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 March 31, 2006
Commission
File Number 1-6560
THE
FAIRCHILD CORPORATION
(Exact
name of Registrant as specified in its charter)
Delaware
(State
of
incorporation or organization)
34-0728587
(I.R.S.
Employer Identification No.)
1750
Tysons Boulevard, Suite 1400, McLean, VA 22102
(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:
[X]
Yes [
] No.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer:
[
] Large
accelerated file [X] Accelerated filer [ ] Non-accelerated filer
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
[
] 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
|
March
31, 2006
|
|
|
Class
A Common Stock, $0.10 Par Value
|
22,604,761
|
Class
B Common Stock, $0.10 Par Value
|
2,621,412
|
THE
FAIRCHILD CORPORATION INDEX TO QUARTERLY REPORT ON FORM
10-Q
FOR
THE PERIOD ENDED MARCH 31, 2006
|
|
Page
|
|
|
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
Condensed
Consolidated Balance Sheets as of March 31, 2006 (Unaudited)
and
|
|
|
September
30, 2005…………………………………………………………………….………...
|
3
|
|
|
|
|
Condensed
Consolidated Statements of Operations and Other Comprehensive Income
(Loss)
|
|
|
(Unaudited)
for the Three and Six Months Ended March 31, 2006 and March 31,
2005…….….
|
5
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows (Unaudited) for the Six Months
Ended
|
|
|
March
31, 2006 and March 31, 2005…………………………….…………...….………………
|
6
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
(Unaudited)……………………………..
|
7
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Results of Operations and Financial
Condition……...
|
20
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosure About Market
Risk………………………………………
|
30
|
|
|
|
Item
4.
|
Controls
and Procedures……………………………………………………………………………
|
31
|
|
|
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings………………………………………………………………………………….
|
32
|
|
|
|
Item
1A.
|
Risk
Factors………….…………………………………………………………………………….
|
32
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds…………………………………….
|
32
|
|
|
|
Item
4.
|
Submission
of Matter to a Vote of Security
Holders..……………………………………………..
|
33
|
|
|
|
Item
5.
|
Other
Information…………………………………………………………………………………..
|
33
|
|
|
|
Item
6.
|
Exhibits
……………………………….……………………………………………………………
|
33
|
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 September 30th.
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
THE
FAIRCHILD CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
March
31,
2006 (Unaudited) and
September 30, 2005
(In
thousands)
ASSETS
|
|
3/31/06
|
|
9/30/05
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
14,606
|
|
$
|
12,582
|
|
Short-term
investments, including restricted investments of $5,693 and
$4,965
|
|
|
7,064
|
|
|
15,698
|
|
Accounts
receivable-trade, less allowances of $1,404 and $2,679
|
|
|
19,702
|
|
|
18,475
|
|
Inventories
- finished goods
|
|
|
117,785
|
|
|
90,856
|
|
Current
assets of discontinued operations
|
|
|
1,859
|
|
|
1,470
|
|
Prepaid
expenses and other current assets
|
|
|
13,238
|
|
|
7,447
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
174,254
|
|
|
146,528
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net of accumulated
|
|
|
|
|
|
|
|
depreciation
of $21,684 and $18,453
|
|
|
58,463
|
|
|
57,718
|
|
Noncurrent
assets of discontinued operations
|
|
|
78,101
|
|
|
79,124
|
|
Goodwill
and intangible assets
|
|
|
42,474
|
|
|
42,665
|
|
Investments
and advances, affiliated companies
|
|
|
2,831
|
|
|
3,786
|
|
Prepaid
pension assets
|
|
|
32,341
|
|
|
31,239
|
|
Deferred
loan costs
|
|
|
1,660
|
|
|
1,839
|
|
Long-term
investments, including restricted investments of $53,511 and
$59,419
|
|
|
62,558
|
|
|
69,652
|
|
Notes
receivable
|
|
|
6,627
|
|
|
6,787
|
|
Other
assets
|
|
|
7,423
|
|
|
7,722
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
466,732
|
|
$
|
447,060
|
|
|
|
|
|
|
|
The
accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
THE
FAIRCHILD CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
March
31,
2006 (Unaudited) and September 30, 2005
(In
thousands)
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
3/31/06
|
|
9/30/05
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Bank
notes payable and current maturities of long-term debt
|
|
$
|
49,250
|
|
$
|
20,902
|
|
Accounts
payable
|
|
|
49,727
|
|
|
22,612
|
|
Accrued
liabilities:
|
|
|
|
|
|
|
|
Salaries,
wages and commissions
|
|
|
9,762
|
|
|
10,187
|
|
Insurance
|
|
|
7,190
|
|
|
7,335
|
|
Interest
|
|
|
251
|
|
|
443
|
|
Other
accrued liabilities
|
|
|
18,433
|
|
|
19,407
|
|
Current
liabilities of discontinued operations
|
|
|
1,177
|
|
|
1,529
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
135,790
|
|
|
82,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES:
|
|
|
|
|
|
|
|
Long-term
debt, less current maturities
|
|
|
29,876
|
|
|
47,990
|
|
Fair
value of interest rate contract
|
|
|
-
|
|
|
5,146
|
|
Other
long-term liabilities
|
|
|
25,690
|
|
|
27,315
|
|
Pension
liabilities
|
|
|
50,037
|
|
|
51,099
|
|
Retiree
health care liabilities
|
|
|
26,727
|
|
|
27,459
|
|
Noncurrent
income taxes
|
|
|
42,179
|
|
|
42,238
|
|
Noncurrent
liabilities of discontinued operations
|
|
|
53,117
|
|
|
53,481
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
363,416
|
|
|
337,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
Class
A common stock, $0.10 par value; 40,000 shares authorized,
|
|
|
|
|
|
|
|
30,480
shares issued and 22,605 shares outstanding;
|
|
|
|
|
|
|
|
entitled
to one vote per share
|
|
|
3,047
|
|
|
3,047
|
|
Class
B common stock, $0.10 par value; 20,000 shares authorized,
|
|
|
|
|
|
|
|
2,621
shares issued and outstanding; entitled
|
|
|
|
|
|
|
|
to
ten votes per share
|
|
|
262
|
|
|
262
|
|
Paid-in
capital
|
|
|
232,547
|
|
|
232,457
|
|
Treasury
stock, at cost, 7,875 shares
|
|
|
|
|
|
|
|
of
Class A common stock
|
|
|
(76,352
|
)
|
|
(76,352
|
)
|
Retained
earnings
|
|
|
9,965
|
|
|
20,206
|
|
Notes
due from stockholders
|
|
|
(43
|
)
|
|
(109
|
)
|
Cumulative
other comprehensive loss
|
|
|
(66,110
|
)
|
|
(69,594
|
)
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
103,316
|
|
|
109,917
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
466,732
|
|
$
|
447,060
|
|
|
|
|
|
|
|
The
accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
THE
FAIRCHILD CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
(Unaudited)
For
The
Three (3) and Six (6) Months Ended March 31, 2006 and 2005
(In
thousands, except per share data)
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
REVENUE:
|
|
03/31/06
|
|
03/31/05
|
|
03/31/06
|
|
03/31/05
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
62,727
|
|
$
|
79,697
|
|
$
|
114,038
|
|
$
|
144,049
|
|
Rental
revenue
|
|
|
237
|
|
|
137
|
|
|
475
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,964
|
|
|
79,834
|
|
|
114,513
|
|
|
144,324
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
38,976
|
|
|
49,869
|
|
|
71,064
|
|
|
92,425
|
|
Cost
of rental revenue
|
|
|
51
|
|
|
41
|
|
|
107
|
|
|
84
|
|
Selling,
general & administrative
|
|
|
34,497
|
|
|
35,853
|
|
|
62,570
|
|
|
68,495
|
|
Pension
& Postretirement
|
|
|
928
|
|
|
1,709
|
|
|
1,856
|
|
|
2,969
|
|
Other
(income) expense, net
|
|
|
(712
|
)
|
|
441
|
|
|
(1,285
|
)
|
|
(1,307
|
)
|
Amortization
of intangibles
|
|
|
129
|
|
|
144
|
|
|
257
|
|
|
287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,869
|
|
|
88,057
|
|
|
134,569
|
|
|
162,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
LOSS
|
|
|
(10,905
|
)
|
|
(8,223
|
)
|
|
(20,056
|
)
|
|
(18,629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(1,851
|
)
|
|
(4,100
|
)
|
|
(4,923
|
)
|
|
(7,604
|
)
|
Interest
income
|
|
|
584
|
|
|
567
|
|
|
905
|
|
|
904
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest expense
|
|
|
(1,267
|
)
|
|
(3,533
|
)
|
|
(4,018
|
)
|
|
(6,700
|
)
|
Investment
income
|
|
|
389
|
|
|
5,751
|
|
|
1,317
|
|
|
5,881
|
|
Increase
in fair market value of interest rate contract
|
|
|
-
|
|
|
2,659
|
|
|
836
|
|
|
4,334
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before taxes
|
|
|
(11,783
|
)
|
|
(3,346
|
)
|
|
(21,921
|
)
|
|
(15,114
|
)
|
Income
tax provision
|
|
|
(22
|
)
|
|
(84
|
)
|
|
(87
|
)
|
|
(153
|
)
|
Equity
in loss of affiliates, net
|
|
|
(957
|
)
|
|
-
|
|
|
(999
|
)
|
|
(200
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(12,762
|
)
|
|
(3,430
|
)
|
|
(23,007
|
)
|
|
(15,467
|
)
|
Earnings
(loss) from discontinued operations, net
|
|
|
637
|
|
|
(470
|
)
|
|
266
|
|
|
(30
|
)
|
Gain
on disposal of discontinued operations, net
|
|
|
-
|
|
|
-
|
|
|
12,500
|
|
|
12,500
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(12,125
|
)
|
$
|
(3,900
|
)
|
$
|
(10,241
|
)
|
$
|
(2,997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
1,115
|
|
|
748
|
|
|
68
|
|
|
2,430
|
|
Unrealized
holding changes on derivatives
|
|
|
-
|
|
|
26
|
|
|
299
|
|
|
27
|
|
Unrealized
periodic holding changes on securities
|
|
|
4,118
|
|
|
(525
|
)
|
|
3,117
|
|
|
1,828
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
5,233
|
|
|
249
|
|
|
3,484
|
|
|
4,285
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME (LOSS)
|
|
$
|
(6,892
|
)
|
$
|
(3,651
|
)
|
$
|
(6,757
|
)
|
$
|
1,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED EARNINGS (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(0.51
|
)
|
$
|
(0.14
|
)
|
$
|
(0.91
|
)
|
$
|
(0.62
|
)
|
Earnings
(loss) from discontinued operations, net
|
|
|
0.03
|
|
|
(0.01
|
)
|
|
0.01
|
|
|
-
|
|
Gain
on disposal of discontinued operations, net
|
|
|
-
|
|
|
-
|
|
|
0.50
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(0.48
|
)
|
$
|
(0.15
|
)
|
$
|
(0.40
|
)
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
25,226
|
|
|
25,245
|
|
|
25,226
|
|
|
25,219
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
THE
FAIRCHILD CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For
The
Six (6) Months Ended March 31, 2006 and 2005
(In
thousands)
|
|
|
3/31/06
|
|
|
3/31/05
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(10,241
|
)
|
$
|
(2,997
|
)
|
Depreciation
and amortization
|
|
|
3,291
|
|
|
3,546
|
|
Amortization
of deferred loan fees
|
|
|
469
|
|
|
821
|
|
Stock
compensation expense
|
|
|
90
|
|
|
-
|
|
Unrealized
holding gain on interest rate contract
|
|
|
(836
|
)
|
|
(4,334
|
)
|
Undistributed
loss of affiliates, net
|
|
|
998
|
|
|
200
|
|
Change
in trading securities
|
|
|
9,318
|
|
|
(4,422
|
)
|
Change
in operating assets and liabilities
|
|
|
(13,775
|
)
|
|
(5,380
|
)
|
Non-cash
charges and working capital changes of discontinued operations
|
|
|
(12,280
|
)
|
|
(12,048
|
)
|
|
|
|
|
|
|
Net
cash used for operating activities
|
|
|
(22,966
|
)
|
|
(24,614
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(4,120
|
)
|
|
(6,508
|
)
|
Net
proceeds received from investment securities
|
|
|
11,204
|
|
|
7,501
|
|
Net
proceeds received from the sale of discontinued operations
|
|
|
12,500
|
|
|
12,500
|
|
Equity
investment in affiliates
|
|
|
(43
|
)
|
|
258
|
|
Changes
in notes receivable
|
|
|
548
|
|
|
294
|
|
Investing
activities of discontinued operations
|
|
|
41
|
|
|
(226
|
)
|
|
|
|
|
|
|
Net
cash provided by investing activities
|
|
|
20,130
|
|
|
13,819
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from issuance of debt
|
|
|
23,584
|
|
|
21,485
|
|
Debt
repayments
|
|
|
(13,849
|
)
|
|
(11,203
|
)
|
Payment
of interest rate contract
|
|
|
(4,310
|
)
|
|
-
|
|
Payment
of financing fees
|
|
|
(289
|
)
|
|
(17
|
)
|
Purchase
of treasury stock
|
|
|
-
|
|
|
(170
|
)
|
Loan
repayments from stockholders'
|
|
|
66
|
|
|
631
|
|
Net
cash used for financing activities of discontinued operations
|
|
|
(343
|
)
|
|
(393
|
)
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
4,859
|
|
|
10,333
|
|
Effect
of exchange rate changes on cash
|
|
|
1
|
|
|
900
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
2,024
|
|
|
438
|
|
Cash
and cash equivalents, beginning of the year
|
|
|
12,582
|
|
|
12,849
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of the period
|
|
$
|
14,606
|
|
$
|
13,287
|
|
|
|
|
|
|
|
The
accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
THE
FAIRCHILD CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In
thousands, except share data)
1.
