form10fy06kv2.htm
UNITED
STATES
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SECURITIES
AND EXCHANGE COMMISSION
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WASHINGTON,
D.C. 20549
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FORM
10-K
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Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
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For
the Year Ended September 30, 2006
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Commission
File Number 1-6560
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THE
FAIRCHILD CORPORATION
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(Exact
name of Registrant as specified in its charter)
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Delaware
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34-0728587
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification No.) |
Incorporation
or organization)
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1750
Tysons Boulevard, Suite 1400, McLean, VA 22102
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(Address
of principal executive offices)
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(703)
478-5800
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(Registrant’s
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of exchange on which registered
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Class
A Common Stock, par value $.10 per share
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(b) of the Act:
None
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Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. [ ] Yes [X]
No.
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. [ ] Yes [X]
No.
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past ninety (90) days [ ] Yes [X ]
No.
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K [ ].
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule
12b-2 of the Act) [ ] Yes [X] No
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act) [ ] Yes [X]
No
On
March
31, 2006, the aggregate market value of the common shares held by nonaffiliates
of the Registrant (based upon the closing price of these shares on the New
York
Stock Exchange) was approximately $46.7 million (excluding shares deemed
beneficially owned by affiliates of the Registrant under Commission
Rules).
On
June
30, 2007, the number of shares outstanding of each of the Registrant's classes
of common stock were as follows:
Class
A Common Stock, $0.10 Par Value
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22,604,835
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Class
B Common Stock, $0.10 Par Value
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2,621,338
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THE
FAIRCHILD CORPORATION
INDEX
TO
ANNUAL
REPORT ON FORM 10-K
FOR
FISCAL YEAR ENDED SEPTEMBER 30, 2006
PART
I
All
references in this Annual Report on Form 10-K to the terms ‘‘we,’’ ‘‘our,’’
‘‘us,’’ the ‘‘Company’’ and ‘‘Fairchild’’ refer to The Fairchild Corporation and
its subsidiaries. All references to ‘‘fiscal’’ in connection with a year shall
mean the 12 months ended September 30, 2006, September 30, 2005, or September
30, 2004, respectively.
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, 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. A detailed discussion of these and other risks and
uncertainties that could cause actual results and events to differ materially
from such forward-looking statements is included in the section entitled “Risk
Factors” (refer to Item 1A). 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.
This
report contains our consolidated financial statements and related notes for
fiscal 2006, as well as a restatement of our previously issued consolidated
financial statements for fiscal 2005 and 2004, and for the quarters ended
June 30, 2006, March 31, 2006, December 31, 2005, June 30, 2005, March
31, 2005, and December 31, 2004. Since we announced our restatement in January
2007, we have devoted substantial efforts towards the completion of our
restatement. For the purposes of the consolidated financial
statements, all restatement adjustments relating to periods prior to
October 1, 2003 have been presented as adjustments to retained earnings as
of September 30, 2003. We have also included under Item 6,
“Selected Financial Data”, restated financial information as of and for the
three month transition period ended September 30, 2003 and as of and for the
fiscal years ended June 30, 2003 and 2002.
During
the course of our fiscal 2006 audit, the Audit Committee of our Board of
Directors concluded in January 2007 that our previously filed interim and
audited consolidated financial statements should not be relied upon since
they
were prepared applying accounting practices in accounting for income taxes
that
did not comply with generally accepted accounting principles (“GAAP”) and,
consequently, we would restate our consolidated financial statements. During
the
course of the Company’s review of its historical financial statements,
additional errors were identified. The consolidated financial
statements for fiscal 2005 and 2004 included in this Annual Report on
Form 10-K include restatement adjustments that we have categorized into the
following three areas: our accounting for income taxes; our accounting for
commitments and contingencies; and our accounting for long-term
investments. See Note 2 of our consolidated financial statements
included in this Form 10-K for additional information regarding the restatement
of our consolidated financial statements for the periods noted
below.
The
overall impact of our restatement was a total increase in retained earnings
of
$2.7 million through June 30, 2006. This amount
includes:
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A
$0.6 million increase in earnings for periods prior to October 1,
2003 (as
reflected in beginning retained earnings as of October 1,
2003);
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A
$1.1 million decrease in earnings for fiscal
2004;
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A
$1.9 million decrease in net loss for fiscal 2005;
and
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·
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A
$1.3 million decrease in net loss for the nine months ended June
30,
2006.
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As
a
result of Fairchild’s failure to file on a timely basis its Quarterly Report on
Form 10-Q for the quarter ended March 31, 2007, Fairchild is no longer eligible
to use form S-3 to register its securities with the SEC until all required
reports under the Securities Exchange Act of 1934 have been timely filed for
the
12 months prior to the filing of the registration statement for those
securities.
General
The
Fairchild Corporation was incorporated in October 1969, under the laws of the
State of Delaware. Our business consists of three segments: PoloExpress; Hein
Gericke; and Aerospace. Both our PoloExpress and Hein Gericke
segments are engaged in the design and retail sale of motorcycle apparel,
protective clothing, helmets, and technical accessories for motorcyclists in
Europe. In addition, Hein Gericke is engaged in the design and distribution
of
motorcycle apparel in the United States. Our Aerospace segment stocks
a wide variety of aircraft parts and distributes them to commercial airlines
and
air cargo carriers, fixed-base operators, corporate aircraft operators, and
other aerospace companies worldwide. Additionally, our Aerospace segment
performs component repair and overhaul services. In fiscal 2006, we
operated a Real Estate segment, which owned and leased a shopping center located
in Farmingdale, New York, and owned and rented two improved parcels located
in
Southern California. During fiscal 2006, we sold the shopping center
and reclassified the remaining portions of our Real Estate segment into our
corporate and other segment. Also during fiscal 2006, we split our
previously reported Sports & Leisure segment into two separate segments,
PoloExpress and Hein Gericke, as management began reviewing the operating
results of each and allocating resources to each separately in
2006.
On
July 6, 2006, we completed the sale of our Farmingdale, New York, shopping
center, Airport Plaza, to an affiliate of Kimco Realty
Corporation. We received net proceeds of approximately $40.7 million
from the sale. As a condition to closing, the buyer assumed our existing
mortgage loan on Airport Plaza that had an outstanding principal balance of
approximately $53.5 million on the closing date.
On
November 1, 2003, we acquired substantially all of the worldwide operations
of
Hein Gericke, PoloExpress, and Intersport Fashions West, Inc., the predecessor
company to Fairchild Sports USA, (“Fairchild Sports USA”) collectively now known
as Fairchild Sports. The Hein Gericke operations, including Fairchild Sports
USA, were acquired out of the German-equivalent of bankruptcy, while the
PoloExpress operations were financially stable.
On
December 3, 2002, we completed the sale of our fastener business to Alcoa Inc.
for approximately $657.0 million in cash and the assumption of certain
liabilities. In addition, we earned additional proceeds of $12.5 million in
each
of fiscal 2004, 2005, and 2006 as the number of commercial aircraft delivered
by
Boeing and Airbus exceeded specified annual levels. We received the
final $12.5 million payment in February 2007.
Financial
Information about Business Segments
Our
business segment information is incorporated herein by reference from Note
16 of
our Consolidated Financial Statements included in Item 8, “Financial Statements
and Supplementary Data”.
Narrative
Description of Business Segments
PoloExpress
Segment
PoloExpress
is engaged in the design and retail sale of motorcycle apparel, protective
clothing, helmets, and technical accessories for motorcyclists in
Europe. As of September 30, 2006, PoloExpress operated 91 retail
shops in Germany and two shops in Switzerland. PoloExpress has
seasonal fluctuations in its business, with a historic trend of a higher volume
of sales and profits during the months of March through
September. Our PoloExpress segment represented approximately 36% of
our consolidated revenues in fiscal 2006.
Products
Products
sold by PoloExpress include motorcycle apparel, helmets, boots, protective
clothing, and technical accessories for motorcycle enthusiasts. The
majority of these products are sold at retail stores leased by us and operated
primarily by shop partners who sell our products in accordance with agreements
with us permitting the shop partner to operate and maintain an individual
store. Shop partners are paid a commission based on the performance
of their store. All inventory displayed and stocked in the stores is
owned by us and, until sold, remains our property. Less than 5% of
PoloExpress stores leased by us are operated using our own
employees. Mail order and internet sales represented 6.8% of
PoloExpress sales for fiscal 2006. Although the PoloExpress retail
stores sell predominantly Polo brand products, these retail stores also stock
and sell products that we purchase from other manufacturers. The PoloExpress
products are manufactured by third parties located principally in Asia, and
are
shipped to our leased warehouse, where they are temporarily stored until shipped
to the individual retail stores for sale. The main warehouse for
PoloExpress is located in Düsseldorf, Germany.
Sales
and Markets
PoloExpress
mainly sells its products in Germany and Switzerland through its retail
stores. Approximately 96% of PoloExpress retail sales are to
customers in Germany and 4% are to customers in Switzerland. Since
the vast majority of sales are through these retail stores, we have a very
large
number of customers. Mainly due to the prevailing weather in Western
Europe, our business is very seasonal with a historic trend of a higher volume
of sales and profits during the months of March through September.
Competition
PoloExpress
faces competition from other European retail sellers of motorcycle equipment
and
clothing, including Hein Gericke, Harley-Davidson, Detlev Louis, Dianese, and
many independent shop owners. There is a large market for motorcycle
enthusiasts in Europe and competition is tight among the
retailers. We believe that a key market position is held by
PoloExpress in Germany.
Hein
Gericke Segment
Hein
Gericke, including Fairchild Sports USA, is engaged in the design and retail
sale of motorcycle apparel, protective clothing, helmets, and technical
accessories for motorcyclists in Europe and the design and distribution of
such
apparel in the United States. As of September 30, 2006, Hein Gericke
operated 145 retail shops in Austria, Belgium, France, Germany, Italy,
Luxembourg, the Netherlands, Turkey, and the United
Kingdom. Fairchild Sports USA, located in Tustin, California, is a
designer and distributor of motorcycle apparel, and other protective clothing,
under several labels, including Hein Gericke. Hein Gericke has seasonal
fluctuations in its business, with a historic trend of a higher volume of sales
and profits during the months of March through September. Our Hein
Gericke segment represented approximately 38% of our consolidated revenues
in
fiscal 2006.
Products
Products
of Hein Gericke include motorcycle apparel, helmets, boots, protective clothing,
and technical accessories for motorcycle enthusiasts. The majority of
these products are sold at retail stores leased by us and operated primarily
by
shop partners who sell our products in accordance with agreements with us
permitting the shop partner to operate and maintain an individual
store. Shop partners are paid a commission based on the performance
of their store. All inventory displayed and stocked in the stores is
owned by us and, until sold, remains our property. Approximately 30%
of stores leased by us are operated using our own employees. Mail
order and internet sales represented 1.0% of Hein Gericke sales in fiscal
2006. Although the Hein Gericke retail stores sell predominantly Hein
Gericke brand products, these retail stores stock and sell products that we
purchase from other manufacturers. The Hein Gericke products are manufactured
by
third parties located principally in Asia, and are shipped to our leased
warehouse, where they are temporarily stored until shipped to the individual
retail stores for sale. The main warehouse for Hein Gericke is
located in Düsseldorf, Germany.
Fairchild
Sports USA is a designer and distributor of motorcycle apparel under several
labels, including Hein Gericke. In addition, Fairchild Sports USA designs and
contracts with manufacturers for the production of apparel under private labels
for third parties, including Honda and Yamaha as well as for Harley-Davidson
dealers under a licensing arrangement with Harley-Davidson.
Sales
and Markets
Hein
Gericke mainly sells its products in Europe through its retail stores in
Austria, Belgium, France, Germany, Italy, Luxembourg, the Netherlands, Turkey,
and the United Kingdom. Approximately 46% of Hein Gericke’s retail
sales are to customers in Germany and 37% are to customers in the United
Kingdom. Since the vast majority of sales are through these retail
stores, we have a very large number of customers. Mainly due to the
prevailing weather in Western Europe, our business is very seasonal with a
historic trend of a higher volume of sales and profits during the months of
March through September.
Fairchild
Sports USA is a designer and distributor in the United States, selling to
companies such as Honda, Yamaha, Harley-Davidson, Harley-Davidson dealers,
and
other independent dealers.
Overall,
foreign sales (revenues generated outside of the United States) and domestic
sales represented 92% and 8%, respectively, of the revenues generated by our
Hein Gericke segment.
Competition
Hein
Gericke faces competition from other European retail sellers of motorcycle
equipment and clothing, including PoloExpress, Harley-Davidson, Detlev Louis,
Dianese, and several independent shop owners. There is a large market
for motorcycle enthusiasts in Europe and competition is tight among the
retailers. We believe that key market positions are held by Hein
Gericke in Europe.
Aerospace
Segment
Our
Aerospace segment consists of aerospace operations that are conducted through
our subsidiary Banner Aerospace Holding Company I, Inc. We offer a
wide variety of aircraft parts and component repair and overhaul
services. The aircraft parts which we distribute are either purchased
on the open market or acquired from original equipment manufacturers (“OEMs”) as
an authorized distributor. Our Aerospace segment represented
approximately 26% of our consolidated revenues in fiscal 2006.
Products
Products
of the aerospace operations include rotable parts, such as flight data
recorders, radar and navigation systems, instruments, hydraulic and electrical
components, space components, and certain defense related items.
Rotable
parts are sometimes purchased as new parts, but are generally purchased in
the
aftermarket and are then overhauled by us or for us by outside contractors,
including OEMs or FAA-licensed facilities. Rotables are sold in a
variety of conditions such as new, overhauled, serviceable, and “as
is”. Rotables may also be exchanged instead of sold. An
exchange occurs when an item in inventory is exchanged for a customer’s part and
the customer is charged an exchange fee.
An
extensive inventory of products and a quick response time are essential in
providing support to our customers. Another key factor in selling to
our customers is our ability to maintain a system that traces a part back to
the
manufacturer or repair facility. We also offer immediate shipment of
parts in aircraft-on-ground situations.
Through
our FAA-licensed repair station, we provide a number of services such as
component repair and overhaul services. Component repair and overhaul
capabilities include pressurization, instrumentation, avionics, aircraft
accessories, and airframe components.
Sales
and Markets
Our
aerospace operations sell products in the United States and abroad to original
equipment manufacturers, commercial airlines, corporate aircraft operators,
fixed-base operators, air cargo carriers, general aviation suppliers, and the
military. Our aerospace operations conduct marketing efforts through
direct sales forces, outside representatives and, for some product lines,
overseas sales offices. Sales in the aviation aftermarket depend on
price, service, quality, and reputation.
Our
Aerospace segment's business does not experience significant seasonal
fluctuations nor depend on a single customer. Approximately 52% of
our aerospace sales are to domestic purchasers, some of which may represent
offshore users.
Competition
Our
aerospace operation competes with: AAR Corp; Volvo Aero Services; Duncan
Aviation; Stevens Aviation; OEMs such as Honeywell, Rockwell Collins, Raytheon,
and Litton; other repair and overhaul organizations; and many smaller
companies.
We
face intense competition in the aerospace industry, as we are one of many
companies competing for business. Quality, performance, service, and price
are
generally the prime competitive factors in the aerospace industry. We
seek to maintain a higher level of quality and performance over our
competitors.
Corporate
and Other Segment
Our
corporate and other segment owns and rents two improved parcels located in
Southern California and owns several other parcels of non-core real estate,
including three parcels located in Farmingdale, New York. Revenues generated
by
the corporate and other segment represented less than 1% of our total
revenues.
Foreign
Operations
Our
operations are located throughout the world. Inter-area sales are not
significant to the total revenue of any geographic area. Export sales
are made by U.S. businesses to customers in non-U.S. countries, whereas foreign
sales are made by our non-U.S. subsidiaries. For our sales results by
geographic area and export sales, see Note 17 of our Consolidated Financial
Statements included in Part II, Item 8, “Financial Statements and Supplementary
Data”.
Backlog
of Orders
Substantially
all of the products we sell are provided to our customers immediately. Backlog
is not an important component to our overall business.
Suppliers
In
fiscal 2006, our PoloExpress and Hein Gericke segments purchased approximately
17% and 11%, respectively, of their products from Kido Industrial Co, Ltd.
In
fiscal 2006, our Aerospace segment purchased approximately 12% of its products
from Universal Avionics Systems. We are not materially dependent upon any other
single supplier, but we are dependent upon a wide range of subcontractors,
vendors, and suppliers of materials to meet our commitments to our customers.
From time to time, we enter into exclusive supply contracts in return for
logistics and price advantages. We do not believe that any one of these
exclusive contracts would impair our operations if a supplier failed to
perform.
Research
and Patents
We
own patents relating to the design of certain of our products and have licenses
of technology covered by the patents of other companies. We do not believe
that
any of our business segments are dependent upon any single patent.
Personnel
As
of September 30, 2006, we had approximately 590
employees. Approximately 210 of these were based in the United
States, and 380 were based in Europe. None of our employees were covered by
collective bargaining agreements. Overall, we believe that relations with our
employees are good.
Environmental
Matters
A
discussion of our environmental matters is included in Note 15, “Contingencies”,
to our Consolidated Financial Statements, included in Part II, Item 8,
“Financial Statements and Supplementary Data” and is incorporated herein by
reference.
Available
Information
Our
Internet address is www.fairchild.com. We make available free
of charge, on our Internet website, our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the SEC.
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Our
operations are primarily dependent upon the retail and aerospace
industries. Our operations may be affected adversely
by general economic conditions and events which result in reduced
customer
spending in the markets served by our products in the retail and
aerospace
industries. Any downturn in either or both industries could materially
and
adversely affect the overall financial condition of our
company.
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·
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Our
company is highly leveraged. Our ability to access additional
capital or liquidate non-core assets may be limited and require
significant lead time. If we are able to raise additional capital,
interest rates or other terms may be unfavorable and adversely
affect our
financial condition or results of operations. As such, our cash
requirements are dependent upon our ability to achieve and execute
internal business plans,
including:
|
o
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Our
ability to accurately predict demand for our
products;
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o
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Our
ability to receive timely deliveries from
suppliers;
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o
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Our
ability to raise cash to meet seasonal and other
demands;
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o
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Our
ability to maintain customer satisfaction, attract customers to our
stores, and deliver products of
quality;
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o
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Our
ability to properly assess our competition;
and
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o
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Our
ability to improve our operations to profitability
status.
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An
adverse assessment in our prediction of our cash requirements and execution
of
internal business plans could materially and adversely affect the overall
financial condition of our company.
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Foreign
exchange rate risks. We purchase and sell a significant
amount of our products internationally. In most markets sales are
made in
the foreign country’s local currency. Additionally, a significant
amount of purchases are made in currencies other than the foreign
country’s local currency. We do not place a significant
reliance on the use of derivative financial instruments to attempt
to
manage risks associated with foreign currency exchange rates.
Accordingly, there can be no assurance that in the future we will
not have
a material adverse effect on our business and results of operations
from
exposure to changes in foreign exchange
rates.
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·
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Interest
rate risk. We are subject to market risk from exposure to changes
in interest rates based on our variable rate financing. Increases
in
interest rates could have a negative impact on our available cash
and our
results of operations and adversely affect the overall financial
condition
of our company.
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·
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Government
regulation. We must comply with governmental laws and regulations
that are subject to change and involve significant
costs. Our sales and operations in areas outside the
United States may be subject to foreign laws, regulations and the
legal
systems of foreign courts or tribunals. These laws and policies
governing operations of foreign-based companies could result in increased
costs or restrictions on the ability of the Company to sell its products
in certain countries. Our international sales operations may also be
adversely affected by United States laws affecting foreign trade
and
taxation.
|
Our
domestic sales and operations are subject to governmental policies and
regulatory actions of agencies of the United States Government, including the
Environmental Protection Agency, Securities and Exchange Commission (“SEC”),
National Highway Traffic Safety Administration, Department of Labor, Federal
Aviation Administration, and Federal Trade Commission. In addition, we are
subject to policies and actions of the New York Stock Exchange (“NYSE”) and laws
and actions of state legislatures and other local regulators. Changes in
regulations or the imposition of additional regulations could have a material
adverse effect on our business and results of our operations.
We
are
subject to numerous local government laws and regulations, including those
relating to the operation of our retail stores. We are also subject to laws
governing our relationship with employees, including minimum wage requirements,
laws and regulations relating to overtime, working and safety conditions, and
citizenship requirements. Material increases in the cost of compliance with
any
applicable law or regulation and similar matters could materially and adversely
affect the overall financial condition of our company.
In
addition, our competition may not be subject to the requirements of the SEC
or
the NYSE rules. As a result, we may be required to expend funds on
financial and other controls and disclose certain information that could put
us
at a competitive disadvantage to our principal competitors.
·
|
Economic,
political, and other risks associated with business activities in
foreign
countries. Because we plan to continue using foreign
manufacturers, our operating results could be harmed by economic,
political, regulatory and other factors in foreign
countries. We currently use suppliers in Asia to
manufacture a significant amount of the products we sell, and we
plan to
continue using foreign suppliers to manufacture these products. These
international operations are subject to inherent risks, which may
adversely affect us, including:
|
o
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political
and economic instability;
|
o
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high
levels of inflation, historically the case in a number of countries
in
Asia;
|
o
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burdens
and costs of compliance with a variety of foreign
laws;
|
o
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changes
in tariff rates or other trade and monetary
policies.
|
·
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Our
operations are dependent upon attracting and retaining skilled
employees. Our future success depends on our
continuing ability to identify, hire, develop, motivate and retain
skilled
personnel in all areas of our organization. The current and future
total compensation arrangements, which include benefits and cash
bonuses,
may not be successful in attracting new employees and retaining and
motivating our existing employees. If we do not succeed in attracting
personnel or retaining and motivating existing personnel, we may
be unable
to develop and distribute products and services or grow effectively.
The
success of one or more of our operations is dependent on our ability
to
satisfy top managers and core employees, who may negotiate as a
group.
|
·
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We
have a number of worldwide competitors of varying sizes some of which
have
greater financial resources than we do. Several of our
competitors are more diversified than we are, and/or they may have
greater
financial resources than we do. Also, if price becomes a more
important competitive factor for our customers, we may have a competitive
disadvantage. Failure to adequately address and quickly respond to
these competitive pressures could have a material adverse effect
on our
business and results of operations.
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·
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Our
marketing strategy of associating our retail products with a motorcycling
lifestyle may not be successful with future customers. We
have had success in marketing our products to motorcyclists. The
lifestyle of motorcyclists is now more typically associated with
a
customer base comprised of individuals who are, on average, in their
mid-forties. To sustain long-term growth, the motorcycle industry
must continue to be successful in promoting motorcycling to customers
new
to the sport of motorcycling including women and younger
riders. Accordingly, we must be successful providing products
that satisfy the latest fashion desires and protection requirements
of our
customers. Failure to adequately address and quickly respond to our
customers needs could have a material adverse effect on our business
and
results of operations.
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·
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Our
success in our retail operations depends upon the continued strength
of
the Hein Gericke and PoloExpress brands. We believe that our Hein
Gericke and PoloExpress brands have significantly contributed to
the
success of our business and that maintaining and enhancing the brands
is
critical to maintaining and expanding our customer base. Failure to
protect the brands from infringers or to grow the value of our Hein
Gericke and PoloExpress brands could have a material adverse effect
on our
business and results of operations.
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·
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Our
future growth will suffer if we do not achieve sufficient market
acceptance of our products to compete effectively. Our
success depends, in part, on our ability to gain acceptance of
our current
and future products by a large number of customers. Achieving
market-
based acceptance for our products will require marketing efforts
and the
expenditure of financial and other resources to create product
awareness
and demand by potential customers. We may be unable to offer
products
consistently, or at all, that compete effectively with products
of others
on the basis of price or performance. Failure to achieve broad
acceptance
of our products by potential customers and to compete effectively
could
have a material adverse effect on our business and results of
operations.
|
·
|
Quarterly
fluctuations. Quarterly results of our PoloExpress and Hein
Gericke segments’ operations have historically fluctuated as a result of
retail customers purchasing patterns, with the highest quarters in
terms
of sales and profitability being our third and fourth quarters. Any
economic downturn occurring in our third and fourth quarters could
have a
material adverse effect on our business and results of
operations.
|
·
|
We
incur substantial costs and cash funding requirements with respect
to
pension benefits and providing healthcare to our former
employees. Our estimates of liabilities and expenses for pensions
and other post-retirement healthcare benefits require the use of
assumptions. These assumptions include the rate used to discount
the
future estimated liability, the rate of return on plan assets, and
several
assumptions relating to the retirees’ medical costs and mortality. Actual
results may differ, which may have a material adverse effect on future
results of operations, liquidity or shareholders’ equity. Our largest
pension plan is in an underfunded situation, and our future funding
requirements were projected based upon legislation that changed in
fiscal
2006. Any additional changes in the pension laws or estimates used
could
have a material adverse effect on our future funding requirements,
business and results of operations. In addition, rising healthcare
and
retirement benefit costs in the United States may put us at a competitive
disadvantage.
|
·
|
If
our goodwill or amortizable intangible assets become impaired, we
may be
required to record a significant charge to
earnings. Under generally accepted
accounting principles, we review our amortizable intangible assets
for
impairment when events or changes in circumstances indicate the carrying
value may not be recoverable. Goodwill and nonamortizable intangible
assets are required to be tested for impairment at least annually.
Factors
that may be considered a change in circumstances indicating that
the
carrying value of our goodwill or intangible assets may not be recoverable
include a decline in stock price and market capitalization, reduced
future
cash flow estimates, and slower growth rates in the industries we
serve.
We may be required to record a significant charge to earnings in
our
financial statements during the period in which any impairment of
our
goodwill or intangible assets is determined, negatively impacting
our
results of operations.
|
·
|
Expense
of being a public company. 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. We have seen audit fees and audit related
fees
significantly increase in past years. These increases, and any additional
burden placed by future legislation, could have a material adverse
effect
on our financial condition, future results of operations, or net
cash
flows. For fiscal 2006, we were not required to have an
external audit of our internal controls over financial reporting
under
Section 404. We will continue to assess our future requirements to
report
on our assessment of controls or have an external audit of our internal
controls on an annual basis.
|
·
|
Concentrated
ownership of voting shares. As of September 30, 2006, the Steiner
family beneficially owns approximately 60.3% of the aggregate vote
of
shares of the Company. Therefore, the ability for individual
shareholders to influence the direction of the Company may be
limited.
|
·
|
Environmental
matters. As an owner and former owner and operator of property,
including those at which we performed manufacturing operations, we
are
subject to extensive federal, state and local environmental laws
and
regulations. Inherent in such ownership and operation is also the
risk
that there may be potential environmental liabilities and costs in
connection with any required remediation of such properties. We routinely
assess our environmental accruals for identified concerns at locations
of
our former operations. We cannot provide assurance that unexpected
environmental liabilities will not
arise.
|
·
|
Legal
matters. We are involved in various other claims and lawsuits
incidental to our business or predecessor businesses. 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 will not have a material adverse effect
on our
financial condition, future results of operations or net cash
flows. However, litigation and other claims are subject to
inherent uncertainties and management’s view of these matters may change
in the future. There exists a possibility that a material
adverse impact on our financial position and results of operations
could
occur in the period for which the effect of an unfavorable final
outcome
becomes probable and reasonably
estimable.
|
If
one or more of these or other risks or uncertainties materializes, or if
underlying assumptions prove incorrect, our actual results may vary materially
from those expected, estimated or projected. If two or more of these risks
or
other risks or uncertainties occur individually or simultaneously, they could
have a material adverse effect on our financial condition and cash position.
Given these uncertainties, users of the information included in this 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.
As
of September 30, 2006, we owned or leased buildings totaling approximately
1,951,000 square feet, of which approximately 277,000 square feet were owned
and
1,674,000 square feet were leased.
Our
PoloExpress segment’s properties consisted of approximately 750,000 square feet
which is all leased. We lease and operate 93 retail stores in Germany
and Switzerland. The stores which were in operation as of September
30, 2006 aggregated approximately 606,000 square feet. The
PoloExpress segment leases 117,000 square feet of warehouse space in
Germany. The primary offices of the PoloExpress segment are located
in Düsseldorf, Germany.
