36
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the Year Ended June 30, 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered Class A Common
Stock, par value New York and Pacific Stock Exchange $.10 per share
Securities registered pursuant to Section 12 (g) of the Act: None
----
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 [X].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
On September 30, 2002, the aggregate market value of the common shares held by
nonaffiliates of the Registrant (based upon the closing price of these shares on
the New York Stock exchange) was approximately $88.3 million (excluding shares
deemed beneficially owned by affiliates of the Registrant under Commission
Rules).
On September 30, 2002, the number of shares outstanding of each of the
Registrant's classes of common stock were as follows:
Class A Common Stock, $0.10 Par Value 22,541,021
Class B Common Stock, $0.10 Par Value 2,621,502
AMENDMENT: This Form 10-K was amended to provide enhanced disclosure of income
taxes and recent developments in Item 7, "Management's Discussion and Analysis
of Results of Operations and Financial Condition", Item 8, "Financial Statements
and Supplementary Data" and provide enhanced disclosure on Part III, Item 5,
"Other Information". Disclosure enhancements to Item 8 were made to Footnote 11,
"Income Taxes," and Footnote 24, "Subsequent Events."
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THE FAIRCHILD CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K/A
FOR FISCAL YEAR ENDED JUNE 30, 2002
Page
PART II
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition 4
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 15
Item 8. Financial Statements and Supplementary Data 16
Item 9. Disagreements on Accounting and Financial Disclosure 62
PART III
Item 5. Other Information 62
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 63
FORWARD-LOOKING STATEMENTS
Except for any historical information contained herein, the matters
discussed in this Annual Report on Form 10-K 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 Annual
Report on Form 10-K. 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; 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 Annual Report on Form 10-K, 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 Annual Report, even if new information, future
events or other circumstances have made them incorrect or misleading.
ITEM 7. 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. We own 100% of RHI Holdings, Inc. and Banner
Aerospace, Inc. RHI is the owner of 100% of Fairchild Holding Corp. Our
principal operations are conducted through Fairchild Holding Corp. and Banner
Aerospace.
The following discussion and analysis provide information which management
believes is relevant to the assessment and understanding of our consolidated
results of operations and financial condition. The discussion should be read in
conjunction with the consolidated financial statements and notes thereto.
GENERAL
We are a leading worldwide aerospace and industrial fastener manufacturer
and distribution supply chain services 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 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 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, including recent intense price
competition; our ability to achieve and execute internal business plans;
worldwide political instability and economic growth; reduced passenger miles
flown as a result of the September 11, 2001 terrorist attacks on the United
States; 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 Annual Report, even if
new information, future events or other circumstances have made them incorrect
or misleading.
CRITICAL ACCOUNTING POLICIES
On December 12, 2001, the Securities and Exchange Commission issued Release
No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting
Policies." Critical accounting policies are those that involve subjective or
complex judgments, often as a result of the need to make estimates. In response
to Release No. 33-8040, we reviewed our accounting policies. The following areas
require the use of judgments and estimates: the valuation of long-lived assets,
pension and postretirement benefits, deferred income taxes, environmental and
litigation accruals and revenue recognition. Estimates in each of these areas
are based on historical experience and a variety of assumptions that we believe
are appropriate. Actual results may differ from these estimates.
Valuation of Long-Lived Assets: We review our long-lived assets for
impairment, including property, plant and equipment, and identifiable
intangibles with definite lives, whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable. To
determine recoverability of our long-lived assets, we evaluate the probability
that future undiscounted net cash flows will be greater than the carrying amount
of our assets. Impairment is measured based on the difference between the
carrying amount of our assets and their estimated fair value.
Pension and Postretirement Benefits: We have defined benefit pension plans
covering most of our employees. Employees in our foreign subsidiaries may
participate in local pension plans, for which our liability is in the aggregate
insignificant. Our funding policy is to make the minimum annual contribution
required by the Employee Retirement Income Security Act of 1974 or local
statutory law. The accumulated benefit obligation for pensions and
postretirement benefits was determined using a discount rate of 7.125% at June
30, 2002 and 7.25% at June 30, 2001. The effect of such change resulted in an
increase to the accumulated benefit obligation in 2002. Assumed health care cost
trend rates have a significant effect on the amounts reported for health care
plans. For measurement purposes, we assumed a 10.0% annual rate of increase in
the per capita claims cost of covered health care benefits for 2002. The rate
was assumed to decrease to 5.0% in 2003 and remain at that level thereafter.
Deferred and Noncurrent Income Taxes: Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. In assessing the realizability of deferred tax assets, we consider
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. We consider the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. As of June 30, 2002, we have recorded $53.8 million of
noncurrent income tax liabilities, which includes additional tax and interest we
may be required to pay if our tax positions are not sustained with respect to
the sale of several businesses, and repayment with property, of debt under a
bank credit agreement in which both we and our subsidiaries were liable, is not
treated as tax free under Section 361 of the Internal revenue Code of 1986, as
amended.
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.
Legal 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 will not have a material adverse
effect on our financial condition, future results of operations, or net cash
flows.
Revenue Recognition: Sales and related costs are recognized upon shipment
of products and/or performance of services, when collection is probable. Sales
and related cost of sales on long-term contracts are recognized as products are
delivered and services performed, as determined by the percentage of completion
method. Lease and rental revenue are recognized on a straight-line basis over
the life of the lease. Shipping and handling amounts billed to customers are
classified as revenues.
RESULTS OF OPERATIONS
Business Transactions
The following summarizes certain business combinations and transactions we
completed which significantly affect the comparability of the period to period
results presented in this Management's Discussion and Analysis of Results of
Operations and Financial Condition.
Fiscal 2000 Transactions
On July 29, 1999, we sold our 31.9% interest in Nacanco Paketleme to
American National Can Group, Inc. for approximately $48.2 million. Our
investment in Nacanco began in November 1987, and throughout the years we
invested approximately $6.2 million in Nacanco. Since the inception of our
investment, we recorded equity earnings of $25.7 million and received cash
dividends of $12.5 million from Nacanco. We recognized a $25.7 million
nonrecurring gain from this divestiture in the nine months ended April 2, 2000.
We also agreed to provide consulting services over a three-year period, at an
annual fee of approximately $1.5 million. We used the net proceeds from the
disposition to reduce our indebtedness. As a result of this disposition, our
interest expense was reduced. However, our equity earnings and dividend proceeds
also significantly decreased. In accordance with our plan to dispose of non-core
assets, the opportunity to dispose of our interest in Nacanco Paketleme
presented us with an excellent opportunity to realize a substantial return on
our investment and allowed us to reduce our then outstanding indebtedness by
approximately 8.6%.
On September 3, 1999, we completed the disposal of our Camloc Gas Springs
division to a subsidiary of Arvin Industries Inc. for approximately $2.7
million. In addition, we received $2.4 million from Arvin Industries for a
covenant not to compete. We recognized a $2.0 million nonrecurring pre-tax gain
from this disposition. We decided to dispose of the Camloc Gas Springs division
in order to concentrate our focus on our operations in the aerospace industry.
On December 1, 1999, we disposed of substantially all of the assets and
certain liabilities of our Dallas Aerospace subsidiary to United Technologies
Inc. for approximately $57.0 million. No gain or loss was recognized from this
transaction, as the proceeds received approximated the net carrying value of
these assets. Approximately $37.0 million of the proceeds from this disposition
were used to reduce our bank term indebtedness and our interest expense. As a
result of this transaction, we reported a reduction in revenues of $21.7 million
and operating income of $2.1 million for the nine months ended April 1, 2001, as
compared to the nine months ended April 2, 2000. We estimated that the market
base for the older-type of engines that we were selling was shrinking, and that
we would be required to invest a substantial amount of cash to purchase
newer-type of engines to maintain market share. The opportunity to exit this
business presented us with an opportunity to improve cash flows by reducing our
indebtedness by $37.0 million, and by preserving our cash, which would otherwise
have had to have been invested to upgrade our inventory.
On April 13, 2000, we completed a spin-off to our stockholders of the
shares of Fairchild (Bermuda) Ltd. On April 14, 2000, Fairchild (Bermuda) sold
to Convac Technologies Ltd. the Optical Disc Equipment Group business formerly
owned by Fairchild Technologies. Subsequently, on April 14, 2000, Fairchild
(Bermuda), renamed Global Sources Ltd., completed an exchange of approximately
95% of its shares for 100% of the shares of Trade Media Holdings Limited, an
Asian based, business-to-business online and traditional marketplace services
provider. Immediately after the share exchange, our stockholders owned 1,183,081
shares of the 26,152,308 issued shares of Global Sources. Global Sources shares
are listed on the NASDAQ under the symbol "GSOL". This transaction allowed us to
complete our formal plan to dispose of Fairchild Technologies and provided our
shareholders with a unique opportunity to participate in a new public entity.
Consolidated Results
We currently report in three principal business segments: aerospace
fasteners, aerospace distribution and real estate operations. The results of
Camloc Gas Springs division, prior to its disposition, were included in the
Corporate and Other classification. The following table provides the historical
sales and operating income of our operations for fiscal 2002, 2001 and 2000. The
following table also illustrates sales and operating income of our operations by
segment, on an unaudited pro forma basis, for fiscal 2000, as if we had operated
in a consistent manner in each of the reported periods. The pro forma results
represent the impact of our dispositions of Dallas Aerospace in December 1999
and Camloc Gas Springs in September 1999, as if these transactions had occurred
at the beginning of fiscal 2000. The pro forma information is based on the
historical financial statements of these companies, giving effect to the
aforementioned transactions. The pro forma information is not necessarily
indicative of the results of operations, that would actually have occurred if
these transactions had been in effect since the beginning of fiscal 2000, nor is
it necessarily indicative of our future results.
(In thousands) Actual Pro Forma
------------------------------------------ --------------
2002 2001 2000 2000
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Sales by Segment:
Aerospace Fasteners Segment $ 560,796 $ 536,904 $ 533,620 $ 533,620
Aerospace Distribution Segment 63,297 85,908 101,002 79,308
Corporate and Other - - 739 -
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Total Sales $ 624,093 $ 622,812 $ 635,361 $ 612,928
------------------------------------------ --------------
Operating Income (Loss) by Segment:
Aerospace Fasteners Segment $ 41,581 $ 37,008 $ 33,909 $ 33,909
Aerospace Distribution Segment 2,579 2,499 7,758 5,707
Real Estate Operations Segment (a) 1,076 (138) 1,033 1,033
Corporate and Other (18,401) (18,066) (19,457) (19,470)
------------------------------------------ --------------
Total Operating Income (Loss) (b) (c) $ 26,835 $ 21,303 $ 23,243 $ 21,179
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<FN>
(a) Includes rental revenue of $6.7 million, $7.0 million, and $3.6 million in
fiscal 2002, 2001 and 2000, respectively. (b) Fiscal 2000 results include
restructuring charges of $8.6 million in the aerospace fasteners segment (c)
Fiscal 2002 results include one-time impairment expenses of $3.0 million in the
aerospace fasteners segment and $0.4 million
in the real estate operations segment. Fiscal 2001 results includes
one-time impairment charges of $1.1 million in the aerospace fasteners
segment, $2.4 million in the aerospace distribution segment, and $2.5
million in the real estate operations segment.
</FN>
Net sales of $624.1 million in 2002 increased by $1.3 million, or 0.2%,
compared to sales of $622.8 million in 2001. Results for the 2001 included
revenue of $8.4 million from an operation in our aerospace distribution segment,
which was shut down in June 2001. Excluding the results of the shut down
operation, net sales would have increased by $9.7 million, or 1.6%, in 2002, as
compared to 2001. Sales in 2002 reflected growth at our aerospace fasteners
segment due to strong order activity prior to September 11, 2001. Net sales of
$622.8 million in 2001 decreased by $12.6 million, or 2.0%, compared to sales of
$635.4 million in 2000. The results for 2000, included revenue of $22.4 million
from Dallas Aerospace and the Camloc Gas Springs division prior to their
respective dispositions. On a pro forma basis, adjusting for the 2000
dispositions, net sales increased by $9.9 million for 2001, as compared to 2000.
Rental revenue was $6.7 million in 2002, $7.0 million in 2001, and $3.6
million in 2000. Rental revenue decreased slightly in 2002, due to a decrease in
the amount of space leased to tenants during the year. Rental revenue was higher
in the 2001 and 2000 periods due to an increase in the amount of space leased to
tenants.
Gross margin as a percentage of sales was 24.3%, 25.1%, and 25.7% in 2002,
2001, and 2000, respectively. The changes in gross margin in 2002 are
attributable primarily to a higher volume of sales of lower margin products. The
changes in gross margin in 2001 are attributable to a change in product mix as a
result of dispositions.
Selling, general & administrative expense as a percentage of sales was
20.6%, 20.1%, and 20.6%, in 2002, 2001, and 2000, respectively.
Other income decreased $0.9 million in 2002, as compared to 2001, and was
offset partially by income recognized from the disposition of future royalty
revenues to an unaffiliated third party in exchange for promissory notes secured
by $12.8 million face value of our outstanding 10 3/4% senior subordinated
debentures due 2009 acquired by the third party. Other income decreased $4.9
million in 2001, as compared to 2000. The decrease in 2001 was due primarily to
$5.1 million of income recognized from the disposition of non-core property in
2000, and a $0.7 million loss recognized from the disposition of non-core
property during 2001.
An impairment charge of $3.4 million and $5.9 million was recorded in 2002
and 2001, respectively. The fiscal 2002 impairment charge included $3.0 million
to write down the long-lived assets of a small airframe component manufacturing
operation at our aerospace fasteners segment that we are attempting to sell and
$0.4 million to write-off of former tenant improvements at our shopping center.
The fiscal 2001 impairment charge included $2.4 million due to the closing of a
small subsidiary at our aerospace distribution segment, of which $1.7 million
represented the write-off of goodwill, and $0.4 million represented severance
payments. Additionally, the fiscal 2001 impairment charge also included a
write-off of approximately $2.4 million of improvements at our shopping center,
and a $1.1 million for the write-off of leasehold improvements from the
relocation of our domestic distribution facility in our aerospace fasteners
segment.
In fiscal 2000, we recorded $8.6 million of restructuring charges as a
result of the integration of Kaynar Technologies, acquired in April 1999, into
our aerospace fasteners segment. All of the charges recorded were a direct
result of product and plant integration costs incurred as of June 30, 2000.
These costs were classified as restructuring and were the direct result of
formal plans to move equipment, 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.
Operating income of $26.8 million in 2002 increased $5.5 million, or 26.0%,
compared to operating income of $21.3 million in 2001. The 2001 results included
goodwill amortization of $12.5 million, prior to the implementation of a new
accounting pronouncement that eliminates goodwill amortization in the 2002
period. Operating income of $21.3 million in 2001 decreased by $1.9 million as
compared to operating income of $23.2 million in 2000. The results in fiscal
2000 included $2.1 million of operating income from Dallas Aerospace, prior to
its disposition and $5.1 million of income recognized from the disposition of
non-core property, offset partially by restructuring charges of $7.5 million.
Operating income in fiscal 2001 was adversely affected by the impairment charge
of $5.9 million.
Net interest expense decreased by $9.0 million, or 16.1%, and cash interest
expense decreased by $5.8 million in fiscal 2002, as compared to fiscal 2001,
due primarily to lower interest rates on our variable rate debt. Net interest
expense increased $11.6 million in fiscal 2001 as compared to fiscal 2000.
However, cash interest expense of $50.5 million in 2001 actually decreased by
$4.1 million, as compared to cash interest expense of $54.5 million in 2000. We
recognized interest expense of $3.5 million in 2001, as compared to $1.0 million
in 2000, resulting from $30.8 million borrowed in March 2000, and we capitalized
$5.8 million of interest expense in fiscal 2000 from real estate development
activities at our shopping center in Farmingdale, New York.
We recorded a net investment loss of $1.0 million in 2002, and investment
income of $8.4 million in 2001 and $9.9 million in 2000. The investment results
in fiscal 2002 included a $2.3 million write down for impaired investments and a
$0.8 million loss on investments sold, offset partially by $1.6 million of
dividend income and a $0.5 million increase in the fair market value of trading
securities. Investment income in 2001 and 2000 was due primarily to recognition
of gains on investments liquidated.
The fair market value adjustment of our position in a ten-year $100 million
interest rate contract decreased by $4.6 million in fiscal 2002 and $5.6 million
in 2001. The fair market value adjustment of this agreement 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.
Nonrecurring income of $28.6 million in fiscal 2000 resulted from $25.7
million, $2.0 million, and $0.9 million gains recognized on the disposition of
our equity investment in Nacanco Paketleme, our Camloc Gas Springs division and
a smaller equity investment, respectively.
We recorded an income tax benefit of $15.4 million in fiscal 2002,
representing a 60.3% effective tax rate benefit on pre-tax losses from
continuing operations. The tax benefit was higher than the statutory rate due
primarily to the reversal of $14.0 million of tax accruals no longer required.
We recorded an income tax benefit of $16.5 million in fiscal 2001, representing
a 52.3% effective tax rate on pre-tax losses from continuing operations. The tax
benefit was higher than the statutory rate due primarily to the reversal of $3.5
million of tax accruals no longer required. We recorded an income tax benefit of
$4.4 million in fiscal 2000 on earnings from continuing operations of $17.7
million. A tax benefit was recorded due primarily to a change in the estimate of
required tax accruals.
Equity in earnings of affiliates decreased by $0.2 million in 2002,
compared to 2001 and improved by $0.5 million in 2001 compared to 2000. The
decrease in 2002 reflected $0.1 million of equity losses in 2002 as compared to
equity income of $0.1 million in 2001. The improvement in 2001 was attributable
primarily to $0.1 million of income in 2001, as compared to $0.3 million of
losses from small start-up ventures in 2000.
In 1998, we adopted a formal plan to discontinue Fairchild Technologies. In
connection with the adoption of such plan, we recorded an after-tax charge of
$12.0 million and $31.3 million, in discontinued operations, in fiscal 2000 and
1999, respectively. The fiscal 1999 after-tax operating loss from Fairchild
Technologies exceeded the June 1998 estimate recorded for expected losses by
$28.6 million, net of an income tax benefit of $8.1 million, through June 1999.
An additional after-tax charge of $2.8 million, net of an income tax benefit of
$2.4 million, was recorded in fiscal 1999, for estimated remaining losses in
connection with the disposition of Fairchild Technologies. The fiscal 2000
after-tax loss in connection with the final disposition of the remaining
operations of Fairchild Technologies exceeded anticipated losses by $20.0
million, net of an income tax benefit of $8.0 million.
In 2002, we recorded a goodwill impairment charge of $144.6 million from
the implementation of SFAS No. 142, presented as a cumulative effect of change
in accounting, as of the beginning of our fiscal year. All of the impairment
charge relates to the three operating units within our aerospace fasteners
segment. No tax effect was recognized on the change in accounting for goodwill.
Instead of amortizing goodwill and intangible assets deemed to have an
indefinite life, goodwill will be tested for impairment annually, or immediately
if conditions indicate that such an impairment could exist. All of our goodwill
has been deemed to have an indefinite life, and as a result of adopting SFAS No.
142, we ceased amortizing goodwill. Prior to the implementation of SFAS No. 142,
we recognized amortization expense for goodwill of $12.5 million and $12.6
million, in 2001 and 2000, respectively.