FINANCIAL STATEMENTS
The
condensed consolidated balance sheet as of March 31, 2006, and the condensed
consolidated statements of operations and other comprehensive income (loss)
and
cash flows for the periods ended March 31, 2006 and 2005 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
March 31, 2006, and for all periods presented, have been made. These adjustments
include certain reclassifications to reflect the sale of Fairchild
Aerostructures and the pending sale of our shopping center as discontinued
operations. The condensed consolidated balance sheet at September 30, 2005
was
reclassified 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
2005
Annual Report on Form 10-K. The results of operations for the periods ended
March 31, 2006 and 2005 are not necessarily indicative of the operating results
for the full year. Certain amounts in the prior period financial statements
have
been reclassified to conform to the current presentation.
The
financial position and operating results of our foreign operations are
consolidated using, as the functional currency, the local currencies of the
countries in which they are located. The balance sheet accounts are translated
at exchange rates in effect at the end of the period, and the statement of
operations accounts are translated at average exchange rates during the period.
The resulting translation gains and losses are included as a separate component
of stockholders' equity. Foreign currency transaction gains and losses are
included in our statement of operations in the period in which they
occur.
Stock-Based
Compensation
In
December 2004, the Financial Accounting Standards Board issued Statement
of
Financial Accounting Standards No. 123R, “Share-Based Payment.” Statement
123R amends certain aspects of Statement 123 and now requires a public entity
to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. In
accordance with Statement 123R, we have elected to implement Statement 123R
on a
modified prospective basis, and to use the Black-Scholes valuation model
in
calculating fair value of the cost of stock-based
employee compensation plans.
That
cost will be recognized on a straight-line basis over the period during which
an
employee is required to provide service in exchange for the award, (usually
the
vesting period). No compensation cost is recognized for equity instruments
for
which employees do not render the requisite service. We adopted Statement
123R
on
October 1, 2005, and accordingly, we recognized $90 of compensation cost
in the
six months ended March 31, 2006.
No tax
benefit and deferred tax asset were recognized on the compensation cost because
of our domestic full valuation allowance against deferred tax
assets.
As
permitted by Statement of Financial Accounting Standards No. 123, “Accounting
for Stock-Based Compensation”, and prior to adoption of Statement 123R, we used
the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, for our stock-based employee compensation
plans. Since the exercise price and the fair value of the underlying stock
were
the same on the grant date, no compensation cost was recognized for the granting
of stock options to our employees in the three and six months ended March
31,
2005. If stock options previously granted were accounted for based on their
fair
value as determined under Statement 123, our pro forma results for the three
and
six months ended March 31, 2005, would be as follows:
|
|
Three
Months
|
|
Six
Months
|
|
|
|
|
|
|
|
|
|
3/31/05
|
|
3/31/05
|
|
|
|
|
|
|
|
Net
loss, as reported
|
|
$
|
(3,900
|
)
|
$
|
(2,997
|
)
|
Total
stock-based employee compensation expense determined
under
the fair value based method for all awards, net of
tax
|
|
|
(91
|
)
|
|
(182
|
)
|
|
|
|
|
|
|
Pro
forma net loss
|
|
$
|
(3,991
|
)
|
$
|
(3,179
|
)
|
|
|
|
|
|
|
Basic
and diluted loss per share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.15
|
)
|
$
|
(0.12
|
)
|
Pro
forma
|
|
$
|
(0.16
|
)
|
$
|
(0.13
|
)
|
The
pro
forma effects of applying SFAS 123 may not be representative of the effects
on
reported net results for future years. Our employee stock option plan ends
in
April 2006, and no new plan is being proposed at this time. We issued stock
options to exercise 3,000 and 6,000 shares of Class A common stock during
the
three months ended March 31, 2006 and March 31, 2005, respectively. On March
31,
2006, we had outstanding stock option awards of 770,087, of which 637,108
stock
option awards were vested.
2.
CASH EQUIVALENTS AND INVESTMENTS
Cash
equivalents and investments at March 31, 2006 consist primarily of investments
in United States government securities, investment grade corporate bonds,
and
equity 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 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:
|
|
March
31, 2006
|
|
September
30, 2005
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
Fair
|
|
Cost
|
|
Fair
|
|
Cost
|
|
|
|
Value
|
|
Basis
|
|
Value
|
|
Basis
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government securities
|
|
$
|
-
|
|
$
|
-
|
|
$
|
16
|
|
$
|
16
|
|
Money
market and other cash funds
|
|
|
14,606
|
|
|
14,606
|
|
|
12,566
|
|
|
12,566
|
|
|
|
|
|
|
|
|
|
|
|
Total
cash and cash equivalents
|
|
$
|
14,606
|
|
$
|
14,606
|
|
$
|
12,582
|
|
$
|
12,582
|
|
|
|
|
|
|
|
|
|
|
|
`
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds - restricted
|
|
$
|
5,693
|
|
$
|
5,693
|
|
$
|
4,965
|
|
$
|
4,965
|
|
Trading
securities - equity securities
|
|
|
1,371
|
|
|
1,371
|
|
|
10,733
|
|
|
10,733
|
|
|
|
|
|
|
|
|
|
|
|
Total
short-term investments
|
|
$
|
7,064
|
|
$
|
7,064
|
|
$
|
15,698
|
|
$
|
15,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government securities - restricted
|
|
$
|
509
|
|
$
|
509
|
|
$
|
9,547
|
|
$
|
9,547
|
|
Money
market funds - restricted
|
|
|
9,399
|
|
|
9,399
|
|
|
10,438
|
|
|
10,436
|
|
Corporate
bonds - restricted
|
|
|
23,476
|
|
|
24,184
|
|
|
23,741
|
|
|
24,319
|
|
Equity
securities - restricted
|
|
|
20,127
|
|
|
15,890
|
|
|
15,693
|
|
|
15,065
|
|
Available-for-sale
equity securities
|
|
|
4,948
|
|
|
3,612
|
|
|
5,309
|
|
|
3,612
|
|
Other
investments
|
|
|
4,099
|
|
|
4,099
|
|
|
4,924
|
|
|
4,924
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term investments
|
|
$
|
62,558
|
|
$
|
57,693
|
|
$
|
69,652
|
|
$
|
67,903
|
|
|
|
|
|
|
|
|
|
|
|
Total
cash equivalents and investments
|
|
$
|
84,228
|
|
$
|
79,363
|
|
$
|
97,932
|
|
$
|
96,183
|
|
|
|
|
|
|
|
|
|
|
|
On
March 31, 2006 and September 30, 2005, we had restricted investments of $59,204
and $64,384 respectively, all of which are maintained as collateral for certain
debt facilities, a put option to purchase the remaining interest in Polo,
environmental matters, and escrow arrangements. On March 31, 2006 and September
30, 2005, we had cash of $10,210 and $9,070, respectively, held by our European
subsidiaries which have debt agreements that place certain restrictions on
the
amount of cash that may be transferred outside the borrowing companies. For
additional information on Debt see Note 3.
On
March
31, 2006, we had gross unrealized holding gains from available-for-sale
securities of $5,614 and gross unrealized losses from available-for-sale
securities of $750. On September 30, 2005, we had gross unrealized holding
gains
from available-for-sale securities of $2,445 and gross unrealized losses
from
available-for-sale securities of $697.
3.
DEBT
At
March
31, 2006 and September 30, 2005, notes payable and long-term debt consisted
of
the following:
|
|
March
31,
|
|
Sept.
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Revolving
credit facilities - Fairchild Sports
|
|
$
|
14,575
|
|
$
|
8,917
|
|
Seasonal
loan - Fairchild
Sports
|
|
|
6,642
|
|
|
-
|
|
Other
short-term debt, collateralized by assets
|
|
|
1,552
|
|
|
-
|
|
Current
maturities of long-term debt
|
|
|
26,481
|
|
|
11,985
|
|
|
|
|
|
|
|
Total
notes payable and current maturities of long-term debt
|
|
|
49,250
|
|
|
20,902
|
|
|
|
|
|
|
|
Term
loan agreement - Fairchild Sports
|
|
|
20,288
|
|
|
25,301
|
|
Promissory
note - Real Estate
|
|
|
13,000
|
|
|
13,000
|
|
CIT
revolving credit facility - Aerospace
|
|
|
10,750
|
|
|
8,164
|
|
GMAC
credit facility - Fairchild Sports
|
|
|
3,869
|
|
|
3,650
|
|
Capital
lease obligations
|
|
|
3,424
|
|
|
4,597
|
|
Other
notes payable, collateralized by assets
|
|
|
5,026
|
|
|
5,263
|
|
Less:
current maturities of long-term debt
|
|
|
(26,481
|
)
|
|
(11,985
|
)
|
|
|
|
|
|
|
Net
long-term debt
|
|
|
29,876
|
|
|
47,990
|
|
|
|
|
|
|
|
Total
debt (a)
|
|
$
|
79,126
|
|
$
|
68,892
|
|
|
|
|
|
|
|
(a)
-
excludes $53,638 at March 31, 2006 and $53,981 at September 30, 2005 of debt
for
our shopping center classified as a discontinued operation. (See Note
8).
Credit
Facilities at Fairchild Sports
On
March
1, 2006, we entered into an €11.0 million ($13.2 million at March 31, 2006)
seasonal credit line with Stadtsparkasse Düsseldorf, with half of the facility
available to us for the 2006 season and €5.5 million ($6.6 million) of
borrowings outstanding at March 31, 2006. The seasonal credit line bears
interest at 2.75% over the three-month Euribor rate (5.24% at March 31, 2006)
and we must pay a 1.25% per annum non-utilization fee on the available facility
during the seasonal drawing period. The seasonal financing facility is 80%
guaranteed by the German State of North Rhine-Westphalia. The seasonal facility
will reduce by €1.0 million per year and expires on June 30, 2008. We are
holding discussions with other German banks, to commit to one half of the
seasonal facility on a permanent basis, subsequent to the 2006 season, but
to
date, we have not received a positive indication from a second bank to
participate in the seasonal financing. If we are unable to obtain a €5.0 million
commitment from a second bank by October 30, 2006, we have undertaken to
deposit
€5.0 million as restricted cash with Stadtsparkasse Düsseldorf in lieu of €5.0
million from the second bank, for the 2007 season. If we fail to do so,
Stadtsparkasse Düsseldorf may reduce, by one half, its €10.0 million loan
commitment for the 2007 season.
At
March
31, 2006, our German subsidiary, Hein Gericke Deutschland GmbH and its German
partnership, PoloExpress, had outstanding borrowings of $34.9 million due
under
its credit facilities with Stadtsparkasse Düsseldorf and HSBC Trinkaus &
Burkhardt KGaA. The revolving credit facility provides a credit line of €10.0
million ($11.4 million outstanding, and $0.6 million available at March 31,
2006), at interest rates of 3.5% over the three-month Euribor (6.0% at March
31,
2006), and matures annually. Outstanding borrowings under the term loan facility
have blended interest rates, with $17.3 million bearing interest at 1% over
the
three-month Euribor rate (3.5% at March 31, 2006), with an interest rate
cap
protection in which our interest expense would not exceed 6% on 50% of debt,
and
the remaining $3.0 million bearing interest at a fixed rate of 6%. The term
loans mature on March 31, 2009, and are secured by the assets of Hein Gericke
Deutschland GmbH and PoloExpress and specified guarantees provided by the
German
State of North Rhine-Westphalia.