Our
Hein Gericke segment’s properties consisted of approximately 820,000 square feet
which is all leased. We lease and operate 145 retail stores in
Austria, Belgium, France, Germany, Italy, Luxembourg, the Netherlands, Turkey,
and the United Kingdom. The stores which were in operation as of
September 30, 2006 aggregated approximately 649,000 square feet. Hein
Gericke’s 68 stores in Germany aggregated 359,000 square feet, and our 45 stores
in the United Kingdom aggregated 135,000 square feet. The remaining 155,000
square feet are leased by the 32 stores in Austria, Belgium, France, Italy,
Luxembourg, the Netherlands, and Turkey. The Hein Gericke segment
leases 79,000 square feet of warehouse space, including 66,000 square feet
in
Germany and 13,000 square feet in England. The primary offices of the Hein
Gericke segment are located in Düsseldorf, Germany; Harrogate, England; and
Tustin, California.
Our
Aerospace segment's properties consists of approximately 93,000 square feet,
with principal operating facilities concentrated in California, Florida,
Georgia, Kansas, and Texas.
We
own and lease a 208,000 square foot manufacturing facility located in Fullerton,
California and a 58,000 square foot manufacturing facility in Huntington Beach,
California. Additionally, we own an 11,000 square foot office and warehouse
facility in Wichita, Kansas. We also lease our corporate headquarters
in McLean, Virginia as well as office space in New York, New
York. Corporate office space is approximately 17,000 square
feet.
The
following table sets forth the location of the larger properties used in our
continuing operations, their square footage, the business segment or groups
they
serve and their primary use. Each of the properties owned or leased
by us is, in our opinion, generally well maintained. All of our occupied
properties are maintained and updated on a regular basis.
|
Owned
or
|
Square
|
|
|
Location
|
Leased
|
Footage
|
Business
Segment
|
Primary
Use
|
Fullerton,
California
|
Owned
|
208,000
|
Corporate
|
Rental
|
Düsseldorf,
Germany
|
Leased
|
144,000
|
PoloExpress
|
Office
& Warehousing
|
Düsseldorf,
Germany
|
Leased
|
116,000
|
Hein
Gericke
|
Office
& Warehousing
|
Huntington
Beach, California
|
Owned
|
58,000
|
Corporate
|
Rental
|
Titusville,
Florida
|
Leased
|
37,000
|
Aerospace
|
Distribution
|
Atlanta,
Georgia
|
Leased
|
29,000
|
Aerospace
|
Distribution
|
Harrogate,
United Kingdom
|
Leased
|
24,000
|
Hein
Gericke
|
Office
|
Tustin,
California
|
Leased
|
15,000
|
Hein
Gericke
|
Office
& Warehousing
|
McLean,
Virginia
|
Leased
|
12,000
|
Corporate
|
Office
|
Wichita,
Kansas
|
Owned
|
11,000
|
Aerospace
|
Distribution
|
Information
concerning our long-term rental obligations at September 30, 2006, is set forth
in Note 14 to our Consolidated Financial Statements, included in Part II, Item
8, “Financial Statements and Supplementary Data”, of this Annual Report, and is
incorporated herein by reference.
A
discussion of our legal proceedings is included in Note 15, “Contingencies”, of
our Consolidated Financial Statements, included in Part II, Item 8, “Financial
Statements and Supplementary Data”, of this annual report and is incorporated
herein by reference.
There
were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART
II
Market
Information
Our
Class A common stock is traded on the New York Stock Exchange under the symbol
“FA”. Effective December 14, 2006, we voluntarily delisted from
listing on the NYSE Arca. Our Class B common stock is not listed on
any exchange and is not publicly traded. Class B common stock can be converted
to Class A common stock at any time at the option of the holder. Information
regarding our Class A and Class B common stock is incorporated herein by
reference from Note 9, “Equity Securities”, of our Consolidated Financial
Statements included in Part II, Item 8, “Financial Statements and Supplementary
Data”.
Information
regarding the quarterly price range of our Class A common stock is incorporated
herein by reference from Note 18, “Quarterly Financial Data (Unaudited)”, of our
Consolidated Financial Statements included in Part II, Item 8, “Financial
Statements and Supplementary Data”.
At
the beginning of the fiscal year, we were authorized to issue 5,141,000 shares
of our Class A common stock under our 1986 non-qualified stock option plan
and
250,000 shares of our Class A common stock under our 1996 non-employee directors
stock option plan. Also at the beginning of the fiscal year, we had
807,581 shares available for grant under the 1986 non-qualified stock option
plan and 193,000 shares available for grant under the 1996 non-employee
directors stock option plan. During the fiscal year, the terms under
which new options could be granted under both plans
expired. Therefore, no shares were available for grant under either
plan at the end of the fiscal year. We are considering adoption of a
new plan which would be submitted to our shareholders for approval at our next
annual meeting. Information regarding our stock option plans is
incorporated herein by referenced from Note 10, “Stock Options”, of our
Consolidated Financial Statements included in Part II, Item 8, "Financial
Statements and Supplementary Data".
Holders
of Record
We
had approximately 914 and 34 record holders of our Class A and Class B common
stock, respectively, at September 30, 2006.
Dividends
We
have not paid any dividends over the past several years. Our intention is to
retain and reinvest earnings into the Company. Additionally, the agreement
between us and Alcoa, under which we sold our Fairchild Fasteners business
on
December 3, 2002, provides that, for a period of five years after that date,
we
will 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; provided, however, that we may engage in a merger or sale
of
substantially all of our assets to a third party that assumes our obligations
under the acquisition agreement and that such provision of the agreement shall
not prevent us from exercising our fiduciary duties to our stockholders. See
Note 21, “Discontinued Operations”, of our Consolidated Financial Statements
included in Part II, Item 8, “Financial Statements and Supplementary
Data”.
Sale
of Unregistered Securities
There
were no sales or issuances of unregistered securities in the last fiscal quarter
of the 2006 fiscal year. Sales or issuance of unregistered securities
in previous fiscal quarters were reported on Form 10-Q for each such
quarter.
Securities
Authorized for Issuance under Equity Compensation Plans
The
following table provides information as of September 30, 2006, with respect
to
compensation plans under which our equity securities are authorized for
issuance.
|
Total
equity compensation plans approved by shareholders
|
Number
of securities to be issued upon exercise of outstanding
options
|
336,359
|
Weighted
average exercise price of outstanding options
|
$ 3.90
|
Number
of securities remaining available for future issuance
|
None
|
Five-Year
Financial Summary
(In
thousands, except per share data)
|
Years
Ended September 30,
|
|
3
Month
Transition
Period
Ended
September
30,
|
|
Years
Ended June 30,
|
|
|
2006
|
|
|
2005(1)
|
|
|
2004(1)
|
|
|
2003(2)
|
|
|
2003(3)
|
|
|
2002(4)
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
|
Restated
|
|
|
Restated
|
|
|
Restated
|
|
Summary
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$ |
308,641
|
|
|
$ |
341,587
|
|
|
$ |
318,132
|
|
|
$ |
14,857
|
|
|
$ |
59,633
|
|
|
$ |
64,648
|
|
Rental revenue
|
|
950
|
|
|
|
656
|
|
|
|
930
|
|
|
|
260
|
|
|
|
808
|
|
|
|
480
|
|
Gross margin
|
|
123,641
|
|
|
|
130,492
|
|
|
|
122,490
|
|
|
|
3,924
|
|
|
|
20,699
|
|
|
|
16,015
|
|
Operating loss
|
|
(26,929 |
) |
|
|
(28,305 |
) |
|
|
(14,099 |
) |
|
|
(5,955 |
) |
|
|
(51,348 |
) |
|
|
(19,140 |
) |
Net interest expense
|
|
8,501
|
|
|
|
11,427
|
|
|
|
10,599
|
|
|
|
662
|
|
|
|
22,328
|
|
|
|
42,534
|
|
Income tax benefit (provision)
|
|
(2,176 |
) |
|
|
1,048 |
|
|
|
8,953
|
|
|
|
415
|
|
|
|
(408 |
) |
|
|
16,094
|
|
Income (loss) from continuing operations
|
|
(33,890 |
) |
|
|
(27,309 |
) |
|
|
(7,388 |
) |
|
|
(2,486 |
) |
|
|
(83,837 |
) |
|
|
(49,336 |
) |
Income (loss) per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
$ |
(1.34 |
) |
|
$ |
(1.08 |
) |
|
$ |
(0.29 |
) |
|
$ |
(0.10 |
) |
|
$ |
(3.33 |
) |
|
$ |
(1.96 |
) |
Other
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
7,777
|
|
|
|
11,668
|
|
|
|
12,260
|
|
|
|
312
|
|
|
|
7,888
|
|
|
|
2,106
|
|
Cash provided by (used for) operating activities
|
|
(71,773 |
) |
|
|
(13,060 |
) |
|
|
(13,101 |
) |
|
|
(6,971 |
) |
|
|
(122,521 |
) |
|
|
19,388
|
|
Cash provided by (used for) investing activities
|
|
54,987
|
|
|
|
26,802
|
|
|
|
(97,284 |
) |
|
|
29
|
|
|
|
605,516
|
|
|
|
(9,632 |
) |
Cash provided by (used for) financing activities
|
|
12,328
|
|
|
|
(13,807 |
) |
|
|
116,622
|
|
|
|
1,523
|
|
|
|
(485,842 |
) |
|
|
(9,655 |
) |
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
415,129
|
|
|
|
448,639
|
|
|
|
499,165
|
|
|
|
377,208
|
|
|
|
390,549
|
|
|
|
992,118
|
|
Long-term debt, less current maturities
|
|
65,450
|
|
|
|
47,990
|
|
|
|
61,382
|
|
|
|
4,277
|
|
|
|
2,815
|
|
|
|
434,736
|
|
Stockholders' equity
|
|
89,018
|
|
|
|
111,346
|
|
|
|
138,896
|
|
|
|
136,139
|
|
|
|
137,957
|
|
|
|
226,111
|
|
Per
outstanding common share
|
$ |
3.53
|
|
|
$ |
4.41
|
|
|
$ |
5.52
|
|
|
$ |
5.41
|
|
|
$ |
5.48
|
|
|
$ |
8.99
|
|
(1)
|
Amounts
have been restated as described in Note 2 to the Consolidated Financial
Statements.
|
(2)
|
The
Operations, Other, and Balance Sheet Data for the 3-month transition
period ended September 30, 2003 have been derived from audited financial
statements restated to account for the adjustments described in Note
2 to
the Consolidated Financial
Statements.
|
(3)
|
The
Operations, Other, and Balance Sheet Data for fiscal 2003 have been
derived from audited financial statements restated to account for
the
adjustments described in Note 2 to the Consolidated Financial
Statements. Net interest expense, income from continuing
operations, and stockholders’ equity decreased by $0.1 million due to
restatement adjustment related to death benefit
obligations. Additionally, stockholders’ equity increased $0.2
million related to reversal of a reserve for potential deduction
disallowance deemed
unnecessary.
|
(4)
|
The
Operations, Other, and Balance Sheet Data for fiscal 2002 have been
derived from audited financial statements restated to account for
the
adjustments described in Note 2 to the Consolidated Financial
Statements. Net interest expense, income from continuing
operations, and stockholders’ equity decreased by $0.2 million due to
restatement adjustment related to death benefit
obligations.
|
The
table above does not include the operating results of acquisitions, prior to
acquisition date, and discontinued operations in the “Summary of Operations”
section, including: our PoloExpress and Hein Gericke segments, which were
acquired on November 1, 2003; the fasteners business, which was sold on December
3, 2002 to Alcoa; APS, which was sold on January 23, 2004; Fairchild
Aerostructures, which was sold on June 24, 2005 to PCA Aerospace; a landfill
development partnership, which was sold on April 28, 2006; and Airport Plaza
shopping center, which was sold on July 6, 2006.
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. and Banner Aerospace Holding Company I,
Inc. Fairchild Holding Corp. is the owner (directly and indirectly)
of Hein Gericke, PoloExpress, and Fairchild Sports USA. Our consolidated
financial statements present as discontinued operations the results of Airport
Plaza shopping center (sold July 6, 2006), a landfill partnership (sold April
28, 2006), Fairchild Aerostructures (sold June 24, 2005), APS (sold January
23,
2004), and our former fastener business (sold December 3, 2002).
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. The information below has been adjusted to reflect
the impacts of the restatement of the Company’s financial results summarized
below and more fully described in Note 2 of the Consolidated Financial
Statements.
FINANCIAL
RESTATEMENT
During
the course of our fiscal 2006 audit, the Audit Committee of our Board of
Directors concluded in January 2007 that our previously filed interim and
audited consolidated financial statements should not be relied upon since
they
were prepared applying accounting practices in accounting for income taxes
that
did not comply with GAAP and, consequently, we would restate our consolidated
financial statements. During the course of the Company’s review of its
historical financial statements, additional errors were
identified. The consolidated financial statements for fiscal 2005 and
2004 included in this Annual Report on Form 10-K include restatement
adjustments that we have categorized into the following three areas: our
accounting for income taxes; our accounting for commitments and contingencies;
and our accounting for long-term investments. See Note 2 of our
consolidated financial statements included in this Form 10-K for additional
information regarding the restatement of our consolidated financial statements
for the periods noted below.
The
overall impact of our restatement was a total increase in retained earnings
of
$2.7 million through June 30, 2006. This amount
includes:
·
|
A
$0.6 million increase in earnings for periods prior to October 1,
2003 (as
reflected in beginning retained earnings as of October 1,
2003);
|
·
|
A
$1.1 million decrease in earnings for fiscal
2004;
|
·
|
A
$1.9 million decrease in net loss for fiscal 2005;
and
|
·
|
A
$1.3 million decrease in net loss for the nine months ended June
30,
2006.
|
As
a result of Fairchild’s failure to file on a timely basis its Quarterly Report
on Form 10-Q for the quarter ended March 31, 2007, Fairchild is no longer
eligible to use form S-3 to register its securities with the SEC until all
required reports under the Securities Exchange Act of 1934 have been timely
filed for the 12 months prior to the filing of the registration statement for
those securities.
EXECUTIVE
OVERVIEW
Our
business consists of three segments: PoloExpress; Hein Gericke; and Aerospace.
Our PoloExpress and Hein Gericke segments are engaged in the design and retail
sale of protective clothing, helmets, and technical accessories for
motorcyclists in Europe and our Hein Gericke segment is engaged in the design
and distribution of such apparel 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.
For
the year ended September 30, 2006, we reported a loss from continuing operations
of $33.9 million, as compared to a loss of $27.3 million in fiscal 2005. The
current year’s loss from continuing operations benefited from the settlement of
the shareholder derivative litigation, which improved results by approximately
$5.7 million. Excluding this item, the increased loss from continuing operations
resulted primarily from lower revenues in our Hein Gericke segment. The
inventory demands of our PoloExpress and Hein Gericke businesses and our
consolidated operating losses have contributed primarily to our $71.8 million
use of cash in our operating activities in fiscal 2006. As of September 30,
2006, we have unrestricted cash, cash equivalents and investments of $59.1
million, and available borrowing under lines of credit of $5.3
million. As of June 30, 2007, we have unrestricted cash, cash
equivalents and investments of $20.3 million, and available borrowing under
lines of credit of $5.3 million.
We
have undertaken a number of actions, which we believe will improve the results
of Hein Gericke in 2007 and beyond including:
·
|
Consolidating
and centralizing our warehouse facilities to one location to service
all
of Europe.
|
·
|
Improving
timeliness of product deliveries from suppliers to our warehouse
and
delivery to the stores.
|
·
|
Reintroducing
our Hein Gericke product catalog to expand brand awareness and attract
customer traffic.
|
·
|
Optimizing
store location and appearance.
|
In
addition, we plan to:
·
|
Continue
cost structure improvements by taking aggressive actions to reduce
expenses.
|
·
|
Identify
and target strategic markets outside of Germany and the United Kingdom
for
possible expansion.
|
·
|
Close
stores which do not provide a positive
contribution.
|
We
also have taken action to reduce the cash needs of Fairchild Sports USA by
significantly downsizing the operations and focusing efforts primarily on its
design and licensing businesses.
On
July 6, 2006, Republic Thunderbolt, LLC (an indirect, wholly-owned subsidiary
of
the Company) completed the sale of Airport Plaza, a shopping center located
in
Farmingdale, New York, to an affiliate of Kimco Realty Corporation. 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 pursue other
opportunities. We received net proceeds of approximately $40.7
million from the sale. As a condition to closing, the buyer assumed our existing
mortgage loan on Airport Plaza that had an outstanding principal balance of
approximately $53.5 million on the closing date. Also as a condition
to closing, we provided the buyer with an environmental indemnification and
agreed to remediate an environmental matter that was identified, the costs
of
which are estimated to be between $1.0 million and $2.7 million. We expect
to
recognize a gain of approximately $15.1 million from this transaction. However,
because of the uncertain nature of the environmental liabilities that we
retained, the gain recognition is required to be delayed until the remediation
efforts are complete.
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
acquisition opportunities;
|
·
|
Provide
a source for any additional cash needs of our Hein Gericke operations
during the 2007 season; or
|
·
|
Consider
the repurchase of our outstanding
stock.
|
Subsequent
to September 30, 2006, and directly resulting from the financial statement
restatement process, we were unable to provide to the lenders timely financial
statements for the year ended September 30, 2006, and the quarters ended
December 31, 2006, March 31, 2007, and June 30, 2007, as required by the credit
agreement. Our lenders have waived certain provisions in the credit
agreement and granted us an extension in time to provide these financial
statements.
Our
cash
needs are generally the highest during our second and third quarters of our
fiscal year, when our Hein Gericke and PoloExpress segments purchase inventory
in advance of the spring and summer selling seasons. Accordingly, €10.0 million
was available and utilized to finance the fiscal 2007 seasonal trough to support
our PoloExpress operations, and €9.0 million will be available to finance the
fiscal 2008 season. We expect that cash on hand, which includes cash proceeds
received from the sale of our shopping center, the Alcoa earn-out and escrow,
the proceeds available from additional seasonal borrowings, cash available
from
lines of credit, and proceeds received from dispositions of short-term
investments and other non-core assets, will be adequate to satisfy our cash
requirements through December 2007.
In
the event our cash needs are substantially higher than projected, particularly
during the fiscal 2008 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.
|
·
|
Refinancing
existing debt and borrowing additional funds which may be available
to us
from improved performances at our Aerospace and
PoloExpress operations or increased values of certain real estate we
own.
|
·
|
Eliminating,
reducing, or delaying all non-essential services provided by outside
parties, including consultants.
|
·
|
Significantly
reducing our corporate overhead
expenses.
|
·
|
Delaying
inventory purchases.
|
However,
if we need to implement one or more of these actions, there remains some
uncertainty that we will actually receive a sufficient amount of cash in time
to
meet all of our needs during the fiscal 2008 seasonal trough. Even if
sufficient cash is realized, any or all of these actions may have adverse
effects on our operating results or business.
We
may also consider raising cash to meet the subsequent needs of our operations
by
issuing additional stock or debt, entering into partnership arrangements,
liquidating assets, or other means. Should these actions be insufficient, we
may
be forced to liquidate other non essential assets and significantly reduce
overhead expenses.
CRITICAL
ACCOUNTING POLICIES
Our
financial statements and accompanying notes are prepared in accordance with
U.S.
generally accepted accounting principles. Preparing financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue, and expenses. These estimates and
assumptions are affected by management’s application of accounting policies.
Critical accounting policies for us include: the valuation of long-lived assets;
impairment of goodwill and intangible assets with indefinite lives; pension
and
postretirement benefits; deferred and noncurrent income taxes; environmental
and
litigation accruals; and revenue recognition. Estimates in each of these areas
are based on historical experience and a variety of assumptions that we believe
are appropriate. Actual results may differ from these estimates.
Valuation
of Long-Lived Assets: We review our long-lived assets for impairment,
including property, plant and equipment, and identifiable intangibles with
definite lives, whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable. To
determine recoverability of our long-lived assets, we evaluate the probability
that future undiscounted net cash flows will be greater than the carrying amount
of our assets. Impairment is measured based on the difference between
the carrying amount of our assets and their estimated fair value.
Impairment
of Goodwill and Intangible Assets With Indefinite Lives: Goodwill and
intangible assets deemed to have indefinite lives are not amortized. Instead
of
amortizing goodwill and intangible assets deemed to have indefinite lives,
these
assets are tested for impairment annually, or immediately if conditions indicate
that such an impairment could exist.
Pension
and Postretirement Benefits: We have defined benefit pension plans covering
certain of our current and former employees. Our funding policy is to make
the
minimum annual contribution required by the Employee Retirement Income Security
Act of 1974 or local statutory law. The accumulated benefit obligation for
pensions and postretirement benefits was determined using a discount rate of
6.0% and 5.625% at September 30, 2006 and 2005, respectively, and an estimated
return on plan assets of 8.5% at September 30, 2006 and 2005. Assumed health
care cost trend rates have a significant effect on the amounts reported for
health care plans. For measurement purposes, in 2006, we assumed a 9.5% annual
rate of increase in the cost per capita of claims covered under health care
benefits. In 2007, the trend rate is assumed to decrease each year by
0.5% to a rate of 5% in 2016 and remain at that level thereafter. The effect
of
any change in these assumptions may result in a material change to the
accumulated benefit obligation.
Deferred
and Noncurrent Income Taxes: Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax
purposes. In assessing the realizability of deferred tax assets, we
consider whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. We consider the scheduled reversal
of
deferred tax liabilities, projected future taxable income, the limitations
that
some taxing jurisdictions in which we operate have on our ability to use tax
loss carry forwards to offset certain recorded deferred tax liabilities and
tax
planning strategies in making this assessment. The liability for
noncurrent income taxes includes significant judgments and interpretations
of
tax laws. Therefore, the ultimate resolution of the associated
contingencies could vary materially from the amounts accrued.
Environmental
Matters: Our current and prior 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, or 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 other
facilities owned, or previously owned, by us, which 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. At the
end of each calendar quarter, we thoroughly review our environmental matters
and
adjust our accrual to equal the estimated probable amount that it will cost
us
in connection with these matters. We believe that we have recorded adequate
accruals in our consolidated financial statements to complete such investigation
and take any necessary corrective actions or make any necessary contributions
or
other payments.
Legal
Matters: We are involved in various other claims and lawsuits incidental to
our business. We, either on our own or through our insurance
carriers, are contesting these matters. At the end of each calendar
quarter, we thoroughly review our legal matters and adjust our accrual to equal
the estimated probable amount that it will cost us in connection with these
matters. In the opinion of management, the ultimate resolution of the legal
proceedings will not have a material adverse effect on our financial condition,
future results of operations, or net cash flows.
Revenue
Recognition: Revenues within our PoloExpress and Hein Gericke segments are
recognized immediately upon the sale of merchandise by our retail stores, net
of
an allowance for returns. Sales and related costs within our Aerospace segment
are recognized on shipment of products and/or performance of services, when
collection is probable. Lease and rental revenue are recognized on a
straight-line basis over the life of the lease. Shipping and handling amounts
billed to customers are classified as revenues.
RESULTS
OF OPERATIONS
Significant
Business Transactions
On
July 6, 2006, Republic Thunderbolt, LLC (an indirect, wholly-owned subsidiary
of
the Company) completed the sale of Airport Plaza, a shopping center located
in
Farmingdale, New York, to an affiliate of Kimco Realty Corporation. 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 pursue other
opportunities. We received net proceeds of approximately $40.7
million from the sale. As a condition to closing, the buyer assumed our existing
mortgage loan on Airport Plaza that had an outstanding principal balance of
approximately $53.5 million on the closing date. Also as a condition
to closing, we provided the buyer with an environmental indemnification and
agreed to remediate an environmental matter that was identified, the costs
of
which are estimated to be between $1.0 million and $2.7 million. We expect
to
recognize a gain of approximately $15.1 million from this transaction. However,
because of the uncertain nature of the environmental liabilities that we
retained, the gain recognition is required to be delayed until the remediation
efforts are complete.
On
April 28, 2006, our consolidated partnership, Eagle Environmental, L.P. II,
completed the sale of its Royal Oaks landfill to Highstar Waste Acquisition
for
approximately $1.4 million. This transaction concludes the operating activity
of
Eagle Environmental L.P.
II
and there is no requirement or current intent by us to pursue any new operating
activities through this partnership. In fiscal 2006, we recognized a $1.1
million gain on disposal of discontinued operations as a result of this
transaction.
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 September 30, 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 deposited with an escrow agent
approximately $0.4 million to secure indemnification obligations we may have
to
PCA Aerospace, which was returned to us, with interest, upon termination of
the
18-month escrow period. 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.
On
November 1, 2003, we acquired for $45.5 million (€39.0 million) substantially
all of the worldwide business of Hein Gericke and Fairchild Sports USA from
the
Administrator for Eurobike AG in Germany. Also on November 1, 2003, we acquired
for $23.4 million (€20.0 million) from the Administrator for Eurobike AG and
from two subsidiaries of Eurobike AG all of their respective ownership interests
in PoloExpress and receivables owed to them by PoloExpress. We used available
cash from investments that were sold to pay the Administrator $14.8 million
(€12.5 million) on November 1, 2003, and borrowed $54.1 million (€46.5 million)
from the Administrator at a rate of 8%, per annum. On May 5, 2004 we received
financing from two German banks and paid the note due to the Administrator.
The
aggregate purchase price for these acquisitions, including $15.0 million (€12.9
million) of cash acquired, was approximately $68.9 million (€59.0
million).
On
January 2, 2004, we acquired for $18.8 million (€15.0 million) all but 7.5% of
the interest owned by Mr. Klaus Esser in PoloExpress. Mr. Esser retained a
7.5%
ownership interest in PoloExpress, but Fairchild has the right to call this
interest at any time from March 2007 to October 2008, for a fixed purchase
price
of €12.3 million ($15.6 million at September 30, 2006). Mr. Esser has the right
to put such interest to us at any time during April 2008 for €12.0 million
($15.2 million at September 30, 2006). On January 2, 2004, we used available
cash to pay Mr. Esser $18.8 million (€15.0 million) and provided collateral of
$15.0 million (€12.0 million) to a German bank to issue a guarantee to Mr. Esser
to secure the price for the put Mr. Esser has a right to exercise in April
2008.
The transaction includes an agreement with Mr. Esser under which he agrees
with
us not to compete with PoloExpress for two years. On March 30, 2007, we amended
an agreement with Mr. Esser, regarding his continued employment, and agreed
to
continue his employment through December 31, 2008. Through September 30, 2006,
in addition to his base salary, Mr. Esser received a profit distribution of
approximately €1.0 million, which reduces, on a Euro for Euro basis, the call or
put option price we must pay for his interest. As of September 30, 2006, the
€11.0 million ($14.7 million) collateralized obligation for the put option,
net
of distributions, was included in other long-term liabilities. The €11.0 million
($14.7 million) restricted cash is invested in a capital protected investment
and money market funds, and is included in long-term investments. We have
treated the put or call option as a debt instrument as it effectively
established the price Mr. Esser will receive for his portion of the
business.
The
total purchase price exceeded the estimated fair value of the net assets
acquired by approximately $34.0 million. Approximately $33.3 million of the
purchase price was allocated to identifiable intangible assets, including brand
names “Hein Gericke” and “Polo”, and reflected in intangible assets in the
consolidated financial statements as of September 30, 2006. The remaining
purchase price was allocated to goodwill. Since their acquisition on November
1,
2003, we have consolidated the results of Hein Gericke, PoloExpress, and
Fairchild Sports USA into our financial statements.
On
December 3, 2002, we completed the sale of our fastener business to Alcoa Inc.
for approximately $657.0 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 year. Deliveries exceeded the threshold
aircraft delivery level needed for us to earn the full $12.5 million contingent
payment for 2003, 2004, and 2005. Accordingly, we recognized a
$12.5 million gain on disposal of discontinued operations in fiscal
2004, 2005, and 2006. The remaining threshold aircraft delivery level
is 650 in 2006. On December 3, 2002, we deposited with an escrow agent $25.0
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. In June 2007, we received
an
arbitration ruling requiring us to pay $4.0 million from the escrow to Alcoa
in
satisfaction of health and safety claims asserted by Alcoa through December
2006. We have sought judicial review of that arbitration
award. Since December 2006, Alcoa has asserted additional claims for
indemnification with respect to which we are contesting or seeking additional
information. The escrow is classified in long-term investments on our
balance sheet. In addition, for the period through 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.
