - | - | 413 |
Accretion of discount on long-term liabilities | 897 | - | - | - | 897 |
Net loss on divestiture of subsidiary | - | - | (28,003) | - | (28,003) |
(Gain) loss on sale of investments | - | 1,009 | - | - | 1,009 |
(Gain) loss on sale of PP&E | - | 70 | 20 | - | 90 |
Undistributed (distributed) earnings of affiliates | - | 310 | - | - | 310 |
Change in assets and liabilities | (4,638) | (48,704) | (434) | 40,613 | (13,163) |
Non-cash charges and working capital changes | |||||
of discontinued operations | - | - | (10,930) | - | (10,930) |
Net cash (used for) provided by operating activities | 14,919 | (31,194) | (5,230) | 206 | (21,299) |
Cash Flows from Investing Activities: | |||||
Proceeds received from (used for) | |||||
Investment securities, net | - | (1,486) | - | - | (1,486) |
Purchase of PP&E | (5) | (9,388) | (2,486) | - | (11,879) |
Equity investment in affiliates | - | (2,447) | - | - | (2,447) |
Gross proceeds from divestiture of subsidiary | - | - | 48,009 | - | 48,009 |
Change in real estate investment | - | - | (5,329) | - | (5,329) |
Change in net assets held for sale | - | 1,346 | - | - | 1,346 |
Investing activities of discontinued operations | - | - | 7,100 | - | 7,100 |
Net cash (used for) provided by investing activities | (5) | (11,975) | 47,294 | - | 35,314 |
Cash Flows from Financing Activities: | |||||
Proceeds from issuance of debt | 14,500 | 110,459 | 1,732 | - | 126,691 |
Debt repayment and repurchase of debentures | |||||
(including intercompany), net | (29,457) | (66,240) | (46,582) | - | (142,279) |
Issuance of Class A common stock | 90 | - | - | - | 90 |
Purchase of treasury stock | - | (624) | - | - | (624) |
Net cash (used for) provided by financing activities | (14,867) | 43,595 | (44,850) | - | (16,122) |
Effect of exchange rate changes on cash | - | 40 | 397 | - | 437 |
Net change in cash | 47 | 466 | (2,389) | 206 | (1,670) |
Cash, beginning of the year | 27 | 41,793 | 13,040 | - | 54,860 |
Cash, end of the year | $ 74 | $ 42,259 | $ 10,651 | $ 206 | $ 53,190 |
</TABLE>
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 Holdings 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 two segments: aerospace fasteners and aerospace distribution. 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.
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; 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 ofsubstantially all of the assets and certain liabilities ofour 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 three months ended October 3, 1999, 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 two principal business segments: aerospace fasteners and aerospace distribution. The results of Camloc Gas Springs division, prior to its disposition, were included in the Corporate and Other classification. The following table provides the historical sales and operating income of our operations for the three months ended October 1, 2000 and October 3, 1999, respectively. The following table also illustrates sales and operating income of our operations by segment, on an unaudited pro forma basis, for the three months ended October 3, 1999, as if we had operated in a consistent manner in each of the reported periods. The pro forma results represent the impact of our disposition of Dallas Aerospace in December 1999, as if this transaction had occurred at the beginning of the three-month period ended October 3, 1999. The pro forma information is based on the historical financial statements of these companies, giving effect to the aforementioned transactions. The pro forma information is not necessarily indicative of the results of operations, that would actually have occurred if the transaction had been in effect since the beginning of fiscal 2000, nor is it necessarily indicative of our future results.
<TABLE>
<CAPTION>
(In thousands) | Pro Forma | |||
Actual Segment Results | Segment Results | |||
Three Months Ended | Three Months Ended | |||
10/1/2000 | 10/3/1999 | 10/3/1999 | ||
<S> | <C> | <C> | <C> | |
Sales by Segment: | ||||
Aerospace Fasteners | $ 125,446 | $ 134,420 | $ 134,420 | |
Aerospace Distribution | 22,921 | 29,350 | 18,206 | |
Corporate and Other | - | 739 | 739 | |
TOTAL SALES | $ 148,367 | $ 164,509 | $ 153,365 | |
Operating Results by Segment: | ||||
Aerospace Fasteners (a) | $ 6,999 | $ 8,875 | $ 8,875 | |
Aerospace Distribution | 1,287 | 2,257 | 1,352 | |
Corporate and Other | (3,990) | (1,098) | (1,098) | |
OPERATING INCOME | $ 4,296 | $ 10,034 | $ 9,129 |
(a) - Includes restructuring charges of $3.0 million in the three months ended October 3, 1999, respectively.
