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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Year Ended June 30, 2000 Commission File Number 1-6560
THE FAIRCHILD CORPORATION
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(Exact name of Registrant as specified in its charter)
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Delaware 34-0728587
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
45025 Aviation Drive, Suite 400, Dulles, VA 20166
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703) 478-5800
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of exchange on which registered
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Class A Common Stock, par value $.10 per share New York and Pacific Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days [X].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [_].
On September 8, 2000, the aggregate market value of the common shares held by
nonaffiliates of the Registrant (based upon the closing price of these shares on
the New York Stock exchange) was approximately $122 million (excluding shares
deemed beneficially owned by affiliates of the Registrant under Commission
Rules).
As of September 8, 2000, the number of shares outstanding of each of the
Registrant's classes of common stock were as follows:
Class A common stock, $.10 par value 22,430,622
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Class B common stock, $.10 par value 2,621,652
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DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement for the 2000 Annual
Meeting of Stockholders' to be held on November 20, 2000 (the "2000 Proxy
Statement"), which the Registrant intends to file within 120 days after June 30,
2000, are incorporated by reference into Parts III and IV.
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THE FAIRCHILD CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED JUNE 30, 2000
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PART I Page
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Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Stockholders 10
PART II
Item 5. Market for Our Common Equity and Related Stockholder Matters 11
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition 14
Item 7A. Quantitative and Qualitative Disclosure about Market Risk 24
Item 8. Financial Statements and Supplementary Data 25
Item 9. Disagreements on Accounting and Financial Disclosure 66
PART III
Item 10. Directors and Executive Officers of the Company 66
Item 11. Executive Compensation 66
Item 12. Security Ownership of Certain Beneficial Owners and Management 66
Item 13. Certain Relationships and Related Transactions 66
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 67
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FORWARD-LOOKING STATEMENTS
Except for any historical information contained herein, the matters discussed
in this Annual Report on Form 10-K contain certain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 with
respect to our financial condition, results of operation and business. These
statements relate to analyses and other information which are based on forecasts
of future results and estimates of amounts not yet determinable. These
statements also relate to our future prospects, developments and business
strategies. These forward-looking statements are identified by their use of
terms and phrases such as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "plan," "predict," "project," "will" and similar
terms and phrases, including references to assumptions. These forward-looking
statements involve risks and uncertainties, including current trend information,
projections for deliveries, backlog and other trend projections, that may cause
our actual future activities and results of operations to be materially
different from those suggested or described in this Annual Report on Form 10-K.
These risks include: product demand; our dependence on the aerospace industry;
reliance on Boeing and the Airbus consortium of companies; customer satisfaction
and quality issues; labor disputes; competition, including price competition;
our ability to achieve and execute internal business plans; worldwide political
instability and economic growth; and the impact of any economic downturns and
inflation.
If one or more of these risks or uncertainties materializes, or if underlying
assumptions prove incorrect, our actual results may vary materially from those
expected, estimated or projected. Given these uncertainties, users of the
information included in this Annual Report on Form 10-K, including investors and
prospective investors are cautioned not to place undue reliance on such forward-
looking statements. We do not intend to update the forward-looking statements
included in this Annual Report, even if new information, future events or other
circumstances have made them incorrect or misleading.
PART I
All references in this Annual Report on Form 10-K to the terms "we,"
"our," "us," the "Company" and "Fairchild" refer to The Fairchild
Corporation and its subsidiaries. All references to "fiscal" in connection
with a year shall mean the 12 months ended June 30.
Item 1. BUSINESS
General
We are a leading worldwide aerospace and industrial fastener manufacturer and
supply chain services provider and, through our wholly-owned subsidiary, Banner
Aerospace, Inc., an international supplier to the aerospace industry,
distributing a wide range of aircraft parts and related support services.
Through internal growth and strategic acquisitions, we have become one of the
leading suppliers of fastening systems to aircraft original equipment
manufacturers (such as Boeing, European Aeronautic Defense and Space Company
(formerly the Airbus consortium), General Electric and Lockheed Martin), as well
as one of the leading aerospace subcontractors to OEMs, independent distributors
and the aerospace aftermarket (such as Honeywell International).
Our aerospace business consists of two segments: aerospace fasteners and
aerospace parts distribution. Our aerospace fasteners segment manufactures and
markets high performance fastening systems used in the manufacture and
maintenance of commercial and military aircraft. Our aerospace distribution
segment stocks and distributes a wide variety of aircraft parts to commercial
airlines and air cargo carriers, fixed-base operators, corporate aircraft
operators and other aerospace companies.
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Our business strategy is as follows:
Maintain Quality Leadership. The aerospace market is extremely demanding in
terms of precision manufacturing and OEMs must certify all parts pursuant to the
Federal Aviation Administration's regulations and equivalent foreign regulators.
Our plants are equipped with cutting-edge CAD/CAM manufacturing programming,
which allows us to produce seamlessly customer orders on a worldwide basis using
the same specification and quality assurance systems. All of our plants are ISO-
9000 approved. We have won numerous industry and customer quality awards and are
a preferred supplier for many major aerospace customers. In order to be named a
preferred supplier, a company must qualify its products through a customer
specific quality assurance program and strictly adhere to it. Approvals and
awards we have obtained include: Boeing D1 9000 Rev A; Boeing (St. Louis) Silver
Supplier; Boeing Source Approved; DaimlerChrysler Aerospace Source Approved;
General Electric Source Approved; Pratt & Whitney Source Approved; Lockheed-
Martin Star Supplier; and DISC Large Business Supplier of the Year.
Lower Manufacturing Costs. Over the past few years, we have invested
significantly in state-of-the-art machinery, employee training and manufacturing
techniques, to produce products at the lowest cost while maintaining high
quality. This investment in process superiority has resulted in increased
capacity, lower break-even levels and faster cycle times, while reducing defect
levels and improving responsiveness to customer needs. For example, the customer
rejection rate at our aerospace fasteners segment has fallen from an average of
18.2% in fiscal 1995 to an average of 1.6% for fiscal 2000. Our on-time delivery
rate in our aerospace fasteners segment has improved significantly since fiscal
1997, to levels that are currently the best in our operating history. We view
these continuous improvements as one of the keys to our business success that
will allow us to better manage industry cycles.
Supply Chain Services. Our aerospace industry customers are increasingly
requiring additional supply chain management services as they seek to manage
inventory and lower their manufacturing costs. In response, we are developing a
number of logistics and supply chain management services that we expect will
contribute to our growth.
Capitalize on Global Presence. The aerospace industry is global and customers
increasingly seek suppliers with the ability to provide reliable and timely
service worldwide. The acquisition of Kaynar Technologies in April 1999 has
resulted in increased manufacturing and distribution capabilities in the U.S.
and Europe, and sales offices worldwide.
Growth through Acquisitions. Despite a trend toward consolidation, the
aerospace components industry remains fragmented. Consolidation has been driven,
in part, by the combination of the OEMs as they seek to reduce their procurement
costs. We have successfully integrated a number of acquisitions, achieving
material synergies in the process, and anticipate further opportunities to do so
in the future.
Our strategy is based on the following strengths:
Expanded Product Range. As a result of the acquisition of Kaynar Technologies,
we greatly expanded the range of products we offer. This expansion permits us to
provide our customers with more complete fastening solutions, by offering
engineering and supply chain services across the breadth of a customer's
aerospace needs. For example, our internally threaded fasteners, such as engine
nuts, which were formerly manufactured by Kaynar Technologies, are now being
sold in combination with our externally threaded fasteners, such as bolts and
pins, to provide a single fastening system. This limits the inventory needs of
the customer, minimizes handling costs and reduces waste.
Long-Term Customer Relationships. We work closely with our customers to
provide high quality engineering solutions accompanied by our superior service
levels. As a result, our customer relationships are generally long-term. For
example, in the fall of 1998 we were awarded a series of long-term commitments
from Boeing and certain other customers to provide a significant quantity of
aircraft fastening components over the next three to five years. We continue to
benefit from the trend of OEMs efforts to reduce the number of their suppliers
in an effort to lower costs and to ensure quality and availability. We have
become or been retained as a key supplier to the OEMs and increased our overall
share of OEM business. OEMs are increasingly demanding in terms of overall
service level, including just-in-time delivery of
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components to the production line. We believe that our focus on quality and
customer service will remain the cornerstone of our relationships with our
customers.
Diverse End Markets. Although a significant proportion of our sales are to
OEMs in the commercial aerospace industry, we have significant sales to the
defense/aerospace aftermarket and industrial markets. In addition, our
distribution business has a very low OEM component. We believe this
diversification will help mitigate the effects of the OEM cycle on our results.
Experienced Management Teams. We have management teams with many years of
experience in the aerospace components industry and a history of improving
quality, lowering costs and raising the level of customer service, leading to
higher overall profitability. In addition, our management teams have achieved
growth by successfully integrating a number of acquisitions.
Recent Developments
Our recent developments are incorporated herein by reference from "Recent
Developments and Significant Business Combinations" included in Item 7
"Management's Discussion and Analysis of Results of Operations and Financial
Condition".
Financial Information about Business Segments
Our business segment information is incorporated herein by reference from Note
18 of our Consolidated Financial Statements included in Item 8, "Financial
Statements and Supplementary Data"
Narrative Description of Business Segments
Aerospace Fasteners
Through our aerospace fasteners segment, we are a leading worldwide
manufacturer and distributor of precision fastening systems, components and
latching devices used primarily in the construction and maintenance of
commercial and military aircraft, as well as applications in other industries,
including the automotive, electronic and other non-aerospace industries. Our
April 20, 1999 acquisition of Kaynar Technologies has expanded our product range
to provide our customers with more complete fastening solutions by offering
engineering and supply chain services across the breadth of a customer's
aerospace needs. In recent years, we have made a concerted effort to establish a
substantial position in the distribution/supply chain services segment of the
aerospace fasteners industry. Through the acquisitions of Special-T Fasteners in
the United States and AS+C in Europe, we have created a unique capability that
we believe enhances dramatically our status as the industry's premier fastening
solutions provider. The aerospace fastener segment accounted for 84% of our net
sales in fiscal 2000.
Products (1) (see note below)
In general, the aerospace fasteners we produce are highly engineered, close
tolerance, high strength fastening devices designed for use in harsh, demanding
environments. Products range from standard aerospace screws and precision self-
locking internally threaded nuts, to more complex systems that fasten airframe
structures, and sophisticated latching or quick disconnect mechanisms that allow
efficient access to internal parts which require regular servicing or
monitoring. Our aerospace fasteners segment produces and sells products under
various trade names and trademarks. The trademarks discussed below either belong
to us or to third parties, which have licensed us to use such trademarks. These
trade names and trademarks include: Voi-Shan(R) (fasteners for aerospace
structures), Screwcorp(TM) (standard externally threaded products for aerospace
applications), K-FAST(TM) nuts (high-strength vibration resistant self-locking
nuts that offer fast, reliable, and repetitve installations with K-FAST(TM)
tooling), Keensert(TM) (inserts that include keys to lock the insert in place
and prevent rotation), RAM(R) (custom designed mechanisms for aerospace
applications), Perma-Thread(R) and Slimsert(TM) (inserts that create a thread
inside a hole and provide a high degree of thread protection and fastening
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integrity), Camloc(R) (components for the industrial, electronic, automotive and
aerospace markets), and Tridair(R) and Rosan(R) (fastening systems for highly-
engineered aerospace, military and industrial applications). Our aerospace
fasteners segment also manufactures and supplies fastening systems used in non-
aerospace industrial, electronic and marine applications.
Principal product lines of the aerospace fasteners segment include:
Standard Aerospace Airframe Fasteners - These fasteners consist of standard
externally threaded fasteners used in non-critical airframe applications on a
wide variety of aircraft. These fasteners include Hi-Torque Speed Drive(R),
Tri-Wing(R), Torq-Set(R) and Phillips(R). We offer a line of lightweight, non-
metallic composite fasteners, used primarily for military aircraft as they are
designed to reduce radar visibility, enhance resistance to lightning strikes and
provide galvanic corrosion protection. We also offer a variety of coatings and
finishes for our fasteners, including anodizing, cadmium plating, silver
plating, aluminum plating, solid film lubricants and water-based cetyl and
solvent free lubricants.
Commercial Aerospace Self-Locking Nuts - These precision, self-locking
internally threaded nuts are used in the manufacture of commercial aircraft and
aerospace/defense products and are designed principally for use in harsh,
demanding environments and include wrenchable nuts, K-Fast(TM) nuts, anchor
nuts, gang channels, shank nuts, barrel nuts, clinch nuts and stake nuts.
Commercial Aerospace Structural and Engine Fasteners - These fasteners consist
of more highly engineered, permanent or semi-permanent fasteners used in both
airframe and engine applications, which could involve joining more than two
materials. These fasteners are generally engineered to specific customer
requirements or manufactured to specific customer specifications for special
applications. We produce fasteners from a variety of materials, including
lightweight nuts and pins made out of aluminum and titanium, to high-strength,
high-temperature tolerant nuts and bolts manufactured from materials such as A-
286, Waspaloy(R), Inconel(R), and Hastelloy(R). These fasteners are designed
for critical aircraft engine and airframe applications. These fasteners include
Hi-Lok(R), Veri-Lite(R), Eddie-Bolt2(R) and customer proprietary engine nuts and
bolts.
Proprietary Products and Fastening Systems - These very highly engineered,
proprietary fasteners are designed by us for specific customer applications and
include high performance structural latches and hold down mechanisms. These
fasteners are usually proprietary in nature and are used primarily in either
commercial aerospace or military applications. They include Livelok(R),
Trimil(R), Keenserts(R), Mark IV(TM), Flatbeam(TM) and Ringlock(TM).
Threaded Inserts - These threaded inserts are used principally in the
commercial aerospace and defense industries and are made of high-grade steel and
other high-tensile metals which are intended to be installed into softer metals,
plastics and composite materials to create bolt-ready holes.
Highly Engineered Fastening Systems for Industrial Applications - These highly
engineered fasteners are designed by us for specific niche applications in the
electronic, automotive and durable goods markets and are sold under the
Camloc(R) trade name.
Precision Machined Structural Components and Assemblies - These precision
machined structural components and assemblies are used for aircraft, including
pylons, flap hinges, struts, wing fittings, landing gear parts, spares and many
other items.
Fastener Tools - These tools are designed primarily to install the fasteners
that we manufacture, but can also be used to attach other wrenchable nuts, bolts
and inserts.
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(1) - Note on the use of registered trademarks. The trademarks discussed herein
either belong to the Company or to third parties who have licensed the Company
to use such trademarks. Tri-Wing(R), Torq-set(R) and Phillips(R) are registered
trademarks of Phillips Screw Company. Waspaloy(R) is a trademark of Carpenter
Technologies Corporation. Hastelloy(R) is a registered trademark of Haynes
International, Inc. Hi-Lok(R) is registered trademark of Hi-Shear Corporation.
Visul-lok(R) and Composi-lok(R) are registered trademarks of Monogram Aerospace
Fasteners, Inc.
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Sales and Markets
The products of our aerospace fasteners segment are sold primarily to domestic
and foreign OEMs of airframes and engines, as well as to subcontractors of OEMs,
and to the maintenance and repair market through distributors. Approximately 66%
of our sales are domestic. Major customers include OEMs such as Boeing,
European Aeronautic Defense and Space Company, and General Electric and their
subcontractors, as well as distributors such as Honeywell, and Wesco Aircraft
Hardware. In fiscal 2000, many OEMs implemented programs to reduce inventories
and pursue just-in-time relationships. In response, we are expanding efforts to
provide supply chain services through our global customer service units, which
include the distributors we acquired in fiscal 1998, formerly known as Special-T
Fasteners in the United States and AS+C in Europe. Although no one customer
accounted for more than 10% of our consolidated sales in fiscal 2000, a large
portion of our revenues come from Boeing and customers providing parts or
services to Boeing, including defense sales, and the European Aeronautic Defense
and Space Company and their subcontractors. Accordingly, we are dependent on the
business of those manufacturers.
Revenues in our aerospace fasteners segment are closely related to aircraft
production. As OEMs searched for cost cutting opportunities during the
aerospace industry recession of 1993-1995, parts manufacturers, including us,
accepted lower-priced orders and/or smaller quantity orders to maintain market
share, at lower profit margins. However, during recent years, this situation
has improved as build rates in the aerospace industry have increased and
resulted in capacity constraints. Although lead times have increased, we have
been able to provide our major customers with favorable pricing, while
maintaining or increasing margins by negotiating for larger minimum lot sizes
that are more economic to manufacture.
Fasteners also have applications in the automotive/industrial markets, where
numerous special fasteners are required, such as engine bolts, wheel bolts and
turbo charger tension bolts. We are actively targeting all markets where
precision fasteners are used.
Manufacturing and Production
Our aerospace fasteners segment has fifteen primary manufacturing facilities,
of which eight are located in the United States, six are located in Europe and
one is located in Australia. Each facility has complete production capability.
Each plant is designed to produce a specified product or group of products,
determined by the production process involved and certification requirements.
Our aerospace fasteners segment's largest customers have recognized its quality
and operational controls by conferring their advanced quality systems
certifications at substantially all of our facilities (e.g. Boeing's D1-9000A).
We have received all necessary quality and product approvals from OEMs.
We have a modern information system at all of our U.S. facilities, which was
expanded to most of our European operations in fiscal 1999 and 2000. The new
system was designed to perform detailed and timely cost analysis of production
by product and facility. Updated IT systems also help us to better service our
customers. OEMs require each product to be produced in an OEM-qualified/OEM-
approved facility.
Competition
Despite intense competition in the industry, we remain the largest
manufacturer of aerospace fasteners. Based on calendar 1999 information, the
worldwide aerospace fastener market is estimated to be $1.3 billion (before
distributor resales). We hold approximately 38% of the market and compete with
SPS Technologies, GFI Industries, and the Huck International division of Alcoa,
which, we believe, hold approximately 18%, 13% and 10% of the market,
respectively.
Quality, performance, service and price are generally the prime competitive
factors in the aerospace fasteners segment. Our broad product range allows us to
serve more fully each OEM and distributor. Our product array is diverse and
offers customers a large selection to address various production needs. We seek
to maintain our technological edge and competitive advantage over our
competitors, and have demonstrated our innovative production methods and new
products
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and supply chain services to meet customer demands. We seek to work closely with
OEMs and involve ourselves early in the design process in order that our
products may be incorporated into the design of their products.
Aerospace Distribution
Through our subsidiary Banner Aerospace, Inc., we offer a wide variety of
aircraft parts, component repair and overhaul and aircraft services. The
aircraft parts, which we distribute are either purchased on the open market or
acquired from OEMs as an authorized distributor. No single distributor
arrangement is material to our financial condition. The aerospace distribution
segment accounted for 16% of our total sales in fiscal 2000.
Products
Products of the aerospace distribution segment include rotable parts such as
flight data recorders, radar and navigation systems, instruments, hydraulic and
electrical components, space components and electronic warfare systems.
Rotable parts are sometimes purchased as new parts, but are generally
purchased in the aftermarket and are then overhauled by us or for us by outside
contractors, including OEMs or FAA-licensed facilities. Rotables are sold in a
variety of conditions such as new, overhauled, serviceable and "as is".
Rotables may also be exchanged instead of sold. An exchange occurs when an item
in inventory is exchanged for a customer's part and the customer is charged an
exchange fee.
An extensive inventory of products and a quick response time are essential in
providing support to our customers. Another key factor in selling to our
customers is our ability to maintain a system that traces a part back to the
manufacturer or repair facility. We also offer immediate shipment of parts in
aircraft-on-ground situations.
Through our FAA-licensed repair stations we provide a number of services such
as component repair and overhaul and aircraft services. Component repair and
overhaul capabilities include pressurization, instrumentation, avionics,
aircraft accessories and airframe components. Aircraft services include aircraft
sales, inspections, repairs, maintenance, modifications and avionics for
corporate aircraft.
Sales and Markets
Our aerospace distribution segment sells its products in the United States and
abroad to commercial airlines and air cargo carriers, fixed-base operators,
corporate aircraft operators, distributors and other aerospace companies.
Approximately 78% of our sales are to domestic purchasers, some of whom may
represent offshore users.
Our aerospace distribution segment conducts marketing efforts through its
direct sales force, outside representatives and, for some product lines,
overseas sales offices. Sales in the aviation aftermarket depend on price,
service, quality and reputation. Our aerospace distribution segment's business
does not experience significant seasonal fluctuations nor depend on a single
customer. No single customer accounts for more than 10% of our consolidated
revenue.
Competition
Our aerospace distribution segment competes with Air Ground Equipment
Services, Duncan Aviation, Stevens Aviation; OEMs such as Honeywell, Rockwell
Collins, Raytheon, and Litton; other fixed based operators and maintenance
repair organizations; and many smaller companies.
Other Operations
We also own several parcels of developed and undeveloped land almost entirely
representing residuals of operations previously divested or closed. Included
among these is an 88-acre site in Farmingdale, New York, on which we are
currently developing and operating a retail shopping center.
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Foreign Operations
Our operations are located throughout the world. Inter-area sales are not
significant to the total revenue of any geographic area. Export sales are made
by U.S. businesses to customers in non-U.S. countries, whereas foreign sales are
made by our non-U.S. subsidiaries. For our sales results by geographic area and
export sales, see Note 19 of our Consolidated Financial Statements included in
Item 8, "Financial Statements and Supplementary Data".
Backlog of Orders
Backlog is important for all our operations, due to the long-term production
requirements of our customers. Our backlog of orders as of June 30, 2000 in the
aerospace fasteners segment amounted to $204 million. We anticipate that in
excess of 85% of the aggregate backlog at June 30, 2000 will be delivered by
June 30, 2001. In the fall of 1998, we were awarded a series of long-term
commitments from Boeing to provide a significant quantity of aircraft fastening
components over a three-to-five year period. However, amounts related to such
agreements are not included in our backlog until Boeing specifies delivery dates
for fasteners ordered.
Suppliers
We are not materially dependent upon any one supplier, but we are dependent
upon a wide range of subcontractors, vendors and suppliers of materials to meet
our commitments to our customers. From time to time, we enter into exclusive
supply contracts in return for logistics and price advantages. We do not believe
that any one of these contracts would impair our operations if a supplier failed
to perform.