Consolidated
Results
We
currently report in three principal business segments: PoloExpress; Hein
Gericke; and Aerospace. The following table provides the revenues and operating
income (loss) of our segments on a historical and pro forma basis for the years
ended September 30, 2006, 2005, and 2004. The pro forma results represent the
impact of our acquisition of Hein Gericke, PoloExpress, and Fairchild Sports
USA, as if this transaction had occurred at the beginning of fiscal 2004. The
pro forma information is based on the historical financial statements of these
companies, giving effect to the aforementioned transactions. The prior period
historical results of the operations and entities we acquired are based upon
the
best information available to us and these financial statements were not
audited. The pro forma information is not necessarily indicative of the results
of operations that would actually have occurred if the transactions had been
in
effect since the beginning of fiscal 2004, nor are they necessarily indicative
of our future results.
|
|
Actual
|
|
|
Pro
Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
|
|
(In
thousands)
|
|
Years
Ended September 30,
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
|
|
|
|
Restated
(a)
|
|
|
Restated
(a)
|
|
|
Restated
(a)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
PoloExpress
|
|
$ |
112,786
|
|
|
$ |
111,161
|
|
|
$ |
94,543
|
|
|
$ |
98,404
|
|
Hein
Gericke
|
|
|
116,255
|
|
|
|
145,933
|
|
|
|
148,189
|
|
|
|
155,415
|
|
Aerospace
Segment
|
|
|
79,600
|
|
|
|
84,493
|
|
|
|
75,400
|
|
|
|
75,400
|
|
Corporate
and Other
|
|
|
1,036
|
|
|
|
1,036
|
|
|
|
971
|
|
|
|
971
|
|
Intercompany
Eliminations
|
|
|
(86 |
) |
|
|
(380 |
) |
|
|
(41 |
) |
|
|
(41 |
) |
Total
|
|
$ |
309,591
|
|
|
$ |
342,243
|
|
|
$ |
319,062
|
|
|
$ |
330,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PoloExpress
|
|
$ |
11,796
|
|
|
$ |
9,895
|
|
|
$ |
10,795
|
|
|
$ |
11,031
|
|
Hein
Gericke
|
|
|
(22,084 |
) |
|
|
(15,295 |
) |
|
|
(3,614 |
) |
|
|
(4,429 |
) |
Aerospace
Segment
|
|
|
5,968
|
|
|
|
6,093
|
|
|
|
4,030
|
|
|
|
3,945
|
|
Corporate
and Other
|
|
|
(22,609 |
) |
|
|
(28,998 |
) |
|
|
(25,310 |
) |
|
|
(25,310 |
) |
Total
|
|
$ |
(26,929 |
) |
|
$ |
(28,305 |
) |
|
$ |
(14,099 |
) |
|
$ |
(14,763 |
) |
(a)
|
Amounts
have been restated as described in Note 2 to the Consolidated Financial
Statements.
|
Revenues
decreased by $32.7 million, or 9.5%, for fiscal 2006 compared to fiscal 2005.
Revenues decreased by $29.7 million in our Hein Gericke segment due primarily
to
the downsized activities of our Fairchild Sports USA business and by $4.9
million in our Aerospace segment due to fiscal 2005 benefiting from the delivery
of several unusually large one-time orders. Revenues increased by $23.2 million,
or 7.3%, in fiscal 2005, as compared to fiscal 2004. The increase in fiscal
2005
was due to the prior period including only eleven months of activity from our
acquisition of Hein Gericke, PoloExpress and Fairchild Sports USA on November
1,
2003, our foreign sales benefiting from a stronger Euro as compared to the
U.S.
dollar, and increased sales at our Aerospace segment.
Gross
margin as a percentage of revenues was 39.9%, 38.1%, and 38.4%, in fiscal 2006,
fiscal 2005, and fiscal 2004, respectively. The improvement in margins in fiscal
2006 compared to fiscal 2005 reflected an increase in margins resulting from
a
shift in the product mix to higher margin products at each of our PoloExpress,
Hein Gericke, and Aerospace segments. The change in margins in fiscal 2005
compared to fiscal 2004 reflects a slight reduction in margins at our Hein
Gericke segment.
Selling,
general and administrative expense includes pension and postretirement expenses
of $3.7 million, $6.5 million, and $6.7 million for 2006, 2005, and 2004,
respectively, primarily relating to inactive and retired employees of businesses
that we sold and for which we retained the pension or postretirement liability.
Pension and postretirement expense decreased by $2.8 million in fiscal 2006
compared to fiscal 2005, and decreased by $0.2 million in fiscal 2005 compared
to fiscal 2004. The decrease from 2005 to 2006 resulted primarily
from higher curtailment expenses in 2005 as well as termination of certain
medical benefits during fiscal 2006. Selling, general and administrative
expense, excluding pension and postretirement expense, as a percentage of
revenues was 49.0%, 45.9%, and 43.4%, in fiscal 2006, fiscal 2005, and fiscal
2004, respectively. The change in fiscal 2006 compared to fiscal 2005 was due
primarily to the lower volume of revenues. Selling, general and administrative
expense in fiscal 2006 also benefited from $5.7 million received by us from
the
settlement of the shareholder derivative litigation, offset partially by $0.6
million of related legal fees. The increase in selling, general and
administrative expense as a percentage of revenues in fiscal 2005, as compared
to fiscal 2004, was due primarily to us owning our PoloExpress and Hein Gericke
segments for 11 months in fiscal 2004, and a stronger Euro as compared to the
U.S. dollar in fiscal 2005 compared to fiscal 2004.
Other
income, net, decreased by $0.2 million in fiscal 2006, as compared to fiscal
2005, due primarily to a $1.0 million gain recognized on the sale of real estate
in fiscal 2005. Other income decreased by $4.2 million in fiscal 2005 compared
to fiscal 2004 due primarily to $1.6 million of proceeds received from a title
insurance claim settlement recognized in fiscal 2004 and $1.0 million of foreign
currency gains recognized in fiscal 2004, compared to foreign currency losses
of
$0.2 million in fiscal 2005.
Restructuring charges of $0.6 million in 2004 included the costs to close all
fifteen of the GoTo Helmstudio retail locations in Germany. All of the charges
were the direct result of activities that occurred as of June 30, 2004. The
restructuring charges included an accrual for the remaining lease costs of
the
closed stores, the write-off of store fittings, and for severance. These costs
were classified as restructuring and were the direct result of a formal plan
to
close the GoTo Helmstudio locations and terminate its employees. Such costs
are
nonrecurring in nature. Other than a reduction in our existing cost structure,
none of the restructuring costs will result in future increases in earnings
or
represent an accrual of future costs of our ongoing business.
Operating
loss for fiscal 2006, fiscal 2005, and fiscal 2004 was $26.9 million, $28.3
million, and $14.1 million, respectively. The $1.4 million improvement in
operating loss for fiscal 2006 compared to fiscal 2005 was due primarily to
$5.1
million net proceeds we received from the settlement of the shareholder
derivative litigation and the decreased pension and postretirement expense,
offset partially by the reduction in gross profit. The $14.2 million increase
in
operating loss in fiscal 2005 compared to fiscal 2004 was due primarily to
a
$12.7 million decrease in operating income at our Hein Gericke segment (see
segment discussion below).
Net
interest expense decreased by $2.9 million, or 25.6%, in fiscal 2006, as
compared to fiscal 2005, due primarily to lower interest expense on the $100
million interest rate contract, which we settled in December 2005, partially
offset by interest expense on the $30.0 million Golden Tree term loan we entered
into on May 3, 2006. Net interest expense increased by $0.8 million, or 7.8%,
in
fiscal 2005, as compared to fiscal 2004, due primarily to a $0.6 million
increase in non-cash interest from an increase in deferred loan fees expensed
in
the current period and a higher average outstanding debt obtained in fiscal
2005
as compared to fiscal 2004.
Investment
income was $2.9 million for fiscal 2006 and included $1.3 million of realized
gains from the sale of investments and $1.1 million of dividend income offset
partially by a $0.5 million increase in the fair market value of investments
classified as trading securities. Investment income was $6.0 million for fiscal
2005, including $5.3 million of stock and dividends received from the
demutualization of an insurance company, $0.5 million in other dividend income,
$0.2 million of realized net gains from the sale of investments, and a $0.8
million increase in the fair market value of investments classified as trading
securities, offset partially by a $0.8 million investment impairment. Investment
income was $3.7 million in 2004, including $2.8 million of stock and dividends
received from the demutualization of an insurance company, $1.1 million in
other
dividend income and $0.3 million of net gains realized from the sale of
investments, partially offset by $0.5 million from the decline in fair market
value of trading securities.
The
fair market value adjustment of our position in a ten-year $100 million interest
rate contract improved by $0.8 million in fiscal 2006, $5.9 million in fiscal
2005, and $4.9 million in fiscal 2004. 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
overall tax expense for fiscal 2006 was $4.8 million. A $2.2 million
tax expense from continuing operations resulted from $0.3 million of current
federal, state, and foreign taxes and $1.9 million of foreign deferred
taxes. The foreign deferred taxes arise from a tax benefit from
operating losses of $0.1 million, offset by $1.9 million in tax expense related
to the impact of the conversion of PoloExpress from a German partnership to
a
German Corporation. The conversion of PoloExpress will allow
PoloExpress and Hein Gericke Deutschland to file consolidated trade tax returns
thereby enabling the Company to reduce its current income tax and trade tax
liabilities. However, as a result of this conversion, the
Company was required to record a deferred tax liability of $5.6 million as
it will no longer benefit from future tax deductions related to the amortization
of acquired intangibles. Offsetting this liability is $3.6 million of deferred
tax assets related to future tax deductions which were previously not expected
to be recoverable. This conversion will allow our two subsidiaries, Hein Gericke
Deutschland and PoloExpress, to compute their trade tax liabilities on a
combined basis and utilize the cumulative combined income and trade tax losses
of approximately $20.6 million and $18.8 million, respectively, to offset their
combined future profits subject to income and trade tax. No Federal taxes were
recognized from continuing operations due to the domestic tax losses. The $2.6
million tax expense in discontinued operations resulted from current state
tax
liabilities of $0.9 million associated with the sale of certain assets and
$1.7
million in additional foreign tax liabilities arising from transfer pricing
issues identified during a tax audit in Germany related to a previously sold
business.
The
overall tax provision for fiscal 2005 was a benefit of $0.2 million,
representing $1.9 million of current and deferred foreign tax expenses, $0.2
million of current state tax expenses related to our continuing operations,
and
$0.8 million of tax expense related to our discontinued operations, all of
which
is more than offset by a $3.2 million tax benefit of federal deferred taxes.
The
overall provision for fiscal 2004 was a benefit of $23.0 million. The
$9.0 million benefit from continuing operations consists of $0.8 million in
current state and foreign tax liabilities, $3.2 million of foreign deferred
tax
expense, of which $1.2 million is a result in changes to the ability to use
certain foreign tax loss carryforwards to offset existing foreign deferred
tax
liabilities in future periods, a $13.0 million benefit associated with the
carryback of current period losses from continuing operations and a reduction
in
various tax contingency requirements. The $14.0 million tax benefit from
discontinued operations resulted from changes to our tax contingency
requirements, primarily the favorable resolution of the tax audits of Kaynar
Technologies, Inc. for its final year ended April 30, 1999, and our tax year
ended June 30, 1999.
Loss
from discontinued operations includes the results of the Airport Plaza shopping
center prior to its sale, the fasteners business prior to its sale, Fairchild
Aerostructures prior to its sale, APS prior to its sale, and certain legal,
tax,
and environmental expenses associated with our former businesses. The loss
from
discontinued operations for fiscal 2006 consists primarily of an accrual of
$9.0
million of environmental liabilities at locations of operations previously
sold
and $5.6 million to cover legal expenses and workers compensation obligations
associated with businesses we sold several years ago, offset partially by $0.9
million of earnings generated by the shopping center prior to its sale. The
loss
from discontinued operations for fiscal 2005 consists primarily of an accrual
of
$5.3 million of environmental liabilities at locations of operations previously
sold and $0.2 million to cover legal expenses and workers compensation
obligations associated with businesses we sold several years ago, offset
partially by $1.9 million of collections of old accounts receivable previously
written-off from businesses we previously sold. The loss from
discontinued operations for fiscal 2004 consists primarily of an accrual of
$14.1 million of environmental liabilities at locations of operations previously
sold and $2.2 million to cover legal expenses and workers compensation
obligations associated with a business we sold several years ago.
In
fiscal 2006, we recognized a $13.6 million gain on the disposal of discontinued
operations, as a result of $12.5 million additional proceeds earned from the
sale of the fastener business, and the $1.1 million gain recognized on the
sale
of a landfill development partnership. In fiscal 2005, we recognized
a $13.6 million gain on the disposal of discontinued operations, as a result
of
$12.5 million additional proceeds earned from the sale of the fastener business,
and the $1.1 million gain recognized on the sale of Fairchild Aerostructures.
In
fiscal 2004, we recorded a $9.5 million gain on the disposal of discontinued
operations, as a result of additional proceeds earned from the sale of the
fastener business.
Other
comprehensive income includes foreign currency translation adjustments,
unrecognized actuarial loss on pensions, and unrealized periodic holding changes
in the fair market value of available-for-sale investment securities. Fiscal
2006 comprehensive income included an $8.1 million decrease in the minimum
pension liability due to changes in the discount rate, a $3.8 million increase
in the fair market value of available-for-sale securities, and a $2.6 million
increase in unrealized foreign currency translations due to the strengthening
of
the Euro against the U.S. dollar. In fiscal 2005, other
comprehensive income included a $7.5 million increase in the minimum pension
liability due to changes in the discount rate, $0.2 million decrease in the
fair
market value of available-for-sale securities, and a $1.4 million decrease
in
unrealized foreign currency translations due to the strengthening of the U.S.
dollar against the Euro. In fiscal 2004, a $1.8 million increase in the minimum
pension liability was offset by a $1.2 million increase in the fair market
value
of available-for-sale securities, and a $0.5 million improvement in unrealized
foreign currency translations due to the strengthening of the Euro against
the
U.S. dollar.
Segment
Results
PoloExpress
Segment
Our
PoloExpress segment designs and sells motorcycle apparel, protective clothing,
helmets, and technical accessories for motorcyclists. As of September
30, 2006, PoloExpress operated 91 retail shops in Germany and two shops in
Switzerland. While the PoloExpress retail stores primarily sell PoloExpress
brand products, these retail stores also sell products of other manufacturers,
the inventory of which is owned by the Company. The PoloExpress
segment is a seasonal business, with an historic trend of a higher volume of
sales and profits during March through September.
Sales
in our PoloExpress segment increased by $1.6 million, or 1.5%, from fiscal
2005
to fiscal 2006. Sales gains resulted from four stores newly opened or
relocated in fiscal 2006 and the incremental sales resulting from the full
year
impact of three new store openings in fiscal 2005. Same store sales
decreased by 0.4% in 2006 reflecting harsh weather in March in Germany and
higher sales generated in fiscal 2005 resulting from PoloExpress celebrating
its
25th
anniversary. Additionally, the month long World Cup soccer tournament, which
was
hosted by Germany beginning in June, negatively affected revenues and profits.
Finally, foreign currency exchange rates on the translation of European sales
into U.S. dollars changed unfavorably and reduced our revenues by approximately
$2.2 million in 2006. Retail sales per square meter was approximately
$2,625 in 2006 compared to $2,864 in 2005. Operating income in our PoloExpress
segment increased by $1.9 million in fiscal 2006 as compared to fiscal
2005. The increase in fiscal 2006 was due primarily to improved gross
margins in conjunction with increased sales.
The
actual results for 2005 and 2004 are not comparable because we only owned the
PoloExpress segment for eleven months in 2004. On a pro forma basis, sales
in
our PoloExpress segment increased by $12.8 million, or 13.0%, in 2005, as
compared to 2004. Approximately $4.3 million of this increase is due to the
weighted average strengthening of the Euro relative to the U.S. Dollar during
2005. Additionally, fiscal 2005 sales were favorably impacted by
incremental sales from three new stores opened in fiscal 2005. Same
store sales increased by 6.4% in 2005. Retail sales per square meter
was approximately $2,864 in 2005 compared to $2,719 in 2004. On a pro
forma basis, operating income of our PoloExpress segment decreased by $1.1
million during 2005 compared to 2004, reflecting higher advertising costs and
other selling costs in fiscal 2005 compared to 2004 as well as incremental
costs
associated with opening our first store in Switzerland.
We
have continued a program to focus on optimizing store size and expanding into
new markets.
Hein
Gericke Segment
Our
Hein Gericke segment designs and sells motorcycle apparel, protective clothing,
helmets, and technical accessories for motorcyclists. As of September 30, 2006,
Hein Gericke operated 145 retail shops in Austria, Belgium, France, Germany,
Italy, Luxembourg, the Netherlands, Turkey, and the United
Kingdom. Although the Hein Gericke retail stores primarily sell Hein
Gericke brand items, these retail stores also sell products of other
manufacturers, the inventory of which is owned by the Company. Fairchild Sports
USA, located in Tustin, California, designs and sells apparel and accessories
under private labels for third parties and sells licensed product to
Harley-Davidson dealers. The Hein Gericke segment is a seasonal business, with
an historic trend of a higher volume of sales during March through
September.
Sales
in our Hein Gericke segment decreased by $29.7 million, or 20.3%, from fiscal
2005 to fiscal 2006. Sales at Fairchild Sports USA represented $19.8 million
of
the decrease in fiscal 2006 due to a reduction in sales to Harley-Davidson
and
the reduction in sales to Tucker-Rocky due to the sale of the First Gear product
line in fiscal 2005. Same store sales decreased by 9.0% in 2006 reflecting
lower
sales at Hein Gericke due in most part to delays in inventory receipts which
resulted in out-of-stock conditions on certain high demand items; a shift in
the
timing and marketing strategy; and unusually harsh weather during March in
Europe. Additionally, the month long World Cup soccer tournament,
which was hosted by Germany beginning in June, negatively affected revenues
and
profits. In addition, foreign currency exchange rates on the translation of
European sales into U.S. Dollars changed unfavorably and reduced our revenues
by
approximately $2.2 million in 2006. Retail sales per square meter was
approximately $2,017 in 2006 compared to $2,210 in 2005. The operating results
in our Hein Gericke segment decreased by $6.8 million in fiscal 2006 as compared
to fiscal 2005. The decrease in fiscal 2006 was due primarily to a
$3.3 million decline in operating results at Fairchild Sports USA, and the
aforementioned sales decreases, offset partially by a 0.6% improvement in its
gross margins as a percentage of sales in fiscal 2006, as compared to fiscal
2005.
The
actual results for 2005 and 2004 are not comparable because we only owned the
Hein Gericke segment for eleven months in 2004. On a pro forma basis, sales
in
our Hein Gericke segment decreased by $9.5 million, or 6.1%, in 2005, as
compared to 2004. A reduction in sales of $8.0 million occurred at
Fairchild Sports USA primarily due to a reduction in sales to
Harley-Davidson. Hein Gericke sales in Europe were negatively
impacted by unfavorable market conditions as overall same store sales decreased
by 4.2% in 2005. Retail sales per square meter was approximately
$2,210 in 2005 compared to $2,251 in 2004. The impact of changes in
foreign currency exchange rates favorably affected the translation of European
sales into U.S. Dollars, by an aggregate of $4.5 million in 2005. On
a pro forma basis, the operating results in our Hein Gericke segment decreased
by $10.9 million during 2005, as compared to 2004. The operating loss
in 2005 was adversely affected by difficult trading conditions in Germany and
the United Kingdom, which led to $2.8 million of higher promotional costs in
an
effort to preserve sales. Lower sales volume in Germany and the United States
negatively impacted our operating results, decreasing our margin contribution
by
$4.6 million. Sales were impacted at all Hein Gericke locations as the
implementation of a new ERP system interrupted stock replenishment at all stores
for one to two months at the beginning of the busy season in 2005. New shops
in
the United Kingdom increased our overhead by $1.9 million, and the development
of a new global web shop cost us $0.9 million.
We
have continued a program to focus on optimal store location. This includes
closing or relocating low performing stores, and opening new stores in Europe.
We have also redesigned several stores to better present our products to
customers. In fiscal 2007, we have plans to open a new store in Amsterdam,
relocate a store in Paris, and we are considering other opportunities for store
optimization. In fiscal 2006, we have taken action to significantly reduce
our
operating costs, including staffing, at Fairchild Sports USA 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,
commercial airlines, corporate aircraft operators, fixed-base operators, air
cargo carriers, general aviation suppliers, and the military. Sales
in our Aerospace segment decreased by $4.9 million, or 5.8%, for fiscal 2006
compared to fiscal 2005. Sales in our Aerospace segment benefited in
2005 from the delivery of several unusually large orders. Sales in
our Aerospace segment increased by $9.1 million, or 12.1%, for fiscal 2005
compared to fiscal 2004. The improvement in sales reflected the delivery of
several unusually large orders delivered in 2005.
Operating
income remained flat at $6.0 million for fiscal 2006, as compared to fiscal
2005. The stable operating income resulted from a 3.0% improvement in gross
margin for fiscal 2006, as compared to fiscal 2005, which offset the decrease
in
sales over the same period. Operating income increased by $2.1 million, or
51.2%, for fiscal 2005 compared to fiscal 2004, reflecting the increase in
sales
volume and a 1.8% increase in gross margin.
Corporate
and Other
Our
other operations consist of a 208,000 square foot manufacturing facility located
in Fullerton, California that we own and lease to Alcoa, and a 58,000 square
foot manufacturing facility located in Huntington Beach, California that we
own
and lease to PCA Aerospace. 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 September 30, 2006,
the
book value of the Huntington Beach property was $2.9 million and we believe
the current fair market value is in excess of $5.5 million.
The
operating loss at corporate was reduced by $6.4 million in fiscal 2006 compared
to fiscal 2005, due primarily to the settlement of shareholder derivative
litigation. We recognized a net reduction in general and administrative expenses
of $5.1 million in fiscal 2006 from net proceeds we received as a result of
settlement of shareholder derivative litigation. The operating loss
increased by $3.7 million in fiscal 2005 compared to fiscal 2004, due primarily
to the added costs of complying with the Sarbanes-Oxley Act of
2002.
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Our
combined debt, which includes debt of discontinued operations, and equity
(“capitalization”) as of September 30, 2006 and 2005 was $181.0 million and
$234.2 million, respectively. The fiscal 2006 change in capitalization included
a net decrease of $31.9 million in debt resulting from assumption of our $53.5
million mortgage loan on Airport Plaza by the acquirer of the property,
obtaining the $30.0 million Golden Tree term loan, and approximately $10.5
million of debt repayments, net of additional
borrowings. Stockholders’ equity decreased by $21.3 million, due
primarily to our $37.3 million reported net loss, offset partially by $3.8
million unrealized gain on available for sale securities as well as $8.1 million
decrease in minimum pension liability. Our combined cash and
investment balances totaled $130.4 million on September 30, 2006, compared
to
$97.9 million on September 30, 2005, and included restricted investments of
$67.0 million and $64.4 million at September 30, 2006 and September 30, 2005,
respectively. Total capitalization as of September 30, 2005 and 2004
was $234.2 million and $277.1 million, respectively. The fiscal 2005 change
in
capitalization included a net decrease of $15.3 million in debt resulting from
approximately $14.1 million of debt repayments net of additional borrowings,
and
a $1.2 million decrease due to the foreign currency effect on debt denominated
in Euros. Stockholders’ equity decreased by $27.6 million, due primarily to our
$19.4 million reported net loss, offset partially by $1.0 million received
on
the repayment of shareholder loans. Our combined cash and investment balances
totaled $97.9 million on September 30, 2005, as compared to $109.4 million
on
September 30, 2004, and included restricted investments of $64.4 million and
$75.0 million at September 30, 2005 and 2004, respectively.
Net
cash used for operating activities for fiscal 2006 was $71.8 million. The
working capital uses of cash in 2006 included a $33.0 million increase in
investments classified as “trading securities”, $15.9 million increase in
inventory, and a $2.7 million increase in other current assets, offset partially
by a $16.0 million increase in accounts payable and other accrued liabilities,
and a $1.8 million decrease in accounts receivable. The working capital uses
of
cash were also affected by our $28.6 million net loss before depreciation and
amortization and $11.9 million of non-cash charges and working capital changes
provided from discontinued operations, including the gain recognized from the
Alcoa earnout. Net cash used for operating activities for fiscal 2005
was $13.1 million. The working capital sources of cash in 2005 included a $10.0
million decrease in accounts receivable, a $4.5 million decrease in inventory,
a
$0.5 million decrease in other current assets, and a $1.0 million decrease
in
other non-current assets, offset partially by an $8.2 million decrease in
accounts payable and other accrued liabilities. The working capital sources
of
cash were offset by our $10.2 million net loss before depreciation and
amortization and $8.5 million of non-cash charges and working capital changes
provided from discontinued operations. Net cash used for operating
activities for fiscal 2004 was $13.1 million. The primary use of cash for
operating activities in 2004 was a $16.5 million increase in inventories, and
a
$16.8 million increase in accounts receivable, offset partially by a $32.5
million decrease in trading securities, a $9.2 million increase in accounts
payable and other accrued liabilities, and our $7.7 million net income before
depreciation and amortization.
Net
cash provided by investing activities for fiscal 2006 was $55.0 million, and
included primarily $40.7 million of proceeds received from the sale of our
shopping center, $12.5 million received from Alcoa as additional earn-out
proceeds from our December 2002 sale of our former fastener business, and $1.4
million of proceeds received from the sale of a landfill development
partnership, offset partially by $7.8 million of capital expenditures. Net
cash
provided by investing activities for fiscal 2005 was $26.8 million, and included
$12.5 million received from Alcoa as additional earn-out proceeds from our
December 2002 sale of our fastener business, $9.5 million of proceeds received
from investment securities, $10.5 million of net proceeds received from the
sale
of non-core property, and $6.0 million received from the sale of Fairchild
Aerostructures in June 2005, offset by $11.7 million of capital expenditures.
Net cash used for investing activities was $97.3 million in fiscal 2004 and
included our payments for acquisition of $75.5 million, net of $15.0 million
of
cash included in the businesses we acquired, as well as $12.2 million of capital
expenditures.
Net
cash provided by financing activities for fiscal 2006 was $12.3 million, which
reflected a $19.5 million net increase in debt from additional borrowings,
offset partially by $4.3 million in settlement of our interest rate contract
and
$0.5 million of term loan repayments associated with our shopping center prior
to its sale. Net cash used for financing activities was $13.8 million for fiscal
2005, which reflects $13.5 million of net debt repayments, offset partially
by
$1.0 million received on repayment of shareholder loans. Net cash provided
by
financing activities was $116.6 million for fiscal 2004, which reflected $51.4
million of net borrowings from discontinued operations, the long-term financing
of $43.4 million for our acquisition of Hein Gericke, PoloExpress, and Fairchild
Sports USA, $13.0 million borrowed to finance property, and $9.0 million
borrowed from a revolving credit facility at our Aerospace segment, offset
partially by $3.2 million of loan fees.
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 available from lines of credit, and proceeds received
from dispositions of short-term investments and other non-core assets, will
be
adequate to satisfy our cash requirements through December 2007.
In
order to improve our liquidity, on December 21, 2005, we signed a definitive
agreement to sell our shopping center, Airport Plaza, located in Farmingdale,
New York, to an affiliate of Kimco Realty Corporation. On July 6, 2006, we
completed the sale of Airport Plaza. We received net proceeds of
approximately $40.7 million from the sale. As a condition to closing, the buyer
assumed our existing mortgage loan on Airport Plaza that had an outstanding
principal balance of approximately $53.5 million on the closing date. 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.
