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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended December 29, 2002 Commission File Number 1-6560
THE FAIRCHILD CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 34-0728587
(State of incorporation or organization) (I.R.S. Employer Identification No.)
45025 Aviation Drive, Suite 400, Dulles, VA 20166
(Address of principal executive offices)
(703) 478-5800 (Registrant's telephone number,
including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Title of Class December 29, 2002
Class A Common Stock, $0.10 Par Value 22,541,021
Class B Common Stock, $0.10 Par Value 2,621,502
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THE FAIRCHILD CORPORATION INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 29, 2002
Page
PART I.FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of
December 29, 2002 (Unaudited) and June 30, 2002......... 3
Condensed Consolidated Statements of Earnings
(Unaudited) for the Three and Six Months Ended
December 29, 2002 and December 30, 2001................. 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended December 29, 2002 and
December 30, 2001....................................... 7
Notes to Condensed Consolidated Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition................................. 17
Item 3. Quantitative and Qualitative Disclosure About Market Risk 25
Item 4. Controls and Procedures................................. 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................... 27
Item 2. Changes in Securities and Use of Proceeds............... 27
Item 4. Submission of Matters to a Vote of Security Holders..... 27
Item 5. Other Information....................................... 28
Item 6. Exhibits and Reports on Form 8-K........................ 28
All references in this Quarterly Report on Form 10-Q to the terms "we,"
"our," "us," the "Company" and "Fairchild" refer to The Fairchild Corporation
and its subsidiaries. All references to "fiscal" in connection with a year shall
mean the 12 months ended June 30.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 29, 2002 (Unaudited) and June 30, 2002
(In thousands)
ASSETS
12/29/02 6/30/02
------------------ ------------------
CURRENT ASSETS:
Cash and cash equivalents $ 133,840 $ 14,810
Short-term investments 8,546 967
Accounts receivable-trade, less allowances of $4,440 and $2,527 13,113 11,602
Inventories - finished goods 20,571 20,628
Net current assets held for sale 4,719 4,821
Net current assets of discontinued operations - 268,687
Prepaid expenses and other current assets 11,283 20,256
------------------ ------------------
Total Current Assets 192,072 341,771
------------------ ------------------
Property, plant and equipment, net of accumulated
depreciation of $8,343 and $7,920 3,546 3,501
Net noncurrent assets held for sale 14,575 15,106
Net noncurrent assets of discontinued operations - 383,986
Goodwill 17,438 17,438
Investments and advances, affiliated companies 3,482 3,261
Prepaid pension assets 59,011 64,693
Deferred loan costs 285 10,907
Real estate investment 118,320 112,484
Long-term investments 47,348 5,360
Notes receivable 219 6,932
Other assets 8,322 5,578
------------------ ------------------
TOTAL ASSETS $ 464,618 $ 971,017
------------------ ------------------
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 29, 2002 (Unaudited) and June 30, 2002
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
12/29/02 6/30/02
------------------ ------------------
CURRENT LIABILITIES:
Bank notes payable and current maturities of long-term debt $ 31,570 $ 53,879
Accounts payable 12,166 8,062
Accrued liabilities:
Salaries, wages and commissions 24,542 4,456
Employee benefit plan costs 2,043 1,982
Insurance 15,309 10,465
Interest 667 6,340
Other accrued liabilities 21,324 22,179
Current liabilities of discontinued operations - 68,224
------------------ ------------------
Total Current Liabilities 107,621 175,587
------------------ ------------------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities 2,968 437,917
Fair value of interest rate contract 17,736 10,989
Other long-term liabilities 12,987 13,569
Pension liabilities 50,533 -
Retiree health care liabilities 26,801 28,011
Noncurrent deferred income taxes 3,269 4,277
Noncurrent income taxes 54,353 53,641
Noncurrent liabilities of discontinued operations - 19,010
------------------ ------------------
TOTAL LIABILITIES 276,268 743,001
------------------ ------------------
STOCKHOLDERS' EQUITY:
Class A common stock, $0.10 par value; 40,000
shares authorized,
30,348 (30,347 in June) shares issued and 22,541
(22,540 in June);
shares outstanding; entitled to one vote per share 3,035 3,035
Class B common stock, $0.10 par value; 20,000
shares authorized,
2,622 shares issued and outstanding; entitled to ten votes per share 262 262
Paid-in capital 232,799 232,797
Treasury stock, at cost, 7,807 shares of Class A common stock (76,532) (76,532)
Retained earnings 82,422 91,947
Notes due from stockholders (1,831) (1,831)
Cumulative other comprehensive income (loss) (51,805) (21,662)
------------------ ------------------
TOTAL STOCKHOLDERS' EQUITY 188,350 228,016
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 464,618 $ 971,017
------------------ ------------------
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
For The Three (3) and Six (6) Months Ended December 29, 2002
and December 30, 2001 (In thousands, except per share data)
------------------------------- --------------------------------
Three Months Ended Six Months Ended
------------------------------- --------------------------------
REVENUE: 12/29/02 12/30/01 12/29/02 12/30/01
------------------------------- --------------------------------
Net sales $ 19,595 $ 18,040 $ 37,391 $ 39,950
Rental revenue 2,099 1,784 3,987 3,637
------------------------------- --------------------------------
21,694 19,824 41,378 43,587
COSTS AND EXPENSES:
Cost of goods sold 17,456 14,589 31,427 32,781
Cost of rental revenue 1,325 1,300 2,557 2,534
Selling, general & administrative 35,305 12,223 43,978 22,114
Other (income) expense, net (138) (4,029) (236) (4,529)
------------------------------- --------------------------------
53,948 24,083 77,726 52,900
OPERATING LOSS (32,254) (4,259) (36,348) (9,313)
Interest expense 19,629 12,121 31,128 24,660
Interest income (7,617) (1,862) (8,368) (2,328)
------------------------------- --------------------------------
Net interest expense 12,012 10,259 22,760 22,332
Investment income (loss) 534 106 482 (280)
Increase (decrease) in fair market value of interest rate
contract 28 2,345 (6,747) (2,905)
------------------------------- --------------------------------
Loss from continuing operations before taxes (43,704) (12,067) (65,373) (34,830)
Income tax benefit (provision) 1,444 3,533 1,416 10,913
Equity in earnings (loss) of affiliates, net (82) - (82) 33
------------------------------- --------------------------------
Loss from continuing operations (42,342) (8,534) (64,039) (23,884)
Earnings (loss) from discontinued operations, net (3,570) 9,441 10,837 21,192
Gain on disposal of discontinued operations, net 43,677 - 43,677 -
------------------------------- --------------------------------
Earnings (loss) before cumulative effect of accounting change (2,235) 907 (9,525) (2,692)
Cumulative effect of change in accounting for goodwill - - - (144,600)
------------------------------- --------------------------------
NET EARNINGS (LOSS) $ (2,235) $ 907 $ (9,525) $ (147,292)
------------------------------- --------------------------------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (a) 18,755 (3,307) 17,517 9,370
Change in minimum pension liability (47,516) - (47,516) -
Unrealized holding changes on derivatives (189) 14 (176) 33
Unrealized periodic holding changes on securities 241 (269) 31 (421)
------------------------------- --------------------------------
Other comprehensive loss (28,709) (3,562) (30,144) 8,982
------------------------------- --------------------------------
COMPREHENSIVE INCOME (LOSS) $ (30,944) $ (2,655) $ (39,669) $ (138,310)
------------------------------- --------------------------------
(a) - In the three and six months ended December 29, 2002, foreign currency
translation adjustments include the recognition of foreign currency losses
as a result of the sale of the fastener business.