Comprehensive income (loss) includes foreign currency translation
adjustments and unrealized holding changes in the fair market value of
available-for-sale investment securities. The fair market value of
available-for-sale securities, on an after-tax basis, declined by $0.6 million,
$1.0 million, and $4.0 million, in 2002, 2001 and 2000, respectively. The
changes in 2001 and 2000 reflect primarily gains realized from the liquidation
of investments. Foreign currency translation adjustments improved by $21.6
million in 2002, which reflected the strengthening of the EURO to the U.S.
Dollar. Foreign currency translation adjustments decreased by $24.5 million, and
$10.1 million in 2001 and 2000, respectively, due to the strengthening of the
U.S. Dollar against the EURO.
We are currently evaluating a change in our method of accounting for our
inventory costing at two of our domestic aerospace fasteners manufacturing
operations from the last-in, first-out ("LIFO") method, to the first-in,
first-out ("FIFO") method. Inventories accounted for using the LIFO method
represented only 15.6% of our total inventory. If we were to implement this
change in method of inventory costing we will be required to retroactively
restate our financial statements for the years ended June 30, 2000 and June 30,
2001, which were audited by Arthur Andersen LLP. Since Arthur Andersen is no
longer issuing audit opinions, our current auditors would be required to reaudit
our financial statements for the periods ended June 30, 2000 and June 30, 2001.
We adopted SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities" on July 1, 2000. At adoption, we recorded within other comprehensive
income, a decrease of $0.5 million in the fair market value of our $100 million
interest rate swap agreement. The $0.5 million decrease will be amortized over
the remaining life of the interest rate swap agreement using the effective
interest method. The offsetting interest rate swap liability is separately being
reported as a "fair market value of interest rate contract" within other
long-term liabilities. In the statement of earnings we have recorded the net
swap interest accrual as part of interest expense. Unrealized changes in the
fair value of the swap are recorded net of the current interest accrual on a
separate line entitled "decrease in fair market value of interest rate
derivatives."
Segment Results
Aerospace Fasteners Segment
Sales in our Aerospace Fasteners segment increased by $23.9 million, or
4.4%, in 2002, as compared 2001. The improvement reflected internal growth,
which was partially offset by a reduction in deliveries in the third and fourth
quarters due to retrenchment in the aerospace industry following the September
11, 2001 terrorist attacks. Our backlog decreased by $42.1 million in 2002, to
$177.9 million at June 30, 2002. Our book-to-bill ratio was 91.6% in fiscal
2002, reflecting the softening of new orders following September 11, 2001. Sales
in our Aerospace Fasteners segment increased by $3.3 million, or 0.6%, in 2001,
as compared to 2000. Sales by our European operations were adversely affected by
approximately $24.4 million in 2001, compared to 2000, due to the foreign
currency impact from the U.S. dollar strengthening against the Euro.
Operating income increased by $4.6 million, or 12.4%, in 2002, as compared
to 2001. The improvement in 2002 was due primarily to the increase in sales and
related economies of scale and the adoption, as of July 1, 2001, of a new
accounting pronouncement that does not require us to amortize goodwill. Goodwill
amortization of $11.3 million was recorded in 2001. We also recorded an
impairment charge of $3.0 million to write down the long-lived assets of a small
airframe manufacturing operation at our aerospace fasteners segment, that we are
attempting to sell. Operating income increased by $3.1 million in 2001, compared
to 2000. The increase was due primarily to productivity improvements from cost
reduction efforts, offset partially by reduced gross margins resulting from
pricing pressures. Operating income in 2001 was adversely affected by
approximately $3.2 million due to the foreign currency impact on our European
operations.
Announcements by our major customers have reinforced our view that
projected aircraft build rates will 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 the
supply chain service programs we entered into during the past several years and
by the 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 regulatory
approvals, the tendering of over 50% of our 10 3/4% senior subordinated
debentures due April 2009, and the approval of our shareholders (See Item 8,
Note 24 to the Consolidated Financial Statements).
Aerospace Distribution Segment
Sales in our aerospace distribution segment decreased by $22.6 million in
2002, compared to 2001. Results in 2001, included revenue of $8.4 million from
an operation which was shut down in June 2001. Sales in 2002 were also adversely
affected due to the terrorist attacks on September 11, 2001. Sales in our
aerospace distribution segment decreased by $15.1 million, or 14.9%, in fiscal
2001, compared to fiscal 2000. Results from fiscal 2000 included revenue of
$21.7 million from Dallas Aerospace, prior to its disposition. On a pro forma
basis, sales increased $6.6 million, or 8.3%, in 2001 compared to 2000, which
reflected an overall improvement in demand for our products prior to September
11, 2001.
Operating income increased by $0.1 million in 2002, as compared to 2001.
The results in 2002 were affected by the reduction in revenue. Operating income
in 2001 included asset impairment charges of $3.1 million due to the closing of
Banner Aircraft Services, which also had operating losses of $3.9 million in
2001. Operating income in our aerospace distribution segment decreased by $5.3
million in 2001, compared to 2000. The results for 2000, included operating
income of $2.1 million from Dallas Aerospace, prior to its disposition.
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 was $6.7 million in 2002, $7.0 million in 2001, and $3.6 million in
2000. Rental revenue decreased slightly in 2002, due to a decrease in the
average per square foot amount charged to tenants, as compared to 2001. Rental
revenue was higher in the 2001, as compared to 2000, due to an increase in the
amount of space leased to tenants. The weighted average occupancy rate of the
shopping center was 76.9%, 74.4% and 48.9% in 2002, 2001, and 2000,
respectively. The average effective annual rental rate per square foot was
$19.22, $20.91, and $16.23 in 2002, 2001, and 2000, respectively. As of June 30,
2002, approximately 92% of the shopping center was leased. We anticipate that
rental income will increase during 2003, as a result of us entering to new
agreements, to lease approximately 54,000 square feet, shortly before the end of
2002.
Operating income increased by $1.2 million in 2002, as compared to 2001.
In 2002, depreciation expense and real estate taxes increased by $0.5 million
and $0.2 million, respectively, as a result of an increased weighted-average
portion of the shopping center being placed into service in 2002. The results
for 2001 were adversely affected by one-time charge of $2.5 million to write-off
improvements at our shopping center. We reported an operating loss of $0.1
million for 2001, compared to operating income of $1.0 million in 2000. The
results of 2001 were also affected by an increase in administrative and
depreciation expenses as a result of the increase in rental revenue as compared
to 2000.
Corporate Segment
The corporate segment reported that operating results decreased by $0.3
million, or 1.9%, in 2002, as compared to 2001 and improved by $1.4 million, or
7.1% in 2001, as compared to 2000. Results from 2001 and 2000 included $3.1
million and $5.1 million, respectively, of gains recognized on the disposition
of non-core assets. Results in each of the three years ended June 30, 2002,
included consulting income of $1.5 million. The consulting agreement expired on
June 30, 2002 and no additional proceeds from this agreement will be received in
future years. The corporate segment included sales from the Gas Springs division
prior to its disposition in September 1999.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total capitalization as of June 30, 2002 and 2001 amounted to $719.8
million and $858.9 million, respectively. The changes in capitalization in 2002
included a decrease of $5.3 million in debt and $133.8 million in equity. The
decrease in debt reflected a $6.4 million decrease in short-term borrowings and
other debt, partially offset by a $1.2 million net increase in borrowings with
our primary lenders. The decrease in equity reflects the $144.6 million
cumulative effect of change in accounting for goodwill, and a $10.2 million loss
from continuing operations, offset partially by a $21.1 million increase in
cumulative other comprehensive income, which was due primarily to a $21.6
million favorable effect in foreign currency fluctuations.
We maintain a portfolio of investments classified primarily as
available-for-sale securities, which had a fair market value of $5.9 million at
June 30, 2002. The market value of these investments decreased by $0.6 million
in 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 2002 was $18.8 million. The
working capital uses of cash in 2002 included a $29.4 million decrease in
accounts payable and other accrued liabilities and a $10.4 million increase in
other non-current assets, offset partially by a $10.6 million decrease in
accounts receivable, a $10.6 million decrease in other current assets and a $5.1
million decrease in inventory. The working capital uses of cash were offset by
$30.4 million of earnings after deducting non-cash expenses of $30.5 million for
depreciation, $2.1 million from the amortization of deferred loan fees, $144.6
million for the cumulative effect of change in accounting for goodwill, $3.4
million loss from impairments, and $4.6 million from the reduction in the fair
market value of an interest rate contract. Net cash used for operating
activities for fiscal 2001 was $39.5 million. The primary use of cash for
operating activities in 2001 was a $9.1 million increase in inventories, a
$117.7 million decrease in accounts payable and other accrued liabilities,
offset partially by a $5.5 million decrease in accounts receivable and a $31.6
million increase in other current assets. Net cash used for operating activities
for 2000 was $67.1 million. In 2000, the primary use of cash for operating
activities was a $23.2 million increase in inventories, a $12.0 million decrease
in accounts payable, and a $25.2 million increase in other current assets.
Net cash used for investing activities was $9.8 million in 2002. The
primary source of cash in 2002 was $8.0 million provided from the dispositions
of non-core real estate and net assets held for sale, offset by $11.9 million of
capital expenditures and a $5.6 increase in notes receivable. Net cash provided
from investing activities for 2001 was $4.1 million, and included $16.4 million
in proceeds received from the dispositions of investments, and $4.6 million in
proceeds received from the disposition of property, offset by capital
expenditures of $16.4 million. Net cash provided from investing activities for
2000 was $90.4 million, and included $108.8 million in proceeds received from
the dispositions of Dallas Aerospace, our Gas Springs division and our
investment in Nacanco Paketleme, and $12.0 million in proceeds received from the
condemnation of property. This was slightly offset by cash of $27.3 million used
for capital expenditures and $27.7 million for real estate investments.
Net cash used for financing activities in 2002 included a $9.6 million
decrease in debt. Net cash provided by financing activities in 2001 was $15.4
million, and included a $14.7 million net issuance of additional debt used to
fund operations. Net cash used for financing activities in 2000 was $41.4
million. The primary use of cash for financing activities in 2000 was $39.4
million used to reduce debt.
At June 30, 2002, $5.6 million of promissory notes were due to us from an
unaffiliated third party, which are included in notes receivable. The promissory
notes earn $1.4 million of annual cash interest and are being accreted to a face
value of $12.8 million through May 2006. The promissory notes are secured by
$12.8 million face value of our outstanding 10.75% senior subordinated
debentures due 2009 acquired by the third party. The third party may sell these
debentures for cash provided that it satisfies its obligation under its
promissory notes.
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 June 30,
2002, the interest coverage ratio was 2.32, which exceeded the minimum
requirement of 2.0. Our interest rates vary based upon the consolidated
indebtedness to EBITDA covenant, which represents the ratio of total debt to
EBITDA, as defined in the credit agreement. On March 31, 2002 our indebtedness
to EBITDA ratio exceeded 5.0, and resulted in a 1/4% increase in our interest
rates under the credit agreement during the fourth quarter of fiscal 2002. On
June 30, 2002 our indebtedness to EBITDA ratio was 5.62, 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 year ended June 30, 2002, capital expenditures were $11.9 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 June 30, 2002, we were in compliance with the
covenants under the credit agreement.
At June 30, 2002, we had contractual commitments to repay debt (including
capital lease obligations), and to make payments under operating leases. Our
long-term debt obligations are restricted by certain covenants that limit our
ability to encumber our assets. Payments due under these long-term obligations
are as follows:
2003 2004 2005 2006 2007 Thereafter Total
------------------------------------------------------------------------------
Long-term debt and capital lease obligations 34,905 3,130 71,544 134,255 1,354 227,634 472,822
Operating lease commitments 9,383 7,801 6,424 4,420 2,764 2,727 33,519
------------------------------------------------------------------------------
Total contractual cash obligations 44,288 10,931 77,968 138,675 4,118 230,361 506,341
------------------------------------------------------------------------------
We have entered into standby letter of credit arrangements with insurance
companies and others, primarily relating to the guarantee of future performance
on certain contracts. At June 30, 2002, we had contingent liabilities of $18.0
million on commitments related to outstanding letters of credit.
In addition, the Company has $17.8 million classified as other long-term
liabilities, which do not have specific payment terms or other similar
contractual arrangements.
At June 30, 2002, we have $282.5 million of federal income tax loss
carryforwards expiring 2010 through 2022, and $3.2 million of unused alternative
minimum tax credit carryforward that does not expire. These federal income tax
loss carryforwards may be reduced by adjustments during the income tax audits of
1995 through 2002, which have not commenced. As the periods of assessment for
1995 to 1998 have expired, additional tax may be collected from us only for 1999
to 2002. Nonetheless, the tax losses of $68.3 million arising in 1995, 1997, and
1998 may still be reduced for determining the proper amount of net operating
loss available to be carried forward to years after 1998. The gain we reported
between 1995 and 2002, for federal income tax, may be significantly increased if
our tax positions are not sustained with respect to the sales of several
businesses; and the repayment with property, of debt under a bank credit
agreement in which both we and our subsidiaries were liable, is not treated as
tax free under Section 361 of the Internal Revenue Code of 1986, as amended. If
all of these adjustments were made for 1995 to 2002, the federal income tax loss
carryforwards would be substantially reduced, and we may be required to pay
additional tax and interest of up to $74 million, which has already been
provided. The amount of additional tax and interest to be paid by the Company
depends on the amount of income tax audit adjustments, which are made and
sustained for 1995 to 2002. These adjustments, if any, would be made at a future
date, which is presently uncertain, and therefore we cannot predict the timing
of cash outflows. To the extent a favorable final determination of the recorded
tax liabilities occurs, appropriate adjustments will be made to decrease the
recorded tax liability in the year such favorable determination will occur. It
is presently uncertain when a final determination will occur since no Internal
Revenue Service audits of 1995 to 2002 have commenced.
Recent Developments
On July 16, 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 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 and bondholders. We will use a portion of the proceeds from the
sale to repay our bank debt and commence a tender offer at par to acquire all of
our outstanding $225 million, 10.75% senior subordinated notes, due in April,
2009. 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 June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations". This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development, and normal operation of a long-lived asset, except
for certain obligations of leases. This statement is effective for fiscal years
beginning after June 15, 2002.
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 in fiscal 2003.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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% from 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 $4.6 million and $5.6 million in 2002 and 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 to 8.125%, the 1-month
LIBOR interest rate that we must pay on the note. 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. In fiscal 2001, we accounted 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% (a)
LIBOR cap rate 8.125% N/A
Average floor rate N/A N/A
Weighted average forward LIBOR rate 1.95% 4.46%
Fair Market Value at June 30, 2002 $5 $(10,989)
<FN>
(a) - On February 17, 2003, the bank will have a one-time option to elect to
cancel the agreement or to do nothing and proceed with the transaction, using a
fixed LIBOR rate of 6.715% from February 17, 2003 to February 19, 2008.
</FN>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company and the
report of our independent auditors, are set forth below.
Page
Report of Ernst & Young LLP, Independent Auditors (Fiscal 2002) 17
Report of Arthur Andersen LLP, Independent Public Accountants
(Fiscal 2001 and Fiscal 2000) 18
Consolidated Balance Sheets as of June 30, 2002 and 2001 19
Consolidated Statements of Earnings for each of the Three Years
Ended June 30, 2002, 2001, and 2000 21
Consolidated Statements of Stockholders' Equity for each of the
Three Years Ended June 30, 2002, 2001, and 2000 23
Consolidated Statements of Cash Flows for each of the Three Years
Ended June 30, 2002, 2001, and 2000 24
Notes to Consolidated Financial Statements 25
Supplementary information regarding "Quarterly Financial Data (Unaudited)" is
set forth under Item 8 in Note 22 to Consolidated Financial Statements.
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors of The Fairchild Corporation:
We have audited the accompanying consolidated balance sheet of The Fairchild
Corporation and subsidiaries (the "Company") as of June 30, 2002, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for the year then ended. Our audit also included the financial statement
schedule, as of and for the year ended June 30, 2002, listed in the Index at
Item 14(a). These consolidated financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audit. The consolidated balance sheet of the Company as of June 30, 2001, and
the related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the two years in the period ended June 30, 2001 were audited
by other auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those consolidated financial statements in their report
dated September 7, 2001.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the 2002 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Fairchild
Corporation and subsidiaries at June 30, 2002, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 3 to the consolidated financial statements, effective July
1, 2001, the Company adopted Statement of Financial Accounting Standards No.
142, "Accounting for Goodwill and Other Intangible Assets."
/s/ Ernst & Young LLP
McLean, Virginia
August 29, 2002
Report of Independent Public Accountants
To The Fairchild Corporation:
We have audited the accompanying consolidated balance sheets of The
Fairchild Corporation (a Delaware corporation) and subsidiaries as of June 30,
2001 and 2000, and the related consolidated statements of earnings,
stockholders' equity and cash flows for the three years in the period ended June
30, 2001. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We did not audit the
financial statements of Nacanco Paketleme (see Note 6), an investment that was
sold in July 1999 and until then, was reflected in the accompanying consolidated
financial statements using the equity method of accounting. The investment in
Nacanco Paketleme represented 1 percent of total assets as of June 30, 1999, and
the equity in its net income represented 11 percent of earnings from continuing
operations for the year ended June 30, 1999. The statements of Nacanco Paketleme
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Nacanco Paketleme, is
based on the report of other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of The Fairchild Corporation and
subsidiaries as of June 30, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2001, in conformity with accounting principles generally accepted in the United
States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedules I and II in Item 14 of Part IV
of the Form 10-K is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
These schedules have been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Vienna, VA
September 7, 2001
LEGEND FOR AUDIT OPINION
This is a copy of the audit report previously issued by Arthur Andersen in
connection with the Company's filing of its Annual Report on Form 10-K for the
fiscal year ended June 30, 2001, prior to certain balance sheet
reclassification. This audit report has not been reissued by Arthur Andersen in
connection with this Annual Report on Form 10-K. See Exhibit 23.2 for further
discussion.