</TABLE>
Net sales of $148.4 million in the first quarter of fiscal 2001 decreased by $16.1 million, or 9.8%, compared to sales of $164.5 million in the first quarter of fiscal 2000. The results for the three months ended October 3, 1999, included $11.8 million of revenue from Dallas Aerospace and Camloc Gas Springs division prior to their dispositions. Additionally, the first quarter of fiscal 2001 sales were adversely affected by approximately $6.5 million due to the foreign currency impact on our European operations. On a pro forma basis and excluding the period-to-period foreign currency effect, net sales increased by $2.2 million for the three months ended October 1, 2000, compared to the three months ended October 3, 1999.
Gross margin as a percentage of sales was 23.4% and 26.2% for the first three months of fiscal 2001 and fiscal 2000, respectively. The reduced margins in the fiscal 2001 period are attributable to lower prices and a change in product mix.
Selling, general & administrative expense as a percentage of sales was 20.1% and 19.3% in the first three months of fiscal 2001 and 2000, respectively. The increase is due primarily to $0.9 million of higher operating costs of our Farmingdale shopping center as a result of increased rental income.
Other income decreased $2.4 million in the first three months of fiscal 2001, compared to the first three months of fiscal 2000. The decrease is due primarily to $3.1 million of income recognized from the disposition of non-core property during the three months ended October 3, 1999 and a $0.3 million loss recognized from the disposition of non-core property during the three months ended October 1, 2000, offset partially by a $1.3 million increase in rental income on our Farmingdale shopping center.
In the three months ended October 3, 1999, we recorded $3.0 million of restructuring charges as a result of the continued integration of Kaynar Technologies, acquired in April 1999, into our aerospace fasteners segment. All of the charges recorded were a direct result of product integration costs incurred as of October 3, 1999. These costs were classified as restructuring and were the direct result of formal plans to close plants and to terminate employees. Such costs are nonrecurring in nature. Other than a reduction in our existing cost structure, none of the restructuring charges resulted in future increases in earnings or represented an accrual of future costs. Our integration process was completed by June 30, 2000.
Operating income for the first quarter ended October 1, 2000 decreased by $5.7 million as compared to the first quarter of the prior year. The results for the three months ended October 3, 1999, included $0.9 million of operating income from Dallas Aerospace, prior to its disposition and $3.1 million of income recognized from the disposition of non-core property, offset partially by restructuring charges of $3.0 million. Operating income for the first quarter of fiscal 2001 was adversely affected by approximately $1.0 million due to the foreign currency impact on our European operations, and by a $0.3 million loss from the disposition of non-core property.
Net interest expense increased $1.5 million in the first three months of fiscal 2001, compared to the first three months of fiscal 2000 due primarily to higher interest rates and $0.5 million of non-cash interest expense recognized on the fair market value adjustment of an interest rate hedge agreement.
We recognized investment income of $0.9 million in the first three months of fiscal 2000, and an investment loss of $0.4 million in the first three months of fiscal 2001 due primarily to recognizing realized gains on investments liquidated.
Nonrecurring pre-tax income of $28.0 million in the three months ended October 3, 1999 resulted from the disposition of our equity investment in Nacanco Paketleme and the disposition of our Camloc Gas Springs division.
An income tax benefit of $3.6 million in the first three months of fiscal 2001 represented a 39.7% effective tax rate on pre-tax losses from continuing operations. The tax benefit approximated the statutory rate.
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. We adopted SFAS 133 on July 1, 2000 and recognized a cumulative loss of approximately $0.5 million.
Comprehensive income (loss) 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 October 1, 2000, foreign currency translation adjustments decreased by $4.1 million, and the fair market value of unrealized holding gains on investment securities we own decreased by $0.8 million.