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) For The
Three (3) and Six (6) Months Ended December 29, 2002
and December 30, 2001
(In thousands, except per share data)
------------------------------- --------------------------------
Three Months Ended Six Months Ended
------------------------------- --------------------------------
12/29/02 12/30/01 12/29/02 12/30/01
------------------------------- --------------------------------
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Loss from continuing operations $ (1.68) $ (0.34) $ (2.55) $ (0.95)
Earnings (loss) from discontinued operations, net (0.14) 0.38 0.43 0.84
Gain on disposal of discontinued operations, net 1.74 - 1.74 -
------------------------------- --------------------------------
Earnings (loss) before cumulative effect of accounting change (0.08) 0.04 (0.38) (0.11)
Cumulative effect of change in accounting for goodwill - - - (5.75)
------------------------------- --------------------------------
NET EARNINGS (LOSS) $ (0.08) $ 0.04 $ (0.38) $ (5.86)
------------------------------- --------------------------------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments $ 0.75 $ (0.13) $ 0.70 $ 0.37
Minimum pension liability adjustment (1.89) - (1.89) -
Unrealized holding changes on derivatives (0.01) - (0.01) -
Unrealized periodic holding changes on securities 0.01 (0.01) - (0.02)
------------------------------- --------------------------------
Other comprehensive loss (1.14) (0.14) (1.20) 0.35
------------------------------- --------------------------------
COMPREHENSIVE INCOME (LOSS) $ (1.22) $ (0.10) $ (1.58) $ (5.51)
------------------------------- --------------------------------
Weighted average shares outstanding:
Basic 25,163 25,149 25,162 25,149
------------------------------- --------------------------------
Diluted 25,163 25,149 25,162 25,149
------------------------------- --------------------------------
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For The
Six (6) Months Ended December 29, 2002 and December 30, 2001
(In thousands)
12/29/02 12/30/01
-------------- --------------
Cash flows from operating activities:
Net loss $ (9,525) $ (147,292)
Depreciation and amortization 2,621 2,553
Amortization of deferred loan fees 10,869 1,018
Unrealized holding loss on interest rate contract 6,747 2,904
Net gain on the sale of discontinued operations (43,477) -
Paid-in kind interest income (7,530) -
Cumulative effect of change in accounting for goodwill - 144,600
Undistributed (earnings) loss of affiliates, net 53 (33)
Change in operating assets and liabilities 1,574 (5,554)
Non-cash charges and working capital changes of discontinued operations (a) - 5,056
-------------- --------------
Net cash provided by (used for) operating activities (38,668) 3,252
Cash flows from investing activities:
Purchase of property, plant and equipment (531) (473)
Net proceeds received from the sale of property, plant, and equipment - 291
Net proceeds received from (used for) investment securities, net (48,227) 1,377
Net proceeds received from the sale of discontinued operations 657,050 -
Equity investment in affiliates (186) (394)
Change in real estate investment (7,247) (77)
Changes in net assets held for sale (194) 4,233
Changes in notes receivable 14,243 (4,563)
Investing activities of discontinued operations (a) - (6,953)
-------------- --------------
Net cash provided by (used for) investing activities 614,908 (6,559)
Cash flows from financing activities:
Proceeds from issuance of debt 71,385 81,964
Debt repayments (528,643) (79,328)
Issuance of Class A common stock 2 -
Financing activities of discontinued operations (a) - (718)
-------------- --------------
Net cash provided by (used for) financing activities (457,256) 1,918
Effect of exchange rate changes on cash 45 351
-------------- --------------
Net change in cash and cash equivalents 119,029 (1,038)
Cash and cash equivalents, beginning of the year 14,811 14,951
-------------- --------------
Cash and cash equivalents, end of the period $ 133,840 $ 13,913
-------------- --------------
(a) - For the six months ended December 30, 2001, the effects of the fastener
business sold are presented separately. Cash used for changes in working
capital the fastener business was $7,478, net of accumulated depreciation
of $12,534. Cash used for investing activities of discontinued operations
reflect the capital expenditures of the fastener business. Cash used for
financing activities of discontinued operations reflect net debt borrowed
by the fastener business.
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (In thousands, except share data)
1. FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of December 29, 2002, and the
condensed consolidated statements of earnings and cash flows for the six months
ended December 29, 2002 and December 30, 2001 have been prepared by us, without
audit. In the opinion of management, all adjustments, necessary to present
fairly the financial position, results of operations and cash flows at December
29, 2002, and for all periods presented, have been made. These adjustments
include reclassification adjustments to reflect the sale of the fastener
business as a discontinued operation. The balance sheet at June 30, 2002 was
condensed from the audited financial statements as of that date.
The condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and the Securities and Exchange Commission's instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, certain information and
footnote disclosures normally included in complete financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted. These condensed consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in our 2002
Annual Report on Form 10-K, as amended. The results of operations for the period
ended December 29, 2002 are not necessarily indicative of the operating results
for the full year. Certain amounts in the prior year's quarterly financial
statements have been reclassified to conform to the current presentation.
2. DISCONTINUED OPERATIONS
On December 3, 2002, we completed the sale of our fastener business to
Alcoa Inc for approximately $657 million in cash and the assumption of certain
liabilities. The cash received from Alcoa is subject to a post-closing
adjustment based upon the net working capital of the fastener business on
December 3, 2002, compared with its net working capital as of March 31, 2002. We
may also receive additional cash proceeds up to $12.5 million per year over the
four-year period from 2003 to 2006, if the number of commercial aircraft
delivered by Boeing and Airbus exceeds specified annual levels.
In connection with the sale, we have deposited with an escrow agent $25
million to secure indemnification obligations we may have to Alcoa. The escrow
period is five years, but funds may be held longer if claims are asserted and
unresolved. In addition, for a period of five years after the closing, we are
required to maintain our corporate existence, take no action to cause our own
liquidation or dissolution, and take no action to declare or pay any dividends
on our common stock.
The sale of the fastener business has reduced our dependence upon the
aerospace industry. Additionally, the sale has allowed us to eliminate
essentially our debt. We used a portion of the proceeds from the sale to repay
our bank debt and to acquire by tender all of our outstanding $225 million
10.75% senior subordinated notes due in April 2009, leaving us with only a $30.8
million non-recourse term loan on our shopping center and $3.7 million of debt
at Fairchild Aerostructures. On February 3, 2003, we paid off the $30.8 million
non-recourse term loan. We plan to use the remaining proceeds from the sale to
fund acquisition opportunities.
In the three and six months ended December 29, 2002, we recorded a $43.7
million gain on the disposal of discontinued operations, net of $10.4 million of
taxes, as a result of the sale of the fastener business. The results of the
fastener business are recorded as earnings (loss) on discontinued operations,
the components of which are as follows:
Three Months Ended Six Months Ended
--------------------------------- ----------------------------------
12/29/02 (a) 12/30/01 12/29/02 (a) 12/30/01
--------------- --------------- ---------------- ----------------
Net sales $ 85,808 $ 139,795 $ 205,239 $ 282,958
Cost of goods sold 62,157 104,740 153,477 210,952
--------------- --------------- ---------------- ----------------
Gross margin 23,651 35,055 51,762 72,006
Selling, general & administrative expense 23,955 22,019 43,276 43,884
Other (income) expense, net 1,430 301 801 (416)
--------------- --------------- ---------------- ----------------
Operating income (loss) (1,734) 12,735 7,685 28,538
Net interest expense 124 311 374 665
--------------- --------------- ---------------- ----------------
Earnings (loss) from operations before taxes (1,858) 12,424 7,311 27,873
Income tax benefit (provision) (1,712) (2,983) 3,526 (6,681)
--------------- --------------- ---------------- ----------------
Net earnings (loss) from discontinued operations $ (3,570) $ 9,441 $ 10,837 $ 21,192
--------------- --------------- ---------------- ----------------
(a) - The results presented for the three and six months ended December 29,
2002, reflect the activity of the fastener business through its sale on
December 3, 2002.
The net assets of the fastener business were classified as discontinued
operations at June 30, 2002, and were as follows:
6/30/02
--------------
Short-term investments $ 87
Accounts receivable 97,918
Inventories 160,402
Prepaid and other current assets 10,280
Property, plant and equipment, net of $178,252 accumulated depreciation 125,717
Goodwill 257,111
Notes receivable 223
Other assets 935
Accounts payable (30,655)
Accrued liabilities (37,569)
Retiree health care liabilities (14,640)
Noncurrent income taxes (150)
Other long-term liabilities (4,220)
--------------
Total net assets of discontinued operations $565,439
--------------
3. CASH EQUIVALENTS AND INVESTMENTS
Cash equivalents and investments at December 29, 2002 consist primarily of
investments in United States government securities, which are recorded at market
value. Restricted cash equivalent investments are classified as short-term or
long-term investments depending upon the length of the restriction period.
Investments in common stock of public corporations are recorded at fair market
value and classified as trading securities or available-for-sale securities.