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
acquisition opportunities;
|
·
|
Provide
a guarantee for any additional cash needed by our Hein Gericke segment
and
corporate needs; or
|
·
|
Consider
the repurchase of our outstanding
stock.
|
Our
cash needs are generally the highest during our second and third quarters of
our
fiscal year, when our Hein Gericke and PoloExpress segments purchase inventory
in advance of the spring and summer selling seasons. In November 2006, we
obtained a financing commitment from a second bank to participate in our
seasonal credit facility. Accordingly, €10.0 million was available and utilized
to finance the fiscal 2007 seasonal trough to support our PoloExpress
operations, and €9.0 million will be available to finance the fiscal 2008
season.
Although
we believe that our relationship with the principal lenders to our PoloExpress
and Hein Gericke segments is strong, a significant portion of our debt
facilities are subject to annual renewal. We expect that the
facilities will be renewed annually in the normal course of
business. Should the lenders decide not to renew the facilities, we
believe that we could secure alternative funding sources on commercially
reasonable terms.
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 and corporate governance 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 ceased to be deemed
an accelerated filer in accordance with the United States Securities and
Exchange Commission regulations and were not required to have an external audit
of our internal controls under Section 404 of the Sarbanes-Oxley Act of 2002
in
fiscal 2006. We did not have an external audit of our internal controls
resulting in a reduction in our audit fees in fiscal 2006. However,
audit expenses associated with the restatement are expected to lead to a
substantial increase in 2006 audit fees.
We
considered additional options for reducing our public costs, including
opportunities to take our company private, or “going dark”. An offer to take our
company private at $2.73 per share, led by Jeffrey Steiner, our Chairman and
Chief Executive Officer, and Philip Sassower, was terminated. As of
this date, no further discussions are on-going. However, our senior management
will continue to pursue opportunities to reduce our public costs and our
corporate expenses and consider any other opportunities to restructure our
existing debt and pursue additional merger, acquisition, and divestiture
opportunities.
In
February 2005, we announced our intention to purchase up to 500,000 shares
of
our outstanding Class A Common Stock. Through September 30, 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. We may purchase additional shares in the
future. Under the terms of the Golden Tree loan, in order to
repurchase shares, our Minimum Liquidity, as defined in the Golden Tree
agreement, must exceed $10.0 million. As of September 30, 2006, our
Minimum Liquidity was $53.3 million.
In
the event that our cash needs are substantially higher than projected,
particularly during the fiscal 2008 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.
|
·
|
Refinancing
existing debt and borrowing additional funds which may be available
to us
from improved performances at our Aerospace and PoloExpress operations
or
increased values of certain real estate we
own.
|
·
|
Eliminating,
reducing, or delaying all non-essential services provided by outside
parties, including consultants.
|
·
|
Significantly
reducing overhead expenses at certain operations and our corporate
headquarters.
|
·
|
Delaying
purchases of inventory.
|
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 fiscal 2008 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 the subsequent needs of our operations
by
issuing additional stock or debt, entering into partnership arrangements,
liquidating assets, or other means. Should these actions be insufficient, we
may
be forced to liquidate other non essential assets, and significantly reduce
overhead expenses.
Off Balance Sheet
Items
On
September 30, 2006, approximately $1.5 million of bank loans received by retail
shop partners in the PoloExpress 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 assumed by us when we acquired the PoloExpress
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 these retail stores.
Contractual
Obligations
At
September 30, 2006, we had contractual commitments to repay debt, to make
payments under operating and capital lease obligations, to make pension
contribution payments, and to purchase the remaining 7.5% interest in
PoloExpress. Payments due under these long-term obligations are as
follows:
(In
thousands)
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
$ |
23,546
|
|
|
$ |
31,141
|
|
|
$ |
2,711
|
|
|
$ |
30,377
|
|
|
$ |
589
|
|
|
$ |
-
|
|
|
$ |
88,364
|
|
Estimated
interest costs
|
|
|
6,972
|
|
|
|
4,827
|
|
|
|
4,013
|
|
|
|
1,981
|
|
|
|
49
|
|
|
|
-
|
|
|
|
17,842
|
|
Capital
lease obligations
|
|
|
1,945
|
|
|
|
428
|
|
|
|
204
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,577
|
|
Operating
lease commitments
|
|
|
22,115
|
|
|
|
17,549
|
|
|
|
13,162
|
|
|
|
9,663
|
|
|
|
7,246
|
|
|
|
23,676
|
|
|
|
93,411
|
|
Pension
contributions
|
|
|
1,900
|
|
|
|
8,000
|
|
|
|
7,300
|
|
|
|
7,400
|
|
|
|
8,000
|
|
|
|
15,600
|
|
|
|
48,200
|
|
Postretirement
benefits
|
|
|
2,962
|
|
|
|
2,856
|
|
|
|
2,794
|
|
|
|
2,735
|
|
|
|
2,668
|
|
|
|
11,654
|
|
|
|
25,669
|
|
Acquire
remaining interest in PoloExpress
|
|
|
-
|
|
|
|
13,912
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,912
|
|
Total
contractual cash obligations
|
|
$ |
59,440
|
|
|
$ |
78,713
|
|
|
$ |
30,184
|
|
|
$ |
52,156
|
|
|
$ |
18,552
|
|
|
$ |
50,930
|
|
|
$ |
289,975
|
|
We
have entered into standby letter of credit arrangements with insurance companies
and others, issued primarily to guarantee our payments of workers compensation.
At September 30, 2006, we had contingent liabilities of $3.0 million on
commitments related to outstanding letters of credit.
Our
operations enter into purchase commitments in the normal course of
business.
We
have $31.8 million classified as other long-term liabilities at September 30,
2006, including $13.9 million due to purchase the remaining 7.5% interest in
PoloExpress in April 2008. The remaining $17.9 million of other long-term
liabilities includes environmental and other liabilities, which do not have
specific payment terms or other similar contractual arrangements.
Currently,
we are not being audited by the Internal Revenue Service for any years. However,
we are currently being audited in Germany for 1997 through 2002. Our noncurrent
tax liability was $46.0 million at September 30, 2006. However, based on tax
planning strategies, we do not anticipate having to satisfy the tax liability
over the short-term. In March 2007, our tax liability was reduced by
approximately $26.2 million due to the expiration of the related statute of
limitations and closure of the related tax period.
At September 30, 2006, we have $4.8 million of unused alternative minimum tax
credit carryforwards that do not expire and $187.6 million of federal operating
loss carryforwards expiring as follows: $12.5 million in 2018; $60.9 million
in
2019; $51.3 million in 2020; $4.2 million in 2021; $11.4 million in 2023; $21.9
million in 2024; and $25.4 million in 2025. As the periods of
assessment for 1995 to 2003 have expired during 2007, additional tax may be
collected from us only for 2004 to 2006. Tax losses of $204.8 million
arising in years prior to 2006 may still be reduced for determining the proper
amount of net operating loss available to be carried forward to years after
2003. The Company also has approximately $20.6 million of foreign income tax
and
$18.8 million of foreign trade tax loss carryforwards that have no expiration
period. The Company’s policy is to include deductions that are
subject to contingencies in its disclosed net operating losses. The
gains on the disposal of discontinued operations we reported between 1995 to
2006, for federal income tax, may be significantly increased if our tax position
is not sustained with respect to the sales of several businesses; and the
repayment with property, of debt under a bank credit agreement in which both
we
and our subsidiaries were liable, is not treated as tax free under Section
361
of the Internal Revenue Code of 1986, as amended. If all of these
adjustments were made for 1995 to 2006, the federal income tax loss
carryforwards might be substantially reduced, and we may be required to pay
additional U.S. tax and interest of up to $26.2 million, which has already
been
provided. The amount of additional tax and interest to be paid by us
depends on the amount of income tax audit adjustments, which are made and
sustained for 2004 to 2006. These adjustments, if any, would be made at a future
date, which is presently uncertain, and therefore we cannot predict the timing
of cash outflows. To the extent a favorable final determination of
the recorded income tax liabilities occurs, appropriate adjustments will be
made
to decrease the recorded tax liability in the year such favorable determination
occurs.
Should
any of these liabilities become immediately due, we may be obligated to obtain
financing, raise capital, and/or liquidate assets to satisfy our
obligations.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair
Value Option for Financial Assets and Liabilities. SFAS
No. 159 provides a fair value option election that allows companies to
irrevocably elect fair value as the initial and subsequent measurement attribute
for certain financial assets and liabilities, with changes in fair value
recognized in earnings as they occur. SFAS No. 159 permits the
fair value option election on an instrument by instrument basis at initial
recognition of an asset or liability or upon an event that gives rise to a
new
basis of accounting for that instrument. SFAS No. 159 is
effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007. We are currently evaluating the impact this
new standard will have on our future results of operations and financial
position.
In
September 2006, the FASB published SFAS No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Pension Plans, which
amends SFAS No. 87, SFAS No. 88, SFAS No. 106, and SFAS No.
132(R). SFAS No. 158 requires an employer to recognize in its
statement of financial position the overfunded or underfunded status of a
defined benefit postretirement plan measured as the difference between the
fair
value of plan assets and the benefit obligation. Employers must also recognize
as a component of other comprehensive income, net of tax, the actuarial gains
and losses and the prior service costs and credits that arise during the period.
Statement 158 is effective for fiscal years ending after December 15,
2006. If SFAS No. 158 was adopted as of September 30, 2006, the
Company would have recorded a reduction in prepaid assets and other assets
of
$18.1 million and $1.5 million, respectively, a decrease in pension liabilities
of $2.6 million, and a charge to other accumulated comprehensive income (loss)
of $17.0 million.
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, which is intended to increase consistency and comparability
in fair value measurements by defining fair value, establishing a framework
for
measuring fair value and expanding disclosures about fair value measurements.
SFAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. We
are currently evaluating the impact this new standard will have on our future
results of operations and financial position.
In
July 2006, the FASB issued Interpretation No. (“FIN”) 48, Accounting
for Uncertainty in Income Taxes. FIN 48 requires the use of a two-step
approach for recognizing and measuring tax benefits taken or expected to be
taken in a tax return and disclosures regarding uncertainties in income tax
positions. We are required to adopt FIN 48 effective October 1, 2007. The
cumulative effect of initially adopting FIN 48 will be recorded as an adjustment
to opening retained earnings in the year of adoption and will be presented
separately. Only tax positions that meet the more likely than not recognition
threshold at the effective date may be recognized upon adoption of FIN 48.
We
are currently evaluating the impact this new standard will have on our future
results of operations and financial position.
In
February 2006, the FASB issued SFAS No. 155, Accounting for
Certain Hybrid Financial Instruments, which amends
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, and SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS No. 155 simplifies the accounting
for certain derivatives embedded in other financial instruments by allowing
them
to be accounted for as a whole if the holder elects to account for the entire
instrument on a fair value basis. SFAS No. 155 also clarifies and
amends certain other provisions of SFAS No. 133 and
SFAS No. 140. SFAS No. 155 is effective for all financial
instruments acquired, issued or subject to a remeasurement event occurring
in
fiscal years beginning after September 15, 2006. Earlier adoption is
permitted, provided the company has not yet issued financial statements,
including for interim periods, for that fiscal year. We are currently assessing
the possible impact, if any, of implementing this standard.
In
June 2005, the FASB published SFAS No. 154, Accounting Changes and Error
Corrections, which requires retrospective application to prior periods’
financial statements of every voluntary change in accounting principle
unless it
is impracticable. The Statement replaces Accounting Principles Board Opinion
(“APB”) No. 20, Accounting Changes, and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements, although it carries
forward some of their provisions. The FASB believes that the Statement’s
requirements will enhance the consistency of financial information between
periods and is the result of the FASB’s efforts to improve the comparability of
cross-border financial reporting by working with the International Accounting
Standards Board toward development of a single set of high-quality accounting
standards. Statement 154 is effective for accounting changes and corrections
of
errors made in fiscal years beginning after December 15, 2005. We do not
anticipate any impact from adopting this new standard.
In
March 2005, the FASB issued FIN 47, Accounting for Conditional Asset
Retirement Obligations. FIN 47 clarifies the term “conditional” as used in
SFAS No. 143, Accounting for Asset Retirement Obligations. This
interpretation refers to a legal obligation to perform an asset retirement
activity even if the timing and/or settlement is conditional on a future event
that may or may not be within the control of an entity. Accordingly, the entity
must record a liability for the conditional asset retirement obligation if
the
fair value of the obligation can be reasonably estimated. FIN 47 is effective
for fiscal years ending after December 15, 2005. The adoption of FIN 47 did
not
have a material impact on our consolidated financial statements.
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 No. 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 September 30, 2006, the fair value of this instrument
is nominal.
Essentially
all of our other outstanding debt is variable rate debt. We are
exposed to risks of rising interest rates, which could result in rising interest
costs.
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 deem it appropriate, we may consider utilizing foreign
currency forward contracts in the future. For fiscal 2006, we estimate that
approximately 74% of our total revenues were derived from customers outside
of
the United States, with approximately 71% of our total revenues denominated
in
currencies other than the U.S. dollar. We estimate that revenue and operating
expenses for fiscal 2006 were lower by $4.3 million and $2.1 million,
respectively, as a result of changes in exchange rates compared to fiscal
2005.
At September 30, 2006, we had $41.9 million of working capital denominated
in foreign currencies. At September 30, 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 September 30,
2006:
|
Euro
|
British
Pound
|
Swiss
Franc
|
Exposure
|
Revenues
|
80%
|
18%
|
2%
|
100%
|
Operating
Expenses
|
82%
|
17%
|
1%
|
100%
|
Working
Capital
|
85%
|
13%
|
2%
|
100%
|
A
hypothetical 10% strengthening of the U.S. dollar during fiscal 2006 versus
the
foreign currencies in which we have exposure would have reduced revenue by
approximately $20.0 million and reduced operating expenses by approximately
$9.8 million, resulting in a $10.2 million improvement in our
operating loss as compared to what was actually reported. Working capital
at
September 30, 2006, would have been approximately $3.8 million lower than
actually reported, if we had used this hypothetical stronger U.S. dollar.
These
numbers were estimated using the different hypothetical rate for the entire
year
and applying it evenly to all non U.S. dollar transactions.
Inflation:
We believe that inflation has not had a material impact on our results
of
operations for fiscal 2006. However, we cannot assure you that future inflation
would not have an adverse impact on our operating results and financial
condition.
The
following consolidated financial statements of the Company and the report of
our
independent auditors, are set forth below.
|
|
Page
|
|
|
|
Report of KPMG LLP, Independent Registered Public Accounting
Firm |
|
33
|
|
|
|
Consolidated Balance Sheets as of September 30, 2006 and 2005 |
|
34
|
|
|
|
Consolidated Statements of Operations for the years ended September
30,
2006, 2005, and 2004 |
|
36
|
|
|
|
Consolidated Statements of Stockholders’ Equity for the years ended
September 30, 2006, 2005, and 2004 |
|
37
|
|
|
|
Consolidated Statements of Cash Flows for the years ended September
30,
2006, 2005, and 2004 |
|
38
|
|
|
|
Notes to Consolidated Financial Statements |
|
39
|
Supplementary
information regarding “Quarterly Financial Data (Unaudited)” is set forth under
Item 8 in Note 18 to Consolidated Financial Statements.
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders of
The
Fairchild Corporation:
We
have
audited the accompanying consolidated balance sheets of The Fairchild
Corporation and subsidiaries (the “Company”) as of September 30, 2006 and 2005,
and the related consolidated statements of operations, stockholders’ equity and
cash flows for each of the years in the three-year period ended September 30,
2006. In connection with our audits of the consolidated financial statements,
we
also have audited financial statement schedule listed in Item
15(a)(2). These consolidated financial statements and financial
statement schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of The Fairchild Corporation
and subsidiaries as of September 30, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 2006, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth herein.
As
discussed in Note 2 to the consolidated financial statements, the Company
has restated its consolidated financial statements as of September 30, 2005
and
for each of the years ended September 30, 2005 and 2004.
/s/
KPMG
LLP
McLean,
Virginia
August
13, 2007
THE
FAIRCHILD CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands)
ASSETS
|
|
September
30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Restated
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
8,541
|
|
|
$ |
12,582
|
|
Short-term
investments - unrestricted
|
|
|
50,510
|
|
|
|
10,733
|
|
Short-term
investments - restricted
|
|
|
6,002
|
|
|
|
4,965
|
|
Accounts
receivable-trade, less allowances of $1,083 and $2,679
|
|
|
16,927
|
|
|
|
18,475
|
|
Inventories,
less reserves for obsolescence of $15,223 and $15,118
|
|
|
106,718
|
|
|
|
90,856
|
|
Current
assets of discontinued operations
|
|
|
-
|
|
|
|
1,509
|
|
Prepaid
expenses and other current assets
|
|
|
10,795
|
|
|
|
8,122
|
|
Total
Current Assets
|
|
|
199,493
|
|
|
|
147,242
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net of accumulated
|
|
|
|
|
|
|
|
|
depreciation
of $24,989 and $18,453
|
|
|
58,698
|
|
|
|
57,468
|
|
Noncurrent
assets of discontinued operations
|
|
|
-
|
|
|
|
79,373
|
|
Goodwill
|
|
|
14,128
|
|
|
|
13,961
|
|
Amortizable
intangible assets, net of accumulated
|
|
|
|
|
|
|
|
|
amortization
of $1,673 and $1,073
|
|
|
1,279
|
|
|
|
1,729
|
|
Non-amortizable
intangible assets
|
|
|
30,969
|
|
|
|
29,424
|
|
Prepaid
pension assets
|
|
|
33,373
|
|
|
|
31,239
|
|
Deferred
loan costs
|
|
|
3,170
|
|
|
|
1,839
|
|
Long-term
investments - restricted
|
|
|
60,949
|
|
|
|
59,419
|
|
Long-term
investments - unrestricted
|
|
|
4,370
|
|
|
|
10,233
|
|
Notes
receivable
|
|
|
5,396
|
|
|
|
9,765
|
|
Other
assets
|
|
|
3,304
|
|
|
|
6,947
|
|
TOTAL
ASSETS
|
|
$ |
415,129
|
|
|
$ |
448,639
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part
of
these statements.
THE
FAIRCHILD CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except per share data)
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
September
30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Restated
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
Bank
notes payable and current maturities of long-term debt
|
|
$ |
25,492
|
|
|
$ |
20,902
|
|
Accounts
payable
|
|
|
26,325
|
|
|
|
22,602
|
|
Accrued
liabilities:
|
|
|
|
|
|
|
|
|
Salaries,
wages and commissions
|
|
|
10,044
|
|
|
|
10,187
|
|
Insurance
|
|
|
7,357
|
|
|
|
7,335
|
|
Interest
|
|
|
1,810
|
|
|
|
443
|
|
Other
accrued liabilities
|
|
|
28,304
|
|
|
|
18,588
|
|
Income
taxes
|
|
|
2,314
|
|
|
|
1,029
|
|
Current
liabilities of discontinued operations
|
|
|
62
|
|
|
|
1,540
|
|
Total
Current Liabilities
|
|
|
101,708
|
|
|
|
82,626
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES:
|
|
|
|
|
|
|
|
|
Long-term
debt, less current maturities
|
|
|
65,450
|
|
|
|
47,990
|
|
Fair
value of interest rate contract
|
|
|
-
|
|
|
|
5,146
|
|
Other
long-term liabilities
|
|
|
31,750
|
|
|
|
27,669
|
|
Pension
liabilities
|
|
|
40,622
|
|
|
|
51,099
|
|
Retiree
health care liabilities
|
|
|
26,008
|
|
|
|
27,459
|
|
Deferred
tax liabilities
|
|
|
4,530
|
|
|
|
3,438
|
|
Noncurrent
income taxes
|
|
|
39,923
|
|
|
|
38,385
|
|
Noncurrent
liabilities of discontinued operations
|
|
|
16,120
|
|
|
|
53,481
|
|
TOTAL
LIABILITIES
|
|
|
326,111
|
|
|
|
337,293
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
Class
A common stock, $0.10 par value; 40,000 shares authorized,
|
|
|
|
|
|
|
|
|
30,480
(30,480 in Sept. 2005) shares issued and 22,605 (22,605 in
|
|
|
|
|
|
|
|
|
Sept.
2005); 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
(2,621 in Sept. 2005) shares issued and outstanding;
entitled
|
|
|
|
|
|
|
|
|
to
ten votes per share
|
|
|
262
|
|
|
|
262
|
|
Paid-in
capital
|
|
|
232,612
|
|
|
|
232,457
|
|
Treasury
stock, at cost, 7,875 (7,875 in Sept. 2005) shares
|
|
|
|
|
|
|
|
|
of
Class A common stock
|
|
|
(76,352 |
) |
|
|
(76,352 |
) |
Retained
earnings (accumulated deficit)
|
|
|
(15,680 |
) |
|
|
21,619
|
|
Notes
due from stockholders
|
|
|
(43 |
) |
|
|
(109 |
) |
Accumulated
other comprehensive loss
|
|
|
(54,828 |
) |
|
|
(69,578 |
) |
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
89,018
|
|
|
|
111,346
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$ |
415,129
|
|
|
$ |
448,639
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part
of
these statements.
THE
FAIRCHILD CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except share and per share data)
|
|
Years
Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
308,641
|
|
|
$ |
341,587
|
|
|
$ |
318,132
|
|
Rental
revenue
|
|
|
950
|
|
|
|
656
|
|
|
|
930
|
|
|
|
|
309,591
|
|
|
|
342,243
|
|
|
|
319,062
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
185,712
|
|
|
|
211,582
|
|
|
|
196,409
|
|
Cost
of rental revenue
|
|
|
238
|
|
|
|
169
|
|
|
|
163
|
|
Selling,
general & administrative
|
|
|
155,364
|
|
|
|
163,734
|
|
|
|
145,136
|
|
Other
income, net
|
|
|
(5,336 |
) |
|
|
(5,497 |
) |
|
|
(9,647 |
) |
Amortization
of intangibles
|
|
|
542
|
|
|
|
560
|
|
|
|
537
|
|
Restructuring
charges
|
|
|
-
|
|
|
|
-
|
|
|
|
563
|
|
|
|
|
336,520
|
|
|
|
370,548
|
|
|
|
333,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
LOSS
|
|
|
(26,929 |
) |
|
|
(28,305 |
) |
|
|
(14,099 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(11,498 |
) |
|
|
(13,143 |
) |
|
|
(12,154 |
) |
Interest
income
|
|
|
2,997
|
|
|
|
1,716
|
|
|
|
1,555
|
|
Net
interest expense
|
|
|
(8,501 |
) |
|
|
(11,427 |
) |
|
|
(10,599 |
) |
Investment
income
|
|
|
2,923
|
|
|
|
5,920
|
|
|
|
3,733
|
|
Fair
market value increase in interest rate contract
|
|
|
836
|
|
|
|
5,942
|
|
|
|
4,924
|
|
Loss
from continuing operations before income taxes
|
|
|
(31,671 |
) |
|
|
(27,870 |
) |
|
|
(16,041 |
) |
Income
tax (provision) benefit
|
|
|
(2,176 |
) |
|
|
1,048 |
|
|
|
8,953
|
|
Equity
in loss of affiliates, net
|
|
|
(43 |
) |
|
|
(487 |
) |
|
|
(300 |
) |
Loss
from continuing operations
|
|
|
(33,890 |
) |
|
|
(27,309 |
) |
|
|
(7,388 |
) |
Net
loss from discontinued operations
|
|
|
(14,405 |
) |
|
|
(4,806 |
) |
|
|
(13,913 |
) |
Net
gain on disposal of discontinued operations
|
|
|
13,600
|
|
|
|
13,575
|
|
|
|
9,522
|
|
Income
tax (provision) benefit from discontinued operations
|
|
|
(2,604 |
) |
|
|
(825
|
) |
|
|
14,010
|
|
NET
EARNINGS (LOSS)
|
|
$ |
(37,299 |
) |
|
$ |
(19,365 |
) |
|
$ |
2,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED EARNINGS (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(1.34 |
) |
|
$ |
(1.08 |
) |
|
$ |
(0.29 |
) |
Loss
from discontinued operations, net
|
|
|
(0.58 |
) |
|
|
(0.19 |
) |
|
|
(0.56 |
) |
Gain
on disposal of discontinued operations, net
|
|
|
0.54
|
|
|
|
0.54
|
|
|
|
0.38
|
|
Income
tax (provision) benefit from discontinued operations
|
|
|
(0.10 |
) |
|
|
(0.03
|
) |
|
|
0.56
|
|
NET
EARNINGS (LOSS)
|
|
$ |
(1.48 |
) |
|
$ |
(0.76 |
) |
|
$ |
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
25,226
|
|
|
|
25,224
|
|
|
|
25,192
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part
of
these statements.
THE
FAIRCHILD CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(In
thousands, except share data)
|
|
|
Class
A Common Stock
|
|
|
|
Class
B Common Stock
|
|
|
|
Paid-in
Capital
|
|
|
|
Treasury
Stock
|
|
|
|
Retained
Earnings (Accumulated Deficit)
|
|
|
|
Notes
Due From Stockholders
|
|
|
|
Accumulated
Other Comprehensive Loss
|
|
|
|
Total
|
|
Balance,
October 1, 2003
|
|
$ |
3,037
|
|
|
$ |
262
|
|
|
$ |
232,741
|
|
|
$ |
(76,459 |
) |
|
$ |
38,129
|
|
|
$ |
(1,508 |
) |
|
$ |
(60,687 |
) |
|
$ |
135,515
|
|
Effect
of restatement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
624
|
|
|
|
-
|
|
|
|
-
|
|
|
|
624
|
|
Restated
balance, October 1, 2003
|
|
|
3,037
|
|
|
|
262
|
|
|
|
232,741
|
|
|
|
(76,459 |
) |
|
|
38,753
|
|
|
|
(1,508 |
) |
|
|
(60,687 |
) |
|
|
136,139
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
net earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,231
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,231
|
|
Cumulative
translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
517
|
|
|
|
517
|
|
Change
in fair market value of cash flow hedges
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
105
|
|
|
|
105
|
|
Excess
of additional pension liability over unrecognized
prior service cost
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,811 |
) |
|
|
(1,811 |
) |
Net
unrealized holding changes on available-for-sale
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,242
|
|
|
|
1,242
|
|
Total
restated comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,284
|
|
Proceeds
from stockholders loan repayments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
447
|
|
|
|
-
|
|
|
|
447
|
|
Proceeds
received from stock options exercised
|
|
|
1
|
|
|
|
-
|
|
|
|
25
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26
|
|
Restated
balance, September 30, 2004
|
|
|
3,038
|
|
|
|
262
|
|
|
|
232,766
|
|
|
|
(76,459 |
) |
|
|
40,984
|
|
|
|
(1,061 |
) |
|
|
(60,634 |
) |
|
|
138,896
|
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(19,365 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(19,365 |
) |
Cumulative
translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,366 |
) |
|
|
(1,366 |
) |
Change
in fair market value of cash flow hedges
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
114
|
|
|
|
114
|
|
Excess
of additional pension liability over unrecognized prior service
cost
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,457 |
) |
|
|
(7,457 |
) |
Net
unrealized holding changes on available-for-sale
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(235 |
) |
|
|
(235 |
) |
Total
restated comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,309 |
) |
Proceeds
received from deferred compensation units exercised
|
|
|
9
|
|
|
|
-
|
|
|
|
(309 |
) |
|
|
300
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Purchase
of treasury shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(193 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(193 |
) |
Proceeds
from stockholders loan repayments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
952
|
|
|
|
-
|
|
|
|
952
|
|
Restated
balance, September 30, 2005
|
|
|
3,047
|
|
|
|
262
|
|
|
|
232,457
|
|
|
|
(76,352 |
) |
|
|
21,619
|
|
|
|
(109 |
) |
|
|
(69,578 |
) |
|
|
111,346
|
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(37,299 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(37,299 |
) |
Cumulative
translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,591
|
|
|
|
2,591
|
|
Change
in fair market value of cash flow hedges
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
298
|
|
|
|
298
|
|
Excess
of additional pension liability over unrecognized
prior service cost
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,051
|
|
|
|
8,051
|
|
Net
unrealized holding changes onavailable-for-sale
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,810
|
|
|
|
3,810
|
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,549 |
) |
Compensation
expense from stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
155
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
155
|
|
Proceeds
from stockholders loan repayments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
66
|
|
|
|
-
|
|
|
|
66
|
|
Balance,
September 30, 2006
|
|
$ |
3,047
|
|
|
$ |
262
|
|
|
$ |
232,612
|
|
|
$ |
(76,352 |
) |
|
$ |
(15,680 |
) |
|
$ |
(43 |
) |
|
$ |
(54,828 |
) |
|
$ |
89,018
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part
of
these statements.