Nevertheless, commercial deposits of certain metals, such as titanium and
nickel, which are required for the manufacture of several of our products, are
found only in certain parts of the world. The availability and prices of these
metals may be influenced by private or governmental cartels, changes in world
politics, unstable governments in exporting nations, or inflation. Similarly,
supplies of steel and other less exotic metals used by us may also be subject to
variation in availability. We purchase raw materials, which include the various
metals, composites, and finishes used in production, from over twenty different
suppliers. We have entered into several long-term contracts to supply titanium
and alloy metals. In the past, fluctuations in the price of titanium have had an
adverse effect on our sales margins.
Research and Patents
We own patents relating to the design and manufacture of certain of our
products and are licensees of technology covered by the patents of other
companies. We do not believe that any of our business segments are dependent
upon any single patent.
Personnel
As of June 30, 2000, we had approximately 4,900 employees. Of these,
approximately 3,300 are based in the United States and 1,600 are based in Europe
and elsewhere. Approximately 20% of our employees were covered by collective
bargaining agreements. Although, in the past, we have had isolated work
stoppages in France, these stoppages have not had a material impact on our
business. Overall, we believe that our relations with our employees are good.
Environmental Matters
A discussion of our environmental matters is included in Note 17,
"Contingencies", to our Consolidated Financial Statements, included in Part II,
Item 8, "Financial Statements and Supplementary Data" and is incorporated herein
by reference.
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ITEM 2. PROPERTIES
As of June 30, 2000, we owned or leased buildings totaling approximately
1,933,000 square feet, of which approximately 1,100,000 square feet were owned
and 825,000 square feet were leased. Our aerospace fasteners segment's
properties consisted of approximately 1,750,000 square feet, with principal
operating facilities of approximately 1,575,000 square feet concentrated in
Southern California, Massachusetts, France, Germany and Australia. The
aerospace distribution segment's properties consisted of approximately 90,000
square feet, with principal operating facilities of approximately 30,000 square
feet located in Georgia. We lease our corporate headquarters building at
Washington-Dulles International Airport.
The following table sets forth the location of the larger properties used in
our continuing operations, their square footage, the business segment or groups
they serve and their primary use. Each of the properties owned or leased by us
is, in our opinion, generally well maintained. All of our occupied properties
are maintained and updated on a regular basis.
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Owned or Square
Location Leased Footage Business Segment/Group Primary Use
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Saint Cosme, France Owned 304,000 Aerospace Fasteners Manufacturing
Fullerton, California Leased 288,000 Aerospace Fasteners Manufacturing
Torrance, California Owned 284,000 Aerospace Fasteners Manufacturing
City of Industry, California Owned 140,000 Aerospace Fasteners Manufacturing
Stoughton, Massachusetts Leased 110,000 Aerospace Fasteners Manufacturing
Montbrison, France Owned 63,000 Aerospace Fasteners Manufacturing
Huntington Beach, California Owned 58,000 Aerospace Fasteners Manufacturing
Hildesheim, Germany Owned 57,000 Aerospace Fasteners Manufacturing
Toulouse, France Owned 52,000 Aerospace Fasteners Manufacturing
Kelkheim, Germany Owned 52,000 Aerospace Fasteners Manufacturing
Chatsworth, California Leased 36,000 Aerospace Fasteners Distribution
Dulles, Virginia Leased 34,000 Corporate Office
Atlanta, Georgia Leased 29,000 Aerospace Distribution Distribution
Victoria, Australia Leased 24,000 Aerospace Fasteners Manufacturing
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We have several parcels of property which we are attempting to market, lease
and/or develop, including: (i) an eighty-eight acre parcel located in
Farmingdale, New York, (ii) a six acre parcel in Temple City, California, (iii)
an eight acre parcel in Chatsworth, California, and (iv) several other parcels
of real estate, located primarily throughout the continental United States.
Information concerning our long-term rental obligations at June 30, 2000, is
set forth in Note 16 to our Consolidated Financial Statements, included in Item
8, "Financial Statements and Supplementary Data", and is incorporated herein by
reference.
ITEM 3. LEGAL PROCEEDINGS
A discussion of our legal proceedings is included in Note 17, "Contingencies",
to our Consolidated Financial Statements, included in Part II, Item 8,
"Financial Statements and Supplementary Data", of this annual report and is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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PART II
ITEM 5 MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market Information
Our Class A common stock is traded on the New York Stock Exchange and Pacific
Stock Exchange under the symbol FA. Our Class B common stock is not listed on
any exchange and is not publicly traded. Class B common stock can be converted
to Class A common stock at any time at the option of the holder.
Information regarding the quarterly price range of our Class A common stock is
incorporated herein by reference from Note 20 of our Consolidated Financial
Statements included in Item 8, "Financial Statements and Supplementary Data".
We are authorized to issue 5,141,000 shares of our Class A common stock under
our 1986 non-qualified stock option plan, and 250,000 shares of our Class A
common stock under our 1996 non-employee directors stock option plan. At the
beginning and of the fiscal year we had 317,597 shares available to grant under
the 1986 non-qualified stock option plan and 139,000 shares available to grant
under the 1996 non-employee directors stock option plan. At the end of the
fiscal year we had 325,997 shares available to grant under the 1986 non-
qualified stock option plan and 103,000 shares available to grant under the 1996
non-employee directors stock option plan. Information regarding our stock
option plans is incorporated herein by referenced from Note 11 of our
Consolidated Financial Statements included in Item 8, "Financial Statements and
Supplementary Data".
Holders of Record
We had approximately 1,301 and 38 record holders of our Class A and Class B
common stock, respectively, at September 8, 2000.
Dividends
Our current policy is to retain earnings to support the growth of our present
operations and to reduce our outstanding debt. Any future payment of dividends
will be determined by our Board of Directors and will depend on our financial
condition, results of operations and by restrictive covenants in our credit
agreement and 10 3/4% senior subordinated notes that limit the payment of
dividends over their respective terms. See Note 7 of our Consolidated Financial
Statements included in Item 8, "Financial Statements and Supplementary Data".
Sale of Unregistered Securities
In fiscal 1998, we adopted a stock option deferral plan for officers and
directors, pursuant to which recipients of stock options may elect to defer the
gain on exercise of stock options. The "gain" is the difference between the
market value of the shares issued to an officer or director upon exercise of the
stock option, and the price paid by the officer or director for the exercise of
such stock option. An officer's or director's deferred gain is issued in the
form of "deferred compensation units." Each deferred compensation unit entitles
the recipient to receive one share of Class A common stock upon expiration of
the "deferral period" for the stock options exercised.
The deferred compensation units may be deemed our securities. Only officers
and directors who are accredited investors are allowed to elect to receive
deferred compensation units. The shares issued to an officer or director upon
expiration of the deferral period (in exchange for deferred compensation units)
have been registered pursuant to a Registration Statement on Form S-8.
In fiscal 1998, under the stock option deferral plan, J. Flynn deferred
$85,313 in exchange for 4,027 deferred compensation units; D. Miller deferred
$85,313 in exchange for 4,027 deferred compensation units; and E. Steiner,
deferred $573,750 in exchange for 24,545 deferred compensation units. In fiscal
1999, under the stock option deferral
11
<PAGE>
plan, D. Miller deferred $135,000 in exchange for 8,852 deferred compensation
units. In fiscal 2000, under the stock option deferral plan, P. David deferred
$118,125 in exchange for 15,882 deferred compensation units; J. Flynn deferred
$80,625 in exchange for 9,126 deferred compensation units; H. Harris deferred
$116,250 in exchange for 15,762 deferred compensation units; D. Miller deferred
$120,000 in exchange for 13,568 deferred compensation units; H. Richey deferred
$140,000 in exchange for 18,666 deferred compensation units; E. Steiner deferred
$125,938 in exchange for 14,254 deferred compensation units; and J. Steiner,
deferred $303,750 in exchange for 33,986 deferred compensation units.
On February 23, 2000, Deutsche Bank exercised a warrant of 250,000 shares
through a "cashless exercise". This resulted in the issuance of 63,300
unregistered shares. The shares were deemed to have been held by the warrant
holder for more than two years, and may be sold by the warrant holder in the
market pursuant to Rule 144.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Five-Year Financial Summary
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the years ended June 30,
--------------------------------------------------------------------------
Summary of Operations: 2000 1999 1998 1997 1996
------------- ------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 635,361 $ 617,322 $ 741,176 $ 680,763 $349,236
Gross profit 163,338 112,429 186,506 181,344 74,101
Operating income (loss) 23,243 (45,911) 45,443 33,499 (11,286)
Net interest expense 44,092 30,346 42,715 47,681 56,459
Earnings (loss) from continuing operations 21,764 (23,507) 52,399 1,816 (32,186)
Earnings (loss) per share from continuing
operations:
Basic $ 0.87 $ (1.03) $ 2.78 $ 0.11 $ (1.98)
Diluted 0.87 (1.03) 2.66 0.11 (1.98)
Other Data:
EBITDA 65,065 (20,254) 66,316 54,314 5,931
Capital expenditures 27,339 30,142 36,029 15,014 5,680
Cash provided by (used for) operating activities (67,072) 23,268 (85,231) (93,321) (48,951)
Cash provided by (used for) investing activities 90,372 (99,157) 43,614 73,238 57,540
Cash provided by (used for) financing activities (41,373) 81,218 74,088 (1,455) (39,637)
Balance Sheet Data:
Total assets 1,267,420 1,328,786 1,157,259 1,052,666 993,398
Long-term debt, less current maturities 453,719 495,283 295,402 416,922 368,589
Stockholders' equity 402,113 407,500 473,559 232,424 230,861
per outstanding common share $ 16.05 $ 16.38 $ 20.54 $ 13.98 $ 14.10
</TABLE>
The results of Banner Aerospace, Inc. are included in the periods since
February 25, 1996, when Banner Aerospace became a majority-owned subsidiary.
Prior to February 25, 1996, our investment in Banner Aerospace was accounted for
using the equity method. Fiscal 1998 includes the gain from the disposition of
Banner Aerospace's hardware group. The results of the hardware group are
included in the periods from March 1996 through December 1997, until
disposition. Fiscal 1999 includes the loss on the disposition of Banner
Aerospace's Solair subsidiary and the loss recognized on the sale of Dallas
Aerospace. The results of Solair are included in the periods from March 1996
through December 1998, until disposition. The results of Dallas Aerospace are
included in the periods from March 1996 through November 1999, until
disposition. These transactions materially affect the comparability of the
information reflected in the selected financial data.
EBITDA represents the sum of operating income before depreciation and
amortization. Included in EBITDA are restructuring and unusual charges of
$8,578, $6,374 and $2,319 in fiscal 2000, 1999 and 1996, respectively. We
consider EBITDA to be an indicative measure of our operating performance due to
the significance of our long-lived assets and because such data is considered
useful by the investment community to better understand our results, and can be
used to measure our ability to service debt, fund capital expenditures and
expand our business. EBITDA is not a measure of financial performance under
GAAP, may not be comparable to other similarly titled measures of other
companies and should not be considered as an alternative either to net income as
an indicator of our operating performance, or to cash flows as a measure of our
liquidity. Cash expenditures for various long-term assets, interest expense, and
income taxes have been, and will be incurred which are not reflected in the
EBITDA presentation.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The Fairchild Corporation was incorporated in October 1969, under the laws of
the State of Delaware, under the name of Banner Industries, Inc. On November
15, 1990, we changed our name from Banner Industries, Inc. to The Fairchild
Corporation. We are the owner of 100% of RHI Holdings, Inc. and Banner
Aerospace, Inc. RHI is the owner of 100% of Fairchild Holding Corp. Our
principal operations are conducted through FHC and Banner Aerospace. During the
periods presented, we held significant equity interests in Nacanco Paketleme and
Shared Technologies Fairchild Inc.
The following discussion and analysis provide information which management
believes is relevant to the assessment and understanding of our consolidated
results of operations and financial condition. The discussion should be read in
conjunction with the consolidated financial statements and notes thereto.
GENERAL
We are a leading worldwide aerospace and industrial fastener manufacturer and
distribution supply chain services manager and, through Banner Aerospace, an
international supplier to airlines and general aviation businesses, distributing
a wide range of aircraft parts and related support services. Through internal
growth and strategic acquisitions, we have become one of the leading suppliers
of fasteners to aircraft OEMs, such as Boeing, European Aeronautic Defense and
Space Company, General Electric, Lockheed Martin, and Northrop Grumman.
Our aerospace business consists of two segments: aerospace fasteners and
aerospace distribution. The aerospace fasteners segment manufactures and markets
high performance fastening systems used in the manufacture and maintenance of
commercial and military aircraft. The aerospace distribution segment stocks and
distributes a wide variety of aircraft parts to commercial airlines and air
cargo carriers, fixed-base operators, corporate aircraft operators and other
aerospace companies.
CAUTIONARY STATEMENT
Certain statements in this financial discussion and analysis by management
contain certain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 with respect to our financial
condition, results of operation and business. These statements relate to
analyses and other information which are based on forecasts of future results
and estimates of amounts not yet determinable. These statements also relate to
our future prospects, developments and business strategies. These forward-
looking statements are identified by their use of terms and phrases such as
"anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan,"
"predict," "project," "will" and similar terms and phrases, including references
to assumptions. These forward-looking statements involve risks and
uncertainties, including current trend information, projections for deliveries,
backlog and other trend projections, that may cause our actual future activities
and results of operations to be materially different from those suggested or
described in this Annual Report on Form 10-K. These risks include: product
demand; our dependence on the aerospace industry; reliance on Boeing and
European Aeronautic Defense and Space Company; customer satisfaction and quality
issues; labor disputes; competition, including recent intense price competition;
our ability to achieve and execute internal business plans; worldwide political
instability and economic growth; and the impact of any economic downturns and
inflation.
If one or more of these risks or uncertainties materializes, or if underlying
assumptions prove incorrect, our actual results may vary materially from those
expected, estimated or projected. Given these uncertainties, users of the
information included in this financial discussion and analysis by management,
including investors and prospective investors are cautioned not to place undue
reliance on such forward-looking statements. We do not intend to update these
forward-looking statements in this Annual Report, even if new information,
future events or other circumstances have made them incorrect or misleading.
14
<PAGE>
RESULTS OF OPERATIONS
Business Transactions
The following summarizes certain business combinations and transactions we
completed which significantly affect the comparability of the period to period
results presented in this Management's Discussion and Analysis of Results of
Operations and Financial Condition.
Fiscal 2000 Transactions
On July 29, 1999, we sold our 31.9% interest in Nacanco Paketleme to American
National Can Group, Inc. for approximately $48.2 million. 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.
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.
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 term indebtedness.
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".
Fiscal 1999 Transactions
On December 31, 1998, Banner consummated the sale of Solair, Inc., its largest
subsidiary in the rotables group of the aerospace distribution segment, to
Kellstrom Industries, Inc., in exchange for approximately $60.4 million in cash
and a warrant to purchase 300,000 shares of common stock of Kellstrom. In
December 1998, Banner recorded a $19.3 million pre-tax loss from the sale of
Solair. This loss was included in cost of goods sold as it was primarily
attributable to the bulk sale of inventory at prices below the carrying amount
of inventory.
On February 22, 1999, we used available cash to acquire 77.3% of SNEP S.A. By
June 30, 1999, we had purchased significantly all of the remaining shares of
SNEP. The total amount paid was approximately $8.0 million, including $1.1
million of debt assumed, in a business combination accounted for as a purchase.
The total cost of the acquisition exceeded the fair value of the net assets of
SNEP by approximately $4.3 million, which is being allocated as goodwill, and
amortized using the straight-line method over 40 years. SNEP is a French
manufacturer of precision machined self-locking nuts and special threaded
fasteners serving the European industrial, aerospace and automotive markets.
On April 8, 1999, we acquired the remaining 15% of the outstanding common and
preferred stock of Banner Aerospace, Inc. not already owned by us, through the
merger of Banner with one of our subsidiaries. Under the terms of the merger
with Banner, we issued 2,981,412 shares of our Class A common stock to acquire
all of Banner's common and preferred stock (other than those already owned by
us). Banner is now our wholly-owned subsidiary.
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<PAGE>
On April 20, 1999, we completed the acquisition of all the capital stock of
Kaynar Technologies Inc. for approximately $222 million and assumed
approximately $103 million of existing debt, the majority of which was
refinanced at closing. In addition, we paid $28 million for a covenant not to
compete from Kaynar Technologies' largest preferred shareholder. The total cost
of the acquisition exceeded the fair value of the net assets of Kaynar
Technologies by approximately $282 million, which is being allocated as
goodwill, and amortized using the straight-line method over 40 years. The
acquisition was financed with existing cash, the sale of $225 million of 10 3/4%
senior subordinated notes due 2009 and proceeds from a new bank credit facility.
On June 18, 1999, we completed the acquisition of Technico S.A. for
approximately $4.1 million and assumed approximately $2.2 million of Technico's
existing debt. The total cost of the acquisition exceeded the fair value of the
net assets of Technico by approximately $3.4 million, which is being allocated
as goodwill, and amortized using the straight-line method over 40 years. The
acquisition was financed with additional borrowings from our credit facility.
Fiscal 1998 Transactions
On November 28, 1997, we acquired AS+C GmbH, Aviation Supply + Consulting in a
business combination accounted for as a purchase. The total cost of the
acquisition was $14.0 million, which exceeded the fair value of the net assets
of AS+C by approximately $8.1 million, which is allocated as goodwill and
amortized using the straight-line method over 40 years. We purchased AS+C with
cash borrowings. AS+C is an aerospace parts, logistics, and distribution company
primarily servicing the European OEM market.
On December 19, 1997, we completed a secondary offering of public securities.
The offering consisted of an issuance of 3,000,000 shares of our Class A common
stock at $20.00 per share, which generated $57 million of net proceeds. On
December 19, 1997, immediately following the Offering, we restructured our FHC
and RHI credit agreements by entering into a new six-and-a-half-year credit
facility to provide us with a $300 million senior secured credit facility
consisting of (i) a $75 million revolving loan with a letter of credit sub-
facility of $30 million and a $10 million swing loan sub-facility, and (ii) a
$225 million term loan.
On January 13, 1998, Banner Aerospace completed the disposition of
substantially all of the assets and certain liabilities of certain of its
subsidiaries to two wholly-owned subsidiaries of AlliedSignal Inc. (now
Honeywell International), in exchange for shares of AlliedSignal common stock
with an aggregate value of $369 million. The assets transferred to AlliedSignal
consisted primarily of Banner Aerospace's hardware group, which included the
distribution of bearings, nuts, bolts, screws, rivets and other types of
fasteners, and its PacAero unit. Approximately $196 million of the common stock
received from AlliedSignal Inc. was used to repay outstanding term loans of
Banner Aerospace's subsidiaries, and related fees.
On February 3, 1998, with the proceeds of the equity offering, term loan
borrowings under the credit facility, and a portion of the after tax proceeds we
received from the Shared Technologies Fairchild, we refinanced substantially all
of our then existing indebtedness (other than indebtedness of Banner),
consisting of (i) $63.0 million to redeem 11 7/8% Senior Debentures due 1999;
(ii) $117.6 million to redeem 12% Intermediate Debentures due 2001; (iii) $35.9
million to redeem 13 1/8% Subordinated Debentures due 2006; (iv) $25.1 million
to redeem 13% Junior Subordinated Debentures due 2007; and (vi) accrued interest
of $10.6 million.
On March 2, 1998, we acquired Edwards and Lock Management Corporation, doing
business as Special-T Fasteners, in a business combination accounted for as a
purchase. The cost of the acquisition was approximately $50.0 million, of which
50.1% of the contractual purchase price was paid in shares of our Class A common
stock and 49.9% was paid in cash. The total cost of the acquisition exceeded the
fair value of the net assets of Special-T by approximately $23.3 million, which
is being allocated as goodwill, and amortized using the straight-line method
over 40 years. Special-T manages the logistics of worldwide distribution of
Company-manufactured precision fasteners to customers in the aerospace industry,
government agencies, OEMs, and other distributors.
On March 11, 1998, Shared Technologies Fairchild Inc. merged into Intermedia
Communications Inc. Under the terms of the merger, holders of Shared
Technologies Fairchild common stock received $15.00 per share in cash. We
received
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<PAGE>
approximately $178.0 million in cash (before tax and selling expenses) in
exchange for the common and preferred stock of Shared Technologies Fairchild we
owned. In fiscal 1998, we recorded a $96.0 million gain, net of tax, on disposal
of discontinued operations, from the proceeds received from the merger of Shared
Technologies Fairchild with Intermedia. The results of Shared Technologies
Fairchild have been accounted for as discontinued operations.
On May 11, 1998, we commenced an offer to exchange, for each properly tendered
share of common stock of Banner, a number of shares of our Class A common stock,
par value $0.10 per share, equal to the quotient of $12.50 divided by $20.675 up
to a maximum of 4,000,000 shares of Banner Aerospace's common stock. The
exchange offer expired on June 9, 1998 and 3,659,364 shares of Banner
Aerospace's common stock were validly tendered for exchange and we issued
2,212,361 shares Class A common stock to the tendering shareholders.
Consolidated Results
We currently report in two principal business segments: aerospace fasteners
and aerospace distribution. The results of the Gas Springs division are
included in the Corporate and Other classification. The following table
illustrates the historical sales and operating income of our operations for the
past three years.
<TABLE>
<CAPTION>
(In thousands) For the years ended June 30,
---------------------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Sales by Segment:
Aerospace Fasteners $533,620 $442,722 $387,236
Aerospace Distribution 101,002 168,336 358,431
Corporate and Other 739 6,264 5,760
Eliminations (a) - - (10,251)
----------------- ----------------- -----------------
Total Sales $635,361 $617,322 $741,176
================= ================= =================
Operating Income (Loss) by Segment:
Aerospace Fasteners $ 33,909 $ 38,956 $ 32,722
Aerospace Distribution 7,758 (40,003) 20,330
Corporate and Other (18,424) (44,864) (7,609)
----------------- ----------------- -----------------
Total Operating Income (Loss) (b) $ 23,243 $(45,911) $ 45,443
================= ================= =================
</TABLE>
(a) Represents intersegment sales from our aerospace fasteners segment to our
aerospace distribution segment.
(b) Fiscal 2000 results include restructuring charges of $8,578 in the
aerospace fasteners segment. Fiscal 1999 results include inventory
impairment charges of $41,465 in the aerospace distribution segment, costs
relating to acquisitions of $23,604 and restructuring charges of $5,526 in
the aerospace fasteners segment, $348 in the aerospace distribution
segment, and $500 at corporate.