Other short-term investments and long-term investments do not have readily
determinable fair values and consist primarily of investments in preferred and
common shares of private companies and limited partnerships. A summary of the
cash equivalents and investments held by us follows:
December 29, 2002 June 30, 2002
------------------------------- -------------------------------
Aggregate Aggregate
------------------------------- -------------------------------
Fair Cost Fair Cost
Value Basis Value Basis
------------------------------- -------------------------------
Cash and cash equivalents:
U.S. government securities $ 129,075 $ 129,075 $ - $ -
Money market and other cash funds 4,765 4,765 14,811 14,811
------------------------------- -------------------------------
Total cash and cash equivalents $ 133,840 $ 133,840 $ 14,811 $ 14,811
------------------------------- -------------------------------
Short-term investments:
U.S. government securities - restricted $ 7,605 $ 7,605 $ - $ -
Money market funds - restricted 498 498 472 472
Trading securities - equity 319 582 356 574
Available-for-sale equity securities 69 200 83 200
Other investments 55 55 55 55
------------------------------- -------------------------------
Total short-term investments $ 8,546 $ 8,940 $ 966 $ 1,301
------------------------------- -------------------------------
Long-term investments:
U.S. government securities - restricted $ 42,124 $ 42,124 $ - $ -
Money market funds - restricted 225 225 - -
Available-for-sale equity securities 713 3,329 1,074 3,329
Other investments 4,286 4,286 4,286 4,286
------------------------------- -------------------------------
Total long-term investments $ 47,348 $ 49,964 $ 5,360 $ 7,615
------------------------------- -------------------------------
On December 29, 2002 and June 30, 2002, we had restricted investments of
$50,452 and $472, respectively, all of which are maintained in U.S. government
securities or money market funds as collateral for certain debt facilities, our
interest rate contract and escrow arrangements.
4. PENSIONS
The sale of our fastener business on December 3, 2002 was considered a
"significant event" under US generally accepted accounting principles. As such,
we were required to re-measure our pension obligations at that date, in addition
to measuring any gain or loss resulting from certain actions taken as a result
of the sale of the fastener business.
Several plan assumptions were changed during the remeasurement of our
pension plan on December 3, 2002. The discount rate was decreased from 7.125% to
6.75% reflecting the drop in bond yields since June 30, 2002. The return on plan
assets was reduced from 9.0% to 8.5% to reflect lower long-term expected return
on plan assets. To recognize mortality improvements, the mortality assumption
was changed from the 1983 Group Annuity Mortality table to the 1994 Group
Annuity Mortality table. The assumed form of payment for our remaining employees
was changed from life annuity to lump sum, to reflect actual experience.
In connection with the sales agreement of the fastener business, we
extended vesting of pension benefits to United States fastener employees who
were not already vested. Generally accepted accounting principles in the United
States require us to recognize immediately the costs for the enhanced
termination benefits related to this curtailment event. The pre-tax expense of
this one-time curtailment accounting loss was $8.3 million, which was included
as a partial offset to the net gain on the disposal of discontinued operations.
All United States fastener employees transferring to Alcoa are being
treated by us as having been terminated from our employment, and as such, are
eligible to request immediate distribution of pension benefits in the form of
lump sums. We expect that almost all will do so. In accordance with generally
accepted accounting principles, this caused us to record a one-time, pre-tax
settlement accounting loss of $17.5 million, which was included as a partial
offset to the net gain on disposal of discontinued operations.
We have reviewed our pension plan's funded position to determine if it is
necessary to reflect a pension liability and recognize a reduction in equity.
This is required when a pension plan's unfunded accumulated benefit obligation
exceeds the net liability being recognized for the pension plan. On December 3,
2002, the accumulated benefit obligation of the pension plan exceeded the fair
value of the plan assets by $17.5 million. Under generally accepted accounting
principles, this caused us to record an additional minimum pension liability of
$50.5 million, and required the recognition of a $47.5 million non-cash
reduction to our stockholders' equity. These amounts may change in the future as
our assets change in value and also due to changes in the discount rate
assumptions. Should, in the future, our pension plan's accumulated benefit
obligations be less than the fair value of plan assets, the additional minimum
pension liability and corresponding equity reduction will be reversed.
During the quarter ended December 29, 2002, we contributed $7.4 million of
cash to fund our pension plan in advance of required contributions. Based upon
our actuary's current assumptions and projections, we do not expect additional
cash contributions to the pension plan to be required until 2008.
5. NOTES PAYABLE AND LONG-TERM DEBT
In connection with the sale of the fastener business, we repaid our bank
credit agreement in the United States and all of the outstanding $225 million
senior subordinated notes. The remaining $9.9 million of deferred loan fees
associated with the bank credit agreement and senior subordinated notes were
expensed as interest expense for the three and six months ended December 29,
2002. At December 29, 2002 and June 30, 2002, notes payable and long-term debt
consisted of the following:
12/29/02 6/30/02
-----------------------------
Short-term notes payable $ - $ 18,975
-----------------------------
Bank credit agreements $ 30,750 $ 240,200
103/4% Senior subordinated notes due 2009 - 225,000
Capital lease obligations 111 607
Other notes payable, collateralized by property, plant and equipment 3,677 7,015
-----------------------------
34,538 472,822
Less: Current maturities of long-term debt (31,570) (34,904)
-----------------------------
Net long-term debt $ 2,968 $ 437,918
-----------------------------
On March 23, 2000, we entered into a $30,750 term loan agreement with
Morgan Guaranty Trust Company of New York. The loan is secured by all of the
developed rental property of our shopping center located in Farmingdale, New
York, including tenant leases and mortgage escrows. Borrowings under this
agreement had a maturity date of April 1, 2003, and bear interest at the rate of
LIBOR plus 3.1%. See Footnote 11, subsequent events.
6. EQUITY SECURITIES
We had 22,541,021 shares of Class A common stock and 2,621,502 shares of
Class B common stock outstanding at December 29, 2002. Class A common stock is
traded on both the New York and Pacific Stock Exchanges. There is no public
market for the Class B common stock. The shares of Class A common stock are
entitled to one vote per share and cannot be exchanged for shares of Class B
common stock. The shares of Class B common stock are entitled to ten votes per
share and can be exchanged, at any time, for shares of Class A common stock on a
share-for-share basis. During the six months ended December 29, 2002, we issued
1,000 shares of Class A common stock as a result of the exercise of stock
options.
7. EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted
earnings per share:
Three Months Ended Six Months Ended
----------------------------- -----------------------------
12/29/02 12/30/01 12/29/02 12/30/01
-------------- -------------- -------------- --------------
Basic earnings per share:
Loss from continuing operations $ (42,342) $ (8,534) $ (64,039) $ (23,884)
-------------- -------------- -------------- --------------
Weighted average common shares outstanding 25,163 25,149 25,162 25,149
-------------- -------------- -------------- --------------
Basic loss from continuing operations per share $ (1.68) $ (0.34) $ (2.55) $ (0.95)
-------------- -------------- -------------- --------------
Diluted earnings per share:
Loss from continuing operations $ (42,342) $ (8,534) $ (64,039) $ (23,884)
-------------- -------------- -------------- --------------
Weighted average common shares outstanding 25,163 25,149 25,162 25,149
Options antidilutive antidilutive antidilutive antidilutive
Warrants N/A antidilutive N/A antidilutive
-------------- -------------- -------------- --------------
Total shares outstanding 25,163 25,149 25,162 25,149
-------------- -------------- -------------- --------------
Diluted loss from continuing operations per share $ (1.68) $ (0.34) $ (2.55) $ (0.95)
-------------- -------------- -------------- --------------
Stock options entitled to purchase 1,990,521 and 1,952,543 shares of Class
A common stock were antidilutive and not included in the earnings per share
calculation for the three and six months ended December 29, 2002, respectively.
Stock options entitled to purchase 1,985,377 and 2,092,616 shares of Class A
common stock were antidilutive and not included in the earnings per share
calculation for the three and six months ended December 30, 2001, respectively.
Stock warrants entitled to purchase 400,000 shares of Class A common stock were
antidilutive and not included in the earnings per share calculation for the
three and six months ended December 30, 2001. The stock warrants expired during
fiscal 2002. The stock options could be dilutive in future periods.
