EDWARDS AND LOCK MANAGEMENT CORPORATION
FINANCIAL STATEMENTS
AS OF DECEMBER 31 AND MARCH 31, 1997
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Edwards and Lock Management Corporation:
We have audited the accompanying balance sheets of Edwards and
Lock Management Corporation, (a California Corporation) as of
December 31, 1997 and March 31, 1997, and the related statements
of operations and retained earnings and cash flows for the nine
months ended December 31, 1997 and the year ended March 31,
1997. 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 generally accepted
auditing standards. Those standards require that we plan and
perform the audits 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 financial position
of Edwards and Lock Management Corporation as of December 31,
1997 and March 31, 1997, and the results of its operations and
its cash flows for the nine months ended December 31, 1997 and
the year ended March 31, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
April 9, 1998
EDWARDS AND LOCK MANAGEMENT CORPORATION
BALANCE SHEETS
ASSETS
(in thousands)
12/31/97 3/31/97
CURRENT ASSETS:
Cash and cash equivalents $ 2,749 $ 2,170
Accounts receivable, net of
allowance for doubtful accounts
of $159 and $53 at December 31 and
March 31, 1997, respectively 6,716 6,263
Income taxes receivable 416 41
Other receivables 23 23
Inventories, net 18,465 14,259
Deferred tax asset 1,122 996
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Total current assets 29,491 23,752
PROPERTY AND EQUIPMENT:
Office equipment 958 866
Warehouse equipment 316 305
Leasehold improvements 372 327
Building 797 797
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2,443 2,295
Less--Accumulated depreciation (1,009) (849)
------- -------
Net property and equipment 1,434 1,446
Investment in affiliate 50 -
Other assets 41 41
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Total assets $31,016 $25,239
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The accompanying notes are an integral part of these balance
sheets.
EDWARDS AND LOCK MANAGEMENT CORPORATION
BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
(in thousands)
12/31/97 3/31/97
CURRENT LIABILITIES:
Accounts payable $ 3,464 $ 2,306
Accrued expenses 635 884
Current portion of capital lease obligation 175 180
Dividends payable 225 -
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Total current liabilities 4,499 3,370
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CAPITAL LEASE OBLIGATION 125 243
COMMITMENTS & CONTINGENCIES
SHAREHOLDER'S EQUITY:
Capital stock, no par value;
authorized 100,000 shares;
outstanding 45,000 shares 9 9
Retained earnings 26,383 21,617
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Total shareholder's equity 26,392 21,626
------- -------
Total liabilities and shareholder's equity $31,016 $25,239
======= =======
The accompanying notes are an integral part of these balance
sheets
EDWARDS AND LOCK MANAGEMENT CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(in thousands)
9 MONTHS 12 MONTHS
ENDED ENDED
12/31/97 3/31/97
Net sales $46,125 $49,344
Cost of sales 29,628 31,317
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Gross profit 16,497 18,027
Selling, general and
administrative expenses 8,158 9,786
Equity in income(loss) of affiliate 50 (5)
------- -------
Income from operations 8,389 8,236
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Interest income 77 47
------- -------
Income before taxes 8,466 8,283
Income taxes 3,475 3,279
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Net income 4,991 5,004
RETAINED EARNINGS, beginning of year 21,617 16,838
Dividends (225) (225)
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RETAINED EARNINGS, end of year $26,383 $21,617
======= =======
The accompanying notes are an integral part of these financial
statements.
EDWARDS AND LOCK MANAGEMENT CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
9 MONTHS 12 MONTHS
ENDED ENDED
12/31/97 3/31/97
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,991 $ 5,004
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 160 243
Equity in undistributed earnings of affiliate(50) -
Increase in accounts receivable (453) (848)
Decrease in taxes (375) (450)
Increase in other receivables - (23)
Increase in inventory (4,206) (1,343)
(Decrease) increase in deferred tax asset (126) 105
Decrease in other assets - 2
Increase (decrease) in accounts payable 1,158 (2,121)
(Decrease) Increase in accrued liabilities(249) 267
Decrease in capital lease obligation (123) (154)
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Net cash provided by operating
activities 727 682
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (148) (182)
Proceeds from sale of bonds - 1,560
------- -------
Net cash (used in) provided by
investing activities (148) 1,378
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CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid - (225)
------- -------
NET CHANGE IN CASH 579 1,835
CASH, beginning of year 2,170 335
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CASH, end of year $ 2,749 $ 2,170
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes during the nine months ending
December 31, 1997 and fiscal year 1997 was $3,975 and $3,355,
respectively. There was no cash paid for interest during any of
the aforementioned periods.
The accompanying notes are an integral part of these financial
statements.
EDWARDS AND LOCK MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31 AND MARCH 31, 1997
(in thousands)
1. Organization
Edwards and Lock Management Corp. (the "Company"), a
California corporation doing business as Special-T
Fasteners ("Special-T"), was formed on April 20, 1977.
Special-T distributes precision fasteners, utilized
primarily in the aerospace industry, to both the government
and commercial manufacturers in the United States and
abroad. The Company is individually-owned by one of the
original shareholders of the Company (the "shareholder").