THE FAIRCHILD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS June 30, June 30,
------
2002 2001
-----------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 15,283 $ 14,951
Short-term investments 581 3,105
Accounts receivable, less allowance of $7,635 and $6,951 109,520 121,703
Inventories:
Finished goods 143,235 146,416
Work-in-process 28,841 30,813
Raw materials 8,955 11,758
-----------------------------------
181,031 188,987
Prepaid expenses and other current assets 34,985 42,624
-----------------------------------
TOTAL CURRENT ASSETS 341,400 371,370
-----------------------------------
Property, plant and equipment, net of accumulated
depreciation of $186,172 and $156,914 129,218 149,108
Net assets held for sale 19,406 17,999
Goodwill, less accumulated amortization of $209,932 and $65,332 274,549 419,149
Investments and advances, affiliated companies 3,261 2,813
Prepaid pension assets 64,693 65,249
Deferred loan costs 10,907 12,916
Real estate investment 108,184 110,505
Long-term investments 5,360 7,779
Notes receivable 7,155 1,038
Other assets 6,513 3,690
-----------------------------------
TOTAL ASSETS $ 970,646 $ 1,161,616
-----------------------------------
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
THE FAIRCHILD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, June 30,
------------------------------------
2002 2001
-----------------------------------
CURRENT LIABILITIES:
Bank notes payable and current maturities of long-term debt $ 53,879 $ 26,528
Accounts payable 38,717 57,625
Accrued liabilities:
Salaries, wages and commissions 27,934 29,894
Employee benefit plan costs 3,134 6,421
Insurance 13,764 13,923
Interest 6,514 7,016
Other accrued liabilities 31,274 38,031
-----------------------------------
TOTAL CURRENT LIABILITIES 175,216 179,438
-----------------------------------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities 437,917 470,530
Fair value of interest rate contract 10,989 6,422
Other long-term liabilities 17,789 25,729
Retiree health care liabilities 42,651 41,886
Noncurrent income taxes 53,791 27,072
Deferred income taxes 4,277 48,686
-----------------------------------
TOTAL LIABILITIES 742,630 799,763
-----------------------------------
STOCKHOLDERS' EQUITY:
Class A common stock, $0.10 par value; entitled to one vote per share; 40,000
shares authorized, 30,354 (30,342 in 2001) shares issued and
22,540 (22,528 in 2001) shares outstanding 3,035 3,034
Class B common stock, $0.10 par value; entitled to ten votes per share;
20,000 shares authorized, 2,622 shares issued and outstanding 262 262
Paid-in capital 232,797 232,820
Treasury stock, at cost, 7,814 shares of Class A common stock (76,532) (76,563)
Retained earnings 91,947 246,787
Notes due from stockholders (1,831) (1,767)
Cumulative other comprehensive loss (21,662) (42,720)
-----------------------------------
TOTAL STOCKHOLDERS' EQUITY 228,016 361,853
-----------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 970,646 $ 1,161,616
-----------------------------------
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
THE FAIRCHILD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
For the years ended June 30,
----------------------------------------------------
2002 2001 2000
----------------------------------------------------
REVENUE:
Net sales $ 624,093 $ 622,812 $ 635,361
Rental revenue 6,679 7,030 3,583
Other income, net 5,021 5,922 10,827
----------------------------------------------------
635,793 635,764 649,771
COSTS AND EXPENSES:
Cost of goods sold 472,270 466,361 472,023
Cost of rental revenue 4,911 4,599 2,489
Selling, general & administrative 128,342 125,106 130,864
Amortization of intangibles - 12,506 12,574
Impairment charges 3,435 5,889 -
Restructuring - - 8,578
----------------------------------------------------
608,958 614,461 626,528
OPERATING INCOME 26,835 21,303 23,243
Interest expense 51,124 57,577 48,942
Interest income (4,368) (1,861) (4,850)
----------------------------------------------------
Net interest expense 46,756 55,716 44,092
Investment income (loss) (992) 8,367 9,935
Decrease in fair market value of interest rate contract (4,567) (5,610) -
Nonrecurring gain - - 28,625
----------------------------------------------------
Earnings (loss) from continuing operations before taxes (25,480) (31,656) 17,711
Income tax benefit 15,377 16,546 4,399
Equity in earnings (loss) of affiliates, net (137) 110 (346)
----------------------------------------------------
Earnings (loss) from continuing operations (10,240) (15,000) 21,764
Loss on disposal of discontinued operations, net - - (12,006)
Cumulative effect of change in accounting for goodwill (144,600) - -
----------------------------------------------------
NET EARNINGS (LOSS) $ (154,840) $ (15,000) $ 9,758
----------------------------------------------------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments $ 21,621 $ (24,452) $ (10,098)
Unrealized holding changes on derivatives 63 (478) -
Unrealized periodic holding changes on securities, net of tax
benefit of $337 in 2002, $554 in 2001, and $2,133 in 2000 (626) (1,028) (3,961)
----------------------------------------------------
Other comprehensive income (loss) 21,058 (25,958) (14,059)
----------------------------------------------------
COMPREHENSIVE LOSS $ (133,782) $ (40,958) $ (4,301)
----------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
THE FAIRCHILD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
For the years ended June 30,
----------------------------------------------------
2002 2001 2000
----------------------------------------------------
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Earnings (loss) from continuing operations $ (0.41) $ (0.60) $ 0.87
Loss on disposal of discontinued operations, net - - (0.48)
Cumulative effect of change in accounting for goodwill (5.75) - -
----------------------------------------------------
NET EARNINGS (LOSS) $ (6.16) $ (0.60) $ 0.39
----------------------------------------------------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments $ 0.86 $ (0.97) $ (0.40)
Unrealized holding changes on derivatives - (0.02) -
Unrealized periodic holding changes on securities (0.02) (0.04) (0.16)
----------------------------------------------------
Other comprehensive loss 0.84 (1.03) (0.56)
----------------------------------------------------
COMPREHENSIVE LOSS $ (5.32) $ (1.63) $ (0.17)
----------------------------------------------------
Weighted average shares outstanding:
Basic 25,155 25,122 24,954
----------------------------------------------------
Diluted 25,155 25,122 25,137
----------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
THE FAIRCHILD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Cumulative
Class A Class B Notes Other
Common Common Paid-in Treasury Retained Due From Comprehensive
Stock Stock Capital Stock Earnings Stockholders Income (a) Total
-----------------------------------------------------------------------------------------------
Balance, July 1, 1999 $2,975 $ 262 $229,038 $(74,102) $252,029 $ - $ (2,703) $407,499
Net earnings - - - - 9,758 - - 9,758
Cumulative translation adjustment - - - - - - (10,098) (10,098)
Stock issued for Special-T Fasteners
acquisition (44,079 shares) 4 - 530 - - - - 534
Proceeds received from stock options
exercised (314,126 shares) 22 - 1,321 (916) - - - 427
Stock issued for Special-T restricted
stock plan (14,969 shares) 1 - (1) - - - - -
Cashless exercise of warrants 6 - (6) - - - - -
Purchase of treasury shares - - - (488) - - - (488)
Compensation expense-stock options - - 308 - - - - 308
Loans to stockholders' - - - - - (1,867) - (1,867)
Net unrealized holding gain on
available-for-sale securities - - - - - - (3,961) (3,961)
-----------------------------------------------------------------------------------------------
Balance, June 30, 2000 3,008 262 231,190 (75,506) 261,787 (1,867) (16,762) 402,112
Net loss - - - - (15,000) - - (15,000)
Cumulative translation adjustment - - - - - - (24,452) (24,452)
Proceeds received from stock
options exercised (374,016 shares) 26 - 1,403 (1,057) - - - 372
Compensation expense-stock options - - 227 - - - - 227
Net change in stockholders' loans - - - - - 100 - 100
Change in fair market value of
interest rate contract - - - - - - (478) (478)
Net unrealized holding changes on
available-for-sale securities - - - - - - (1,028) (1,028)
-----------------------------------------------------------------------------------------------
Balance, June 30, 2001 3,034 262 232,820 (76,563) 246,787 (1,767) (42,720) 361,853
Net loss - - - - (154,840) - - (154,840)
Cumulative translation adjustment - - - - - - 21,621 21,621
Issuance of deferred
Compensation units 1 - (32) 31 - - - -
Compensation expense-stock options - - 9 - - - - 9
Net change in stockholders' loans - - - - - (64) - (64)
Change in fair market value of
interest rate contract - - - - - - 63 63
Net unrealized holding changes on
available-for-sale securities - - - - - - (626) (626)
-----------------------------------------------------------------------------------------------
Balance, June 30, 2002 $ 3,035 $ 262 $232,797 $(76,532) $91,947 $ (1,831) $ (21,662) $228,016
-----------------------------------------------------------------------------------------------
<FN>
(a) - At June 30, 2002, cumulative other comprehensive income was comprised of
$19,675 of foreign currency translation adjustments, $1,572 of unrealized
holding losses on available-for-sale securities, and $415 of the remaining
unamortized portion of the transitional fair market value of the interest rate
contract.
</FN>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
THE FAIRCHILD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the years ended June 30,
------------------------------------------
Cash flows from operating activities: 2002 2001 2000
- -------------------------------------
------------------------------------------
Net earnings (loss) $ (154,840) $ (15,000) $ 9,758
Depreciation and amortization 30,529 43,732 41,821
Deferred loan fee amortization 2,082 1,871 1,200
Cumulative effect of change in accounting for goodwill 144,600 - -
Net gain on the disposition of subsidiaries - - (28,625)
Loss from impairments 3,435 5,889 -
(Gain) loss on sale of property, plant, and equipment (498) 4,159 (1,964)
Earnings (loss) of affiliates, net 137 (110) 372
Paid-in kind interest income (653) - -
Unrealized holding (gain) loss on derivatives 4,567 6,422 -
Realized (gain) loss from sale and impairment of investments 1,931 (8,861) (8,628)
Change in trading securities 1,022 667 (578)
Change in accounts receivable 10,625 5,526 2,892
Change in inventories 5,102 (9,128) (23,223)
Change in prepaid expenses and other current assets 10,583 31,576 (25,156)
Change in other non-current assets (10,358) 11,439 (9,677)
Change in accounts payable, accrued liabilities and other long-term liabilities (29,424) (117,719) (11,913)
Non-cash charges and working capital changes of discontinued operations - - (13,351)
------------------------------------------
Net cash provided by (used for) operating activities 18,840 (39,537) (67,072)
Cash flows from investing activities:
Purchase of property, plant and equipment (11,922) (16,384) (27,339)
Proceeds from sale of property, plant and equipment 4,698 4,628 12,693
Proceeds received from available-for-sale securities, net 1,027 16,447 14,655
Equity investment in affiliates (524) 477 (2,489)
Net proceeds received from divestiture of investment in affiliate - - 46,886
Net proceeds received from the sale of subsidiaries - - 61,906
Net proceeds received from the sale of discontinued operations - - 7,100
Change in real estate investment (797) (2,566) (27,712)
Changes in net assets held for sale 3,316 1,491 4,672
Changes in notes receivable (5,594) - -
------------------------------------------
Net cash provided by (used for) investing activities (9,796) 4,093 90,372
Cash flows from financing activities:
Proceeds from issuance of debt 131,225 168,161 206,874
Debt repayments (140,825) (153,416) (246,260)
Issuance of Class A common stock 9 593 368
Purchase of treasury stock - - (488)
Notes due from stockholders (63) 99 (1,867)
------------------------------------------
Net cash provided by (used for) financing activities (9,654) 15,437 (41,373)
Effect of exchange rate changes on cash 942 (832) (997)
------------------------------------------
Net change in cash and cash equivalents 332 (20,839) (19,070)
Cash and cash equivalents, beginning of the year 14,951 35,790 54,860
------------------------------------------
Cash and cash equivalents, end of the year $ 15,283 $ 14,951 $35,790
------------------------------------------
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
THE FAIRCHILD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General: All references in the notes to the consolidated financial
statements to the terms "we," "our," "us," the "Company" and "Fairchild" refer
to The Fairchild Corporation and its subsidiaries.
Corporate Structure: The Fairchild Corporation was incorporated in
October 1969, under the laws of the State of Delaware. Effective April 8, 1999,
we became the sole owner of Banner Aerospace, Inc. RHI Holdings, Inc. is our
direct subsidiary. RHI is the owner of 100% of Fairchild Holding Corp. Our
principal operations are conducted through Fairchild Holding Corp. and Banner
Aerospace. Our financial statements present the results of our former
Technologies segment as discontinued operations.
Nature of Business Operations: We are a leading worldwide aerospace and
industrial fastener manufacturer and distribution 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.
Recent Developments: On July 16, 2002 we announced that we signed a
definitive agreement to sell our Fairchild Fasteners business for approximately
$657 million in cash to Alcoa Inc. (See Note 24 for additional details).
Fiscal Year: Our fiscal year ends June 30. All references herein to "2002",
"2001", and "2000" mean the fiscal years ended June 30, 2002, 2001 and 2000,
respectively.
Consolidation Policy: The accompanying consolidated financial statements
are prepared in accordance with accounting principles generally accepted in the
United States and include our accounts and all of the accounts of our
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. Investments in companies in which ownership
interests range from 20 to 50 percent are accounted for using the equity method.
Revenue Recognition: Sales and related costs are recognized upon shipment
of products and/or performance of services, when collection is probable. Sales
and related cost of sales on long-term contracts are recognized as products are
delivered and services performed, as determined by the percentage of completion
method. Lease and rental revenue are recognized on a straight-line basis over
the life of the lease. Shipping and handling amounts billed to customers are
classified as revenues.
Shipping and Handling Costs: Shipping and handling costs are expensed as
incurred and included in cost of goods sold.
Concentration of Credit Risk: Financial instruments that potentially
subject us to a concentration of credit risk principally consist of cash, cash
equivalents and trade receivables. We sell our products throughout the world to
a large number of customers, primarily in the aerospace industry. To reduce
credit risk, we perform ongoing credit evaluations of our customers' financial
condition. We generally do not require collateral. We invest available cash in
money market securities of financial institutions with high credit ratings.
Cash Equivalents/Statements of Cash Flows: For purposes of the Statements
of Cash Flows, we consider all highly liquid investments with original maturity
dates of three months or less as cash equivalents. Cash is invested in
short-term treasury bills and certificates of deposit. Total net cash
disbursements (receipts) made by us for income taxes and interest were as
follows:
2002 2001 2000
---------------------------------------
Interest $45,755 $50,471 $54,535
Income taxes 571 388 (15,076)
Restricted Cash: On June 30, 2002 and 2001, we had restricted cash of $472
and $1,184, respectively, all of which is maintained as collateral for certain
debt facilities and tenant deposits.
Investments: Management determines the appropriate classification of our
investments at the time of acquisition and reevaluates such determination at
each balance sheet date. Trading securities are carried at fair value, with
unrealized holding gains and losses included in earnings. Available-for-sale
securities are carried at fair value, with unrealized holding gains and losses,
net of tax, reported as a separate component of stockholders' equity.
Investments in equity securities and limited partnerships that do not have
readily determinable fair values are stated at cost and are categorized as other
investments. Realized gains and losses are determined using the specific
identification method based on the trade date of a transaction. Interest on
corporate obligations, as well as dividends on preferred stock, are accrued at
the balance sheet date.
Accounts Receivable: We provide an allowance for doubtful accounts equal to
the estimated uncollectible amounts. Our estimate is based on historical
collection experience and a review of the current status of trade accounts
receivable. It is reasonably possible that our estimate of allowance for
doubtful accounts will change in the future. Changes in the allowance for
doubtful accounts are as follows:
For the years ended June 30,
--------------------------------------------
2002 2001 2000
--------------------------------------------
Beginning balance $ 6,951 $ 9,598 $ 6,442
Charges to cost and expenses 4,660 3,184 2,377
Charges to other accounts (a) 24 (477) 1,671
Amounts written off (4,000) (5,354) (892)
--------------------------------------------
Ending Balance $ 7,635 $ 6,951 $ 9,598
--------------------------------------------
<FN>
(a) Represent recoveries of amounts written off in prior periods and
the effect of foreign currency translation.
</FN>
Inventories: Inventories are stated at the lower of cost or market. Cost is
determined using the last-in, first-out ("LIFO") method at two of our domestic
aerospace fastener manufacturing operations, and using the first-in, first-out
("FIFO") method elsewhere. If the FIFO inventory valuation method had been used
exclusively, inventories would have been approximately $3,675 and $3,188 higher
at June 30, 2002 and 2001, respectively. Allowances for excess and obsolete
inventory were $53,616 and $50,915 at June 30, 2002 and 2001, respectively.
Inventories from continuing operations are valued as follows:
June 30, June 30,
2002 2001
-------------------------------
First-in, first-out (FIFO) $ 152,789 $ 156,375
Last-in, first-out (LIFO) 28,242 32,612
-------------------------------
Total inventories $ 181,031 $ 188,987
-------------------------------
Properties and Depreciation: The cost of property, plant and equipment is
depreciated over the estimated useful lives of the related assets. The cost of
leasehold improvements is depreciated over the lesser of the length of the
related leases or the estimated useful lives of the assets. Our machinery and
equipment is depreciated over 10 years. Depreciation is computed using the
straight-line method for financial reporting purposes and accelerated
depreciation methods for Federal income tax purposes. Depreciation expense was
$30,529, $31,226 and $29,247 in 2002, 2001, and 2000, respectively. Property,
plant and equipment consisted of the following:
June 30, June 30,
2002 2001
-------------------------------
Land $ 10,334 $ 13,035
Building and improvements 45,837 45,282
Machinery and equipment 231,889 221,566
Transportation vehicles 1,048 1,085
Furniture and fixtures 21,017 19,805
Construction in progress 5,265 5,249
-------------------------------
Property, plant and equipment, at cost 315,390 306,022
Less: Accumulated depreciation 186,172 156,914
-------------------------------
Net property, plant and equipment $ 129,218 $ 149,108
-------------------------------
Net Assets Held for Sale: Net assets held for sale are stated at the lower
of cost or at estimated net realizable value, which considers anticipated sales
proceeds. Interest is not allocated to net assets held for sale. Net assets held
for sale at June 30, 2002 includes a small airframe manufacturing operation in
our aerospace fasteners segment and several parcels of real estate in our
corporate segment. The real estate is located primarily throughout the
continental United States, which we plan to sell, lease or develop, subject to
the resolution of certain environmental matters and market conditions. Also
included in net assets held for sale is a limited partnership interest in a
landfill development partnership.
Real Estate Investment: We own and operate a shopping center located in
Farmingdale, New York, which is classified as a "real estate investment" on our
consolidated balance sheets. Our real estate investment is recorded at cost and
includes financing costs, interest costs, and real estate taxes incurred during
the original construction period. Ordinary repairs and maintenance are expensed
as incurred and major replacements and improvements are capitalized. Building
and improvements are depreciated on a straight-line basis over an estimated
useful life of 30 years. Tenant improvements and costs incurred to prepare
tenant space for occupancy are depreciated on a straight-line basis over the
terms of the respective leases or the assets' remaining useful lives, whichever
is shorter.
Amortization of Goodwill: On July 1, 2001, we adopted Statement of
Financial Accounting Standards No. 142, "Accounting for Goodwill and Other
Intangible Assets." Since the adoption of SFAS No. 142, goodwill and intangible
assets deemed to have an indefinite life are not amortized. Instead of
amortizing goodwill and intangible assets deemed to have an indefinite life,
goodwill is tested for impairment annually, or immediately if conditions
indicate that such an impairment could exist. All of our goodwill has been
deemed to have an indefinite life and as a result of adopting SFAS No. 142, we
ceased amortizing goodwill. Prior to the implementation of SFAS No. 142, we
recognized amortization expense for goodwill of $12,506 and $12,574 in 2001 and
2000, respectively. (See Note 3).
Deferred Loan Costs: Costs incurred in connection with the issuance of
debentures and credit facilities are deferred and amortized, using the effective
interest method over the term of the agreements. Amortization expense of these
loan costs was $2,082, $1,871, and $1,200, in 2002, 2001, and 2000,
respectively.
Valuation of Long-Lived Assets: We review our long-lived assets for
impairment, including property, plant and equipment, and identifiable
intangibles with definite lives, whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable. To
determine recoverability of our long-lived assets, we evaluate the probability
that future undiscounted net cash flows will be greater than the carrying amount
of our assets. Impairment is measured based on the difference between the
carrying amount of our assets and their estimated fair value. An impairment
charge of $3.4 million, and $5.9 million, was recorded in 2002 and 2001,
respectively. The fiscal 2002 impairment charge included $3.0 million to write
down the long-lived assets of a small airframe manufacturing operation at our
aerospace fasteners segment, that we are attempting to sell, and $0.4 million to
write-off tenant improvements at our shopping center. The fiscal 2001 impairment
charge included $2.4 million due to the closing of a small subsidiary at our
aerospace distribution segment, of which $1.7 million represented the write-off
of goodwill, and $0.4 million represented severance payments. Additionally, the
fiscal 2001 impairment charge also included a write-off of approximately $2.3
million of improvements at our shopping center, and a $1.1 million for the
write-off of leasehold improvements from the relocation of our domestic
distribution facility in our aerospace fasteners segment.
