- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
June 30, 2002
Date of Report (Date of earliest event reported)
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)
- --------------------------------------------------------------------------------
Item 5. OTHER EVENTS
We have restated our previously issued financial statements to reflect, as
discontinued operations, the disposition of our fastener business and our
intention to sell APS. Because of the reclassification of the fastener business
and APS as a discontinued operation, we are required to retroactively restate
our financial statements for the years ended June 30, 2000 and June 30, 2001,
which were previously audited by Arthur Andersen LLP. Since Arthur Andersen is
no longer issuing audit opinions, our current auditors have completed a reaudit
of our financial statements for the periods ended June 30, 2000 and June 30,
2001. Accordingly, we are filing our consolidated balance sheets as of June 30,
2002 and 2001 and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years June 30, 2002, 2001 and 2000.
We are also filing management's discussion and analysis of result of operations
and financial condition for the same periods.
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) 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 3
Consolidated Balance Sheets as of June 30, 2002 and 2001 4
Consolidated Statements of Earnings for each of the
Three Years Ended June 30, 2002, 2001, and 2000 6
Consolidated Statements of Stockholders' Equity for each
of the Three Years Ended June 30, 2002, 2001, and 2000 8
Consolidated Statements of Cash Flows for each of the
Three Years Ended June 30, 2002, 2001, and 2000 9
Notes to Consolidated Financial Statements 10
Management's Discussion and Analysis of Results of
Operations and Financial Condition 41
Quantitative and Qualitative Disclosures about Market Risk 53
Controls and Procedures 54
(b) Pro Forma Financial Information.
Not Applicable.
(c) Exhibits
*12.1 Certifications required by Section 302 of the Sarbanes-Oxley Act.
*12.2 Certifications required by Section 906 of the Sarbanes-Oxley Act.
*23.1 Consent of Independent Auditors
* Filed herewith.
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors of The Fairchild Corporation:
We have audited the accompanying consolidated balance sheets of The Fairchild
Corporation and subsidiaries (the "Company") as of June 30, 2002 and 2001, and
the related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
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, the 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 2001, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2002, in conformity with accounting principles
generally accepted in the United States.
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."
As discussed in Note 1 to the consolidated financial statements, effective July
1, 2001, the Company adopted Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
/s/ Ernst & Young LLP
McLean, Virginia
March 28, 2003
THE FAIRCHILD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS June 30, June 30,
2002 2001
-----------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 14,810 $ 13,767
Short-term investments 966 4,218
Accounts receivable-trade, less allowances of $2,577 and $1,895 12,232 17,025
Inventories:
Finished goods 20,382 25,015
Work-in-process 1,555 999
Raw materials 1,311 1,747
-----------------------------------
23,248 27,761
Current assets of discontinued operations 286,769 294,466
Prepaid expenses and other current assets 3,891 10,906
-----------------------------------
Total Current Assets 341,916 368,143
-----------------------------------
Property, plant and equipment, net of accumulated
depreciation of $22,228 and $14,770 119,757 126,579
Net noncurrent assets held for sale 9,928 13,699
Noncurrent assets of discontinued operations 384,145 518,683
Goodwill 17,438 36,758
Investments and advances, affiliated companies 3,261 2,813
Prepaid pension assets 64,693 65,249
Deferred loan costs 10,925 12,916
Long-term investments 5,360 7,779
Notes receivable 11,275 4,935
Deferred income tax assets 16,611 -
Other assets 6,809 6,476
-----------------------------------
TOTAL ASSETS $ 992,118 $ 1,164,030
-----------------------------------
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 9,456 11,916
Accrued liabilities:
Salaries, wages and commissions 4,625 11,960
Employee benefit plan costs 2,025 2,224
Insurance 10,465 10,527
Interest 6,365 6,517
Other accrued liabilities 21,294 30,068
Current deferred income taxes 702 -
Current liabilities of discontinued operations 69,059 86,591
-----------------------------------
Total Current Liabilities 177,870 186,331
-----------------------------------
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 13,569 15,628
Retiree health care liabilities 28,011 28,559
Noncurrent deferred income taxes - 39,916
Noncurrent income taxes 53,791 27,072
Noncurrent liabilities of discontinued operations 39,749 25,805
-----------------------------------
TOTAL LIABILITIES 761,896 800,263
-----------------------------------
STOCKHOLDERS' EQUITY:
Class A common stock, $0.10 par value; 40,000 shares authorized,
30,354 (30,342 in 2001) shares issued and 22,540 (22,528 in 2001);
shares outstanding; entitled to one vote per share 3,035 3,034
Class B common stock, $0.10 par value; 20,000 shares authorized,
2,622 shares issued and outstanding; entitled to ten votes per share 262 262
Paid-in capital 232,797 232,820
Treasury stock, at cost, 7,814 shares of Class A common stock (76,532) (76,563)
Retained earnings 94,153 248,701
Notes due from stockholders (1,831) (1,767)
Cumulative other comprehensive income (21,662) (42,720)
-----------------------------------
TOTAL STOCKHOLDERS' EQUITY 230,222 363,767
-----------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 992,118 $ 1,164,030
-----------------------------------
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,
----------------------------------------------------
REVENUE: 2002 2001 2000
----------------------------------------------------
Net sales $ 76,531 $ 94,192 $ 111,669
Rental revenue 7,159 7,498 4,051
----------------------------------------------------
83,690 101,690 115,720
COSTS AND EXPENSES:
Cost of goods sold 61,059 72,030 85,478
Cost of rental revenue 4,917 4,622 2,507
Selling, general & administrative 39,594 40,517 47,108
Other (income) expense, net (4,293) (4,181) (9,292)
Amortization of intangibles - 1,097 1,103
Impairment charges 3,435 4,750 -
----------------------------------------------------
104,712 118,835 126,904
OPERATING LOSS (21,022) (17,145) (11,184)
Interest expense 49,650 55,605 47,251
Interest income (4,304) (1,684) (4,673)
----------------------------------------------------
Net interest expense 45,346 53,921 42,578
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
----------------------------------------------------
Loss from continuing operations before income taxes (71,927) (68,309) (15,202)
Income tax benefit 16,047 28,676 12,653
Equity in earnings (loss) of affiliates, net (138) 110 (346)
----------------------------------------------------
Loss from continuing operations 56,018) (39,523) (2,895)
Earnings from discontinued operations, net 46,070 24,337 25,137
Loss on disposal of discontinued operations, net - - (12,006)
Cumulative effect of change in accounting for goodwill (144,600) - -
----------------------------------------------------
NET EARNINGS (LOSS) $ (154,548) $ (15,186) $ 10,236
----------------------------------------------------
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 (626) (1,028) (3,961)
----------------------------------------------------
Other comprehensive income (loss) 21,058 (25,958) (14,059)
----------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ (133,490) $ (41,144) $ (3,823)
----------------------------------------------------
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:
Loss from continuing operations $ (2.23) $ (1.57) $ (0.12)
Earnings from discontinued operations, net 1.83 0.97 1.01
Loss on disposal of discontinued operations, net - - (0.48)
Cumulative effect of change in accounting for goodwill (5.75) - -
----------------------------------------------------
NET EARNINGS (LOSS) $ (6.15) $ (0.60) $ 0.41
----------------------------------------------------
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 INCOME (LOSS) $ (5.31) $ (1.63) $ (0.15)
----------------------------------------------------
Weighted average shares outstanding:
Basic 25,155 25,122 24,954
----------------------------------------------------
Diluted 25,155 25,122 24,954
----------------------------------------------------
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) $253,651 $ - $ (2,703) $409,121
Net earnings - - - - 10,236 - - 10,236
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 changes on
available-for-sale securities - - - - - - (3,961) (3,961)
-----------------------------------------------------------------------------------------------
Balance, June 30, 2000 3,008 262 231,190 (75,506) 263,887 (1,867) (16,762) 404,212
Net loss - - - - (15,186) - - (15,186)
Cumulative translation adjustmen - - - - - - (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) 248,701 (1,767) (42,720) 363,767