Segment Results
Aerospace Fasteners Segment
Sales by our Aerospace Fasteners segment decreased by $9.0 million, or 6.7%, in the first quarter of fiscal 2001, as compared to the same period of fiscal 2000. Sales from our European operations were adversely affected by approximately $6.5 million in the first quarter of fiscal 2001, compared to the first quarter of fiscal 2000, due to the foreign currency impact from the U.S. dollar strengthening against the Euro. Pricing pressures throughout the aerospace fasteners market continue to negatively affect revenues. However, our book-to-bill ratio continues to remain positive indicating an improving market place as compared to the sluggish conditions we have experienced over the past twelve months.
Operating income decreased by $1.9 million in the first quarter of fiscal 2001, compared to the first quarter of fiscal 2000 due primarily to reduced gross margins resulting from pricing pressures, offset partially by cost reduction efforts in fiscal 2000. Operating income for the first quarter of fiscal 2001 was adversely affected by approximately $1.0 million due to the foreign currency impact on our European operations. Included in our prior quarter results are restructuring charges of $3.0 million due to the integration of Kaynar Technologies into our Aerospace Fasteners business. Operating expenses at all operations are being strictly controlled as management attempts to reduce operating costs to improve operating results in the short-term, without adversely affecting our future long-term performance.
We believe that the integration savings from the Kaynar merger and production efficiency improvements will partially offset the current weakened demand for our products. We anticipate that the overall demand for aerospace fasteners in fiscal 2001 will improve as OEMs inventory reduction programs subside and the announced increase in aircraft build rates favorably affect the demand for our products.
Aerospace Distribution Segment
Sales in our aerospace distribution segment decreased by $6.4 million, or 21.9%, in the first three months of fiscal 2001, compared to the first three months of fiscal 2000. The results for the three months ended October 3, 1999, included $11.1 million of revenue from Dallas Aerospace, prior to its disposition. On a pro forma basis, sales in our aerospace distribution segment increased by $4.7 million, or 25.9%, in the current three-month period, reflecting an overall improvement in demand for its products.
Operating income decreased by $1.0 million in the first quarter of fiscal 2001, compared to the first quarter of fiscal 2000. The results for the three months ended October 3, 1999, included $0.9 million of operating income from Dallas Aerospace, prior to its disposition. On a pro forma basis, operating income was flat in the first three months ended October 1, 2000, compared to the first three months ended October 3, 1999 and reflected a reduction in margins due primarily to the change in product mix.
Corporate and Other
The Corporate and Other classification included the Camloc Gas Springs division, prior to its disposition, and corporate activities. The group reported a decrease in sales as a result of the disposition of the Camloc Gas Springs division in September 1999. The operating loss increased by $2.9 million in the first three months of fiscal 2001, compared to the first three months of fiscal 2000. The first quarter of fiscal 2000 included $3.1 million of income recognized from the disposition of non-core property, while the first quarter of fiscal 2001 included a $0.3 million loss recognized from the disposition of non-core property. Rental income earned at our shopping center in Farmingdale, New York increased by $1.4 million in the first quarter of fiscal 2001, compared to the first quarter of fiscal 2000.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total capitalization as of October 1, 2000 and June 30, 2000 amounted to $892.6 million and $884.4 million, respectively. The changes in capitalization included an $18.7 million increase in debt reflecting cash used to support our operations, offset partially by a $5.4 million decrease in equity in the three months ended October 1, 2000 due primarily to our reported net loss and a reduction in comprehensive income.
We maintain a portfolio of investments classified primarily as available-for-sale securities, which had a fair market value of $13.3 million at October 1, 2000. The market value of these investments decreased by $0.8 million in the three months ended October 1, 2000. There is risk associated with market fluctuations inherent in stock investments, and because our portfolio is not diversified, large swings in its value may occur.
Net cash used for operating activities for the three months ended October 1, 2000 and October 3, 1999 was $25.1 million and $21.3 million, respectively. The primary use of cash for operating activities in the first three months of fiscal 2001 was a $22.9 million decrease in accounts payable and other accrued liabilities, offset partially by a $14.3 million decrease in accounts receivable. The primary use of cash for operating activities in the first quarter of fiscal 2000 was an increase in inventories of $14.1 million.
Net cash provided by investing activities for the three months ended October 1, 2000 and October 3, 1999, amounted to $1.5 million and $35.3 million, respectively. In the first three months of fiscal 2001, the primary source of cash from investing activities was $7.0 million of net proceeds received from the sale of investments and dispositions of non-core real estate, offset partially by capital expenditures of $4.2 million and investments in our Farmingdale shopping center of $1.0 million. In the first quarter of fiscal 2000, the primary source of cash from investing activities was $48.0 million of net proceeds received from the dispositions of Nacanco and the Camloc Gas Springs division, offset partially by capital expenditures of $11.9 million.