Foreign Currency Translation: The financial position and operating results
of our foreign operations are consolidated using the local currencies of the
countries in which they are located as the functional currency. The balance
sheet accounts are translated at exchange rates in effect at the end of the
period, and income statement accounts are translated at average exchange rates
during the period. The resulting translation gains and losses are included as a
separate component of stockholders' equity. Foreign currency transaction gains
and losses are included in our income statement in the period in which they
occur.
Research and Development: Company-sponsored research and development
expenditures are expensed as incurred and were insignificant in 2002, 2001 and
2000.
Capitalization of Interest and Taxes: We capitalize interest expense and
property taxes relating to certain real estate property being developed in
Farmingdale, New York. Capitalized interest is added to the cost of the
underlying assets and is amortized over the useful lives of the assets. Interest
of $386 and $5,792 was capitalized in 2001 and 2000, respectively.
Nonrecurring Gain: Nonrecurring gain of $28,625 in 2000 resulted from the
disposition of two of our equity investments including Nacanco Paketleme, and
the disposition of our Camloc Gas Springs division.
Stock-Based Compensation: As permitted by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", we use the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, for our stock-based employee compensation plans. The fair
market disclosures that are required by SFAS No. 123 are included in Note 13.
Fair Value of Financial Instruments: The carrying amount reported in the
consolidated balance sheets approximates the fair value for our cash and cash
equivalents, investments, specified hedging agreements, short-term borrowings,
current maturities of long-term debt, and all other variable rate debt
(including borrowings under our credit agreements). The fair value for our other
fixed rate long-term debt is determined by the market value of recent trades or
estimated using discounted cash flow analyses, based on our current incremental
borrowing rates for similar types of borrowing arrangements. Fair values of our
other off-balance-sheet instruments (letters of credit, commitments to extend
credit, and lease guarantees) are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the counter parties' credit standing. These instruments are described in
Note 9.
Use of Estimates: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications: Certain amounts in our prior years' consolidated
financial statements have been reclassified to conform to the 2002 presentation.
Such reclassifications had no effect on previously reported net income (loss) or
stockholders' equity.
Recently Issued Accounting Pronouncements: In June 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations". This statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and associated asset retirement costs.
It applies to legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development, and normal
operation of a long-lived asset, except for certain obligations of leases. This
statement is effective for fiscal years beginning after June 15, 2002.
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 No. 121 regarding when and how to measure an
impairment loss, SFAS No. 144 provides additional implementation guidance. SFAS
No. 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 No. 144 also expands the scope of a
discontinued operation to include a component of an entity, and eliminates the
current exemption of 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 in fiscal 2003.
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.
2. BUSINESS COMBINATIONS
Divestitures
On December 1, 1999, we disposed of substantially all of the assets and
certain liabilities of our Dallas Aerospace subsidiary, to United Technologies
Inc. for approximately $57.0 million. No gain or loss was recognized from this
transaction, as the proceeds received approximated the net carrying value of the
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 $2.0 million nonrecurring gain from
this disposition. We used the net proceeds from the disposition to reduce our
indebtedness.
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 fiscal
2000, we recognized a $25.7 million nonrecurring gain from this divestiture. We
also agreed to provide consulting services over a three-year period, at an
annual fee of approximately $1.5 million. We used the net proceeds from the
disposition to reduce our indebtedness.
3. GOODWILL
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Accounting for Business Combinations."
This statement requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, and establishes specific
criteria for the recognition of intangible assets separately from goodwill. We
will follow the requirements of this statement for business acquisitions made
after June 30, 2001. There were no acquisitions during 2002.
Effective July 1, 2001, we adopted Statement of Financial Accounting
Standards No. 142, "Accounting for Goodwill and Other Intangible Assets." This
statement changes the accounting for goodwill by requiring that goodwill and
intangible assets deemed to have an indefinite life not be amortized and that
the amortization period of intangible assets with finite lives will no longer be
limited to forty years. Instead of amortizing goodwill and intangible assets
deemed to have an indefinite life, the statement requires a test for impairment
to be performed annually, or immediately if conditions indicate that such an
impairment could exist. The determination of impairment required by SFAS No. 142
is a two-step process. The first step compares the carrying value of a reporting
unit to the fair value of a reporting unit with goodwill. If the fair value of
the reporting unit is less than the carrying value, a second step is performed
to determine the amount of goodwill impairment. The second step allocates the
fair value of the reporting unit to the reporting unit's net assets other than
goodwill. The excess of the fair value of the reporting unit over the amounts
assigned to its net assets other than goodwill is considered the implied fair
value of the reporting unit's goodwill. The implied fair value of the reporting
unit's goodwill is then compared to the carrying value of its goodwill and any
shortfall represents the amount of goodwill impairment. The fair market value of
a reporting unit is determined by considering the market prices of comparable
businesses and the present value of cash flow projections.
In 2002, we recorded a goodwill impairment charge of $144.6 million from
the implementation of SFAS No. 142, which is being presented as cumulative
effect of change in accounting, as of the beginning of our fiscal year. All of
the impairment charge relates to the three operating units within our aerospace
fasteners segment. No tax effect was recognized on the change in accounting for
goodwill. As a result of adopting SFAS No. 142, we will no longer amortize
goodwill of approximately $12.5 million per year. We have selected first day of
our fourth quarter as our annual impairment test date.
The following table provides the comparable effects of adoption of SFAS No.
142 for 2002, 2001 and 2000, respectively:
2002 2001 2000
------------------------------------------
Reported net income (loss) $ (154,840) $ (15,000) $ 9,758
Add back: Goodwill amortization - 12,506 12,574
------------------------------------------
Adjusted net income (loss) $ (154,840) $ (2,494) $ 22,332
------------------------------------------
Basic and Diluted income (loss) per share:
Reported net income (loss) $ (6.16) $ (0.60) $ 0.39
Add back: Goodwill amortization - 0.50 0.50
------------------------------------------
Adjusted net income (loss) $ (6.16) $ (0.10) $ 0.89
------------------------------------------
The changes in the carrying amount of goodwill for the year ended June 30,
2002, are as follows:
Aerospace Aerospace
Fasteners Distribution Corporate Total
--------------------------------------------------------------
Balance as of June 30, 2001 $ 135,999 $ 5,513 $ 277,637 $ 419,149
Allocation/pushdown of goodwill (277,637)
265,712 11,925 -
Goodwill written off on adoption of SFAS No. 142 (144,600) (144,600)
- -
--------------------------------------------------------------
Balance as of June 30, 2002 $257,111 $ 17,438 $ - $274,549
--------------------------------------------------------------
4. PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
The following table sets forth the derivation of the unaudited pro forma
results, representing the impact of our dispositions of Dallas Aerospace
(December 1999), Camloc Gas Springs (September 1999), and the investment in
Nacanco Paketleme (July 1999), as if these transactions had occurred on July 1,
1999. The pro forma information is based on the historical financial statements
of these companies, giving effect to the aforementioned transactions. In
preparing the pro forma data, certain assumptions and adjustments have been made
which affect interest expense and investment income from our revised debt
structures. The pro forma financial information does not reflect nonrecurring
income and gains from the disposal of discontinued operations that have occurred
from these transactions. The unaudited pro forma information is not intended to
be indicative of the future results of our operations or results that might have
been achieved if these transactions had been in effect since July 1, 1999.
2000
---------------
Sales $612,928
Operating income (a) 21,179
Earnings from continuing operations (a) 2,358
Basic earnings from continuing operations per share 0.09
Diluted earnings from continuing operations per share 0.09
Net loss (9,648)
Basic loss per share (0.39)
Diluted loss per share (0.38)
<FN>
(a) - Includes pre-tax restructuring charges of $8,578.
</FN>
5. INVESTMENTS
Investments at June 30, 2002 consist primarily of common stock investments
in public corporations, which are recorded at fair market value and classified
as trading securities or available-for-sale securities. Other short-term
investments and long-term investments do not have readily determinable fair
values and consist primarily of investments in preferred and common shares of
private companies and limited partnerships. A summary of investments held by us
follows:
June 30, 2002 June 30, 2001
-------------------------- --------------------------
Aggregate Aggregate
Fair Cost Fair Cost
Short-term investments: Value Basis Value Basis
- -----------------------
-------------------------- ---------------------------
Trading securities - equity $ 356 $ 574 $ 2,175 $ 2,875
Available-for-sale equity securities 84 200 875 912
Other investments 141 141 55 55
-------------------------- ---------------------------
$ 581 $ 915 $ 3,105 $ 3,842
-------------------------- ---------------------------
Long-term investments:
Available-for-sale equity securities $ 1,074 $ 3,329 $ 2,204 $ 3,622
Other investments 4,286 4,286 5,575 5,575
-------------------------- ---------------------------
$ 5,360 $ 7,615 $ 7,779 $ 9,197
-------------------------- ---------------------------
On June 30, 2002, we had gross unrealized holding losses from
available-for-sale securities of $2,372. We use the specific identification
method to determine the gross realized gains (losses) from sales of
available-for-sale securities. Investment income is summarized as follows:
2002 2001 2000
----------------------------------------
Gross realized gain from sales of available-for-sale securities $ 30 $ 10,732 $ 15,133
Gross realized loss from sales of trading securities (811) - (31)
Change in unrealized holding gain (loss) from trading securities 486 (668) 578
Gross realized loss from impairments (2,296) (2,376) (6,473)
Dividend income 1,599 679 728
----------------------------------------
$ (992) $ 8,367 $ 9,935
----------------------------------------
6. INVESTMENTS AND ADVANCES, AFFILIATED COMPANIES
Our share of equity in earnings (loss), net of tax, of unconsolidated
affiliates for 2002, 2001 and 2000 was $(137), $110, and $(346), respectively.
The carrying value of investments and advances, affiliated companies was $3,261
and $2,813 at June 30, 2002 and 2001, respectively.
On June 30, 2002, approximately $(142) of our $91,947 consolidated retained
earnings were from undistributed losses of 50 percent or less currently owned
affiliates accounted for using the equity method.
7. NOTES RECEIVABLE
At June 30, 2002, $5.6 million of promissory notes were due to us from an
unaffiliated third party, which are included in notes receivable. The promissory
notes earn $1.4 million of annual cash interest and are being accreted to a face
value of $12.8 million through May 2006. The promissory notes are secured by
$12.8 million face value of our outstanding 10.75% senior subordinated
debentures due 2009 acquired by the third party. The third party may sell these
debentures for cash provided that it satisfies its obligation under its
promissory notes.
8. NOTES PAYABLE AND LONG-TERM DEBT
At June 30, 2002 and 2001, notes payable and long-term debt consisted of
the following:
June 30, 2002 June 30, 2001
-----------------------------------
Short-term notes payable (weighted average interest rates of 3.79% $ 18,974 $ 22,272
and 4.75% in 2002 and 2001, respectively)
-----------------------------------
Bank credit agreements $ 240,200 $ 239,041
103/4% Senior subordinated notes due 2009 225,000 225,000
Industrial revenue bonds, variable rate interest from 7.2% to 8.5% - 1,500
Capital lease obligations, interest from 4.7% to 13.9% 607 638
Other notes payable, collateralized by property, plant and
Equipment, interest from 3.0% to 9.6% 7,015 8,607
-----------------------------------
472,822 474,786
Less: Current maturities (34,905) (4,256)
-----------------------------------
Net long-term debt $ 437,917 $ 470,530
-----------------------------------
Credit Agreements
We maintain credit facilities with a consortium of banks, providing us with
a term loan and revolving credit facilities. On June 30, 2002, the credit
facilities with our senior lenders consisted of a $140,650 term loan and a
$100,000 revolving loan with a $40,000 letter of credit sub-facility and a
$15,000 swing loan sub-facility. Borrowings under the term loan generally bear
interest at a rate of, at our option, either 2 1/4% over the Citibank N.A. base
rate, or 3 1/4% over the LIBOR rate. Advances made under the revolving credit
facilities generally bear interest at a rate of, at our option, either (i) 1
3/4% over the Citibank N.A. base rate, or (ii) 2 3/4% over the LIBOR rate. These
interest rates are subject to change quarterly based upon our financial
performance. The credit facilities are subject to a non-use commitment fee on
the aggregate unused availability, of 1/2% if greater than half of the revolving
loan is being utilized or 3/4% if less than half of the revolving loan is being
utilized. Outstanding letters of credit are subject to fees equivalent to the
revolving LIBOR rate margin. The revolving credit facilities and the term loan
will mature on April 30, 2005 and April 30, 2006, respectively. The term loan is
subject to mandatory prepayment requirements and optional prepayments. The
revolving loan is subject to mandatory prepayment requirements and optional
commitment reductions.
We are required under the credit agreement with our lending institutions,
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
covenant is the interest coverage ratio, which represents the ratio of EBITDA to
interest expense, as defined in the credit agreement. At June 30, 2002, the
interest coverage ratio was 2.32, which exceeded the minimum requirement of 2.0.
Our interest rates vary based upon the consolidated indebtedness to EBITDA
covenant, which represents the ratio of total debt to EBITDA, as defined in the
credit agreement. On March 31, 2002 our indebtedness to EBITDA ratio exceeded
5.0 and resulted in a 1/4% increase in our interest rates under the credit
agreement during the fourth quarter of fiscal 2002. On June 30, 2002 our
indebtedness to EBITDA ratio was 5.62, 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 year ended
June 30, 2002, capital expenditures were $11.9 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 June
30, 2002, we were in compliance with the covenants under the credit agreement.
At June 30, 2002, we had borrowings outstanding of $68,800 under the
revolving credit facilities and we had letters of credit outstanding of $17,959,
which were supported by a sub-facility under the revolving credit facilities. At
June 30, 2002, we had unused bank lines of credit aggregating $13,241, at
interest rates slightly higher than the prime rate. We also had short-term lines
of credit relating to foreign operations, aggregating $32,834, against which we
owed $18,221 at June 30, 2002.
On March 23, 2000, we entered into a $30,750 term loan agreement with
Morgan Guaranty Trust Company of New York. The loan is secured by all of the
developed rental property of the Fairchild Airport Plaza shopping center located
in Farmingdale, New York, including tenant leases and mortgage escrows.
Borrowings under this agreement will mature on April 1, 2003, and bear interest
at the rate of LIBOR plus 3.1%.
Senior Subordinated Notes
On April 20, 1999, we issued, at par value, $225,000 of 10 3/4% senior
subordinated notes that mature on April 15, 2009. We pay interest on these notes
semi-annually on April 15th and October 15th of each year. Except in the case of
certain equity offerings by us, we cannot choose to redeem these notes until
five years have passed from the issue date of the notes. At any one or more
times after that date, we may choose to redeem some or all of the notes at
certain specified prices, plus accrued and unpaid interest. Upon the occurrence
of certain change of control events, each holder may require us to repurchase
all or a portion of the notes at 101% of their principal amount, plus accrued
and unpaid interest.
The notes are our senior subordinated unsecured obligations. They rank
senior to or equal in right of payment with any of our future subordinated
indebtedness, and subordinated in right of payment to any of our existing and
future senior indebtedness. The notes are effectively subordinated to
indebtedness and other liabilities of our subsidiaries, which are not
guarantors. Substantially all of our domestic subsidiaries guarantee the notes
with unconditional guaranties of payment that will effectively rank below their
senior debt, but will rank equal to their other subordinated debt, in right of
payment.
The indenture under which the notes were issued contains covenants that
limit what we (and most or all of our subsidiaries) may do. The indenture
contains covenants that limit our ability to: incur additional indebtedness; pay
dividends on, redeem or repurchase our capital stock; make investments; sell
assets; create certain liens; engage in certain transactions with affiliates;
and consolidate, merge or sell all or substantially all of our assets or the
assets of certain of our subsidiaries. In addition, we will be obligated to
offer to repurchase the notes at 100% of their principal amount, plus accrued
and unpaid interest, if any, to the date of repurchase, in the event of certain
asset sales. These restrictions and prohibitions are subject to a number of
important qualifications and exceptions.
On June 30, 2002, the $225,000 face value of our outstanding 10 3/4% senior
subordinated notes had a fair market value of $130,500.
Debt Maturity Information
The annual maturity of our bank notes payable and long-term debt
obligations (exclusive of capital lease obligations) for each of the five years
following June 30, 2002, are as follows: $53,529 for 2003; $2,948 for 2004;
$71,501 for 2005; $134,234 for 2006; and $1,343 for 2007.
9. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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 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 adopted SFAS No. 133 on July 1, 2000. At adoption, we recorded, within
other comprehensive income, a decrease of $0.5 million in the fair market value
of our $100 million interest rate swap agreement. The $0.5 million decrease will
be amortized over the remaining life of the interest rate swap agreement using
the effective interest method. The offsetting interest rate swap liability is
separately being reported as a "fair market value of interest rate contract"
within other long-term liabilities. In the statement of earnings, we have
recorded the net swap interest accrual as part of interest expense. Unrealized
changes in the fair value of the swap are recorded on a separate line entitled
"decrease in fair market value of interest rate contract."
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 $4.6 million and $5.6 million in 2002 and 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 the 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, we issued a floating rate note with a principal amount of
$30,750. Embedded within the promissory note agreement is an interest rate cap.
The embedded interest rate cap limits to 8.125%, the 1-month LIBOR interest rate
that we must pay on the note. 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. In
fiscal 2001, we accounted for the hybrid contract, comprised of the variable
rate note and the embedded interest rate cap, as a single debt instrument.
We recognize interest expense under the provisions of the hedge agreements
based on the fixed rate. We are exposed to credit loss in the event of
non-performance by the lenders; however, such non-performance is not
anticipated.
The table below provides information about our derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates, which include interest rate swaps. For interest rate swaps, the
table presents notional amounts and weighted average interest rates by expected
(contractual) maturity dates. Notional amounts are used to calculate the
contractual payments to be exchanged under the contract. Weighted average
variable rates are based on implied forward rates in the yield curve at the
reporting date.
Expected Fiscal Year Maturity Date 2003 2008
----------------------------------------------------------------------
Type of Interest Rate Contracts Interest Rate Cap Variable to Fixed
Variable to Fixed $30,750 $100,000
Fixed LIBOR rate N/A 6.24% (a)
LIBOR cap rate 8.125% N/A
Average floor rate N/A N/A
Weighted average forward LIBOR rate 1.95% 4.46%
Fair Market Value at June 30, 2002 $5 $(10,989)
<FN>
(a) - On February 17, 2003, the bank will have a one-time option to elect to
cancel the agreement or to do nothing and proceed with the transaction, using a
fixed LIBOR rate of 6.715% for the period February 17, 2003 to February 19,
2008.
</FN>
10. PENSIONS AND POSTRETIREMENT BENEFITS
Pensions
We have defined benefit pension plans covering most of our employees.
Employees in our foreign subsidiaries may participate in local pension plans,
for which our liability is in the aggregate insignificant. Our funding policy is
to make the minimum annual contribution required by the Employee Retirement
Income Security Act of 1974 or local statutory law.