Net loss - - - - (154,548) - - (154,548)
Cumulative translation adjustmen - - - - - - 21,621 21,621
Issuance of deferred
Compensation unit 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) $94,153 $ (1,831) $ (21,662) $230,222
---------------------------------------------------------------------------------------------
<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,
--------------------------------------------
2002 2001 2000
--------------------------------------------
Cash flows from operating activities:
Net earnings (loss) $ (154,548) $ (15,186) $ 10,236
Depreciation and amortization 5,161 6,087 4,777
Deferred loan fee amortization 2,084 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 4,750 -
(Gain) loss on sale of property, plant, and equipment 45 386 (1,964)
Equity in earnings (loss) of affiliates, net 138 (110) 346
Paid-in kind interest income (653) - -
Unrealized holding loss on interest rate contract 4,567 5,610 -
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 4,792 3,224 (48)
Change in inventories 4,513 2,691 (2,436)
Change in prepaid expenses and other current assets 7,146 33,461 4,542
Change in other non-current assets (19,583) (3,178) (38,983)
Change in accounts payable, accrued liabilities and other long-term liabilities (5,221) (104,062) 3,754
Non-cash charges and working capital changes of discontinued operations 19,959 32,494 (14,896)
--------------------------------------------
Net cash provided by (used for) operating activities 19,388 (40,156) (71,303)
Cash flows from investing activities:
Purchase of property, plant and equipment (2,450) (3,832) (20,836)
Proceeds from sale of plant, property and equipment 315 1,543 12,693
Proceeds received from available-for-sale investment securities, net 1,755 28,460 15,701
Equity investment in affiliates (524) 477 (2,489)
Net proceeds received from divestiture of investment in affiliates - - 46,886
Net proceeds received from the sale of subsidiaries - - 61,906
Net proceeds received from the sale of discontinued operations - - 7,100
Changes in net assets held for sale 3,679 1,491 1,133
Changes in notes receivable (5,817) (170) -
Investing activities of discontinued operations (6,590) (9,736) (26,445)
--------------------------------------------
Net cash provided by (used for) investing activities (9,632) 18,233 95,649
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 (64) 100 (1,867)
--------------------------------------------
Net cash provided by (used for) financing activities (9,655) 15,438 (41,373)
Effect of exchange rate changes on cash 942 (832) (997)
--------------------------------------------
Net change in cash and cash equivalents 1,043 (7,317) (18,024)
Cash and cash equivalents, beginning of the year 13,767 21,084 39,108
--------------------------------------------
Cash and cash equivalents, end of the year $ 14,810 $ 13,767 $ 21,084
--------------------------------------------
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:
Restatements: We have restated our previously issued financial statements
to reflect, as discontinued operations, the disposition of our fastener business
and our intention to sell APS. Because of the reclassification of the fastener
business and APS as a discontinued operation, we are required to retroactively
restate our financial statements for the years ended June 30, 2000 and June 30,
2001, which were previously audited by Arthur Andersen LLP. Since Arthur
Andersen is no longer issuing audit opinions, our current auditors have
completed a reaudit of our financial statements for the periods ended June 30,
2000 and June 30, 2001. Our net earnings increased by $292 and $478 in fiscal
2002 and 2000, respectively, and decreased by $186 in fiscal 2001 from our
previously reported results. We have restated our retained earnings at July 1,
1999, from the previously reported balance of $252,029 to $253,651. These
differences reflect a change in our method of accounting for our inventory
costing at two of our domestic manufacturing operations at our fastener business
from the last-in, first-out ("LIFO") method, to the first-in, first-out ("FIFO")
method.
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. Fairchild Holding
Corp. is our indirect 100% owned subsidiary. Fairchild Holding Corp. is the
owner of Fairchild Aerostructures, Inc., and the indirect owner of 100% of
Warthog Inc. Our principal operations are conducted through Banner Aerospace,
Fairchild Aerostructures, and Warthog. Our financial statements present the
results of our former fastener business, a small subsidiary being sold,
known as APS, and our former technologies segment, as discontinued operations.
Nature of Business Operations: Our business consists of three segments:
aerospace distribution, aerospace manufacturing and real estate operations. 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 worldwide. Our
aerospace manufacturing segment primarily manufactures airframe components. Our
real estate operations segment owns and leases a shopping center located in
Farmingdale, New York, and owns and rents one property located in Southern
California.
Recent Developments: On December 3, 2002, we completed the sale of our
fastener business to Alcoa Inc. for approximately $657 million in cash and the
assumption of certain liabilities. The cash received from Alcoa is subject to a
post-closing adjustment based upon the net working capital of the fastener
business on December 3, 2002, compared with its net working capital as of March
31, 2002. We may also receive additional cash proceeds up to $12.5 million per
year over the four-year period from 2003 to 2006, if the number of commercial
aircraft delivered by Boeing and Airbus exceeds specified annual levels. (See
Note 15 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 consist principally 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 do not generally 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 $1,112, respectively, all of which is maintained as collateral for certain
debt facilities and tenant deposits. Restricted cash is classified with
short-term investments on our balance sheet.
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 $ 1,895 $ 2,406 $ 3,414
Charges to cost and expenses 2,629 448 1,823
Charges to other accounts (a) 3 14 (2,820)
Amounts written off (1,950) (973) (11)
--------------------------------------------
Ending balance $ 2,577 $ 1,895 $ 2,406
--------------------------------------------
<FN>
(a) Represent recoveries of amounts written off in prior periods,
offset by the allowance in doubtful accounts from a business sold in
2000.
</FN>
Inventories: Inventories are stated at the lower of cost or market. Cost
is determined using the first-in, first-out ("FIFO") method.
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. We own and operate a
shopping center located in Farmingdale, New York, which 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. Depreciation expense from continuing operations was $5,067, $4,851,
and $3,674, in 2002, 2001, and 2000, respectively. Property, plant and equipment
consisted of the following:
June 30, June 30,
2002 2001
-------------------------------
Land $ 49,295 $ 49,295
Building and improvements 70,611 70,732
Machinery and equipment 14,689 13,862
Transportation vehicles 327 302
Furniture and fixtures 4,313 3,992
Construction in progress 2,750 3,166
-------------------------------
Property, plant and equipment, at cost 141,985 141,349
Less: Accumulated depreciation 22,228 14,770
-------------------------------
Net property, plant and equipment $ 119,757 $ 126,579
-------------------------------
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 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. The net assets of Fairchild Aerostructures, a
small airframe manufacturing operation located in our aerospace manufacturing
segment, were reclassified from net assets held for sale as a result of a
potential sale of this business not being consummated.
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 $1,097 and $1,113 from
continuing operations in 2001 and 2000, respectively, and $11,409 and $11,471
from discontinued operations 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 $2,084, $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 $4.8 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 manufacturing segment, and $0.4 million to write-off tenant
improvements at our shopping center. The fiscal 2001 impairment charge included
a write-off of approximately $2.3 million of improvements at our shopping
center; and $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,
included as partial offset to earnings from discontinued operations in fiscal
2001, was an impairment charge of $1.1 million that was recognized to write-off
leasehold improvements from the relocation of a domestic distribution facility
of our fasteners business.
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 capitalized interest expense and
property taxes relating to certain real estate property 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. See Note 8. 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.