The
loan
agreements require Hein Gericke Deutschland and PoloExpress to maintain
compliance with certain covenants. The most restrictive of the covenants
requires Hein Gericke Deutschland to maintain equity of €44.5 million
($53.7 million at March 31, 2006), as defined in the loan contract. No dividends
may be paid by Hein Gericke Deutschland unless such covenants are met, and
dividends may then be paid only up to its consolidated after tax profits.
As of
March 31, 2006, Hein Gericke Deutschland borrowed approximately $13.6 million
(€11.3 million) from our subsidiary, Fairchild Holding Corp., which is not
subject to any restriction against repayment. At March 31, 2006, we were
in
compliance with the loan covenants.
At
March
31, 2006, our subsidiary, Hein Gericke UK had outstanding borrowings of $3.9
million (£2.2 million) on its £5.0 million ($8.7 million) credit facility with
GMAC. The loan bears interest at 2.25% above the base rate of Lloyds TSB
Bank
Plc and matures on April 30, 2007. We must pay a 0.75% per annum non-utilization
fee on the available facility. The financing is secured by the inventory
of Hein
Gericke UK and an investment with a fair market value of $4.1 million at
March
31, 2006. The credit facility requires Hein Gericke UK to maintain compliance
with certain covenants. The most restrictive covenant requires Hein Gericke
UK
to maintain a minimum earnings before interest, taxes, depreciation and
amortization (“EBITDA”) as defined. At March 31, 2006, Hein Gericke UK missed
its EBITDA target by approximately £0.3 million ($0.6 million). Accordingly,
this debt was classified in notes payable and current maturities of long-term
debt on our balance sheet at March 31, 2006. We have held discussions with
GMAC
and anticipate that a waiver of the covenant violation will be granted. If
a
waiver is not granted, the lender may accelerate the term of the loan and
demand
immediate repayment. There is no cross default with any of our other outstanding
debt agreements as a result of the covenant violation.
Under
an
$8.0 million line of credit agreement with City National Bank that expires
on June 30, 2006, our subsidiary, IFW may borrow up to $3.0 million for
working capital needs and the remainder for letters of credit. Letters of
credit
which mature may be converted to a banker’s acceptance with a maturity date of
up to 90 days. Interest is payable monthly at the bank’s prime interest
rate. The interest rate at March 31, 2006 was 7.5%. At March 31, 2006, $0.4
million and $2.8 million were outstanding under this facility in the form
of
banker’s acceptance notes and for working capital requirements, respectively.
The line of credit is collateralized by substantially all assets of IFW,
is
guaranteed by us, and contains financial covenants. The most restrictive
covenants include maintaining a tangible net worth plus subordinated debt
of not
less than $5.5 million, and a ratio of total senior liabilities to tangible
net worth plus subordinated debt of not more than 2-to-1. The Company was
in
compliance with these covenants as of March 31, 2006.
Credit
Facility at Aerospace Segment
At
March
31, 2006, we have outstanding borrowings of $10.8 million under a $20.0 million
asset based revolving credit facility with CIT. The amount that we can borrow
under the facility is based upon inventory and accounts receivable at our
aerospace segment and $1.7 million was available for future borrowings at
March
31, 2006. Borrowings under the facility are collateralized by a security
interest in the assets of our aerospace segment. The loan bears interest
at 1.0%
over prime (8.5% at March 31, 2006) and we pay a non-usage fee of 0.5%. The
credit facility matures in January 2007.
Promissory
Note - Real Estate
At
March
31, 2006, we have an outstanding loan of $13.0 million with Beal Bank, SSB.
The
loan is evidenced by a Promissory Note dated as of August 26, 2004, and is
secured by a mortgage lien on the Company’s real estate in Huntington Beach CA,
Fullerton CA and Wichita KS. Interest on the note is at the rate of one-year
LIBOR (determined on an annual basis), plus 6% (10.26% at March 31, 2006),
and
is payable monthly. The loan matures on October 31, 2007, provided that the
Company may extend the maturity date for one year, during which time the
interest rate shall be one-year LIBOR plus 8%. The promissory note contains
a
prepayment penalty of 5%, if prepaid after September 2005, and before September
2006; and 3% if prepaid between September 2006 and October 30, 2007. On March
31, 2006, approximately $1.2 million of the loan proceeds were held in escrow
to
fund specific improvements to the mortgaged property.
Guarantees
At
March
31, 2006, we included $1.3 million as debt for guarantees Hein Gericke
Deutschland and PoloExpress retail shop partners’ indebtedness incurred by the
shop partners’ for the purchase of store fittings in Germany. These guarantees
were issued by our subsidiary in the sports & leisure segment. In addition,
at March 31, 2006, approximately $1.6 million of bank loans received by retail
shop partners in the sports & leisure segment were guaranteed by our
subsidiaries and are not reflected on our balance sheet because these loans
have
not been assumed by us. These guarantees were not assumed by us when we acquired
the sports & leisure business. The loans are secured by the store fittings
purchased to outfit our retail stores.
Letters
of Credit
We
have
entered into standby letter of credit arrangements with insurance companies
and
others, issued primarily to guarantee payment of our workers’ compensation
liabilities. At March 31, 2006, we had contingent liabilities of $1,961,
on
commitments related to outstanding letters of credit which were secured by
restricted cash collateral.
4.
PENSIONS AND POSTRETIREMENT BENEFITS
The
Company and its subsidiaries sponsor three qualified defined benefit pension
plans and several other postretirement benefit plans. The components of net
periodic benefit cost from these plans are as follows:
|
|
Pension
Benefits
|
|
Postretirement
Benefits
|
|
|
|
|
|
|
|
|
|
Three
Months
|
|
Six
Months
|
|
Three
Months
|
|
Six
Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/31/06
|
|
3/31/05
|
|
3/31/06
|
|
3/31/05
|
|
3/31/06
|
|
3/31/05
|
|
3/31/06
|
|
3/31/05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
96
|
|
$
|
108
|
|
$
|
193
|
|
$
|
355
|
|
$
|
7
|
|
$
|
22
|
|
$
|
13
|
|
$
|
44
|
|
Interest
cost
|
|
|
2,626
|
|
|
3,244
|
|
|
5,252
|
|
|
5,899
|
|
|
518
|
|
|
737
|
|
|
1,037
|
|
|
1,474
|
|
Expected
return on plan assets
|
|
|
(3,405
|
)
|
|
(3,555
|
)
|
|
(6,810
|
)
|
|
(7,110
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Amortization
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service cost
|
|
|
91
|
|
|
77
|
|
|
181
|
|
|
155
|
|
|
(278
|
)
|
|
(54
|
)
|
|
(556
|
)
|
|
(108
|
)
|
Actuarial
(gain)/loss
|
|
|
894
|
|
|
810
|
|
|
1,788
|
|
|
1,620
|
|
|
379
|
|
|
320
|
|
|
758
|
|
|
640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$
|
302
|
|
$
|
684
|
|
$
|
604
|
|
$
|
919
|
|
$
|
626
|
|
$
|
1,025
|
|
$
|
1,252
|
|
$
|
2,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our
funding policy is to make the minimum annual contribution required by the
Employee Retirement Income Security Act of 1974, or local statutory law.
Based
upon the Employee Retirement Income Security Act of 1974 and our actuary’s
current assumptions and projections, we would not have to provide additional
cash contributions to the largest pension plan until 2009. These current
actuarial projections indicate contribution requirements of $1,180 in 2009,
$1,970 in 2010 and a total of $11,420 in 2011 through 2015. Under current
law,
we are required to make annual cash contributions of approximately $0.3 million
to fund a small pension plan.
5.
EARNINGS PER SHARE
The
following table illustrates the computation of basic and diluted loss per
share:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
|
|
|
Basic
loss per share:
|
|
|
3/31/06
|
|
|
3/31/05
|
|
|
3/31/06
|
|
|
3/31/05
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(12,762
|
)
|
$
|
(3,430
|
)
|
$
|
(23,007
|
)
|
$
|
(15,467
|
)
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
25,226
|
|
|
25,245
|
|
|
25,226
|
|
|
25,219
|
|
|
|
|
|
|
Basic
loss from continuing operations per share
|
|
$
|
(0.51
|
)
|
$
|
(0.14
|
)
|
$
|
(0.91
|
)
|
$
|
(0.62
|
)
|
|
|
|
|
|
Diluted
loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(12,762
|
)
|
$
|
(3,430
|
)
|
$
|
(23,007
|
)
|
$
|
(15,467
|
)
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
25,226
|
|
|
25,245
|
|
|
25,226
|
|
|
25,219
|
|
Options
|
|
|
antidilutive
|
|
|
antidilutive
|
|
|
antidilutive
|
|
|
antidilutive
|
|
|
|
|
|
|
Total
shares outstanding
|
|
|
25,226
|
|
|
25,245
|
|
|
25,226
|
|
|
25,219
|
|
|
|
|
|
|
Diluted
loss from continuing operations per share
|
|
$
|
(0.51
|
)
|
$
|
(0.14
|
)
|
$
|
(0.91
|
)
|
$
|
(0.62
|
)
|
|
|
|
|
|
Stock
options entitled to purchase 768,120 and 774,840 shares of Class A common
stock
were antidilutive and not included in the earnings per share calculation
for the
three and six months ended March 31, 2006, respectively. Stock options entitled
to purchase 1,017,787 and 1,023,760 shares of Class A common stock were
antidilutive and not included in the earnings per share calculation for the
three and six months ended March 31, 2005, respectively. The stock options
could
become dilutive in future periods.
6.
EQUITY SECURITIES
We
had
22,604,761 shares of Class A common stock and 2,621,412 shares of Class B
common
stock outstanding at March 31, 2006. 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.
7.
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
had a
material effect on our financial condition, results of operations, and net
cash
flows, and 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, or arising
from
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 several lawsuits and proceedings seeking to require us to pay
for
investigation or remediation of environmental matters, and for injuries to
persons or property allegedly caused thereby, and we have been alleged to
be a
potentially responsible party at various "superfund" sites. We believe that
we
have recorded adequate accruals 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.
In
October 2003, we learned that volatile organic compounds had been detected
in
amounts slightly exceeding regulatory thresholds in a town water supply well
in
East Farmingdale, New York. Recent sampling of groundwater from the extraction
wells to be used in the remediation system for this site has indicated that
contaminant levels at the extraction point are significantly higher than
previous sampling results indicated. These compounds may, to an as yet
undetermined extent, be attributable to a groundwater plume containing volatile
organic compounds, which may have had its source, at least in part, from
plant
operations conducted by a predecessor of ours in Farmingdale. We are aiding
East
Farmingdale in its investigation of the source and extent of the volatile
organic compounds, and may assist it in treatment. In the first six months
of
fiscal 2006, we contributed approximately $0.3 million toward this
remediation.
We
expensed $0.2 million in discontinued operations for environmental matters
in
the six months ended March 31, 2006. As of March 31, 2006 and September 30,
2005, the consolidated total of our recorded liabilities for environmental
matters was approximately $9.9 million and $10.8 million, respectively, which
represented the estimated probable exposure for these matters. On March 31,
2006, $1.1 million of these liabilities were classified as other accrued
liabilities and $8.8 million were classified as other long-term liabilities.
It
is reasonably possible that our exposure for these matters could be
approximately $15.4 million.
The
sales
agreement with Alcoa includes an indemnification for legal and environmental
claims in excess of $10.4 million, for our fastener business. To date, Alcoa
has
contacted us concerning potential environmental and legal claims for
approximately $16.0 million, which, while disputed, could exceed the $10.4
million indemnification liability included in the sales agreement. We do
not
believe that we will have any liability to Alcoa in excess of the
indemnification amount included in the sales agreement. Accordingly, we have
not
recorded an additional accrual for these environmental claims at March 31,
2006.
However, Alcoa may seek to claim that amounts in excess of the $10.4 million
should be paid from the $25.0 million held in escrow, which we would dispute.
If
it becomes probable that we are liable for claims in excess of the
indemnification amount included in the sales agreement, we will, at that
time
record the liability. We have commenced an arbitration action against Alcoa
to
determine the validity of its claims.
Asbestos
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. This case was discontinued as to all defendants,
thereby extinguishing the indemnity claim against us in the instant case.