The changes in the pension plans' benefit obligations were as follows:
2002 2001
---------------------------
Projected benefit obligation at beginning of year $ 209,559 $ 199,021
Service cost 6,869 5,729
Interest cost 15,182 15,403
Actuarial loss 414 7,248
Benefit payments (20,156) (17,376)
Curtailments (180) -
Special termination benefits 162 -
Plan amendment 486 71
Plan wind-up - (537)
---------------------------
Projected benefit obligation at end of year $ 212,336 $ 209,559
---------------------------
The changes in the fair values of the pension plans' assets were as follows:
2002 2001
---------------------------
Plan assets at beginning of year $ 242,321 $ 247,768
Actual return on plan assets 3,245 14,471
Administrative expenses (1,565) (1,201)
Benefit payments (20,156) (17,376)
Plan wind-up - (1,341)
---------------------------
Plan assets at end of year $ 223,845 $ 242,321
---------------------------
At June 30, 2002, one pension plan had an aggregate projected benefit
obligation of $168,979. The aggregate fair value of this plan was $168,279,
which exceeded the accumulated benefit obligation at June 30, 2002.
The following table sets forth the funded status and amounts recognized in
our consolidated balance sheets at June 30, 2002 and 2001, for the plans:
June 30, 2002 June 30, 2001
----------------------------
Plan assets in excess of projected benefit obligations $ 11,509 $ 32,762
Unrecognized net loss 50,153 29,392
Unrecognized prior service cost 3,031 3,095
----------------------------
Prepaid pension expense recognized in the balance sheet $ 64,693 $ 65,249
----------------------------
A summary of the components of total pension expense is as follows:
2002 2001 2000
-----------------------------------------
Service cost - benefits earned during the period $6,869 $ 5,729 $ 5,122
Interest cost on projected benefit obligation 15,182 15,403 15,214
Expected return on plan assets (22,716) (22,816) (22,360)
Amortization of net loss 1,242 37 1,306
Amortization of prior service cost 549 510 290
Amortization of transition asset - (9) (37)
-----------------------------------------
Net periodic pension (income) expense $ 1,126 $ (1,146) $ (465)
-----------------------------------------
FAS 88 Charges:
Special termination benefit charge 162 - -
-----------------------------------------
Total net periodic pension cost $ 1,288 $ (1,146) $ (465)
-----------------------------------------
Weighted average assumptions used in accounting for the defined benefit
pension plans as of June 30, 2002, 2001, and 2000 were as follows:
2002 2001 2000
-----------------------------------------
Discount rate 7.125% 7.25% 8.0%
Expected rate of increase in salaries 3.75% 4.0% 4.5%
Expected long-term rate of return on plan assets 9.0% 9.0% 9.0%
Plan assets include an investment in 641,420 shares of our Class A common
stock, valued at a fair market value of $2,020 and $4,496 at June 30, 2002 and
2001, respectively. Substantially all of the other plan assets are invested in
listed stocks and bonds.
Postretirement Health Care Benefits
We provide health care benefits for most of our retired employees.
Postretirement health care benefit expense from continuing operations totaled
$1,570, $1,262, and $1,065 for 2002, 2001, and 2000, respectively. Our accrual
was approximately $31,018 and $31,302 as of June 30, 2002 and 2001,
respectively, for postretirement health care benefits related to discontinued
operations. These amounts represent the cumulative discounted value of the
long-term obligation and includes benefit expense of $3,953, $3,612, and $3,484
for the years ended June 30, 2002, 2001 and 2000, respectively.
The changes in the accumulated postretirement benefit obligation of the plans
were as follows:
2002 2001
------------------------------
Accumulated postretirement benefit obligation at beginning of year $ 58,221 $ 50,558
Service cost 499 347
Interest cost 4,067 4,062
Plan participants' contributions 1,305 -
Plan amendments (2,937) -
Actuarial gains 6,143 8,988
Curtailments (292) -
Benefit payments (6,509) (5,734)
------------------------------
Accumulated postretirement benefit obligation end of year $ 60,497 $ 58,221
------------------------------
The following table sets forth the funded status and amounts recognized in
the Company's consolidated balance sheets at June 30, 2002 and 2001, for the
plans:
2002 2001
------------------------------
Accumulated postretirement benefit obligation $ 60,497 $ 58,221
Unrecognized prior service credit 3,596 728
Unrecognized net loss (22,294) (17,414)
------------------------------
Accrued postretirement benefit liability $ 41,799 $ 41,535
------------------------------
The accumulated postretirement benefit obligation was determined using a
discount rate of 7.125% at June 30, 2002 and 7.25% at June 30, 2001. The effect
of such change resulted in an increase to the accumulated postretirement benefit
obligation in fiscal 2002. For measurement purposes, we assumed a 10.0% annual
rate of increase in the per capita claims cost of covered health care benefits
for fiscal 2002. The rate was assumed to decrease to 5.00% in fiscal 2003 and
remain at that level thereafter.
A summary of the components of total postretirement expense is as follows:
2002 2001 2000
----------------------------------------
Service cost - benefits earned during the period $ 499 $ 347 $ 302
Interest cost on accumulated postretirement benefit obligation 4,067 4,062 3,733
Amortization of prior service credit (69) (69) (69)
Amortization of net loss 971 534 583
----------------------------------------
Net periodic postretirement benefit cost $ 5,468 $ 4,874 $ 4,549
----------------------------------------
Assumed health care cost trend rates have a significant effect on the
amounts reported for health care plans. A one percentage-point change in assumed
health care cost trend rates would have the following effects as of and for the
fiscal year ended June 30, 2002:
One Percentage-Point
Increase Decrease
----------------------------------
Effect on service and interest components of net periodic cost $ 112 $ (103)
Effect on accumulated postretirement benefit obligation 1,597 (1,434)
11. INCOME TAXES
Significant components of the provision (benefit) for income taxes
attributable to our continuing operations are as follows:
2002 2001 2000
---------------------------------------------
Current:
Federal $ (14,768) $(16,671) $(11,638)
State 1,048 (792) (2,496)
Foreign 866 (513) 2,893
---------------------------------------------
Total current $ (12,854) $(17,976) $ (11,241)
Deferred:
Federal $ (1,917) $ 1,049 $ 5,912
State (606) 381 930
---------------------------------------------
Total deferred $ (2,523) $ 1,430 $ 6,842
---------------------------------------------
Total tax provision (benefit) $ (15,377) $(16,546) $ (4,399)
---------------------------------------------
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rate of 35% to the actual provision
for income taxes in fiscal 2002, 2001, and 2000, is as follows:
2002 2001 2000
----------------------------------------------
Tax at United States statutory rates $ (8,918) $ (11,080) $ 6,199
State income taxes, net of federal tax benefit (424) 2,329 (654)
Nondeductible acquisition valuation items - 3,374 4,002
Tax on foreign earnings (4,737) (7,149) (5,030)
Difference between book and tax basis of assets
acquired and liabilities assumed - - (1,491)
Revision of estimate for tax accruals, net of deferred
tax asset valuation allowance 1,094 (3,500) (7,800)
Extraterritorial income exclusion (1,645) - -
Other, net (747) (520) 375
----------------------------------------------
Net tax provision (benefit) $ (15,377) $ (16,546) $(4,399)
----------------------------------------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of our deferred tax assets and liabilities as of June 30, 2002 and
June 30, 2001 are as follows:
June 30, June 30,
2002 2001
-------------------------------
Deferred tax assets:
Accrued expenses $ 5,484 $ 6,160
Asset basis differences 215 -
Inventory 11,437 10,924
Employee compensation and benefits 7,449 13,449
Environmental reserves 3,386 4,765
Postretirement benefits 16,269 12,286
Net Operating loss, capital loss and credit carryforwards 98,893 83,799
Other 9,888 3,713
-------------------------------
Total deferred tax assets $ 153,021 $135,096
Less: Valuation allowance (98,893) (83,798)
-------------------------------
Net deferred tax assets $ 54,128 $ 51,298
-------------------------------
Deferred tax liabilities:
Asset basis differences $(27,364) $(67,160)
Pensions (18,923) (19,819)
-------------------------------
Total deferred tax liabilities $(46,287) $(86,979)
-------------------------------
Net deferred tax assets (liabilities) $ 7,841 $(35,681)
-------------------------------
In assessing the realizability of deferred tax assets, we consider whether
it is more likely than not, that some portion or all of the deferred tax assets
will not be realized. The above asset basis differences represent timing
differences primarily related to fixed assets and investments. The timing
differences to fixed assets are due to depreciation being computed using the
straight-line method for financial reporting purposes and accelerated
depreciation methods for tax purposes. The timing differences to investments
result from the mark-to-market method required for financial reporting purposes
and original cost being used for tax purposes. We consider the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment.
At June 30, 2002, we have a $3,196 unused alternative minimum tax credit
carryforward that does not expire and $282,547 of federal operating loss
carryforwards expiring as follows: $26,204 in 2010; $1,509 in 2012; $40,604
in2013; $56,566 in 2019; $60,868 in 2020; $53,671 in 2021; and $43,126 in 2022.
On June 30, 2001 and June 30, 2000, our federal operating loss carryforwards
were $239,421 and $185,751, respectively.
The amounts included in the balance sheet are as follows:
June 30, June 30,
2002 2001
-----------------------------------
Prepaid expenses and other current assets:
Current deferred $ 12,118 $ 13,005
-----------------------------------
Noncurrent income tax liabilities:
Noncurrent deferred $ 4,277 $ 48,686
Other noncurrent 53,791 27,072
-----------------------------------
$58,068 $75,758
-----------------------------------
As of June 30, 2002, we have recorded $53,791 of noncurrent income tax
liabilities, which includes additional tax and interest we may be required to
pay if our tax positions are not sustained with respect to the sale of several
businesses, and repayment with property, of debt under a bank credit agreement
in which both we and our subsidiaries were liable, is not treated as tax free
under Section 361 of the Internal revenue Code of 1986, as amended.
We maintain a very complex structure in the United States and overseas,
particularly due to the large number of acquisitions and dispositions that have
occurred along with other tax planning strategies. The noncurrent income tax
liability is after utilization of available net operating losses and is
attributable to permanent differences between the financial statement carrying
amounts of assets and liabilities which we have sold in prior years and their
respective tax bases. Our management performs a comprehensive review of its
worldwide tax positions on an annual basis. Based on outcomes in recent years,
as a result of discussions and resolutions of matters with the tax authorities
and the closure of tax years subject to tax audit, we have revised our tax
accruals, net of valuation allowances, by $(1,094), $3,500, and $7,800, in 2002,
2001, and 2000, respectively.
At June 30, 2002, we have $282,547 of federal income tax loss carryforwards
expiring 2010 through 2022, and $3,196 of unused alternative minimum tax credit
carryforward that does not expire. These federal income tax loss carryforwards
may be reduced by adjustments during the income tax audits of 1995 through 2002,
which have not commenced. As the periods of assessment for 1995 to 1998 have
expired, additional tax may be collected from us only for 1999 to 2002.
Nonetheless, the tax losses of $68,317 arising in 1995, 1997, and 1998 may still
be reduced for determining the proper amount of net operating loss available to
be carried forward to years after 1998. The gain we reported between 1995 to
2002, for federal income tax, may be significantly increased if our tax
positions are not sustained with respect to the sales of several businesses; and
the repayment with property, of debt under a bank credit agreement in which both
we and our subsidiaries were liable, is not treated as tax free under Section
361 of the Internal Revenue Code of 1986, as amended. If all of these
adjustments were made for 1995 to 2002, the federal income tax loss
carryforwards would be substantially reduced, and we may be required to pay
additional tax and interest of up to $74 million, which has already been
provided. The amount of additional tax and interest to be paid by the Company
depends on the amount of income tax audit adjustments, which are made and
sustained for 1995 to 2002. These adjustments, if any, would be made at a future
date, which is presently uncertain, and therefore we cannot predict the timing
of cash outflows. To the extent a favorable final determination of the recorded
tax liabilities occurs, appropriate adjustments will be made to decrease the
recorded tax liability in the year such favorable determination will occur. It
is presently uncertain when a final determination will occur since no Internal
Revenue Service audits of 1995 to 2002 have commenced.
Domestic income taxes, less available credits, are provided on the
unremitted income of foreign subsidiaries and affiliated companies, to the
extent we intend to repatriate such earnings. No domestic income taxes or
foreign withholding taxes are provided on the undistributed earnings of foreign
subsidiaries and affiliates, which are considered permanently invested, or which
would be offset by allowable foreign tax credits. As of June 30, 2002, the
cumulative unremitted income of those foreign subsidiaries and affiliates for
which deferred taxes have not been provided was $80,366.
In the opinion of our management, adequate provision has been made for all
income taxes and interest; and any liability that may arise for prior periods
will not have a material effect on our financial condition or our results of
operations.
12. EQUITY SECURITIES
We had 22,540,021 shares of Class A common stock and 2,621,502 shares of
Class B common stock outstanding at June 30, 2002. Class A common stock is
listed on the New York Stock Exchange under the ticker symbol of "FA". 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 year ended June 30, 2002, we issued
12,220 shares of Class A common stock as a result of the pay out of 12,220
deferred compensation units pursuant to our stock option deferral plan. During
fiscal 2002, stock warrants entitled to purchase 400,000 shares of our common
stock expired.
13. STOCK OPTIONS
Stock Options
We are authorized to issue 5,141,000 shares of our Class A common stock
upon the exercise of stock options issued under our 1986 non-qualified and
incentive stock option plan. The purpose of the 1986 stock option plan is to
encourage continued employment and ownership of Class A common stock by our
officers and key employees, and to provide additional incentive to promote
success. The 1986 stock option plan authorizes the granting of options at not
less than the market value of the common stock at the time of the grant. The
option price is payable in cash or, with the approval of our compensation and
stock option committee of the Board of Directors, in "mature" shares of common
stock, valued at fair market value at the time of exercise. The options normally
vest by twenty-five percent at the end of each of the first four years and
terminate five years from the date of grant, or for a stipulated period of time
after an employee's death or termination of employment. The 1986 plan expires on
April 9, 2006; however, all stock options outstanding as of April 9, 2006 shall
continue to be exercisable pursuant to their terms.
We are authorized to issue 250,000 shares of our Class A common stock upon
the exercise of stock options issued under the ten-year 1996 non-employee
directors stock option plan. The 1996 non-employee directors stock option plan
authorizes the granting of options at the market value of the common stock on
the date of grant. An initial stock option grant for 30,000 shares of Class A
common stock is made to each person who becomes a new non-employee Director,
with the options vesting 25% each year from the date of grant. On the date of
each annual meeting, each person elected as a non-employee Director will be
granted an option for 1,000 shares of Class A common stock that vest
immediately. The exercise price is payable in cash or, with the approval of our
compensation and stock option committee, in shares of Class A or Class B common
stock, valued at fair market value at the date of exercise. All options issued
under the 1996 non-employee directors stock option plan will terminate five
years from the date of grant or a stipulated period of time after a non-employee
Director ceases to be a member of the Board. The 1996 non-employee directors
stock option plan is designed to maintain our ability to attract and retain
highly qualified and competent persons to serve as our outside directors.
At the Annual Shareholders meeting held in November 2001, the shareholders
approved the 2001 non-employee directors stock option plan, pursuant to which
non-employee directors were issued stock options for 86,942 shares, in the
aggregate, immediately after the 2001 Annual Meeting.
At the Annual Shareholders meeting held in November 2000, the shareholders
approved the 2000 non-employee directors stock option plan, pursuant to which
each non-employee director was issued stock options for 7,500 shares (52,500
shares in the aggregate) immediately after the 2000 Annual Meeting.
Upon our April 8, 1999 merger with Banner Aerospace, all of Banner
Aerospace's stock options then issued and outstanding were converted into the
right to receive 870,315 shares of our common stock.
A summary of stock option transactions under our stock option plans is
presented in the following tables:
Weighted
Average
Exercise
Shares Price
-----------------------------------
Outstanding at June 30, 1999 2,786,563 $ 11.05
Granted 200,500 8.89
Exercised (329,126) 3.98
Expired (88,216) 6.79
Forfeited (103,150) 14.53
-----------------------------------
Outstanding at June 30, 2000 2,466,571 11.82
Granted 353,906 6.38
Exercised (374,016) 3.67
Expired (222,719) 8.06
Forfeited (300,400) 17.53
-----------------------------------
Outstanding at June 30, 2001 1,923,342 11.92
Granted 563,764 2.98
Expired (350,119) 14.50
Forfeited (19,565) 7.79
-----------------------------------
Outstanding at June 30, 2002 2,117,422 $ 9.18
-----------------------------------
Exercisable at June 30, 2000 1,793,459 $ 10.57
Exercisable at June 30, 2001 1,291,911 $ 12.97
Exercisable at June 30, 2002 1,174,329 $ 12.46
A summary of options outstanding at June 30, 2002 is presented as follows:
Options Outstanding Options Exercisable
------------------------------------------------------ ----------------------------------
Weighted Average Weighted
Average Remaining Average
Range of Number Exercise Contract Number Exercise
Exercise Prices Outstanding Price Life Exercisable Price
-------------------- ------------------------------------------------------ ----------------------------------
$2.35 - $3.10 561,764 $2.97 4.3 years 7,000 $2.35
$6.00 - $8.63 576,260 6.39 2.2 years 300,956 6.34
$8.72 - $13.48 434,853 9.45 1.7 years 379,853 9.41
$13.62 - $16.25 344,545 14.61 1.8 years 286,520 14.64
$18.56 - $25.07 200,000 24.70 0.2 years 200,000 24.70
-------------------- ------------------------------------------------------ ----------------------------------
$2.35 - $25.07 2,117,422 $9.18 2.4 years 1,174,329 $12.46
-------------------- ------------------------------------------------------ ----------------------------------
The weighted average grant date fair value of options granted during 2002,
2001, and 2000 was $1.62, $3.13, and $4.16, respectively. The fair value of each
option granted is estimated on the grant date using the Black-Scholes option
pricing model. The following significant assumptions were made in estimating
fair value:
2002 2001 2000
----------------------------------------------------------
Risk-free interest rate 3.6% - 4.7% 5.3% - 6.3% 5.9% - 6.8%
Expected life in years 4.75 4.31 4.66
Expected volatility 53% - 65% 52% - 53% 45% - 47%
Expected dividends None None None
We recognized compensation expense of $9 and $13 from stock options issued
to consultants in 2002 and 2001, respectively. We are applying APB Opinion No.
25 in accounting for our stock option plans. Accordingly, no compensation cost
has been recognized for the granting of stock options to our employees in 2002,
2001 or 2000. If stock options granted in 2002, 2001 and 2000 were accounted for
based on their fair value as determined under SFAS 123, pro forma earnings would
be as follows:
2002 2001 2000
----------------------------------------------
Net earnings (loss):
As reported $ (154,840) $ (15,000) $ 9,758
Pro forma (156,776) (16,923) 8,096
Basic and diluted earnings (loss) per share:
As reported $ (6.16) $ (0.60) $ 0.39
Pro forma (6.23) (0.67) 0.32
The pro forma effects of applying SFAS 123 are not representative of the
effects on reported net earnings for future years. The effect of SFAS 123 is not
applicable to awards made prior to 1996. Additional awards are expected in
future years.