8. CONTINGENCIES
Environmental Matters
Our operations are subject to stringent government imposed environmental
laws and regulations concerning, among other things, the discharge of materials
into the environment and the generation, handling, storage, transportation and
disposal of waste and hazardous materials. To date, such laws and regulations
have not had a material effect on our financial condition, results of
operations, or net cash flows, although we have expended, and can be expected to
expend in the future, significant amounts for the investigation of environmental
conditions and installation of environmental control facilities, remediation of
environmental conditions and other similar matters.
In connection with our plans to dispose of certain real estate, we must
investigate environmental conditions and we may be required to take certain
corrective action prior or pursuant to any such disposition. In addition, we
have identified several areas of potential contamination related to other
facilities owned, or previously owned, by us, that may require us either to take
corrective action or to contribute to a clean-up. We are also a defendant in
certain lawsuits and proceedings seeking to require us to pay for investigation
or remediation of environmental matters and we have been alleged to be a
potentially responsible party at various "superfund" sites. We believe that we
have recorded adequate reserves in our financial statements to complete such
investigation and take any necessary corrective actions or make any necessary
contributions. No amounts have been recorded as due from third parties,
including insurers, or set off against, any environmental liability, unless such
parties are contractually obligated to contribute and are not disputing such
liability.
As of December 29, 2002, the consolidated total of our recorded liabilities
for environmental matters was approximately $10.7 million, which represented the
estimated probable exposure for these matters. It is reasonably possible that
our total exposure for these matters could be approximately $14.1 million.
Other Matters
On January 21, 2003, we and one of our subsidiaries were served with a
third-party complaint in an action brought in New York by a non-employee worker
and his spouse alleging personal injury as a result of exposure to
asbestos-containing products. The defendant, which is one of many defendants in
the action, had purchased a pump business from us, and asserts the right to be
indemnified by us under its purchase agreement. While the purchaser has notified
us of, and claimed a right to indemnity from us against other asbestos-related
claims against it, this is the only instance in which a suit has been instituted
against us. We have not yet assessed any impact of the other claims.
We are involved in various other claims and lawsuits incidental to our
business. We, either on our own or through our insurance carriers, are
contesting these matters. In the opinion of management, the ultimate resolution
of litigation against us, including that mentioned above, will not have a
material adverse effect on our financial condition, future results of operations
or net cash flows.
9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets", which supersedes SFAS No. 121. Though it retains
the basic requirements of SFAS 121 regarding when and how to measure an
impairment loss, SFAS 144 provides additional implementation guidance. SFAS 144
applies to long-lived assets to be held and used or to be disposed of, including
assets under capital leases of lessees; assets subject to operating leases of
lessors; and prepaid assets. SFAS 144 also expands the scope of a discontinued
operation to include a component of an entity, and eliminates the current
exemption to consolidation when control over a subsidiary is likely to be
temporary. This statement is effective for our fiscal year beginning on July 1,
2002. Accordingly, we have accounted for the sale of the fastener business as a
discontinued operation as of the date of the sale on December 3, 2002.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections as of April 2002". SFAS No. 145
eliminates the requirement to report material gains or losses from debt
extinguishments as an extraordinary item, net of tax, in an entity's statement
of earnings. SFAS No. 145 instead requires that a gain or loss recognized from a
debt extinguishment be classified as an extraordinary item only when the
extinguishment meets the criteria of both "unusual in nature" and "infrequent in
occurrence" as prescribed under Accounting Principles Bulletin No. 30,
"Reporting the Result of Operations - Reporting the Effects of Disposal of a
Segment of Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". This statement is effective for our fiscal year
beginning on July 1, 2002. As a result of the sale of our fastener business,
$9.9 million in deferred loan fees associated with the debt we repaid were
written-off during the second quarter and are included in interest expense.
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities".
This standard requires costs associated with exit or disposal activities to be
recognized when they are incurred and applies prospectively to such activities
initiated after December 31, 2002.
On December 31, 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure". Statement 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation", to provide alternative methods of transition to
Statement 123's fair value method of accounting for stock-based employee
compensation. Statement 148 also amends the disclosure provisions of Statement
123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure
in the summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
While the Statement does not amend Statement 123 to require companies to account
for employee stock options using the fair value method, the disclosure
provisions of Statement 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that compensation
using the fair value method of Statement 123 or the intrinsic value method of
Opinion 25. We are currently accounting for stock options using the intrinsic
value method of Opinion 25. Under the intrinsic value method, compensation
expense is not recognized in the income statement, but the effects are
disclosed. Previous to Statement 148, the disclosure was required only on annual
financial statements. Beginning with our FY03 third quarter 10-Q, the
disclosures will also be required quarterly.
10. BUSINESS SEGMENT INFORMATION
We currently report in three principal business segments: aerospace
distribution, aerospace manufacturing and real estate operations. The following
table provides the historical results of our operations for the three and six
months ended December 29, 2002 and December 30, 2001, respectively.
Three Months Ended Six Months Ended
------------------------------- --------------------------------
12/29/02 12/30/01 12/29/02 12/30/01
------------------------------- --------------------------------
Revenues
Aerospace Distribution Segment $ 16,198 $ 14,069 $ 31,175 $ 32,052
Aerospace Manufacturing Segment 3,397 3,971 6,216 7,898
Real Estate Operations Segment 2,099 1,784 3,987 3,637
------------------------------- --------------------------------
Total $ 21,694 $ 19,824 $ 41,378 $ 43,587
------------------------------- --------------------------------
Operating Income (Loss)
Aerospace Distribution Segment $ 503 $ 391 $ 1,151 $ 845
Aerospace Manufacturing Segment (2,317) (887) (2,940) (1,824)
Real Estate Operations Segment 710 171 1,306 730
Corporate and Other (31,150) (3,934) (35,865) (9,064)
------------------------------- --------------------------------
Total $ (32,254) $ (4,259) $ (36,348) $ (9,313)
------------------------------- --------------------------------
Earnings (Loss) From Continuing
Operations Before Taxes
Aerospace Distribution Segment $ 468 $ 373 $ 1,094 $ 804
Aerospace Manufacturing Segment (2,394) (637) (3,093) (1,694)
Real Estate Operations Segment (110) (371) (28) (480)
Corporate and Other (41,668) (11,432) (63,346) (33,460)
------------------------------- --------------------------------
Total $ (43,704) $ (12,067) $ (65,373) $ (34,830)
------------------------------- --------------------------------
Assets 12/29/02 6/30/02
-------------------------------
Aerospace Distribution Segment $ 48,352 $ 49,358
Aerospace Manufacturing Segment 10,371 671,909
Real Estate Operations Segment 123,870 120,320
Corporate and Other 282,025 129,430
-------------------------------
Total $ 464,618 $ 971,017
-------------------------------
11. SUBSEQUENT EVENTS
On February 3, 2003, we paid off the $30,750 non-recourse term loan agreement
of our shopping center with a portion of the proceeds from the sale of the
fastener business. We intend to refinance the shopping center to provide
additional funds for future acquisitions.
In February 2003, we adopted a formal plan for the discontinuance of APS.
APS is a small operation in our aerospace manufacturing segment which reported
revenues of $1.3 million during the six months ended December 29, 2002. The
company expects to either sell or shut down APS by December 2003. Accordingly,
the results of APS will be reported as a discontinued operation in our next
quarterly report on Form 10-Q.
In February 2003, we received a request to pay Alcoa $10.2 million as the
post-closing adjustment based upon the net working capital of the fastener
business on December 3, 2002, compared with its net working capital at March 31,
2002. We are presently reviewing the validity of this request.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Fairchild Corporation was incorporated in October 1969, under the
laws of the State of Delaware, under the name of Banner Industries, Inc. On
November 15, 1990, we changed our name from Banner Industries, Inc. to The
Fairchild Corporation. We own 100% of RHI Holdings, Inc. and Banner Aerospace,
Inc. RHI is the owner of 100% of Fairchild Holding Corp. Our principal
operations are conducted through Fairchild Holding Corp. and Banner Aerospace.
The following discussion and analysis provide information which management
believes is relevant to the assessment and understanding of our consolidated
results of operations and financial condition. The discussion should be read in
conjunction with the consolidated financial statements and notes thereto.