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 have accounted for the sale of our fastener business as a
discontinued operation as of December 3, 2002, the date of the sale.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections as of April 2002". SFAS No. 145
eliminates the requirement to report material gains or losses from debt
extinguishments as an extraordinary item, net of tax, in an entity's statement
of earnings. SFAS No. 145 requires instead that a gain or loss recognized from a
debt extinguishment be classified as an extraordinary item only when the
extinguishment meets the criteria of both "unusual in nature" and "infrequent in
occurrence" as prescribed under Accounting Principles Bulletin No. 30,
"Reporting the Result of Operations - Reporting the Effects of Disposal of a
Segment of Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". This statement is effective for our fiscal year
beginning on July 1, 2002.
In July 2002, the FASB issued Statement of Financial Accounting Standards
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.
On December 31, 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure". Statement 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation", to provide alternative methods of transition to
Statement 123's fair value method of accounting for stock-based employee
compensation. Statement 148 also amends the disclosure provisions of Statement
123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure
in the summary of significant accounting policies, of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share, in annual and interim financial statements.
While the Statement does not amend Statement 123 to require companies to account
for employee stock options using the fair value method, the disclosure
provisions of Statement 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that compensation
using the fair value method of Statement 123 or the intrinsic value method of
Opinion 25. We are currently accounting for stock options using the intrinsic
value method of Opinion 25. Under the intrinsic value method, compensation
expense determined under the fair value method is not recognized in the income
statement, but the effects are disclosed. Previous to Statement 148, the
disclosure was required only in annual financial statements. Beginning with our
fiscal 2003 third quarter 10-Q, the disclosures will also be required quarterly.
2. BUSINESS 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.
Please see Note 15 "Discontinued Operations", regarding other operations
divested by us.
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, presented as a cumulative effect of change
in accounting, as of the beginning of our fiscal year. Of this amount, $19.3
million relates to our Fairchild Aerostructures operating unit in our aerospace
manufacturing segment, and $125.3 million relates to our fastener business sold
to Alcoa on December 3, 2002. 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. We have
selected the 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) $ (154,548) $ (15,186) $ 10,236
Add back: Goodwill amortization (a) - 12,506 12,574
------------------------------------------
Adjusted net income (loss) $ (154,548) $ (2,680) $ 22,810
------------------------------------------
Basic and Diluted income (loss) per share:
Reported net income (loss) $ (6.15) $ (0.60) $ 0.41
Add back: Goodwill amortization - 0.50 0.50
------------------------------------------
Adjusted net income (loss) $ (6.15) $ (0.10) $ 0.91
------------------------------------------
<FN>
(a) - Includes goodwill amortization expense from discontinued operations
of $11,409 and $11,471 in 2001 and 2000, respectively.
</FN>
The changes in the carrying amount of goodwill for the year ended June 30,
2002, are as follows:
Aerospace Aerospace Discontinued
Distribution Manufacturing Operations Total
-----------------------------------------------------------------
Balance as of June 30, 2001 $ 17,438 $ 19,320 $ 382,391 $ 419,149
Goodwill written off on adoption of SFAS No. 142 - (19,320) (125,280) (144,600)
-----------------------------------------------------------------
Balance as of June 30, 2002 $ 17,438 $ - $ 257,111 $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 not 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 $89,235
Operating income (loss) (13,248)
Loss from continuing operations (30,555)
Basic and diluted loss from continuing operations, per share (1.22)
Net loss (9,170)
Basic loss per share (0.37)
Diluted loss per share (0.37)
5. INVESTMENTS
Investments at June 30, 2002 consist primarily of restricted cash and
investments in common stock of 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
-------------------------- ---------------------------
Money market and other cash funds - restricted $ 472 $ 472 $ 1,112 $ 1,112
Trading securities - equity 355 574 2,175 2,875
Available-for-sale equity securities 84 200 876 912
Other investments 55 55 55 55
-------------------------- ---------------------------
$ 966 $ 1,301 $ 4,218 $ 4,954
-------------------------- ---------------------------
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 (loss) 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 $(138), $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 $94,153 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 were 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. As a result of the sale of the
fastener business on December 3, 2002, we redeemed for cash the debentures held
by the third party, and the third party then satisfied 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
Prior to December 3, 2002, we maintained 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. All of the credit facilities
under the credit agreement were paid in full on December 3, 2002.
We were 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.
Additionally, the credit agreement restricted 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
were pledged as collateral under the credit agreement. The credit agreement
restricted 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. At
June 30, 2002, we were in compliance with the covenants under the credit
agreement. On December 3, 2002, a portion of the proceeds received from the sale
of our fastener business was used to repay all of the debt borrowed 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%. This loan was paid in full on February 1, 2003.
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 December 3, 2002, a portion of the
proceeds received from the sale of our fastener business was used to repay all
of the $225,000 of 10 3/4% senior subordinated notes.
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 did not exercise a one-time option to cancel the agreement, and the
transaction will proceed, using a fixed LIBOR rate of 6.745% from 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
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 did not exercise a one-time option to
cancel the agreement, and the transaction will proceed, using a fixed LIBOR rate
of 6.745% from 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 the assets 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
$177, $184, and $177 for 2002, 2001, and 2000, respectively. Our accrual was
approximately $40,626 and $40,391 as of June 30, 2002 and 2001, respectively,
for postretirement health care benefits related to discontinued operations. This
represents 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. Discontinued operations benefit expenses
related to the fastener business was $1,338, $1,078, and $888, 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 July 1, $ 47,315 $ 42,587
Service cost 13 16
Interest cost 3,264 3,315
Plan participants' contributions 1,084 -
Plan amendments (2,544) -
Actuarial gains 4,886 6,218
Benefit payments (5,446) (4,821)
------------------------------
Accumulated postretirement benefit obligation at June 30, $ 48,572 $ 47,315
------------------------------
In fiscal 1998, we amended a former subsidiary's medical plan to increase
the retirees' contribution rate to approximately 20% of the negotiated premium.
Such plan amendment resulted in a $1,003 decrease to the accumulated
postretirement benefit obligation and is being amortized as an unrecognized
prior service credit over the average future lifetime of the respective
retirees.