Stock Option Deferral Plan
On November 17, 1998, our shareholders approved a stock option deferral
plan. Pursuant to the stock option deferral plan, certain officers may, at their
election, defer payment of the "compensation" they receive in a particular year
or years from the exercise of stock options. "Compensation" means the excess
value of a stock option, determined by the difference between the fair market
value of shares issueable upon exercise of a stock option, and the option price
payable upon exercise of the stock option. An officer's deferred compensation is
payable in the form of "deferred compensation units," representing the number of
shares of common stock that the officer is entitled to receive upon expiration
of the deferral period. The number of deferred compensation units issueable to
an officer is determined by dividing the amount of the deferred compensation by
the fair market value of our stock as of the date of deferral.
Shares Available for Future Issuance
The following table reflects a summary of the shares that could be issued
under our stock option and stock deferral plans at June 30, 2002:
1996 2000 2001 Stock
1986 Directors Directors Directors Banner Deferral
Securities to be issued upon: Plan Plan Plan Plan Plan Plan Total
- -----------------------------
-------------------------------------------------------------------------------------
Exercise of outstanding options 1,303,328 62,000 52,500 86,942 612,652 - 2,117,422
Weighted average option exercise price $ 9.66 $ 9.19 $ 6.00 $ 2.35 $ 9.39 N/A $ 9.18
Options available for future grants 181,859 188,000 - - - - 369,859
Issuance of deferred compensation units - - - - - 286,896 286,896
-------------------------------------------------------------------------------------
Shares available for future issuance 1,485,187 250,000 52,500 86,942 612,652 286,896 2,774,177
-------------------------------------------------------------------------------------
14. EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted earnings
(loss) per share:
2002 2001 2000
----------------------------------------------
Basic earnings per share:
Earnings (loss) from continuing operations $ (10,240) $ (15,000) $ 21,764
----------------------------------------------
Weighted average common shares outstanding 25,155 25,122 24,954
----------------------------------------------
Basic earnings per share:
Basic earnings (loss) from continuing operations per share $ (0.41) $ (0.60) $ 0.87
----------------------------------------------
Diluted earnings per share:
Earnings (loss) from continuing operations $ (10,240) $ (15,000) $ 21,764
----------------------------------------------
Weighted average common shares outstanding 25,155 25,122 24,954
Diluted effect of options antidilutive antidilutive 97
Diluted effect of warrants antidilutive antidilutive 86
----------------------------------------------
Total shares outstanding 25,155 25,122 25,137
----------------------------------------------
Diluted earnings (loss) from continuing operations per share $ (0.41) $ (0.60) $ 0.87
----------------------------------------------
The computation of diluted loss from continuing operations per share for
2002 and 2001 excluded the effect of incremental common shares attributable to
the potential exercise of common stock options outstanding and warrants
outstanding, because their effect was antidilutive. No adjustments were made to
share information in the calculation of earnings per share for the change in
accounting for goodwill and discontinued operations in 2002 and 2000,
respectively.
15. RESTRUCTURING CHARGES
In fiscal 2000, we recorded $8,578 of restructuring charges as a result of
the continued integration of Kaynar Technologies into our aerospace fasteners
segment. All of the charges recorded during 2000 were a direct result of product
and plant integration costs incurred as of June 30, 2000. These costs were
classified as restructuring and were the direct result of formal plans to move
equipment, 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.
16. DISCONTINUED OPERATIONS
Based on our formal plan, we have disposed of the Fairchild Technologies'
businesses, including its intellectual property, through a series of
transactions. Because of Fairchild Technologies' significant utilization of
cash, in February 1998, our Board of Directors adopted a formal plan to
discontinue Fairchild Technologies, under which, Fairchild Technologies would
either be sold or liquidated. In connection with the adoption of that plan, we
recorded an after-tax charge of $36.2 million in discontinued operations in
fiscal 1998. Included in the fiscal 1998 charge, was $28.2 million, net of an
income tax benefit of $11.8 million, for the net losses of Fairchild
Technologies through June 30, 1998. This charge included the write down of
assets to estimated net realizable value and $8.0 million, net of an income tax
benefit of $4.8 million, for the estimated remaining operating losses of
Fairchild Technologies through February 1999, the originally anticipated
disposal date. The dispositions of the Fairchild Technologies semiconductor
equipment group, the major portion of the Fairchild Technologies business, took
place by June 1999, approximately 15 months after the adoption of the
disposition plan. We also completed a spin-off of the Fairchild Technologies
optical disc equipment group business in April 2000, approximately 25 months
after the original disposition plan. We received proceeds from the dispositions
of Fairchild Technologies of less than we originally projected, and the
operating losses of Fairchild Technologies, since the adoption date, exceeded
our original estimates. At each quarter end, we continued to reevaluate our
conclusions on discontinued operations and update the estimates of losses as
circumstances changed. At no point did we consider retaining any portion of the
Fairchild Technology business. As a result, we adjusted the net loss on disposal
of discontinued operations by $31.3 million and $12.0 million in fiscal 1999 and
2000, respectively. The following schedule provides a summary of the net loss on
disposal of discontinued operations for Fairchild Technologies:
1998 1999 (a) 2000 (b) Total
-----------------------------------------------------
Accrual for future operating losses, net $ 8,000 $ (5,203) $ (2,797) $ -
Operating losses, net 12,644 21,313 1,217 35,174
Loss on dispositions, net 15,599 15,239 13,586 44,424
-----------------------------------------------------
Loss on disposal of discontinued operations, net $ 36,243 $ 31,349 $ 12,006 $ 79,598
-----------------------------------------------------
<FN>
(a) The fiscal 1999 after-tax operating loss from Fairchild Technologies
exceeded the June 1998 estimate recorded for expected losses by $28.6
million, net of an income tax benefit of $8.1 million, through June 1999.
Operating losses for fiscal 1999 of $8.0 million were originally planned
for the first eight months of fiscal 1999. Operating costs were higher than
originally projected, due to deterioration in market conditions, which
resulted in increased operating expenses and hindered the disposition of
Fairchild Technologies within twelve months, as originally expected. Due to
the decision to cease operations of the Fairchild Technologies
semiconductor group in March 1999, additional expenses became necessary to
reflect the shut down of facilities and accrue for severance expenses. An
additional after-tax charge of $2.8 million was recorded in fiscal 1999 for
the estimated remaining losses in connection with the disposition of
Fairchild Technologies.
(b) The fiscal 2000 after-tax loss in connection with the disposition of the
remaining operations of Fairchild Technologies exceeded anticipated losses
by $12.0 million, net of tax. We recognized a higher than expected loss on
the disposition of the final portions of Fairchild Technologies.
</FN>
At the measurement date in February 1998, management's reasonable
expectation was that Fairchild Technologies would be disposed of within one
year. Management felt confident that this could be accomplished for the
following reasons:
o We retained an investment banker to aid in the disposal of the Fairchild
Technologies business.
o Our belief was further enhanced as active discussions began with
approximately 20 potentially interested parties; and based on those
discussions we believed that we could sell Fairchild Technologies
within one year.
o The expected quarterly losses, as accrued at the measurement date
created an incentive to sell the Fairchild Technologies business in
order to reduce cash outflows.
However, our February 1998 expectations that we could sell Fairchild
Technologies within one year were severely hampered by a general slowdown in the
semiconductor manufacturing equipment industry, the economic crisis in Asia, and
public knowledge that the business was for sale. As a result of these
conditions, the major customer of Fairchild Technologies semiconductor equipment
group business refused to place additional firm orders and Fairchild
Technologies incurred net operating losses well in excess of the $8.0 million
originally planned. As a further result of these conditions, efforts to sell the
Fairchild Technologies business, as a whole, were unsuccessful. However, several
parties expressed interest in specific product lines and intellectual property
of Fairchild Technologies. Management realized that it would have to split-up
Fairchild Technologies and separately dispose of components of its semiconductor
equipment group and its optical disc equipment business. In February 1999,
disposition discussions began to intensify, and shortly thereafter letters of
intent were signed to sell portions of the Fairchild Technologies business.
In March 1999, management decided to cease all manufacturing activities of
the semiconductor equipment group of Fairchild Technologies. In April 1999, we
began to dispose of the semiconductor equipment group's production machinery and
existing inventory, informed customers and business partners that it ceased
operations, significantly reduced its workforce, and stepped up the level of
discussions and negotiations with other companies regarding the sale of its
remaining assets. Fairchild Technologies also continued exploring several
alternative transactions with potential buyers for its optical disc equipment
group business.
During the fourth quarter of fiscal 1999, we liquidated, through several
transactions, a significant portion of Fairchild Technologies, consisting mostly
of its semiconductor equipment group. On April 14, 1999, we disposed of
Fairchild Technologies' photoresist deep ultraviolet track equipment machines
and technology, spare parts and testing equipment to Apex Co., Ltd., in exchange
for 1,250,000 shares of Apex stock valued at approximately $5.1 million. On May
1, 1999, we sold Fairchild CDI for a nominal amount. On June 15, 1999, we
received from Suess Microtec AG $7.9 million and the right to receive 350,000
shares of Suess Microtec stock (or approximately $3.5 million) in exchange for
Fairchild Technologies' Falcon semiconductor equipment group product line and
certain intellectual property.
In July 1999, we received approximately $7.1 million from Novellus in
exchange for Fairchild Technologies' Low-K dielectric product line and certain
intellectual property. This transaction finalized the liquidation of the
semiconductor equipment group of Fairchild Technologies.
Following these transactions Fairchild Technologies completely ceased
operations. Under these circumstances, management believes that discontinued
operations treatment for accounting purposes continued to be appropriate
subsequent to March 1999.
On April 13, 2000, we completed a spin-off to our stockholders of the
shares of Fairchild (Bermuda) Ltd. On April 14, 2000, Fairchild (Bermuda) sold
to Convac Technologies Ltd. the Optical Disc Equipment Group business formerly
owned by Fairchild Technologies. Subsequently, on April 14, 2000, Fairchild
(Bermuda), renamed Global Sources Ltd., completed an exchange of approximately
95% of its shares for 100% of the shares of Trade Media Holdings Limited, an
Asian based, business-to-business online and traditional marketplace services
provider. Immediately after the share exchange, our stockholders owned 1,183,081
shares of the 26,152,308 issued shares of Global Sources. Global Sources shares
are listed on the NASDAQ under the symbol "GSOL". This transaction allowed us to
complete our formal plan to dispose of Fairchild Technologies and provided our
shareholders with a unique opportunity to participate in a new public entity.
Fairchild Technologies reported sales of $8,087 in 2000.
17. RELATED PARTY TRANSACTIONS
We pay for a chartered helicopter used from time to time for business
related travel. The owner of the chartered helicopter is a company controlled by
Mr. Jeffrey Steiner. Cost for such flights that are charged to us are comparable
to those charged in arm's length transactions between unaffiliated third
parties. The total amounts paid for such helicopter was approximately $143 and
$200 in 2001 and 2000, respectively. No amounts were paid in 2002.
We have extended loans to purchase our Class A common stock to certain
members of our senior management and Board of Directors, for the purpose of
encouraging ownership of our stock, and to provide additional incentive to
promote our success. The loans are non-interest bearing, have maturity dates
ranging from 1 1/2 to 3 1/2 years, and become due and payable immediately upon
the termination of employment for senior management, or director affiliation
with us for a director. As of June 30, 2002, the indebtedness owed to us from
Mr. Flynn, Mr. Juris, Mr. Persavich, and Mr. J. Steiner, was approximately $175
each. On June 30, 2002, Mr. Gerard, Ms. Hercot, Mr. Kelley, Mr. Miller and Mr.
E. Steiner owed us approximately $99, $167, $50, $220 and $220, respectively. On
June 30, 2002, approximately $106 of indebtedness was owed to us by each of Mr.
Caplin, Mr. David, Mr. Harris, Mr. Lebard, and Mr. Richey. As of June 30, 2002,
each of the individual amounts due to us represented the largest aggregate
balance of indebtedness outstanding under the officer and director stock
purchase program. We recognized compensation expense of $22 and $443 in 2001 and
2000, respectively, as a result of favorable terms granted to the recipients of
the loans.
On November 16, 1999, Mr. Richey borrowed $46 from us to exercise stock
options and hold our Class A common stock. The loan matures on November 16, 2002
and bears interest at 5.5%. The loan balance was $53 at June 30, 2002.
18. LEASES
Operating Leases
We hold certain of our facilities and equipment under long-term leases. The
minimum rental commitments under non-cancelable operating leases with lease
terms in excess of one year, for each of the five years following June 30, 2002,
are as follows: $9,383 for 2003; $7,801 for 2004; $6,424 for 2005; $4,420 for
2006; and $2,764 for 2007. Rental expense on operating leases from continuing
operations for fiscal 2002, 2001, and 2000 was $9,279, $12,445, and $11,280,
respectively.
Capital Leases
Minimum commitments under capital leases for each of the five years
following June 30, 2002, are $344 for 2003; $176 for 2004; $37 for 2005; $23 for
2006; and $12 for 2007, respectively. At June 30, 2002, the present value of
capital lease obligations was $553 and imputed interest was $39. Capital assets
leased and included in property, plant, and equipment consisted of:
June 30, June 30,
2002 2001
-------------------------
Land $ - $ 70
Buildings and improvements 153 378
Machinery and equipment 1,063 1,920
Furniture and fixtures - 17
Transportation vehicles 44 -
Less: Accumulated depreciation (443) (1,993)
-------------------------
$ 817 $ 392
-------------------------
Leasing Operations
In fiscal 1999, we began leasing retail space to tenants under operating
leases at a 456,000 square foot shopping center that we developed in
Farmingdale, New York. Rental revenue is recognized as lease payments are due
from tenants, and the related costs are amortized over their estimated useful
life. The future minimum lease payments to be received from non-cancelable
operating leases on June 30, 2002 are $6,296 in 2003; $6,706 in 2004; $6,636 in
2005; $6,575 in 2006; $6,575 in 2007; and $44,531 thereafter. Rental property
under operating leases consists of the following as of June 30, 2002:
Land and improvements $21,818
Buildings and improvements 55,533
Tenant improvements 9,121
Less: Accumulated depreciation (5,915)
--------------
$80,557
--------------
19. 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 June 30, 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. On June 30, 2002, $4.8 million of
these liabilities was classified as other accrued liabilities and $9.1 million
was classified as other long-term liabilities. It is reasonably possible that
our total exposure for these matters could be approximately $18.1 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.
20. BUSINESS SEGMENT INFORMATION
We report in three principal business segments. The aerospace fasteners
segment includes the manufacture of high performance specialty fasteners and
fastening systems. The aerospace distribution segment distributes a wide range
of aircraft parts and related support services to the aerospace industry. The
real estate segment leases space to tenants at completed sections of a shopping
center in Farmingdale, New York. The corporate segment includes the Gas Springs
division prior to its disposition and corporate activities. Our financial data
by business segment is as follows:
Aerospace Aerospace Real Estate
Fasteners (d) Distribution Operations Corporate Total
-----------------------------------------------------------------------------------
Fiscal 2002:
Sales $ 560,796 $ 63,297 $ - $ - $ 624,093
Operating Income (Loss) (a) 41,581 2,579 1,076 (18,401) 26,835
Capital Expenditures 10,938 545 - 439 11,922
Depreciation and Amortization 26,661 679 2,744 445 30,529
Identifiable Assets at June 30 671,909 49,358 116,020 133,359 970,646
Fiscal 2001:
Sales $ 536,904 $ 85,908 $ - $ - $ 622,812
Operating Income (Loss) (b) 37,008 2,499 (138) (18,066) 21,303
Capital Expenditures 15,261 751 - 372 16,384
Depreciation and Amortization 39,090 900 2,268 1,474 43,732
Identifiable Assets at June 30 578,981 46,718 116,250 419,667 1,161,616
Fiscal 2000:
Sales $ 533,620 $ 101,002 $ - $ 739 $ 635,361
Operating Income (Loss) (c) 33,909 7,758 1,033 (19,457) 23,243
Capital Expenditures 26,367 630 - 342 27,339
Depreciation and Amortization 38,025 976 894 1,926 41,821
Identifiable Assets at June 30 599,139 54,784 122,148 491,349 1,267,420
<FN>
(a) Fiscal 2002 results include one-time impairment expenses of $3.0 million in
the aerospace fasteners segment and $0.4 million in the real estate
operations segment.
(b) Fiscal 2001 results include one-time impairment expenses of $1.1 million in
the aerospace fasteners segment, $2.4 million in the aerospace distribution
segment, and $2.5 million in the real estate operations segment.
(c) Fiscal 2000 results include restructuring charges of $8.6 million in the
aerospace fasteners segment.
(d) Sales from our aerospace fasteners segment included $75.6 million to Boeing
in fiscal 2002, representing approximately 12% of our consolidated sales.
Sales to Boeing were below 10% of our consolidated sales in fiscal 2001 and
2000, respectively.
</FN>
21. FOREIGN OPERATIONS AND EXPORT SALES
Our operations are located primarily in the United States and Europe. All
rental revenue is generated in the United States. Inter-area sales are not
significant to the total sales of any geographic area. Sales by geographic area
are attributed by country of domicile of our subsidiaries. Our financial data by
geographic area is as follows:
United
States Europe Australia Other Total
------------------------------------------------------------------------
Fiscal 2002:
- ------------
Sales by geographic area $ 462,630 $ 158,737 $ 2,092 $ 634 $ 624,093
Rental Revenue by geographic area 6,679 - - - 6,679
Operating income (loss) by geographic area 8,371 17,973 514 (23) 26,835
Earnings (loss) from continuing operations before taxes (35,931) 10,116 107 228 (25,480)
Identifiable assets by geographic area at June 30 781,674 179,224 8,079 1,669 970,646
Long-lived assets by geographic area at June 30 301,520 39,847 1,575 848 343,790
Fiscal 2001:
Sales by geographic area $ 465,490 $ 154,339 $ 2,260 $ 723 $ 622,812
Rental Revenue by geographic area 7,030 - - - 7,030
Operating income (loss) by geographic area (4,402) 24,377 1,329 (1) 21,303
Loss from continuing operations before taxes (51,536) 19,029 854 (3) (31,656)
Identifiable assets by geographic area at June 30 984,344 168,729 7,678 865 1,161,616
Long-lived assets by geographic area at June 30 318,196 38,458 1,515 12 358,181
Fiscal 2000:
Sales by geographic area $ 470,984 $ 160,954 $ 2,762 $ 661 $ 635,361
Rental Revenue by geographic area 3,583 - - - 3,583
Operating income (loss) by geographic area (1,440) 24,382 380 (79) 23,243
Earnings from continuing operations before taxes (2,874) 20,849 (185) (79) 17,711
Identifiable assets by geographic area at June 30 1,013,100 244,106 9,399 815 1,267,420
Long-lived assets by geographic area at June 30 343,151 43,094 2,016 1,839 390,100
Export sales are defined as sales by our operations located in the United
States to customers in foreign regions. Export sales were as follows:
Asia
Europe Canada Japan (without Japan) South America Other Total
-------------------------------------------------------------------------------------------------------------
Fiscal 2002 $ 40,972 $ 14,265 $ 8,003 $ 3,612 $ 9,242 $ 4,405 $ 80,499
Fiscal 2001 42,067 14,670 8,502 2,140 1,906 3,811 73,096
Fiscal 2000 42,831 16,621 8,568 3,031 1,146 4,947 77,144
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table of quarterly financial data has been prepared from our
financial records, without audit, and reflects all adjustments which are, in the
opinion of our management, necessary for a fair presentation of the results of
operations for the interim periods presented.