However, the purchaser has notified us of, and claimed a right to indemnity
from
us in relation to many thousands of other asbestos-related claims filed against
it. We have not received enough information to assess the impact, if any,
of the
other claims. During the last twenty-nine months, we have been served directly
by plaintiffs’ counsel in twenty-five cases related to the same pump business.
Two of the nineteen cases were dismissed as to all defendants, based upon
forum
objections. We, in coordination with our insurance carriers, intend aggressively
to defend ourselves against these claims.
We
have
been served with a total of twenty-eight separate complaints in actions filed
in
various venues by non-employee workers, alleging personal injury or wrongful
death as a result of exposure to asbestos-containing products other than
those
related to the pump business. The plaintiffs’ complaints do not specify
which, if any, products are at issue, making it difficult to assess the merit
and value, if any, of the asserted claims. We have resolved eleven similar
(non-pump business) asbestos-related lawsuits that were previously served
upon
us. In nine cases, we were voluntarily dismissed, without payment of
consideration to plaintiffs. The remaining two cases were settled for nominal
amounts. We, in coordination with our insurance carriers, intend aggressively
to
defend ourselves against these claims.
Our
insurance carriers have participated in the defense of all of the aforementioned
asbestos claims, both pump and non-pump related. Although insurance coverage
varies, depending upon the policy period(s) and product line involved in
each
case, management believes that our insurance coverage levels are adequate,
and
that asbestos claims will not have a material adverse effect on our financial
condition, future results of operation, or net cash flow.
CL
Motor Freight Litigation
In
July
2005, we received notice from the Ohio Bureau of Workers Compensation that
it is
seeking reimbursement from us of approximately $7.3 million for CL Motor
Freight
Inc. workers’ compensation claims which were insured under a self-insured
workers compensation program in Ohio from the 1950s until 1985. In March
2006,
we received a letter from the Ohio Bureau of Workers Compensation increasing
the
amount of reimbursement it is seeking from us to approximately $7.7 million
and
suggesting a meeting to discuss a settlement. Prior to July 2005, we had
not
received any communication from the Ohio Bureau of Workers Compensation for
many
years. CL Motor Freight is a former wholly-owned subsidiary of ours, which
filed
for Bankruptcy protection in 1985. We are contesting this claim.
Other
Matters
Two
actions, styled Noto
v. Steiner,
et al.,
and
Barbonel
v. Steiner, et
al.,
were
commenced on November 18, 2004, and November 23, 2004, respectively, in the
Court of Chancery of the State of Delaware in and for Newcastle County,
Delaware. The plaintiffs allege that each is, or was, a shareholder of The
Fairchild Corporation and purported to bring actions derivatively on behalf
of
the Company, claiming, among other things, that Fairchild executive officers
received excessive pay and perquisites and that the Company’s directors approved
such excessive pay and perquisites in violation of fiduciary duties to the
Company. The complaints name, as defendants, all of the Company’s directors, its
Chairman and Chief Executive Officer, its President and Chief Operating Officer,
its former Chief Financial Officer, and its General Counsel. While the Company
and its Officers and Directors believe it and they have meritorious defenses
to
these suits, and deny liability or wrongdoing with respect to any and all
claims
alleged in the suits, it and its Officers and Directors elected to settle
to
avoid onerous costs of defense, inconvenience and distraction. On April 1,
2005,
we mailed to our shareholders a Notice of Hearing and Proposed Settlement
of The
Fairchild Corporation Stockholder Derivative Litigation. On May 18, 2005,
the
Court of Chancery of the State of Delaware in and for New Castle County declined
to approve that proposed settlement of the actions. On October 24, 2005,
we
mailed to our shareholders a Notice of Hearing and Proposed Supplemental
Settlement of The Fairchild Corporation Stockholder Derivative Litigation.
On
November 23, 2005, the Court of Chancery of the State of Delaware in and
for New
Castle County approved the proposed settlement of these actions. The Court’s
order became final on December 23, 2005. As a result of the settlement, we
recognized a reduction in our selling, general and administrative expense
for
approximately $4.7 million of proceeds we received from Mr. J. Steiner and
our
insurance carriers. As of March 31, 2006, we have liabilities of approximately
$1.3 million for legal expenses associated with the shareholder litigation,
which represented the remaining estimated and unpaid costs for these matters.
In
January 2006, we received approximately $0.9 million from our insurance carriers
to pay for the plaintiffs’ and objector’s attorneys’ fees. In April 2006, we
received approximately $0.8 million from our insurance carriers to pay for
certain of our legal costs associated with this matter. Additionally, we
are
seeking reimbursement from our insurance carriers of an additional $1.6 million
for our other legal costs associated with this matter. Any reimbursement
we
recover will be recognized as a reduction in our general & administrative
expenses at the time recovery becomes definite. As a term of the settlement,
we
are required to add two independent members to our Board of Directors, whom
we
are seeking.
In
connection with the sale of the fasteners business to Alcoa in December 2002,
Alcoa demanded that the Company make a post-closing balance sheet adjustment
which, if accepted by us, would have entitled Alcoa to approximately $8.1
million. We rejected the adjustment and, in response, Alcoa, without our
authorization, withheld payment to us of $4.0 million of the amount due to
us
from the $12.5 million we earned based upon commercial aircraft deliveries
in
2003. We filed a claim against Alcoa in regard to the post-closing balance
sheet
matter, which was then submitted to BDO Seidman, LLP for arbitration. On
February 18, 2005, BDO Seidman resolved in our favor the dispute with Alcoa,
finding that the $8.1 million adjustment Alcoa demanded was inappropriate
and
denying Alcoa’s request for reformation of the acquisition agreement entered
into by Alcoa and us. We also filed a claim against Alcoa to collect the
$4.0
million Alcoa, without our authorization, held back “in escrow” which Alcoa
agreed was due to the Company, pending resolution of a post-closing balance
sheet adjustment dispute. In March 2005, Alcoa paid the $4.0 million amount
it
unilaterally withheld from us which remained outstanding for over a year.
There
is no provision in the agreements between the Company and Alcoa permitting
Alcoa
to create an escrow for the disputed post-closing balance sheet adjustment,
and
we intend to continue to pursue Alcoa for adequate compensation on the amount
it
arbitrarily withheld from us, including reimbursement of damages and legal
fees.
In addition, Alcoa has asserted other claims which, if proven, would, according
to Alcoa, aggregate in excess of $5.0 million. If Alcoa is correct and these
other claims exceed $5.0 million, we may be required to reimburse Alcoa for
the
full amount, without benefit of a threshold set forth in the acquisition
agreement under which we sold our fastener business to Alcoa. To date, Alcoa
has
contacted us concerning potential environmental and legal claims for
approximately $16 million, which, while disputed, could exceed the $10.4
million
indemnification reserve included in the sales agreement. We have notified
Alcoa
of our dispute of these matters and claims, and expect that resolution will
require litigation, arbitration, or alternative dispute resolution
methods.
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.
8.
DISCONTINUED OPERATIONS
Shopping
Center
On
December 21, 2005, we signed a definitive agreement to sell our Farmingdale,
New
York, power shopping center, Airport Plaza, to KRC Acquisition Corp., acting
on
behalf of a joint venture comprised of Kimco Realty Corporation and a fund
managed by a major investment bank, for a total price of approximately $95
million. The purchaser has deposited $4.75 million into escrow to ensure
its
obligations and to seek the approval of our mortgage lender to assume our
existing mortgage loan of approximately $53.6 million, or to defease the
loan.
Accordingly, we expect to receive net proceeds of approximately $40 million
from
this transaction. The closing will take place following the purchaser’s
obtaining consent of the mortgage lender to its loan assumption, which could
occur as early as May 2006. If the loan is defeased, the transaction may
not
close until as late as July 2006. The sale does not include several other
undeveloped parcels of real estate that we own in Farmingdale, the largest
of
which is under contract of sale to the market chain, Stew Leonards. We decided
to sell the shopping center to enhance our financial flexibility, allowing
us to
invest in existing operations or pursue other opportunities. We expect to
recognize a gain from this transaction. However, because of uncertain
environmental liabilities, the gain may be delayed.
Aerostructures
Business
On
June
24, 2005, we completed the sale of our Fairchild Aerostructures business
for
$6.0 million to PCA Aerospace. The cash received from PCA Aerospace is subject
to a post-closing adjustment based upon the net working capital of the business
on January 1, 2005, compared with its net working capital as of June 24,
2005,
which we have estimated to be approximately $1.5 million, and is included
in
accounts receivable at March 31, 2006. PCA Aerospace disputes the working
capital post-closing adjustment, and also alleges that we owe PCA Aerospace
$4.4
million. We have notified PCA Aerospace of our dispute of these claims. In
connection with the sale, we have deposited with an escrow agent approximately
$0.4 million to secure indemnification obligations we may have to PCA Aerospace.
The escrow period is eighteen months. We decided to sell Fairchild
Aerostructures, which was included in our aerospace segment, because we believe
we received adequate fair value for a business whose performance was below
our
expectations and because its business was unrelated to other businesses we
own.
We used $0.9 million of the proceeds from the sale to repay a portion of
our CIT
revolving credit facility and we used the remaining proceeds from the sale
to
reinvest in our existing operations. Fairchild Aerostructures was previously
included in our aerospace segment.
In
addition, we are leasing property we own located in Huntington Beach,
California, to PCA Aerospace through October 2007. We can cause PCA Aerospace
to
purchase the Huntington Beach property at the greater of fair market value
or
$6.0 million under a put option we hold which can be exercised upon the earlier
of the Beal Bank loan being paid off (currently due in October 2007, but
with
extension options) or January 31, 2012. PCA Aerospace also holds a similar
purchase option. At March 31, 2006, the book value of the Huntington Beach
property was $3.0 million and we believe the current fair market value is
approximately $5.5 million.
Fastener
Business
On
December 3, 2002, we completed the sale of our fastener business to Alcoa
Inc.
for approximately $657 million in cash and the assumption of certain
liabilities. During the four-year period from 2003 to 2006, we are entitled
to
receive additional cash proceeds of $0.4 million for each commercial aircraft
delivered by Boeing and Airbus in excess of stated threshold levels, up to
a
maximum of $12.5 million per calendar year. Deliveries exceeded
the threshold aircraft delivery level needed for us to earn the full $12.5
million contingent payment for calendar 2003 to 2005. Accordingly, we
recognized a gain of $12.5 million on the disposal of discontinued
operations in the six months ended March 31, 2006 and March 31, 2005. The
remaining threshold aircraft delivery level is 650 in 2006.