THE
FAIRCHILD CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Years
Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss)
|
|
$ |
(37,299 |
) |
|
$ |
(19,365 |
) |
|
$ |
2,231
|
|
Depreciation
and amortization
|
|
|
7,523
|
|
|
|
7,873
|
|
|
|
5,011
|
|
Deferred
loan fee amortization
|
|
|
1,138
|
|
|
|
1,329
|
|
|
|
412
|
|
Gain
on sale of property, plant, and equipment, net
|
|
|
(8 |
) |
|
|
(645 |
) |
|
|
(39 |
) |
Compensation
expense from stock options
|
|
|
155
|
|
|
|
-
|
|
|
|
-
|
|
Equity
in loss of affiliates, net of distributions
|
|
|
43
|
|
|
|
487
|
|
|
|
300
|
|
Unrealized
holding gain on interest rate contract
|
|
|
(836 |
) |
|
|
(5,942 |
) |
|
|
(4,924 |
) |
Loss
from impairments
|
|
|
-
|
|
|
|
2,894
|
|
|
|
1,206
|
|
Realized
gain from sale and impairment of investments
|
|
|
(1,812 |
) |
|
|
(7,022 |
) |
|
|
(4,263 |
) |
Change
in trading securities
|
|
|
(33,048 |
) |
|
|
8,097
|
|
|
|
32,518
|
|
Change
in accounts receivable
|
|
|
1,798
|
|
|
|
9,975
|
|
|
|
(16,805 |
) |
Change
in inventories
|
|
|
(15,862 |
) |
|
|
4,456
|
|
|
|
(16,520 |
) |
Change
in prepaid expenses and other current assets
|
|
|
(2,673 |
) |
|
|
513
|
|
|
|
(3,613 |
) |
Change
in other non-current assets
|
|
|
5,053
|
|
|
|
978
|
|
|
|
(19,956 |
) |
Change in accounts payable, accrued liabilities and other long-term
liabilities
|
|
|
15,970
|
|
|
|
(8,226 |
) |
|
|
9,219
|
|
Non-cash
charges and working capital changes of discontinued
operations
|
|
|
(11,915 |
) |
|
|
(8,462 |
) |
|
|
2,122
|
|
Net
cash used for operating activities
|
|
|
(71,773 |
) |
|
|
(13,060 |
) |
|
|
(13,101 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(7,777 |
) |
|
|
(11,668 |
) |
|
|
(12,260 |
) |
Proceeds
from sale of plant, property and equipment
|
|
|
61
|
|
|
|
10,502
|
|
|
|
4,264
|
|
Change
in available-for-sale investment securities, net
|
|
|
4,239
|
|
|
|
9,532
|
|
|
|
(18,577 |
) |
Equity
investment in affiliates
|
|
|
-
|
|
|
|
(400 |
) |
|
|
-
|
|
Acquisitions,
net of cash acquired
|
|
|
-
|
|
|
|
-
|
|
|
|
(75,495 |
) |
Net
proceeds received from the sale of discontinued operations
|
|
|
54,561
|
|
|
|
18,500
|
|
|
|
5,736
|
|
Changes
in notes receivable
|
|
|
4,001
|
|
|
|
963
|
|
|
|
152
|
|
Investing
activities of discontinued operations
|
|
|
(98 |
) |
|
|
(627 |
) |
|
|
(1,104 |
) |
Net
cash provided by (used for) investing activities
|
|
|
54,987
|
|
|
|
26,802
|
|
|
|
(97,284 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of debt
|
|
|
50,068
|
|
|
|
29,894
|
|
|
|
171,493
|
|
Debt
repayments
|
|
|
(30,589 |
) |
|
|
(43,395 |
) |
|
|
(103,507 |
) |
Issuance
of Class A common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
26
|
|
Purchase
of treasury stock
|
|
|
-
|
|
|
|
(193 |
) |
|
|
-
|
|
Payment
of financing fees
|
|
|
(2,403 |
) |
|
|
(377 |
) |
|
|
(3,246 |
) |
Proceeds
from stockholder loan repayments
|
|
|
66
|
|
|
|
952
|
|
|
|
447
|
|
Payment
of interest rate contract
|
|
|
(4,310 |
) |
|
|
-
|
|
|
|
-
|
|
Financing
activities of discontinued operations
|
|
|
(504 |
) |
|
|
(688 |
) |
|
|
51,409
|
|
Net
cash provided by (used for) financing activities
|
|
|
12,328
|
|
|
|
(13,807 |
) |
|
|
116,622
|
|
Net
change in cash and cash equivalents
|
|
|
(4,458 |
) |
|
|
(65 |
) |
|
|
6,237
|
|
Effect
of exchange rate changes on cash
|
|
|
417
|
|
|
|
(202 |
) |
|
|
11
|
|
Cash
and cash equivalents, beginning of the period
|
|
|
12,582
|
|
|
|
12,849
|
|
|
|
6,601
|
|
Cash
and cash equivalents, end of the period
|
|
$ |
8,541
|
|
|
$ |
12,582
|
|
|
$ |
12,849
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part
of
these statements.
THE
FAIRCHILD CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES:
|
General:
All references in the notes to the consolidated financial statements to the
terms ‘‘we,’’ ‘‘our,’’ ‘‘us,’’ the ‘‘Company’’ and ‘‘Fairchild’’ refer to The
Fairchild Corporation and its subsidiaries.
Corporate
Structure: 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. and Banner Aerospace Holding
Company I, Inc. Effective November 1, 2003 and January 2, 2004, Fairchild
Holding Corp. acquired ownership interests in Hein Gericke, PoloExpress, and
Fairchild Sports USA. Our principal operations are conducted through these
entities. Our consolidated financial statements present the results of our
former fastener business, Airport Plaza shopping center, Royal Oaks landfill,
Fairchild Aerostructures, and APS as discontinued operations.
Nature
of Business Operations: Our business consists of three segments:
PoloExpress; Hein Gericke; and Aerospace. Our PoloExpress and Hein
Gericke segments are engaged in the design and retail sale of protective
clothing, helmets and technical accessories for motorcyclists in Europe and
our
Hein Gericke segment is also engaged in the design, licensing, and distribution
of such apparel in the United States. Our Aerospace segment stocks a
wide variety of aircraft parts and distributes them to commercial airlines,
and
air cargo carriers, fixed-base operators, corporate aircraft operators and
other
aerospace companies worldwide.
Fiscal
Year: Our fiscal year ends September 30. All references herein
to “2006”, “2005”, or “2004” mean the fiscal years ended September 30,
respectively.
Basis
of Presentation: The accompanying consolidated financial statements are
prepared in accordance with accounting principles generally accepted in the
United States (“GAAP”) and include our accounts and all of the accounts of our
subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation. Certain amounts in our prior
years' consolidated financial statements have been reclassified to conform
to
the 2006 presentation.
As
more fully discussed in Note 2, the 2005 and 2004 consolidated financial
statements presented herein have been restated.
Liquidity:
The
Company has experienced losses from operations and negative operating cash
flows
in each of the years for the three years ended September 30,
2006. Although the Company believes its financial resources are
sufficient to fund its operations and other contractual obligations in the
near
term, our cash needs could be substantially higher than projected. The
Company believes it has sufficient financial flexibility to meet the near term
liquidity needs, including the potential to refinance existing debt, borrow
additional funds, sell non-core assets, or reduce operational cash
disbursements. However, external factors could impact our ability to
execute these alternatives.
Revenue
Recognition: Revenues in our PoloExpress and Hein Gericke segments are
recognized immediately upon the sale of merchandise by our retail stores. Sales
and related costs in our Aerospace segment are recognized on shipment of
products and/or performance of services, when collection is probable. Shipping
and handling amounts billed to customers are classified as
revenues.
Shipping
and Handling Costs: Shipping and handling costs are expensed as incurred
and included in cost of goods sold.
Concentration
of Credit Risk: Financial instruments that potentially subject us to a
concentration of credit risk consist principally of cash, cash equivalents,
and
trade receivables. We sell approximately 26% of our products throughout the
world to a large number of customers, primarily in the aerospace industry.
To
reduce credit risk, we perform ongoing credit evaluations of our customers’
financial condition. Generally, we do not require collateral. We invest
available cash in money market securities of financial institutions with high
credit ratings and United States treasury securities. We also invest restricted
funds in longer term opportunities, which we believe will result in better
rates
of return. Investment portfolios are subject to fluctuations in market
value.
Cash
Equivalents/Statements of Cash Flows: For purposes of the Statements of
Cash Flows, we consider all highly liquid investments with original maturity
dates of three months or less as cash equivalents. Cash is invested in
short-term treasury bills and certificates of deposit. Total net cash
disbursements made by us for income taxes and interest expense were as
follows:
(In
thousands)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Interest
|
|
$ |
10,131
|
|
|
$ |
13,488
|
|
|
$ |
12,052
|
|
Income
taxes
|
|
|
260
|
|
|
|
520
|
|
|
|
263
|
|
Restricted
Cash and Investments: On September 30, 2006 and September 30, 2005, we had
restricted investments of $67.0 million and $64.4 million, respectively, all
of
which are maintained as collateral for certain debt facilities, our interest
rate contract, environmental matters, and escrow arrangements. The restricted
funds are invested in money market funds, equity securities, U.S. government
securities, or high investment grade corporate bonds. Restricted cash and
investments are classified as short-term and long-term investments on September
30, 2006 and 2005 depending upon the length of the restriction period and are
classified as available-for-sale securities.
Investments:
Management determines the appropriate classification of our investments at
the
time of acquisition and reevaluates such determination at each balance sheet
date. Cash equivalents and investments consist primarily of money
market accounts, investments in United States government securities, investment
grade corporate bonds, credit derivative obligations, and equity
securities. Investments in common stock of public corporations are
recorded at fair market value and classified as trading securities or
available-for-sale securities. Investments in credit derivative
obligations, characterized as other securities, are recorded at fair market
value and classified as available-for-sale securities. Other long-term
investments do not have readily determinable fair values and consist primarily
of investments in preferred and common shares of private companies and limited
partnerships.
Available-for-sale
securities are carried at fair value, with unrealized holding gains and losses,
net of tax, reported as a separate component of stockholders' equity, except
to
the extent that unrealized losses are deemed to be other than temporary, in
which case such unrealized losses are reflected in earnings. Trading
securities are carried at fair value, with unrealized holding gains and losses
included in investment income. Investments in equity securities and
limited partnerships that do not have readily determinable fair values are
stated at cost and are categorized as other investments. Realized gains and
losses are determined using the specific identification method based on the
trade date of a transaction. Interest on government and corporate
obligations are accrued at the balance sheet date. Investments in companies
in
which ownership interests range from 20 to 50 percent are accounted for using
the equity method.
Accounts
Receivable: Accounts receivable is stated at the amount we expect to
collect. We provide an allowance for doubtful accounts equal to the estimated
uncollectible amounts. Our estimate is based on historical collection experience
and a review of the current status of trade accounts receivable. Account
balances are charged against the allowance after collection efforts have been
exhausted and the potential recovery is considered remote. It is reasonably
possible that our estimate of allowance for doubtful accounts will change in
the
future. Changes in the allowance for doubtful accounts are as
follows:
(In
thousands)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Beginning
balance
|
|
$ |
2,679
|
|
|
$ |
2,775
|
|
|
$ |
1,221
|
|
From
acquired companies
|
|
|
-
|
|
|
|
-
|
|
|
|
1,983
|
|
Charges
to cost and expenses
|
|
|
1,002
|
|
|
|
629
|
|
|
|
48
|
|
Charges
to other accounts (a)
|
|
|
41
|
|
|
|
(183 |
) |
|
|
161
|
|
Amounts
written off
|
|
|
(2,639 |
) |
|
|
(542 |
) |
|
|
(638 |
) |
Ending
balance
|
|
$ |
1,083
|
|
|
$ |
2,679
|
|
|
$ |
2,775
|
|
(a)
|
Represent
recoveries of amounts written off in prior periods and foreign currency
translation adjustments.
|
Inventories:
Inventories, all of which are finished goods, are stated at the lower of cost
or
market. Cost is determined using the first-in, first-out ("FIFO") method. Market
is determined based on net realizable value. Appropriate consideration is given
to obsolescence, excess quantities, and other factors in evaluating net
realizable value. Changes in the reserve for obsolescence are as
follows:
(In
thousands)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Beginning
balance
|
|
$ |
15,118
|
|
|
$ |
13,681
|
|
|
$ |
7,765
|
|
From
acquired companies
|
|
|
-
|
|
|
|
-
|
|
|
|
2,107
|
|
Charges
to cost and expenses
|
|
|
768
|
|
|
|
3,378
|
|
|
|
4,320
|
|
Charges
to other accounts (a)
|
|
|
196
|
|
|
|
(616 |
) |
|
|
155
|
|
Amounts
written off
|
|
|
(859 |
) |
|
|
(1,325 |
) |
|
|
(666 |
) |
Ending
balance
|
|
$ |
15,223
|
|
|
$ |
15,118
|
|
|
$ |
13,681
|
|
(a)
|
Represent
recoveries of amounts written off in prior periods and foreign currency
translation adjustments.
|
Properties
and Depreciation: The cost of property, plant and equipment is depreciated
over the estimated useful lives of the related assets. The cost of leasehold
improvements is depreciated over the lesser of the length of the related leases
or the estimated useful lives of the assets. Our machinery and equipment is
depreciated over a 5 to 10 year range. Depreciation is computed using the
straight-line method for financial reporting purposes. Ordinary repairs and
maintenance are expensed as incurred and major replacements and improvements
are
capitalized. Building and improvements are depreciated on a straight-line basis
over an estimated useful life of 30 years. Depreciation expense was $7.0 million
in fiscal 2006, $7.4 million in fiscal 2005, and $4.5 million in fiscal 2004.
Property, plant and equipment consisted of the following:
|
|
September
30,
|
|
(In
thousands)
|
|
2006
|
|
|
2005
|
|
Land
|
|
$ |
21,606
|
|
|
$ |
21,605
|
|
Building
and improvements
|
|
|
11,482
|
|
|
|
11,616
|
|
Machinery
and equipment
|
|
|
14,866
|
|
|
|
13,442
|
|
Transportation
vehicles
|
|
|
7,134
|
|
|
|
6,471
|
|
Furniture
and fixtures
|
|
|
24,838
|
|
|
|
19,237
|
|
Construction
in progress
|
|
|
3,761
|
|
|
|
3,550
|
|
Property,
plant and equipment, at cost
|
|
|
83,687
|
|
|
|
75,921
|
|
Less:
Accumulated depreciation
|
|
|
24,989
|
|
|
|
18,453
|
|
Net
property, plant and equipment
|
|
$ |
58,698
|
|
|
$ |
57,468
|
|
Leases:
We recognize rental income and rental expense on a straight-line basis over
the
minimum contractual lease term. Lease incentives, if any, including free rent
are also recognized on a straight line basis.
Goodwill
and Intangible Assets: Goodwill and intangible assets deemed to have an
indefinite life are tested for impairment annually, or immediately if conditions
indicate that such an impairment could exist. We allocated to goodwill and
intangible assets $36.0 million, as restated, of our purchase price associated
with our fiscal 2004 acquisition of Hein Gericke, PoloExpress and Fairchild
Sports USA. Approximately $33.6 million, as restated, of the intangible assets
we acquired were determined to have indefinite lives. Acquired finite-lived
intangibles are generally amortized on a straight-line basis over two to five
years. In 2006, 2005, and 2004, we recognized $0.5 million, $0.6
million, and $0.5 million, respectively, of amortization expense for intangible
assets with definite lives. We expect annual amortization expense will be
approximately $0.5 million in each of the next two fiscal years.
Deferred
Loan Costs: Costs incurred in connection with the issuance of debentures
and credit facilities are deferred and amortized, using the effective interest
method over the term of the agreements. Amortization expense of these loan
costs
was $1.1 million in 2006, $1.3 million in 2005, and $0.4 million in
2004.
Valuation
of Long-Lived Assets: We review our long-lived assets for impairment,
including property, plant and equipment, and identifiable intangibles with
definite lives, whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable. To
determine recoverability of our long-lived assets, we evaluate the probability
that future undiscounted net cash flows will be greater than the carrying amount
of our assets. Impairment is measured based on the difference between
the carrying amount of our assets and their estimated fair value. Impairment
charges of $2.9 million and $1.2 million were recorded in 2005 and 2004,
respectively. Our decision in the fourth quarter of 2005 to no longer provide
funds to our landfill development partnership caused impairment recognition
of
$2.9 million in fiscal 2005. The 2004 impairment charges included $1.2 million
to write down the long-lived assets of a limited partnership interest which
we
are required to consolidate in accordance with Financial Accounting Standards
Board Interpretation (“FIN”) No. 46R. The impairment charges in fiscal 2005 and
fiscal 2004 were reclassified to Loss from discontinued operations, net as
the
amounts pertained to businesses we sold.
Environmental Liabilities: We recognize environmental cleanup
liabilities when a loss is probable and can be reasonably estimated for
liabilities that are not subject to insurance coverage. We estimate
the cost of each environmental cleanup based on consultation with external
specialists, based on current law, considering the estimated cost of
investigation and remediation required and the likelihood that, where
applicable, other potentially responsible parties will be able to fulfill their
commitments at the sites where we may be jointly and severally
liable. The process of estimating environmental cleanup liabilities
is complex and dependent primarily on the nature and extent of historical
information and physical data relating to a contaminated site, the complexity
of
the site, the uncertainty as to what remediation will be required and what
technology will be employed therefor, and the outcome of discussions with
regulatory agencies and other potentially responsible parties, at multi-party
sites. In future periods, new laws or regulations, advances in
cleanup technologies and additional information about the ultimate cleanup
remediation methodology to be used could significantly change our
estimates.
Income
Taxes: Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets
and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
a
change in tax rates would be recognized in income in the period that includes
the enactment date. The Company maintains contingency reserves,
including interest and penalties, for potential cash tax assessments made by
federal, state and foreign taxing authorities as a component of its income
tax
expense. These amounts are computed based on the company’s estimate
of the tax liability associated with the settlement of various tax issues taken
in various tax filings. The Company reassesses existing requirements,
establishes new requirements for current year tax positions and releases
existing requirements upon settlement of the requirement or expiration of the
statute of limitations for a given tax year on a quarterly basis.
Other
Obligations: We have $31.8 million classified as other long-term
liabilities at September 30, 2006, including $13.9 million due to purchase
the
remaining 7.5% interest in PoloExpress in April 2008. The remaining $17.9
million of other long-term liabilities includes environmental and other
liabilities, which do not have specific payment terms or other similar
contractual arrangements.
Foreign
Currency Translation: The financial position and operating results of our
foreign operations are consolidated using the local currencies of the countries
in which they are located as the functional currency. The balance sheet accounts
are translated at exchange rates in effect at the end of the period, and income
statement accounts are translated at average exchange rates during the
period. The resulting translation gains and losses are included as a
separate component of stockholders' equity. Foreign currency
transaction gains and losses are included in other (income) expense, net in
our
statement of operations in the period in which they occur. In 2006 and 2004,
we
recognized $0.7 million and $1.1 million, respectively, of foreign currency
transaction gains. In 2005, we recognized $0.1 million of foreign currency
transaction losses.
Advertising
Expense: We expense the production costs of advertising the first time the
advertising takes place, except for direct response advertising. Direct response
advertising consists primarily of catalog book production, printing, and postage
costs, which is capitalized and amortized over its expected period of future
benefits, not to exceed the remainder of the fiscal year when it is incurred.
Advertising expense was $15.0 million for 2006, $18.6 million for 2005, and
$16.2 million for 2004.
Research
and Development: Company-sponsored research and development expenditures
are expensed as incurred and were insignificant in 2006, 2005, and
2004.
Stock-Based
Compensation: In December 2004, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R,
Share-Based Payment. SFAS No. 123R amends certain aspects of
SFAS No. 123, Accounting for Stock-Based Compensation, 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 SFAS No. 123R, we have elected to implement
SFAS No. 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 SFAS No. 123R on October 1, 2005, and accordingly, we recognized
$0.2
million of compensation cost in fiscal 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 of September 30,
2006, there was $0.1 million of total unrecognized compensation cost related
to
unvested share-based compensation arrangements granted under our stock option
plans. The cost is expected to be recognized over a weighted-average
period of 3.8 years.
As
permitted by SFAS No. 123 and prior to adoption of SFAS No. 123R, we used the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion (“APB”) 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 fiscal 2005 and 2004. If stock options
previously granted were accounted for based on their fair value as determined
under SFAS No. 123, our pro forma results for fiscal 2005 and 2004 would have
been as follows:
(In
thousands, except per share data)
|
|
2005
|
|
|
2004
|
|
Net
earnings (loss), as restated
|
|
$ |
(19,365 |
) |
|
$ |
2,231
|
|
Total
stock-based employee compensation expense determined under the
fair value based method for all awards, net of tax
|
|
|
(150 |
) |
|
|
(334 |
) |
Pro
forma
|
|
$ |
(19,515 |
) |
|
$ |
1,897
|
|
Basic
and diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
As
restated
|
|
$ |
(0.76 |
) |
|
$ |
0.09
|
|
Pro
forma
|
|
|
(0.77 |
) |
|
|
0.08
|
|
The
weighted average grant date fair value of options granted during 2006, 2005,
and
2004, was $1.22, $1.42, and $3.12, respectively. The fair value of
each option granted is estimated on the grant date using the Black-Scholes
option pricing model. The following significant assumptions were made
in estimating fair value:
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Risk-free
interest rate
|
|
|
4.6%-5.0%
|
|
|
|
3.6%-4.2%
|
|
|
|
3.4%
|
|
Expected
life in years
|
|
|
4.94
|
|
|
|
4.94
|
|
|
|
4.92
|
|
Expected
volatility
|
|
|
60%-61%
|
|
|
|
61%-63%
|
|
|
|
72%
|
|
Expected
dividends
|
|
None
|
|
|
None
|
|
|
None
|
|
For
additional information on stock options see Note 10.
Derivative Instruments and Hedging Activities: The fair market
value adjustment of our position in a ten-year $100 million interest rate
contract improved by $0.8 million in fiscal 2006, $5.9 million in fiscal 2005,
and $4.9 million in fiscal 2004. The fair market value adjustment of this
agreement reflected increased interest rates in each period based upon the
3-month LIBOR implied forward interest rate curve, which caused the favorable
change in fair market value of the interest rate 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.
Fair
Value of Financial Instruments: The carrying amount reported in the
consolidated balance sheets approximates the fair value for our cash and cash
equivalents, investments, specified hedging agreements, short-term borrowings,
current maturities of long-term debt, and all other variable rate debt
(including borrowings under our credit agreements). The carrying
amount of our other fixed rate long-term debt approximates fair value as
determined by the market value of recent trades, or is estimated using
discounted cash flow analyses, based on our current incremental borrowing rates
for similar types of borrowing arrangements (See Note 6). Fair values of our
other off-balance-sheet instruments (letters of credit, commitments to extend
credit, and lease guarantees) are based on fees currently charged to enter
into
similar agreements, taking into account the remaining terms of the agreements
and the other parties' credit standing.
Discontinued
Operations: In October 2001, the FASB issued SFAS No. 144, Accounting
for the Impairment or Disposal of Long-lived Assets, which supersedes SFAS
No. 121. Though it retains the basic requirements of SFAS No. 121 regarding
when
and how to measure an impairment loss, SFAS No. 144 provides additional
implementation guidance. SFAS No. 144 applies to long-lived assets to be held
and used or to be disposed of, including assets under capital leases of lessees;
assets subject to operating leases of lessors; and prepaid assets. SFAS No.
144
also expands the scope of a discontinued operation to include a component of
an
entity, and eliminates the current exemption to consolidation when control
over
a subsidiary is likely to be temporary. This Statement was effective for our
fiscal year beginning on July 1, 2002. Accordingly, we have accounted for the
sales of the Airport Plaza shopping center, the Royal Oaks landfill, the
fastener business, Fairchild Aerostructures, and APS as discontinued operations
(See Note 21).
We
include within discontinued operations interest expense attributable to debt
directly related to operations included within discontinued
operations.
Use
of Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities, the disclosure of contingent assets and liabilities,
and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Recently
Issued
Accounting Pronouncements: In February 2007, the FASB
issued SFAS No. 159, The Fair Value Option for Financial Assets and
Liabilities. SFAS No. 159 provides a fair value option
election that allows companies to irrevocably elect fair value as the initial
and subsequent measurement attribute for certain financial assets and
liabilities, with changes in fair value recognized in earnings as they
occur. SFAS No. 159 permits the fair value option election on an
instrument by instrument basis at initial recognition of an asset or liability
or upon an event that gives rise to a new basis of accounting for that
instrument. SFAS No. 159 is effective as of the beginning of an
entity’s first fiscal year that begins after November 15,
2007. We are currently evaluating the impact this new standard will
have on our future results of operations and financial position.
In
September 2006, the FASB published SFAS No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Pension Plans, which
amends SFAS No. 87, SFAS No. 88, SFAS No. 106, and SFAS No.
132(R). SFAS No. 158 requires an employer to recognize in its
statement of financial position the overfunded or underfunded status of a
defined benefit postretirement plan measured as the difference between the
fair
value of plan assets and the benefit obligation. Employers must also recognize
as a component of other comprehensive income, net of tax, the actuarial gains
and losses and the prior service costs and credits that arise during the period.
Statement 158 is effective for fiscal years ending after December 15,
2006. If SFAS No. 158 was adopted as of September 30, 2006, the
Company would have recorded a reduction in prepaid assets and other assets
of
$18.1 million and $1.5 million, respectively, a decrease in pension liabilities
of $2.6 million, and a charge to accumulated other comprehensive income
(loss) of $17.0 million.
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, which is intended to increase consistency and comparability
in fair value measurements by defining fair value, establishing a framework
for
measuring fair value and expanding disclosures about fair value measurements.
SFAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. We
are currently evaluating the impact this new standard will have on our future
results of operations and financial position.
In
July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in
Income Taxes. FIN No. 48 requires the use of a two-step approach for
recognizing and measuring tax benefits taken or expected to be taken in a tax
return and disclosures regarding uncertainties in income tax positions. We
are
required to adopt FIN No. 48 effective October 1, 2007. The cumulative
effect of initially adopting FIN No. 48 will be recorded as an adjustment to
opening retained earnings in the year of adoption and will be separately
presented. Only tax positions that meet the more likely than not recognition
threshold at the effective date may be recognized upon adoption of FIN No.
48.
We are currently evaluating the impact this new standard will have on our future
results of operations and financial position.
In
February 2006, the FASB issued SFAS No. 155, Accounting for
Certain Hybrid Financial Instruments, which amends
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, and SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS No. 155 simplifies the accounting
for certain derivatives embedded in other financial instruments by allowing
them
to be accounted for as a whole if the holder elects to account for the entire
instrument on a fair value basis. SFAS No. 155 also clarifies and
amends certain other provisions of SFAS No. 133 and
SFAS No. 140. SFAS No. 155 is effective for all financial
instruments acquired, issued or subject to a remeasurement event occurring
in
fiscal years beginning after September 15, 2006. Earlier adoption is
permitted, provided the company has not yet issued financial statements,
including for interim periods, for that fiscal year. We do not expect a material
impact from implementing this standard.
In
June 2005, the FASB published SFAS No. 154, Accounting Changes and Error
Corrections, which requires retrospective application to prior periods'
financial statements of every voluntary change in accounting principle unless
it
is impracticable. The Statement replaces APB No. 20, Accounting
Changes, and SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements, although it carries forward some of their provisions.