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:
2002 2001
------------------------------
Accumulated postretirement benefit obligation $ 48,572 $ 47,315
Unrecognized prior service credit 3,203 728
Unrecognized net loss (19,584) (15,620)
------------------------------
Accrued postretirement benefit liability $ 32,191 $ 32,423
------------------------------
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, a 10.0% annual rate of
increase in the per capita claims cost of covered health care benefits was
assumed 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 $ 13 $ 16 $ 14
Interest cost on accumulated postretirement benefit obligation 3,264 3,315 3,133
Amortization of prior service credit (69) (69) (69)
Amortization of net loss 922 534 583
----------------------------------------
Net periodic postretirement benefit cost $ 4,130 $ 3,796 $ 3,661
----------------------------------------
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 $ (14,010) $ (27,784) $ (23,721)
State 230 311 399
Foreign 385 92 215
---------------------------------------------
Total current $ (13,395) $ (27,381) $ (23,107)
Deferred:
Federal $ (2,039) $ (1,978) $ 9,327
State (613) 683 1,127
---------------------------------------------
Total deferred $ (2,652) $ (1,295) $ 10,454
---------------------------------------------
Total tax provision (benefit) $ (16,047) $(28,676) $ (12,653)
---------------------------------------------
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 $ (25,175) $ (23,908) $ (5,321)
State income taxes, net of federal tax benefit (464) 884 1,387
Nondeductible acquisition valuation items - 226 2,589
Tax on foreign earnings (2,289) (1,671) (2,282)
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 12,796 (3,500) (7,800)
Extraterritorial income exclusion (265) - -
Other, net (650) (707) 265
----------------------------------------------
Net tax provision (benefit) $ (16,047) $ (28,676) $ (12,653)
----------------------------------------------
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 $ 4,976 $ 5,816
Asset basis differences 215 8,207
Inventory 5,416 8,942
Employee compensation and benefits 2,405 6,702
Environmental reserves 3,386 4,765
Postretirement benefits 13,067 11,913
Net operating loss, capital loss and credit carryforwards 110,595 83,799
Other 6,596 1,042
-----------------------------------
Total deferred tax assets $ 146,656 $ 131,186
Less: Valuation allowance (110,595) (83,798)
-----------------------------------
Net deferred tax assets $ 36,061 $ 47,388
-----------------------------------
Deferred tax liabilities:
Asset basis differences $ (711) (61,154)
Pensions (19,442) (20,957)
-----------------------------------
Total deferred tax liabilities $ (20,153) $ (82,111)
-----------------------------------
Net deferred tax assets (liabilities) $ 15,908 $ (34,723)
-----------------------------------
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 in
2013; $56,566 in 2019; $60,868 in 2020; $53,671 in 2021; and $43,125 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 $ - $ 5,195
----------------------------
Noncurrent deferred tax assets $ 16,611 $ -
----------------------------
Current liabilities:
Deferred income taxes $ 702 $ -
----------------------------
Noncurrent income tax liabilities:
Noncurrent deferred $ - $39,916
Other noncurrent 53,791 27,072
----------------------------
$ 53,791 $66,988
----------------------------
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 $12,796, $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 $54 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, $79,961 related to
Discontinued Operations and $405 related to Continuing Operations.
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 $ (154,548) $ (15,186) $ 10,236
Pro forma (156,484) (17,109) 8,574
Basic and diluted earnings (loss) per share:
As reported $ (6.15) $ (0.60) $ 0.41
Pro forma (6.22) (0.68) 0.34
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 $ (56,018) $ (39,523) $ (2,895)
----------------------------------------------
Weighted average common shares outstanding 25,155 25,122 24,954
----------------------------------------------
Basic earnings per share:
Basic earnings (loss) from continuing operations per share $ (2.23) $ (1.57) $ (0.12)
----------------------------------------------
Diluted earnings per share:
Earnings (loss) from continuing operations $ (56,018) $ (39,523) $ (2,895)
----------------------------------------------
Weighted average common shares outstanding 25,155 25,122 24,954
Diluted effect of options antidilutive antidilutive antidilutive
Diluted effect of warrants antidilutive antidilutive antidilutive
----------------------------------------------
Total shares outstanding 25,155 25,122 24,954
----------------------------------------------
Diluted earnings (loss) from continuing operations per share $ (2.23) $ (1.57) $ (0.12)
----------------------------------------------
The computation of diluted loss from continuing operations per share for
2002, 2001 and 2000 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.
15. DISCONTINUED OPERATIONS
Fastener Business
On December 3, 2002, we completed the sale of our fastener business to
Alcoa Inc. for approximately $657 million in cash and the assumption of certain
liabilities. The cash received from Alcoa is subject to a post-closing
adjustment based upon the net working capital of the fastener business on
December 3, 2002, compared with its net working capital as of March 31, 2002. We
may also receive additional cash proceeds up to $12.5 million per year over the
four-year period from 2003 to 2006, if the number of commercial aircraft
delivered by Boeing and Airbus exceeds specified annual levels.
In connection with the sale, we have deposited with an escrow agent $25
million to secure indemnification obligations we may have to Alcoa. The escrow
period is five years, but funds may be held longer if claims are asserted and
unresolved. In addition, for a period of five years after the closing, we are
required to maintain our corporate existence, take no action to cause our own
liquidation or dissolution, and take no action to declare or pay any dividends
on our common stock.
The sale of the fastener business has reduced our dependence upon the
aerospace industry. Additionally, the sale has allowed us to eliminate
substantially all of our debt. We used a portion of the proceeds from the sale
to repay our bank debt and to acquire by tender all of our outstanding $225
million 10.75% senior subordinated notes due in April 2009, leaving us with only
a $30.8 million non-recourse term loan on our shopping center and $3.7 million
of debt at Fairchild Aerostructures. On February 3, 2003, we paid off the $30.8
million non-recourse term loan. We plan to use the remaining proceeds from the
sale to fund acquisition opportunities.
APS
In February 2003, our Board of Directors adopted a formal plan for the sale
of APS, a small operation in our aerospace manufacturing segment, which has been
unprofitable. Based on our formal plan, APS is available for sale immediately,
and we believe that it is probable that we can consummate a sale of APS by
December 2003. Accordingly, the results of APS are being reported as a
discontinued operation.
The results of the fastener business and APS are recorded as earnings from
discontinued operations, the components of which are as follows:
2002 2001 2000
------------------------------------------
Net sales $ 547,562 $ 528,620 $ 523,692
Cost of goods sold 410,724 394,638 385,750
------------------------------------------
Gross margin 136,838 133,982 137,942
Selling, general & administrative expense 88,748 95,998 103,804
Other (income) expense, net (254) (156) (1,085)
------------------------------------------
Operating income 48,344 38,140 35,223
Net interest expense 1,409 1,796 1,514
------------------------------------------
Earnings from discontinued operations before income taxes 46,935 36,344 33,709
Income tax provision (865) (12,007) (8,572)
------------------------------------------
Net earnings from discontinued operations $ 46,070 $ 24,337 $ 25,137
------------------------------------------
The assets and liabilities of the fastener business and APS were reported
as assets and liabilities discontinued operations at June 30, 2002 and June 30,
2001, and were as follows:
June 30, June 30,
2002 2001
------------------------
Current assets of discontinued operations:
Short-term investments $ 87 $ 72
Accounts receivable 98,977 103,138
Inventories 164,297 164,415
Deferred taxes 11,723 7,036
Prepaid and other current assets 11,685 19,805
------------------------
$286,769 $ 294,466
------------------------
Noncurrent assets of discontinued operations:
Property, plant and equipment $ 304,044 $ 281,261
Accumulated depreciation (178,318) (145,405)
Goodwill 257,111 382,391
Notes receivable 223 204
Other assets 1,085 232
------------------------
$ 384,145 $ 518,683
------------------------
Current liabilities of discontinued operations:
Accounts payable (30,470) (45,708)
Accrued liabilities (38,589) (40,883)
------------------------
$(69,059) $(86,591)
------------------------
Noncurrent liabilities of discontinued operations:
Retiree health care liabilities (14,640) (13,328)
Noncurrent deferred income taxes (20,888) (8,770)
Other long-term liabilities (4,221) (3,707)
------------------------
$(39,749) $(25,805)
------------------------
Total net assets of discontinued operations $ 562,106 $ 700,753
------------------------
Fairchild Technologies
Based on a formal plan, we 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.
16. 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. Subsequent to June 30, 2002, no new loans will be made to executive
officers or directors.
On November 16, 1999, Mr. Richey borrowed $46 from us to exercise stock
options and hold our Class A common stock. The loan matured on November 16, 2002
and bore interest at 5.5%. The loan balance was $53 at June 30, 2002, and has
since been repaid.
The Company has been informed by counsel to Mr. Jeffrey Steiner that on
March 17, 2003, a trial commenced in France with respect to charges by French
authorities against thirty-seven defendants, including Mr. Steiner, in the Elf
Bidermann case. Mr. Steiner's counsel has informed the Company that the charges
against Mr. Steiner are that in 1989 and 1990 he allegedly facilitated and
benefited from the misuse of funds at Elf Acquitaine, a French petroleum
company, allegedly committed by a former official of Elf Acquitaine, and/or
Maurice Bidermann, against whom the Company had prevailed in litigation. Mr.