Net cash provided by financing activities for the three months ended October 1, 2000 was $21.0 million and net cash used for financing activities for the three months ended October 3, 1999 was $16.1 million. Cash provided by financing activities in the first quarter of fiscal 2001, included $20.8 million of net proceeds from the issuance of additional debt. Cash used for financing activities in the first quarter of fiscal 2000 included a $15.0 million net reduction in debt and the $0.6 million purchase of treasury stock.
Our principal cash requirements include debt service, capital expenditures, acquisitions, real estate development, and payment of other liabilities. Other liabilities that require the use of cash include postretirement benefits, environmental investigation and remediation obligations, and litigation settlements and related costs. We expect that cash on hand, cash generated from operations, cash from borrowings and additional financing and asset sales will be adequate to satisfy our cash requirements in fiscal 2001.
We are required under the credit agreement to comply with certain financial and non-financial loan covenants, including maintaining certain interest and fixed charge coverage ratios and maintaining certain indebtedness to EBITDA ratios at the end of each fiscal quarter. Additionally, the credit agreement restricts annual capital expenditures to $40 million during the life of the facility. Except for non-guarantor assets, substantially all of our assets are pledged as collateral under the credit agreement. The credit agreement restricts the payment of dividends to our shareholders to an aggregate of the lesser of $0.01 per share or $0.4 million over the life of the agreement. Noncompliance with any of the financial covenants without cure or waiver would constitute an event of default under the credit agreement. An event of default resulting from a breach of a financial covenant can result, at the option of lenders holding a majority of the loans, in an acceleration of the principal and interest outstanding, and a termination of the revolving credit line. At October 1, 2000, we were in full compliance with all the covenants under the credit agreement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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.
<TABLE>
<CAPTION>
(In thousands)
Expected Fiscal Year Maturity Date | 2003 | 2008 (a) |
<S> | <C> | <C> |
Interest Rate Hedges: | ||
Variable to Fixed | $30,750 | $100,000 |
Average cap rate | 11.625% | 6.49% |
Average floor rate | N/A | 6.24% |
Weighted average rate | 10.39% | 6.81% |
Fair Market Value | $183 | $(1,282) |
- - 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 this agreement.
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.
Item 2. Changes in Securities and Use of Proceeds
Our stock option deferral plan allows officers and directors who are accredited investors to defer the gain upon exercise of stock options by receiving deferred compensation units instead of shares of stock. The deferred compensation units may be deemed securities issued by us. The shares issued to an officer or director upon expiration of the deferral period (in exchange for deferred compensation units) have been registered pursuant to a form S-8 registration statement. Under our stock option deferral plan, an aggregate of 132,394 deferred compensation units were issued in September 2000 to the following officers: M. Alcox (12,220 deferred compensation units); J. Flynn (7,102 deferred compensation units); N. Hercot (6,641 deferred compensation units); D. Miller (5,586 deferred compensation units); and J. Steiner (100,845 deferred compensation units).
In 1996, for services rendered as a consultant, we issued to Nicolas Schlumberger a warrant to purchase 25,000 shares of Class A common stock at $9 per share. The expiration date for the warrant was November 8, 2000. On September 19, 2000 the Board approved an extension to November 8, 2001, of the expiration date of the warrant, and increased to $9.34 per share the exercise price.
Item 5. Other Information
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. In connection with this inquiry, the magistrate has made inquiry into allegedly improper transactions between Mr. Steiner and that petroleum company. In response to the magistrate's request that Mr. Steiner appear in France as a witness, Mr. Steiner submitted written statements concerning the transactions and appeared in person before the magistrate and others. The magistrate has put Mr. Steiner under examination(mis en examen) with respect to this matter and imposed a surety (caution) of ten million French francs which has been paid. Mr. Steiner has not been charged.
Item 6. Exhibits and Reports on Form 8-K
- Exhibits:
- Reports on Form 8-K:
*27 Financial Data Schedules.
* - Filed herewith
There were no reports filed on Form 8-K during the quarter ended October 1, 2000 for which this report is filed.
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: November 14, 2000