The following unaudited pro forma table illustrates sales and operating income
of our operations by segment, on a pro forma basis, as if we had operated in a
consistent manner for the past three years. The pro forma results represent the
impact of our acquisition of Kaynar Technologies (completed in April 1999), our
merger with Banner Aerospace (completed in April 1999), our acquisition of
Special-T (effective January 1998), and our dispositions of Dallas Aerospace
(December 1999), Solair (December 1998), the hardware group of Banner Aerospace
(completed January 1998), and the investment in Nacanco Paketleme (July 1999)
and Shared Technologies Fairchild (completed in March 1998), as if these
transactions had occurred at the beginning of each period presented. The pro
forma information is based on the historical financial statements of these
companies, giving effect to the aforementioned transactions. The pro forma
information is not necessarily indicative of the results of operations that
would actually have occurred if the transactions had been in effect since the
beginning of each period, nor are they necessarily indicative of our future
results.
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<PAGE>
<TABLE>
<CAPTION>
For the years ended June 30,
---------------------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Sales by Segment:
Aerospace Fasteners $533,620 $610,200 $630,538
Aerospace Distribution 79,308 70,196 68,335
Corporate and Other 739 6,264 5,760
----------------- ----------------- -----------------
Total Sales $613,667 $686,660 $704,633
================= ================= =================
Operating Income (Loss) by Segment:
Aerospace Fasteners $ 33,909 $ 54,427 $ 68,037
Aerospace Distribution 5,680 (1,611) 3,355
Corporate and Other (18,397) (24,071) (12,439)
----------------- ----------------- -----------------
Total Operating Income (Loss) (a) $ 21,192 $ 28,745 $ 58,953
================= ================= =================
</TABLE>
(a) Fiscal 2000 results include restructuring charges of $8,578 in the
aerospace fasteners segment. Fiscal 1999 results include costs relating to
acquisitions of $23,604 and restructuring charges of $5,526 in the
aerospace fasteners segment, $348 in the aerospace distribution segment,
and $500 at corporate.
Net sales of $635.4 million in 2000 increased by $18.0 million, or 2.9%,
compared to sales of $617.3 million in 1999. The improvement is attributable
primarily to the additional revenues provided by the acquisition of Kaynar
Technologies, offset partially by the dispositions of Solair and Dallas
Aerospace. Net sales of $617.3 million in 1999 decreased by $123.9 million, or
16.7%, compared to sales of $741.2 million in 1998. The decrease is attributable
primarily to the loss of revenues resulting from the disposition of our
aerospace distribution segment's hardware group and Solair. On a pro forma
basis, net sales decreased 10.6% and 2.6% in 2000 and 1999, respectively, as
compared to the previous fiscal periods.
Gross margin as a percentage of sales was 25.7%, 18.2%, and 25.2% in 2000,
1999, and 1998, respectively. Included in cost of goods sold for 1999 was a
charge of $41.5 million recognized in our aerospace distribution segment from
the dispositions of Solair and Dallas Aerospace. Of this charge, $19.3 million
was attributable to Solair's bulk sale of inventory at prices below the carrying
amount. Excluding these charges, gross margin as a percentage of sales was
24.9% in fiscal 1999. The change in margins in 2000 and 1999 periods are
attributable to a change in product mix as a result of the acquisitions and
dispositions. Partially offsetting the overall lower margins in 1999 was an
improvement in margins within our aerospace fasteners segment, resulting from
acquisitions, efficiencies associated with production being integrated, and
improved skills of the work force.
Selling, general & administrative expense as a percentage of sales was 21.0%,
24.2%, and 19.2%, in 2000, 1999, and 1998, respectively. Included in selling,
general & administrative expense in fiscal 1999 were $23.6 million of one-time
costs associated primarily with the acquisition of Kaynar Technologies.
Excluding these costs, selling, general & administrative expense as a percentage
of sales would have been 20.4% in 1999.
Other income increased $10.5 million in 2000 as compared to 1999, due
primarily to $5.1 million of gains recognized on the disposition of real estate
and $3.2 million in increased rental income received from new tenants occupying
a shopping center we own and are developing in Farmingdale, New York. Other
income decreased $2.6 million in 1999 as compared to 1998, due primarily to the
fiscal 1998 condemnation of air rights over a portion of the property we own in
Farmingdale, New York.
In fiscal 1999, we recorded $6.4 million of restructuring charges. Of this
amount, $0.5 million was recorded at our corporate office for severance benefits
and $0.3 million was recorded at our aerospace distribution segment for the
write-
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<PAGE>
off of building improvements from premises vacated. The remainder, $5.5 million
was recorded as a result of the costs incurred from the initial integration of
Kaynar Technologies into our aerospace fasteners segment, i.e. for severance
benefits ($3.9 million), for product integration costs incurred as of June 30,
1999 ($1.3 million), and for the write down of fixed assets ($0.3 million). In
fiscal 2000, we recorded $8.6 million of restructuring charges as a result of
the continued integration of Kaynar Technologies into our aerospace fasteners
segment. All of the charges recorded were a direct result of product and plant
integration costs incurred as of June 30, 2000. These costs were classified as
restructuring and were the direct result of formal plans to move equipment,
close plants and to terminate employees. Such costs are nonrecurring in nature.
Other than a reduction in our existing cost structure, none of the restructuring
charges resulted in future increases in earnings or represented an accrual of
future costs. As of June 30, 2000, significantly all of our integration plans
have been executed and our integration process is substantially complete.
Operating income of $23.2 million in fiscal 2000 increased $69.2 million, or
150.6%, compared to an operating loss of $45.9 million in fiscal 1999. We
reported an operating loss of $45.9 million in fiscal 1999, which was a decrease
from operating income of $45.4 million reported in fiscal 1998. Fiscal 1999 was
affected by $71.4 million of expenses recognized for inventory impairment,
restructuring costs and other costs related to acquisitions. Fiscal 2000 results
also improved because of $5.1 million of gains recognized on the sale of real
estate, and $3.2 million in increased rental income received from new tenants
occupying a shopping center we own and are developing in Farmingdale, New York.
Net interest expense increased by 45.3% in fiscal 2000 as compared to fiscal
1999, as a result of the additional debt we incurred to finance the acquisition
of Kaynar Technologies. Net interest expense decreased 29.0% in fiscal 1999
compared to fiscal 1998. The improvement in fiscal 1999 was due to a series of
transactions occurring in fiscal 1998 that significantly reduced our total debt.
Investment income (loss), net, was $9.9 million, $39.8 million, and $(3.4)
million in 2000, 1999, and 1998, respectively. Investment income in fiscal 2000
and fiscal 1999, respectively, was due primarily to recognizing realized gains
on investments liquidated. We recognized a large gain in 1999 from the
liquidation of our position in AlliedSignal to raise funds to acquire Kaynar
Technologies.
Nonrecurring income of $28.6 million in fiscal 2000 resulted from a $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. Nonrecurring income of $124.0 million
in 1998 resulted from the disposition of Banner Aerospace's hardware group.
We recorded an income tax benefit of $4.4 million in fiscal 2000 on earnings
from continuing operations of $17.7 million. A tax benefit was recorded due
primarily to a change in the estimate of required tax accruals. We recorded an
income tax benefit of $13.2 million in fiscal 1999 representing a 36.3%
effective tax rate on pre-tax losses from continuing operations. The tax benefit
approximates the statutory rate. The income tax provision of $47.3 million
reported in fiscal 1998 represents a 38.3% effective tax rate on pre-tax
earnings from continuing operations of $123.4 million. The tax provision was
slightly higher than the statutory rate because of goodwill associated with the
disposition of Banner Aerospace's hardware group, which is not deductible for
tax purposes.
Equity in earnings of affiliates decreased $2.1 million in 2000, compared to
1999, and $0.8 million in 1999, compared to 1998. In July 1999, we divested our
31.9% interest in Nacanco and this reduced our equity earnings in fiscal 2000.
The decrease in 1999 was attributable primarily to losses recorded by small
start-up ventures.
Included in earnings (loss) from discontinued operations are the results of
Fairchild Technologies through January 1998, and our equity in earnings of
Shared Technologies Fairchild prior to the merger of Shared Technologies
Fairchild. (See Note 4 to our Consolidated Financial Statements).
In 1998, we recorded a $96.0 million gain, net of tax, on disposal of
discontinued operations, from the proceeds received from the merger of Shared
Technologies Fairchild. This gain was partially offset in connection with the
adoption of a formal plan to enhance the opportunities for disposition of
Fairchild Technologies. In connection with the adoption of
19
<PAGE>
such plan, we recorded an after-tax charge of $12.0 million, $31.3 million and
$36.2 million in discontinued operations in fiscal 2000, 1999 and 1998,
respectively. 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, and $8.0 million, net of an income tax
benefit of $4.8 million, for the estimated remaining operating losses of
Fairchild Technologies. 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 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 fiscal 1999, we recognized an extraordinary loss of $4.2 million, net of
tax, to write-off the remaining deferred loan fees associated with the early
extinguishment of our indebtedness pursuant to our acquisition of Kaynar
Technologies (See Note 8). In fiscal 1998, we recognized an extraordinary loss
of $6.7 million, net of tax, to write-off the remaining deferred loan fees and
original issue discounts associated with early extinguishment of our
indebtedness pursuant the repayment of all our public debt and refinancing of
credit facilities.
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 unrealized holding securities
declined by $4.0 million and $16.5 million in fiscal 2000 and 1999,
respectively. The changes reflect primarily gains realized from the liquidation
of investments, including AlliedSignal common stock divested in fiscal 1999.
Foreign currency translation adjustments decreased by $10.1 million and $2.5
million in fiscal 2000 and 1999, respectively, due primarily to the
strengthening of the U.S. Dollar against the French Franc and German Mark.
Segment Results
Aerospace Fasteners Segment
Sales by our aerospace fasteners segment increased by $90.9 million to $533.6
million, up 20.5% in fiscal 2000, compared to fiscal 1999. These improvements
reflected growth from acquisitions, offset partially by weakened demand for our
products in the commercial aerospace industry. On June 30, 2000, our backlog was
$204 million compared to $220 million at June 30, 1999. On a pro forma basis,
sales decreased by 12.5% in fiscal 2000, as compared to fiscal 1999. Our
operations in the United States were negatively impacted by reduced bookings
caused by inventory reduction efforts at Boeing and its ripple effect on prices.
Sales in the aerospace fasteners segment increased by $55.5 million to $442.7
million, up 14.3% in fiscal 1999, compared to fiscal 1998, reflecting growth due
primarily to the acquisition of Kaynar Technologies. Backlog increased by $38
million in fiscal 1999 to $220 million at June 30, 1999, reflecting the
acquisition of Kaynar Technologies. Excluding $90 million of backlog contributed
by Kaynar Technologies, our backlog decreased $52 million in fiscal 1999. On a
pro forma basis reflecting acquisitions in comparable periods, sales decreased
3.2% in fiscal 1999, compared to fiscal 1998.
Operating income in our aerospace fasteners segment decreased by $5.0 million
in fiscal 2000, compared to fiscal 1999. Included in our fiscal 2000 and 1999
results are restructuring charges incurred of $8.6 million and $5.5 million,
respectively, due to the integration of Kaynar Technologies into our Aerospace
Fasteners business. Excluding restructuring charges, operating income decreased
by $2.0 million in fiscal 2000, compared to fiscal 1999, reflecting reduced
margins due to pricing pressures offset partially by cost improvement
initiatives and acquisitions made during fiscal 1999. Operating expenses at all
operations are being strictly controlled as management attempts to reduce
operating costs to improve operating results in the short term, without
adversely affecting our future performance. Operating income increased by $6.2
million, or 19.1%, in fiscal 1999, compared to fiscal 1998. Included in our
1999 results are restructuring charges of $5.5 million for integration costs and
severance from the integration of our business with the Kaynar Technologies
business. Excluding restructuring charges, operating income increased $11.8
million in fiscal 1999 compared to fiscal 1998. On a pro forma basis and
excluding restructuring charges, operating income decreased by $17.5
20
<PAGE>
million in fiscal 2000, compared to fiscal 1999, and $8.1 million in fiscal 1999
as compared to fiscal 1998, due to lower sales levels associated with a weakened
commercial aerospace industry and its negative effects on operating
effectiveness.
We believe the overall demand for aerospace fasteners in fiscal 2001 will
improve as the results of Boeing's inventory reduction program diminishes and
the announced increase in aircraft build rates favorably affect demand. We
believe that the integration savings from the Kaynar merger and production
efficiency improvements will partially offset the weakened demand for our
products.
Aerospace Distribution Segment
Sales in our aerospace distribution segment decreased by $67.3 million, or
40.0%, in fiscal 2000, compared to the fiscal 1999 period. The decrease was due
to the loss of revenues as a result of the disposition of Solair and Dallas
Aerospace. Sales decreased by $190.1 million, or 53.0%, in fiscal 1999, compared
to the fiscal 1998 period, due primarily to the loss of revenues as a result of
the disposition of the hardware group and Solair. On a pro forma basis, sales
increased $9.1 million, or 13.0%, in 2000 compared to 1999, and $1.9 million, or
2.7%, in 1999 compared to 1998.
Operating income in our aerospace distribution segment increased by $47.8
million in fiscal 2000, compared to fiscal 1999. Included in the fiscal 1999
period, was a charge of $19.3 million due to the sale of Solair and a $22.1
million charge relating to the potential sale of Dallas Aerospace. Operating
income decreased by $60.3 million, in fiscal 1999, as compared to fiscal 1998. A
charge of $41.4 million is included in the 1999 results, in connection with the
disposition of Solair and the potential disposition of Dallas Aerospace.
Excluding these charges, operating income would have decreased $18.9 million in
fiscal 1999, compared to fiscal 1998, due primarily to the disposition of Solair
and the hardware group. On a pro forma basis, operating income increased by $7.3
million in fiscal 2000, compared to fiscal 1999, reflecting increases in margins
and a reduction in corporate overhead.
Corporate and Other
The Corporate and Other segment includes the Gas Springs division prior to its
disposition and corporate activities. The group reported an improvement of $26.4
million, or 58.9%, reducing operating losses from $44.9 million in fiscal 1999
to $18.4 million in fiscal 2000. An operating loss of $44.9 million in fiscal
1999 was $37.3 million higher than the operating loss of $7.6 million reported
in fiscal 1998. Results from fiscal 2000 included $5.1 million of gains
recognized on the disposition of real estate and $3.2 million in increased
rental income received from new tenants occupying a shopping center we own and
are developing in Farmingdale, New York. Results from fiscal 1999 included $23.6
million of one-time costs associated primarily with the acquisition of Kaynar
Technologies, restructuring charges, and increased environmental, legal and
travel expenses. Results from fiscal 1998 included other income of $8.6 million,
including $4.4 million realized as a result of the condemnation of air rights
over a portion of the property we own and are developing in Farmingdale, New
York.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total capitalization as of June 30, 2000 and 1999 amounted to $884.4 million
and $931.6 million, respectively. The changes in capitalization included a
decrease of $41.8 million in debt and a decrease of $5.4 million in equity. The
decrease in debt reflected a $81.3 million decrease in term loan borrowing with
our primary lenders, as a result of the proceeds received from the divestiture
of assets, offset partially by $30.8 million of cash borrowed from a new term
loan facility used to support our operations and finance construction costs to
complete a shopping center being developed in Farmingdale, New York. The
decrease in equity was due primarily to a $14.1 million decrease in cumulative
other comprehensive income, offset partially by reported net income of $9.8
million.
We maintain a portfolio of investments classified primarily as available-for-
sale securities, which had a fair market value of $19.1 million at June 30,
2000. The market value of the investment portfolio decreased by $4.0 million in
2000 as a result of realized gains from the divestiture of securities. While
there is risk associated with market fluctuations inherent in stock investments,
and because our portfolio is not diversified, large swings in its value should
be expected.
21
<PAGE>
We have an 88-acre site in Farmingdale, New York, which we are developing and
operating as a shopping center. We have invested (cash and capitalized interest)
approximately $28.8 million, $40.4 million, and $17.3 million into this project
in 2000, 1999 and 1998, respectively. We estimate additional funding of
approximately $5.0 million is needed to complete the current phases of this
project.
Net cash used for operating activities for fiscal 2000 was $67.1 million. The
primary use of cash for operating activities in fiscal 2000 was a $23.2 million
increase in inventories, a $12.0 million decrease in accounts payable, and a
$25.7 million increase in other current assets. Net cash provided by operating
activities for fiscal 1999 was $23.3 million. The primary source of cash for
operating activities in fiscal 1999 was an increase in accounts payable, accrued
liabilities and other long-term liabilities of $45.9 million, partially offset
by our net loss and non-cash adjustments of $16.8 million. Net cash used for
operating activities for fiscal 1998 was $85.2 million. The primary use of cash
for operating activities in fiscal 1998 was a $54.9 million increase in
inventories.
Net cash provided from investing activities for fiscal 2000 was $90.4 million
and included $108.8 million in proceeds received from the dispositions of Dallas
Aerospace, our Gas Springs division and our investment in Nacanco Paketleme, and
$12.0 million proceeds received from the condemnation of property. This was
slightly offset by cash used for capital expenditures and real estate
investments of $27.3 million and $27.7 million, respectively. Net cash used for
investing activities for fiscal 1999 was $99.2 million and included $274.4
million used for acquisitions, partially offset by $189.4 million received from
the liquidation of investments. Net cash provided from investing activities for
fiscal 1998 was $43.6 million and included proceeds of $168.0 million received
from the disposition of discontinued operations, including Shared Technologies
Fairchild. This was offset slightly by cash used for the acquisition of
subsidiaries and minority interests of $32.8 million and $26.4 million,
respectively.
Net cash used for financing activities in fiscal 2000 was $41.4 million, The
primary use of cash for financing activities in fiscal 2000 was $39.4 million
used to reduce debt. Net cash provided by financing activities in fiscal 1999
and fiscal 1998 was $81.2 million and $74.1 million, respectively. Cash provided
by financing activities in fiscal 1999 included the issuance of additional debt
of $483.2 million offset partially by $380.0 million of debt repayments and
$22.1 million of treasury stock purchased. We increased our debt in fiscal 1999,
as a result of the acquisition of Kaynar Technologies. Cash provided by
financing activities in fiscal 1998 included the issuance of $53.8 million of
stock from our 1998 equity offering and $275.5 million from the issuance of
additional debt partially offset by $258.0 million from the repayment of debt
and the repurchase of debentures.
Our principal cash requirements include debt service, capital expenditures,
acquisitions, real estate development, and payment of other liabilities. Other
liabilities that require the use of cash include postretirement benefits,
environmental investigation and remediation obligations, and litigation
settlements and related costs. We expect that cash on hand, cash generated from
operations, cash from borrowings and additional financing and asset sales will
be adequate to satisfy our cash requirements in fiscal 2001.
We are required under the credit agreement to comply with certain financial
and non-financial loan covenants, including maintaining certain interest and
fixed charge coverage ratios and maintaining certain indebtedness to EBITDA
ratios at the end of each fiscal quarter. Additionally, the credit agreement
restricts annual capital expenditures to $40 million during the life of the
facility. Except for non-guarantor assets, substantially all of our assets are
pledged as collateral under the credit agreement. The credit agreement restricts
the payment of dividends to our shareholders to an aggregate of the lesser of
$0.01 per share or $0.4 million over the life of the agreement. Noncompliance
with any of the financial covenants without cure or waiver would constitute an
event of default under the credit agreement. An event of default resulting from
a breach of a financial covenant can result, at the option of lenders holding a
majority of the loans, in an acceleration of the principal and interest
outstanding, and a termination of the revolving credit line. At June 30, 2000,
we were in full compliance with all the covenants under the credit agreement.
22
<PAGE>
Discontinued Operations
In 1998, we adopted a formal plan to dispose of Fairchild Technologies. Based
on this plan, we have sold the Fairchild Technologies' businesses, including
most of its intellectual property, through a series of transactions. On April
14, 1999, we disposed of Fairchild Technologies photoresist deep-ultraviolet
track equipment machines, 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 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 at least
approximately $3.5 million, by September 2000 in exchange for certain inventory,
fixed assets, and intellectual property of Fairchild Technologies' semiconductor
equipment group. On May 1, 1999, we sold Fairchild CDI for a nominal amount. In
July 1999, we received approximately $7.1 million from Novellus Systems, Inc. in
exchange for Fairchild Technologies' Low-K dielectric product line and certain
intellectual property. On April 13, 2000, we completed the disposition of
Fairchild Technologies' optical disc equipment group by a spinoff of Fairchild
(Bermuda), Ltd. to our shareholders.
Year 2000
We did not experience any material problems as a result of the Year 2000
turnover or in connection with the leap year date of February 29, 2000.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes a new model for accounting for derivatives and hedging activities
and supersedes and amends a number of existing accounting standards. It
requires that all derivatives be recognized as assets and liabilities on the
balance sheet and measured at fair value. The corresponding derivative gains or
losses are reported based on the hedge relationship that exists, if any.
Changes in the fair value of derivative instruments that are not designated as
hedges or that do not meet the hedge accounting criteria in SFAS 133, are
required to be reported in earnings. Most of the general qualifying criteria
for hedge accounting under SFAS 133 were derived from, and are similar to, the
existing qualifying criteria in SFAS 80 "Accounting for Futures Contracts."
SFAS 133 describes three primary types of hedge relationships: fair value hedge,
cash flow hedge, and foreign currency hedge. In June 1999, the FASB issued
Statement of Financial Accounting Standards No. 137 to defer the required
effective date of implementing SFAS 133 from fiscal years beginning after June
15, 1999 to fiscal years beginning after June 15, 2000. We adopted SFAS 133 on
July 1, 2001 and recognize a cumulative pre-tax loss of approximately $0.8
million.
23
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The table below provides information about our derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates, which include interest rate swaps. For interest rate swaps, the
table presents notional amounts and weighted average interest rates by expected
(contractual) maturity dates. Notional amounts are used to calculate the
contractual payments to be exchanged under the contract. Weighted average
variable rates are based on implied forward rates in the yield curve at the
reporting date.
(In thousands)
<TABLE>
<CAPTION>
Expected Fiscal Year Maturity Date 2003 2008 (a)
-------------------------------------
<S> <C> <C>
Interest Rate Hedges:
---------------------
Variable to fixed $30,750 $100,000
Average cap rate 11.625% 6.49%
Average floor rate N/A 6.24%
Weighted average rate 10.39% 7.06%
Fair market value $ 166 $ (812)
</TABLE>
(a) - On February 17, 2003, the bank with which we entered into the interest
rate swap agreement will have a one-time option to elect to cancel this
agreement.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company and the report
of our independent public accountants with respect thereto, are set forth below.