On
December 3, 2002, we deposited with an escrow agent $25 million to secure
indemnification obligations we may have to Alcoa. The escrow period remains
in
effect to December 3, 2007, but funds may be held longer if claims are timely
asserted and remain unresolved. The escrow is classified in long-term
investments on our balance sheet. In addition, for a period ending on December
3, 2007, 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
results of the shopping center, Fairchild Aerostructures, and the fastener
business are recorded as earnings from discontinued operations, the components
of which are as follows:
|
Three Months Ended
|
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
3/31/06 |
|
|
3/31/05 |
|
|
|
3/31/06 |
|
|
3/31/05 |
|
|
|
|
|
|
Net Revenues |
|
$ |
2,498 |
|
$ |
4,773 |
|
|
$ |
4,888 |
|
$ |
9,502 |
|
Cost of Revenues |
|
|
931 |
|
|
4,109 |
|
|
|
2,548 |
|
|
8,288 |
|
|
|
|
|
|
Gross Margin |
|
|
1,567 |
|
|
664 |
|
|
|
2,340 |
|
|
1,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general &
Administrative expense |
|
|
144 |
|
|
352 |
|
|
|
476 |
|
|
184 |
|
Other (income) expense, net |
|
|
- |
|
|
(17 |
) |
|
|
- |
|
|
(35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
1,423 |
|
|
329 |
|
|
|
1,864 |
|
|
1,065 |
|
Net interest expense |
|
|
778 |
|
|
799 |
|
|
|
1,583 |
|
|
1,599 |
|
|
|
|
|
|
Earnings (loss) from discontinued operations before
taxes |
|
|
645 |
|
|
(470 |
) |
|
|
281 |
|
|
(534 |
) |
Income tax (provision) benefit |
|
|
(8 |
) |
|
- |
|
|
|
(15 |
) |
|
504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from discontinued operations |
|
$ |
637 |
|
$ |
(470 |
) |
|
$ |
266 |
|
$ |
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
assets and liabilities of our Shopping Center are being reported as assets
and
liabilities of discontinued operations at March 31, 2006 and September 30,
2005,
and were as follows:
|
|
3/31/06
|
|
9/30/05
|
|
|
|
|
|
|
|
Current
assets of discontinued operations:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
26
|
|
$
|
60
|
|
Prepaid
expenses and other current assets
|
|
|
1,833
|
|
|
1,410
|
|
|
|
|
|
|
|
|
|
|
1,859
|
|
|
1,470
|
|
|
|
|
|
|
|
Noncurrent
assets of discontinued operations:
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
90,741
|
|
|
90,781
|
|
Accumulated
depreciation
|
|
|
(16,346
|
)
|
|
(15,571
|
)
|
Deferred
loan costs
|
|
|
790
|
|
|
832
|
|
Other
assets
|
|
|
2,916
|
|
|
3,082
|
|
|
|
|
|
|
|
|
|
|
78,101
|
|
|
79,124
|
|
|
|
|
|
|
|
Current
liabilities of discontinued operations:
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
|
(689
|
)
|
|
(668
|
)
|
Accounts
payable
|
|
|
(105
|
)
|
|
(415
|
)
|
Accrued
liabilities
|
|
|
(383
|
)
|
|
(446
|
)
|
|
|
|
|
|
|
|
|
|
(1,177
|
)
|
|
(1,529
|
)
|
|
|
|
|
|
|
Noncurrent
liabilities of discontinued operations:
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
(52,949
|
)
|
|
(53,313
|
)
|
Other
long-term liabilities
|
|
|
(168
|
)
|
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
(53,117
|
)
|
|
(53,481
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net assets of discontinued operations
|
|
$
|
25,666
|
|
$
|
25,584
|
|
|
|
|
|
|
|
Term
Loan Agreement - Shopping Center
At
March
31, 2006, our subsidiary, Republic Thunderbolt, LLC, has outstanding borrowings
of $53.6 million on a non-recourse 10-year term loan financing of our Airport
Plaza shopping center in Farmingdale, New York. The interest rate is fixed
at
6.2% for the term of the loan and the loan matures in January 2014. The loan
requires the maintenance of a lock-box arrangement, whereby rental revenues
are
deposited and funds are automatically withdrawn to satisfy the monthly loan
payments. After the monthly loan payments are made, the remaining funds are
then
disbursed to us. The loan does not have a subjective acceleration clause.
In
addition, the loan may not be prepaid until three months before its maturity,
however, the loan may be assumed by other parties, or after June 2006, defeased.
The loan is secured by the assets of our shopping center. On March 31, 2006,
approximately $6.0 million of the loan proceeds were being invested in a
long-term escrow account as collateral to fund certain contingent environmental
matters.
9.
BUSINESS SEGMENT INFORMATION
We
currently report in three principal business segments: sports & leisure,
aerospace, and real estate operations. The following table provides the
historical results of our operations for the three and six months ended March
31, 2006 and 2005, respectively.
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
|
3/31/06
|
|
3/31/05
|
|
3/31/06
|
|
3/31/05
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sports
& Leisure Segment
|
|
$
|
43,316
|
|
$
|
56,398
|
|
$
|
77,745
|
|
$
|
99,513
|
|
Aerospace
Segment
|
|
|
19,411
|
|
|
23,299
|
|
|
36,293
|
|
|
44,536
|
|
Real
Estate Operations Segment
|
|
|
258
|
|
|
258
|
|
|
518
|
|
|
518
|
|
Intercompany
Eliminations
|
|
|
(21
|
)
|
|
(121
|
)
|
|
(43
|
)
|
|
(243
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
62,964
|
|
$
|
79,834
|
|
$
|
114,513
|
|
$
|
144,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sports
& Leisure Segment
|
|
$
|
(6,550
|
)
|
$
|
(2,812
|
)
|
$
|
(13,650
|
)
|
$
|
(8,329
|
)
|
Aerospace
Segment
|
|
|
1,231
|
|
|
1,977
|
|
|
1,798
|
|
|
3,393
|
|
Real
Estate Operations Segment
|
|
|
57
|
|
|
116
|
|
|
196
|
|
|
255
|
|
Corporate
and Other
|
|
|
(5,643
|
)
|
|
(7,504
|
)
|
|
(8,400
|
)
|
|
(13,948
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(10,905
|
)
|
$
|
(8,223
|
)
|
$
|
(20,056
|
)
|
$
|
(18,629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(Loss) From Continuing
Operations
Before Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sports
& Leisure Segment
|
|
$
|
(7,419
|
)
|
$
|
(4,051
|
)
|
$
|
(15,372
|
)
|
$
|
(10,684
|
)
|
Aerospace
Segment
|
|
|
896
|
|
|
1,621
|
|
|
1,131
|
|
|
2,743
|
|
Real
Estate Operations Segment
|
|
|
(292
|
)
|
|
(178
|
)
|
|
(509
|
)
|
|
(338
|
)
|
Corporate
and Other
|
|
|
(4,968
|
)
|
|
(738
|
)
|
|
(7,171
|
)
|
|
(6,835
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(11,783
|
)
|
$
|
(3,346
|
)
|
$
|
(21,921
|
)
|
$
|
(15,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
3/31/06
|
|
|
9/30/05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sports
& Leisure Segment
|
|
$
|
186,014
|
|
$
|
154,648
|
|
|
|
|
|
|
|
Aerospace
Segment
|
|
|
47,375
|
|
|
42,848
|
|
|
|
|
|
|
|
Real
Estate Operations Segment
|
|
|
115,842
|
|
|
117,226
|
|
|
|
|
|
|
|
Corporate
and Other
|
|
|
117,501
|
|
|
132,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
466,732
|
|
$
|
447,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
SUBSEQUENT EVENTS
On
May 3,
2006, we entered into a credit agreement with The Bank of New York, as
administrative agent and GoldenTree Asset Management, L.P., as collateral
agent.
The lenders under the Credit Agreement were GoldenTree Capital Opportunities,
L.P. and GoldenTree Capital Solutions Fund Financing. Pursuant to the credit
agreement, we borrowed from the lenders $30.0 million. The loan matures on
May
3, 2010, subject to certain mandatory prepayment events described in the
credit
agreement. Interest on the loan is LIBOR plus 7.5%, per annum, with the initial
interest rate fixed for the first six months. Subsequent interest periods
may be
selected by us, ranging from one month to six months, or, if consented to
by the
lenders, for 12 months.
The
loan
is secured by the stock of Banner Aerospace Holding Company I, Inc., (the
parent
of our aerospace segment), certain undeveloped real estate owned by us in
Farmingdale, N.Y., condemnation proceeds we expect to receive for certain
other
real estate in Farmingdale, N.Y., and any remaining proceeds to be received
by
us in the future from the Alcoa transaction. Upon the sale or other monetization
of the collateral, the proceeds from such collateral must be used to prepay
the
Loan. We may elect to retain 27.5% of the proceeds from the monetization
of the
collateral (instead of applying 100% of such proceeds to make a mandatory
prepayment of the loan), provided that: the remaining collateral meet or
exceed
a collateral to loan value of 1.9:1, and we pay the lenders a fee of 3% of
the
retained proceeds. If the loan is voluntarily prepaid by us within the first
three years of the loan, we must pay a prepayment penalty of 3% in year one,
2%
in year two, or 1% in year three.
The
credit agreement defines an “Available Amount” as $30 million, plus net cash
proceeds from the sale of the Company’s shopping center, plus new money from any
equity offerings and earnings from investments. During the term of the loan,
the
aggregate of the following may not exceed the Available Amount (unless consented
to by the lenders): investments by the Company in Fairchild Sports or in
any new
company or new ventures; new acquisitions; guarantees by us of additional
debt
incurred by Fairchild Sports (with an exception for the existing guarantees);
loans by us to Fairchild Sports (with an exception for the existing loans);
and
repurchases by us of our outstanding stock.
During
the term of the loan:
· |
We
must maintain cash or cash equivalents equal to a minimum liquidity
threshold of not greater than $20 million or less than $10 million.
|
· |
a
change of control whereby Jeffrey Steiner, Eric Steiner or Natalia
Hercot
cease to own a controlling interest in The Fairchild Corporation
would be
an event of default under the loan.
|
Subject
to the covenants in the credit agreement, the proceeds of the loan may be
used
for general working capital purposes, investments, or stock
repurchases.
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. We have 100% ownership interests (directly and indirectly)
in
Fairchild Holding Corp., Republic Thunderbolt, LLC, and Banner Aerospace
Holding
Company I, Inc. Fairchild Holding Corp. is the owner of Hein Gericke,
PoloExpress, and IFW. Our principal operations are conducted through these
entities. Our consolidated financial statements present the results of our
shopping center (under contract to sell), our former fastener business (sold
December 3, 2002), and Fairchild Aerostructures (sold June 24, 2005), as
discontinued operations.
The
following discussion and analysis provide information which management believes
is relevant to the assessment and understanding of our consolidated results
of
operations and financial condition. The discussion should be read in conjunction
with the consolidated financial statements and notes thereto included elsewhere
in this report.
CAUTIONARY
STATEMENT
Certain
statements in this filing 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: our ability to finance and successfully
operate
our retail businesses; our ability to accurately predict demand for our
products; our ability to receive timely deliveries from vendors; our ability
to
raise cash to meet seasonal demands; our dependence on the retail and aerospace
industries; our ability to maintain customer satisfaction and deliver products
of quality; our ability to properly assess our competition; our ability to
improve our operations to profitability status; our ability to liquidate
non-core assets to meet cash needs; our ability to attract and retain highly
qualified executive management; our ability to achieve and execute internal
business plans; weather conditions in Europe during peak business season
and on
weekends; labor disputes; competition; foreign currency fluctuations; worldwide
political instability and economic growth; military conflicts, including
terrorist activities; infectious diseases; new legislation which may cause
us to
be required to fund our pension plan earlier than we had expected; and the
impact of any economic downturns and inflation.
If
one or
more of these and other risks or uncertainties materialize, 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 filing, even if new information,
future events or other circumstances have made them incorrect or
misleading.
EXECUTIVE
OVERVIEW
Our
business consists of three segments: sports & leisure, aerospace, and real
estate operations. Our sports & leisure segment is engaged in the design and
retail sale of protective clothing, helmets and technical accessories for
motorcyclists in Europe and the design and distribution of such apparel and
helmets in the United States. Our aerospace segment stocks a wide variety
of
aircraft parts, then distributes them to commercial airlines and air cargo
carriers, fixed-base operators, corporate aircraft operators and other aerospace
companies worldwide. Our real estate operations segment owns and leases a
shopping center located in Farmingdale, New York (under contract to sell),
and
owns and rents two improved parcels located in Southern California.
For
the
six months ended March 31, 2006, we reported a loss from continuing operations
before income taxes of $21.9 million, as compared to a loss of $15.1 million
for
the six months ended March 31, 2005. The current six months loss from continuing
operations benefited from the settlement of the shareholder derivative
litigation, which improved results by approximately $4.5 million. Excluding
this
item, the increased loss from continuing operations resulted primarily from
lower revenues in our sports & leisure and aerospace segments. The seasonal
inventory demands of our sports & leisure business and the operating losses
have contributed primarily to our $23.0 million use of cash in our operating
activities in the six months ended March 31, 2006. As of March 31, 2006,
we have
unrestricted cash, cash equivalents and short-term investments of $16.0 million,
and available borrowing under lines of credit of $3.2 million. Also, on March
1,
2006, we entered into an €11.0 million ($13.3 million at March 31, 2006)
seasonal credit line with Stadtsparkasse Düsseldorf, and received funding of
€5.5 million in March 2006.
We
have
undertaken a number of actions, which we believe will improve the results
of
Hein Gericke in 2006 and beyond including:
· |
Implementation
of an internet sales shop.
|
· |
Tighter
control over discretionary spending and promotional
activities.
|
· |
Management
changes, with emphasis on enhancing the supply chain, sales and
marketing.
|
· |
Implementation
of a new computer system which provides improved sales and inventory
management information and enhances operational
efficiencies.
|
· |
Reduction
of overhead expenses to improve our operational
efficiency.
|
In
addition, we plan to:
· |
Enhance
training programs for our sales people.
|
· |
Modify
marketing activities.
|
· |
Promote
our internet sales shop.
|
· |
Identify
strategic markets outside of Germany and the United Kingdom for possible
expansion.
|
In
order
to improve our liquidity, on December 21, 2005, we signed a definitive agreement
to sell our Farmingdale, New York, power shopping center, Airport Plaza,
to KRC
Acquisition Corp., acting on behalf of a joint venture comprised of Kimco
Realty
Corporation and a fund managed by a major investment bank, for approximately
$95
million. The purchaser has deposited into escrow $4.75 million to ensure
its
obligations and is seeking approval to assume our existing mortgage loan
of
approximately $53.6 million, or will defease the loan. The closing will take
place following the purchaser’s obtaining consent of the mortgage lender to its
loan assumption, which could occur as early as May 2006. If the loan is
defeased, the transaction may not close until as late as July 2006. The sale
does not include several other undeveloped parcels of real estate that we
own in
Farmingdale, New York, the largest of which is under contract of sale to
the
market chain, Stew Leonards. We decided to sell the shopping center to enhance
our financial flexibility, allowing us to invest in existing operations or
pursue other opportunities.