Steiner has informed the Company that these charges are without merit, and that
he will vigorously defend himself against them. The Company had previously
disclosed that an investigation was pending, that the Company had provided a
surety for Mr. Steiner and, since June 1996, has paid his legal expenses
totaling approximately $5 million in connection with these charges, 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.
17. LEASES
Operating Leases
We hold certain of our facilities and equipment under long-term leases. The
minimum rental commitments under non-cancelable operating leases from both
continuing and discontinued operations 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 both continuing and discontinued
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 $359 for 2003; $176 for 2004; $37 for 2005; $23 for
2006; and $12 for 2007. At June 30, 2002, the present value of capital lease
obligations was $607, including imputed interest of $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
Our real estate operations segment owns and operates a 451,000 square foot
shopping center located in Farmingdale, New York and also owns and leases a
102,000 square foot building in Chatsworth, California. 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 $6,788 in
2003; $7,198 in 2004; $7,128 in 2005; $7,067 in 2006; $7,067 in 2007; and
$45,023 thereafter. Certain tenants of the shopping center have options to
extend their lease term by an additional 5 to 35 years. Rental property under
operating leases consists of the following:
June 30, June 30,
2002 2001
----------------------------
Land and improvements $24,302 $24,302
Buildings and improvements 57,349 57,228
Tenant improvements 9,121 9,445
Less: Accumulated depreciation (5,915) (3,262)
----------------------------
$84,857 $87,713
----------------------------
The tenant leasing our building in Chatsworth, California has an option to
purchase the property for $4.5 million.
18. 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.
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
On January 21, 2003, we and one of our subsidiaries were served with a
third-party complaint in an action brought in New York by a non-employee worker
and his spouse alleging personal injury as a result of exposure to
asbestos-containing products. The defendant, which is one of many defendants in
the action, had purchased a pump business from us, and asserts the right to be
indemnified by us under its purchase agreement. While the purchaser has notified
us of, and claimed a right to indemnity from us against other asbestos-related
claims against it, this is the only instance in which a suit has been instituted
against us. We have not received enough information to assess the impact, if
any, of the other claims.
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 litigation against us, including that mentioned above, will not have a
material adverse effect on our financial condition, future results of operations
or net cash flows.
19. BUSINESS SEGMENT INFORMATION
We report in three principal business segments. The aerospace distribution
segment distributes a wide range of aircraft parts and related support services
to the aerospace industry. The aerospace manufacturing segment includes the
manufacture of airframe components. 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
Distribution Manufacturing (c) Estate Corporate Total
-------------------------------------------------------------------------------------------
Fiscal 2002:
Revenues $ 63,298 $ 13,233 $ 7,159 $ - $ 83,690
Operating Income (Loss) (a) 2,579 (6,276) 1,550 (18,875) (21,022)
Capital Expenditures 545 344 1,122 439 2,450
Depreciation 679 1,201 2,744 537 5,161
Identifiable Assets at June 30 49,358 677,164 120,320 145,276 992,118
Fiscal 2001:
Revenues $ 85,908 $ 8,284 $ 7,498 $ - $ 101,690
Operating Income (Loss) (b)(d) 2,259 (2,093) 307 (17,618) (17,145)
Capital Expenditures 751 1,068 1,641 372 3,832
Depreciation and Amortization (d) 1,140 1,962 2,268 717 6,087
Identifiable Assets at June 30 58,643 847,881 120,550 136,956 1,164,030
Fiscal 2000:
Revenues $ 101,002 $ 9,928 $ 4,051 $ 739 $ 115,720
Operating Income (Loss) (d) 7,536 (1,189) 1,483 (19,014) (11,184)
Capital Expenditures 630 141 19,723 342 20,836
Depreciation and Amortization (d) 1,198 2,268 894 417 4,777
Identifiable Assets at June 30 65,420 879,782 126,448 199,229 1,270,879
<FN>
(a) Fiscal 2002 results include one-time impairment expenses of $3.0 million in
the aerospace manufacturing segment and $0.4 million in the real estate
operations segment.
(b) Fiscal 2001 results include one-time impairment expenses of $2.4 million in
the aerospace distribution segment, and $2.4 million in the real estate
operations segment.
(c) Identifiable assets in the aerospace manufacturing segment included short
term and long term assets for discontinued operations of $670,914,
$813,149, $833,683 in fiscal 2002, 2001, and 2000 respectively.
(d) Fiscal 2001 and 2000 results include goodwill amortization expense of $520
and $523, respectively, in our aerospace distribution segment and goodwill
amortization expense of $577 and $580, respectively, in our aerospace
manufacturing segment.
</FN>
20. 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:
Revenues by geographic area $ 83,690 $ - $ - $ - $ 83,690
Operating income (loss) by geographic area (23,181) 2,159 - - (21,022)
Earnings (loss) from continuing operations before taxes (74,084) 2,157 - - (71,927)
Identifiable assets by geographic area at June 30 (a) 803,146 179,224 8,079 1,669 992,118
Long-lived assets by geographic area at June 30 (b) 322,457 39,847 1,575 848 364,727
Fiscal 2001:
Revenues by geographic area $ 101,690 $ - $ - $ - $ 101,690
Operating income (loss) by geographic area (c) (17,018) (127) - - (17,145)
Loss from continuing operations before taxes (c) (68,442) 133 - - (68,309)
Identifiable assets by geographic area at June 30 (a) 986,758 168,729 7,678 865 1,164,030
Long-lived assets by geographic area at June 30 (b) 323,837 38,458 1,515 12 363,822
Fiscal 2000:
Revenues by geographic area $ 99,168 $ 16,552 $ - $ - $ 115,720
Operating income (loss) by geographic area (c) (14,682) 3,498 - - (11,184)
Earnings from continuing operations before taxes (c) (18,613) 3,411 - - (15,202)
Identifiable assets by geographic area at June 30 (a) 1,016,559 244,106 9,399 815 1,270,879
Long-lived assets by geographic area at June 30 (b) 348,668 43,094 2,016 1,839 395,617
<FN>
(a) Identifiable assets related to discontinued operations in the United
States, Europe, Australia, and Other were $470,699, $178,714, $8,079,
$1,669 in fiscal 2002, $628,841, $168,729, $7,678, $865 in fiscal 2001, and
$631,062, $192,407, $9,399, $815 in fiscal 2000 respectively.
(b) Long-lived assets related to discontinued operations in the United States,
Europe, Australia, and Other were $85,068, $39,847, $1,575, $848 in fiscal
2002, $96,330, $38,412, $1,515, $12 in fiscal 2001, and $114,328, $42,774,
$2,016, $1,839 in fiscal 2000 respectively.
(c) Includes goodwill amortization expense of $1,097 and $1,103 in fiscal 2001 and 2000, respectively.