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Public Accountants 26
Consolidated Balance Sheets as of June 30, 2000 and 1999 27
Consolidated Statements of Earnings for each of the Three Years Ended June 30, 2000, 1999, and 1998 29
Consolidated Statements of Stockholders' Equity for each of the Three Years Ended
June 30, 2000, 1999, and 1998 31
Consolidated Statements of Cash Flows for each of the Three Years Ended June 30, 2000, 1999, and 1998 32
Notes to Consolidated Financial Statements 33
</TABLE>
Supplementary information regarding "Quarterly Financial Data (Unaudited)" is
set forth under Item 8 in Note 20 to Consolidated Financial Statements.
25
<PAGE>
Report of Independent Public Accountants
To the Shareholders of The Fairchild Corporation:
We have audited the accompanying consolidated balance sheets of The Fairchild
Corporation (a Delaware corporation) and consolidated subsidiaries as of June
30, 2000 and 1999, and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of Nacanco Paketleme (see Note 6), an
investment that was sold in July 1999, and until then, was reflected in the
consolidated accompanying financial statements using the equity method of
accounting. The investment in Nacanco Paketleme represented 1 percent of total
assets as of June 30, 1999, and the equity in its net income represents 11
percent, and 9 percent of earnings from continuing operations for the years
ended June 30, 1999 and 1998, respectively. The statements of Nacanco Paketleme
were audited by other auditors whose report has been furnished to us and our
opinion, insofar as it relates to the amounts included for Nacanco Paketleme, is
based on the report of other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
an audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of The Fairchild Corporation and
consolidated subsidiaries as of June 30, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2000, in conformity with accounting principles generally accepted in
the United States.
Arthur Andersen LLP
Vienna, VA
September 11, 2000
26
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
ASSETS June 30, June 30,
------
2000 1999
----------------- -----------------
<S> <C> <C>
CURRENT ASSETS:
---------------
Cash and cash equivalents, $14,287 and $15,752 restricted $ 35,790 $ 54,860
Short-term investments 9,054 13,094
Accounts receivable-trade, less allowances of $9,598 and $6,442 127,230 130,121
Inventories:
Finished goods 138,330 137,807
Work-in-process 30,523 38,316
Raw materials 11,006 14,116
----------------- -----------------
179,859 190,239
Prepaid expenses and other current assets 74,231 73,926
----------------- -----------------
Total Current Assets 426,164 462,240
Property, plant and equipment, net of accumulated
depreciation of $142,938 and $103,556 174,137 184,065
Net assets held for sale 20,112 21,245
Cost in excess of net assets acquired (Goodwill), less
accumulated amortization of $52,826 and $40,307 436,442 447,722
Investments and advances, affiliated companies 3,238 31,791
Prepaid pension assets 64,418 63,958
Deferred loan costs 14,714 13,077
Real estate investment 112,572 83,791
Long-term investments 10,084 15,844
Other assets 5,539 5,053
----------------- -----------------
TOTAL ASSETS $1,267,420 $1,328,786
================= =================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
27
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, June 30,
------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
CURRENT LIABILITIES:
--------------------
Bank notes payable and current maturities of long-term debt $ 28,594 $ 28,860
Accounts payable 62,494 72,271
Accrued liabilities:
Salaries, wages and commissions 38,065 43,095
Employee benefit plan costs 5,608 5,204
Insurance 12,237 14,216
Interest 6,408 7,637
Other accrued liabilities 60,123 50,984
----------------- -----------------
122,441 121,136
Net current liabilities of discontinued operations - 10,999
----------------- -----------------
Total Current Liabilities 213,529 233,266
LONG-TERM LIABILITES:
---------------------
Long-term debt, less current maturities 453,719 495,283
Other long-term liabilities 26,741 25,963
Retiree health care liabilities 42,803 44,813
Noncurrent income taxes 128,515 121,961
----------------- -----------------
TOTAL LIABILITIES 865,307 921,286
STOCKHOLDERS' EQUITY:
---------------------
Class A common stock, $0.10 par value; authorized
40,000 shares, 30,079 (29,754 in 1999) shares issued and
22,430 (22,259 in 1999) shares outstanding 3,008 2,975
Class B common stock, $0.10 par value; authorized 20,000
shares, 2,622 shares issued and outstanding 262 262
Paid-in capital 231,190 229,038
Treasury stock, at cost, 7,649 (7,496 in 1999) shares of Class A common stock (75,506) (74,102)
Retained earnings 261,788 252,030
Notes due from stockholders (1,867) -
Cumulative other comprehensive income (16,762) (2,703)
----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 402,113 407,500
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,267,420 $1,328,786
================= =================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
28
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended June 30,
----------------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
REVENUE:
--------
Net sales $635,361 $617,322 $741,176
Other income, net 14,410 3,899 6,508
---------------- ---------------- ----------------
649,771 621,221 747,684
COSTS AND EXPENSES:
--------------------
Cost of goods sold 472,023 504,893 554,670
Selling, general & administrative 133,353 149,348 142,102
Amortization of goodwill 12,574 6,517 5,469
Restructuring 8,578 6,374 -
---------------- ---------------- ----------------
626,528 667,132 702,241
OPERATING INCOME (LOSS) 23,243 (45,911) 45,443
Interest expense 48,942 33,162 46,007
Interest income (4,850) (2,816) (3,292)
---------------- ---------------- ----------------
Net interest expense 44,092 30,346 42,715
Investment income (loss) 9,935 39,800 (3,362)
Nonrecurring gain 28,625 - 124,028
---------------- ---------------- ----------------
Earnings (loss) from continuing operations before taxes 17,711 (36,457) 123,394
Income tax (provision) benefit 4,399 13,245 (47,274)
Equity in earnings (loss) of affiliates, net (346) 1,795 2,571
Minority interest, net - (2,090) (26,292)
---------------- ---------------- ----------------
Earnings (loss) from continuing operations 21,764 (23,507) 52,399
Loss from discontinued operations, net - - (4,296)
Gain (loss) on disposal of discontinued operations, net (12,006) (31,349) 59,717
Extraordinary items, net - (4,153) (6,730)
---------------- ---------------- ----------------
NET EARNINGS (LOSS) $ 9,758 $(59,009) $101,090
================ ================ ================
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (10,098) (2,545) (5,140)
Unrealized holding changes on securities arising during the period (3,961) (16,544) 20,633
---------------- ---------------- ----------------
Other comprehensive income (loss) (14,059) (19,089) 15,493
---------------- ---------------- ----------------
COMPREHENSIVE INCOME (LOSS) $ (4,301) $(78,098) $116,583
================ ================ ================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
29
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended June 30,
-----------------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
-------------------------
Earnings (loss) from continuing operations $ 0.87 $ (1.03) $ 2.78
Loss from discontinued operations, net - - (0.23)
Gain (loss) on disposal of discontinued operations, net (0.48) (1.38) 3.17
Extraordinary items, net - (0.18) (0.36)
----------------- ----------------- -----------------
NET EARNINGS (LOSS) $ 0.39 $ (2.59) $ 5.36
================= ================= =================
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments $ (0.40) $ (0.11) $ (0.27)
Unrealized holding changes on securities arising during the period (0.16) (0.73) 1.10
----------------- ----------------- -----------------
Other comprehensive income (loss) (0.56) (0.84) 0.83
----------------- ----------------- -----------------
COMPREHENSIVE INCOME (LOSS) $ (0.17) $ (3.43) $ 6.19
================= ================= =================
DILUTED EARNINGS PER SHARE:
---------------------------
Earnings (loss) from continuing operations $ 0.87 $ (1.03) $ 2.66
Loss from discontinued operations, net - - (0.22)
Gain (loss) on disposal of discontinued operations, net (0.48) (1.38) 3.04
Extraordinary items, net - (0.18) (0.34)
----------------- ----------------- -----------------
NET EARNINGS (LOSS) $ 0.39 $ (2.59) $ 5.14
================= ================= =================
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments $ (0.40) $ (0.11) $ (0.26)
Unrealized holding changes on securities arising during the period (0.16) (0.73) 1.05
----------------- ----------------- -----------------
Other comprehensive income (loss) (0.56) (0.84) 0.79
----------------- ----------------- -----------------
COMPREHENSIVE INCOME (LOSS) $ (0.17) $ (3.43) $ 5.93
================= ================= =================
Weighted average shares outstanding:
Basic 24,954 22,766 18,834
================= ================= =================
Diluted 25,137 22,766 19,669
================= ================= =================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
30
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Cumulative
Class A Class B Notes Other
Common Common Paid-in Retained Treasury Due From Comprehensive
Stock Stock Capital Earnings Stock Stockholders Income Total
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1997 $2,023 $263 $ 71,015 $209,949 $(51,719) $ - $ 893 $232,424
Net earnings - - - 101,090 - - - 101,090
Cumulative translation adjustment - - - - - - (5,140) (5,140)
Compensation expense from adjusted
terms to warrants and options - - 5,655 - - - 5,655
Stock issued for Special-T Fasteners
acquisition 108 - 21,939 - - - - 22,047
Stock issued for Exchange Offer 221 - 42,588 - - - - 42,809
Equity Offering 300 - 53,268 - - - - 53,568
Proceeds received from stock options
exercised (141,259 shares) 10 - 652 - (189) - - 473
Cashless exercise of warrants 5 - (5) - - - - -
Net unrealized holding gain on
available-for-sale securities - - - - - - 20,633 20,633
----------------------------------------------------------------------------------------------
Balance, June 30, 1998 2,667 263 195,112 311,039 (51,908) - 16,386 473,559
Net loss - - - (59,009) - - - (59,009)
Cumulative translation adjustment - - - - - - (2,545) (2,545)
Stock issued for Special-T Fasteners
acquisition 1 - 132 - - - - 133
Stock issued for Banner Aerospace
merger 298 - 33,093 - - - - 33,391
Proceeds received from stock options
exercised (75,383 shares) 7 - 266 - (92) - - 181
Stock issued for Special-T
restricted stock plan
(14,969 shares) 1 - (1) - - - - -
Purchase of treasury shares - - - - (22,102) - - (22,102)
Exchange of Class B for Class A
common stock (3,064 shares) 1 (1) - - - - - -
Compensation expense-stock options - - 436 - - - - 436
Net unrealized holding loss on
available-for-sale securities - - - - - - (16,544) (16,544)
----------------------------------------------------------------------------------------------
Balance, June 30, 1999 2,975 262 229,038 252,030 (74,102) - (2,703) 407,500
Net earnings - - - 9,758 - - - 9,758
Cumulative translation adjustment - - - - - - (10,098) (10,098)
Stock issued for Special-T Fasteners
acquisition (44,079 shares) 4 - 530 - - - - 534
Proceeds received from stock options
exercised (314,126 shares) 22 - 1,321 - (916) - - 427
Stock issued for Special-T
restricted stock plan
(14,969 shares) 1 - (1) - - - - -
Cashless exercise of warrants 6 - (6) - - - - -
Purchase of treasury shares - - - - (488) - - (488)
Compensation expense-stock options - - 308 - - - - 308
Loans to stockholders - - - - - (1,867) - (1,867)
Net unrealized holding loss on
available-for-sale securities - - - - - - (3,961) (3,961)
----------------------------------------------------------------------------------------------
Balance, June 30, 2000 $3,008 $262 $231,190 $261,788 $(75,506) $(1,867) $(16,762) $402,113
==============================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
31
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended June 30,
-----------------------------------------
2000 1999 1998
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
-------------------------------------
Net earnings (loss) $ 9,758 $ (59,009) $ 101,090
Depreciation and amortization 41,821 25,657 20,873
Deferred loan fee amortization 1,200 1,100 2,406
Accretion of discount on long-term liabilities 66 5,270 3,766
Net gain on the disposition of subsidiaries and investments in affiliates (28,625) - (124,041)
Net gain on the sale of discontinued operations - - (132,787)
Extraordinary items, net of cash payments - 6,389 10,347
Provision for restructuring (excluding cash payments of $2,600 in 1999) - 3,774 -
(Gain) loss on sale of property, plant, and equipment (1,964) 400 246
(Undistributed) distributed earnings of affiliates, net 372 3,433 1,725
Minority interest - 2,090 26,292
Change in trading securities - (1,254) 9,275
Change in receivables 2,892 8,632 (12,846)
Change in inventories (23,223) 14,727 (54,857)
Change in other current assets (25,734) (22,365) (26,643)
Change in other non-current assets (18,305) (26,741) 700
Change in accounts payable, accrued liabilities and other long-term liabilities (11,979) 45,906 77,434
Non-cash charges and working capital changes of discontinued operations (13,351) 15,259 11,789
------------- ------------ ------------
Net cash provided by (used for) operating activities (67,072) 23,268 (85,231)
Cash flows from investing activities:
--------------------------------------
Proceeds received from (used for) investment securities, net 14,655 189,379 (7,287)
Purchase of property, plant and equipment (27,339) (30,142) (36,029)
Proceeds from sale of plant, property and equipment 12,693 844 336
Equity investment in affiliates (2,489) (7,678) (4,343)
Proceeds received from divestiture of investment in affiliates 46,886 - -
Acquisition of subsidiaries, net of cash acquired - (274,427) (59,178)
Net proceeds received from sale of subsidiaries 61,906 60,396 -
Net proceeds received from the sale of discontinued operations 7,100 - 167,987
Changes in real estate investment (27,712) (40,351) (17,262)
Changes in net assets held for sale 4,672 3,134 2,140
Investing activities of discontinued operations - (312) (2,750)
------------- ------------ ------------
Net cash provided by (used for) investing activities 90,372 (99,157) 43,614
Cash flows from financing activities:
--------------------------------------
Proceeds from issuance of debt 206,874 483,222 275,523
Debt repayments and repurchase of debentures, net (246,260) (380,083) (258,014)
Issuance of Class A common stock 368 181 54,041
Purchase of treasury stock (488) (22,102) -
Loans to stockholders (1,867) - -
Financing activities of discontinued operations - - 2,538
------------- ------------ ------------
Net cash provided by (used for) financing activities (41,373) 81,218 74,088
Effect of exchange rate changes on cash (997) (70) (2,290)
------------- ------------ ------------
Net change in cash and cash equivalents (19,070) 5,259 30,181
Cash and cash equivalents, beginning of the year 54,860 49,601 19,420
-------------------------------------------
Cash and cash equivalents, end of the year $ 35,790 $ 54,860 $ 49,601
=============== ============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
32
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General: All references in the notes to the consolidated financial statements
to the terms "we," "our," "us," the "Company" and "Fairchild" refer to The
Fairchild Corporation and its consolidated subsidiaries.
Corporate Structure: The Fairchild Corporation was incorporated in October
1969, under the laws of the State of Delaware. Effective April 8, 1999, we
became the sole owner of Banner Aerospace, Inc. RHI Holdings, Inc. is our
direct subsidiary. RHI is the owner of 100% of Fairchild Holding Corp. Our
principal operations are conducted through Fairchild Holding Corp. and Banner
Aerospace. During fiscal 1999 and 1998 we held a significant equity interest in
Nacanco Paketleme. Our financial statements present the results of our former
communications services segment, Shared Technologies Fairchild and Fairchild
Technologies as discontinued operations.
Fiscal Year: Our fiscal year ends June 30. All references herein to "2000",
"1999", and "1998" mean the fiscal years ended June 30, 2000, 1999 and 1998,
respectively.
Consolidation Policy: The accompanying consolidated financial statements are
prepared in accordance with generally accepted accounting principles and include
our accounts and all of the accounts of our wholly-owned and majority-owned
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
(see Note 6).
Revenue Recognition: Sales and related costs are recognized upon shipment of
product and performance of services. Sales and related cost of sales on long-
term contracts are recognized as products are delivered and services performed,
determined by the percentage of completion method. Lease and rental revenue are
recognized on a straight-line basis over the life of the lease.
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. Total net cash disbursements
(receipts) made by us for income taxes and interest were as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------------------------------------------------
<S> <C> <C> <C>
Interest $ 54,535 $ 29,200 $52,737
Income Taxes (15,076) (21,304) (987)
</TABLE>
Restricted Cash: On June 30, 2000 and 1999, we had restricted cash of $14,287
and $15,752, respectively, all of which is maintained as collateral for certain
debt facilities. Cash investments are in short-term treasury bills and
certificates of deposit.
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.
33
<PAGE>
Inventories: Inventories are stated at the lower of cost or market. Cost is
determined using the last-in, first-out ("LIFO") method at several of our
domestic aerospace fastener manufacturing operations and using the first-in,
first-out ("FIFO") method elsewhere. If the FIFO inventory valuation method had
been used exclusively, inventories would have been approximately $3,920 and
$3,018 higher at June 30, 2000 and 1999, respectively. Inventories from
continuing operations are valued as follows:
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
----------------- ---------------
<S> <C> <C>
First-in, first-out (FIFO) $141,094 $162,797
Last-in, first-out (LIFO) 38,765 27,442
----------------- ---------------
Total inventories $179,859 $190,239
================= ===============
</TABLE>
Properties and Depreciation: The cost of property, plant and equipment is
depreciated over 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. In fiscal 1999, we
changed the estimated useful life for depreciating our machinery and equipment
from 8 to 10 years. Depreciation is computed using the straight-line method for
financial reporting purposes and accelerated depreciation methods for Federal
income tax purposes. Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
--------------- ---------------
<S> <C> <C>
Land $ 13,170 $ 13,325
Building and improvements 48,844 56,790
Machinery and equipment 223,059 173,791
Transportation vehicles 1,124 1,062
Furniture and fixtures 20,181 22,439
Construction in progress 10,697 20,214
--------------- ---------------
Property, plant and equipment at cost 317,075 287,621
Less: Accumulated depreciation 142,938 103,556
--------------- ---------------
Net property, plant and equipment $174,137 $184,065
=============== ===============
</TABLE>
Amortization of Goodwill: Goodwill, which represents the excess of the cost of
purchased businesses over the fair value of their net assets at dates of
acquisition, is being amortized on a straight-line basis over 40 years.
Deferred Loan Costs: Deferred loan costs associated with various debt issues
are being amortized over the terms of the related debt, based on the amount of
outstanding debt, using the effective interest method. For 2000, 1999, and 1998
amortization expense for these loan costs was $1,338, $1,100, and $2,406,
respectively.
Impairment of Long-Lived Assets: We review for impairment our long-lived
assets, including property, plant and equipment, identifiable intangibles and
goodwill, 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 less than the carrying amount of our assets. Impairment
is measured based on the difference between the carrying amount of our assets
and their fair value.
Foreign Currency Translation: For foreign subsidiaries whose functional
currency is the local foreign currency, 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 for 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 other income and were insignificant in fiscal 2000, 1999 and 1998.
34
<PAGE>
Research and Development: Company-sponsored research and development
expenditures are expensed as incurred.
Capitalization of interest and taxes: We capitalize interest expense and
property taxes relating to certain real estate property being developed in
Farmingdale, New York. Interest of $5,792, $4,671 and $3,078 was capitalized in
2000, 1999 and 1998, respectively.
Nonrecurring Income: Nonrecurring income 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. Nonrecurring income of
$124,028 in 1998 resulted from the disposition of our aerospace distribution
segment's hardware group (See Note 2).
Stock-Based Compensation: As permitted by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", we will continue
to use the intrinsic value based method of accounting prescribed by APB Opinion
No. 25, for our stock-based employee compensation plans. The fair market
disclosures that are required by SFAS 123 are included in Note 11.
Fair Value of Financial Instruments: The carrying amount reported in the
balance sheet approximates the fair value for our cash and cash equivalents,
investments, 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 estimated using
discounted cash flow analyses, based on our current incremental borrowing rates
for similar types of borrowing arrangements. Fair values of our off-balance-
sheet instruments (hedging agreements, 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 7.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires our management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, concerning 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' financial statements
have been reclassified to conform to the 2000 presentation.
Recently Issued Accounting Pronouncements: In June 1998, the FASB issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing accounting standards. It requires that all derivatives be
recognized as assets and liabilities on the balance sheet and measured at fair
value. The corresponding derivative gains or losses are reported based on the
hedge relationship that exists. Changes in the fair value of derivative
instruments that are not designated as hedges or that do not meet the hedge
accounting criteria in SFAS 133, are required to be reported in earnings. Most
of the general qualifying criteria for hedge accounting under SFAS 133 were
derived from, and are similar to, the existing qualifying criteria in SFAS 80,
"Accounting for Futures Contracts." SFAS 133 describes three primary types of
hedge relationships: fair value hedge, cash flow hedge, and foreign currency
hedge. In June 1999, the FASB issued Statement of Financial Accounting Standards
No. 137 to defer the required effective date of implementing SFAS 133 from
fiscal years beginning after June 15, 1999 to fiscal years beginning after June
15, 2000. We adopted SFAS 133 on July 1, 2001 and recognized a cumulative pre-
tax loss of approximately $0.8 million.
35
<PAGE>
2. BUSINESS COMBINATIONS
Acquisitions
We have accounted for the following acquisitions by using the purchase method.
The respective purchase price is assigned to the net assets acquired, based on
the fair value of such assets and liabilities at the respective acquisition
dates.
On June 18, 1999, we completed the acquisition of Technico S.A. for
approximately $4.1 million and assumed approximately $2.2 million of Technico's
existing debt. The total cost of the acquisition exceeded the fair value of the
net assets of Technico by approximately $3.4 million, which is being allocated
as goodwill, and amortized using the straight-line method over 40 years. The
acquisition was financed with additional borrowings from our credit facility.
On April 20, 1999, we completed the acquisition of all the capital stock of
Kaynar Technologies, Inc. for approximately $222 million and assumed
approximately $103 million of existing debt, the majority of which was
refinanced at closing. In addition, we paid $28 million for a covenant not to
compete from Kaynar Technologies' largest preferred shareholder. The total cost
of the acquisition exceeded the fair value of the net assets of Kaynar
Technologies by approximately $282 million, which is being allocated as
goodwill, and amortized using the straight-line method over 40 years. The
acquisition was financed with existing cash, the sale of $225 million of 10 3/4%
senior subordinated notes due 2009 and proceeds from a new bank credit facility.
On February 22, 1999, we used available cash to acquire 77.3% of SNEP S.A. By
June 30, 1999, we had purchased significantly all of the remaining shares SNEP.
The total amount paid was approximately $8.0 million, including $1.1 million of
debt assumed in a business combination accounted for as a purchase. The total
cost of the acquisition exceeded the fair value of the net assets of SNEP by
approximately $4.3 million, which is being allocated as goodwill, and amortized
using the straight-line method over 40 years. SNEP is a French manufacturer of
precision machined self-locking nuts and special threaded fasteners serving the
European industrial, aerospace and automotive markets.