During January 1998, the Company entered into an agreement
and was acquired by The Fairchild Corporation
("Fairchild")(see Note 11).
2. Summary of Significant Accounting Policies
General
The preparation of financial statements in conformity with
generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period.
Accordingly, actual results could differ from estimated
amounts. Management believes that these estimates provide
a reasonable basis for the fair presentation of the
Company's financial position and results of operations.
Risks and uncertainties
Since Special-T's products are used primarily by
manufacturers in the aerospace industry, significant
changes in the aerospace industry could have a significant
impact on the Company's results of operations for any
particular year.
Cash and cash equivalents
The Company considers all highly liquid investments with
original maturities of three months or less at the time of
purchase to be cash equivalents.
2. Summary of Significant Accounting Policies (continued)
Accounts receivable
Accounts receivable are recorded at the time product is
shipped. Any amounts which are at least 12 months past due
and deemed uncollectable are written off in full. The
allowance for doubtful accounts is based on historical
experience and review of periodic aging of accounts.
Inventories
Inventories are priced at lower of cost or market (net
realizable value). Cost is determined primarily using the
weighed average cost method, which approximates the first-
in first-out (FIFO) method. Appropriate consideration is
given to price deterioration, excess and obsolescence and
other factors in evaluating net realizable value.
During the nine months ended December 31, 1997, the Company
purchased approximately $1,600 of product from a subsidiary
of Fairchild (see Note 4). This inventory was excluded from
management's analysis of potential excess or obsolete
inventory because the marketing lead time for this
inventory is longer than that of the Company's general
products. Management believes that the carrying value of
this inventory is fully realizable. Reserves for excess
and obsolete inventory, aggregated $3,126 and $2,675 at
December 31 and March 31, 1997, respectively.
Property and equipment
Property and equipment are stated at cost less accumulated
depreciation. Gains or losses on disposition of property
and equipment are credited or charged to income.
Depreciation is computed principally using accelerated tax
methods for both income tax and financial statement
purposes. The method used for financial statement purposes
approximates the double-declining balance method and is
determined by management to be a reasonable allocation of
the assets' cost to expense over the assets' useful lives
as detailed below:
Years
Office equipment 5 to 7
Warehouse equipment 5 to 7
Building and
Leasehold Improvements 15 to 31.5
Depreciation expense for the nine months and fiscal year
ended December 31 and March 31, 1997 was $160 and $243,
respectively.
2. Summary of Significant Accounting Policies (continued)
Property and equipment (continued)
In March 1995, the FASB issued SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of" ("SFAS 121") which requires
impairment losses to be recorded on long-lived assets used
in operations when indications of impairment are present
and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount.
The Company follows the provisions of SFAS 121 and no
adjustment to the fixed assets' carrying values was
required as of December 31 and March 31, 1997.
Other assets
Other assets consist of deposits on the Company's leased
facility, including a deposit towards the purchase of the
facility (see Note 5).
Revenue recognition
Revenues and related accounts receivable are recorded at
the time the products are shipped.
New Accounting Principles
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), which
establishes standards for reporting the components of
comprehensive income. The Company will adopt SFAS 130
effective fiscal 1999.
3. Investment in Joint Venture
During fiscal year ended March 31, 1997, the Company
entered into a joint venture, Tri-Fast, to further the
Company's sales overseas. The Company's 50% investment is
accounted for under the equity method of accounting. As
such, the Company's initial investment is adjusted at year
end for the proportionate share of the investee's net
income or loss.
At December 31, 1997 the Company's cumulative share of Tri-
Fast's earnings was $50. At March 31, 1997, the Company's
cumulative share of Tri-Fast's losses was $32, which
reduced their initial investment of $5 to zero. The
Company has provided for taxes on these undistributed
earnings in its provision for income taxes.
During the fiscal year ended March 31, 1997, the Company
forwarded $23 to Tri-Fast to fund start up expenses, which
was repaid during the nine months ended December 31, 1997.
The Company also paid commissions of $133 and $81 during
the nine months ended December 31, 1997 and fiscal year
ended March 31, 1997, respectively, to Tri-Fast for sales
obtained through their marketing efforts.
4. Significant Vendors and Purchase Commitments
Approximately 80% of the Company's sales are derived from
products purchased from three subsidiaries of The Fairchild
Corporation (the "Manufacturer"). The Company has entered
into three master distribution agreements with the
Manufacturer which appoint the Company as nonexclusive
"authorized distributor".
Furthermore, the Company has a contractual arrangement with
the Manufacturer whereby a total of approximately $1,020 of
product was purchased at 10% of the Manufacturer's cost.
When sold, the Company must remit 50% of the invoice price
less shipping and handling costs back to the Manufacturer.
The aforementioned contract expires in July 2001. Any
proceeds derived from the sale of product after the
contractual expiration date are retained by the Company.
Amounts due to the Manufacturer under the aforementioned
arrangement approximated $24 and $66 at December 31 and
March 31, 1997, respectively.