</FN>
Export sales are defined as sales by our continuing 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 $7,751 $1,546 $5,019 $451 $5,069 $2,905 $22,741
Fiscal 2001 7,052 2,363 7,343 845 1,577 3,031 22,211
Fiscal 20 7,338 3,056 6,159 2,083 1,289 2,998 22,923
21. 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 revenues $ 23,266 $ 19,384 $ 21,385 $ 19,655
Gross profit 4,453 4,232 5,132 3,896
Loss from continuing operations (14,969) (8,388) (7,311) (25,349)
Per basic and diluted share (0.60) (0.33) (0.29) (1.01)
Earnings from discontinued operations (b) 11,847 9,262 7,659 17,302
Per basic and diluted share 0.47 0.37 0.30 0.69
Cumulative effect of change in accounting for goodwill (a) (144,600) - - -
Per basic and diluted share (5.75) - - -
Net earnings (loss) (a) (b) (147,722) 874 347 (8,047)
Per basic and diluted share (5.87) 0.03 0.01 (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 Oct-1 Dec-31 Apr-1 Jun-30
----------------------------------- ----------------------------------
Net revenues $ 25,359 $ 26,457 $ 24,243 $ 25,631
Gross profit 5,958 6,698 7,474 4,908
Loss from continuing operations (10,120) (11,503) (11,211) (6,688)
Per basic and diluted share (0.40) (0.46) (0.45) (0.27)
Earnings from discontinued operations (b) 4,702 5,760 6,531 7,343
Per basic and diluted share 0.19 0.23 (0.26) 0.29
Net earnings (loss) (b) (5,417) (5,743) (4,680) 654
Per basic and diluted share (0.22) (0.23) (0.19) 0.03
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.
(b) - Our reported amounts for all of the quarters in fiscal 2002 and 2001 have
been restated to reflect the fastener business and APS as discontinued
operations and to reflect the change in inventory from the LIFO method to
the FIFO method at two locations of the fasteners business.
(c) - Our reported amounts include goodwill amortization expense of $274 in each of the four quarters of fiscal 2001.
</FN>
22. SUBSEQUENT EVENTS
Effects from Sale of Fastener Business
The sale of the fastener business has reduced our dependence upon the
aerospace industry. Additionally, the sale has allowed us to eliminate
essentially our debt. We used a portion of the proceeds from the sale to repay
our bank debt and to acquire by tender all of our outstanding $225 million
10.75% senior subordinated notes due in April 2009, leaving us with only a $30.8
million non-recourse term loan on our shopping center and $3.7 million of debt
at Fairchild Aerostructures. On February 3, 2003, we paid off the $30.8 million
non-recourse term loan. We plan to use the remaining proceeds from the sale to
fund acquisition opportunities.
In the six months ended December 29, 2003, we recorded a $43.7 million gain
on the disposal of discontinued operations, net of $10.4 million of taxes, as a
result of the sale of the fastener business. The gain is subject to a
post-closing adjustment based upon the net working capital of the fastener
business on December 3, 2002, compared with its net working capital as of March
31, 2002. We may also receive additional cash proceeds up to $12.5 million per
year over the four-year period from 2003 to 2006, if the number of commercial
aircraft delivered by Boeing and Airbus exceeds specified annual levels.
Pensions
The sale of our fastener business on December 3, 2002 was considered a
"significant event" under US generally accepted accounting principles. As such,
we were required to re-measure our pension obligations at that date, in addition
to measuring any gain or loss resulting from certain actions taken as a result
of the sale of the fastener business.
Several plan assumptions were changed during the remeasurement of our
pension plan on December 3, 2002. The discount rate was decreased from 7.125% to
6.75% reflecting the drop in bond yields since June 30, 2002. The return on plan
assets was reduced from 9.0% to 8.5% to reflect lower long-term expected return
on plan assets. To recognize mortality improvements, the mortality assumption
was changed from the 1983 Group Annuity Mortality table to the 1994 Group
Annuity Mortality table. The assumed form of payment for our remaining employees
was changed from life annuity to lump sum, to reflect actual experience.
In connection with the sales agreement of the fastener business, we
extended vesting of pension benefits to United States fastener employees who
were not already vested. Generally accepted accounting principles in the United
States require us to recognize immediately the costs for the enhanced
termination benefits related to this curtailment event. The pre-tax expense of
this one-time curtailment accounting loss was $8.3 million, which was included
as a partial offset to the net gain on the disposal of discontinued operations.
All United States fastener employees transferring to Alcoa are being
treated by us as having been terminated from our employment, and as such, are
eligible to request immediate distribution of pension benefits in the form of
lump sums. We expect that almost all will do so. In accordance with generally
accepted accounting principles, this caused us to record a one-time, pre-tax
settlement accounting loss of $17.5 million, which was included as a partial
offset to the net gain on disposal of discontinued operations.
We have reviewed our pension plan's funded position to determine if it is
necessary to reflect a pension liability and recognize a reduction in equity.
This is required when a pension plan's unfunded accumulated benefit obligation
exceeds the net liability being recognized for the pension plan. On December 3,
2002, the accumulated benefit obligation of the pension plan exceeded the fair
value of the plan assets by $17.5 million. Under generally accepted accounting
principles, this caused us to record an additional minimum pension liability of
$50.5 million, and required the recognition of a $47.5 million non-cash
reduction to our stockholders' equity. These amounts may change in the future as
our assets change in value and also due to changes in the discount rate
assumptions. Should, in the future, our pension plan's accumulated benefit
obligations be less than the fair value of plan assets, the additional minimum
pension liability and corresponding equity reduction will be reversed.
The Pension Benefit Guaranty Corporation had 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. In December 2002, we contributed $7.4 million of cash to fund our
pension plan. Based upon our actuary's assumptions and projections, we do not
expect additional cash contributions to the pension plan to be required until
2008.
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. Banner Aerospace, Inc. is a 100% owned subsidiary.
Fairchild Holding Corp. is our indirect 100% owned subsidiary. Fairchild
Holding Corp. is the owner of Fairchild Aerostructures, Inc., and the
indirect owner of 100% of Warthog Inc. Our principal operations are conducted
through Banner Aerospace, Fairchild Aerostructures, and Warthog. Our financial
statements present the results of our former fastener business, a small
subsidiary being sold or shut down, known as APS, and our former technologies
segment as discontinued operations.
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
Our business consists of three segments: aerospace distribution, aerospace
manufacturing and real estate operations. 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 worldwide. Our aerospace manufacturing segment
primarily manufactures airframe components. Our real estate operations segment
owns and leases a shopping center located in Farmingdale, New York, and owns and
rents one improved parcel located in Southern California.
On December 3, 2002, we completed the sale of our fastener business to
Alcoa Inc. for approximately $657 million in cash and the assumption of certain
liabilities. The cash received from Alcoa is subject to a post-closing
adjustment based upon the net working capital of the fastener business on
December 3, 2002, compared with its net working capital as of March 31, 2002. We
may also receive additional cash proceeds up to $12.5 million per year over the
four-year period from 2003 to 2006, if the number of commercial aircraft
delivered by Boeing and Airbus exceeds specified annual levels.
CAUTIONARY STATEMENT
Certain statements in this financial discussion and analysis by management
contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 with respect to our financial
condition, results of operation and business. These statements relate to
analyses and other information, which are based on forecasts of future results
and estimates of amounts not yet determinable. These statements also relate to
our future prospects, developments and business strategies. These
forward-looking statements are identified by their use of terms and phrases such
as "anticipate," "believe," "could," "estimate," "expect," "intend," "may,"
"plan," "predict," "project," "will" and similar terms and phrases, including
references to assumptions. These forward-looking statements involve risks and
uncertainties, including current trend information, projections for deliveries,
backlog and other trend estimates, that may cause our actual future activities
and results of operations to be materially different from those suggested or
described in this financial discussion and analysis by management. These risks
include: product demand; our dependence on the aerospace industry; customer
satisfaction and quality issues; labor disputes; competition; our ability to
achieve and execute internal business plans; worldwide political instability and
economic growth; military conflicts; reduced airline revenues as a result of the
September 11, 2001 terrorist attacks on the United States, and their aftermath;
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 Current 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, 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.
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.
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.