On March 2, 1998, we acquired Edwards and Lock Management Corporation, doing
business as Special-T Fasteners, in a business combination accounted for as a
purchase. The cost of the acquisition was approximately $50.0 million, of which
50.1% of the contractual purchase price was paid in shares of our Class A common
stock and 49.9% was paid in cash. The total cost of the acquisition exceeded the
fair value of the net assets of Special-T by approximately $23.3 million, which
is being allocated as goodwill, and amortized using the straight-line method
over 40 years. Special-T manages the logistics of worldwide distribution of our
manufactured precision fasteners to our customers in the aerospace industry,
government agencies, OEMs, and other distributors.
On November 28, 1997, we acquired AS+C GmbH, Aviation Supply + Consulting in a
business combination accounted for as a purchase. The total cost of the
acquisition was $14.0 million, which exceeded the fair value of the net assets
of AS+C by approximately $8.1 million, which is being allocated as goodwill and
amortized using the straight-line method over 40 years. We purchased AS+C with
cash borrowings. AS+C is an aerospace parts, logistics, and distribution company
primarily servicing European customers.
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
36
<PAGE>
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.
On December 31, 1998, Banner Aerospace consummated the sale of Solair, Inc.,
its largest subsidiary in the rotables group, to Kellstrom Industries, Inc., in
exchange for approximately $60.4 million in cash and a warrant to purchase
300,000 shares of common stock of Kellstrom. In December 1998, Banner Aerospace
recorded a $19.3 million pre-tax loss from the sale of Solair. This loss was
included in cost of goods sold as it was attributable primarily to the bulk sale
of inventory at prices below the carrying amount of that inventory.
On January 13, 1998, Banner Aeropsace completed the disposition of
substantially all of the assets and certain liabilities of certain subsidiaries
to AlliedSignal Inc., in exchange for shares of AlliedSignal Inc. common stock
with an aggregate value of $369 million. The assets transferred to AlliedSignal
consisted primarily of Banner Aerospace's hardware group, which included the
distribution of bearings, nuts, bolts, screws, rivets and other types of
fasteners, and its PacAero unit. Approximately $196 million of the common stock
received from AlliedSignal was used to repay outstanding term loans of Banner
Aerospace's subsidiaries, and related fees.
Acquisition of Minority Interest in Consolidated Subsidiaries
On April 8, 1999, we acquired the remaining 15% of the outstanding common and
preferred stock of Banner Aerospace, Inc. not already owned by us, through the
merger of Banner Aerospace with one of our subsidiaries. Under the terms of the
merger with Banner, we issued 2,981,412 shares of our Class A common stock to
acquire all of Banner Aerospace's common and preferred stock (other than those
already owned by us). Banner Aerospace is now our wholly-owned subsidiary.
On June 9, 1998 we exchanged 3,659,364 shares of Banner Aerospace's common
stock for 2,212,361 newly issued shares of our Class A common stock. As a result
of the exchange offer, our ownership of Banner common stock increased to 83.3%.
3. DISCONTINUED OPERATIONS AND NET ASSETS HELD FOR SALE
On March 11, 1998, Shared Technologies Fairchild Inc. merged into Intermedia
Communications Inc. Under the terms of the merger we received approximately
$178.0 million in cash (before tax and selling expenses) in exchange for the
common and preferred stock of Shared Technologies Fairchild we owned. In fiscal
1998, we recorded a $96.0 million gain, net of tax, on disposal of discontinued
operations, from the proceeds received from the merger of Shared Technologies
Fairchild with Intermedia. The results of Shared Technologies Fairchild have
been accounted for as discontinued operations. Net earnings from discontinued
operations for Shared Technologies Fairchild was $648 in 1998.
Based on our formal plan, we have sold the Fairchild Technologies' businesses,
including most of its intellectual property, through a series of transactions.
On April 14, 1999, we disposed of Fairchild Technologies photoresist deep-
ultraviolet track equipment machines, 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 June 15, 1999, we received from Suess Microtec AG $7.9 million
and the right to receive by September 2000, 350,000 shares of Suess Microtec
stock, or at least approximately $3.5 million, in exchange for certain
inventory, fixed assets, and intellectual property of Fairchild Technologies'
semiconductor equipment group. On May 1, 1999, we sold Fairchild CDI for a
nominal amount. In July 1999, we received approximately $7.1 million from
Novellus Systems, Inc. in exchange for Fairchild Technologies' Low-K dielectric
product line and certain intellectual property. On April 13, 2000, we completed
the disposition of Fairchild Technologies' optical disc equipment group by a
spinoff of Fairchild (Bermuda), Ltd. to our shareholders.
37
<PAGE>
In connection with the adoption of such plan, we recorded an after-tax
charge of $12.0 million, $31.3 million and $36.2 million in discontinued
operations in fiscal 2000, 1999 and 1998, respectively. 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 and $8.0
million, net of an income tax benefit of $4.8 million, for the estimated
remaining operating losses of Fairchild Technologies. 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 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.
Earnings from discontinued operations for the twelve months ended June 30,
1998 includes net losses of $4,944 from Fairchild Technologies until the
adoption date of a formal plan for its discontinuance.
Net assets held for sale are stated at the lower of cost or at estimated
net realizable value, which consider anticipated sales proceeds. Interest is not
allocated to net assets held for sale. Net assets held for sale at June 30,
2000, includes two parcels of real estate in California, and several parcels of
real estate 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.
4. PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
The following table set forth the derivation of the unaudited pro forma
results, representing the impact of our acquisition of Kaynar Technologies
(completed in April 1999), our merger with Banner Aerospace (completed in April
1999), our acquisition of Special-T (effective January 1998), and our
dispositions of Dallas Aerospace (December 1999), Solair (December 1998), the
hardware group of Banner Aerospace (completed January 1998), and the investment
in Nacanco Paketleme (July 1999) and Shared Technologies Fairchild (completed in
March 1998), as if these transactions had occurred at the beginning of each
period presented. The pro forma information is based on the historical financial
statements of these companies, giving effect to the aforementioned transactions.
In preparing the pro forma data, certain assumptions and adjustments have been
made which affect interest expense and investment income from our revised debt
structures and reduce minority interest from our merger with Banner Aerospace.
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 the beginning of
these fiscal periods.
<TABLE>
<CAPTION>
2000 1999 1998
--------------- ---------------- ----------------
<S> <C> <C> <C>
Sales $613,667 $686,660 $704,633
Operating income (a) 21,192 28,745 58,953
Earnings (loss) from continuing operations (a, b) 3,695 (579) 6,174
Basic earnings (loss) from continuing operations per share 0.15 (0.03) 0.27
Diluted earnings (loss) from continuing operations per share 0.15 (0.03) 0.25
Net earnings (loss) (8,310) (36,081) 54,865
Basic earnings (loss) per share (0.33) (1.58) 2.36
Diluted earnings (loss) per share (0.33) (1.58) 2.26
</TABLE>
(a) - Fiscal 2000 pro forma results include pre-tax restructuring charges of
$8,578. Fiscal 1999 pro forma results includes pre-tax charges recorded for
acquisitions of $23,604 and restructuring charges of $6,374.
(b) - Excludes pre-tax nonrecurring gain of $25,747 from the liquidation
Nacanco Paketleme in fiscal 2000. Excludes pre-tax investment income of
$35,407 from the liquidation of certain investments in fiscal 1999.
38
<PAGE>
5. INVESTMENTS
Investments at June 30, 2000 consist primarily of common stock investments
in public corporations, which are 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:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
--------------------------------- ---------------------------------
Aggregate Aggregate
Fair Cost Fair Cost
Value Basis Value Basis
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Short-term investments:
-----------------------
Trading securities - equity $ 2,715 $ 2,926 $ 1,254 $ 1,221
Available-for-sale equity securities 6,284 5,400 11,618 9,573
Other investments 55 55 222 222
-------------- -------------- -------------- --------------
$ 9,054 $ 8,381 $ 13,094 $ 11,016
============== ============== ============== ==============
Long-term investments:
----------------------
Available-for-sale equity securities $ 3,828 $ 5,436 $ 14,616 $ 7,342
Other investments 6,256 6,256 1,228 1,228
-------------- -------------- -------------- --------------
$ 10,084 $ 11,692 $ 15,844 $ 8,570
============== ============== ============== ==============
</TABLE>
On June 30, 2000, we had gross unrealized holding gains from available-for-
sale securities of $1,357 and gross unrealized holding losses from
available-for-sale securities of $2,082. Investment income is summarized as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
Gross realized gain from sales $15,102 $ 36,677 $ 364
Change in unrealized holding gain (loss) from trading
securities 578 33 (5,791)
Gross realized loss from impairments (6,473) - (182)
Dividend income 728 3,090 2,247
------------ ----------- -----------
$ 9,935 $ 39,800 $ (3,362)
============ =========== ===========
</TABLE>
6. INVESTMENTS AND ADVANCES, AFFILIATED COMPANIES
The following table summarizes historical financial information on a
combined 100% basis of our investment in Nacanco Paketleme, which was accounted
for using the equity method in the periods that we owned it.
Statement of Earnings: 1999 1998
------------- -------------
Net sales $75,495 $90,235
Gross profit 25,297 32,449
Earnings from continuing operations 13,119 14,780
Net earnings 13,119 14,780
Balance Sheet at June 30, 1999
Current assets $26,942
Non-current assets 38,661
Total assets 65,603
Current liabilities 12,249
Non-current liabilities 1,828
39
<PAGE>
On June 30, 1999 we owned approximately 31.9% of Nacanco Paketleme common
stock. We recorded equity earnings of $4,153 and $4,683 from this investment for
1999 and 1998, respectively.
Our share of equity in earnings, net of tax, of all unconsolidated
affiliates for 2000, 1999 and 1998 was $(346), $1,795, and $2,571, respectively.
The carrying value of investments and advances, affiliated companies consists of
the following:
June 30, June 30,
2000 1999
------ -------
Nacanco $ - $17,356
Others 3,238 14,435
------ -------
$3,238 $31,791
====== =======
On June 30, 2000, approximately $(3,309) of our $261,788 consolidated
retained earnings were from undistributed losses of 50 percent or less currently
owned affiliates accounted for using the equity method.
7. NOTES PAYABLE AND LONG-TERM DEBT
At June 30, 2000 and 1999, notes payable and long-term debt consisted of
the following:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
-------------- --------------
<S> <C> <C>
Short-term notes payable (weighted average interest rates of 4.5%
and 3.6% in 2000 and 1999, respectively) $ 23,069 $ 22,924
============== ==============
Bank credit agreements $218,691 $258,100
10 3/4% Senior subordinated notes due 2009 225,000 225,000
10.65% Industrial revenue bonds 1,500 1,500
Capital lease obligations, interest from 7.4% to 10.1% 2,146 2,873
Other notes payable, collateralized by property, plant and
equipment, interest from 3.0% to 10.5% 11,907 13,746
-------------- --------------
459,244 501,219
Less: Current maturities (5,525) (5,936)
-------------- --------------
Net long-term debt $453,719 $495,283
============== ==============
</TABLE>
Credit Agreements
We maintain credit facilities with a consortium of banks, providing us with
a term loan and revolving credit facilities. On June 30, 2000, the credit
facilities with our senior lenders consisted of a $143,691 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% over the Citibank N.A. base
rate, or 3% over the Eurodollar rate, and is subject to change quarterly based
upon our financial performance. Advances made under the revolving credit
facilities generally bear interest at a rate of, at our option, either (i) 1
1/2% over the Citibank N.A. base rate, or (ii) 2 1/2% over the Eurodollar rate,
and is 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 Eurodollar
margin rate. 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.
40
<PAGE>
We are required under the credit agreement to comply with certain financial
and non-financial loan covenants, including maintaining certain interest and
fixed charge coverage ratios and maintaining certain indebtedness to EBITDA
ratios at the end of each fiscal quarter. Additionally, the credit agreement
restricts annual capital expenditures to $40,000 during the life of the
facility. Except for non-guarantor assets, substantially all of our assets are
pledged as collateral under the credit agreement. The credit agreement restricts
the payment of dividends to our shareholders to an aggregate of the lesser of
$0.01 per share or $400 over the life of the agreement. Noncompliance with any
of the financial covenants without cure or waiver would constitute an event of
default under the credit agreement. An event of default resulting from a breach
of a financial covenant can result, at the option of lenders holding a majority
of the loans, in an acceleration of the principal and interest outstanding, and
a termination of the revolving credit line. At June 30, 2000, we were in full
compliance with all the covenants under the credit agreement.
At June 30, 2000, we had borrowings outstanding of $42,000 under the
revolving credit facilities and we had letters of credit outstanding of $16,544,
which were supported by a sub-facility under the revolving credit facilities. At
June 30, 2000, we had unused bank lines of credit aggregating $41,456, at
interest rates slightly higher than the prime rate. We also had short-term lines
of credit relating to foreign operations, aggregating $32,653, against which we
owed $14,512 at June 30, 2000.
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
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 3.5% per annum. If our debt coverage ratio at any time reaches a
threshold of 1.4 or greater, the interest rate will be reduced to LIBOR plus
3.1%.
Senior Subordinated Notes
On April 20, 1999, in conjunction with the acquisition of Kaynar
Technologies, we issued, at par value, $225,000 of 10 3/4% senior subordinated
notes that mature on April 15, 2009. We will pay interest on these notes semi-
annually on April 15 and October 15 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 or 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.
41
<PAGE>
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, 2000, are as follows: $27,813 for 2001, $4,386 for 2002,
$34,595 for 2003, $3,084 for 2004 and $44,575 for 2005.
Hedge Agreements
In fiscal 1998 we entered into a series of interest rate hedge agreements
to reduce our exposure to increases in interest rates on variable rate debt. The
ten-year hedge agreements provide us with interest rate protection on $100,000
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 will have a
one-time option to elect to cancel the agreement or to do nothing and proceed
with the transaction, using a fixed LIBOR rate of 6.715% for the period February
17, 2003 to February 19, 2008. No costs were incurred as a result of these
transactions.
In conjunction with the $30,750 term loan agreement with Morgan Guaranty
Trust Company of New York, we purchased an interest rate cap agreement for $183
from the lender, which provides for a maximum rate of interest of 11.625% and
will mature on April 1, 2003. The cost of this agreement is being amortized as
additional interest expense over the life of the loan.
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.
(In thousands)
Expected Fiscal Year Maturity Date 2003 2008 (a)
-----------------------
Interest Rate Hedges:
--------------------
Variable to Fixed $30,750 $100,000
Average cap rate 11.625% 6.49%
Average floor rate N/A 6.24%
Weighted average rate 10.39% 7.06%
Fair Market Value $ 166 $ (812)
(a) - On February 17, 2003, the bank with which we entered into the interest
rate swap agreement will have a one-time option to elect to cancel this
agreement.
42
<PAGE>
8. 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:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Projected benefit obligation at July 1, $221,985 $222,607
Service cost 5,122 3,454
Interest cost 15,214 14,328
Actuarial gains (12,593) (5,003)
Benefit payments (19,239) (14,236)
Plan amendment 3,190 837
Foreign currency translation (4) (2)
----------- -----------
Projected benefit obligation at June 30, $213,675 $221,985
=========== ===========
</TABLE>
The changes in the fair values of the pension plans' assets were as
follows:
<TABLE>
2000 1999
----------- -----------
<S> <C> <C>
Plan assets at July 1, $257,662 $261,097
Actual return on plan assets 10,767 11,995
Administrative expenses (1,413) (1,190)
Benefit payments (19,239) (14,236)
Foreign currency translation (9) (4)
----------- -----------
Plan assets at June 30, $247,768 $257,662
=========== ===========
</TABLE>
The following table sets forth the funded status and amounts recognized in
our consolidated balance sheets at June 30, 2000 and 1999, for the plans:
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
----------- ------------
<S> <C> <C>
Plan assets in excess of projected benefit obligations $34,096 $35,677
Unrecognized net loss 26,970 27,867
Unrecognized prior service cost 3,534 634
Unrecognized transition (asset) (182) (220)
----------- ------------
Prepaid pension expense recognized in the balance sheet $64,418 $63,958
=========== ============
</TABLE>
The net prepaid pension expense recognized in the consolidated balance
sheets consisted entirely of a prepaid pension asset.
43
<PAGE>
A summary of the components of total pension expense is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 5,122 $ 3,454 $ 2,685
Interest cost on projected benefit obligation 15,214 14,328 14,518
Expected return on plan assets (22,360) (21,694) (20,455)
Amortization of net loss 1,306 1,813 1,522
Amortization of prior service cost (credit) 290 (184) (184)
Amortization of transition (asset) (37) (36) (38)
----------- ----------- -----------
Net periodic pension (income) $ (465) $ (2,319) $ (1,952)
=========== =========== ===========
</TABLE>
Weighted average assumptions used in accounting for the defined benefit
pension plans as of June 30, 2000 and 1999 were as follows:
2000 1999
---- -----
Discount rate 8.0% 7.25%
Expected rate of increase in salaries 4.5% 4.5%
Expected long-term rate of return on plan assets 9.0% 9.0%
Plan assets include an investment in our Class A common stock, valued at a
fair market value of $3,127 and $8,178 at June 30, 2000 and 1999, respectively.
Substantially all of the other plan assets are invested in listed stocks and
bonds.
Postretirement Health Care Benefits
We provide health care benefits for most of our retired employees.
Postretirement health care benefit expense from continuing operations totaled
$1,065, $951, and $804 for 2000, 1999, and 1998, respectively. Our accrual was
approximately $32,345 and $33,155 as of June 30, 2000 and 1999, 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 $3,484, $3,902 and $3,714 for the years ended June
30, 2000, 1999 and 1998, respectively.
The changes in the accumulated postretirement benefit obligation of the
plans were as follows:
2000 1999
------- -------
Accumulated postretirement benefit obligation at July 1, $55,027 $58,197
Service cost 302 227
Interest cost 3,733 3,860
Actuarial gains (3,290) (2,718)
Benefit payments (5,198) (4,539)
Acquisitions/Divestitures (16) -
------- -------
Accumulated postretirement benefit obligation at June 30, $50,558 $55,027
======= =======
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.
44
<PAGE>
The following table sets forth the funded status and amounts recognized in
the Company's consolidated balance sheets at June 30, 2000 and 1999, for the
plans:
2000 1999
------- --------
Accumulated postretirement benefit obligation $50,558 $ 55,027
Unrecognized prior service credit 797 866
Unrecognized net loss (8,960) (12,833)
------- --------
Accrued postretirement benefit liability $42,395 $ 43,060
======= ========
The accumulated postretirement benefit obligation was determined using a
discount rate of 8.0% at June 30, 2000 and 7.25% at June 30, 1999. The effect
of such change resulted in a decrease to the accumulated postretirement benefit
obligation in fiscal 2000. For measurement purposes, a 6.5% annual rate of
increase in the per capita claims cost of covered health care benefits was
assumed for fiscal 2000. The rate was assumed to decrease gradually to 5.0% for
fiscal 2003 and remain at that level thereafter.
A summary of the components of total postretirement expense is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 302 $ 227 $ 166
Interest cost on accumulated postretirement benefit
obligation 3,733 3,860 3,979
Amortization of prior service credit (69) (69) (69)
Amortization of net loss 583 835 442
--------- --------- ---------
Net periodic postretirement benefit cost $4,549 $4,853 $4,518
========= ========= =========
</TABLE>
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, 2000:
One Percentage-Point
Increase Decrease
-------- --------
Effect on service and interest components of
net periodic cost $ 107 $ (105)
Effect on accumulated postretirement benefit
obligation 1,490 (1,351)
45
<PAGE>
9. INCOME TAXES
The provision (benefit) for income taxes from continuing operations is
summarized as follows:
2000 1999 1998
-------- -------- -------
Current:
Federal $(11,234) $ 3,416 $(6,245)
State 427 140 500
Foreign 2,893 3,994 3,893
-------- -------- -------
(7,914) 7,550 (1,852)
Deferred:
Federal 5,508 (10,731) 46,092
State (1,993) (10,064) 3,034
-------- -------- -------
3,515 (20,795) 49,126
-------- -------- -------
Net tax provision (benefit) $ (4,399) $(13,245) $47,274
======== ======== =======
The income tax provision (benefit) for continuing operations differs from
that computed using the statutory Federal income tax rate of 35%, in fiscal
2000, 1999, and 1998, for the following reasons:
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- -----------
<S> <C> <C> <C>
Computed statutory amount $ 6,199 $(12,760) $43,188
State income taxes, net of applicable federal tax benefit (654) 2,488 4,362
Nondeductible acquisition valuation items 4,002 1,903 1,204
Tax on foreign earnings, net of tax credits (5,030) (2,392) (1,143)
Difference between book and tax basis of assets acquired and
liabilities assumed (1,491) (53) 4,932
Revision of estimate for tax accruals (7,800) (1,790) (3,905)
Other 375 (641) (1,364)
----------- ---------- -----------
Net tax provision (benefit) $(4,399) $(13,245) $47,274
========== ========== ===========
</TABLE>
46
<PAGE>
The following table is a summary of the significant components of our
deferred tax assets and liabilities, and deferred provision or benefit, for the
following periods:
<TABLE>
<CAPTION>
2000 1999 1998
Deferred Deferred Deferred
June 30, (Provision) June 30, (Provision) (Provision)
2000 Benefit 1999 Benefit Benefit
--------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Deferred tax assets:
Accrued expenses $ 6,249 $(7,910) $ 14,159 $11,572 $ (3,853)
Asset basis differences 9,384 562 8,822 710 7,540
Inventory 5,135 (5,982) 11,117 11,117 (2,198)
Employee compensation and benefits 17,022 3,435 13,587 8,501 (55)
Environmental reserves 4,738 763 3,975 509 207
Loss and credit carryforward 7,035 7,035 - - -
Postretirement benefits 12,000 (4,428) 16,428 (1,706) (1,338)
Other 2,234 (2,405) 4,639 (7,465) 4,506
--------- ------- --------- ------- --------
63,797 (8,930) 72,727 23,238 4,809
Deferred tax liabilities:
Asset basis differences (80,038) 4,348 (84,386) (3,954) (54,012)
Inventory - - - 1,546 (1,546)
Pensions (19,318) 296 (19,614) (428) 95
Other (4,548) 771 (5,319) 393 1,528
--------- ------- --------- ------- --------
(103,904) 5,415 (109,319) (2,443) (53,935)
--------- ------- --------- ------- --------
Net deferred tax liability $ (40,107) $(3,515) $ (36,592) $20,795 $(49,126)
========= ======= ========= ======= ========
</TABLE>
The amounts included in the balance sheet are as follows:
June 30, June 30,
2000 1999
------- -------
Prepaid expenses and other current assets:
Current deferred $ 27,206 $ 5,999
======== ========
Noncurrent income tax liabilities:
Noncurrent deferred $ 67,313 $ 42,591
Other noncurrent 61,202 79,370
-------- --------
$128,515 $121,961
======== ========
The 2000, 1999 and 1998 net tax benefits include the results of reversing
$7,800, $1,790 and $3,905, respectively, of federal income taxes previously
provided, due to a change in the estimate of required tax accruals.