The Company entered into a second contract with the
Manufacturer whereby it purchased approximately $1,600 of
product on an extended one-year payment schedule. Under
the terms of this contract, the Company makes equal
quarterly payments with the final payment due June 1998.
Amounts due to the Manufacturer under the aforementioned
contract approximated $800 at December 31, 1997.
The Company also warehouses consignment inventory owned by
the Manufacturer. As the inventory is sold, the proceeds
from the sale are split equally between the Company and the
Manufacturer.
Sales to Fairchild and its subsidiaries were $588 and $830
for the nine months ended December 31, 1997 and fiscal year
ended March 31, 1997, respectively.
Accounts receivable includes $184 and $110 of amounts due
from Fairchild and its subsidiaries for the nine months
ended December 31, 1997 and fiscal year ended March 31,
1997.
Accounts payable includes $2,490 and $1,304 of amounts due
to Fairchild and its subsidiaries for the nine months ended
December 31, 1997 and fiscal year ended March 31, 1997.
5. Commitments and Contingencies
Leases
The Company leases its facility under a capital lease.
During fiscal 1995, the Company made a $25 deposit towards
the purchase of the facility. As set forth in the option
to purchase agreement, the Company can exercise the option
within six to twelve months of the close of the original
lease term on August 31, 1999, or any time during the
extension period, which expires August 31, 2004.
5. Commitments and Contingencies (continued)
Property and equipment includes the following amounts for
leases that have been capitalized:
12/31/97 3/31/97
Buildings $797 $797
Less--Accumulated depreciation (84) (65)
---- ----
$713 $732
==== ====
The future minimum payments related to this lease
commitment are as follows at December 31, 1997:
Minimum
Lease
Period Ended March 31, Payments
1998 $ 48
1999 193
2000 80
2001 -
2002 -
Thereafter -
----
Total minimum lease payments 321
Amount representing interest 21
----
Total present value of minimum
lease payments 300
Current portion 175
----
Total non-current portion $125
====
Rental expense for the fiscal year ended March 31, 1997 was
$1. There was no rent expense during the nine months ended
December 31, 1997.
6. Income Taxes
The Company follows the provisions of Financial Accounting
Standards Board's SFAS No. 109, Accounting for Income Taxes
("SFAS 109"). Under the asset and liability method of SFAS
109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to temporary
differences between the financial statement carrying
amounts of assets and liabilities and their respective tax
bases. A deferred benefit or expense is recognized for the
net change during the period in the deferred tax liability
or asset. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable
income in the years in which those temporary differences
are expected to be recovered or settled. Under SFAS 109,
the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period
that includes the enactment date.
The reconciliations between the provision for income taxes
and the amounts computed by applying the federal statutory
rate of 34% to
pre-tax income consists of the following:
12/31/97 3/31/97
Income tax expense at Federal
statutory rate $2,878 $2,816
State income taxes, net of
Federal tax benefit 496 503
Effect of permanent difference (2) (3)
Other 103 (37)
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$3,475 $3,279
====== ======
The Company's provision for income taxes consists of the
following:
12/31/97 3/31/97
Current federal $3,045 $2,647
Deferred federal (126) 105
Current state 556 527
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$3,475 $3,279
====== ======
The components of the deferred tax asset consists of the
following:
12/31/97 3/31/97
Operating reserves and accruals $1,071 $912
Other 51 84
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$1,122 $996
====== ======
7. Common Stock
During fiscal year ended March 31, 1997, the Company paid
cash dividends of $225 to the shareholder. As of December
31, 1997, the company had declared dividends of $225.
8. Employee Benefit Plans
The Company has a defined contribution retirement plan (the
"Plan") for all employees who are at least 18 years of age
and who have completed at least one year of service. The
Company contributed and expensed $44 under the provisions
of the Plan for the nine months ended December 31, 1997 and
the fiscal year ended March 31, 1997, respectively.
The Company provides pension benefits for all its employees
through a profit-sharing plan under which annual
contributions of the Company's income are made at the
discretion of management. Such contributions approximated
$117 and $156 during the nine months ended December 31,
1997 and the fiscal year ended March 31, 1997,
respectively, and were funded by the Company.
9. Executive Compensation Plan
The Company has a discretionary executive compensation plan
(the "Executive Plan") whereby certain key executives of
the Company are paid bonuses which are based upon
achieving certain business performance measures. The
bonuses paid to key executives under the Executive
Plan during the nine months ended December 31, 1997 and the
fiscal year ended March 31, 1997 aggregated $453 and $616,
respectively.
10. Related Party Transactions
The Company paid $2,200 and $2,100 as executive
compensation to the shareholder during the nine months
ended December 31, 1997 and the fiscal year ended March 31,
1997, respectively.
Other receivables of $23 at March 31, 1997 represent
amounts due from Tri-Fast (see note 3).
11. Subsequent Events
During January 1998, the Company entered into an agreement
and was acquired by Fairchild. Under the terms of the
agreement, Fairchild acquired the Company effective January
1, 1998. The purchase price was payable in cash and common
stock of Fairchild and exceeded the carrying value of the
Company's net assets at December 31, 1997.