The FASB believes that the Statement's requirements will enhance the consistency
of financial information between periods and is the result of the FASB's efforts
to improve the comparability of cross-border financial reporting by working
with
the International Accounting Standards Board toward development of a single
set
of high-quality accounting standards. Statement 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. We do not anticipate any impact from adopting this new
standard.
In
January 2007, we announced that we would restate our previously filed
consolidated financial statements because those financial statements were
prepared applying accounting practices that did not comply with GAAP. Since
the
time of our announcement, we have devoted substantial efforts towards the
completion of our restatement.
In
this Annual Report on Form 10-K, we have restated our previously filed
audited consolidated financial statements for fiscal 2005 and 2004, and our
unaudited consolidated financial statements for the quarters ended June 30,
2006, March 31, 2006, and December 31, 2005. The restatement adjustments
resulted in a cumulative net increase in retained earnings of $2.7 million
as of June 30, 2006. This amount includes:
·
|
A
$0.6 million increase in earnings for periods prior to October 1,
2003 (as
reflected in beginning retained earnings as of October 1,
2003);
|
·
|
A
$1.1 million decrease in earnings for fiscal
2004;
|
·
|
A
$1.9 million decrease in net loss for fiscal 2005;
and
|
·
|
A
$1.3 million decrease in net loss for the nine months ended June
30, 2006
(see Note 18).
|
The
cumulative restatement period extended through June 30, 2006, which is the
last period for which we filed a periodic report with the SEC. We have
classified our restatement adjustments into the three primary categories as
set
forth in the table below. These categories involve subjective judgments by
management regarding classification of amounts and particular accounting errors
that may fall within more than one category. While such classifications are
not
required under GAAP, management believes these classifications may assist
investors in understanding the nature and impact of the corrections made in
completing the restatement.
The
following table summarizes the impact of the restatement adjustments on net
income (loss) and basic and diluted income (loss) per share for fiscal 2005
and
2004.
|
|
Years
Ended
|
|
|
|
September
30,
|
|
(In
thousands, except per share data)
|
|
2005
|
|
|
2004
|
|
Net
income (loss), as previously reported
|
|
$ |
(21,284 |
) |
|
$ |
3,361
|
|
Restatement
adjustments for:
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
1,565
|
|
|
|
(36 |
) |
Long-term
investments
|
|
|
(833 |
) |
|
|
139
|
|
Income
taxes
|
|
|
1,187
|
|
|
|
(1,233 |
) |
Net
income (loss), as restated
|
|
$ |
(19,365 |
) |
|
$ |
2,231
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
As
previously reported
|
|
$ |
(0.84 |
) |
|
$ |
0.13
|
|
Total
impact of restatement adjustments
|
|
|
0.08
|
|
|
|
(0.04 |
) |
As
restated
|
|
$ |
(0.76 |
) |
|
$ |
0.09
|
|
Income
Taxes
We
identified errors and omissions in the reporting of income tax for foreign
operations, domestic operations, and tax contingencies.
Foreign
Taxes
Upon
the acquisition of Hein Gericke and PoloExpress in fiscal year 2004, we did
not
properly establish all necessary deferred tax balances required in purchase
accounting. In addition, we did not accrue the deferred tax expense associated
with a change in German tax law enacted in December 2003, which limits our
ability to fully offset certain indefinite lived deferred tax liabilities with
tax loss carryforwards. In addition, we improperly treated the recovery of
acquired deferred tax assets previously reserved through a valuation allowance
as a tax benefit as opposed to a change in goodwill and failed to disclose
the
deferred taxes, tax loss carryforwards, and associated valuation allowances
related to foreign operations in our footnotes. These errors resulted
in establishment of a net deferred tax liability and additional goodwill of
$3.0
million as of November 1, 2003 and an additional tax expense of $1.2 million
for
the year ending September 30, 2004, and an additional tax benefit of $0.2
million for the year ending September 30, 2005. As of September 30,
2005, the restatement adjustments associated with this error resulted in a
$1.1
million decrease in retained earnings, an increase in total liabilities of
$3.4
million, and a $2.3 million increase in total assets.
Domestic
Taxes
The
Company had accounted for its domestic deferred taxes using only the Federal
tax
rate. The Company is restating to include an appropriate state tax rate, net
of
federal tax effect. This change will impact only the disclosure of deferred
taxes as a result of the application of a full valuation allowance to the net
deferred tax asset related to domestic operations.
The
company had not appropriately allocated its
fiscal 2005 income tax provision between continuing operations and discontinued
operations. This reduced the income tax provision from continuing operations
by
$3.2 million, resulting in an income tax benefit, and reduced the income
tax benefit from discontinued operations by $3.2 million, resulting in an income
tax provision from discontinued operations. This did not impact the Company's
financial position, cash flows, or net income.
Tax
Contingencies
We
identified errors and omissions in the reporting of noncurrent income tax
liabilities. Items affecting noncurrent income tax liability related to a
reserve for potential deduction disallowance, which was not
necessary. This resulted in an increase to retained earnings and a
related decrease to noncurrent income tax liabilities of $2.3 million as of
October 1, 2003 and a decrease to loss from discontinued operations of
$0.2 million for each of the years ending September 30, 2004 and September
30,
2005. As of September 30, 2005, the restatement adjustments
associated with these errors resulted in a $2.6 million increase in
retained earnings and a corresponding decrease in total
liabilities.
We
also identified errors regarding the interest rates used to calculate interest
on potential tax liabilities. These related to interest on taxes and
certain tax income and loss items, resulting in increased retained earnings
and
decreased noncurrent tax liability of $0.5 million as of October 1,
2003. Additionally, the restatement adjustments associated with these
errors resulted in an increase of $0.6 million to tax provision and a decrease
of $0.4 million to loss from discontinued operations for the year ending
September 30, 2004 and a decrease of $0.8 million in loss from discontinued
operations for the year ending September 30, 2005. The restatement
adjustments associated with these errors resulted in a cumulative increase
in
retained earnings and a decrease in total liabilities of $1.2 million as of
September 30, 2005.
The
Company’s net operating loss carryforward previously included an amount related
to a tax benefit which required the Company to make an investment within a
stated period of time. The Company did not make the required investment
and therefore the benefit and corresponding valuation allowance should have
been
removed from its deferred taxes. As a result, the Company has corrected its
disclosure to reduce its net operating loss carryforward and the valuation
allowance at June 30, 2006 by $3.5 million to remove this tax benefit. The
correction of this error had no impact on the financial position, results of
operation or cash flows for any of the periods presented.
Commitments
and Contingencies
We
identified three errors associated with our commitments and
contingencies. The first of these errors was that we did not record a
liability for our death benefit payment obligation for retirees of businesses
that were shut down approximately 22 years ago by a previous owner. This
resulted in a $2.0 million decrease to retained earnings and a related increase
in liabilities as of October 1, 2003. The restatement adjustments
associated with this error resulted in a decrease in retained earnings and
an
increase in total liabilities of $1.9 million as of September 30,
2005. Additionally, the restatement adjustments associated with this
error resulted in a decrease to interest expense of $0.2 million and an increase
of $0.1 million to loss from discontinued operations for the year ended
September 30, 2004 as well as a decrease to interest expense and an increase
to
loss from discontinued operations of $0.1 million for the year ended September
30, 2005, respectively.
Additionally,
we incorrectly applied SFAS No. 5, Accounting for Contingencies, in
recording our potential liability related to claims by the Ohio Workers
Compensation Bureau for reimbursement of workers compensation costs related
to a
business we sold more than 20 years ago, about which we received no
communication for 9 years prior to 2005. The restatement adjustments
associated with this error resulted in a increase in retained earnings and
a
decrease in total liabilities of $1.5 million as of September 30,
2005. Additionally, the restatement adjustments associated with this
error resulted in a decrease to loss from discontinued operations of $1.5
million for the year ended September 30, 2005.
Finally,
we incorrectly applied SFAS No. 13, Accounting for Leases, as we
previously had not straight-lined our rent expense for all our facility leases
associated with our PoloExpress and Hein Gericke segments. The
restatement adjustments associated with this error resulted in a decrease in
retained earnings and an increase in total liabilities of $0.1 million as of
September 30, 2005. Additionally, the restatement adjustments
associated with this error resulted in an increase to operating expenses of
$0.1
million for the year ended September 30, 2004.
Long-Term
Investments
We
identified two errors associated with our long-term
investments. The first of these errors was that we inappropriately
characterized our investment in the operator of a hotel and casino located
in
Northern Cyprus (“Voyager Kibris”) as an equity investment after a note
receivable due to us from a partial owner of Voyager Kibris was restructured
and
exchanged for a 30% investment interest in Voyager Kibris and a consulting
arrangement. The Company previously recognized its share of the
Voyager Kibris net losses as well as the cash received under the consulting
arrangement as Equity in loss of affiliates. This investment should have been
accounted for as a note receivable due to rights we
retained. Additionally, the cash received from Voyager Kibris should
have been recorded as a collection against our note receivable. This
resulted in a $0.2 million decrease to retained earnings and a related decrease
in assets as of October 1, 2003. The balance sheet restatement
adjustments associated with this error resulted in a decrease in retained
earnings and a decrease in total assets of $0.4 million as of September 30,
2005. The statement of operations restatement adjustments associated
with this error resulted in a decrease to equity in loss of affiliates of $0.1
million for the year ended September 30, 2004 and an increase to equity in
loss
of affiliates of $0.3 million for the year ended September 30,
2005.
Secondly,
the Company received a note receivable in a structured settlement related to
an
existing receivable. We did not appropriately discount the note
receivable for imputed interest. The balance sheet restatement
adjustments associated with this error resulted in a decrease in retained
earnings and a decrease in total assets of $0.4 million as of September 30,
2005. The statement of operations restatement adjustments associated
with this error resulted in a decrease to other income of $0.4 million for
the
year ended September 30, 2005.
Financial
Statement Impact
The
following tables display the net impact of restatement adjustments in the
previously issued consolidated financial statements. The following
consolidated financial statements are presented in a condensed
format.
Balance
Sheet Impact
The
following table displays the cumulative impact of the restatement on the
condensed consolidated balance sheet as of September 30, 2005.
|
|
|
|
|
Restatement
Adjustments for:
|
|
|
|
|
|
|
|
(In
thousands)
|
|
As
Previously Reported (a)
|
|
|
Income
Taxes
|
|
|
Commitments
and Contingencies
|
|
|
Long-Term
Investments
|
|
|
Total
Restatement Adjustments
|
|
|
As
Restated
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
cash equivalents, and investments
|
|
$ |
97,932
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$ |
-
|
|
|
$ |
97,932
|
|
Accounts
receivable-trade, net
|
|
|
18,475
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,475
|
|
Inventories,
net
|
|
|
90,856
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
90,856
|
|
Property,
plant, and equipment, net
|
|
|
57,468
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
57,468
|
|
Intangible
assets, net
|
|
|
42,665
|
|
|
|
2,449
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,449
|
|
|
|
45,114
|
|
Prepaid
pension assets
|
|
|
31,239
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,239
|
|
Assets
of discontinued operations
|
|
|
80,882
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
80,882
|
|
Other
assets
|
|
|
27,543
|
|
|
|
(68 |
) |
|
|
-
|
|
|
|
(802 |
) |
|
|
(870 |
) |
|
|
26,673
|
|
Total
assets
|
|
$ |
447,060
|
|
|
$ |
2,381
|
|
|
$ |
-
|
|
|
$ |
(802 |
) |
|
$ |
1,579
|
|
|
$ |
448,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
68,892
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
68,892
|
|
Accounts
payable and accrued liabilities
|
|
|
58,944
|
|
|
|
-
|
|
|
|
122
|
|
|
|
89
|
|
|
|
211
|
|
|
|
59,155
|
|
Postretirement
liabilities
|
|
|
78,558
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
78,558
|
|
Tax
liabilities
|
|
|
43,267
|
|
|
|
(415 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(415 |
) |
|
|
42,852
|
|
Liabilities
of discontinued operations
|
|
|
55,021
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55,021
|
|
Other
liabilities
|
|
|
32,460
|
|
|
|
-
|
|
|
|
355
|
|
|
|
-
|
|
|
|
355
|
|
|
|
32,815
|
|
Total
liabilities
|
|
|
337,142
|
|
|
|
(415 |
) |
|
|
477
|
|
|
|
89
|
|
|
|
151
|
|
|
|
337,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in-capital
|
|
|
232,457
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
232,457
|
|
Retained
earnings (accumulated deficit)
|
|
|
20,206
|
|
|
|
2,781
|
|
|
|
(477 |
) |
|
|
(891 |
) |
|
|
1,413
|
|
|
|
21,619
|
|
Accumulated
other comprehensive loss
|
|
|
(69,593 |
) |
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
(69,578 |
) |
Other
stockholders' equity
|
|
|
(73,152 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(73,152 |
) |
Total
stockholders' equity
|
|
|
109,918
|
|
|
|
2,796
|
|
|
|
(477 |
) |
|
|
(891 |
) |
|
|
1,428
|
|
|
|
111,346
|
|
Total
liabilities and stockholders' equity
|
|
$ |
447,060
|
|
|
$ |
2,381
|
|
|
$ |
-
|
|
|
$ |
(802 |
) |
|
$ |
1,579
|
|
|
$ |
448,639
|
|
(a)
|
Certain
previously reported balances have been reclassified to conform to
the
current condensed consolidated balance sheet presentation, including
reclassification to discontinued operations those assets and liabilities
related to a landfill development partnership, sold in April 2006,
and
Airport Plaza shopping center, sold in July
2006.
|
The
following table displays the cumulative impact of the restatement on
stockholders’ equity in the condensed consolidated balance sheet as of September
30, 2003.
(In
thousands)
|
|
Retained
Earnings
|
|
|
Accumulated
Other Comprehensive Loss
|
|
|
Other
Stockholders' Equity
|
|
|
Total
Stockholders' Equity
|
|
September
30, 2003 balance, as previously reported
|
|
$ |
38,129
|
|
|
$ |
(60,687 |
) |
|
$ |
158,073
|
|
|
$ |
135,515
|
|
Restatement
adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
(2,005 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(2,005 |
) |
Long-term
investments
|
|
|
(199 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(199 |
) |
Pre-tax
total impact of restatement adjustments
|
|
|
(2,204 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(2,204 |
) |
Restatement
adjustments for income taxes
|
|
|
2,828
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,828
|
|
Tax
impact (benefit) of restatement adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
impact of restatement adjustments
|
|
|
624
|
|
|
|
-
|
|
|
|
-
|
|
|
|
624
|
|
September
30, 2003 balance, as restated
|
|
$ |
38,753
|
|
|
$ |
(60,687 |
) |
|
$ |
158,073
|
|
|
$ |
136,139
|
|
Statement
of Operations Impact
The
following table displays the cumulative impact of the restatement on the
condensed consolidated statements of operations for fiscal 2005.
|
|
|
|
|
Restatement
Adjustments for:
|
|
|
|
|
|
|
|
(In
thousands)
|
|
As
Previously Reported (a)
|
|
|
Income
Taxes
|
|
|
Commitments
and Contingencies
|
|
|
Long-term
Investments
|
|
|
Total
Restatement Adjustments
|
|
|
As
Restated
|
|
Revenues
|
|
$ |
342,243
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
342,243
|
|
Cost
of revenues
|
|
|
211,751
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
211,751
|
|
Other
operating expenses
|
|
|
158,300
|
|
|
|
-
|
|
|
|
85
|
|
|
|
412
|
|
|
|
497
|
|
|
|
158,797
|
|
Operating
loss
|
|
|
(27,808 |
) |
|
|
-
|
|
|
|
(85 |
) |
|
|
(412 |
) |
|
|
(497 |
) |
|
|
(28,305 |
) |
Interest
expense, net
|
|
|
(11,577 |
) |
|
|
-
|
|
|
|
150
|
|
|
|
-
|
|
|
|
150
|
|
|
|
(11,427 |
) |
Investment
income
|
|
|
6,009
|
|
|
|
-
|
|
|
|
- |
|
|
|
(89
|
) |
|
|
(89 |
) |
|
|
5,920
|
|
Fair
market value increase in interest rate contract
|
|
|
5,942
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,942
|
|
Loss
from continuing operations before income taxes
|
|
|
(27,434 |
) |
|
|
-
|
|
|
|
65 |
|
|
|
(501 |
) |
|
|
(436 |
) |
|
|
(27,870 |
) |
Income
tax (provision) benefit
|
|
|
(2,294 |
) |
|
|
3,342
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,342
|
|
|
|
1,048 |
|
Equity
in loss of affiliates, net
|
|
|
(155 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(332 |
) |
|
|
(332 |
) |
|
|
(487 |
) |
Loss
from continuing operations
|
|
|
(29,883 |
) |
|
|
3,342
|
|
|
|
65 |
|
|
|
(833 |
) |
|
|
2,574 |
|
|
|
(27,309 |
) |
Loss
from discontinued operations, net
|
|
|
(6,306 |
) |
|
|
-
|
|
|
|
1,500
|
|
|
|
-
|
|
|
|
1,500
|
|
|
|
(4,806 |
) |
Gain
on disposal of discontinued operations, net
|
|
|
13,575
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,575
|
|
Income
tax benefit from discontinued operations
|
|
|
1,330
|
|
|
|
(2,155
|
) |
|
|
-
|
|
|
|
-
|
|
|
|
(2,155
|
) |
|
|
(825
|
) |
Net
earnings (loss)
|
|
$ |
(21,284 |
) |
|
$ |
1,187
|
|
|
$ |
1,565
|
|
|
$ |
(833 |
) |
|
$ |
1,919
|
|
|
$ |
(19,365 |
) |
(a)
|
Certain
previously reported balances have been reclassified to conform
to the
current condensed consolidated balance sheet presentation, including
reclassification to discontinued operations those assets and liabilities
related to a landfill development partnership, sold in April 2006,
and
Airport Plaza shopping center, sold in July
2006.
|
The
following table displays the cumulative impact of the restatement on the
condensed consolidated statements of operations for fiscal 2004.
|
|
|
|
|
Restatement
Adjustments for:
|
|
|
|
|
|
|
|
(In
thousands)
|
|
As
Previously Reported (a)
|
|
|
Income
Taxes
|
|
|
Commitments
and Contingencies
|
|
|
Long-term
Investments
|
|
|
Total
Restatement Adjustments
|
|
|
As
Restated
|
|
Revenues
|
|
$ |
319,062
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
319,062
|
|
Cost
of revenues
|
|
|
196,572
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
196,572
|
|
Other
operating expenses
|
|
|
136,383
|
|
|
|
-
|
|
|
|
206
|
|
|
|
-
|
|
|
|
206
|
|
|
|
136,589
|
|
Operating
loss
|
|
|
(13,893 |
) |
|
|
-
|
|
|
|
(206 |
) |
|
|
-
|
|
|
|
(206 |
) |
|
|
(14,099 |
) |
Interest
expense, net
|
|
|
(10,768 |
) |
|
|
-
|
|
|
|
169
|
|
|
|
-
|
|
|
|
169
|
|
|
|
(10,599 |
) |
Investment
income
|
|
|
3,733
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,733
|
|
Fair
market value increase in interest rate contract
|
|
|
4,924
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,924
|
|
Loss
from continuing operations before income taxes
|
|
|
(16,004 |
) |
|
|
-
|
|
|
|
(37 |
) |
|
|
-
|
|
|
|
(37 |
) |
|
|
(16,041 |
) |
Income
tax (provision) benefit
|
|
|
10,761
|
|
|
|
(1,808 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(1,808 |
) |
|
|
8,953
|
|
Equity
in loss of affiliates, net
|
|
|
(439 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
139
|
|
|
|
139
|
|
|
|
(300 |
) |
Loss
from continuing operations
|
|
|
(5,682 |
) |
|
|
(1,808 |
) |
|
|
(37 |
) |
|
|
139
|
|
|
|
(1,706 |
) |
|
|
(7,388 |
) |
Loss
from discontinued operations, net
|
|
|
(13,914 |
) |
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
(13,913 |
) |
Gain
on disposal of discontinued operations, net
|
|
|
9,522
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,522
|
|
Income
tax benefit from discontinued operations
|
|
|
13,435
|
|
|
|
575
|
|
|
|
-
|
|
|
|
-
|
|
|
|
575
|
|
|
|
14,010
|
|
Net
earnings (loss)
|
|
$ |
3,361
|
|
|
$ |
(1,233 |
) |
|
$ |
(36 |
) |
|
$ |
139
|
|
|
$ |
(1,130 |
) |
|
$ |
2,231
|
|
(a)
|
Certain
previously reported balances have been reclassified to conform
to the
current condensed consolidated balance sheet presentation, including
reclassification to discontinued operations those assets and liabilities
related to a landfill development partnership, sold in April 2006,
and
Airport Plaza shopping center, sold in July
2006.
|
The
following table displays the cumulative impact of the restatement on the
condensed consolidated statements of cash flows for fiscal 2005 and
2004.
|
|
For
the Year Ended September 30, 2005
|
|
|
For
the Year Ended September 30, 2004
|
|
(In
thousands)
|
|
As
Previously Reported
|
|
|
Total
Restatement Adjustments (a)
|
|
|
As
Restated
|
|
|
As
Previously Reported
|
|
|
Total
Restatement Adjustments (b)
|
|
|
As
Restated
|
|
Net
cash flows used in operating activities
|
|
$ |
(13,959 |
) |
|
$ |
899
|
|
|
$ |
(13,060 |
) |
|
$ |
(15,559 |
) |
|
$ |
2,458
|
|
|
$ |
(13,101 |
) |
Net
cash flows provided by investing activities
|
|
|
27,701
|
|
|
|
(899 |
) |
|
|
26,802
|
|
|
|
(94,826 |
) |
|
|
(2,458 |
) |
|
|
(97,284 |
) |
Net
cash flows provided by financing activities
|
|
|
(13,807 |
) |
|
|
-
|
|
|
|
(13,807 |
) |
|
|
116,622
|
|
|
|
-
|
|
|
|
116,622
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(65 |
) |
|
|
-
|
|
|
|
(65 |
) |
|
|
6,237
|
|
|
|
-
|
|
|
|
6,237
|
|
Effect
of exchange rate changes on cash
|
|
|
(202 |
) |
|
|
-
|
|
|
|
(202 |
) |
|
|
11
|
|
|
|
-
|
|
|
|
11
|
|
Cash
and cash equivalents, beginning of the period
|
|
|
12,849
|
|
|
|
-
|
|
|
|
12,849
|
|
|
|
6,601
|
|
|
|
-
|
|
|
|
6,601
|
|
Cash
and cash equivalents, end of the period
|
|
$ |
12,582
|
|
|
$ |
-
|
|
|
$ |
12,582
|
|
|
$ |
12,849
|
|
|
$ |
-
|
|
|
$ |
12,849
|
|
(a)
|
|
The
primary impact to both operating and investing cash flows in fiscal
2005
resulted from the restatement adjustment associated with our investment
in
Voyager Kibris.
|
(b)
|
|
The
primary impact to both operating and investing cash flows in fiscal
2004
resulted from the restatement adjustment associated with the additional
goodwill related to the establishment of the necessary deferred taxes
as
part of the acquisition of Hein Gericke and
PoloExpress.
|
On
November 1, 2003, we acquired for $45.5 million (€39.0 million) substantially
all of the worldwide business of Hein Gericke and the capital stock of Fairchild
Sports USA from the Administrator for Eurobike AG in Germany. Also on November
1, 2003, we acquired for $23.4 million (€20.0 million) from the Administrator
for Eurobike AG and from two subsidiaries of Eurobike AG all of their respective
ownership interests in PoloExpress and receivables owed to them by PoloExpress.
We used available cash from investments that were sold to pay the Administrator
$14.8 million (€12.5 million) on November 1, 2003, and borrowed $54.1 million
(€46.5 million) from the Administrator at a rate of 8%, per annum. On May 5,
2004 we received financing from two German banks and paid the note due to the
Administrator. The aggregate purchase price for these acquisitions was
approximately $68.9 million (€59.0 million), including $15.0 million (€12.9
million) of cash acquired.
On
January 2, 2004, we acquired for $18.8 million (€15.0 million) all but 7.5% of
the interest owned by Mr. Klaus Esser in PoloExpress. Mr. Esser retained a
7.5%
ownership interest in PoloExpress, but Fairchild has the right to call this
interest at any time from March 2007 to October 2008, for a fixed purchase
price
of €12.3 million ($15.6 million at September 30, 2006). Mr. Esser has the right
to put such interest to us at any time during April of 2008 for €12.0 million
($15.2 million at September 30, 2006). On January 2, 2004, we used available
cash to pay Mr. Esser $18.8 million (€15.0 million) and provided collateral of
$15.0 million (€12.0 million) to a German bank to issue a guarantee to Mr. Esser
to secure the price for the put Mr. Esser has a right to exercise in April
of
2008. The transaction includes an agreement with Mr. Esser under which he agrees
with us not to compete with PoloExpress for two years. We also signed an
employment agreement with Mr. Esser through December 31, 2008. Through September
30, 2006, in addition to his base salary, Mr. Esser received a profit
distribution of approximately €1.0 million, which reduces, on a Euro for Euro
basis, the call or put option price we must pay for his interest. As of
September 30, 2006, the €11.0 million ($14.7 million) collateralized obligation
for the put option, net of distributions, was included in other long-term
liabilities. The €11.0 million ($14.7 million) restricted cash is invested in a
capital protected investment and money market funds, and is included in
long-term investments.
The
total purchase price exceeded the estimated fair value of the net assets
acquired by approximately $36.0 million, as restated. The excess of the purchase
price over net tangible assets was all allocated to identifiable intangible
assets, including brand names “Hein Gericke” and “Polo”, and is reflected in
goodwill and intangible assets in the consolidated financial statements as
of
September 30, 2006. Since their acquisition on November 1, 2003, we have
consolidated the results of Hein Gericke, PoloExpress and Fairchild Sports
USA
into our financial statements.
Hein
Gericke, including Fairchild Sports USA, and PoloExpress are highly seasonal
businesses with an historic trend for higher volumes of sales and profits during
March through September, when the weather in Europe is more favorable for
individuals to use their motorcycles than during October to February. We
acquired these companies because we believe they have potential upside, and
may
provide a platform for other entrees into related leisure businesses. The
acquired companies are European leaders of their industry, and opportunities
for
expansion are significant in Europe and the United States. At September 30,
2006, Hein Gericke operated 145 retail shops in Austria, Belgium, France,
Germany, Italy, Luxembourg, the Netherlands, Turkey, and the United Kingdom
and
PoloExpress operated 91 retail shops in Germany and two shops in Switzerland.
Fairchild Sports USA, located in Tustin, California, is a designer and
distributor of motorcycle clothing and other apparel under several labels,
including Hein Gericke. In addition, Fairchild Sports USA designs and sells
apparel under private labels for third parties. This acquisition has lessened
our dependence on the aerospace industry.
4.
|
GOODWILL
AND INTANGIBLE
ASSETS
|
Intangible
assets with finite lives are amortized over their estimated useful lives.