Recent Developments
On December 3, 2002, we completed the sale of our fastener business to
Alcoa Inc. for approximately $657 million in cash and the assumption of certain
liabilities. The cash received from Alcoa is subject to a post-closing
adjustment based upon the net working capital of the fastener business on
December 3, 2002, compared with its net working capital as of March 31, 2002. We
may also receive additional cash proceeds up to $12.5 million per year over the
four-year period from 2003 to 2006, if the number of commercial aircraft
delivered by Boeing and Airbus exceeds specified annual levels.
In connection with the sale, we have deposited with an escrow agent $25
million to secure indemnification obligations we may have to Alcoa. The escrow
period is five years, but funds may be held longer if claims are asserted and
unresolved. In addition, for a period of five years after the closing, we are
required to maintain our corporate existence, take no action to cause our own
liquidation or dissolution, and take no action to declare or pay any dividends
on our common stock.
The sale of the fastener business has reduced our dependence upon the
aerospace industry. Additionally, the sale has allowed us to eliminate
substantially all of our debt. We used a portion of the proceeds from the sale
to repay our bank debt and to acquire by tender all of our outstanding $225
million 10.75% senior subordinated notes due in April 2009, leaving us with only
a $30.8 million non-recourse term loan on our shopping center and $3.7 million
of debt at Fairchild Aerostructures. On February 3, 2003, we paid off the $30.8
million non-recourse term loan. We plan to use the remaining proceeds from the
sale to fund acquisition opportunities.
In February 2003, we adopted a formal plan to sell APS. APS is a small
operation in our aerospace manufacturing segment, which reported revenues of
$1.4 million, $3.7 million, and $3.8 million in 2002, 2001, and 2000,
respectively, and operating losses of $2.7 million in 2002 and $1.2 million in
2001 and operating income of $0.2 million in 2000. Based on our formal plan, we
expect to sell APS by December 2003. Accordingly, the results of APS are being
reported as a discontinued operation.
We have restated our results to reflect, as discontinued operations, our
fastener business and APS. Because of the reclassification of the fastener
business and APS as discontinued operations, we are required to retroactively
restate our financial statements for the years ended June 30, 2000 and June 30,
2001, which were previously audited by Arthur Andersen LLP. Since Arthur
Andersen is no longer issuing audit opinions, our current auditors have
completed a reaudit our financial statements for the periods ended June 30, 2000
and June 30, 2001. Our net earnings increased by $0.3 million and $0.5 million
in fiscal 2002 and 2000, respectively, and decreased by $0.2 million in fiscal
2001 from our previously reported results. These differences reflect a change in
our method of accounting for our inventory costing at two of our domestic
manufacturing operations at our fastener business from the last-in, first-out
("LIFO") method, to the first-in, first-out ("FIFO") method.
The results of the fastener business and APS are recorded as earnings from
discontinued operations, the components of which are as follows:
(In thousands) 2002 2001 2000
-------------- -------------- --------------
Net sales $ 547,562 $ 528,620 $ 523,692
Cost of goods sold 410,724 394,638 385,750
-------------- -------------- --------------
Gross margin 136,838 133,982 137,942
Selling, general & administrative expense 88,748 95,998 103,804
Other (income) expense, net (254) (156) (1,085)
-------------- -------------- --------------
Operating income 48,344 38,140 35,223
Net interest expense 1,409 1,796 1,514
-------------- -------------- --------------
Earnings from discontinued operations before taxes 46,935 36,344 33,709
Income tax provision (865) (12,007) (8,572)
-------------- -------------- --------------
Net earnings from discontinued operations $ 46,070 $ 24,337 $ 25,137
-------------- -------------- --------------
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 fiscal 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 proceeds received from dividends
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, in 2001 we reported a reduction of $21.7 million in
revenues and a reduction of $2.1 million in operating income, as compared to
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
distribution, aerospace manufacturing 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
------------------------------------------ --------------
Revenues by Segment:
Aerospace Distribution Segment $ 63,298 $ 85,908 $ 101,002 $ 79,308
Aerospace Manufacturing Segment 13,233 8,284 9,928 9,928
Real Estate Operations Segment 7,159 7,498 4,051 4,051
Corporate and Other - - 739 -
------------------------------------------ --------------
Total Revenues $ 83,690 $ 101,690 $ 115,720 $ 93,287
------------------------------------------ --------------
Operating Income (Loss) by Segment:
Aerospace Distribution Segment $ 2,579 $ 2,259 $ 7,536 $ 5,485
Aerospace Manufacturing Segment (6,276) (2,093) (1,189) (1,188)
Real Estate Operations Segment 1,550 307 1,483 1,483
Corporate and Other (18,875) (17,618) (19,014) (19,028)
------------------------------------------ --------------
Total Operating Income (Loss) (a) $ (21,022) $ (17,145) $ (11,184) $ (13,248)
------------------------------------------ --------------
<FN>
(a) Operating income in fiscal 2002 includes one-time impairment expenses
of $3.0 million in the aerospace manufactuirng segment and $0.4 million
in the real estate operations segment. Operating income in Fiscal 2001
includes one-time impairment charges of $2.4 million in the aerospace
distribution segment, and $2.4 million in the real estate operations
segment.
</FN>
Net revenues of $83.7 million in 2002 decreased by $18.0 million, or 17.7%,
as compared to revenues of $101.7 million in 2001. The results for 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 revenues would have decreased by $9.6 million, or 10.3%, in 2002,
as compared to 2001. Revenues in 2002 reflected the severely hampered aerospace
industry in the aftermath of September 11, 2001. Net revenues of $101.7 million
in 2001 decreased by $14.0 million, or 12.1%, compared to revenues of $115.7
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 $8.4 million for 2001, as compared to 2000.
Gross margin as a percentage of revenues was 21.2%, 24.6%, and 24.0% 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 and
pricing competition due to uncertainty in the aerospace industry following
September 11, 2001. 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 revenues was
47.3%, 39.8%, and 40.7%, in 2002, 2001, and 2000, respectively.
Other income increased $0.1 million in 2002, as compared to 2001, and
reflected 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 $5.1 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 $4.8 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 the ongoing operation at our aerospace
manufacturing segment due to impairment and $0.4 million to write-off a 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 a former tenant's improvements at our shopping center.
The operating loss of $21.0 million in 2002 was larger by $3.9 million, or
22.6%, compared to the operating loss of $17.1 million in 2001. The 2001 results
included goodwill amortization of $1.1 million, prior to the implementation of a
new accounting pronouncement that eliminates goodwill amortization in the 2002
period. The operating loss of $17.1 million in 2001 was larger by $5.9 million
as compared to operating loss of $11.2 million in 2000. Operating income in
fiscal 2001 was adversely affected by the impairment charge of $4.8 million. 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.
Net interest expense decreased by $8.6 million, or 15.9%, and cash interest
expense decreased by $5.3 million in fiscal 2002, as compared to fiscal 2001,
due primarily to lower interest rates on our variable rate debt. Net interest
expense increased $11.3 million in fiscal 2001 as compared to fiscal 2000.
However, cash interest expense of $49.1 million in 2001 actually decreased by
$1.9 million, as compared to cash interest expense of $51.0 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 rate 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 rate 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 $16.0 million in fiscal 2002,
representing a 22.3% effective tax rate benefit on pre-tax losses from
continuing operations. The tax benefit resulted primarily from the reversal of
tax accruals no longer required, and was lower than the statutory rate due
primarily to $282.5 million of federal income tax net operating loss
carryforwards, which we had at June 30, 2002. We recorded an income tax benefit
of $28.7 million in fiscal 2001, representing a 42.0% 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 $12.7 million in fiscal
2000 on pre-tax losses from continuing operations. A tax benefit was recorded
due primarily to a change in the estimate of required tax accruals, net of
valuation allowances.