GENERAL
We are engaged in the aerospace distribution business which stocks and
distributes a wide variety of aircraft parts to commercial airlines and
aerospace companies providing aircraft parts and devices to customers worldwide.
We also own and operate a shopping center located in Farmingdale, New York.
Our business consists of three segments: aerospace distribution, aerospace
manufacturing and real estate operations. Our aerospace distribution segment
stocks and distributes a wide variety of aircraft parts to commercial airlines
and air cargo carriers, fixed-base operators, corporate aircraft operators and
other aerospace companies. The aerospace manufacturing segment primarily
manufactures airframe components. Our real estate operations segment owns and
leases a shopping center located in Farmingdale, New York, and owns and rents
two improved parcels located in Southern California.
CAUTIONARY STATEMENT
Certain statements in this financial discussion and analysis by management
contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 with respect to our financial
condition, results of operation and business. These statements relate to
analyses and other information, which are based on forecasts of future results
and estimates of amounts not yet determinable. These statements also relate to
our future prospects, developments and business strategies. These
forward-looking statements are identified by their use of terms and phrases such
as "anticipate," "believe," "could," "estimate," "expect," "intend," "may,"
"plan," "predict," "project," "will" and similar terms and phrases, including
references to assumptions. These forward-looking statements involve risks and
uncertainties, including current trend information, projections for deliveries,
backlog and other trend estimates, that may cause our actual future activities
and results of operations to be materially different from those suggested or
described in this financial discussion and analysis by management. These risks
include: product demand; our dependence on the aerospace industry; customer
satisfaction and quality issues; labor disputes; competition; our ability to
achieve and execute internal business plans; worldwide political instability and
economic growth; reduced airline revenues as a result of the September 11, 2001
terrorist attacks on the United States, and their aftermath; and the impact of
any economic downturns and inflation.
If one or more of these risks or uncertainties materializes, or if
underlying assumptions prove incorrect, our actual results may vary materially
from those expected, estimated or projected. Given these uncertainties, users of
the information included in this financial discussion and analysis by
management, including investors and prospective investors are cautioned not to
place undue reliance on such forward-looking statements. We do not intend to
update the forward-looking statements included in this Quarterly Report, even if
new information, future events or other circumstances have made them incorrect
or misleading.
RESULTS OF OPERATIONS
Business Transactions
On December 3, 2002, we completed the sale of our fastener business to
Alcoa Inc for approximately $657 million in cash and the assumption of certain
liabilities. The cash received from Alcoa is subject to a post-closing
adjustment based upon the net working capital of the fastener business on
December 3, 2002, compared with its net working capital as of March 31, 2002. We
may also receive additional cash proceeds up to $12.5 million per year over the
four-year period from 2003 to 2006, if the number of commercial aircraft
delivered by Boeing and Airbus exceeds specified annual levels.
In connection with the sale, we have deposited with an escrow agent $25
million to secure indemnification obligations we may have to Alcoa. The escrow
period is five years, but funds may be held longer if claims are asserted and
unresolved. In addition, for a period of five years after the closing, we are
required to maintain our corporate existence, take no action to cause our own
liquidation or dissolution, and take no action to declare or pay any dividends
on our common stock.
The sale of the fastener business has reduced our dependence upon the
aerospace industry. Additionally, the sale has allowed us to eliminate
essentially our debt. We used a portion of the proceeds from the sale to repay
our bank debt and to acquire by tender all of our outstanding $225 million
10.75% senior subordinated notes due in April 2009, leaving us with only a $30.8
million non-recourse term loan on our shopping center and $3.7 million of debt
at Fairchild Aerostructures. On February 3, 2003, we paid off the $30.8 million
non-recourse term loan. We plan to use the remaining proceeds from the sale to
fund acquisition opportunities.
In the three and six months ended December 29, 2002, we recorded a $43.7
million gain on the disposal of discontinued operations, net of $10.4 million of
taxes, as a result of the sale of the fastener business. The results of the
fastener business are recorded as earnings (loss) on discontinued operations,
the components of which are as follows:
(In thousands) Three Months Ended Six Months Ended
--------------------------------- ----------------------------------
12/29/02 (a) 12/30/01 12/29/02 (a) 12/30/01
--------------- --------------- ---------------- ----------------
Earnings from fastener operations before taxes (1,858) 12,424 7,311 27,873
Income tax benefit (provision) (1,712) (2,983) 3,526 (6,681)
--------------- --------------- ---------------- ----------------
Net earnings (loss) from discontinued operations $ (3,570) $ 9,441 $ 10,837 $ 21,192
--------------- --------------- ---------------- ----------------
(a) The results presented for the three and six months ended December 29, 2002,
reflect the activity of the fastener business through its sale on December
3, 2002.
Consolidated Results
We currently report in three principal business segments: aerospace
distribution, aerospace manufacturing, and real estate operations. The following
table provides the historical sales and operating income of our segments for the
three and six months ended December 29, 2002 and December 30, 2001,
respectively.
(In thousands) Three Months Ended Six Months Ended
------------------------------- --------------------------------
12/29/02 12/30/01 12/29/02 12/30/01
------------------------------- --------------------------------
Revenues
Aerospace Distribution Segment $ 16,198 $ 14,069 $ 31,175 $ 32,052
Aerospace Manufacturing Segment 3,397 3,971 6,216 7,898
Real Estate Operations Segment 2,099 1,784 3,987 3,637
------------------------------- --------------------------------
Total $ 21,694 $ 19,824 $ 41,378 $ 43,587
------------------------------- --------------------------------
Operating Income (Loss)
Aerospace Distribution Segment $ 503 $ 391 $ 1,151 $ 845
Aerospace Manufacturing Segment (2,317) (887) (2,940) (1,824)
Real Estate Operations Segment 710 171 1,306 730
Corporate and Other (31,150) (3,934) (35,865) (9,064)
------------------------------- --------------------------------
Total $ (32,254) $ (4,259) $ (36,348) $ (9,313)
------------------------------- --------------------------------
On December 3, 2002, we completed the sale of our fasteners business to
Alcoa for $657 million. As a result of this transaction, we recognized a $43.7
million, net gain on the disposal of discontinued operations in the period ended
December 29, 2002. The results of the fasteners business, during the time we
owned it, have been reclassified to earnings (loss) from discontinued
operations. Selling, general and administrative expense for the three and six
months ended December 29, 2002, includes $13.7 million of one-time change of
control payments required under contracts with our top four executives as a
result of the sale of the fastener business, and $10.4 million of bonuses
awarded to our top four executives as a result of the sale of the fasteners
business. The top four executives have relinquished their right to any other
future change of control payments. The proceeds received from the sale have
significantly reduced our debt. Accordingly, we are currently seeking
acquisition opportunities, which may be outside of the aerospace industry.
Because of these events, the discussion below can not be relied upon as a trend
of our future results.
Revenues of $21.7 million in the second quarter of fiscal 2003 increased by
$1.9 million, or 9.4%, compared to revenues of $19.8 million in the second
quarter of fiscal 2002. Revenues of $41.4 million in the first six months of
fiscal 2003 decreased by $2.2 million, or 5.1%, compared to revenues of $43.6
million in the first six months of fiscal 2002. Revenues in the first six months
of fiscal 2003 were adversely affected by the overall conditions in the
aerospace industry, resulting primarily from the events of September 11, 2001
and the weakness in the overall economy.
Gross margin as a percentage of sales in our aerospace distribution segment
was 25.3% and 24.7% in the first six months of fiscal 2003 and fiscal 2002,
respectively, and 24.2% and 27.0% in the second quarter of fiscal 2003 and
fiscal 2002, respectively. The change in gross margin at our aerospace
distribution segment reflected product mix and highly competitive pricing
pressures. Products at our two remaining aerospace manufacturing locations were
sold below cost, and reflected revenues below their break even point.
Selling, general and administrative expense for the three and six months
ended December 29, 2002, includes $13.7 million of one-time change of control
payments required under contracts with our top four executives as a result of
the sale of the fastener business, and $10.4 million of bonuses awarded to our
top four executives as a result of the sale of the fasteners business. The top
four executives have relinquished their right to any other future change of
control payments. Excluding these, selling, general & administrative expense as
a percentage of revenues was 48.1% and 50.7% in the first six months of fiscal
2003 and 2002, respectively, and 51.7% and 61.7% in the second quarter of fiscal
2003 and 2002, respectively.