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
47
<PAGE>
permanently invested, or which would be offset by allowable foreign tax credits.
At June 30, 2000, the amount of domestic taxes payable upon distribution of such
earnings was not significant.
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.
10. EQUITY SECURITIES
We had 22,429,722 shares of Class A common stock and 2,621,652 shares of
Class B common stock outstanding at June 30, 2000. 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, 2000, 100,795 and
14,968 shares of Class A common stock were issued as a result of the exercise of
stock options and the Special-T restricted stock plan, respectively. Under the
terms of our acquisition of Special-T, we issued 44,079 restricted shares of our
Class A common stock during fiscal 2000, as additional merger consideration. On
February 23, 2000, we issued 63,300 restricted shares of Class A common stock as
a result of a cashless exercise of 250,000 warrants. In addition, our Class A
common stock outstanding was reduced as a result of 52,000 shares purchased by
us during fiscal 2000, which are considered as treasury stock for accounting
purposes.
During fiscal 2000, we issued 121,244 deferred compensation units pursuant
to our stock option deferral plan, as a result of the exercise of 228,891 stock
options. Each deferred compensation unit is represented by one share of our
treasury stock and is convertible into one share of our Class A common stock
after a specified period of time.
11. STOCK OPTIONS AND WARRANTS
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 shares of common stock,
valued at fair market value at the time of exercise. The options normally
terminate five years from the date of grant, subject to extension of up to 10
years 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.
48
<PAGE>
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:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
---------------- ----------------
<S> <C> <C>
Outstanding at July 1, 1997 1,485,440 $ 7.46
Granted 357,250 24.25
Exercised (141,259) 4.70
Forfeited (46,650) 7.56
---------------- ----------------
Outstanding at June 30, 1998 1,654,781 7.46
Granted 338,000 14.36
Plans assumption from Banner merger 870,315 4.25
Exercised (75,383) 5.21
Expired (500) 3.50
Forfeited (650) 12.16
---------------- ----------------
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
================ ================
Exercisable at June 30, 1998 667,291 $ 6.58
Exercisable at June 30, 1999 1,867,081 $ 8.75
Exercisable at June 30, 2000 1,793,459 $10.57
</TABLE>
A summary of options outstanding at June 30, 2000 is presented as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------- ---------------------------------
Weighted Average Weighted
Average Remaining Average
Range of Number Exercise Contract Number Exercise
Exercise Prices Outstanding Price Life Exercisable Price
------------------------------ ----------------- --------------- ---------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
$3.50 - $8.625 822,699 $ 5.30 1.1 years 762,199 $ 5.18
$8.72 - $13.48 492,987 $ 9.57 3.7 years 345,487 $ 9.41
$13.625 - $16.25 841,385 $14.80 2.2 years 531,023 $14.94
$18.5625 - $25.0625 309,500 $24.65 1.2 years 154,750 $24.65
------------------------------ ----------------- --------------- ---------------- ---------------- -----------
$3.50 - $25.0625 2,466,571 $11.82 4.1 years 1,793,459 $10.57
============================== ================= =============== ================ ================ ===========
</TABLE>
49
<PAGE>
The weighted average grant date fair value of options granted during 2000,
1999 and 1998 was $4.16, $6.48, and $11.18, 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:
<TABLE>
<CAPTION>
2000 1999 1998
------------------- ------------------- -----------------
<S> <C> <C> <C>
Risk-free interest rate 5.9% - 6.8% 4.3% - 5.4% 5.4% - 6.3%
Expected life in years 4.66 4.66 4.66
Expected volatility 45% - 47% 45% - 46% 44% - 45%
Expected dividends none none none
</TABLE>
We recognized compensation expense of $23 from stock options issued to a
consultant and $414 from an employee stock plan that was established with our
acquisition of Special-T Fasteners in 1998. We recognized compensation expense
of $104 as a result of stock options that were modified in 1998. We are applying
APB Opinion No. 25 in accounting for its stock option plans. Accordingly, no
compensation cost has been recognized for the granting of stock options to our
employees in 2000, 1999 or 1998. If stock options granted in 2000, 1999 and 1998
were accounted for based on their fair value as determined under SFAS 123, pro
forma earnings would be as follows:
<TABLE>
<CAPTION>
2000 1999 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Net earnings (loss):
As reported $9,758 $(59,009) $101,090
Pro forma 8,096 (60,682) 99,817
Basic earnings (loss) per share:
As reported $ 0.39 $ (2.59) $ 5.36
Pro forma 0.32 (2.66) 5.30
Diluted earnings (loss) per share:
As reported $ 0.39 $ (2.59) $ 5.14
Pro forma 0.32 (2.66) 5.07
</TABLE>
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.
Stock Warrants
Effective as of February 21, 1997, we approved the continuation of an existing
warrant to Stinbes Limited (an affiliate of Jeffrey Steiner) to purchase 375,000
shares of our Class A or Class B common stock at $7.80 per share. The warrant
50
<PAGE>
has been modified to permit exercise within certain window periods including,
within two years after the merger of Shared Technologies Fairchild Inc. with
certain companies. The warrant's exercise price per share increases by $.002 for
each day subsequent to March 13, 1999. The payment of the warrant price may be
made in cash or in shares of our Class A or Class B common stock, valued at fair
market value at the time of exercise, or combination thereof. In no event may
the warrant be exercised after March 13, 2002. As a result of certain
modifications to the warrant, we recognized a charge of $5,606 in 1998.
On February 21, 1996, we issued warrants to purchase 25,000 shares of Class A
common stock, at $9.00 per share, to a non-employee for services provided in
connection with our various dealings with Peregrine Direct Investments Limited.
The warrants issued are immediately exercisable and will expire on November 8,
2000.
On November 9, 1995, we issued warrants to purchase 500,000 shares of Class A
Common Stock, at $9.00 per share, to Peregrine Direct Investments Limited, in
exchange for a standby commitment it received on November 8, 1995, from
Peregrine. We elected not to exercise our rights under the Peregrine commitment.
On February 23, 2000, we issued 63,300 restricted shares of Class A common stock
as a result of a cashless exercise of 250,000 of these warrants. The remaining
250,000 of warrants are immediately exercisable and will expire on November 8,
2000.
12. EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CATION>
2000 1999 1998
----------------- --------------- ----------------
<S> <C> <C> <C>
Basic earnings per share:
Earnings (loss) from continuing operations $21,764 $(23,507) $52,399
================= =============== ================
Weighted average common shares outstanding 24,954 22,766 18,834
================= =============== ================
Basic earnings per share:
Basic earnings (loss) from continuing operations per share $ 0.87 $ (1.03) $ 2.78
================= =============== ================
Diluted earnings per share:
Earnings (loss) from continuing operations $21,764 $(23,507) $52,399
================= =============== ================
Weighted average common shares outstanding 24,954 22,766 18,834
Diluted effect of options 97 antidilutive 546
Diluted effect of warrants 86 antidilutive 289
----------------- --------------- ----------------
Total shares outstanding 25,136 22,766 19,669
================= =============== ================
Diluted earnings (loss) from continuing operations per share $ 0.87 $ (1.03) $ 2.66
================= =============== ================
</TABLE>
The computation of diluted loss from continuing operations per share for 1999
excluded the effect of incremental common shares attributable to the potential
exercise of common stock options outstanding and warrants outstanding, because
their effect was antidilutive. No adjustments were made to share information in
the calculation of earnings per share for discontinued operations and
extraordinary items.
13. RESTRUCTURING CHARGES
In fiscal 1999, we recorded $6,374 of restructuring charges. Of this amount,
$500 was recorded at our corporate office for severance benefits and $348 was
recorded at our aerospace distribution segment for the write-off of building
improvements from premises vacated. The remainder, $5,526 was recorded as a
result of the Kaynar Technologies initial integration in our aerospace fasteners
segment, i.e. for severance benefits ($3,932), for product integration costs
incurred as of June 30, 1999 ($1,334), and for the write down of fixed assets
($260). In fiscal 2000, we recorded $8,578 of
51
<PAGE>
restructuring charges as a result of the continued integration of Kaynar
Technologies into our aerospace fasteners segment. All of the charges recorded
during the current year were a direct result of product and plant integration
costs incurred as of June 30, 2000. These costs were classified as restructuring
and were the direct result of formal plans to move equipment, close plants and
to terminate employees. Such costs are nonrecurring in nature. Other than a
reduction in our existing cost structure, none of the restructuring charges
resulted in future increases in earnings or represented an accrual of future
costs. As of June 20, 2000, significantly all of our integration plans have been
executed and our integration process is substantially complete.
14. EXTRAORDINARY ITEMS
In fiscal 1999, we recognized an extraordinary loss of $4,153, net of tax, to
write-off the remaining deferred loan fees associated with the early
extinguishment of our indebtedness in connection with refinanced credit
facilities enabling our acquisition of Kaynar Technologies.
In fiscal 1998, we recognized an extraordinary loss of $6,730, net of tax, to
write-off the remaining deferred loan fees and original issue discounts
associated with early extinguishment of our indebtedness when we repaid all our
public debt and refinanced our credit facilites.
15. 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.
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 2
1/2 to 4 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, 2000, the indebtedness owed to us from Mr. Cohen, Mr.
Flynn, Mr. Juris, Mr. Persavich, Mr. Sharpe, and Mr. J. Steiner, was
approximately $175 each. On June 30, 2000, Ms. Hercot, Mr. Kelley, Mr. Miller
and Mr. E. Steiner owed us approximately $167, $50, $220 and $220, respectively.
On June 30, 2000, 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,
2000, 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 $443 in 2000 as a result
of favorable terms granted to the recipients of the loans.
On November 16, 1999, Mr. Richey borrowed $46 from us to exercise stock
options and hold our Class A common stock. The loan matures on November 16, 2001
and bears interest at 5.5%.
On June 30, 2000, Mr. J. Stenier has non-interest bearing indebtedness owed to
us of $200. He has authorized us to deduct this amount from his fiscal 2001
compensation.
In 1998, we made loans in the aggregate amount of $300 to Mr. Sharpe in order
to assist him in relocating from California to Virginia. $95 of the first loan
for $100 was repaid in full on October 1, 1998. The second loan, for $200, bears
interest at 5.5% per annum and matures on June 30, 2001. At June 30, 2000, a
balance of approximately $214 was outstanding.
52
<PAGE>
16. LEASES
Operating Leases
We hold certain of our facilities and equipment under long-term leases. The
minimum rental commitments under non-cancelable operating leases with lease
terms in excess of one year, for each of the five years following June 30, 2000,
are as follows: $4,429 for 2001, $3,809 for 2002, $3,077 for 2003, $2,129 for
2004, and $1,835 for 2005. Rental expense on operating leases from continuing
operations for fiscal 2000, 1999 and 1998 was $11,280, $9,485 and $8,610,
respectively.
Capital Leases
Minimum commitments under capital leases for each of the five years following
June 30, 2000, are $909 for 2001, $704 for 2002, $478 for 2003, $275 for 2004,
and $38 for 2005, respectively. At June 30, 2000, the present value of capital
lease obligations was $2,146. At June 30, 2000, capital assets leased and
included in property, plant, and equipment consisted of:
Land $ 79
Buildings and improvements 2,143
Machinery and equipment 2,886
Furniture and fixtures 31
Less: Accumulated depreciation (1,610)
--------------
$ 3,529
==============
Leasing Operations
In fiscal 1999, we began leasing retail space to tenants under operating
leases at completed sections of a shopping center we are developing in
Farmingdale, New York. Rental revenue is recognized as lease payments are due
from tenants and the related costs are amortized over their estimated useful
life. The future minimum lease payments to be received from noncancellable
operating leases on June 30, 2000 were $5,356 in 2001, $5,439 in 2002, $5,444 in
2003, $5,463 in 2004, $5,571 in 2005, and $49,735 thereafter. Rental property
under operating leases consists of the following as of June 30, 2000:
Land and improvements $36,228
Buildings and improvements 42,054
Tenant improvements 4,815
Construction in progress 12,643
Less: Accumulated depreciation (994)
--------------
$94,746
==============
53
<PAGE>
17. CONTINGENCIES
Government Claims
The Corporate Administrative Contracting Officer, based upon the advice of the
United States Defense Contract Audit Agency, alleged that a former subsidiary of
ours did not comply with Federal Acquisition Regulations and Cost Accounting
Standards in accounting for (i) the 1985 reversion of certain assets of
terminated defined benefit pension plans, and (ii) pension costs upon the
closing of segments of our former subsidiary's business. In January 2000, we
paid the government $1.1 million to settle these pension accounting issues.
Environmental Matters
Our operations are subject to stringent government imposed environmental laws
and regulations concerning, among other things, the discharge of materials into
the environment and the generation, handling, storage, transportation and
disposal of waste and hazardous materials. To date, such laws and regulations
have not had a material effect on our financial condition, results of
operations, or net cash flows, although we have expended, and can be expected to
expend in the future, significant amounts for the investigation of environmental
conditions and installation of environmental control facilities, remediation of
environmental conditions and other similar matters, particularly in our
aerospace fasteners segment.
In connection with our plans to dispose of certain real estate, we must
investigate environmental conditions and we may be required to take certain
corrective action prior or pursuant to any such disposition. In addition, we
have identified several areas of potential contamination related to other
facilities owned, or previously owned, by us, that may require us either to take
corrective action or to contribute to a clean-up. We are also a defendant in
certain lawsuits and proceedings seeking to require us to pay for investigation
or remediation of environmental matters and we have been alleged to be a
potentially responsible party at various "superfund" sites. We believe that we
have recorded adequate reserves in our financial statements to complete such
investigation and take any necessary corrective actions or make any necessary
contributions. No amounts have been recorded as due from third parties,
including insurers, or set off against, any environmental liability, unless such
parties are contractually obligated to contribute and are not disputing such
liability.
As of June 30, 2000, the consolidated total of our recorded liabilities for
environmental matters was approximately $13.4 million, which represented the
estimated probable exposure for these matters. It is reasonably possible that
our total exposure for these matters could be approximately $19.9 million.
Other Matters
On January 12, 1999, AlliedSignal asserted indemnification claims against us
for $18.9 million, arising from the disposition of Banner Aerospace's hardware
business to AlliedSignal. AlliedSignal, now Honeywell International, has since
added additional claims totaling $19.9 million. We believe that the amount of
the claims is far in excess of any amount that AlliedSignal is entitled to
recover from us.
We are involved in various other claims and lawsuits incidental to our
business. We, either on our own or through our insurance carriers, are
contesting these matters. In the opinion of management, the ultimate resolution
of the legal proceedings, including those mentioned above, will not have a
material adverse effect on our financial condition, future results of operations
or net cash flows.
18. BUSINESS SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 supersedes Statement of Financial
Accounting Standards No. 14 "Financial Reporting for Segments of a Business
Enterprise" and requires that a public company report certain information about
its reportable operating segments in annual and interim financial reports.
54
<PAGE>
Generally, financial information is required to be reported on the basis that is
used internally for evaluating segment performance and deciding how to allocate
resources to segments. We adopted SFAS 131 in fiscal 1999.
We report in two principal business segments. The aerospace fasteners segment
includes the manufacture of high performance specialty fasteners and fastening
systems. The aerospace distribution segment distributes a wide range of
aircraft parts and related support services to the aerospace industry. The
Corporate and Other segment includes the Gas Springs division prior to its
disposition and corporate activities. Our financial data by business segment is
as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Sales:
Aerospace Fasteners $ 533,620 $ 442,722 $ 387,236
Aerospace Distribution 101,002 168,336 358,431
Corporate and Other 739 6,264 5,760
Eliminations (a) - - (10,251)
---------------- ---------------- ----------------
Total Sales $ 635,361 $ 617,322 $ 741,176
================ ================ ================
Operating Income (Loss):
Aerospace Fasteners $ 33,909 $ 38,956 $ 32,722
Aerospace Distribution 7,758 (40,003) 20,330
Corporate and Other (18,424) (44,864) (7,609)
---------------- ---------------- ----------------
Operating Income (Loss) (b) $ 23,243 $ (45,911) $ 45,443
================ ================ ================
Capital Expenditures:
Aerospace Fasteners $ 26,367 $ 27,414 $ 31,221
Aerospace Distribution 630 1,951 3,812
Corporate and Other 342 777 996
---------------- ---------------- ----------------
Total Capital Expenditures $ 27,339 $ 30,142 $ 36,029
================ ================ ================
Depreciation and Amortization:
Aerospace Fasteners $ 38,025 $ 22,459 $ 16,260
Aerospace Distribution 976 1,871 3,412
Corporate and Other 2,820 1,327 1,201
---------------- ---------------- ----------------
Total Depreciation and Amortization $ 41,821 $ 25,657 $ 20,873
================ ================ ================
Identifiable Assets at June 30:
Aerospace Fasteners $ 632,152 $ 655,714 $ 427,927
Aerospace Distribution 90,918 291,281 452,397
Corporate and Other 544,350 381,791 276,935
---------------- ---------------- ----------------
Total Identifiable Assets $1,267,420 $1,328,786 $1,157,259
================ ================ ================
</TABLE>
(a) - Represents inter-segment sales from our aerospace fasteners segment to
our aerospace distribution segment.
(b) - Fiscal 2000 results include restructuring charges of $8,578 in the
aerospace fasteners segment. Fiscal 1999 results include inventory
impairment charges of $41,465 in the aerospace distribution segment, costs
relating to acquisitions of $23,604 and restructuring charges of $5,526 in
the aerospace fasteners segment, $348 in the aerospace distribution
segment, and $500 at corporate.
55
<PAGE>
19. FOREIGN OPERATIONS AND EXPORT SALES
Our operations are located primarily in the United States and Europe. Inter-
area sales are not significant to the total sales of any geographic area. Our
financial data by geographic area is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Sales by Geographic Area:
United States $ 470,984 $ 440,447 $ 613,325
Europe 160,954 176,315 127,851
Australia 2,762 417 -
Other 661 143 -
---------------- ---------------- ----------------
Total Sales $ 635,361 $ 617,322 $ 741,176
================ ================ ================
Operating Income (Loss) by Geographic Area:
United States $ (1,440) $ (66,245) $ 28,575
Europe 24,382 19,989 16,868
Australia 380 331 -
Other (79) 14 -
---------------- ---------------- ----------------
Total Operating Income (Loss) $ 23,243 $ (45,911) $ 45,443
================ ================ ================
Identifiable Assets by Geographic Area at June 30:
United States $1,013,100 $1,011,993 $ 903,054
Europe 244,106 306,156 254,205
Australia 9,399 10,176 -
Other 815 461 -
---------------- ---------------- ----------------
Total Identifiable Assets $1,267,420 $1,328,786 $1,157,259
================ ================ ================
</TABLE>
Export sales are defined as sales by our domestic operations to customers in
foreign regions. Export sales were as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Export Sales
Europe $42,831 $42,891 $ 68,515
Canada 16,621 12,460 16,426
Japan 8,568 14,147 12,056
Asia (excluding Japan) 3,031 6,337 19,744
South America 1,146 3,556 11,038
Other 4,947 14,694 10,340
---------------- ---------------- ----------------
Total Export Sales $77,144 $94,085 $138,119
================ ================ ================
</TABLE>
56
<PAGE>
20. 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.
<TABLE>
<CAPTION>
Fiscal 2000 quarters ended Oct. 3 Jan. 2 April 2 June 30
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 164,509 $152,244 $158,029 $160,579
Gross profit 43,147 37,872 40,502 41,817
Earnings (loss) from continuing operations 18,110 (7,080) 2,622 8,112
per basic share 0.73 (0.28) 0.10 0.32
per diluted share 0.72 (0.28) 0.10 0.32
Loss from disposal of discontinued operations, net - - - (12,006)
Per basic share - - - (0.48)
Per diluted share - - - (0.48)
Net earnings (loss) 18,110 (7,080) 2,622 (3,894)
Per basic share 0.73 (0.28) 0.10 (0.16)
per diluted share 0.72 (0.28) 0.10 (0.16)
Market price range of Class A Stock:
High 12 15/16 10 3/16 9 7/16 8
Low 8 3/8 6 13/16 4 1/2 4 1/8
Close 9 3/4 9 1/16 6 13/16 4 7/8
<CAPTION>
Fiscal 1999 quarters ended Sept. 27 Dec. 27 March 28 June 30
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $148,539 $151,181 $ 146,352 $171,250
Gross profit 34,672 18,062 36,890 22,805
Earnings (loss) from continuing operations 1,190 (8,827) 20,383 (36,253)
per basic share 0.05 (0.40) 0.93 (1.46)
per diluted share 0.05 (0.40) 0.92 (1.46)
Loss from disposal of discontinued operations, net - (9,180) (19,694) (2,475)
per basic share - (0.42) (0.90) (0.10)
per diluted share - (0.42) (0.89) (0.10)
Extraordinary items, net - - - (4,153)
Per basic share - - - (0.17)
Per diluted share - - - (0.17)
Net earnings (loss) 1,190 (18,007) 689 (42,881)
per basic share 0.05 (0.82) 0.03 (1.73)
per diluted share 0.05 (0.82) 0.03 (1.73)
Market price range of Class A Stock:
High 23 7/8 16 1/4 16 3/16 15
Low 12 3/8 10 3/8 10 1/2 10
Close 13 5/8 13 7/8 10 11/16 12 3/4
</TABLE>
Gross profit was reduced for inventory impairment adjustments of $19,320 and
$22,145 in the second and fourth quarter of fiscal 1999, respectively, relating
to the disposition of Solair and Dallas Aerospace. Loss on disposal of
57
<PAGE>
discontinued operations includes losses of $12,006 in the fourth quarter of
fiscal 2000, and $9,180, $19,694, and $2,475 in the second, third and fourth
quarters of fiscal 1999, respectively, resulting from the estimated loss on
disposal of Fairchild Technologies. Earnings from discontinued operations, net,
includes the results of Fairchild Technologies (until disposition) in each
quarter. Extraordinary items relate to the early extinguishment of our debt.
21. CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED)
The following unaudited consolidating financial statements separately show
The Fairchild Corporation and the subsidiaries of The Fairchild Corporation.
These financial statements are provided to fulfill public reporting requirements
and separately present guarantors of the 10 3/4% senior subordinated notes due
2009 issued by The Fairchild Corporation (the "Parent Company"). The guarantors
are primarily composed of our domestic subsidiaries, excluding Fairchild
Technologies, the equity investment in Nacanco, a real estate development
venture, and certain other subsidiaries.
CONSOLIDATING STATEMENT OF EARNINGS
FOR THE YEAR ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
----------- ------------ ------------ --------------- ----------
<S> <C> <C> <C> <C> <C>
Net Sales $ - $470,595 $166,558 $ (1,792) $635,361
Costs and expenses:
Cost of sales - 355,643 118,172 (1,792) 472,023
Selling, general & administrative 6,175 91,305 21,463 - 118,943
Restructuring - 8,578 - - 8,578
Amortization of goodwill 808 10,745 1,021 - 12,574
----------- ------------ ------------ --------------- ----------
6,983 466,271 140,656 (1,792) 612,118
----------- ------------ ------------ --------------- ----------
Operating income (loss) (6,983) 4,324 25,902 - 23,243
Net interest expense 42,347 (7,512) 9,257 - 44,092
Investment income, net (6) (9,929) - - (9,935)
Intercompany dividends - - - - -
Nonrecurring income on disposition of subsidiary - - (28,625) - (28,625)
----------- ------------ ------------ --------------- ----------
Earnings (loss) before taxes (49,324) 21,765 45,270 - 17,711
Income tax (provision) benefit 6,343 (238) (1,706) - 4,399
Equity in earnings of affiliates and subsidiaries 52,739 - - (53,086) (347)
Earnings (loss) from continuing operations 9,758 21,527 43,564 (53,086) 21,763
Earnings (loss) from disposal of discontinued operations - - (12,005) - (12,005)
----------- ------------ ------------ --------------- ----------
Net earnings (loss) $ 9,758 $ 21,527 $ 31,559 $(53,086) $ 9,758
=========== ============ ============ =============== ==========
</TABLE>
58
<PAGE>
CONSOLIDATING BALANCE SHEET
JUNE 30, 2000
<TABLE>
<CAPTION>
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
----------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Cash $ 35 $ 23,063 $ 12,692 $ - $ 35,790
Short-term investments 71 8,983 - - 9,054
Accounts Receivable (including intercompany), less 2,079 82,054 43,097 - 127,230
Allowances
Inventory, net - 130,634 49,225 - 179,859
Prepaid and other current assets 141 67,624 6,466 - 74,231
----------- ------------ ------------ -------------- ------------
Total current assets 2,326 312,358 111,480 - 426,164
Investment in Subsidiaries 869,958 - - (869,958) -
Net fixed assets 493 131,029 42,615 - 174,137
Net assets held for sale - 20,112 - - 20,112
Investments and advances in affiliates 945 2,293 - - 3,238
Goodwill 16,528 385,156 34,758 - 436,442
Deferred loan costs 13,284 24 1,406 - 14,714
Prepaid pension assets - 64,418 - - 64,418
Real estate investment - - 112,572 - 112,572
Long-term investments 355 9,729 - - 10,084
Other assets 17,592 (13,418) 1,365 - 5,539
----------- ------------ ------------ -------------- ------------
Total assets $921,481 $911,701 $304,196 $(869,958) $1,267,420
=========== ============ ============ ============== ============
Bank notes payable & current maturities of debt $ 2,250 $ 2,194 $ 24,150 $ - $ 28,594
Accounts payable (including intercompany) 2,954 46,105 13,435 - 62,494
Other accrued expenses (42,778) 129,106 36,113 - 122,441
Net current liabilities of discontinued operations - - - - -
----------- ------------ ------------ -------------- ------------
Total current liabilities (37,574) 177,405 73,698 - 213,529
Long-term debt, less current maturities 410,691 8,242 34,786 - 453,719
Other long-term liabilities 405 19,839 6,474 - 26,718
Noncurrent income taxes 145,847 (17,525) 193 - 128,515
Retiree health care liabilities - 38,196 4,607 - 42,803
Minority interest in subsidiaries - - 23 - 23
----------------------------------------- -------------- ------------
Total liabilities 519,369 226,157 119,781 - 865,307
Class A common stock 3,008 - 2,090 (2,090) 3,008
Class B common stock 262 - - - 262
Notes due from stockholders (520) (1,347) - - (1,867)
Paid-in-capital 5,158 226,032 249,301 (249,301) 231,190
Retained earnings 469,270 469,183 (58,098) (618,567) 261,788
Cumulative other comprehensive income (46) (7,838) (8,878) - (16,762)
Treasury stock, at cost (75,020) (486) - - (75,506)
----------- ------------ ------------ -------------- ------------
Total stockholders' equity 402,112 685,544 184,415 (869,958) 402,113
----------- ------------ ------------ -------------- ------------
Total liabilities & stockholders' equity $921,481 $911,701 $304,196 $(869,958) $1,267,420
=========== ============ ============ ============== ============
</TABLE>
59
<PAGE>
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
------------------------------------
Net earnings (loss) $ 9,758 $ 21,527 $ 31,559 $(53,086) $ 9,758
Depreciation and amortization 931 32,350 8,540 - 41,821
Accretion of discount on long-term liabilities - (73) 139 - 66
Deferred loan fee amortization 1,075 2 123 - 1,200
(Gain) loss on sale of property, plant and equipment - (2,207) 243 - (1,964)
Gain on sale of investments - (9,206) - - (9,206)
Undistributed loss (earnings) of affiliates, net - 372 - - 372
(Gain) on sale of affiliate investments and divestiture - - (28,625) - (28,625)
of subsidiary
Change in assets and liabilities 58,562 (124,976) (53,815) 53,086 (67,143)
Non-cash charges and working capital changes of - - (13,351) - (13,351)
discontinued operations
----------- ------------ ------------ --------------- ---------
Net cash (used for) provided by operating activities 70,326 (82,211) (55,187) - (67,072)
----------- ------------ ------------ --------------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
------------------------------------
Net proceeds received from investments - 14,655 - - 14,655
Purchase of property, plant and equipment (5) (19,321) (8,013) - (27,339)
Proceeds from sale of property, plant and equipment - 12,693 - - 12,693
Net proceeds from divestiture of subsidiaries - 57,000 51,792 - 108,792
Net proceeds from sale of affiliate investments -
Proceeds from net assets held for sale - 4,672 - - 4,672
Real estate investment - - (27,712) - (27,712)
Equity investment in affiliates - (2,489) - - (2,489)
Investing activities of discontinued operations - - 7,100 - 7,100
----------- ------------ ------------ --------------- ---------
Net cash provided by investing activities (5) 67,210 23,167 - 90,372
----------- ------------ ------------ --------------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
------------------------------------
Proceeds from issuance of debt 52,200 111,569 43,105 - 206,874
Debt repayments (122,359) (113,465) (10,436) - (246,260)
Loans to Stockholders (520) (1,347) - - (1,867)
Issuance of Class A common stock 366 - - - 366
Purchase of treasury stock - (486) - - (486)
----------- ------------ ------------ --------------- ---------
Net cash (used for) financing activities (70,313) (3,729) 32,669 - (41,373)
----------- ------------ ------------ --------------- ---------
Effect of exchange rate changes on cash - - (997) - (997)
----------- ------------ ------------ --------------- ---------
Net change in cash and cash equivalents 8 (18,730) (348) - (19,070)
----------- ------------ ------------ --------------- ---------
Cash and cash equivalents, beginning of the year 27 41,793 13,040 - 54,860
----------- ------------ ------------ --------------- ---------
Cash and cash equivalents, end of the period $ 35 $ 23,063 $ 12,692 $ - $ 35,790
=========== ============ ============ =============== =========
</TABLE>
<PAGE>
CONSOLIDATING STATEMENT OF EARNINGS
FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Net Sales $ - $ 448,495 $ 169,720 $ (893) $ 617,322
Costs and expenses
Cost of sales - 381,912 123,874 (893) 504,893
Selling, general & administrative 8,114 113,167 24,168 - 145,449
Restructuring - 6,374 - - 6,374
Amortization of goodwill 248 5,228 1,041 - 6,517
----------- ----------- ----------- ----------- -----------
8,362 506,681 149,083 (893) 663,233
----------- ----------- ----------- ----------- -----------
Operating income (loss) (8,362) (58,186) 20,637 - (45,911)
Net interest expense 27,130 (4,283) 7,499 - 30,346
Investment (income) loss, net - (39,800) - - (39,800)
----------- ----------- ----------- ----------- -----------
Earnings (loss) before taxes (35,492) (14,103) 13,138 - (36,457)
Income tax (provision) benefit 21,481 (6,936) (1,300) - 13,245
Equity in earnings of
Affiliates and subsidiaries (44,998) (516) 1,344 45,965 1,795
Minority interest - (2,090) - - (2,090)
----------- ----------- ----------- ----------- -----------
Earnings (loss) from continuing
Operations (59,009) (23,645) 13,182 45,965 (23,507)
Earnings (loss) from disposal of
Discontinued operations - - (31,349) - (31,349)
Extraordinary items - (4,153) - - (4,153)
----------- ----------- ----------- ----------- -----------
Net earnings (loss) $ (59,009) $ (27,798) $ (18,167) $ 45,965 $ (59,009)
=========== =========== =========== =========== ===========
</TABLE>
61
<PAGE>
CONSOLIDATING BALANCE SHEET
JUNE 30, 1999
<TABLE>
<CAPTION>
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Cash $ 27 $ 41,793 $ 13,040 $ - $ 54,860
Short-term investments 71 13,023 - - 13,094
Accounts Receivable (including intercompany),
less allowances 549 52,929 76,643 - 130,121
Inventory, net (182) 145,080 45,341 - 190,239
Prepaid and other current assets 1,297 69,000 3,629 - 73,926
----------- ----------- ----------- ----------- -----------
Total current assets 1,762 321,825 138,653 - 462,240
Investment in Subsidiaries 841,744 - - (841,744) -
Net fixed assets 611 137,852 45,602 - 184,065
Net assets held for sale - 21,245 - - 21,245
Investments in affiliates 1,300 13,135 17,356 - 31,791
Goodwill 5,533 402,595 39,594 - 447,722
Deferred loan costs 13,029 26 22 - 13,077
Prepaid pension assets - 63,958 - - 63,958
Real estate investment - - 83,791 - 83,791
Long-term investments - 15,844 - - 15,844
Other assets 16,244 (11,865) 674 - 5,053
----------- ----------- ----------- ----------- -----------
Total assets $ 880,223 $ 964,615 $ 325,692 $ (841,744) $ 1,328,786
=========== =========== =========== =========== ===========
Bank notes payable & current maturities of
debt $ 2,250 $ 2,548 $ 24,062 $ - $ 28,860
Accounts payable (including intercompany) 972 12,824 58,475 - 72,271
Other accrued expenses 7,272 99,669 14,195 - 121,136
Net current liabilities of discontinued
operations - - 10,999 - 10,999
----------- ----------- ----------- ----------- -----------
Total current liabilities 10,494 115,041 107,731 - 233,266
Long-term debt, less current maturities 480,850 9,908 4,525 - 495,283
Other long-term liabilities 405 18,138 7,361 - 25,904
Noncurrent income taxes (19,026) 140,749 238 - 121,961
Retiree health care liabilities - 40,189 4,624 - 44,813
Minority interest in subsidiaries - 9 50 - 59
----------- ----------- ----------- ----------- -----------
Total liabilities 472,723 324,034 124,529 - 921,286
Class A common stock 2,775 200 5,085 (5,085) 2,975
Class B common stock 262 - - - 262
Paid-in-capital 2,138 226,900 263,058 (263,058) 229,038
Retained earnings (deficit) 477,191 413,483 (65,043) (573,601) 252,030
Cumulative other comprehensive income (764) (2) (1,937) - (2,703)
Treasury stock, at cost (74,102) - - - (74,102)
----------- ----------- ----------- ----------- -----------
Total stockholders' equity 407,500 640,581 201,163 (841,744) 407,500
----------- ----------- ----------- ----------- -----------
Total liabilities & stockholders' equity $ 880,223 $ 964,615 $ 325,692 $ (841,744) $ 1,328,786
=========== =========== =========== =========== ===========
</TABLE>
62
<PAGE>
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net earnings (loss) $ (59,009) $ (27,798) $ (18,167) $ 45,965 $ (59,009)
Depreciation & amortization 127 17,610 7,920 - 25,657
Amortization of deferred loan fees 1,100 - - - 1,100
Accretion of discount on long-term liabilities 5,270 - - - 5,270
Extraordinary items net of cash paid - 6,389 - - 6,389
Provision for restructuring - 3,774 - - 3,774
Loss on sale of PP&E - 307 93 - 400
Distributed earnings of affiliates - 1,460 1,973 - 3,433
Minority interest - 2,826 (736) - 2,090
Change in assets and liabilities 15,030 52,898 (3,058) (45,965) 18,905
Non-cash charges and working capital changes
of discontinued operations - - 15,259 - 15,259
----------- ----------- ----------- ----------- -----------
Net cash (used for) provided by operating
activities (37,482) 57,466 3,284 - 23,268
----------- ----------- ----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds received from investment securities - 189,379 - - 189,379
Purchase of PP&E (61) (19,162) (10,919) - (30,142)
Proceeds from sale of PP&E - 656 188 - 844
Equity investment in affiliates 630 (8,308) - - (7,678)
Gross proceeds from divestiture of subsidiary - 60,396 - - 60,396
Acquisition of subsidiaries, net of cash acquired (221,467) (45,287) (7,673) - (274,427)
Change in real estate investment - - (40,351) - (40,351)
Change in net assets held for sale - 3,134 - - 3,134
Investing activities of discontinued operations - - (312) - (312)
----------- ----------- ----------- ----------- -----------
Net cash (used for) provided by investing
activities (220,898) 180,808 (59,067) - (99,157)
----------- ----------- ----------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from issuance of debt 483,100 (3,241) 3,363 - 483,222
Debt repayment (including intercompany), net (225,000) (213,187) 58,104 - (380,083)
Issuance of Class A common stock 126 (126) - - -
Proceeds from exercised stock options 181 - - - 181
Purchase of treasury stock - (22,102) - - (22,102)
----------- ----------- ----------- ----------- -----------
Net cash (used for) provided by financing
activities 258,407 (238,656) 61,467 - 81,218
----------- ----------- ----------- ----------- -----------
Exchange rate effect on cash - - (70) - (70)
----------- ----------- ----------- ----------- -----------
Net change in cash and cash equivalents 27 (382) 5,614 - 5,259
Cash, beginning of the year - 42,175 7,426 - 49,601
----------- ----------- ----------- ----------- -----------
Cash, end of the year $ 27 $ 41,793 $ 13,040 $ - $ 54,860
=========== =========== =========== =========== ===========
</TABLE>
63
<PAGE>
CONSOLIDATING STATEMENTS OF EARNINGS
FOR THE YEAR ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Net Sales $ - $ 613,324 $ 138,807 $ (10,955) $ 741,176
Costs and expenses
Cost of sales - 464,942 100,683 (10,955) 554,670
Selling, general & administrative 3,516 112,447 19,631 - 135,594
Amortization of goodwill 147 4,247 1,075 - 5,469
----------- ----------- ----------- ----------- -----------
3,663 581,636 121,389 (10,955) 695,733
----------- ----------- ----------- ----------- -----------
Operating income (loss) (3,663) 31,688 17,418 - 45,443
Net interest expense 24,048 14,094 4,573 - 42,715
Investment (income) loss, net (208) 3,570 - - 3,362
Nonrecurring income on
disposition of subsidiary - (124,028) - - (124,028)
----------- ----------- ----------- ----------- -----------
Earnings (loss) before taxes (27,503) 138,052 12,845 - 123,394
Income tax (provision) benefit 10,580 (54,384) (3,470) - (47,274)
Equity in earnings of affiliates and
subsidiaries 118,013 140 3,044 (118,626) 2,571
Minority interest - (26,292) - - (26,292)
----------- ----------- ----------- ----------- -----------
Earnings (loss) from continuing operations
101,090 57,516 12,419 (118,626) 52,399
Earnings (loss) from discontinued
operations - 2,348 (6,644) - (4,296)
Earnings (loss) from disposal of
discontinued operations - 95,018 (35,301) - 59,717
Extraordinary items - (6,730) - - (6,730)
----------- ----------- ----------- ----------- -----------
Net earnings (loss) $ 101,090 $ 148,152 $ (29,526) $ (118,626) $ 101,090
=========== =========== =========== =========== ===========
</TABLE>
64
<PAGE>
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Parent Non Fairchild
Company Guarantors Guarantors Eliminations Historical
------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net earnings (loss) $ 101,090 $ 148,152 $(29,526) $(118,626) $ 101,090
Depreciation & amortization 72 14,939 5,862 - 20,873
Amortization of deferred loan fees 2,406 - - - 2,406
Accretion of discount on long-term liabilities 3,766 - - - 3,766
Net gain on disposition of subsidiaries - (124,041) - - (124,041)
Net gain on sale of discontinued operations - (132,787) - - (132,787)
Extraordinary items net of cash paid - 10,347 - - 10,347
Loss on sale of PP&E - 147 99 - 246
Distributed earnings of affiliates - 547 1,178 - 1,725
Minority interest - 26,890 (598) - 26,292
Change in assets and liabilities (187,408) 64,276 (2,431) 118,626 (6,937)
Non-cash charges and working capital changes
of discontinued operations - - 11,789 - 11,789
---------- ---------- ---------- ---------- ----------
Net cash (used for) provided by operating
activities (80,074) 8,470 (13,627) - (85,231)
---------- ---------- ---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds used for investment securities - (7,287) - - (7,287)
Purchase of PP&E - (30,220) (5,809) - (36,029)
Proceeds from sale of PP&E - 336 - - 336
Equity investment in affiliates (141) (4,202) - - (4,343)
Minority interest in subsidiaries - (26,383) - - (26,383)
Acquisition of subsidiaries, net of cash acquired - (25,445) (7,350) - (32,795)
Net proceeds from sale of discontinued operations - 167,987 - - 167,987
Change in real estate investment - - (17,262) - (17,262)
Change in net assets held for sale - 2,140 - - 2,140
Investing activities of discontinued operations - - (2,750) - (2,750)
---------- ---------- ---------- ---------- ----------
Net cash (used for) provided by investing
activities (141) 76,926 (33,171) - 43,614
---------- ---------- ---------- ---------- ----------
Cash Flows from Financing Activities:
Proceeds from issuance of debt 225,000 50,523 - - 275,523
Debt repayment (including intercompany), net (198,867) (106,899) 47,752 - (258,014)
Issuance of Class A common stock 53,848 193 - - 54,041
Financing activities of discontinued operations - - 2,538 - 2,538
---------- ---------- ---------- ---------- ----------
Net cash provided by (used for) financing
Activities 79,981 (56,183) 50,290 - 74,088
---------- ---------- ---------- ---------- ----------
Exchange rate effect on cash - - (2,290) - (2,290)
---------- ---------- ---------- ---------- ----------
Net change in cash (234) 29,213 1,202 - 30,181
Cash, beginning of the year 234 12,962 6,224 - 19,420
---------- ---------- ---------- ---------- ----------
Cash, end of the year $ - $ 42,175 $ 7,426 $ - $ 49,601
========== ========== ========== ========== ==========
</TABLE>
65
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 5. OTHER INFORMATION
Articles have appeared in the French press reporting an inquiry by a French
magistrate into allegedly improper business transactions involving Elf
Acquitaine, a French petroleum company, its former chairman and various third
parties. In connection with this inquiry, the magistrate has made inquiry into
allegedly improper transactions between Mr. Steiner and that petroleum company.
In response to the magistrate's request that Mr. Steiner appear in France as a
witness, Mr. Steiner submitted written statements concerning the transactions
and appeared in person before the magistrate and others. The magistrate has put
Mr. Steiner under examination (mis en examen) with respect to this matter and
imposed a surety (caution) of ten million French francs which has been paid. Mr.
Steiner has not been charged.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this Item is incorporated herein by reference from
the 2000 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference from
the 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference from
the 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference from
the 2000 Proxy Statement.
66
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this Report:
(a)(1) Financial Statements.
All financial statements of the registrant as set forth under Item 8 of this
report on Form 10-K (see index on Page 15).
(a)(2) Financial Statement Schedules and Report of Independent Public
Accountants.
<TABLE>
<CAPTION>
Schedule Number Description Page
--------------- ------------------------------------------------- ----
<S> <C> <C>
I Condensed Financial Information of Parent Company 69
II Valuation and Qualifying Accounts 73
</TABLE>
All other schedules are omitted because they are not required.