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. Of this amount, $19.3
million relates to our Fairchild Aerostructures operating unit in our aerospace
manufacturing segment and $125.3 million relates to our fastener business sold
to Alcoa on December 3, 2002. 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 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 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 $0.3 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.
Aerospace Manufacturing Segment
Sales in our aerospace manufacturing segment increased by $4.9 million, or
59.7%, in 2002, as compared 2001. The improvement reflected internal growth.
However, sales decreased in the third and fourth quarters of fiscal 2002, due to
a reduction in shipments resulting from an overall lower level of demand in the
aerospace industry following the September 11, 2001 terrorist attacks. Sales in
our aerospace manufacturing segment decreased by $1.6 million, or 16.6%, in
2001, as compared to 2000.
Operating results in our aerospace manufacturing segment decreased by $4.2
million, as compared to 2001. The decrease was due primarily to impairment
charges of $3.0 million to write down long-lived assets, and $1.3 million to
write down inventory through cost of goods sold. Goodwill amortization of $0.5
million was recorded in 2001. Operating results decreased by $0.9 million in
2001, as compared to 2000. The decrease was due primarily to the reduction in
sales and related economies of scale.
On December 3, 2002, we sold our fastener business for approximately $657
million in cash to Alcoa Inc. Additionally, in February 2003, we adopted a
formal plan to sell APS. The company expects to sell APS by December 2003.
Accordingly, the results of our fastener business and APS have been restated to
report them as discontinued operations.
Real Estate Operations Segment
Our real estate operations segment owns and operates a 451,000 square foot
shopping center located in Farmingdale, New York and also owns and leases a
102,000 square foot building in Chatsworth, California. We have two tenants that
each occupy more than 10% of the rentable space of the shopping center. Rental
revenue was $7.2 million in 2002, $7.5 million in 2001, and $4.1 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 new leases for
approximately 54,000 square feet, entered into shortly before the end of 2002.
The Chatsworth property is leased through July 2008, and is expected to generate
revenues and operating income approximating $0.5 million per year.
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 a one-time charge of $2.5 million to
write-off improvements at our shopping center. We reported an operating income
of $0.3 million for 2001, as compared to operating income of $1.5 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 in 2002 decreased by
$1.3 million, or 7.1%, as compared to 2001 and improved by $1.4 million, or 7.3%
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 $722.0
million and $860.8 million, respectively. The changes in capitalization in 2002
included a decrease of $5.3 million in debt and $133.6 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 $56.0 million loss
from continuing operations, offset partially by $46.1 million of earnings from
discontinued operations and 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 $6.3 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 $19.4 million. The
working capital uses of cash in 2002 included a $5.2 million decrease in
accounts payable and other accrued liabilities and a $19.6 million increase in
other non-current assets, offset partially by a $4.8 million decrease in
accounts receivable, a $7.1 million decrease in other current assets, and a $4.5
million decrease in inventory. The working capital uses of cash were offset by
$20.0 million of non-cash charges and working capital changes provided from
discontinued operations, and $5.3 million of earnings, after deducting non-cash
expenses of $5.2 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 $40.2 million. The
primary use of cash for operating activities in 2001 was a $104.9 million
decrease in accounts payable and other accrued liabilities, offset partially by
a $3.2 million decrease in accounts receivable, a $33.5 million increase in
other current assets, a $2.7 million increase in inventories, and $32.5 million
of non-cash charges and working capital changes provided from discontinued
operations. Net cash used for operating activities for 2000 was $71.3 million.
In 2000, the primary use of cash for operating activities was a $2.4 million
increase in inventories, a $39.0 million decrease in accounts payable and other
accrued liabilities, and $14.9 million of non-cash charges and working capital
uses relating to discontinued operations.
Net cash used for investing activities was $9.6 million in 2002. The
primary source of cash in 2002 was $4.0 million provided from the dispositions
of non-core real estate and net assets held for sale, offset by $2.5 million of
capital expenditures and a $5.8 increase in notes receivable and $6.6 million of
investing activities used for discontinued operations. Net cash provided from
investing activities for 2001 was $17.8 million, and included $28.0 million in
proceeds received from the dispositions of investments, and $1.5 million in
proceeds received from the disposition of property, offset by capital
expenditures of $3.8 million and $9.7 million of investing activities used for
discontinued operations. Net cash provided from investing activities for 2000
was $96.1 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 $20.8 million used for capital
expenditures and $26.4 million of investing activities uses relating to
discontinued operations.
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 were 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. As a result of the sale of the
fastener business on December 3, 2002, we redeemed for cash the debentures held
by the third party, and the third party then satisfied 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 were 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.
Additionally, the credit agreement restricted 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
were pledged as collateral under the credit agreement. The credit agreement
restricted 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. At
June 30, 2002, we were in compliance with the covenants under the credit
agreement. On December 3, 2002, a portion of the proceeds received from the sale
of our fastener business was used to repay all of the debt borrowed 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
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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 $54 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.
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 have accounted for the sale of our fastener business as a
discontinued operation as of December 3, 2002, the date of the sale.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections as of April 2002". SFAS No. 145
eliminates the requirement to report material gains or losses from debt
extinguishments as an extraordinary item, net of tax, in an entity's statement
of earnings. SFAS No. 145 instead requires that a gain or loss recognized from a
debt extinguishment be classified as an extraordinary item only when the
extinguishment meets the criteria of both "unusual in nature" and "infrequent in
occurrence" as prescribed under Accounting Principles Bulletin No. 30,
"Reporting the Result of Operations - Reporting the Effects of Disposal of a
Segment of Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". This statement is effective for our fiscal year
beginning on July 1, 2002.
In July 2002, the FASB issued Statement of Financial Accounting Standards
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.
On December 31, 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure". Statement 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation", to provide alternative methods of transition to
Statement 123's fair value method of accounting for stock-based employee
compensation. Statement 148 also amends the disclosure provisions of Statement
123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure
in the summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
While the Statement does not amend Statement 123 to require companies to account
for employee stock options using the fair value method, the disclosure
provisions of Statement 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that compensation
using the fair value method of Statement 123 or the intrinsic value method of
Opinion 25. We are currently accounting for stock options using the intrinsic
value method of Opinion 25. Under the intrinsic value method, compensation
expense is not recognized in the income statement, but the effects are
disclosed. Previous to Statement 148, the disclosure was required only on annual
financial statements. Beginning with our fiscal 2003 third quarter 10-Q, the
disclosures will also be required quarterly.
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, did not
exercise a one-time option to cancel the agreement; and accordingly the
transaction will proceed at a fixed LIBOR rate of 6.745% 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 did not exercise a one-time option to
cancel the agreement, and the transaction will proceed, using a fixed LIBOR rate
of 6.745% from February 17, 2003 to February 19, 2008.
</FN>
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The term "disclosure controls and procedures" is defined in Rules 13a-14(c)
and 15d-14(c) of the Securities Exchange Act of 1934. These rules refer to the
controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
under the Exchange Act is recorded, processed, summarized and reported within
required time periods. Our Chief Executive Officer and our Chief Financial
Officer have evaluated the effectiveness of our disclosure controls and
procedures as of a date within 90 days before the filing of this quarterly
report, which we refer to as the Evaluation Date. They have concluded that, as
of the Evaluation Date, such controls and procedures were effective at ensuring
that the required information was disclosed on a timely basis in our reports
filed under the Exchange Act.
Changes in Internal Controls
We maintain a system of internal accounting controls that are designed to
provide reasonable assurance that our books and records accurately reflect our
transactions and that our established policies and procedures are followed. For
the quarter ended December 29, 2002, there were no significant changes to our
internal controls or in other factors that could significantly affect our
internal controls.
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, Treasurer
and Senior Vice President, Tax
Date: April 18, 2003