Other income decreased $3.9 million and $4.3 million in the second quarter
and first six months of fiscal 2003, compared to the same periods of fiscal
2002, due primarily to income recognized in the second quarter of fiscal 2002
from the disposition of future royalty revenues to an unaffiliated third party
in exchange for $4.7 million of promissory notes.
Operating loss for the three months and six months ended December 29, 2002,
includes the $13.7 million of one-time change of control payments required under
contracts with our top four executives as a result of the sale of the fastener
business, and $10.4 million of bonuses awarded to our top four executives as a
result of the sale of the fasteners business. The top four executives have
relinquished their right to any other future change of control payments. With
the sale of the fasteners business, we have become a much smaller company and
are currently seeking acquisition opportunities. Costs at all locations are
strictly being monitored, and reduced wherever possible. In January 2003, we
announced a staff reduction of 24% at our corporate headquarters.
Net interest expense was $22.8 million and $22.3 million for the six months
ended December 29, 2002 and December 30, 2001, respectively. The results for the
second quarter and first six months of fiscal 2003 included an expense of $9.9
million to write-off deferred loan fees due to the repayment of all our
outstanding senior subordinated notes and our term loan and revolving credit
facilities, offset partially by $6.9 million of interest income recognized from
the acceleration of principal on the repayment of notes due to us from an
unaffiliated third party. As a result of the sale of the fastener business, our
debt has been reduced by $457.3 million since June 30, 2002 to $34.5 million at
December 29, 2002. On February 1, 2003 an additional $30.8 million of debt was
repaid. As a result of our debt reduction, cash interest expense is expected to
be significantly lower in the future.
We recognized investment income of $0.5 million in the six months ended
December 29, 2002 due to realized gains on investments sold. The results of the
six months ended December 30, 2001, respectively, reflect $0.3 million of losses
realized on investments sold.
We recognized an expense of $6.7 million and $2.9 million in the first six
months of 2003 and 2002, respectively, from the fair market value adjustment of
a ten-year $100 million interest rate contract. Declining interest rates have
caused the change in fair market value of the contract.
An income tax benefit of $1.4 million and $10.9 million in the first six
months of fiscal 2003 and fiscal 2002, respectively, was lower than the
statutory rate, due primarily to the loss from continuing operations recognized
during these periods not available to be utilized immediately and increasing our
net operating loss carryforward.
Earnings (loss) from discontinued operations includes the results of the
fasteners business prior to its sale. The current period reductions in earnings
reflect owning the fastener business for only five months in 2003 as compared to
the full six months in 2002.
Other comprehensive income includes foreign currency translation
adjustments, unrecognized actuarial loss on pensions, and unrealized periodic
holding changes in the fair market value of available-for-sale investment
securities. For the six months ended December 29, 2002, other comprehensive
income included a decrease of $47.5 million due to the recognition of the
additional minimum pension liability, offset partially by an increase of $18.8
million foreign currency translation adjustments which were realized as part of
the sale of the fasteners business. For the six months ended December 30, 2001,
the foreign currency translation adjustment resulted in a $9.4 million increase
to other comprehensive income, and was offset partially by a $0.4 million
decrease in the fair market value of unrealized holding gains on investment
securities.
Segment Results
Aerospace Distribution Segment
Our aerospace distribution business is an international supplier to the
airlines, corporate aviation, and the military. The business operates from five
locations in the United States and specializes in the distribution of avionics,
airframe accessories, and other components. Products include, navigation and
radar systems, instruments, and communication systems, flat panel technologies
and rotables. The company also overhauls and repairs, landing gear,
pressurization components, instruments, and avionics. Customers include commuter
and regional airlines, corporate aircraft and fixed-base operators, air cargo
carriers, general aviation suppliers and the military. Sales in our aerospace
distribution segment increased by $2.1 million, or 15.1%, in the second quarter
of fiscal 2003, compared to the second quarter of fiscal 2002. Sales in the six
months ended December 29, 2002 and December 30, 2001, were adversely affected by
the overall conditions in the aerospace industry, resulting primarily from the
events of September 11, 2001, and the general weakness in the overall economy.
Operating income increased by $0.1 million in the second quarter and $0.3
million in the first six months of fiscal 2003, as compared to the same period
in fiscal 2002. The results for the six months ended December 29, 2002, reflect
a slight increase in gross margin as a percentage of sales.
Aerospace Manufacturing Segment
Sales in our aerospace manufacturing segment decreased by $0.6 million in
the second quarter, and by $1.7 million in the first six months of fiscal 2003,
as compared to the same periods of fiscal 2002. The change reflected a reduction
in shipments in the current period due to an overall lower level of demand in
the aerospace industry resulting from the September 11, 2001 terrorist attacks.
Operating income decreased by $1.4 million in the second quarter and $1.1
million in the first six months of fiscal 2003, as compared to the same periods
of fiscal 2002. The change primarily reflects the decrease in sales as a result
of the downturn in the aerospace industry.
In February 2003, we adopted a formal plan for the discontinuance of APS.
The company expects to either sell or shut down APS by December 2003.
Accordingly, the results of APS will be reported as a discontinued operation in
our next quarterly report on Form 10-Q.
Real Estate Operations Segment
Our real estate operations segment owns and operates a 456,000 square foot
shopping center located in Farmingdale, New York. We have two tenants that each
occupy more than 10% of the rentable space of the shopping center. Rental
revenue increased slightly in the three months ended December 29, 2002, due to a
slight increase in the amount of space leased to tenants, as compared to the
three months ended December 30, 2001. The weighted average occupancy rate of the
shopping center was 83.1% and 77.1% in the first six months of 2003 and 2002,
respectively. The average effective annual rental rate per square foot was
$19.71 and $19.20 during the first six months of 2003 and 2002, respectively. As
of December 29, 2002, approximately 91% of the shopping center was leased.
During the second quarter of fiscal 2002, our real estate segment purchased, for
$5.3 million, a 208,000 square foot manufacturing facility located in Fullerton,
California. The Fullerton property is fully leased through October 2007, and is
expected to generate revenues and operating income in excess of $0.5 million per
year. Our real estate segment also owns and leases a 102,000 square foot
building in Chatsworth, California. The Chatsworth property is leased through
July 2008, and is expected to generate revenues and operating income
approximating $0.5 million per year.
Rental revenue increased by 17.7% in the second quarter and 9.6% in the
first six months of fiscal 2003, as compared to the same periods of fiscal 2002.
The increase reflects tenants occupying an additional 66,000 square feet of the
shopping center during the current periods. We anticipate that rental income
will increase during the remainder of fiscal 2003, as a result of the lease for
the Fullerton property.
Operating income increased by $0.5 million in the second quarter and $0.6
million in the first six months of fiscal 2003, as compared to the same periods
of fiscal 2002. The improvement in the first six months of fiscal 2003 reflects
an increase in the weighted-average portion of the shopping center occupied
during fiscal 2003, and the write-off of $0.2 million of tenant improvements in
the first six months of fiscal 2002.
Corporate
The operating results at corporate for the first six months of fiscal 2002
includes $13.7 million of one-time change of control payments required under
contracts with our top four executives as a result of the sale of the fastener
business, and $10.4 million of bonuses awarded to our top four executives as a
result of the sale of the fasteners business. The top four executives have
relinquished their right to any other future change of control payments. Other
income at corporate decreased by $4.1 million as a result of income recognized
in the second quarter of fiscal 2002 from the disposition of future royalty
revenues to an unaffiliated third party in exchange for $4.7 million of
promissory notes. In January 2003, we reduced our corporate staff by
approximately 24%. Severance expense associated with the reduction will be
recognized in our third quarter ending March 31, 2003.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total capitalization as of December 29, 2002 and June 30, 2002 amounted to
$222.9 million and $719.8 million, respectively. The change in capitalization
included a $457.3 million decrease in debt reflecting the repayment of debt with
the proceeds received from the sale of the fasteners business, and a decrease in
equity of $39.7 million. The change in equity was due primarily to our reported
net loss and changes in other comprehensive income, which included a decrease of
$47.5 million, due to the recognition of the additional minimum pension
liability, offset partially by an increase of $18.8 million foreign currency
translation adjustments which were realized as part of the sale of the fasteners
business.