67
<PAGE>
Report of Independent Public Accountants
To The Fairchild Corporation:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of The Fairchild
Corporation and consolidated subsidiaries included in this Form 10-K and have
issued our report thereon dated September 11, 2000. Our audits were made for
the purpose of forming an opinion on the basic financial statements taken as a
whole. The schedules listed in the index on the preceding page are the
responsibility of the Company's management and are presented for the purpose of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Vienna, VA
September 11, 2000
68
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE FAIRCHILD CORPORATION
CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANY
BALANCE SHEETS (NOT CONSOLIDATED)
(In thousands)
<TABLE>
<CAPTION>
June 30, June 30,
ASSETS 2000 1999
--------------------- ---------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 35 $ 27
Marketable Securities 71 71
Accounts receivable 2,079 549
Inventory (182)
Current tax assets 49,181 -
Prepaid expenses and other current assets 141 1,297
--------------------- ---------------------
Total current assets 51,507 1,762
Property, plant and equipment, less accumulated depreciation 493 611
Investments in subsidiaries 869,958 841,744
Investments and advances, affiliated companies 945 1,300
Goodwill 16,528 5,533
Noncurrent tax assets - 19,026
Deferred loan fees 13,284 13,029
Other assets 17,947 16,244
--------------------- ---------------------
Total assets $970,662 $899,249
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 2,250 $ 2,250
Accounts payable 2,954 972
Accrued Salaries 111 497
Accrued Insurance 213 213
Accrued Interest 5,736 7,049
Other Accrued 343 1,990
Accrued Income Taxes - (2,477)
--------------------- ---------------------
Total current liabilities 11,607 10,494
Long-term debt 410,691 480,850
Other long-term liabilities 405 405
Noncurrent Income Tax 145,847 -
--------------------- ---------------------
Total liabilities 568,550 491,749
Stockholders' equity:
Class A common stock 3,008 2,775
Class B common stock 262 262
Notes due from stockholders (520) -
Treasury stock (75,020) (74,102)
Cumulative comprehensive Income (46) (764)
Additional paid in capital 5,158 2,138
Retained earnings 469,270 477,191
--------------------- ---------------------
Total stockholders' equity 402,112 407,500
--------------------- ---------------------
Total liabilities and stockholders' equity $970,662 $899,249
===================== =====================
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
69
<PAGE>
Schedule I
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED FINANCIAL STATEMENTS OF THE COMPANY
STATEMENT OF EARNINGS (NOT CONSOLIDATED)
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended June 30,
-------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------
<S> <C> <C> <C>
Costs and Expenses:
Selling, general & administrative $ 6,175 $ 8,114 $ 3,516
Amortization of goodwill 808 248 147
-------------------------------------------------------------------
6,983 8,362 3,663
Operating loss (6,983) (8,362) (3,663)
Net interest expense 42,347 27,130 24,048
Investment income, net 6 -- 208
Equity in earnings of affiliates (347) 967 (613)
-------------------------------------------------------------------
Loss from continuing operations before taxes (49,671) (34,525) (28,116)
Income tax provision (benefit) (6,343) (21,481) (10,580)
-------------------------------------------------------------------
Loss before equity in earnings (loss) of subsidiaries (43,328) (13,044) (17,536)
Equity in earnings (loss) of subsidiaries 53,086 (45,965) 118,626
-------------------------------------------------------------------
Net earnings (loss) $ 9,758 $(59,009) $101,090
===================================================================
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
70
<PAGE>
Schedule I
THE FAIRCHILD CORPORATION
CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANY
STATEMENT OF CASH FLOWS (NOT CONSOLIDATED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the Years Ended June 30,
---------------------------------------------------------------
2000 1999 1998
------------------- --------------------- -------------------
<S> <C> <C> <C>
Cash provided by (used for) operations $ 70,326 $ (37,482) $ (80,074)
Investing activities:
Acquisition of subsidiaries -- (221,467) --
Purchase of PP&E (5) (61) --
Equity investments in affiliates -- 630 (141)
Other -- -- --
------------------- --------------------- -------------------
(5) (220,898) (141)
Financing activities:
Proceeds from issuance of debt, including intercompany 52,200 483,100 225,000
Debt repayments (122,359) (225,000) (198,867)
Issuance of common stock 366 307 53,848
Other (520) -- --
------------------- --------------------- -------------------
(70,313) 258,407 79,981
------------------- --------------------- -------------------
Net increase (decrease) in cash $ 8 $ 27 $ (234)
=================== ===================== ===================
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
71
<PAGE>
Schedule I
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED FINANCIAL STATEMENTS OF THE COMPANY
NOTES TO FINANCIAL STATEMENTS (NOT CONSOLIDATED)
(In thousands)
1. BASIS OF PRESENTATION
In accordance with the requirements of Regulation S-X of the Securities and
Exchange Commission, our financial statements are condensed and omit many
disclosures presented in the consolidated financial statements and the notes
thereto.
2. LONG-TERM DEBT
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
------------------ ----------------
<S> <C> <C>
Bank Credit Agreement $187,941 $258,100
10 3/4% Senior subordinated Notes Due 2009 225,000 225,000
------------------ ----------------
Total Debt 412,941 483,100
================== ================
Less: Current Maturities (2,250) (2,250)
------------------ ----------------
Total Long-Term Debt $410,691 $480,850
================== ================
</TABLE>
Long-term debt maturing over the next five years is as follows: $2,250 in
2001, $2,250 in 2002, $2,250 in 2003, $2,250 in 2004, and $2,250 in 2005.
3. DIVIDENDS FROM SUBSIDIARIES
Cash dividends paid to The Fairchild Corporation by its consolidated
subsidiaries were, $25,317, $47,742 and $42,100 in 2000, 1999 and 1998,
respectively. In 1999, The Fairchild Corporation received from its subsidiaries,
dividends of its stock with a fair market value of $22,102 and Banner
Aerospace's stock with a fair market value of $187,424. We are involved in
various other claims and lawsuits incidental to our business, some of which
involve substantial amounts.
4. CONTINGENCIES
We are involved in various other claims and lawsuits incidental to our
business, some of which involve substantial amounts. We, either on our own or
through our insurance carriers, are contesting these matters. In the opinion of
management, the ultimate resolution of the legal proceedings will not have a
material adverse effect on our financial condition, or future results of
operations or net cash flows.
72
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Changes in the allowance for doubtful accounts are as follows:
<TABLE>
<CAPTION>
For the Years Ended June 30,
-------------------------------------------------------
2000 1999 1998
--------------- --------------- --------------
<S> <C> <C> <C>
Beginning balance $6,442 $ 5,655 $ 6,905
Charges to cost and expenses 2,377 3,426 2,240
Charges to other accounts (a) 1,671 (2,940) (2,642)
Acquired companies - 616 -
Amounts written off (892) (315) (848)
--------------- --------------- --------------
Ending Balance $9,598 $ 6,442 $ 5,655
=============== =============== ==============
</TABLE>
(a) Recoveries of amounts written off in prior periods, foreign currency
translation and the change in related noncurrent taxes. Fiscal 1998
includes a reduction of $2,801 relating to the assets disposed of as a
result the disposition of Banner Aerospace's hardware group.
73
<PAGE>
(a)(3) Exhibits.
Articles of Incorporation, Bylaws, and Instruments Defining Rights of Securities
3.1 Registrant's Restated Certificate of Incorporation (incorporated by
reference to Exhibit "C" of Registrant's Proxy Statement dated October
27, 1989).
3.2 Registrant's Amended and Restated By-Laws, as amended as of November 21,
1996 (incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 29, 1996).
3.3 Amendment to the Company's By-Laws, dated as of February 12, 1999
(incorporated by reference to Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1999).
3.4 Amendment to the Company's By-Laws, dated February 17, 2000, together
with Charter for the Board's Audit Committee, adopted on February 17,
2000 (incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended April 2, 2000).
4.1 Specimen of Class A Common Stock certificate (incorporated by reference
to Registration Statement No. 33-15359 on Form S-2).
4.2 Specimen of Class B Common Stock certificate (incorporated by reference
to Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1989).
4.3 Indenture dated as of April 20, 1999, between the Company and Subsidiary
Guarantors and The Bank of New York, as Trustee (relating to the
Company's 10 3/4% Senior Subordinated Notes Due 2009) (incorporated by
reference to Registrant's Registration Statement No. 333-80311 on Form
S-4, declared effective August 9, 1999).
4.4 Form of Global Note (relating to the Company's 10 3/4% Senior
Subordinated Notes Due 2009) (incorporated by reference to Registrant's
Registration Statement No. 333-80311 on Form S-4, declared effective
August 9, 1999).
4.5 Registration Rights Agreement, dated April 15, 1999, between the Company
and Credit Suisse First Boston Corporation on behalf of the Initial
Purchasers (relating to the Company's 10 3/4% Senior Subordinated Notes
Due 2009) (incorporated by reference to Registrant's Registration
Statement No. 333-80311 on Form S-4, declared effective August 9, 1999).
4.6 Purchase Agreement, dated as of April 15, 1999, between the Company, the
Subsidiary Guarantors and the Initial Purchasers (relating to the
Company's 10 3/4% Senior Subordinated Notes Due 2009) (incorporated by
reference to Registrant's Registration Statement No. 333-80311 on Form
S-4, declared effective August 9, 1999).
(a)(3) Exhibits (continued)
10. Material Contracts
(Stock Option Plans)
10.1 1988 U.K. Stock Option Plan of Banner Industries, Inc. (incorporated by
reference to Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1988).
10.2 Description of grants of stock options to non-employee directors of
Registrant (incorporated by reference to Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1988).
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10.3 Amended and Restated 1986 Non-Qualified and Incentive Stock Option Plan,
dated as of February 9, 1998 (incorporated by reference to Exhibit B of
Registrant's Proxy Statement dated October 9, 1998).
10.4 Amendment Dated May 7, 1998 to the 1986 Non-Qualified and Incentive
Stock Option Plan (incorporated by reference to Exhibit A of
Registrant's Proxy Statement dated October 9, 1998).
10.5 1996 Non-Employee Directors Stock Option Plan (incorporated by reference
to Exhibit B of Registrant's Proxy Statement dated October 7, 1996).
10.6 Stock Option Deferral Plan dated February 9, 1998 (for the purpose of
allowing deferral of gain upon exercise of stock options) (incorporated
by reference to Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 29, 1998).
*10.7 Amendment to the Stock Option Deferral Plan, dated June 28, 2000 (for
the purpose of making an equitable adjustment in connection with the
spin off of Fairchild Bermuda and the receipt of Global Sources shares).
10.8 Amendment dated May 21, 1999, amending the 1996 Non-Employee Directors
Stock Option Plan (for the purpose of allowing deferral of gain upon
exercise of stock options) (incorporated by reference to Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1999).
(Employee Agreements)
10.9 Amended and Restated Employment Agreement between Registrant and Jeffrey
J. Steiner dated September 10, 1992 (incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1993).
10.10 Employment Agreement between RHI Holdings, Inc., and Jacques Moskovic,
dated as of December 29, 1994 (incorporated by reference to Registrant's
Annual Report on Form 10-K/A for the fiscal year ended June 30, 1996).
10.11 Employment Agreement between Fairchild France, Inc., and Jacques
Moskovic, dated as of December 29, 1994 (incorporated by reference to
Registrant's Annual Report on Form 10-K/A for the fiscal year ended June
30, 1996).
10.12 Employment Agreement between Fairchild France, Inc., Fairchild CDI,
S.A., and Jacques Moskovic, dated as of April 18, 1997 (incorporated by
reference to the Registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 1995).
10.13 Letter Agreement dated September 9, 1996, between Registrant and Colin
M. Cohen (incorporated by reference to Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1997).
10.14 Banner Aerospace, Inc. Deferred Bonus Plan, dated January 21, 1998 (as
amended), to allow the deferral of bonuses in connection with 1998 or
1999 Extraordinary Transactions (incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1999).
10.15 Letter Agreement dated February 27, 1998, between Registrant and John L.
Flynn (incorporated by reference to Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 29, 1998).
10.16 Letter Agreement dated February 27, 1998, between Registrant and Donald
E. Miller (incorporated by reference to Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 29, 1998).
10.17 Employment Agreement between Robert Edwards and Fairchild Holding Corp.,
dated March 2, 1998 (incorporated by reference to Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 29, 1998).
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10.18 Promissory Note in the amount of $100,000, issued by Robert Sharpe to
the Registrant, dated July 1, 1998 (incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1998).
10.19 Promissory Note in the amount of $200,000 issued by Robert Sharpe to the
Registrant, dated July 1, 1998 (incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1998).
10.20 Officer Loan Program, dated as of February 5, 1999, lending up to
$750,000 to officers for the purchase of Company Stock (incorporated by
reference to Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1999).
10.21 Director and Officer Loan Program, dated as of August 12, 1999, lending
up to $2,000,000 to officers and directors for the purchase of Company
Stock (incorporated by reference to Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1999).
*10.22 Employment Agreement between Eric Steiner and The Fairchild Corporation,
dated as of August 1, 2000.
*10.23 Employment Agreement between Banner Aerospace, Inc. and Warren D.
Persavich (together with Amendment No. 1 to such Agreement).
(Credit Agreements)
Fairchild Holding Corp. Credit Agreement
10.24 Restated and Amended Credit Agreement dated as of July 26, 1996, among
Fairchild Holding Corp, Citicorp USA, Inc. and certain financial
institutions (the "FHC Credit Agreement") (incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1996).
10.25 Amendment No. 1, dated as of January 21, 1997, to the FHC Credit
Agreement dated as of March 13, 1996 (incorporated by reference to
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
30, 1997).
10.26 Amendment No. 2 and Consent, dated as of February 21, 1997, to the FHC
Credit Agreement dated as of March 13, 1996 (incorporated by reference
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 30, 1997).
10.27 Amendment No. 3, dated as of June 30, 1997, to the FHC Credit Agreement
dated as of March 13, 1996 (incorporated by reference to Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1997).
10.28 Second Amended And Restated Credit Agreement dated as of July 18, 1997,
to the FHC Credit Agreement dated as of March 13, 1996 (incorporated by
reference to Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1997).
RHI Credit Agreement
10.29 Restated and Amended Credit Agreement dated as of May 27, 1996, (the
"RHI Credit Agreement"), among RHI Holdings, Inc., Citicorp USA, Inc.
and certain financial institutions. (incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1996).
10.30 Amendment No. 1 dated as of July 29, 1996, to the RHI Credit Agreement
dated as of May 27, 1996 (incorporated by reference to Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1996).
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10.31 Amendment No. 2 dated as of April 7, 1997, to the RHI Credit Agreement
dated as of May 27, 1996 (incorporated by reference to Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1997).
10.32 Amendment No. 3 dated as of September 26, 1997, to the RHI Credit
Agreement dated as of May 27, 1996 (incorporated by reference to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 28, 1997).
Fairchild Corporation Credit Agreement
10.33 Third Amended and Restated Credit Agreement, dated as of December 19,
1997, among RHI Holdings, Inc., Fairchild Holding Corp., the Registrant,
Citicorp USA, Inc. and certain financial institutions (incorporated by
reference to Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 28, 1997).
10.34 Amendment No. 1 dated as of January 29, 1999 to Third Amended and
Restated Credit Agreement dated as of December 19, 1997 (incorporated by
reference to Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 28, 1999).
10.35 Credit Agreement dated as of April 20, 1999, among The Fairchild
Corporation (as Borrower), Citicorp. USA, Inc. and certain financial
institutions (incorporated by reference to Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1999).
10.36 Amendment No. 1, dated as of November 29, 1999 to the Credit Agreement
dated as of April 20, 1999 (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended January
2, 2000).
10.37 Amendment No. 2, dated as of March 10, 2000 to the Credit Agreement
dated as of April 20, 1999 (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended April
2, 2000).
Warthog, Inc. Credit Agreement
10.38 Mortgage and Security Agreement with Morgan Guaranty Trust Company of
New York dated March 23, 2000 (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended April
2, 2000).
Interest Rate Hedge Agreements
10.39 Interest Rate Hedge Agreement between Registrant and Citibank, N.A.
dated as of August 19, 1997 (incorporated by reference to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 28, 1997).
10.40 Amendment dated as of December 23, 1997, to the Interest Rate Hedge
Agreement between Registrant and Registrant and Citibank, N.A. dated as
of August 19, 1997(incorporated by reference to (incorporated by
reference to Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 28, 1997).
10.41 Amendment dated as of January 14, 1997, to the Interest Rate Hedge
Agreement between Registrant and Citibank, N.A. dated as of August 19,
1997 (incorporated by reference to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 29, 1998).
(Warrants to Steiner Affiliate)
10.42 Form Warrant Agreement (including form of Warrant) issued by the Company
to Drexel Burnham Lambert on March 13, 1986, subsequently purchased by
Jeffrey Steiner and subsequently assigned to Stinbes Limited (an
affiliate of
77
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Jeffrey Steiner), for the purchase of Class A or Class B Common Stock
(incorporated herein by reference to Exhibit 4(c) of the Company's
Registration Statement No. 33-3521 on Form S-2).
10.43 Form Warrant Agreement issued to Stinbes Limited dated as of September
26, 1997, effective retroactively as of February 21, 1997 (incorporated
by reference to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 28, 1997).
10.44 Extension of Warrant Agreement between Registrant and Stinbes Limited
for 375,000 shares of Class A or Class B Common Stock dated as of
September 26, 1997, effective retroactively as of February 21, 1997
(incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 28, 1997).
10.45 Amendment of Warrant Agreement dated February 9, 1998, between the
Registrant and Stinbes Limited (incorporated by reference to
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
29, 1998).
10.46 Amendment of Warrant Agreement dated December 12, 1998, effective
retroactively as of September 7, 1998, between Registrant and Stinbes
Limited (incorporated by reference to Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 29, 1999).
(Other Material Contracts)
10.47 Voting Agreement dated as of July 16, 1997, between RHI Holdings, Inc.,
and Tel-Save Holdings, Inc. (regarding voting Registrant's stock in
Shared Technologies Fairchild Inc.) (incorporated by reference to the
Registrant's Schedule 13D/A, Amendment No. 3, filed July 22, 1997).
10.48 Stock Option Agreement dated November 20, 1997 between RHI Holdings,
Inc. and Intermedia Communications Inc. (incorporated by reference to
Schedule 13D/A, Amendment No. 4, dated as of November 25, 1997, filed by
the Company on December 1, 1997).
10.49 Stock Purchase Agreement dated November 25, 1997 between RHI Holdings,
Inc. and Intermedia Communications Inc. (incorporated by reference to
Schedule 13D/A, Amendment No. 4, dated as of November 25, 1997, filed by
the Company on December 1, 1997).
10.50 Asset Purchase Agreement dated as of December 8, 1997, among Banner
Aerospace, Inc. and seven of its subsidiaries (Adams Industries, Inc.,
Aerospace Bearing Support, Inc., Aircraft Bearing Corporation, Banner
Distribution, Inc., Burbank Aircraft Supply, Inc., Harco, Inc. and
PacAero), AlliedSignal Inc. and AS BAR LLC (incorporated by reference to
Banner Aerospace, Inc.'s Report on Form 8-K dated January 28, 1998).
10.51 Asset Purchase Agreement dated as of December 8, 1997, among Banner
Aerospace, Inc. and two of its subsidiaries (PB Herndon Aerospace, Inc.
and Banner Aerospace Services, Inc.), AlliedSignal Inc. and AS BAR PBH
LLC (incorporated by reference to Banner Aerospace, Inc.'s Report on
Form 8-K dated January 28, 1998).
10.52 Agreement and Plan of Merger dated January 28, 1998, as amended on
February 20, 1998, and March 2, 1998 (the "Special-T Fasteners Merger
Agreement), between the Company and the shareholders' of Special-T
Fasteners, regarding the merger of Special-T into Fairchild
(incorporated by reference to Registrant's Report on Form 8-K dated
March 2, 1998, filed on March 12, 1998).
10.53 Third Amendment dated September 25, 1998 to the Special-T Fasteners
Merger Agreement (incorporated by reference to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 27, 1998).
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<PAGE>
10.54 Agreement and Plan of Reorganization by and among The Fairchild
Corporation, Dah Dah, Inc. and Kaynar Technologies Inc., dated as of
December 26, 1998, regarding the merger of Kaynar into Fairchild
(incorporated by reference to Registrant's Registration Statement on
Form S-4 filed on January 15, 1999).
10.55 Voting and Option Agreement by and among The Fairchild Corporation, Dah
Dah, Inc., CFE Inc., and general Electric Capital Corporation dated as
of December 26, 1998, regarding voting of Kaynar stock for the Kaynar-
Fairchild merger (incorporated by reference to Registrant's Report on
Form 8-K dated December 30, 1998).
10.56 Voting Agreements by and between The Fairchild Corporation and each of
the following individuals: Jordan Law, David A. Werner, Robert L. Beers
and LeRoy A. Dack, each agreement dated as of December 26, 1998,
regarding voting of Kaynar stock for the Kaynar-Fairchild merger
(incorporated by reference to Registrant's Report on Form 8-K dated
December 30, 1998).
10.57 Agreement and Plan of Merger between The Fairchild Corporation, MTA,
Inc. and Banner Aerospace, Inc., dated as of January 11, 1999, regarding
the merger of Banner into Fairchild (incorporated by reference to
"Appendix A" of Registrant's Proxy Statement/Prospectus included as part
of Registrant's Registration Statement No. 333-70673 on Form S-4
declared effective March 25, 1999).
10.58 Share Purchase Agreement dated as of July 27, 1999 between a Company
subsidiary and Jeffrey Steiner (as Sellers) and American National Can
Group, Inc. (as Buyer), for the sale of all stock of Nacanco Paketleme
A.S. owned by the Sellers (incorporated by reference to Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1999).
10.59 Asset Purchase Agreement dated as of October 22, 1999, among The
Fairchild Corporation, Banner Aerospace, Inc., Dallas Aerospace, Inc.,
and United Technologies Corporation, acting through its Pratt & Whitney
Division (incorporated by reference to the Registrant's Report on Form
8-K dated December 13, 1999).
(a)(3) Exhibits (continued)
Other Exhibits
11. Computation of earnings per share (found at Note 12 in Item 8 to
Registrant's Consolidated Financial Statements for the fiscal years
ended June 30, 2000, 1999 and 1998).
*22 List of subsidiaries of Registrant.
*23.1 Consent of Arthur Andersen LLP, independent public accountants.
*27 Financial Data Schedules.
-------------------------
*Filed herewith.
(b) Reports on Form 8-K
We have not filed any reports under Form 8-K during the quarter ended June 30,
2000.
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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/ MICHAEL T. ALCOX
--------------------
Michael T. Alcox
Senior Vice President and
Chief Financial Officer
Date: September 20, 2000
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<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant, in
their capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
By: /s/ JEFFREY J. STEINER Chairman, Chief Executive September 20, 2000
------------------------------------------
Jeffrey J. Steiner Officer and Director
By: /s/ MELVILLE R. BARLOW Director September 20, 2000
------------------------------------------
Melville R. Barlow
By: /s/ MORTIMER M. CAPLIN Director September 20, 2000
------------------------------------------
Mortimer M. Caplin
By: /s/ PHILIP DAVID Director September 20, 2000
------------------------------------------
Philip David
By: /s/ ROBERT EDWARDS Executive Vice President-Fairchild September 20, 2000
------------------------------------------
Robert Edwards Fasteners and Director
By: /s/ STEVEN L. GERARD Director September 20, 2000
------------------------------------------
Steven L. Gerard
By: /s/ HAROLD J. HARRIS Director September 20, 2000
------------------------------------------
Harold J. Harris
By: /s/ DANIEL LEBARD Director September 20, 2000
------------------------------------------
Daniel Lebard
By: /s/ HERBERT S. RICHEY Director September 20, 2000
------------------------------------------
Herbert S. Richey
By: /s/ ERIC I. STEINER President, Chief Operating September 20, 2000
------------------------------------------
Eric I. Steiner Officer and Director
</TABLE>
81