On
May 3,
2006, we decided to borrow $30.0 million from GoldenTree Capital Opportunities,
L.P. and GoldenTree Capital Solutions Fund Financing to further improve our
liquidity and provide us with flexible opportunities to:
· |
Invest
in our existing operations
|
· |
Pursue
acquisitions opportunities.
|
· |
Provide
a guarantee for any additional debt incurred by our sports & leisure
segment
|
· |
Repurchase
our outstanding stock.
|
We
expect
that cash on hand, which includes cash proceeds received from the stockholder
derivative litigation and the Alcoa earn-out, cash available from lines of
credit, $30.0 million of proceeds received from a new credit agreement at
Corporate, and proceeds received from dispositions of short-term investments
and
our shopping center, will be adequate to satisfy our cash requirements during
the next twelve months.
Our
cash
needs at our sports & leisure segment are generally the highest during the
first and second quarters of our fiscal year, when our sports and leisure
segment purchases inventory in advance of the spring and summer selling
seasons.
On
March
1, 2006, we entered into an €11.0 million ($13.2 million at March 31, 2006)
seasonal credit line with Stadtsparkasse Düsseldorf, with half of the facility
available to us for the 2006 season and €5.5 million ($6.6 million) of
borrowings outstanding at March 31, 2006. The seasonal credit line bears
interest at 2.75% over the three-month Euribor rate (5.24% at March 31, 2006)
and we must pay a 1.25% per annum non-utilization fee on the available facility
during the seasonal drawing period. The seasonal financing facility is 80%
guaranteed by the German State of North Rhine-Westphalia. The seasonal facility
will reduce by €1.0 million per year and expires on June 30, 2008. We are
holding discussions with other German banks, to commit to one half of the
seasonal facility on a permanent basis, subsequent to the 2006 season, but
to
date, we have not received a positive indication from a second bank to
participate in the seasonal financing. If we are unable to obtain a €5.0 million
commitment from a second bank by October 30, 2006, we have undertaken to
deposit
€5.0 million as restricted cash with Stadtsparkasse Düsseldorf in lieu of €5.0
million from the second bank, for the 2007 season. If we fail to do so,
Stadtsparkasse Düsseldorf may reduce, by one half, its €10.0 million loan
commitment for the 2007 season.
In
the
event that our cash needs are substantially higher than projected, particularly
during our seasonal trough, we will take additional actions to generate the
required cash. These actions may include one or any combination of the
following:
· |
Liquidating
investments and other non-core assets.
|
· |
Obtaining
additional borrowings from new lenders.
|
· |
Eliminating,
reducing, or delaying all non-essential services provided by outside
parties, including consultants.
|
· |
Significantly
reducing our corporate overhead expenses.
|
· |
Delaying
purchases of inventory.
|
During
the next several months, we plan to:
· |
Consummate
the closing of our shopping center sale.
|
· |
Generate
additional cash from borrowings and/or the sale of other non-core
assets
to support our operations and corporate
needs.
|
· |
Enhance
operational efficiency by eliminating unprofitable product
lines
|
· |
Merging
back office functions where practical.
|
RESULTS
OF OPERATIONS
Business
Transactions
On
June
24, 2005, we completed the sale of our Fairchild Aerostructures business
for
$6.0 million to PCA Aerospace. The cash received from PCA Aerospace is subject
to a post-closing adjustment based upon the net working capital of the business
on January 1, 2005, compared with its net working capital as of June 24,
2005,
which we have estimated to be approximately $1.5 million, and is included
in
accounts receivable at March 31, 2006. PCA Aerospace disputes the working
capital post-closing adjustment, and also alleges that we owe PCA Aerospace
$4.4
million. We have notified PCA Aerospace of our dispute of these claims. In
connection with the sale, we have deposited with an escrow agent approximately
$0.4 million to secure indemnification obligations we may have to PCA Aerospace.
The escrow period is eighteen months. We decided to sell Fairchild
Aerostructures, which was included in our aerospace segment, because we believe
we received adequate fair value for a business whose performance was below
our
expectations and because its business was unrelated to other businesses we
own.
We used $0.9 million of the proceeds from the sale to repay a portion of
our CIT
revolving credit facility and we used the remaining proceeds from the sale
to
reinvest in our existing operations.
Consolidated
Results
We
currently report in three principal business segments: sports & leisure,
aerospace, and real estate operations. Because
Fairchild Sports is a highly seasonal business, with an historic trend of
a
higher volume of sales and profits during the months of March through September,
the discussion below should not be relied upon as a trend of our future results.
The
following table provides the revenues and operating income (loss) of our
segments:
(In
thousands)
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
3/31/06
|
|
|
3/31/05
|
|
|
3/31/06
|
|
|
3/31/05
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sports
& Leisure Segment
|
|
$
|
43,316
|
|
$
|
56,398
|
|
$
|
77,745
|
|
$
|
99,513
|
|
Aerospace
Segment
|
|
|
19,411
|
|
|
23,299
|
|
|
36,293
|
|
|
44,536
|
|
Real
Estate Operations Segment
|
|
|
258
|
|
|
258
|
|
|
518
|
|
|
518
|
|
Intercompany
Eliminations
|
|
|
(21
|
)
|
|
(121
|
)
|
|
(43
|
)
|
|
(243
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
62,964
|
|
$
|
79,834
|
|
$
|
114,513
|
|
$
|
144,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sports
& Leisure Segment
|
|
$
|
(6,550
|
)
|
$
|
(2,812
|
)
|
$
|
(13,650
|
)
|
$
|
(8,329
|
)
|
Aerospace
Segment
|
|
|
1,231
|
|
|
1,977
|
|
|
1,798
|
|
|
3,393
|
|
Real
Estate Operations Segment
|
|
|
57
|
|
|
116
|
|
|
196
|
|
|
255
|
|
Corporate
and Other
|
|
|
(5,643
|
)
|
|
(7,504
|
)
|
|
(8,400
|
)
|
|
(13,948
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(10,905
|
)
|
$
|
(8,223
|
)
|
$
|
(20,056
|
)
|
$
|
(18,629
|
)
|
|
|
|
|
|
|
|
|
|
|
Revenues
decreased by $16.9 million, or 21.1%, in the second quarter of fiscal 2006,
as
compared to the second quarter of fiscal 2005. Revenues decreased by $29.8
million, or 20.7%, in the first six months of fiscal 2006, as compared to
the
first six months of fiscal 2005. The first six months of fiscal 2006, included
reduced revenues of $21.8 million and $8.2 million in our sports & leisure
segment and our aerospace segment, respectively. See segment discussion below
for further details.
Gross
margin as a percentage of sales improved to 37.7% in the first six months
of
fiscal 2006, as compared to 35.8% in the first six months of fiscal 2005.
The
increase in margins at our sports & leisure segment helped to partially
offset the lower sales. Gross margins also improved at our aerospace segment
due
primarily to a change in product mix.
Selling,
general and administrative expense as a percentage of sales increased to
54.6%
for the six months ended March 31, 2006, as compared to 47.5% in the first
six
months of fiscal 2005, due primarily to the lower volume of revenues. Selling,
general and administrative expense for the six months ended March 31, 2006,
also
benefited from $4.5 million received by us from the settlement of the
shareholder derivative litigation, offset partially by $0.6 million of related
legal fees.
Net
interest expense was $4.0 million and $6.7 million for the six months ended
March 31, 2006 and March 31, 2005, respectively. The decrease was due primarily
to lower interest expense on the $100 million interest rate contract, which
we
settled in December 2005. The settlement of the $100 million interest rate
contract will reduce interest expense over the next three quarters.
Investment
income decreased by $4.6 million for
the
six months ended March 31, 2006 as compared to the six months ended March
31,
2005, due primarily to the prior period including
$5.3 million of income recognized from stock and dividends received from
the
demutalization of an insurance company.
The
fair
market value adjustment of our position in a ten-year $100 million interest
rate
contract improved by $0.8 million in the first six months of fiscal 2006,
as
compared to $4.3 million in the same period in fiscal 2005.
The
fair
market value adjustment of this agreement reflected increasing interest rates
and caused the favorable change in fair market value of the contract in these
periods. We
settled the interest rate contract at the end of December 2005, and accordingly
we will have no further income or loss from this contract. The settlement
allowed us to increase cash available for operations by releasing approximately
$2.5 million of cash held in escrow in excess of the liability.
The
tax
provision for the six months ended March 31, 2006, represents $0.1 million
of
state taxes. No tax benefit was accrued, due to our domestic and foreign
operations reporting a loss for the first six months and our annual projected
loss for domestic operations. The tax provision for the six months ended
March
31, 2005, represents foreign taxes withheld and state taxes.
Earnings
(loss) from discontinued operations include the results of our shopping center,
which is under contract of sale, Fairchild Aerostructures prior to its sale,
certain accounts receivable recovery efforts, and legal and environmental
expenses associated with our former businesses. The earnings from discontinued
operations for the first six months of fiscal 2006 reflected $0.6 million
of
earnings recognized by our shopping center, due primarily to the discontinuance
of depreciation expense on this asset held for sale, offset partially by
$0.2
million of environmental expenses. The marginal loss from discontinued
operations for the first six months of fiscal 2005 resulted from net losses
of
$0.4 million reported by our shopping center and $0.5 million from Fairchild
Aerostructures offset partially by a $0.2 million reduction in our environmental
accrual due to a settlement of a matter for an amount lower than its expected
cost and a tax benefit of $0.5 million realized from the carryback of
environmental remediation payments.
We
recognized a $12.5 million gain on the disposal of discontinued operations
in
each of the six months ended March 31, 2006 and March 31, 2005, due to $12.5
million of additional proceeds earned from the sale of the fastener business.
No
income tax expense was recorded due to our overall tax loss in the United
States.
Segment
Results
Sports
& Leisure Segment
Our
sports & leisure segment designs and sells motorcycle apparel, protective
clothing, helmets, and technical accessories for motorcyclists. Primary brand
names of our products include Hein Gericke and Polo. Hein Gericke currently
operates 146 retail shops in Austria, Belgium, France, Germany, Italy,
Luxembourg, the Netherlands, and the United Kingdom. Polo currently operates
88
retail shops in Germany and one shop in Switzerland. For the most part, the
Hein
Gericke retail stores sell Hein Gericke brand items, and the Polo retail
stores
sell Polo brand products. Both the Hein Gericke and Polo retail stores sell
products of other manufacturers, the inventory of which is owned by the Company.
IFW, located in Tustin, California, is a designer and distributor of motorcycle
apparel, boots and helmets under several labels, including Hein Gericke.
In
addition, IFW designs and produces apparel under private labels for third
parties. The
sports and leisure segment is a seasonal business, with an historic trend
of a
higher volume of sales and profits during March through September.
Sales in
our sports & leisure segment decreased by $13.1 million and $21.8 million
during the three and six months ended March 31, 2006, respectively, as compared
to the three and six months ended March 31, 2005. Sales at IFW decreased
by $5.8
million and $11.3 million during the three and six months ended March 31,
2006,
respectively, as compared to the three and six months ended March 31, 2005,
due
to a reduction in sales to Harley-Davidson and Tucker-Rocky. Same store sales
at
our retail stores decreased by 7.7% in the current six month period.
Additionally, foreign currency exchange rates on the translation of European
sales into U.S. dollars changed unfavorably by approximately $8.3 million,
or
8.4%, in the six month period. Average retail sales per square meter was
$750.15
in the six months ended March 31, 2006, as compared to $878.27 in the six
months
ended March 31, 2005. Sales were down at Hein Gericke due to delays in inventory
receipts which resulted in out-of-stock conditions on certain high demand
items;
a shift in the timing of an advertising campaign from March to April; and
unusually harsh weather during March in Europe. Sales were down at Polo due
to
the harsh weather in March in Germany and higher sales generated in the prior
period resulting from Polo celebrating its 25th
anniversary. The operating loss was $6.6 million and $13.7 million for the
three
and six months ended March 31, 2006, respectively as compared to $2.8 million
and $8.3 million for the three and six months ended March 31, 2005,
respectively. The increase in the operating loss in the current periods was
due
primarily to the aforementioned sales decreases and the reduction in business
at
IFW. The business improved its gross margins as a percentage of sales by
1.6%
over the six months ended March 31, 2006, which offset partially the reduction
in revenues during this period.