Net cash used for operating activities for the six months ended December
29, 2002, was $38.7 million. The working capital uses of cash in the first six
months of fiscal 2002 included $7.4 million that was contributed to fund our
pension plan, $13.7 million of one-time change of control payments required
under contracts with our top four executives as a result of the sale of the
fastener business, and $10.4 million of bonuses awarded to our top four
executives as a result of the sale of the fasteners business. The primary source
of cash from operating activities in the first six months of fiscal 2002
included $9.7 million of earnings after deducting non-cash expenses of $144.6
million for the cumulative effect of change in accounting for goodwill, $2.5
million for depreciation, $2.9 million from the reduction in the fair market
value of an interest rate contract, and $1.0 million from the amortization of
deferred loan fees.
Net cash provided by investing activities was $614.9 million for the six
months ended December 29, 2002. In the first six months of fiscal 2003, the
primary source of cash was $657.1 million of cash proceeds received from the
sale of our fastener business, partially offset by $49.5 million of new
investments and $7.2 million real estate investments, including the purchase of
a manufacturing facility located in Fullerton, California. Net cash used for
investing activities was $6.6 million for the six months ended December 30,
2001. In the first six months of fiscal 2002, the primary source of cash was
$4.2 million provided from the dispositions of non-core real estate and net
assets held for sale, offset by $6.9 million of capital expenditures at the
fastener business and a $4.6 million increase in notes receivable.
Net cash used by financing activities was $457.3 million for the six months
ended December 29, 2002, which reflected the repayment of essentially all of our
debt, except for a $30.8 million term loan on our shopping center and $3.7
million of debt at Fairchild Aerostructures. Net cash provided by financing
activities was $1.9 million for the six months ended December 30, 2001, and
included the net proceeds we received from the issuance of additional debt.
Our principal cash requirements include acquisitions, debt service, capital
expenditures, and the payment of other liabilities including postretirement
benefits, environmental investigation and remediation obligations, and
litigation settlements and related costs. We expect that cash on hand, cash
generated from operations, cash available from borrowings, and proceeds received
from dispositions of assets will be adequate to satisfy our cash requirements
during the next twelve months.
The Pension Benefit Guaranty Corporation had contacted us to understand the
impact of the sale of our aerospace fasteners business on our ability to fund
our long-term pension obligations. The PBGC has expressed concern that our
retirement plan will be underfunded by $86 million after the sale of our
aerospace fasteners business. We have provided the PBGC with information which
represented the underfunding to be $42 million, using the PBGC plan termination
assumptions. During the quarter ended December 29, 2002, we contributed $7.4
million of cash to fund our pension plan. Based upon our actuary's assumptions
and projections, we do not expect additional cash contributions to the pension
plan to be required until 2008.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets", which supersedes SFAS No. 121. Though it retains
the basic requirements of SFAS 121 regarding when and how to measure an
impairment loss, SFAS 144 provides additional implementation guidance. SFAS 144
applies to long-lived assets to be held and used or to be disposed of, including
assets under capital leases of lessees; assets subject to operating leases of
lessors; and prepaid assets. SFAS 144 also expands the scope of a discontinued
operation to include a component of an entity, and eliminates the current
exemption to consolidation when control over a subsidiary is likely to be
temporary. This statement is effective for our fiscal year beginning on July 1,
2002. Accordingly, we have accounted for the sale of the fastener business as a
discontinued operation as of the date of the sale on December 3, 2002.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections as of April 2002". SFAS No. 145
eliminates the requirement to report material gains or losses from debt
extinguishments as an extraordinary item, net of tax, in an entity's statement
of earnings. SFAS No. 145 instead requires that a gain or loss recognized from a
debt extinguishment be classified as an extraordinary item only when the
extinguishment meets the criteria of both "unusual in nature" and "infrequent in
occurrence" as prescribed under Accounting Principles Bulletin No. 30,
"Reporting the Result of Operations - Reporting the Effects of Disposal of a
Segment of Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". This statement is effective for our fiscal year
beginning on July 1, 2002. As a result of the sale of our fastener business,
$9.9 million in deferred loan fees associated with the debt we repaid were
written-off during the second quarter and are included in interest expense.
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities".
This standard requires costs associated with exit or disposal activities to be
recognized when they are incurred and applies prospectively to such activities
initiated after December 31, 2002.
On December 31, 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure". Statement 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation", to provide alternative methods of transition to
Statement 123's fair value method of accounting for stock-based employee
compensation. Statement 148 also amends the disclosure provisions of Statement
123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure
in the summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
While the Statement does not amend Statement 123 to require companies to account
for employee stock options using the fair value method, the disclosure
provisions of Statement 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that compensation
using the fair value method of Statement 123 or the intrinsic value method of
Opinion 25. We are currently accounting for stock options using the intrinsic
value method of Opinion 25. Under the intrinsic value method, compensation
expense is not recognized in the income statement, but the effects are
disclosed. Previous to Statement 148, the disclosure was required only on annual
financial statements. Beginning with our FY03 third quarter 10-Q, the
disclosures will also be required quarterly.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In fiscal 1998, we entered into a ten-year interest rate swap agreement to
reduce our cash flow exposure to increases in interest rates on variable rate
debt. The ten-year interest rate swap agreement provides us with interest rate
protection on $100 million of variable rate debt, with interest being calculated
based on a fixed LIBOR rate of 6.24% to February 17, 2003. On February 17, 2003,
the bank with which we entered into the interest rate swap agreement, will have
a one-time option to elect to cancel the agreement or to do nothing and proceed
with the transaction, using a fixed LIBOR rate of 6.715% for the period February
17, 2003 to February 19, 2008.
We did not elect to pursue hedge accounting for the interest rate swap
agreement, which was executed to provide an economic hedge against cash flow
variability on the floating rate note. When evaluating the impact of SFAS No.
133 on this hedge relationship, we assessed the key characteristics of the
interest rate swap agreement and the note. Based on this assessment, we
determined that the hedging relationship would not be highly effective. The
ineffectiveness is caused by the existence of the embedded written call option
in the interest rate swap agreement, and the absence of a mirror option in the
hedged item. As such, pursuant to SFAS No. 133, we designated the interest rate
swap agreement in the no hedging designation category. Accordingly, we have
recognized a non-cash decrease in fair market value of interest rate
derivatives, of $6.8 million and $2.9 million, in the six months ended December
29, 2002 and December 30, 2001, respectively, as a result of the fair market
value adjustment for our interest rate swap agreement.
The fair market value adjustment of these agreements will generally
fluctuate based on the implied forward interest rate curve for 3-month LIBOR. If
the implied forward interest rate curve decreases, the fair market value of the
interest hedge contract will increase and we will record an additional charge.
If the implied forward interest rate curve increases, the fair market value of
the interest hedge contract will decrease, and we will record income.
In March 2000, the Company issued a floating rate note with a principal
amount of $30,750,000. Embedded within the promissory note agreement is an
interest rate cap. The embedded interest rate cap limits the 1-month LIBOR
interest rate that we must pay on the note to 8.125%. At execution of the
promissory note, the strike rate of the embedded interest rate cap of 8.125% was
above the 1-month LIBOR rate of 6.61%. Under SFAS 133, the embedded interest
rate cap is considered to be clearly and closely related to the debt of the host
contract and is not required to be separated and accounted for separately from
the host contract. We are accounting for the hybrid contract, comprised of the
variable rate note and the embedded interest rate cap, as a single debt
instrument.
The table below provides information about our derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates, which include interest rate swaps. For interest rate swaps, the
table presents notional amounts and weighted average interest rates by expected
(contractual) maturity dates. Notional amounts are used to calculate the
contractual payments to be exchanged under the contract. Weighted average
variable rates are based on implied forward rates in the yield curve at the
reporting date.