Fiscal 2002 quarters ended Sep-30 Dec-30 Mar-31 Jun-30
----------------------------------- ----------------------------------
Net sales $ 165,073 $ 157,835 $ 153,231 $ 147,954
Rental revenue 1,733 1,664 1,625 1,657
Gross Profit 41,169 38,870 38,088 35,464
Earnings (loss) from continuing operations (3,599) 907 506 (8,054)
Per basic share (0.14) 0.04 0.02 (0.32)
Per diluted share (0.14) 0.04 0.02 (0.32)
Cumulative effect of change in accounting for goodwill (a) (144,600) - - -
Per basic share (5.75) - - -
Per diluted share (5.75) - - -
Net earnings (loss) (a) (148,199) 907 506 (8,054)
Per basic share (5.89) 0.04 0.02 (0.32)
Per diluted share (5.89) 0.04 0.02 (0.32)
Market price range of Class A Stock:
High 7.15 3.90 2.99 6.24
Low 3.00 2.05 2.15 2.45
Close 3.40 2.69 2.52 3.15
Fiscal 2001 quarters ended Sep-30 Dec-30 Mar-31 Jun-30
----------------------------------- ----------------------------------
Net sales $ 148,367 $ 148,100 $ 162,358 $ 163,987
Rental revenue 1,668 1,862 1,615 1,885
Gross Profit 35,341 39,646 43,121 40,774
Net earnings (loss) (5,445) (6,639) (3,492) 576
Per basic share (0.22) (0.26) (0.14) 0.02
Per diluted share (0.22) (0.26) (0.14) 0.02
Market price range of Class A Stock:
High 7.50 7.00 6.64 7.74
Low 4.69 4.63 4.91 4.33
Close 6.44 5.50 4.92 7.01
<FN>
(a) - Our reported amounts in the first quarter of 2002 were restated to reflect
the transitional goodwill impairment charge of $144.6 million from the
implementation of SFAS No. 142, which was presented as a cumulative effect of
change in accounting retroactive to the beginning of fiscal 2002.
</FN>
23. CONSOLIDATING FINANCIAL STATEMENTS
The following consolidating financial statements separately show The
Fairchild Corporation and the subsidiaries of The Fairchild Corporation. These
financial statements are provided to fulfill public reporting requirements and
separately present guarantors of the 10 3/4% senior subordinated notes due 2009
issued by The Fairchild Corporation (the "Parent Company"). The guarantors are
primarily composed of our domestic subsidiaries, excluding Fairchild
Technologies, a real estate development venture, and certain other subsidiaries.
The Parent Company owns 100% of each of the subsidiary guarantors, and has no
independent assets or operations. The guarantees are full and unconditional and
are also joint and several. There are no restrictions of the Parent Company, or
any guarantor, on the ability to obtain funds from its subsidiairies.
CONSOLIDATING STATEMENT OF EARNINGS
FOR THE YEAR ENDED JUNE 30, 2002
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
--------------------------------------------------------------------------
Revenue:
Net sales $ - $ 480,006 $ 163,822 $ (19,735) $ 624,093
Rental revenue - - 6,679 - 6,679
Other income, net (238) 3,749 1,510 - 5,021
--------------------------------------------------------------------------
(238) 483,755 172,011 (19,735) 635,793
Costs and expenses:
Cost of goods sold - 372,845 119,160 (19,735) 472,270
Cost of rental revenue - - 4,911 - 4,911
Selling, general & administrative 7,318 94,784 26,240 - 128,342
Impairment charges - 3,435 - - 3,435
--------------------------------------------------------------------------
7,318 471,064 150,311 (19,735) 608,958
--------------------------------------------------------------------------
Operating income (loss) (7,556) 12,691 21,700 - 26,835
Net interest expense (including intercompany) (18,095) 54,457 10,394 - 46,756
Investment (income) loss, net (13) 1,005 - - 992
Intercompany dividends - 1,577 - (1,577) -
Decrease in market value of interest rate contract (4,567) - - - (4,567)
--------------------------------------------------------------------------
Earnings (loss) from continuing operations before taxes 5,985 (44,348) 11,306 1,577 (25,480)
Income tax (provision) benefit (3,402) 25,204 (6,425) 15,377
Equity in earnings (loss) of affiliates and subsidiaries (157,423) (212) - 157,498 (137)
Minority interest - - - - -
--------------------------------------------------------------------------
Earnings (loss) from continuing operations (154,840) (19,356) 4,881 159,075 (10,240)
Cumulative effect in change in accounting goodwill - (144,600) - - (144,600)
--------------------------------------------------------------------------
Net earnings (loss) $(154,840) $(163,956) $ 4,881 $ 159,075 $ (154,840)
==========================================================================
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, 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, net - 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
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 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 58,587 (669) 150 - 58,068
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 CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2002
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
--------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net earnings (loss) $ (154,840) $ (163,956) $ 4,881 $ 159,075 $ (154,840)
Depreciation & amortization 82 20,020 10,427 - 30,529
Amortization of deferred loan fees 1,542 20 520 - 2,082
Unrealized holding (gain) loss on interest rate contract 4,567 - - - 4,567
Cumulative effect of change in accounting for goodwill - 144,600 - - 144,600
Loss from impairments - 3,061 374 - 3,435
Paid-in kind interest income - (653) - - (653)
Loss (gain) on sale and impairment of investments 1,145 786 - - 1,931
Earnings (loss) of affiliates, net (75) 212 - - 137
Change in assets and liabilities 146,242 2,316 (2,431) (159,075) (12,948)
--------------------------------------------------------------------------
Net cash (used for) provided by operating activities (1,337) 6,406 13,771 - 18,840
Cash Flows from Investing Activities:
- --------------------------------------
Proceeds received from (used for):
Purchase of property, plant and equipment (125) (7,811) (3,986) - (11,922)
Investment securities, net - 1,027 - - 1,027
Sale of fixed assets - 3,841 857 - 4,698
Equity investment in affiliates (524) (524)
Real estate investment - - (797) - (797)
Proceeds received from net assets held for sale - 3,316 - - 3,316
Change in notes receivable 155 (5,713) (36) - (5,594)
--------------------------------------------------------------------------
Net cash (used for) provided by investing activities (494) (5,340) (3,962) - (9,796)
Cash Flows from Financing Activities:
Proceeds from issuance of debt 106,439 478 24,308 - 131,225
Debt repayments, net (105,153) (3,209) (32,463) - (140,825)
Issuance of Class A common stock 9 - - - 9
Loans to stockholders (16) (47) - - (63)
--------------------------------------------------------------------------
Net cash (used for) provided by financing activities 1,279 (2,778) (8,155) - (9,654)
Effect of exchange rate changes on cash - - 942 - 942
--------------------------------------------------------------------------
Net change in cash (552) (1,712) 2,596 - 332
Cash and cash equivalents, beginning of the year 562 6,546 7,843 - 14,951
--------------------------------------------------------------------------
Cash and cash equivalents, end of the period $ 10 $ 4,834 $ 10,439 $ - $ 15,283
==========================================================================
CONSOLIDATING STATEMENT OF EARNINGS (UNAUDITED)
FOR THE YEAR ENDED JUNE 30, 2001
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
------------- -------------- -------------- -------------- ------------
Revenue:
Net sales $ - $ 474,653 $ 160,894 $ (12,735) $ 622,812
Rental revenue - - 7,030 - 7,030
Other income, net (70) 5,593 399 - 5,922
------------- -------------- -------------- -------------- ------------
(70) 480,246 168,323 (12,735) 635,764
Costs and expenses:
Cost of good sold - 365,506 113,590 (12,735) 466,361
Cost of rental revenue - - 4,599 - 4,599
Selling, general & administrative 6,488 94,227 24,391 - 125,106
Amortization of goodwill 808 10,704 994 - 12,506
Impairment charges - 5,889 - - 5,889
------------- -------------- -------------- -------------- -------------
7,296 476,326 143,574 (12,735) 614,461
------------- -------------- -------------- -------------- -------------
Operating income (loss) (7,366) 3,920 24,749 - 21,303
Net interest expense (including intercompany) (10,831) 57,904 8,643 - 55,716
Investment (income) loss, net (2,995) 1,533 (6,905) - (8,367)
Intercompany dividends - 500 2 (502) -
Fair market value adjustment of interest rate contract 5,610 - - - 5,610
------------- -------------- -------------- -------------- -------------
Earnings (loss) before taxes 850 (56,017) 23,009 502 (31,656)
Income tax (provision) benefit (1,396) 38,151 (20,209) - 16,546
Equity in earnings of affiliates and subsidiaries (14,454) 169 - 14,395 110
------------- -------------- -------------- -------------- -------------
Net earnings (loss) $(15,000) $(17,697) $ 2,800 $ 14,897 $ (15,000)
============= ============== ============== ============== =============
CONSOLIDATING BALANCE SHEET (UNAUDITED)
JUNE 30, 2001
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
-------------- -------------- -------------- -------------- ------------
Cash and cash equivalents $ 562 $ 6,546 $ 7,843 $ - $ 14,951
Short-term investments 71 3,034 - - 3,105
Accounts receivable (including intercompany), less
allowances 2,336 628,104 84,599 (593,336) 121,703
Inventory, net - 144,157 44,830 - 188,987
Prepaid expenses and other current assets 13,292 22,134 7,198 - 42,624
-------------- -------------- -------------- -------------- ------------
Total current assets 16,261 803,975 144,470 (593,336) 371,370
Investment in subsidiaries 880,946 - - (880,946) -
Net fixed assets 501 112,969 35,638 - 149,108
Net assets held for sale - 17,999 - - 17,999
Investments and advances in affiliates 92 2,721 - - 2,813
Goodwill, net 15,720 370,440 32,989 - 419,149
Deferred loan costs 11,944 20 952 - 12,916
Prepaid pension assets - 65,249 - - 65,249
Real estate investment - - 110,505 - 110,505
Long-term investments 1,205 3,626 3,436 (488) 7,779
Other assets 2,607 1,335 786 - 4,728
-------------- -------------- -------------- -------------- ------------
Total assets $ 929,276 $ 1,378,334 $ 328,776 $(1,474,770) $1,161,616
============== ============== ============== ============== ============
Bank notes payable & current maturities of debt $ 2,250 $ 1,631 $ 22,647 $ - $ 26,528
Accounts payable (including intercompany) 20 778,542 230,934 (951,871) 57,625
Other accrued expenses 6,855 57,840 30,590 - 95,285
-------------- -------------- -------------- -------------- ------------
Total current liabilities 9,125 838,013 284,171 (951,871) 179,438
Long-term debt, less current maturities 431,041 5,918 33,571 - 470,530
Fair market value of interest rate contract 6,422 - - - 6,422
Other long-term liabilities 406 21,672 3,651 - 25,729
Noncurrent income taxes 76,217 (587) 128 - 75,758
Retiree health care liabilities - 37,335 4,551 - 41,886
-------------- -------------- -------------- -------------- ------------
Total liabilities 523,211 902,351 326,072 (951,871) 799,763
Class A common stock 3,034 - - - 3,034
Class B common stock 262 - - - 262
Notes due from stockholders (429) (1,338) - - (1,767)
Paid-in capital 232,820 478,207 83,513 (561,720) 232,820
Retained earnings 246,787 25,623 (64,932) 39,309 246,787
Cumulative other comprehensive loss (334) (26,509) (15,877) - (42,720)
Treasury stock, at cost (76,075) - - (488) (76,563)
-------------- -------------- -------------- -------------- ------------
Total stockholders' equity 406,065 475,983 2,704 (522,899) 361,853
-------------- -------------- -------------- -------------- ------------
Total liabilities & stockholders' equity $ 929,276 $ 1,378,334 $ 328,776 $(1,474,770) $1,161,616
============== =============== ============== =============== ============
CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE YEAR ENDED JUNE 30, 2001
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
-------------- -------------- -------------- -------------- ------------
Cash Flows from Operating Activities:
Net earnings (loss) $ (15,000) $(17,697) $ 2,800 $ 14,897 $(15,000)
Depreciation & amortization 885 32,243 10,604 - 43,732
Amortization of deferred loan fees 1,414 3 454 - 1,871
Unrealized holding loss on interest rate contract 6,422 - - - 6,422
Loss from impairments - 3,524 2,365 - 5,889
Gain on sale of investments (850) (4,575) (3,436) - (8,861)
Undistributed (distributed) earnings of affiliates 59 (169) - - (110)
Change in assets and liabilities (13,821) (28,718) (16,044) (14,897) (61,702)
-------------- -------------- -------------- -------------- ------------
Net cash used for operating activities (20,891) (15,389) (3,257) - (39,537)
Cash Flows from Investing Activities:
Proceeds received from (used for):
Purchase of property, plant and equipment (106) (11,643) (4,635) - (16,384)
Sale of property, plant and equipment 14 4,459 155 - 4,628
Investment securities, net - 16,447 - - 16,447
Equity investment in affiliates 477 - - - 477
Change in real estate investment - - (2,566) - (2,566)
Change in net assets held for sale - 1,491 - - 1,491
-------------- -------------- -------------- -------------- ------------
Net cash (used for) provided by investing activities 385 10,754 (7,046) - 4,093
Cash Flows from Financing Activities:
Proceeds from issuance of debt 146,974 - 21,187 - 168,161
Debt repayments, net (126,624) (11,891) (14,901) - (153,416)
Issuance of Class A common stock 593 - - - 593
Loans to stockholders 90 9 - - 99
-------------- -------------- -------------- -------------- ------------
Net cash (used for) provided by financing activities 21,033 (11,882) 6,286 - 15,437
Effect of exchange rate changes on cash - - (832) - (832)
-------------- -------------- -------------- -------------- ------------
Net change in cash 527 (16,517) (4,849) - (20,839)
Cash, beginning of the year 35 23,063 12,692 - 35,790
-------------- -------------- -------------- -------------- ------------
Cash, end of the year $ 562 $ 6,546 $ 7,843 $ - $ 14,951
============== ============== ============== ============== ============
CONSOLIDATING STATEMENT OF EARNINGS (UNAUDITED)
FOR THE YEAR ENDED JUNE 30, 2000
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
-------------- ------------- ------------- ---------------- ------------
Revenue:
Net sales $ - $ 470,595 $ 166,558 $ (1,792) $ 635,361
Rental revenue - - 3,583 - 3,583
Other income, net (103) 9,178 1,752 - 10,827
-------------- ------------- ------------- ---------------- ------------
(103) 479,773 171,893 (1,792) 649,771
Costs and expenses:
Cost of sales - 355,643 118,172 (1,792) 472,023
Cost of rental revenue - - 2,489 - 2,489
Selling, general & administrative 6,072 100,483 24,309 - 130,864
Restructuring - 8,578 - - 8,578
Amortization of goodwill 808 10,745 1,021 - 12,574
-------------- ------------- ------------- ---------------- ------------
6,880 475,449 145,991 (1,792) 626,528
-------------- ------------- ------------- ---------------- ------------
Operating income (loss) (6,983) 4,324 25,902 - 23,243
Net interest expense (income) 42,347 (7,512) 9,257 - 44,092
Investment income, net (6) (9,929) - - (9,935)
Nonrecurring income on disposition of subsidiary - - (28,625) - (28,625)
-------------- ------------- ------------- ---------------- ------------
Earnings (loss) before taxes (49,324) 21,765 45,270 - 17,711
Income tax (provision) benefit 6,343 (238) (1,706) - 4,399
Equity in earnings of affiliates and subsidiaries 52,739 - - (53,085) (346)
-------------- ------------- ------------- ---------------- ------------
Earnings (loss) from continuing operations 9,758 21,527 43,564 (53,085) 21,764
Earnings (loss) from disposal of discontinued operations - - (12,006) - (12,006)
-------------- ------------- ------------- ---------------- ------------
Net earnings (loss) $ 9,758 $ 21,527 $ 31,558 $ (53,085) $ 9,758
============== ============= ============= ================ ============
CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE YEAR ENDED JUNE 30, 2000
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
-------------- ------------- --------------- -------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net earnings (loss) $ 9,758 $ 21,527 $ 31,558 $ (53,085) $ 9,758
Depreciation and amortization 931 32,350 8,540 - 41,821
Deferred loan fee amortization 1,075 2 123 - 1,200
(Gain) loss on sale of property, plant and equipment - (2,207) 243 - (1,964)
Gain on sale of investments - (9,206) - - (9,206)
Undistributed loss (earnings) of affiliates, net - 372 - - 372
(Gain) on sale of affiliate investments and divestiture of
subsidiary - - (28,625) - (28,625)
Change in assets and liabilities 58,560 (125,047) (53,675) 53,085 (67,077)
Non-cash charges and working capital changes of
discontinued operations - - (13,351) - (13,351)
-------------- ------------- --------------- -------------- ------------
Net cash (used for) provided by operating activities 70,324 (82,209) (55,187) - (67,072)
-------------- ------------- --------------- -------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds received from investments - 14,655 - - 14,655
Purchase of property, plant and equipment (5) (19,321) (8,013) - (27,339)
Proceeds from sale of property, plant and equipment - 12,693 - - 12,693
Net proceeds from divestiture of subsidiaries - 57,000 51,792 - 108,792
Proceeds from net assets held for sale - 4,672 - - 4,672
Real estate investment - - (27,712) - (27,712)
Equity investment in affiliates - (2,489) - - (2,489)
Investing activities of discontinued operations - - 7,100 - 7,100
-------------- ------------- --------------- -------------- ------------
Net cash provided by (used for) investing activities (5) 67,210 23,167 - 90,372
-------------- ------------- --------------- -------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 52,200 111,569 43,105 - 206,874
Debt repayments (122,359) (113,465) (10,436) - (246,260)
Loans to Stockholders (520) (1,347) - - (1,867)
Issuance of Class A common stock 368 - - - 368
Purchase of treasury stock - (488) - - (488)
-------------- ------------- --------------- -------------- ------------
Net cash provided by (used for) financing activities (70,311) (3,731) 32,669 - (41,373)
-------------- ------------- --------------- -------------- ------------
Effect of exchange rate changes on cash - - (997) - (997)
-------------- ------------- --------------- -------------- ------------
Net change in cash and cash equivalents 8 (18,730) (348) - (19,070)
-------------- ------------- --------------- -------------- ------------
Cash and cash equivalents, beginning of the year 27 41,793 13,040 - 54,860
-------------- ------------- --------------- -------------- ------------
Cash and cash equivalents, end of the period $ 35 $ 23,063 $ 12,692 $ - $ 35,790
-------------- ------------- --------------- -------------- ------------
24. SUBSEQUENT EVENTS
On July 16, 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 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 and bondholders. We will use a portion of the proceeds from the
sale to repay our bank debt and commence a tender offer to acquire all of our
outstanding $225 million, 10.75% senior subordinated notes, due in April, 2009.