Since
the
November 1, 2003 acquisition, Hein Gericke has initiated steps to advance
its
retail business in Germany. Hein Gericke is focusing on more efficient
advertising and marketing to restore brand recognition and increase customer
traffic previously enjoyed by Hein Gericke in Germany. A new ERP computer
system
operational at Polo, was expanded to encompass the operations of Hein Gericke.
The new ERP computer system enables the business to operate in a more efficient
manner. We believe relations with the suppliers of Fairchild Sports have
improved since our acquisition. We have initiated a program to focus on optimal
store location. This includes closing or relocating low performing stores,
and
opening new stores in England and elsewhere in Western Europe. We have also
redesigned several stores to better present our products to customers. Recently,
we have taken action to significantly reduce the staff at IFW and focus its
future efforts on designing for private labels and its licensing
business.
Aerospace
Segment
Our
aerospace segment has five locations in the United States, and is an
international supplier to the aerospace industry. Four locations specialize
in
the distribution of avionics, airframe accessories, and other components,
and
one location provides overhaul and repair capabilities. The products distributed
include: navigation and radar systems, instruments, and communication systems,
flat panel technologies and rotables. Our location in Titusville, Florida,
overhauls and repairs landing gear, pressurization components, instruments,
and
avionics. Customers include original equipment manufacturers, commuter and
regional airlines, corporate aircraft and fixed-base operators, air cargo
carriers, general aviation suppliers and the military. Sales in our aerospace
segment decreased by $3.9 million, or 16.7%, in the three months ended March
31,
2006, as compared to the three months ended March 31, 2005.
Sales in
our aerospace segment decreased by $8.2 million, or 18.5%, in the first six
months of fiscal 2006, as compared to the first six months of fiscal
2005.
Sales in
our aerospace segment benefited in the six months ended March 31, 2005, from
the
delivery of several unusually large orders. Demand in the aerospace industry
for
the products we sell continues to be adversely
affected by the financial
difficulties of commercial airlines.
Operating
income decreased by $0.7 million and $1.6 million, in the three and six months
ended March 31, 2006, respectively, as compared to the same periods in fiscal
2005. The change was due
primarily to the decrease in volume of sales, offset partially by a 2.6%
and
2.7% increase in gross margin as a percentage of sales
in the
three and six months ended March 31, 2006, respectively, as compared to the
same
periods in fiscal 2005,
reflecting margin increases at two of the five locations.
Real
Estate Operations Segment
Our real estate operations segment owns and operates a 451,000 square foot
shopping center located in Farmingdale, New York, owns and leases to Alcoa
a
208,000 square foot manufacturing facility located in Fullerton, California,
and
also owns and leases to PCA Aerospace a 58,000 square foot manufacturing
facility located in Huntington Beach, California.
The
Fullerton property is leased to Alcoa through October 2007, and is expected
to
generate revenues and operating income in excess of $0.5 million per year.
The
Huntington Beach property is leased to PCA Aerospace through October 2007,
and
is expected to generate revenues and operating income of $0.4 million per
year.
We can cause PCA Aerospace to purchase the Huntington Beach property at the
greater of fair market value or $6.0 million under a put option we hold which
can be exercised upon the earlier of the time when a mortgage loan, which
encumbers the property, is paid off (currently due in October 2007, but with
extension options) or January 31, 2012. PCA Aerospace also holds a similar
purchase option. At December 30, 2005, the book value of the Huntington Beach
property was $3.0 million and we believe the current fair market value is
in excess of $5.5 million.
In
April
2005, we engaged Eastdil Realty Company, LLC, to explore opportunities for
the
sale of our Farmingdale, New York shopping center. In October 2005, our Board
of
Directors’ authorized management to sell the shopping center, and on December
21, 2005, we signed a definitive agreement to sell our center to KRC Acquisition
Corp., acting on behalf of a joint venture comprised of Kimco Realty Corporation
and a fund managed by a major investment bank, for approximately $95 million.
The purchaser has deposited into escrow $4.75 million to ensure its obligations
and is seeking approval to assume our existing mortgage loan of approximately
$53.6 million, or will defease the loan. The closing will take place following
purchaser’s obtaining consent of the mortgage lender to its loan assumption,
which could occur as early as May 2006. If the loan is defeased, the transaction
may not close until as late as July 2006. The results of the shopping center
are
included in discontinued operations. We expect to recognize a gain from this
transaction.
Corporate
The
operating loss at corporate was reduced by $1.9 million and $5.5 million
in the
three and six months ended March 31 2006, respectively, as compared to the
same
periods of fiscal 2005, due primarily to the settlement of the shareholder
derivative litigation. We recognized a net reduction in general and
administrative expenses of $0.8 million and $4.8 million in the three and
six
months ended March 31 2006, respectively, from proceeds received as a result
of
the shareholder settlement.
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total
capitalization as of March 31, 2006 and September 30, 2005 was $182.4 million
and $178.8 million, respectively. The six-month change in capitalization
included a $10.2 million net increase in debt resulting from additional
borrowings from our credit facilities, including $6.6 million from the seasonal
line of credit, offset partially by approximately $7.0 million of term debt
repayments. Equity decreased by $3.7 million, reflecting our $10.2 million
net
loss, offset partially by a $6.4 million increase in other comprehensive
income,
primarily from a $3.7 million fair market value increase on an investment
in a
business that completed its initial public offering in March 2006. Our combined
cash and investment balances totaled $84.2 million on March 31, 2006, as
compared to $97.9 million on September 30, 2005, and included restricted
investments of $59.2 million and $64.4 million at March 31, 2006 and September
30, 2005, respectively.
Net
cash
used for operating activities for the six months ended March 31, 2006, was
$23.0
million, and included a $13.8 million increase in net operating assets,
principally related to a $26.9 million increase in inventory, offset partially
by $9.3 million of trading securities liquidated used to fund our operating
requirements.
Net cash
used for operating activities for the six months ended March 31, 2005, was
$24.6
million and included a $28.0 million increase in inventory, offset partially
by
a $22.0 million increase in accounts payable and other accrued
liabilities.
Net
cash
provided by investing activities for the six months ended March 31, 2006
was
$20.1 million, and included $11.2 million of proceeds received from investment
securities and $12.5 million received from the calendar 2005 earn-out associated
with our 2002 disposition of our fasteners business to Alcoa, offset partially
by $4.1 million of capital expenditures. Net cash provided by investing
activities for the six months ended March 31, 2005 was $13.8 million, and
included $12.5 million received from the calendar 2004 earn-out associated
with
our 2002 disposition of our fasteners business to Alcoa, and $7.5 million
of
proceeds received from investment securities, offset partially by $6.5 million
of capital expenditures.
Net
cash
provided by financing activities was $4.9 million for the six months ended
March
31, 2006, which reflected a $5.4 million net increase in debt from additional
borrowings, offset partially by $0.3 million of term loan repayments associated
with our shopping center being classified as a discontinued operation. Net
cash
provided by financing activities was $10.3 million for the six months ended
March 31, 2005, which reflects $9.9 million of net borrowings, offset partially
by $0.6 million received on repayment of shareholder loans.
Our
principal cash requirements include supporting our current operations, general
and administrative expenses, capital expenditures, and the payment of other
liabilities including pension and postretirement benefits, environmental
investigation and remediation costs, and litigation related costs. We expect
that cash on hand, cash generated from the pending sale of our shopping center,
cash available from lines of credit, and proceeds received from dispositions
of
short-term investments, will be adequate to satisfy our cash requirements
during
the next twelve months.
At
March
31, 2006, our subsidiary, Hein Gericke UK had outstanding borrowings of $3.9
million (£2.2 million) on its £5.0 million ($8.7 million) credit facility with
GMAC. The credit facility requires Hein Gericke UK to maintain compliance
with
certain covenants. The most restrictive covenant requires Hein Gericke UK
to
maintain a minimum earnings before interest, taxes, depreciation and
amortization (“EBITDA”) as defined. At March 31, 2006, Hein Gericke UK missed
its EBITDA target by approximately £0.3 million ($0.6 million). Accordingly,
this debt was classified in notes payable and current maturities of long-term
debt on our balance sheet at March 31, 2006. We have held discussions with
GMAC
and anticipate that a waiver of the covenant violation will be granted. If
a
waiver is not granted, the lender may accelerate the term of the loan and
demand
immediate repayment. There is no cross default with any of our other outstanding
debt agreements as a result of the covenant violation.
In
order
to improve our liquidity, on December 21, 2005, we signed a definitive agreement
to sell our Farmingdale, New York, power shopping center, Airport Plaza,
to KRC
Acquisition Corp., acting on behalf of a joint venture comprised of Kimco
Realty
Corporation and a fund managed by a major investment bank, for approximately
$95
million. The purchaser deposited into escrow $4.75 million to ensure its
obligations and is seeking approval to assume our existing mortgage loan
of
approximately $53.8 million, or will defease the loan. The closing will take
place following purchaser’s obtaining consent of the mortgage lender to its loan
assumption, which could occur as early as May 2006. If the loan is defeased,
the
transaction may not close until as late as July 2006. The sale does not include
several other undeveloped parcels of real estate that we own in Farmingdale,
New
York, the largest of which is under contract of sale to the market chain,
Stew
Leonards. We decided to sell the shopping center to enhance our financial
flexibility, allowing us to invest in existing operations or pursue other
opportunities.
On
May 3,
2006, we decided to borrow $30.0 million from GoldenTree Capital Opportunities,
L.P. and GoldenTree Capital Solutions Fund Financing to further improve our
liquidity and provide us with flexible opportunities to:
· |
Invest
in our existing operations
|
· |
Pursue
acquisitions opportunities.
|
· |
Provide
a guarantee for any additional debt incurred by our sports & leisure
segment
|
· |
Repurchase
our outstanding stock.
|
We
expect
that cash on hand, which includes cash proceeds received from the stockholder
derivative litigation and the Alcoa earn-out, cash available from lines of
credit, $30.0 million of proceeds received from a new credit agreement at
Corporate, and proceeds received from dispositions of short-term investments
and
our shopping center, will be adequate to satisfy our cash requirements during
the next twelve months.
In
the
event that our cash needs are substantially higher than projected, particularly
during our seasonal trough and prior to the completion of the sale of our
shopping center, we will take additional actions to generate the required
cash.
These actions may include one or any combination of the following:
· |
Liquidating
investments and other non-core assets.
|
· |
Eliminating,
reducing, or delaying all non-essential services provided by outside
parties, including consultants.
|
· |
Significantly
reducing our corporate overhead expenses and the overhead expense
of our
subsidiaries.
|
· |
Delaying
purchases of inventory and capital
expenditures.
|
However,
if we need to implement one or more of these actions, there nevertheless
remains
some uncertainty that we will actually receive a sufficient amount of cash
in
time to meet all of our needs during the seasonal trough. Even if sufficient
cash is realized, any or all of these actions may have adverse affects on
our
operating results and/or businesses.
We
may
also consider raising cash to meet subsequent needs of our operations by
issuing
additional stock or debt, entering into partnership arrangements, liquidating
assets or other means. Should the sale of our shopping center be delayed
or not
occur, we may be forced to liquidate other non-essential assets, and
significantly reduce overhead expenses.
The
costs
of being a small to mid-sized public company have increased substantially
with
the introduction and implementation of controls and procedures mandated by
the
Sarbanes Oxley Act of 2002. Audit fees and audit related fees have significantly
increased over the past two years. Our increased costs also include the effects
of acquisitions and additional costs related to compliance with various
financing agreements. The costs to comply with Section 404 of the Sarbanes
Oxley
Act of 2002 alone substantially increased our audit and related costs to
approximately $3.1 million in fiscal 2005, as compared to only $1.6 million
in
fiscal 2004. This increase is significant for a company of our size. However,
on
March
31, 2006, our market capitalization was below the $50.0 million threshold
and
accordingly, on September 30, 2006, we will cease to be deemed an accelerated
filer in accordance with the United States Securities and Exchange Commission
regulations and will not be required to comply
with Section 404 of the Sarbanes Oxley Act of 2002 in fiscal 2006. We will
likely choose not to comply with some or all of the provisions of Section
404,
and specifically do not plan to have an audit of our internal controls and,
accordingly, we expect a substantial reduction in our audit fees in fiscal
2006.