(In thousands)
Expected Fiscal Year Maturity Date 2003 2008
----------------------------------------------------------------------
Type of Interest Rate Contracts Interest Rate Cap Variable to Fixed
Variable to Fixed $30,750 $100,000
Fixed LIBOR rate N/A 6.24%
LIBOR cap rate 8.125% N/A
Average floor rate N/A N/A
Weighted average forward LIBOR rate 1.69% 3.36%
Fair Market Value at December 29, 2002 $0 $(17,736)
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The term "disclosure controls and procedures" is defined in Rules 13a-14(c)
and 15d-14(c) of the Securities Exchange Act of 1934. These rules refer to the
controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
under the Exchange Act is recorded, processed, summarized and reported within
required time periods. Our Chief Executive Officer and our Chief Financial
Officer have evaluated the effectiveness of our disclosure controls and
procedures as of a date within 90 days before the filing of this quarterly
report, which we refer to as the Evaluation Date. They have concluded that, as
of the Evaluation Date, such controls and procedures were effective at ensuring
that the required information was disclosed on a timely basis in our reports
filed under the Exchange Act.
Changes in Internal Controls
We maintain a system of internal accounting controls that are designed to
provide reasonable assurance that our books and records accurately reflect our
transactions and that our established policies and procedures are followed. For
the quarter ended December 29, 2002, there were no significant changes to our
internal controls or in other factors that could significantly affect our
internal controls.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required to be disclosed under this Item is set forth in
Footnote 6 (Contingencies) of the Consolidated Financial Statements (Unaudited)
included in this Report.
Item 2. Changes in Securities and Use of Proceeds.
Pursuant to the sale of our fastener business to Alcoa, we have agreed that
the Company may not declare dividends on its common stock for a period of five
years (ending December 2007).
Item 4. Submission of matters to a Vote of Security Holders
A special meeting of our Stockholders was held on November 21, 2002. Five
matters of business were voted upon:
o Proposal 1 - to approve the sale of our fastener business to Alcoa Inc. for
approximately $657 million in cash, which sale, for purposes of Delaware
corporate law, would be deemed to constitute a sale of substantially all of
our assets;
o Proposal 2 - to approve the material terms of the fiscal 2003 performance
goal for incentive compensation for the President;
o Proposal 3 - to approve the material terms of the fiscal 2003 performance
goal for incentive compensation for the Chief Executive Officer.
o Proposal 4 - to approve the material terms of the fiscal 2003 performance
goal for incentive compensation for the Chief Financial Officer and Senior
Vice President, Tax; and
o Proposal 5 - to approve the material terms of the fiscal 2003 performance
goal for incentive compensation for the Executive Vice President;
The follwing table provides the results of the stockholder voting on each
proposal, expressed in number of votes:
_Votes For Votes Against Abstain
Proposal 1 41,190,854 125,664 24,468
Proposal 2 37,240,739 4,059,631 40,616
Proposal 3 37,234,382 4,067,341 39,263
Proposal 4 37,241,563 4,060,159 39,264
Proposal 5 37,242,168 4,060,291 38,527
The Annual Meeting of our Stockholders was held on November 21, 2002. Three
matters of business were voted upon:
o Proposal 1 - to elect nine directors for the ensuing year;
o Proposal 2 - to approve the material terms of the fiscal 2003
performance goal for incentive compensation for the President;
o Proposal 3 - to approve the material terms of the fiscal 2003
performance goal for incentive compensation for the Chief
Executive Officer.
The following tables provides the results of the stockholder voting on each
proposal, expressed in number of votes:
Directors: _Votes For Votes Withheld
----------- --------- --------------
Melville R. Barlow 43,531,945 2,575,741
Mortimer M. Caplin 43,727,309 2,380,377
Robert E. Edwards 43,939,512 2,168,174
Steven L. Gerard 43,734,956 2,372,730
Harold J. Harris 43,538,569 2,569,117
Daniel Lebard 43,744,960 2,362,726
Herbert S. Richey 43,532,859 2,574,827
Eric I. Steiner 43,183,745 2,923,941
Jeffrey J. Steiner 43,189,693 2,917,993
_Votes For Votes Against Abstain Non-Vote
--------- ------------- ------- --------
Proposal 2 36,594,636 3,785,914 45,460 5,681,676
Proposal 3 36,576,634 3,803,461 45,915 5,681,676
Item 5. Other Information
The Company has been informed by counsel to Mr. Jeffrey Steiner that such
counsel received on January 6, 2003, a dossier containing charges by French
authorities against thirty-seven defendants, including Mr. Steiner, in the Elf
Bidermann case. Mr. Steiner's counsel has informed the Company that the charges
against Mr. Steiner are that in 1989 and 1990 he allegedly facilitated and
benefited from the misuse of funds at Elf Acquitaine, a French petroleum
company, allegedly committed by a former official of Elf Acquitaine and/or
Maurice Bidermann, against whom the Company had and had prevailed in litigation.
A trial has tentatively been scheduled to begin on March 17, 2003. Mr. Steiner
has informed the Company that these charges are without merit, and that he will
vigorously defend himself against them. The Company had previously disclosed
that an investigation was pending, that the Company had provided a surety for
Mr. Steiner and, since June 1996, has paid his legal expenses totaling
approximately $5 million in connection with these charges, and will continue to
do so, in accordance with Delaware law. Mr. Steiner has undertaken to repay us
the surety and expenses paid by us on his behalf if it is ultimately determined
that Mr. Steiner was not entitled to indemnification under Delaware law.
Delaware law provides that Mr. Steiner would be entitled to indemnification if
it is determined that he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company, and had
no reasonable cause to believe his conduct was unlawful.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
2.1 Acquisition Agreement dated as of July 16, 2002 among Alcoa Inc.,
The Fairchild Corporation, Fairchild Holding Corp. and Sheepdog, Inc.,
with Exhibit A (Conveyance, Assignment, Transfer and Bill of Sale),
Exhibit B (Undertaking and Indemnity Agreement) and Exhibit C (Escrow
Agreement) attached thereto (incorporated by reference to Exhibit 2.1 to
the Current Report on Form 8-K dated July 16, 2002) (incorporated by
reference to the Registrant's Report on Form 8-K dated December 3,
2002).
2.2 Amendment No. 1 to the Acquisition Agreement, dated as of
December 3, 2002, to the Acquisition Agreement, dated as of
July 16, 2002, among Alcoa Inc., The Fairchild Corporation, Fairchild
Holding Corp. and Sheepdog, Inc. (incorporated by reference to the
Registrant's Report on Form 8-K dated December 3, 2002).
* 10.1 Amendment to Employment Agreements between the Company and
Jeffrey Steiner, dated January 22, 2003 (for the purpose of amending
change of control payments).
* 10.2 Amendment to Employment Agreement between the Company and Eric
Steiner, dated January 22, 2003 (for the purpose of amending change of
control payments).
* 10.3 Amendment to Incentive Contract between the Company and Donald
Miller, dated January 22, 2003 (for the purpose of amending change of
control payments).
* 10.4 Amendment to Incentive Contract between the Company and John
Flynn, dated January 22, 2003 (for the purpose of amending change of
control payments).
* 12. Certifications required by Section 906 of the Sarbanes-Oxley Act.
* Filed herewith.
(b) Reports on Form 8-K:
On December 16, 2002, we filed a Form 8-K to report the December 3, 2002
completion of a transaction between Fairchild and Alcoa Inc., pursuant
to which Alcoa acquired Fairchild's fasteners business for approximately
$657 million in cash and the assumption of certain liabilities.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to the signed on its behalf by the undersigned
hereunto duly authorized.
For THE FAIRCHILD CORPORATION
(Registrant) and as its Chief
Financial Officer:
By: /s/ JOHN L. FLYNN
-----------------
John L. Flynn
Chief Financial Officer, Treasurer
and Senior Vice President, Tax
Date: February 7, 2003
CERTIFICATION ACCOMPANYING PERIODIC REPORT
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, Jeffrey J. Steiner, Chief Executive Officer of The Fairchild
Corporation ("Company"), hereby certifies that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in this
quarterly report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit
committee of the Company's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 7, 2003 /s/ JEFFREY J. STEINER
----------------------
Jeffrey J. Steiner
Chairman of the Board and
Chief Executive Officer
CERTIFICATION ACCOMPANYING PERIODIC REPORT
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, John L. Flynn, Chief Financial Officer of The Fairchild
Corporation ("Company"), hereby certifies that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in this
quarterly report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit
committee of the Company's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 7, 2003 /s/ JOHN L. FLYNN
-----------------
John L. Flynn
Chief Financial Officer, Treasurer
and Senior Vice President, Tax