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.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On May 9, 2002, upon the recommendation of our Audit Committee, the Board
of Directors dismissed Arthur Andersen LLP as our independent auditors and
appointed Ernst & Young LLP to serve as our independent auditors for the fiscal
year which ended on June 30, 2002. The change in auditors is effective
immediately. Arthur Andersen's reports on our consolidated financial statements
for the fiscal years ended June 30, 2001 and June 30, 2000 did not contain an
adverse opinion or disclaimer of opinion, nor were such reports qualified or
modified as to uncertainty, audit scope or accounting principles. During each of
our fiscal years ended June 30, 2001 and June 30, 2000 and through May 9, 2002,
there were: (i) no disagreements with Arthur Andersen on any matter of
accounting principle or practice, financial statement disclosure, or auditing
scope or procedure which, if not resolved to Arthur Andersen's satisfaction,
would have caused them to make reference to the subject matter in connection
with their report on our consolidated financial statements for such years; and
(ii) there were no reportable events as defined in Item 304(a)(1)(v) of
Regulation S-K. We have provided Arthur Andersen with a copy of the foregoing
disclosures. Incorporated by reference as Exhibit 16 is a copy of Arthur
Andersen's letter, dated May 13, 2002, stating its agreement with such
statements. During each of our two previous fiscal years and through the May 9,
2002, we did not consult Ernst & Young with respect to the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on our consolidated
financial statements, or any other matters or reportable events as set forth in
Items 304(a)(2)(i) and (ii) of Regulation S-K.
PART III
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this Report:
(a)(1) Financial Statements.
All financial statements of the registrant as set forth under Item 8 of
this report on Form 10-K (see index on Page 15).
(a)(2) Financial Statement Schedules.
Schedule Number Description Page
I Condensed Financial Information of Parent Company 64
All other schedules are omitted because they are included in the
Consolidated Financial Statements, or are not required.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE FAIRCHILD CORPORATION
CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANY
BALANCE SHEETS (NOT CONSOLIDATED)
(In thousands)
June 30, June 30,
2002 2001
---------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 10 $ 562
Short-term investments 55 71
Accounts receivable 940 2,336
Prepaid expenses and other current assets 72,185 74,546
---------------- -----------------
Total current assets 73,190 77,515
Property, plant and equipment, less accumulated depreciation 541 501
Investments in subsidiaries 735,342 880,946
Investments and advances, affiliated companies 93 92
Goodwill - 15,720
Deferred loan fees 10,475 11,944
Investments 60 1,205
Other assets 3,223 2,607
---------------- -----------------
Total assets $ 822,924 $ 990,530
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 2,279 $ 2,250
Accounts payable 27 20
Other Accrued Expenses 66,801 68,109
---------------- -----------------
Total current liabilities 69,107 70,379
Long-term debt 432,297 431,041
Fair market value of interest rate contract 10,989 6,422
Noncurrent and deferred income taxes 58,587 76,217
Other long-term liabilities 407 406
---------------- -----------------
Total liabilities 571,387 584,465
Stockholders' equity:
Class A common stock 3,035 3,034
Class B common stock 262 262
Notes due from stockholders (446) (429)
Treasury stock (76,044) (76,075)
Cumulative comprehensive income (14) (334)
Paid-in capital 232,797 232,820
Retained earnings 91,947 246,787
---------------- -----------------
Total stockholders' equity 251,537 406,065
---------------- -----------------
Total liabilities and stockholders' equity $ 822,924 $ 990,530
================ =================
The accompanying notes are an integral part of these condensed financial
statements.
Schedule I
THE FAIRCHILD CORPORATION
CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANY
STATEMENT OF EARNINGS (NOT CONSOLIDATED)
(In thousands)
For the Twelve Months Ended June 30,
-------------------------------------------------
2002 2001 2000
-------------------------------------------------
Costs and Expenses:
Selling, general & administrative $ 7,556 $ 6,559 $ 6,175
Amortization of goodwill - 808 808
-------------------------------------------------
7,556 7,367 6,983
Operating loss (7,556) (7,367) (6,983)
Net interest income (expense) 18,095 10,831 (42,347)
Investment income (loss), net 13 2,995 6
Fair market value adjustment of interest rate contract (4,567) (5,610) -
Equity in earnings of affiliates (137) 110 (347)
-------------------------------------------------
Earnings (loss) from continuing operations before taxes 5,848 959 (49,671)
Income tax provision (benefit) 3,402 1,394 (6,343)
-------------------------------------------------
Earnings (loss) before equity in earnings (loss) of
Subsidiaries 2,446 (435) (43,328)
Equity in earnings (loss) of subsidiaries (157,286) (14,565) 53,086
-------------------------------------------------
Net earnings (loss) $ (154,840) $ (15,000) $ 9,758
=================================================
The accompanying notes are an integral part of these condensed financial
statements.
Schedule I
THE FAIRCHILD CORPORATION
CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANY
STATEMENT OF CASH FLOWS (NOT CONSOLIDATED)
(In thousands)
For the Twelve Months Ended June 30,
--------------------------------------------------
2002 2001 2000
--------------------------------------------------
Cash provided by (used for) operations $ (1,337) $ (20,891) $ 70,324
Investing Activities:
Purchase of PP&E (125) (106) (5)
Equity investments in affiliates (524) 477 -
Other 155 14 -
--------------------------------------------------
(494) 385 (5)
Financing activities:
Proceeds from issuance of debt, including intercompany 106,439 146,974 52,200
Debt repayments (105,153) (126,624) (122,359)
Issuance of common stock 9 593 368
Other (16) 90 (520)
--------------------------------------------------
1,279 21,033 (70,311)
--------------------------------------------------
Net increase (decrease) in cash $ (552) $ 527 $ 8
==================================================
The accompanying notes are an integral part of these condensed financial
statements.
Schedule I
THE FAIRCHILD CORPORATION
CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANY
NOTES TO FINANCIAL STATEMENTS (NOT CONSOLIDATED)
(In thousands)
1. BASIS OF PRESENTATION
In accordance with the requirements of Regulation S-X of the Securities and
Exchange Commission, our financial statements are condensed and omit many
disclosures presented in the consolidated financial statements and the notes
thereto.
2. LONG-TERM DEBT
June 30, June 30,
2002 2001
---------------- --------------
Bank Credit Agreement $ 209,450 $ 208,291
10 3/4% Senior subordinated Notes Due 2009 225,000 225,000
Capitalized leases 126 -
---------------- --------------
Total Debt 434,576 433,291
================ ==============
Less: Current Maturities (2,279) (2,250)
---------------- --------------
Total long-term debt $ 432,297 $ 431,041
================ ==============
Long-term debt (exclusive of capital lease obligations) maturing over the
next five years is as follows: $2,250 in 2003, $2,250 in 2004, $71,050 in 2005,
$133,900 in 2006, and $0 in 2007.
3. DIVIDENDS FROM SUBSIDIARIES
Cash dividends paid to The Fairchild Corporation by its consolidated
subsidiaries were $47,742 in 2000.
4. CONTINGENCIES
We are involved in various claims and lawsuits incidental to our business,
some of which involve substantial amounts. 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 will not have a material
adverse effect on our financial condition, or future results of operations or
net cash flows.
(a)(3) Exhibits.
A. Articles of Incorporation, Bylaws, and Instruments Defining Rights of
Securities
3.1 Registrant's Restated Certificate of Incorporation (incorporated by
reference to Exhibit "C" of Registrant's Proxy Statement dated October
27, 1989).
3.2 Certificate of Amendment to Registrant's Certificate of Incorporation,
dated November 16, 1990, changing name from Banner Industries, Inc. to
The Fairchild Corporation.
3.3 Registrant's Amended and Restated By-Laws, as amended as of
November 21, 1996 (incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 29, 1996).
3.4 Amendment to the Company's By-Laws, dated as of February 12, 1999
(incorporated by reference to Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1999).
3.5 Amendment to the Company's By-Laws, dated February 17, 2000, together
with Charter for the Board's Audit Committee, adopted on February 17,
2000 (incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended April 2, 2000).
3.6 Amendment to the Company's Charter of the Audit Committee dated
May 10, 2001.
4.1 Specimen of Class A Common Stock certificate (incorporated by reference
to Registration Statement No. 33-15359 on Form S-2).
4.2 Specimen of Class B Common Stock certificate (incorporated by reference
to Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1989).
4.3 Indenture dated as of April 20, 1999, between the Company and
Subsidiary Guarantors and The Bank of New York, as Trustee (relating to
the Company's 10 3/4% Senior Subordinated Notes Due 2009) (incorporated
by reference to Registrant's Registration Statement No. 333-80311 on
Form S-4, declared effective August 9, 1999).
4.4 Form of Global Note (relating to the Company's 10 3/4% Senior
Subordinated Notes Due 2009) (incorporated by reference to Registrant's
Registration Statement No. 333-80311 on Form S-4, declared effective
August 9, 1999).
4.5 Registration Rights Agreement, dated April 15, 1999, between the
Company and Credit Suisse First Boston Corporation on behalf of the
Initial Purchasers (relating to the Company's 10 3/4% Senior
Subordinated Notes Due 2009) (incorporated by reference to Registrant's
Registration Statement No. 333-80311 on Form S-4, declared effective
August 9, 1999).
4.6 Purchase Agreement, dated as of April 15, 1999, between the Company,
the Subsidiary Guarantors and the Initial Purchasers (relating to the
Company's 10 3/4% Senior Subordinated Notes Due 2009) (incorporated by
reference to Registrant's Registration Statement No. 333-80311 on Form
S-4, declared effective August 9, 1999).
B. Material Contracts
B1. (Stock Option Plans)
10.3 Amended and Restated 1986 Non-Qualified and Incentive Stock Option
Plan, dated as of February 9, 1998 (incorporated by reference to
Exhibit B of Registrant's Proxy Statement dated October 9, 1998).
10.4 Amendment Dated May 7, 1998 to the 1986 Non-Qualified and Incentive
Stock Option Plan (incorporated by reference to Exhibit A of
Registrant's Proxy Statement dated October 9, 1998).
10.5 1996 Non-Employee Directors Stock Option Plan (incorporated by
reference to Exhibit B of Registrant's Proxy Statement dated
October 7, 1996).
10.6 Stock Option Deferral Plan dated February 9, 1998 (for the purpose of
allowing deferral of gain upon exercise of stock options) (incorporated
by reference to Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 29, 1998).
10.7 Amendment to the Stock Option Deferral Plan, dated June 28, 2000 (for
the purpose of making an equitable adjustment in connection with the
spin off of Fairchild Bermuda and the receipt of Global Sources shares)
(incorporated by reference to Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 2000).
10.8 Amendment dated May 21, 1999, amending the 1996 Non-Employee Directors
Stock Option Plan (for the purpose of allowing deferral of gain upon
exercise of stock options) (incorporated by reference to Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1999).
10.9 2000 Non-Employee Directors Stock Option Plan (incorporated by
reference to Appendix 2 of Registrant's Proxy Statement dated
October 10, 2000).
10.10 2001 Non-Employee Directors Stock Option Plan (incorporated by
reference to Appendix 1 of Registrant's Proxy Statement dated
October 10, 2000).
B2. (Employee Agreements)
10.11 Amended and Restated Employment Agreement between Registrant and
Jeffrey J. Steiner dated September 10, 1992 (incorporated by reference
to Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1993).
10.12 Employment Agreement between Banner Aerospace, Inc. and Jeffrey J.
Steiner, dated September 9, 1992.
10.13 Restated and Amended Service Agreement between Fairchild Switzerland,
Inc. and Jeffrey J. Steiner, dated April 1, 2001.
10.14 Banner Aerospace, Inc. Deferred Bonus Plan, dated January 21, 1998 (as
amended), to allow the deferral of bonuses in connection with 1998 or
1999 Extraordinary Transactions (incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1999).
10.15 Letter Agreement dated February 27, 1998, between Registrant and John
L. Flynn (incorporated by reference to Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 29, 1998).
10.16 Letter Agreement dated February 27, 1998, between Registrant and Donald
E. Miller (incorporated by reference to Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 29, 1998).
10.17 Officer Loan Program, dated as of February 5, 1999, lending up to
$750,000 to officers for the purchase of Company Stock (incorporated by
reference to Registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 1999).
10.18 Director and Officer Loan Program, dated as of August 12, 1999, lending
up to $2,000,000 to officers and directors for the purchase of Company
Stock (incorporated by reference to Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1999).
10.19 Employment Agreement between Eric Steiner and The Fairchild
Corporation, dated as of August 1, 2000 (incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 2000).
10.20 Employment Agreement between Banner Aerospace, Inc. and Warren D.
Persavich (together with Amendment No. 1 to such Agreement)
(incorporated by reference to Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 2000).
B3. (Credit Agreements)
B3.1. Fairchild Corporation Credit Agreement:
10.21 Credit Agreement dated as of April 20, 1999, among The Fairchild
Corporation (as Borrower), Citicorp. USA, Inc. and certain financial
institutions (incorporated by reference to Registrant's Annual Report
on Form 10-K for the fiscal year ended June 30, 1999).
10.22 Amendment No. 1, dated as of November 29, 1999 to the Credit Agreement
dated as of April 20, 1999 (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
January 2, 2000).
10.23 Amendment No. 2, dated as of March 10, 2000 to the Credit Agreement
dated as of April 20, 1999 (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
April 2, 2000).
B3.2. Warthog, Inc. Credit Agreement:
10.24 Mortgage and Security Agreement with Morgan Guaranty Trust Company of
New York dated March 23, 2000 (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended April
2, 2000).
B3.3. Interest Rate Hedge Agreements:
10.25 ISDA Master (Swap) Agreement between Registrant and Citibank, N.A.
dated as of October 30, 1997 (incorporated by reference to Exhibit
10.36 of Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 28, 1997).
10.26 Amendment No. 1 dated as of August 7, 1998, to the ISDA Master (Swap)
Agreement between Registrant and Citibank, N.A. dated as of
October 30, 1997.
10.27 Confirmation Letter dated as of January 16, 1998, to the ISDA Master
(Swap) Agreement between Registrant and Citibank, N.A. dated as of
October 30, 1997.
B4. (Warrants to Steiner Affiliate):
10.28 Form Warrant Agreement (including form of Warrant) issued by the
Company to Drexel Burnham Lambert on March 13, 1986, subsequently
purchased by Jeffrey Steiner, subsequently assigned to Stinbes Limited
(an affiliate of Jeffrey Steiner) and subsequently assigned to The
Steiner Group, LLC (an affiliate of Jeffrey Steiner), for the purchase
of Class A or Class B Common Stock (incorporated herein by reference to
Exhibit 4(c) of the Company's Registration Statement No. 33-3521 on
Form S-2). (Referred to as the "Steiner Warrant")
10.29 Form Warrant Agreement issued to Stinbes Limited (subsequently assigned
to The Steiner Group, LLC) dated as of September 26, 1997, effective
retroactively as of February 21, 1997 (incorporated by reference to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 28, 1997).
10.30 Extension of Warrant Agreement between Registrant and Stinbes Limited
(subsequently assigned to The Steiner Group, LLC) for 375,000 shares of
Class A or Class B Common Stock dated as of September 26, 1997,
effective retroactively as of February 21, 1997 (incorporated by
reference to Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 28, 1997).
10.31 Amendment of Warrant Agreement dated February 9, 1998, between the
Registrant and Stinbes Limited (subsequently assigned to The Steiner
Group, LLC) (incorporated by reference to Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 29, 1998).
10.32 Amended Warrant Agreement dated December 28, 1998, effective
retroactively as of September 17, 1998, between Registrant and Stinbes
Limited (subsequently assigned to The Steiner Group, LLC) (incorporated
by reference to Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 29, 1999).
B5. (Other Material Contracts):
10.33 Share Purchase Agreement dated as of July 27, 1999 between a Company
subsidiary and Jeffrey Steiner (as Sellers) and American National Can
Group, Inc. (as Buyer), for the sale of all stock of Nacanco Paketleme
A.S. owned by the Sellers (incorporated by reference to Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1999).
10.34 Asset Purchase Agreement dated as of October 22, 1999, among The
Fairchild Corporation, Banner Aerospace, Inc., Dallas Aerospace, Inc.,
and United Technologies Corporation, acting through its Pratt & Whitney
Division (incorporated by reference to the Registrant's Report on Form
8-K dated December 13, 1999).
(a)(3) Exhibits (continued) Other Exhibits
11. Computation of earnings per share (found at Note 14 in Item 8 to
Registrant's Consolidated Financial Statements for the fiscal years
ended June 30, 2002, 2001 and 2000).
*12. Certifications required by Section 906 of the Sarbanes-Oxley Act.
16. Letter from Arthur Andersen LLP to the Securities and Exchange
Commission dated May 9, 2002. (Incorporated by reference to the
Registrant's Report on Form 8-K dated May 9, 2002.)
22 List of subsidiaries of Registrant. (Incorporated by reference to the
registrant to the Registrants Form 10-K date June 30, 2002.)
*23.1 Consent of Ernst &Young LLP, independent auditors.
*23.2 Notice regarding lack of consent of Arthur Andersen LLP.
- -------------------------
*Filed herewith.
(b) Reports on Form 8-K
On May 15, 2002, we filed a Form 8-K to report on Item 4 and Item 7
regarding the change in certifying accountants. On May 9, 2002, upon the
recommendation of our Audit Committee, the Board of Directors dismissed Arthur
Andersen LLP as our independent auditors and appointed Ernst & Young LLP to
serve as our independent auditors for the current fiscal year which ended on
June 30, 2002. The change in auditors was effective immediately.
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 Section 13 or 15(d) of the Securities
Exchange Act of 1934, we have duly caused this report to be signed on our behalf
by the undersigned, thereunto duly authorized.
THE FAIRCHILD CORPORATION
By: /s/ JOHN L. FLYNN
-----------------
John L. Flynn
Chief Financial Officer and
Senior Vice President, Tax
Date: October 22, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant, in
their capacities and on the dates indicated.
By: JEFFREY J. STEINER Chairman, Chief Executive October 22, 2002
/s/ Officer and Director
-------------------------------
Jeffrey J. Steiner
By: MELVILLE R. BARLOW Director October 22, 2002
/s/
-------------------------------
Melville R. Barlow
By: MORTIMER M. CAPLIN Director October 22, 2002
/s/
-------------------------------
Mortimer M. Caplin
By: ROBERT EDWARDS Director October 22, 2002
/s/
-------------------------------
Robert Edwards
By: STEVEN L. GERARD Director October 22, 2002
/s/
-------------------------------
Steven L. Gerard
By: HAROLD J. HARRIS Director October 22, 2002
/s/
-------------------------------
Harold J. Harris
By: DANIEL LEBARD Director October 22, 2002
/s/
-------------------------------
Daniel Lebard
By: HERBERT S. RICHEY Director October 22, 2002
/s/
-------------------------------
Herbert S. Richey
By: ERIC I. STEINER President, Chief Operating October 22, 2002
/s/ Officer and Director
-------------------------------
Eric I. Steiner
CERTIFICATION ACCOMPANYING PERIODIC REPORT
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. 1350)
The undersigned, Jeffrey J. Steiner, Chief Executive Officer of The Fairchild
Corporation ("Company"), hereby certifies that:
1. I have reviewed this annual report on Form 10-K/A of the Company;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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
annual report;
Date: October 22, 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
(18 U.S.C. 1350)
The undersigned, John L. Flynn, Chief Financial Officer of The Fairchild
Corporation ("Company"), hereby certifies that:
1. I have reviewed this annual report on Form 10-K/A of the Company;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
Date: October 22, 2002 /s/ JOHN L. FLYNN
-----------------
John L. Flynn
Chief Financial Officer and
Senior Vice President, Tax