Instead of amortizing goodwill and intangible assets deemed to have an
indefinite life, goodwill is tested for impairment annually, or immediately
if
conditions indicate that such impairment could exist. We have selected to
perform our annual assessment for impairment in our fourth quarter. The
determination of impairment is a two-step process. The first step compares
the
carrying value of a reporting unit to the fair value of a reporting unit with
goodwill. If the fair value of the reporting unit is less than the carrying
value, a second step is performed to determine the amount of goodwill
impairment. The second step allocates the fair value of the reporting unit
to
the reporting unit’s net assets other than goodwill. The excess of the fair
value of the reporting unit over the amounts assigned to its net assets other
than goodwill is considered the implied fair value of the reporting unit’s
goodwill. The implied fair value of the reporting unit’s goodwill is then
compared to the carrying value of its goodwill and any shortfall represents
the
amount of goodwill impairment. The fair market value of a reporting unit is
determined by considering the market prices of comparable businesses and the
present value of cash flow projections.
|
Changes
in the carrying amount of goodwill by segment were as
follows:
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PoloExpress,
restated
|
|
$ |
3,221
|
|
|
|
(81 |
) |
|
|
3,140
|
|
|
|
167
|
|
|
$ |
3,307
|
|
Aerospace
|
|
|
10,821
|
|
|
|
-
|
|
|
|
10,821
|
|
|
|
-
|
|
|
|
10,821
|
|
Total
|
|
$ |
14,042
|
|
|
|
(81 |
) |
|
|
13,961
|
|
|
|
167
|
|
|
$ |
14,128
|
|
|
The
components of intangible assets, all of which pertain to our PoloExpress
and Hein Gericke segments, were as
follows:
|
(In
thousands)
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
Translation
Adjustment
|
|
|
|
|
Trademarks
|
|
$ |
30,398
|
|
|
|
-
|
|
|
|
(974 |
) |
|
|
29,424
|
|
|
|
-
|
|
|
|
1,545
|
|
|
$ |
30,969
|
|
Customer
relationships
|
|
|
2,312
|
|
|
|
(519 |
) |
|
|
(72 |
) |
|
|
1,721
|
|
|
|
(533 |
) |
|
|
91
|
|
|
|
1,279
|
|
Other
|
|
|
53
|
|
|
|
(41 |
) |
|
|
(4 |
) |
|
|
8
|
|
|
|
(8 |
) |
|
|
-
|
|
|
|
-
|
|
Total
|
|
$ |
32,763
|
|
|
|
(560 |
) |
|
|
(1,050 |
) |
|
|
31,153
|
|
|
|
(541 |
) |
|
|
1,636
|
|
|
$ |
32,248
|
|
5.
|
CASH
EQUIVALENTS AND
INVESTMENTS
|
|
A
summary of the cash equivalents and investments held by us
follows:
|
|
|
September
30, 2006
|
|
|
September
30, 2005
|
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
|
Fair
|
|
|
Cost
|
|
|
Fair
|
|
|
Cost
|
|
(In
thousands)
|
|
Value
|
|
|
Basis
|
|
|
Value
|
|
|
Basis
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government securities
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
16
|
|
|
$ |
16
|
|
Money
market and other cash funds
|
|
|
8,541
|
|
|
|
8,541
|
|
|
|
12,566
|
|
|
|
12,566
|
|
Total
cash and cash equivalents
|
|
|
8,541
|
|
|
|
8,541
|
|
|
|
12,582
|
|
|
|
12,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds – available-for-sale – restricted
|
|
|
6,002
|
|
|
|
6,002
|
|
|
|
4,965
|
|
|
|
4,965
|
|
Corporate
bonds – trading securities
|
|
|
42,919
|
|
|
|
42,919
|
|
|
|
-
|
|
|
|
-
|
|
Equity
securities – trading securities
|
|
|
2,459
|
|
|
|
2,459
|
|
|
|
10,733
|
|
|
|
10,733
|
|
Equity
and equivalent securities – available-for-sale
|
|
|
5,132
|
|
|
|
825
|
|
|
|
-
|
|
|
|
-
|
|
Total
short-term investments
|
|
|
56,512
|
|
|
|
52,205
|
|
|
|
15,698
|
|
|
|
15,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government securities – available-for-sale – restricted
|
|
|
512
|
|
|
|
512
|
|
|
|
9,547
|
|
|
|
9,547
|
|
Money
market funds – available-for-sale – restricted
|
|
|
10,313
|
|
|
|
10,313
|
|
|
|
10,438
|
|
|
|
10,438
|
|
Corporate
bonds – available-for-sale – restricted
|
|
|
28,934
|
|
|
|
29,326
|
|
|
|
23,741
|
|
|
|
24,319
|
|
Equity
and equivalent securities – available-for-sale –
restricted
|
|
|
9,275
|
|
|
|
7,984
|
|
|
|
4,247
|
|
|
|
3,500
|
|
Other
securities – available-for-sale - restricted
|
|
|
11,915
|
|
|
|
11,565
|
|
|
|
11,446
|
|
|
|
11,565
|
|
Equity
and equivalent securities – available-for-sale
|
|
|
-
|
|
|
|
-
|
|
|
|
5,309
|
|
|
|
3,612
|
|
Other
investments, at cost
|
|
|
4,370
|
|
|
|
4,370
|
|
|
|
4,924
|
|
|
|
4,924
|
|
Total
long-term investments
|
|
|
65,319
|
|
|
|
64,070
|
|
|
|
69,652
|
|
|
|
67,905
|
|
Total
cash equivalents and investments
|
|
$ |
130,372
|
|
|
$ |
124,816
|
|
|
$ |
97,932
|
|
|
$ |
96,185
|
|
On
September 30, 2006 and 2005, we had restricted investments of $67.0 million
and
$64.4 million, respectively, all of which are maintained as collateral for
certain debt facilities, our interest rate contract, the Esser put option,
environmental matters, and escrow arrangements. On September 30, 2006 and 2005,
cash of $3.4 million and $9.1 million, respectively, is held by our European
subsidiaries which have debt agreements that place restrictions on the amount
of
cash that may be transferred outside the borrowing companies. For additional
information on debt see Note 6.
On
September 30, 2006, we had gross unrealized holding gains from
available-for-sale securities of $5.9 million and gross unrealized losses from
available-for-sale securities of $0.4 million. On September 30, 2005, we had
gross unrealized holding gains from available-for-sale securities of $2.4
million and gross unrealized losses from available-for-sale securities of $0.7
million. We use the specific identification method to determine the gross
realized gains (losses) from sales of available-for-sale securities. Investment
income (loss) is summarized as follows:
(In
thousands)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Gross
realized gain from sales of available-for-sale securities
|
|
$ |
873
|
|
|
$ |
262
|
|
|
$ |
42
|
|
Gross
realized loss from sales of available-for-sales securities
|
|
|
-
|
|
|
|
(191 |
) |
|
|
(141 |
) |
Gross
realized gain from sales of trading securities
|
|
|
667
|
|
|
|
183
|
|
|
|
411
|
|
Gross
realized loss from sales of trading securities
|
|
|
(200 |
) |
|
|
(6 |
) |
|
|
(35 |
) |
Change
in unrealized holding gain (loss) from trading securities
|
|
|
475
|
|
|
|
746
|
|
|
|
(479 |
) |
Gross
realized loss from impairments
|
|
|
-
|
|
|
|
(825 |
) |
|
|
-
|
|
Dividend
income, restated
|
|
|
1,108
|
|
|
|
5,751
|
|
|
|
3,935
|
|
|
|
$ |
2,923
|
|
|
$ |
5,920
|
|
|
$ |
3,733
|
|
The
maturities of debt securities, including fixed maturity securities, at September
30, 2006 were as follows:
(In
thousands)
|
|
Fair
Value
|
|
|
Cost
Basis
|
|
Due
in one year or less
|
|
$ |
29,065
|
|
|
$ |
29,457
|
|
Due
after ten years
|
|
|
43,300
|
|
|
|
43,300
|
|
|
|
$ |
72,365
|
|
|
$ |
72,757
|
|
6.
|
NOTES
PAYABLE AND LONG-TERM
DEBT
|
At
September 30, 2006 and 2005, notes payable and long-term debt consisted of
the
following:
|
|
September
30,
|
|
|
|
2006
|
|
|
2005
|
|
(In
thousands)
|
|
Amount
|
|
|
Average
Rate
|
|
|
Amount
|
|
|
Average
Rate
|
|
Revolving
credit facilities – Fairchild Sports
|
|
$ |
11,425
|
|
|
|
6.9%
|
|
|
$ |
8,917
|
|
|
|
5.6%
|
|
Current
maturities of long-term debt
|
|
|
14,067
|
|
|
|
|
|
|
|
11,985
|
|
|
|
|
|
Total
notes payable and current maturities of long-term debt
|
|
|
25,492
|
|
|
|
|
|
|
|
20,902
|
|
|
|
|
|
Golden
Tree term loan – Corporate
|
|
|
30,000
|
|
|
|
12.8%
|
|
|
|
-
|
|
|
|
-
|
|
Term
loan agreement – Fairchild Sports
|
|
|
17,382
|
|
|
|
4.6%
|
|
|
|
25,301
|
|
|
|
3.7%
|
|
Promissory
note – Corporate
|
|
|
13,000
|
|
|
|
11.5%
|
|
|
|
13,000
|
|
|
|
10.3%
|
|
CIT
revolving credit facility – Aerospace
|
|
|
9,603
|
|
|
|
9.3%
|
|
|
|
8,164
|
|
|
|
7.8%
|
|
GMAC
credit facility – Fairchild Sports
|
|
|
3,118
|
|
|
|
7.0%
|
|
|
|
3,650
|
|
|
|
6.8%
|
|
Other
notes payable, collateralized by assets
|
|
|
3,837
|
|
|
|
6.7%
|
|
|
|
5,263
|
|
|
|
4.1%
|
|
Capital
lease obligations
|
|
|
2,577
|
|
|
|
8.9%
|
|
|
|
4,597
|
|
|
|
9.0%
|
|
Less:
current maturities of long-term debt
|
|
|
(14,067 |
) |
|
|
|
|
|
|
(11,985 |
) |
|
|
|
|
Net
long-term debt
|
|
|
65,450
|
|
|
|
|
|
|
|
47,990
|
|
|
|
|
|
Total
debt
|
|
$ |
90,942
|
|
|
|
|
|
|
$ |
68,892
|
|
|
|
|
|
Term
Loan at Corporate
On
May 3, 2006, we entered 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 of 12.75%
fixed for the first nine months. Subsequent interest periods may be selected
by
us, ranging from one month to nine months, or, if consented to by the lenders,
for 12 months. Also, we may choose to convert the method of interest from a
LIBOR based loan to a prime based loan.
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 meets or
exceeds 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 $30.0 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): additional investments by us in our
PoloExpress or Hein Gericke segments or in any new company or new ventures;
new
acquisitions; guarantees by us of additional debt incurred by our PoloExpress
or
Hein Gericke segments (with an exception for the existing guarantees); loans
by
us to our PoloExpress or Hein Gericke segments (with an exception for the
existing loans); and repurchases by us of our outstanding stock. The Available
Amount was $57.7 million at September 30, 2006.
During
the term of the loan:
·
|
We
must maintain cash, cash equivalents, or public securities that meet
or
exceed a minimum liquidity threshold between $10 million and $20
million. At September 30, 2006, our minimum liquidity requirement
was
$10.0 million, and accordingly we have classified $10.0 million of
qualified investments as restricted long-term
investments.
|
·
|
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.
Subsequent
to September 30, 2006, and directly resulting from the financial statement
restatement process, we were unable to provide to the lenders timely financial
statements for the year ended September 30, 2006, and the quarters ended
December 31, 2006, March 31, 2007, and June 30, 2007, as required by the
credit
agreement. Our lenders have waived certain provisions in the credit
agreement and granted us an extension in time to provide these financial
statements.
Credit
Facilities at Hein Gericke
On
March 1, 2006, our Hein Gericke segment entered into an €11.0 million ($14.0
million at September 30, 2006) seasonal credit line with Stadtsparkasse
Düsseldorf, with half of the facility available to us for the 2006 season.
Borrowings under the facility for the 2006 season were repaid prior to June
30,
2006. The seasonal credit line bears interest at 2.75% over the three-month
Euribor rate (6.13% at September 30, 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. On November 30, 2006, we amended
the seasonal credit line with Stadtsparkasse Düsseldorf to include HSBC Trinkaus
& Burkhardt AG as a second lender. This amendment allows us to borrow the
entire facility €10.0 million ($12.7 million) for the 2007
season. The seasonal financing facility is 80% guaranteed by the
German State of North Rhine-Westphalia.
At
September 30, 2006, our German subsidiary, Hein Gericke Deutschland GmbH, and
its German subsidiary, PoloExpress, had outstanding borrowings of $28.8 million
due under its credit facilities with Stadtsparkasse Düsseldorf and HSBC Trinkaus
& Burkhardt AG. The revolving credit facility provides a credit line of
€10.0 million ($11.4 million outstanding, and $1.3 million available at
September 30, 2006), at interest rates of 3.5% over the three-month Euribor
(6.9% at September 30, 2006), and matures annually. Outstanding borrowings
under
the term loan facility have blended interest rates, with $15.0 million (€11.8
million) bearing interest at 1% over the three-month Euribor rate (4.4% at
September 30, 2006), with an interest rate cap protection in which our interest
expense would not exceed 6% on 50% of debt, and the remaining $2.4 million
(€1.9
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. On November 30, 2006, HSBC Trinkaus & Burkhardt
AG formally committed to provide one half of the seasonal facility on a
permanent basis. Accordingly, €10.0 million will be available from
the seasonal facility and utilized to finance the fiscal 2007 seasonal trough
to
support our PoloExpress operations.
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
($56.5 million at September 30, 2006), as defined in the loan contracts. No
dividends may be paid by Hein Gericke Deutschland unless such covenants are
met
and dividends may be paid only up to its consolidated after tax profits. As
of
September 30, 2006, Hein Gericke borrowed approximately $4.2 million (€3.3
million) from our subsidiary, Fairchild Holding Corp., which is not subject
to
restriction against repayment. The loan agreements have certain
restrictions on other forms of cash flow from Hein Gericke Deutschland. In
addition, the loan covenants require Hein Gericke Deutschland and PoloExpress
to
maintain inventory and receivables in excess of €50.0 million. At September 30,
2006, inventory and accounts receivable at Hein Gericke Deutschland and
PoloExpress were €65.1 million, which exceeded by €15.1 million, the covenant
requirement. The loan covenants also require Hein Gericke Deutschland to
maintain inventory and accounts receivable at a rate of one and one half times
its net debt position. At September 30, 2006, we were in compliance with the
loan covenants.
At
September 30, 2006, our subsidiary, Hein Gericke UK Ltd had outstanding
borrowings of $3.1 million (£1.7 million) on its £5.0 million ($9.4 million)
credit facility with GMAC. The loan bears interest at 2.25% above the base
rate
of Lloyds TSB Bank Plc (7.0% at September 30, 2006) 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 Ltd
and
an investment with a fair market value of $4.5 million at September 30, 2006.
The most restrictive covenant requires Hein Gericke UK to maintain a minimum
earnings before interest, taxes, depreciation, and amortization (“EBITDA”) as
defined. At September 30, 2006, Hein Gericke UK missed its EBITDA
target by approximately £0.3 million ($0.5 million). GMAC granted a waiver of
the covenant violation as of September 30, 2006 and revised the future covenant
requirements.
Credit
Facility at Aerospace Segment
At
September 30, 2006, we had outstanding borrowings of $9.6 million on 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 $4.0 million was available for future borrowings at
September 30, 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 (9.25% at September 30, 2006) and we pay a non-usage
fee of 0.5%. The credit facility matures in January 2008.
Promissory
Note – Corporate
At
September 30, 2006, we had 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% (11.47% at September
30,
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 will be one-year LIBOR plus 8%. The promissory note agreement
contains a prepayment penalty of 5% if prepaid between September 2005 and
September 2006, and 3% if prepaid between September 2006 and October 30, 2007.
On September 30, 2006, approximately $1.2 million of the loan proceeds were
held
in escrow to fund specific improvements to the mortgaged property.
Guarantees
At
September 30, 2006, we included $1.2 million as debt for guarantees assumed
by
us of retail shop partners indebtedness incurred for the purchase of store
fittings in Germany. These guarantees were issued by our subsidiaries in the
Hein Gericke segment and are collateralized by the fittings in the stores of
the
shop partners for whom we have guaranteed indebtedness. In addition, at
September 30, 2006, approximately $1.5 million of bank loans received by retail
shop partners in the Hein Gericke segment were guaranteed by our subsidiaries
prior to our acquisition of the PoloExpress and Hein Gericke businesses and
are
not reflected on our balance sheet because these loans have not been assumed
by
us.
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 September 30, 2006, we had contingent liabilities of $3.0
million, on commitments related to outstanding letters of credit which were
secured by restricted cash collateral.
Debt
Maturity Information
The
annual maturity of our bank notes payable and long-term debt obligations
(exclusive of capital lease obligations) for each of the five years following
September 30, 2006, are as follows: $23.5 million for 2007; $31.1 million for
2008; $2.7 million for 2009; $30.4 million for 2010; and $0.6 million for 2011;
and none thereafter.
7.
|
PENSIONS
AND POSTRETIREMENT
BENEFITS
|
Defined
Benefit Plans
The
Company and its subsidiaries sponsor three qualified defined benefit pension
plans, one supplemental executive retirement plan, and several other
postretirement benefit plans. We use a September 30 measurement date for all
of
our plans. The following table sets forth the benefit obligation; fair value
of
plan assets; and the funded status of our plans:
|
|
Pension
Benefits
|
|
|
Postretirement
Benefits (a)
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(In
thousands)
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Change
in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$ |
198,441
|
|
|
$ |
201,522
|
|
|
$ |
34,859
|
|
|
$ |
51,302
|
|
Service
cost
|
|
|
391
|
|
|
|
534
|
|
|
|
26
|
|
|
|
42
|
|
Interest
cost
|
|
|
10,589
|
|
|
|
11,529
|
|
|
|
1,920
|
|
|
|
2,901
|
|
Plan
participants’ contributions
|
|
|
-
|
|
|
|
-
|
|
|
|
791
|
|
|
|
1,001
|
|
Amendments
|
|
|
(3 |
) |
|
|
(4,307 |
) |
|
|
(2,569 |
) |
|
|
(15,575 |
) |
Actuarial
(gain) loss
|
|
|
(9,530 |
) |
|
|
7,026
|
|
|
|
(3,989 |
) |
|
|
805
|
|
Settlements
|
|
|
-
|
|
|
|
(965 |
) |
|
|
-
|
|
|
|
-
|
|
Benefits
paid
|
|
|
(21,549 |
) |
|
|
(16,898 |
) |
|
|
(4,853 |
) |
|
|
(5,617 |
) |
Benefit
obligation at end of year
|
|
|
178,339
|
|
|
|
198,441
|
|
|
|
26,185
|
|
|
|
34,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
|
163,282
|
|
|
|
169,189
|
|
|
|
-
|
|
|
|
-
|
|
Actual
return on plan assets
|
|
|
4,630
|
|
|
|
10,468
|
|
|
|
-
|
|
|
|
-
|
|
Employer
contribution
|
|
|
4,251
|
|
|
|
820
|
|
|
|
4,062
|
|
|
|
4,616
|
|
Plan
participants’ contributions
|
|
|
-
|
|
|
|
-
|
|
|
|
791
|
|
|
|
1,001
|
|
Expenses
|
|
|
(2 |
) |
|
|
(302 |
) |
|
|
-
|
|
|
|
-
|
|
Benefits
paid
|
|
|
(21,549 |
) |
|
|
(16,893 |
) |
|
|
(4,853 |
) |
|
|
(5,617 |
) |
Fair
value of plan assets at end of year
|
|
|
150,612
|
|
|
|
163,282
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status
|
|
|
(27,727 |
) |
|
|
(35,159 |
) |
|
|
(26,185 |
) |
|
|
(34,859 |
) |
Unrecognized
net actuarial loss
|
|
|
80,691
|
|
|
|
85,373
|
|
|
|
16,414
|
|
|
|
21,703
|
|
Unrecognized
prior service cost
|
|
|
1,513
|
|
|
|
1,699
|
|
|
|
(19,588 |
) |
|
|
(18,129 |
) |
Net
amount recognized
|
|
$ |
54,477
|
|
|
$ |
51,913
|
|
|
$ |
(29,359 |
) |
|
$ |
(31,285 |
) |
|
(a)
|
Exclusive
of death benefit obligation discussed
below.
|
Information
for amount recognized in our balance sheets and for pension plans with an
accumulated benefit obligation in excess of plan assets at September 30, 2006
and 2005 are as follows:
|
|
Pension
Benefits
|
|
|
Postretirement
Benefits
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(In
thousands)
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Amounts
recognized in our balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
benefit cost
|
|
$ |
33,373
|
|
|
$ |
31,239
|
|
|
$ |
-
|
|
|
$ |
-
|
|
Accrued
liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,351 |
) |
|
|
(3,826 |
) |
Accrued
benefit cost
|
|
|
(42,432 |
) |
|
|
(51,099 |
) |
|
|
(26,008 |
) |
|
|
(27,459 |
) |
Intangible
Assets
|
|
|
1,513
|
|
|
|
1,699
|
|
|
|
-
|
|
|
|
-
|
|
Accumulated
other comprehensive loss
|
|
|
62,023
|
|
|
|
70,074
|
|
|
|
-
|
|
|
|
-
|
|
Net
amount recognized
|
|
$ |
54,477
|
|
|
$ |
51,913
|
|
|
$ |
(29,359 |
) |
|
$ |
(31,285 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
plans with an accumulated benefit obligation in
excess
of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected
benefit obligation
|
|
$ |
134,184
|
|
|
$ |
153,568
|
|
|
|
|
|
|
|
|
|
Accumulated
benefit obligation
|
|
|
133,623
|
|
|
|
152,487
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets
|
|
|
91,191
|
|
|
|
101,389
|
|
|
|
|
|
|
|
|
|
The
following are weighted-average assumptions used to determine benefit obligations
at September 30, 2006 and 2005:
|
|
Pension
Benefits
|
|
|
Postretirement
Benefits
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Discount
rate
|
|
|
6.0%
|
|
|
|
5.625%
|
|
|
|
6.0%
|
|
|
|
5.625%
|
|
Rate
of compensation increase
|
|
|
3.75%
|
|
|
|
3.75%
|
|
|
N/A
|
|
|
N/A
|
|
At
September 30, 2006, we reviewed the funded position of our qualified pension
plans and recognized an $8.1 million increase in equity, as a result of the
accumulated benefit obligation for the qualified pension plans exceeding the
fair value of the plan assets by $42.4 million, as compared to $51.1 million
at
September 30, 2005. The accumulated benefit obligation for our defined benefit
pension plans was $177.8 million and $197.4 million at September 30, 2006 and
September 30, 2005, respectively. These amounts may change in the future as
the
pension plan assets change in value and assumptions change. Should, in the
future, our pension plan’s accumulated benefit obligations be less than the fair
value of plan assets, the additional minimum pension liability and corresponding
equity reduction will be adjusted.
We
recognize amortization of an unrecognized net gain or loss as a component of
net
pension cost for a year if, as of the beginning of the year, that unrecognized
net gain or loss exceeds ten percent of the greater of the projected benefit
obligation or the market-related value of plan assets. If amortization is
required, the minimum amortization is that excess divided by the average
remaining service period of active employees expected to receive benefits under
the plan. For a plan in which all or almost all of plan participants are
inactive, the average remaining life expectancy of the inactive participants
is
utilized instead of average remaining service. In fiscal 2006, the unrecognized
net loss in excess of ten percent of the projected benefit obligation was
amortized over a period of approximately seventeen years.
The
following are weighted-average assumptions used to determine net periodic
pension cost for 2006 and 2005:
|
Pension
Benefits
|
|
Postretirement
Benefits
|
|
September
30,
|
|
September
30,
|
|
2006
|
2005
|
|
2006
|
2005
|
Discount
rate
|
5.625%
|
6.0%
|
|
5.625%
|
6.0%
|
Expected
long-term return on plan assets
|
8.5%
|
8.5%
|
|
N/A
|
N/A
|
Rate
of compensation increase
|
3.75%
|
3.75%
|
|
N/A
|
N/A
|
Our
assumptions for expected long-term return on plan assets, are based on a
periodic review and modeling of the plans’ asset allocation and liability
structure over a long-term horizon. Expectations of returns for each asset
class
are the most important of the assumptions used in the review and modeling,
and
are based on comprehensive reviews of historical data and economic/financial
market theory. The expected long-term rate of return on assets was selected
from
within the reasonable range of rates determined by (a) historical real returns,
net of inflation, for the asset classes covered by the investment policy, and
(b) projections of inflation over the long-term period during which benefits
are
payable to plan participants. Our discount rate is determined based upon the
annual change in the Moody’s AA bond rates, which we have historically used as
our benchmark.
For
measurement purposes, a 9.5% annual rate of increase in the per capita cost
of
covered healthcare benefits was assumed for 2006. The rate was assumed to
decrease gradually to 5% for 2016 and remain at that level
thereafter.
The
components of net periodic benefit cost are as follows for 2006, 2005, and
2004:
|
|
Pension
Benefits
|
|
|
Postretirement
Benefits
|
|
(In
thousands)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Service
cost
|
|
$ |
391
|
|
|
$ |
534
|
|
|
$ |
2,074
|
|
|
$ |
26
|
|
|
$ |
42
|
|
|
$ |
83
|
|
Interest
cost
|
|
|
10,589
|
|
|
|
11,529
|
|
|
|
11,685
|
|
|
|
1,920
|
|
|
|
2,901
|
|
|
|
2,961
|
|
Expected
return on assets
|
|
|
(13,675 |
) |
|
|
(14,443 |
) |
|
|
(14,876 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amortization
of prior service cost
|
|
|
260
|
|
|
|
314
|
|
|
|
409
|
|
|
|
(1,111 |
) |
|
|
(217 |
) |
|
|
(217 |
) |
Amortization
of actuarial (gain)/loss
|
|
|
3,675
|
|
|
|
3,509
|
|
|
|
3,244
|
|
|
|
1,301
|
|
|
|
1,306
|
|
|
|
1,263
|
|
Net
periodic pension cost
|
|
|
1,240
|
|
|
|
1,443
|
|
|
|
2,536
|
|
|
$ |
2,136
|
|
|
$ |
4,032
|
|
|
$ |
4,090
|
|
Curtailment
charge (a)
|
|
|
-
|
|
|
|
970
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement
charge (b)
|
|
|
524
|
|
|
|
750
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net pension cost
|
|
$ |
1,764
|
|
|
$ |
3,163
|
|
|
$ |
2,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The
curtailment reflects the freezing of our SERP plan for the remaining
active employee participants who were executive officers as of December
31, 2004.
|
(b)
|
As
a result of the sale of Fairchild Aerostructures on June 24, 2005,
we have
settled the pension benefits for the Fairchild Aerostructures employees.
This amount was recorded in discontinued operations. The 2006 settlement
resulted from lump distributions from our SERP
plan.
|
We
have multiple non-pension postretirement benefit plans. The healthcare plans
are
contributory, with participants’ contributions adjusted annually; the life
insurance plans are noncontributory. The accounting for the healthcare plans
anticipates future cost sharing changes to the written plan that are consistent
with our current intention to increase retiree contributions each year to cover
the excess of the expected general inflation rate.
Assumed
healthcare cost trend rates have a significant effect on the amounts reported
for the healthcare plans. A 1% point change in assumed healthcare cost trend
rates would have the following effects:
|
|
1%
Point
Increase
|
|
|
1%
Point
Decrease
|
|
Effect
on total of service and interest cost components
|
|
$ |
29
|
|
|
$ |
(27 |
) |
Effect
on postretirement benefit obligation
|
|
$ |
247
|
|
|
$ |
(221 |
) |
Our
pension plans weighted-average asset allocations at September 30, 2006 and
2005
by asset category are as follows:
|
|
September
30,
|
|
|
|
2006
|
|
|
2005
|
|
Asset
Category
|
|
|
|
|
|
|
Equity
securities
|
|
|
13.1%
|
|
|
|
16.0%
|
|
Debt
securities
|
|
|
81.8%
|
|
|
|
78.0%
|
|
Other
|
|
|
5.1%
|
|
|
|
6.0%
|
|
Total
|
|
|
100.0%
|
|
|
|
100.0%
|
|
Our
target asset allocation as of September 30, 2006, by asset category, is as
follows:
Asset
Category
|
|
Equity
securities
|
10–30%
|
Debt
securities
|
65–85%
|
Real
estate
|
0–20%
|
Other
|
0–20%
|
Our
investment policy includes various guidelines and procedures designed to ensure
assets are invested in a manner necessary to meet expected future benefits
earned by participants. The investment guidelines consider a broad range of
economic conditions. Central to the policy are target allocation ranges (shown
above) by major asset categories.
The
objectives of the target allocations are to maintain investment portfolios
that
diversify risk through prudent asset allocation parameters, achieve asset
returns that meet or exceed the plans’ actuarial assumptions, and achieve asset
returns that are competitive with like institutions employing similar investment
strategies.
The
investment policy is periodically reviewed by our management and a designated
third-party fiduciary for investment matters. The policy is established and
administered in a manner so as to comply at all times with applicable government
regulations.