We are also considering additional options for reducing our public costs
in the
coming year, including opportunities to take our company private, or “going
dark”.
In
February 2005, we announced our intention to purchase up to 500,000 shares
of
our outstanding Class A Common Stock. Through March 31, 2006, we acquired
61,800
shares at an average price of $3.12 per share, and have not purchased any
shares
since May 11, 2005.
Off
Balance Sheet Items
On
March
31, 2006, approximately $1.6 million of bank loans received by retail shop
partners in the sports & leisure segment were guaranteed by our subsidiaries
and are not reflected on our balance sheet because these loans have not been
assumed by us. These guarantees were not assumed by us when we acquired the
sports & leisure business. We have guaranteed loans to shop partners for the
purchase of store fittings in certain locations where we sell our products.
The
loans are secured by the store fittings purchased to outfit our retail
stores.
Contractual
and Other Obligations
At
March
31, 2006, we had contractual commitments to repay long-term debt, including
capital lease obligations. Payments due under these long-term obligations
for
the fiscal years ending September 30 are as follows: $6.2 million for 2006;
$25.6 million for 2007; $8.4 million for 2008; $15.2 million for 2009; and
$1.0
million for 2010.
We
have
entered into standby letter of credit arrangements with insurance companies
and
others, issued primarily to guarantee our future performance of contracts.
At
March 31, 2006, we had contingent liabilities of $2.0 million on commitments
related to outstanding letters of credit.
Our
operations enter into purchase commitments in the normal course of business.
Based
upon the Employee Retirement Income Security Act of 1974 and our actuary’s
current assumptions and projections, we would not have to provide additional
cash contributions to the largest pension plan to be required until 2009.
These
current actuarial projections indicate contribution requirements of $1.2
million
in 2009, $2.0 million in 2010 and a total of $11.4 million in 2011 through
2015.
However, three pension reform bills are currently being considered in the
United
States Congress. If any one of these bills were to be enacted into law, as
currently proposed, the timing and amount of our annual contribution
requirements could change materially. While none of these bills may pass,
our
actuaries have projected the effect of the contribution requirements, by
fiscal
year, to be as follows:
(In
thousands)
Proposal:
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Law
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,180
|
|
$
|
1,970
|
|
$
|
2,070
|
|
$
|
2,170
|
|
Bush
Bill
|
|
|
13,543
|
|
|
13,096
|
|
|
13,228
|
|
|
13,347
|
|
|
13,473
|
|
|
2,562
|
|
Senate
Bill
|
|
|
8,773
|
|
|
9,351
|
|
|
10,356
|
|
|
11,736
|
|
|
11,881
|
|
|
12,008
|
|
House
Bill
|
|
|
13,381
|
|
|
15,701
|
|
|
19,421
|
|
|
22,792
|
|
|
29,892
|
|
|
-
|
|
Many
other companies are also materially affected by the proposed legislation,
some
of whom may, based upon their business or industry segment, or otherwise,
be
permitted to delay or stretch out the funding requirements of their unfunded
pension liability over a longer period of time. We are attempting to determine
if similar treatment will be available to us.
Under
current law, we are required to make annual cash contributions of approximately
$0.3 million to fund a small pension plan.
In
addition, we have $25.7 million classified as other long-term liabilities
at
March 31, 2006, including $13.2 million due to purchase the remaining 7.5%
interest in PoloExpress in April 2008. The remaining $12.5 million of other
long-term liabilities include environmental and other liabilities, which
do not
have specific payment terms or other similar contractual arrangements.
Currently,
we are not being audited by the IRS for any years. However, we are currently
being audited in Germany for 1997 through 2002. Our tax liability was $42.2
million at March 31, 2006. However, based on tax planning strategies, we
do not
anticipate having to satisfy the tax liability over the short-term.
Should
any of these liabilities become immediately due, we would be obligated to
obtain
financing, raise capital, and/or liquidate assets to satisfy our
obligations.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In
March
2005, The Financial Accounting Standards Board published FASB Interpretation
No.
47,“Accounting
for Conditional Asset Retirement Obligation”,
to
clarify that an entity must recognize a liability for the fair value of a
conditional asset retirement obligation when incurred if the liability's
fair
value can be reasonably estimated. FIN 47 also defines when an entity would
have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. FIN 47 is intended to provide a more consistent
recognition of liabilities relating to asset retirement obligations, additional
information about expected future cash outflows associated with those
obligations, and additional information about investments in long-lived assets,
because it recognizes additional asset retirement costs as part of the assets'
carrying amounts. FIN 47 is effective no later than the end of our fiscal
year
ending September 30, 2006. We are currently assessing the possible impact,
if
any, of implementing this standard.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
We
are
exposed to certain market risks as part of our ongoing business operations,
including risks from changes in interest rates and foreign currency exchange
rates that could impact our financial condition, results of operations and
cash
flows. We manage our exposure to these and other market risks through regular
operating and financing activities. We may use derivative financial instruments
on a limited basis as additional risk management tools and not for speculative
investment purposes.
Interest
Rate Risk:
In May
2004, we issued a floating rate note with a principal amount of €25.0 million.
Embedded within the promissory note agreement is an interest rate cap protecting
one half of the €25.0 million borrowed. The embedded interest rate cap limits to
6%, the 3-month EURIBOR interest rate that we must pay on the promissory
note.
We paid approximately $0.1 million to purchase the interest rate cap. In
accordance with 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. At March 31, 2006,
the
fair value of this instrument is nominal.
Foreign
Currency Risk: We
are
exposed to foreign currency risks that arise from normal business operations.
These risks include the translation of local currency balances of our foreign
subsidiaries, intercompany loans with foreign subsidiaries and transactions
denominated in foreign currencies. Our objective is to minimize our exposure
to
these risks through our normal operating activities and, if we determine
appropriate, we may consider utilizing foreign currency forward contracts
in the
future. For the six months ended March 31, 2006, we estimate that approximately
74% of our total revenues were derived from customers outside of the United
States, with approximately 63% of our total revenues denominated in currencies
other than the United States dollar. We estimate that revenue and operating
expenses for the six months ended March 31, 2006 were lower by $6.5 million
and $4.0 million, respectively, as a result of changes in exchange rates
as
compared to the six months ended March 31, 2005. At March 31, 2006, we had
$32.5 million of working capital denominated in foreign currencies. At
March 31, 2006, we had no outstanding foreign currency forward contracts.
The
following table shows the approximate split of these foreign currency exposures
by principal currency at March 31, 2006:
|
|
|
|
|
|
|
|
Total
|
|
|
|
Euro
|
|
UK
Pound
|
|
Swiss
Franc
|
|
Exposure
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
78%
|
|
|
21%
|
|
|
1%
|
|
|
100%
|
|
Operating
Expenses
|
|
|
81%
|
|
|
18%
|
|
|
1%
|
|
|
100%
|
|
Working
Capital
|
|
|
67%
|
|
|
30%
|
|
|
3%
|
|
|
100%
|
|
A
hypothetical 10% strengthening of the dollar during the six months ended
March
31, 2006 versus the foreign currencies in which we have exposure would have
reduced revenue by approximately $6.5 million and reduced operating
expenses by approximately $4.0 million, resulting in a $1.0 million
improvement in our operating loss as compared to what was actually reported.
Working capital at March 31, 2006, would have been approximately
$3.0 million lower than actually reported, if we had used this hypothetical
stronger United States dollar. These numbers were estimated using the different
hypothetical rate for the entire year and applying it evenly to all non United
States dollar transactions.
Inflation:
We
believe that inflation has not had a material impact on our results of
operations for the six months ended March 31, 2006. However, we cannot assure
you that future inflation would not have an adverse impact on our operating
results and financial condition.
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 ineffective at ensuring that the required
information was disclosed on a timely basis in our reports filed under the
Exchange Act, due
to
the two material weaknesses noted in our annual report at September 30,
2005,
.
Changes
in Internal Controls
Our
Chief
Executive Officer and our Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures as of the end of
the
period covered by this quarterly report, which we refer to as the evaluation
date. We aim to 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. Our disclosure controls and procedures were not effective at September
30, 2005, due to two material weaknesses noted in our annual report. We
implemented policies and procedures that will document adequately the review
and
approval process of journal entries at our two subsidiaries which were found
to
have a material weakness as of September 30, 2005. Additionally, we have
enhanced our procedures relating to accounting for complex and non-routine
transactions in accordance with U.S. generally accepted accounting principles,
to reduce the likelihood that a misstatement of our annual or interim financial
statements that is more than inconsequential could occur. While we believe
we
may have sufficiently corrected these two material weaknesses, this
determination can only be substantiated with the passage of time. There
were no other significant changes to our internal controls or in other factors
that could significantly affect our internal controls during the quarter
ended
March 31, 2006.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
The
information required to be disclosed under this Item is set forth in Footnote
7
(Contingencies) of the Consolidated Financial Statements (Unaudited) included
in
this Report.
Item
1A. Risk Factors
Certain
statements in this filing 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 quarterly
report.
These risks include:
· |
Our
ability to finance and successfully operate our retail
businesses;
|
· |
Our
ability to accurately predict demand for our
products;
|
· |
Our
ability to receive timely deliveries from vendors;
|
· |
Our
ability to raise cash to meet seasonal demands;
|
· |
Our
dependence on the retail and aerospace industries;
|
· |
Our
ability to maintain customer satisfaction and deliver products of
quality;
|
· |
Our
ability to properly assess our
competition;
|
· |
Our
ability to improve our operations to profitability
status;
|
· |
Our
ability to liquidate non-core assets to meet cash
needs;
|
· |
Our
ability to attract and retain highly qualified executive management;
|
· |
Our
ability to achieve and execute internal business plans;
|
If
one or
more of these and other 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 quarterly report, 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 filing, even if new information, future events
or
other circumstances have made them incorrect or misleading.
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
on December 3, 2007.
Item
4. Submission of Matters to a Vote of Security Holders
The
Annual Meeting of our Stockholders was held on March 8, 2006. At the Annual
Meeting, one matter of business was voted upon - the election of five directors
for the ensuing year. The following table provides the results of the
stockholder voting, expressed in number of votes, on the proposal to elect
five
directors:
Directors:
|
Votes
For
|
Votes
Withheld
|
Robert
E. Edwards
|
42,543,089
|
4,179,518
|
Steven
L. Gerard
|
42,487,383
|
4,235,224
|
Daniel
Lebard
|
42,571,321
|
4,151,286
|
Eric
I. Steiner
|
42,720,407
|
4,002,200
|
Jeffrey
J. Steiner
|
42,701,057
|
4,021,550
|
Item
5. Other Information
The
Board
of Directors has established a Governance and Nominating Committee consisting
of
non-employee independent directors, which, among other functions, identifies
individuals qualified to become board members, and selects, or recommends
that
the Board select, the director nominees for the next annual meeting of
shareholders. As part of its director selection process, the Committee
considers recommendations from many sources, including: management, other
board members and the Chairman. The Committee will also consider nominees
suggested by stockholders of the Company. Stockholders wishing to nominate
a
candidate for director may do so by sending the candidate’s name, biographical
information and qualifications to the Chairman of the Governance and Nominating
Committee c/o the Corporate Secretary, The Fairchild Corporation, 1750 Tysons
Blvd., Suite 1400, McLean VA 22102.
In
identifying candidates for membership on the Board of Directors, the Committee
will take into account all factors it considers appropriate, which may include
(a) ensuring that the Board of Directors, as a whole, is diverse and consists
of
individuals with various and relevant career experience, relevant technical
skills, industry knowledge and experience, financial expertise, including
expertise that could qualify a director as a “financial expert,” as that term is
defined by the rules of the SEC, local or community ties, (b) minimum individual
qualifications, including strength of character, mature judgment, familiarity
with the Company's business and industry, independence of thought and an
ability
to work collegially, and (c) appreciation of contemporary forms of governance,
and the current regulatory environment. The
Committee also may consider the extent to which the candidate would fill
a
present need on the Board of Directors.
Item
6. Exhibits
*31
Certifications required by Section 302 of the Sarbanes-Oxley Act.
*32
Certifications required by Section 906 of the Sarbanes-Oxley Act.
*
Filed
herewith.
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/
JAMES G. FOX
James
G.
Fox
Chief
Financial Officer and
Senior
Vice President, Finance
Date: May
8,
2006