Equity
securities include common stock of The Fairchild Corporation, in the amounts
of
$1.7 million (1.1% of total plan assets) and $1.5 million (0.9% of total plan
assets) at September 30, 2006 and 2005, respectively.
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
(In
thousands)
|
|
Pension
Benefits
|
|
|
Postretirement
Benefits
|
|
2007
|
|
$ |
17,082
|
|
|
$ |
2,962
|
|
2008
|
|
|
14,095
|
|
|
|
2,856
|
|
2009
|
|
|
13,970
|
|
|
|
2,794
|
|
2010
|
|
|
16,151
|
|
|
|
2,735
|
|
2011
|
|
|
14,655
|
|
|
|
2,668
|
|
2012
– 2014
|
|
$ |
68,270
|
|
|
$ |
11,654
|
|
Our
funding policy is to make the minimum annual contribution required by the
Employee Retirement Income Security Act of 1974 or local statutory law. However,
during the year ended June 30, 2003, we contributed $7.4 million of cash to
fund
our largest pension plan in advance of required contributions. Current actuarial
projections indicate cash contribution requirements of $1.6 million in 2007,
$7.7 million in 2008, $7.0 million in 2009, $7.1 million in 2010, and a total
of
$22.7 million from 2011 through 2013. We are required to make annual cash
contributions of approximately $0.3 million to fund a small pension
plan.
In
December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act
of 2003 became law in the United States. The Prescription Drug, Improvement
and
Modernization Act of 2003 introduces a prescription drug benefit under Medicare
as well as a federal subsidy to sponsors of retiree health care benefit plans
that provide a benefit that is at least actuarially equivalent to the Medicare
benefit. The Medicare Prescription Drug Improvement Act of 2003 is
expected to result in improved financial results for employers, including us,
that provide prescription drug benefits for their Medicare-eligible retirees.
In
October 2005, we amended our non-class action retiree medical plans to terminate
the prescription drug coverage for Medicare eligible participants, effective
January 1, 2006, and we have increased our retiree contributions from 35% to
50%
for the retiree medical plan costs in 2006. The plan amendment has an estimated
effect of reducing our postretirement liabilities by approximately $15.6
million. The reduction in liabilities will be recognized over 13 years and
our
postretirement benefit expense will be reduced by approximately $1.4 million
in
fiscal 2007 as a result of this plan amendment. In 2006, we have
adjusted our liability to reflect benefits available to us from the Medicare
Prescription Subsidy available for the 1991 class action settlement. It is
our
current belief that we are entitled to the full benefit of such
subsidy. We expect to receive $0.4 million in each of the next 5
years for the Medicare Prescription Subsidy.
Pensions
– Defined Contribution Plan
We
maintain, for U.S. employees, a 401(k) Savings Plan, which is a defined
contribution plan. The 401(k) Savings Plan provides for specified Company
matching cash contributions, which are discretionary in nature, based upon
the
Company achieving certain performance goals and other factors. We did not make
any cash contributions to the 401(k) Savings Plan in 2004. Our board of
directors approved the resumption of Company matching contributions beginning
on
January 1, 2005. During fiscal 2006, we recorded expense of $0.3 million for
continuing operations for cash contributions we made to the 401(k) Savings
Plan.
During fiscal 2005, we recorded expenses of $0.2 million for continuing
operations and $27,000 for discontinued operations for cash contributions we
made to the 401(k) Savings Plan.
Death
Benefit Obligation
For
certain U.S. employees of several businesses we no longer own, we retained
the
obligation to provide death benefit payments. During 2006, 2005, and
2004, we made associated death benefit payments of $0.2 million, $0.1 million,
and $0.2 million, respectively. As of September 30, 2006, our
remaining obligation was $1.8 million and is included in Other long-term
liabilities.
The
total income tax provision (benefit) is allocated as follows:
(In
thousands)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
Earnings
(loss) from continuing operations
|
|
$ |
2,176
|
|
|
$ |
(1,048
|
) |
|
$ |
(8,953 |
) |
Earnings
(loss) from discontinued operations
|
|
|
2,604
|
|
|
|
825 |
|
|
|
(14,010 |
) |
|
|
$ |
4,780
|
|
|
$ |
(223 |
) |
|
$ |
(22,963 |
) |
The
overall tax expense for fiscal 2006 was $4.8 million. A $2.2 million
tax expense from continuing operations resulted from $0.3 million of current
federal, state, and foreign taxes and $1.9 million of foreign deferred
taxes. The foreign deferred taxes arise from a tax benefit from
operating losses of $0.1 million, offset by $1.9 million in tax expense related
to the impact of the conversion of PoloExpress from a German partnership to
a
German Corporation. The conversion of PoloExpress will allow
PoloExpress and Hein Gericke Deutschland to file consolidated trade tax returns
thereby enabling the Company to reduce its current income tax and trade tax
liabilities. However, as a result of this conversion, the
Company was required to record a deferred tax liability of $5.6 million as
it will no longer benefit from future tax deductions related to the amortization
of acquired intangibles. Offsetting this liability is $3.6 million of deferred
tax assets related to future tax deductions which were previously not expected
to be recoverable. This conversion will allow our two subsidiaries, Hein Gericke
Deutschland and PoloExpress, to compute their trade tax liabilities on a
combined basis and utilize the cumulative combined income and trade tax losses
of approximately $20.6 million and $18.8 million, respectively, to offset their
combined future profits subject to income and trade tax. No Federal taxes were
recognized from continuing operations due to the domestic tax losses. The $2.6
million tax expense in discontinued operations resulted from current state
tax
liabilities of $0.9 million associated with the sale of certain assets and
$1.7
million in additional foreign tax liabilities arising from transfer pricing
issues identified during a tax audit in Germany related to a previously sold
business.
Significant components of the provision (benefit) for income taxes attributable
to our continuing operations are as follows:
(In
thousands)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
94
|
|
|
$ |
-
|
|
|
$ |
(12,982 |
) |
State
|
|
|
160
|
|
|
|
241
|
|
|
|
264
|
|
Foreign
|
|
|
88
|
|
|
|
936
|
|
|
|
596
|
|
Total current
|
|
|
342
|
|
|
|
1,177
|
|
|
|
(12,122 |
) |
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
(3,167
|
) |
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
1,834
|
|
|
|
942
|
|
|
|
3,169
|
|
Total deferred
|
|
|
1,834
|
|
|
|
(2,225
|
) |
|
|
3,169
|
|
Total
tax provision (benefit)
|
|
$ |
2,176
|
|
|
$ |
(1,048
|
) |
|
$ |
(8,953 |
) |
The reconciliation of income tax attributable to continuing operations, computed
at the U.S. federal statutory tax rate of 35%, to the actual provision for
income taxes in each period, is as follows:
(In
thousands)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
Tax
at United States statutory rates
|
|
$ |
(11,085 |
) |
|
$ |
(9,755 |
) |
|
$ |
(5,614 |
) |
State
income taxes, net of federal tax benefit
|
|
|
104
|
|
|
|
157
|
|
|
|
(963 |
) |
Effect
of foreign operations
|
|
|
129
|
|
|
|
32
|
|
|
|
(280 |
) |
Revision
of estimate for tax accruals, net of deferred tax asset valuation
allowance
|
|
|
10,846
|
|
|
|
7,996
|
|
|
|
(3,807 |
) |
Extraterritorial
income exclusion
|
|
|
(307 |
) |
|
|
(281 |
) |
|
|
-
|
|
Effect
of change in tax laws of foreign affiliates
|
|
|
-
|
|
|
|
-
|
|
|
|
1,175
|
|
Effect
of change in tax status
|
|
|
1,970
|
|
|
|
-
|
|
|
|
-
|
|
Other,
net
|
|
|
519
|
|
|
|
803
|
|
|
|
536
|
|
Net
tax provision (benefit)
|
|
$ |
2,176
|
|
|
$ |
(1,048
|
) |
|
$ |
(8,953 |
) |
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of our deferred tax assets and liabilities as of September 30, 2006
and 2005 are as follows:
|
|
September
30,
|
|
(In
thousands)
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Restated
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Accrued expenses
|
|
$ |
3,786
|
|
|
$ |
3,304
|
|
Asset basis differences
|
|
|
5,629
|
|
|
|
3,645
|
|
Inventory
|
|
|
4,371
|
|
|
|
4,385
|
|
Employee compensation and benefits
|
|
|
2,962
|
|
|
|
2,763
|
|
Environmental reserves
|
|
|
4,895
|
|
|
|
3,934
|
|
Postretirement health benefits
|
|
|
11,182
|
|
|
|
11,884
|
|
Net operating loss and credit carryforwards
|
|
|
82,511
|
|
|
|
80,787
|
|
Other
|
|
|
1,904
|
|
|
|
3,537
|
|
Pensions
|
|
|
39,355
|
|
|
|
42,382
|
|
Total deferred tax assets
|
|
|
156,595
|
|
|
|
156,621
|
|
Less: Valuation allowance
|
|
|
(128,155 |
) |
|
|
(133,486 |
) |
Net deferred tax assets
|
|
|
28,440
|
|
|
|
23,135
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Asset basis-liabilities
|
|
|
(19,325 |
) |
|
|
(18,546 |
) |
Pensions
|
|
|
(13,645 |
) |
|
|
(7,286 |
) |
Other
|
|
|
-
|
|
|
|
-
|
|
Total
deferred tax liabilities
|
|
|
(32,970 |
) |
|
|
(25,832 |
) |
Net
deferred tax assets (liabilities)
|
|
$ |
(4,530 |
) |
|
$ |
(2,697 |
) |
As of September 30, 2006, deferred taxes do not include $5.9 million of deferred
tax assets from discontinued operations, which are fully provided for by a
valuation allowance.
The net changes in the total valuation allowance were a decrease of $5.3 million
in 2006 and a decrease of $11.1 million in 2005. In assessing the
ability of deferred tax assets to offset deferred tax liabilities, we consider
whether it is more likely than not, that some portion or all of the deferred
tax
assets and liabilities will not be realized. In making this assessment, we
consider the scheduled reversal of deferred tax liabilities, projected future
taxable income, income tax planning strategies, and the impact of jurisdictional
limitations on certain tax loss carry forwards. Based on this analysis at
September 30, 2006, we have established a full valuation allowance against
all
net domestic deferred tax assets and established a net deferred tax liability
of
$4.5 million in 2006 and $2.7 million in 2005 related to the potential tax
gain
on the sale of certain indefinite lived foreign assets, net of net operating
losses and other deferred tax assets.
The amounts included in the balance sheet are as follows:
|
|
September
30,
|
|
(In
thousands)
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Restated
|
|
Current
deferred tax assets included in Prepaid expenses and other current
assets
|
|
$ |
-
|
|
|
$ |
713
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
deferred tax assets included in Other assets
|
|
$ |
-
|
|
|
$ |
335
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
$ |
-
|
|
|
$ |
-
|
|
Other current
|
|
|
2,314
|
|
|
|
1,029
|
|
|
|
$ |
2,314
|
|
|
$ |
1,029
|
|
Noncurrent
income tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
$ |
4,530
|
|
|
$ |
3,438
|
|
Deferred income taxes included in Other long-term
liabilities
|
|
|
-
|
|
|
|
307
|
|
Other noncurrent
|
|
|
39,923
|
|
|
|
38,385
|
|
|
|
$ |
44,453
|
|
|
$ |
42,130
|
|
Our other noncurrent income tax liabilities of $39.9 million at September 30,
2006 includes additional tax and interest we may be required to pay if our
tax
positions are not sustained with respect to the sale of several businesses,
and
if our repayment with property of debt under a bank credit agreement in which
both we and our subsidiaries were liable is not treated as tax free under
Section 361 of the Internal Revenue Code of 1986, as amended. In
March 2007, we recognized an income tax benefit of $26.2 million due to the
expiration of the related statute of limitations and closure of the related
tax
period.
We maintain a very complex structure in the United States and overseas,
particularly due to the large number of acquisitions and dispositions that
have
occurred, along with other tax planning strategies. The noncurrent income
tax liability is after utilization of available net operating loss
carryforwards, temporary differences, and permanent differences between the
financial statement carrying amounts of assets and liabilities which we have
sold in prior years and their respective tax bases. Our management performs
a
comprehensive review of its worldwide tax positions on at least an annual
basis.
At
September 30, 2006, we have $4.8 million of unused alternative minimum tax
credit carryforwards that do not expire and $187.6 million of federal operating
loss carryforwards expiring as follows: $12.5 million in 2018; $60.9 million
in
2019; $51.3 million in 2020; $4.2 million in 2021; $11.4 million in 2023; $21.9
million in 2024; and $25.4 million in 2025. As the periods of assessment
for 1995 to 2003 have expired during 2007, additional tax may be collected
from
us only for 2004 to 2006. Tax losses of $204.8 million arising in years
prior to 2006 may still be reduced in determining the proper amount of net
operating loss available to be carried forward to years after 2003. The
Company also has approximately $36.5 million of foreign income tax and $18.8
million of foreign trade tax loss carryforwards that have no expiration
period. The Company’s policy is to include deductions that are
subject to contingencies in its disclosed net operating losses.
The
gains on the disposal of discontinued operations we reported between 1995 to
2005, for federal income tax, may be significantly increased if our tax position
is not sustained with respect to the sales of several businesses, and the
repayment with property, of debt under a bank credit agreement in which both
we
and our subsidiaries were liable, is not treated as tax free under Section
361
of the Internal Revenue Code of 1986, as amended. If all of these
adjustments were made, the federal income tax loss carryforwards might be
substantially reduced, and we may be required to pay additional U.S. tax and
interest of up to $26.2 million, which has already been provided. Foreign
tax authorities are also proposing additional tax and interest, which we may
be
required to pay up to $7.0 million, which has already been
provided. Based on potential adjustments to our federal taxable
income and various other state tax exposures, we maintain an additional income
tax contingency balance of $6.7 million. The amount of additional tax
and interest to be paid by us depends on the amount of income tax audit
adjustments, which are made and sustained for 2004 to 2006 tax filings.
These adjustments, if any, would be made at a future date, which is presently
uncertain, and therefore we cannot predict the timing of cash outflows. To
the extent a favorable final determination of the recorded income tax
liabilities occurs, appropriate adjustments will be made to decrease the
recorded tax liability in the year such favorable determination
occurs
Domestic income taxes, less available credits, are provided on the unremitted
income of foreign subsidiaries and affiliated companies, to the extent we intend
to repatriate such earnings. No domestic income taxes or foreign withholding
taxes are provided on the undistributed earnings of foreign subsidiaries and
affiliates, which are considered permanently reinvested, or which would be
offset by allowable foreign tax credits. Due to cumulative losses in the periods
ending September 30, 2004 through September 30, 2006, there are no cumulative
unremitted earnings of those foreign subsidiaries and affiliates for which
deferred taxes have not been provided.
In the opinion of our management, adequate provision has been made for all
income taxes and interest, and any liability that may arise for prior periods
will not have a material effect on our financial condition or our results of
operations.
We
had 22,604,761 shares of Class A common stock and 2,621,412 shares of Class
B
common stock outstanding at September 30, 2006. Class A common stock
is traded on the New York Stock Exchange. There is no public market
for our 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. The agreement between us and Alcoa, under
which we sold our Fairchild Fasteners business on December 3, 2002, provides
that, for a period of five years after the closing, we will not declare or
pay
any dividends on our common stock.
Stock
Options
We
maintained stock option plans under which officers, key employees, and
non-employee directors may be granted options to purchase shares of our
authorized but unissued common stock. The purpose of these plans is to attract,
retain, and motivate eligible persons whose present and potential contributions
are important to our success by offering them an opportunity to participate
in
our future performance through awards of stock options and stock
bonuses. As of September 30, 2006, all our stock option plans had expired.
However, all stock options outstanding as of September 30, 2006 continue to
be
exercisable pursuant to their terms.
The
1986 non-qualified and incentive stock option plan authorized the issuance
of
5,141,000 shares of our Class A common stock upon the exercise of stock options
issued under the plan. The 1986 stock option plan authorized the
granting of options at not less than the market value of the common stock at
the
time of the grant. The option price is payable in cash or, with the
approval of our compensation and stock option committee of the Board of
Directors, in “mature” shares of common stock, valued at fair market value at
the time of exercise. The options normally vest by 25% at the end of
each of the first four years and terminate five years from the date of grant,
or
for a stipulated period of time after an employee's death or termination of
employment. Proceeds received from exercises of stock options are
credited to common stock and paid-in capital. The 1986 plan expired on April
9,
2006; however, all stock options outstanding as of April 9, 2006 continue to
be
exercisable pursuant to their terms.
The
1996 non-employee directors’ stock option plan authorized the issuance of
250,000 shares of our Class A common stock upon the exercise of stock options
issued under the plan. The 1996 non-employee directors’ stock option plan
authorized the granting of options at the market value of the common stock
on
the date of grant. An initial stock option grant for 30,000 shares of
Class A common stock was made to each person who became a new non-employee
Director, with the options vesting 25% each year from the date of
grant. In addition, on the date of each annual meeting, each person
elected as a non-employee Director has been granted an option for 1,000 shares
of Class A common stock that vested immediately. The exercise price
is payable in cash or, with the approval of our compensation and stock option
committee, in shares of Class A or Class B common stock, valued at fair market
value at the date of exercise. All options issued under the 1996
non-employee directors’ stock option plan terminate five years from the date of
grant, or a stipulated period of time after a non-employee Director ceases
to be
a member of the Board. The Non-employee directors’ stock option plan expired on
September 12, 2006; however, all stock options outstanding as of September
12,
2006 continue to be exercisable pursuant to their terms.
At
our Annual Meeting of Shareholders held in November 2001, our shareholders
approved the 2001 non-employee directors’ stock option plan, pursuant to which
non-employee directors were issued stock options for 86,942 shares, in the
aggregate, immediately after the 2001 Annual Meeting. The stock options issued
under the 2001 non-employee directors’ stock option plan are not available for
future grants. These options vest by 25% at the end of each of the
first four years and terminate ten years from the date of grant, or a stipulated
period of time after a non-employee Director ceases to be a member of the
Board.
A
summary of stock option transactions under our stock option plans is presented
in the following tables:
|
|
|
|
|
Weighted
Average
|
|
|
|
Shares
|
|
|
Exercise
Price
|
|
Outstanding
at October 1, 2003
|
|
|
1,328,454
|
|
|
$ |
6.38
|
|
Granted
|
|
|
35,000
|
|
|
|
5.11
|
|
Exercised
|
|
|
(10,500 |
) |
|
|
2.49
|
|
Expired
|
|
|
(299,411 |
) |
|
|
9.90
|
|
Forfeited
|
|
|
(500 |
) |
|
|
3.10
|
|
Outstanding
at September 30, 2004
|
|
|
1,053,043
|
|
|
|
5.37
|
|
Granted
|
|
|
77,000
|
|
|
|
2.54
|
|
Expired
|
|
|
(309,727 |
) |
|
|
9.12
|
|
Forfeited
|
|
|
(5,229 |
) |
|
|
2.49
|
|
Outstanding
at September 30, 2005
|
|
|
815,087
|
|
|
|
3.70
|
|
Granted
|
|
|
93,000
|
|
|
|
2.18
|
|
Expired
|
|
|
(485,478 |
) |
|
|
3.41
|
|
Forfeited
|
|
|
(86,250 |
) |
|
|
2.92
|
|
Outstanding
at September 30, 2006
|
|
|
336,359
|
|
|
$ |
3.90
|
|
Exercisable
at September 30, 2003
|
|
|
864,471
|
|
|
$ |
7.57
|
|
Exercisable
at September 30, 2004
|
|
|
787,015
|
|
|
$ |
5.82
|
|
Exercisable
at September 30, 2005
|
|
|
664,497
|
|
|
$ |
3.71
|
|
Exercisable
at September 30, 2006
|
|
|
246,359
|
|
|
$ |
4.53
|
|
A
summary of options outstanding and exercisable at September 30, 2006 is
presented as follows:
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
|
|
|
Average
|
|
Remaining
|
Range
of
|
|
|
Number
|
|
|
Exercise
|
|
Contractual
|
|
Number
|
|
|
Exercise
|
|
Contractual
|
Exercise
Prices
|
|
|
Outstanding
|
|
|
Price
|
|
Term
|
|
Exercisable
|
|
|
Price
|
|
Term
|
|
$2.17
- $2.99
|
|
|
|
134,442
|
|
|
$ |
2.24
|
|
4.5
years
|
|
|
44,442
|
|
|
$ |
2.37
|
|
1.3
years
|
|
$3.00
- $3.99
|
|
|
|
4,000
|
|
|
|
3.49
|
|
2.5
years
|
|
|
4,000
|
|
|
|
3.49
|
|
2.6
years
|
|
$4.00
- $4.99
|
|
|
|
3,000
|
|
|
|
4.99
|
|
0.8
years
|
|
|
3,000
|
|
|
|
4.99
|
|
0.8
years
|
|
$5.00
- $5.11
|
|
|
|
194,917
|
|
|
|
5.03
|
|
1.0
years
|
|
|
194,917
|
|
|
|
5.03
|
|
1.0
years
|
|
$2.17
- $5.11
|
|
|
|
336,359
|
|
|
$ |
3.90
|
|
2.4
years
|
|
|
246,359
|
|
|
$ |
4.53
|
|
2.4
years
|
Stock
Option Deferral Plan
On
November 17, 1998, our shareholders approved a stock option deferral
plan. Pursuant to the stock option deferral plan, certain officers
and directors may, at their election, defer payment of the "compensation" they
receive in a particular year or years from the exercise of stock options.
"Compensation" means the excess value of a stock option, determined by the
difference between the fair market value of shares issueable upon exercise
of a
stock option, and the option price payable upon exercise of the stock
option. An officer's or director’s deferred compensation is payable
in the form of "deferred compensation units," representing the number of shares
of common stock that the officer or director is entitled to receive upon
expiration of the deferral period. The number of deferred compensation units
issueable to an officer or director is determined by dividing the amount of
the
deferred compensation by the fair market value of our stock as of the date
of
deferral. The stock option deferral plan will end in February 2010, at which
time the deferred compensation units will be issued.
Shares
Available for Future Issuance
The
following table reflects a summary of the shares that could be issued under
our
stock option and stock deferral plans at September 30, 2006:
|
|
|
|
|
1996
|
|
|
2001
|
|
|
Stock
|
|
|
|
|
|
|
1986
|
|
|
Directors
|
|
|
Directors
|
|
|
Deferral
|
|
|
|
|
Securities
to be issued upon:
|
|
Plan
|
|
|
Plan
|
|
|
Plan
|
|
|
Plan
|
|
|
Total
|
|
Exercise
of outstanding options
|
|
|
194,417
|
|
|
|
106,000
|
|
|
|
35,942
|
|
|
|
-
|
|
|
|
336,359
|
|
Weighted
average option exercise price
|
|
$ |
5.00
|
|
|
$ |
2.40
|
|
|
$ |
2.35
|
|
|
|
-
|
|
|
$ |
3.90
|
|
Issuance
of deferred compensation units
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
177,657
|
|
|
|
177,657
|
|
Shares
available for future issuance
|
|
|
194,417
|
|
|
|
106,000
|
|
|
|
35,942
|
|
|
|
177,657
|
|
|
|
514,016
|
|
11.
|
EARNINGS
(LOSS) PER SHARE
RESULTS
|
The
following table illustrates the computation of basic and diluted earnings (loss)
per share:
(In
thousands, except per share data)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
Basic
loss per share:
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(33,890 |
) |
|
$ |
(27,309 |
) |
|
$ |
(7,388 |
) |
Weighted
average common shares outstanding
|
|
|
25,226
|
|
|
|
25,224
|
|
|
|
25,192
|
|
Basic
loss from continuing operations per share
|
|
$ |
(1.34 |
) |
|
$ |
(1.08 |
) |
|
$ |
(0.29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(33,890 |
) |
|
$ |
(27,309 |
) |
|
$ |
(7,388 |
) |
Weighted
average common shares outstanding
|
|
|
25,226
|
|
|
|
25,224
|
|
|
|
25,192
|
|
Diluted
effect of options
|
|
antidilutive
|
|
|
antidilutive
|
|
|
antidilutive
|
|
Total
shares outstanding
|
|
|
25,226
|
|
|
|
25,224
|
|
|
|
25,192
|
|
Diluted
loss from continuing operations per share
|
|
$ |
(1.34 |
) |
|
$ |
(1.08 |
) |
|
$ |
(0.29 |
) |
The
computation of diluted loss from continuing operations per share for 2006,
2005,
and 2004 excluded the effect of 336,359, 815,087, and 1,053,043 incremental
common shares, respectively, attributable to the potential exercise of
common stock options outstanding because the effect was
antidilutive.
12.
|
ACCUMULATED
OTHER COMPREHENSIVE
LOSS
|
The
activity in other comprehensive income (loss), net of tax, was:
(In
thousands)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
Minimum
pension liability
|
|
$ |
8,051
|
|
|
$ |
(7,457 |
) |
|
$ |
(1,811 |
) |
Unrealized
holding changes on derivatives
|
|
|
298
|
|
|
|
114
|
|
|
|
105
|
|
Unrealized
periodic holding changes on available-for-sale securities
|
|
|
3,810
|
|
|
|
(235 |
) |
|
|
1,242
|
|
Foreign
currency translation adjustments
|
|
|
2,591
|
|
|
|
(1,366 |
) |
|
|
517
|
|
Other
comprehensive income (loss)
|
|
$ |
14,750
|
|
|
$ |
(8,944 |
) |
|
$ |
53
|
|
The
components of accumulated other comprehensive loss were:
|
|
September
30,
|
|
(In
thousands)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
Excess
of additional pension liability over unrecognized prior service
costs
|
|
$ |
(62,023 |
) |
|
$ |
(70,074 |
) |
|
$ |
(62,617 |
) |
Foreign
currency translation adjustments
|
|
|
1,636
|
|
|
|
(955 |
) |
|
|
411
|
|
Unrealized
holding gains on available-for-sale securities
|
|
|
5,559
|
|
|
|
1,749
|
|
|
|
1,984
|
|
Other
|
|
|
-
|
|
|
|
(298 |
) |
|
|
(412 |
) |
Accumulated
other comprehensive loss
|
|
$ |
(54,828 |
) |
|
$ |
(69,578 |
) |
|
$ |
(60,634 |
) |
13.
|
RELATED
PARTY
TRANSACTIONS
|
Previously,
we have extended loans to purchase our Class A common stock to certain members
of our senior management and Board of Directors, for the purpose of encouraging
ownership of our stock, and to provide additional incentive to promote our
success. The loans are non-interest bearing, and all have been fully repaid
but
one. The remaining outstanding loan matures in 1¼ years, or becomes
due and payable immediately upon the termination of employment if prior to
such
maturity date. On September 30, 2006, the borrower, Mr. Kelley, owed us
approximately $50,000. In fiscal 2006, Mr. Gerard, now a former director, repaid
his outstanding loan when due. All other loans to directors and executive
officers were repaid in full prior to September 30, 2005. During 2006, the
largest aggregate balance of indebtedness outstanding under the officer and
director stock purchase program was approximately $66,000 from Mr. Gerard;
and
$50,000 from Mr. Kelley. In fiscal 2003, the Board of Directors extended, by
five years, the expiration date of the loan to Mr. Kelley, who was not deemed
an
executive officer. In accordance with the Sarbanes-Oxley Act of 2002, no new
loans will be made to executive officers or directors.
As
of
September 30, 2006, the Steiner family beneficially owns approximately 60.3%
of
the aggregate vote of shares of the Company. Therefore, the ability for
individual shareholders to influence the direction of the Company may be
limited.
We paid for the maintenance and upkeep of an apartment located in Paris, France
that was used by us from time to time for business related travel. The owner
of
the apartment was a company controlled by the Steiner Family, which sold its
apartment in 2004, and thereafter, the apartment was no longer used by us.
We
believe our cost for this apartment was significantly less than the cost of
similar accommodations for our business related travel. The total amounts paid
for this apartment were approximately $11,000 in fiscal 2005 and $43,000 in
fiscal 2004.
On
September 30, 2006 and 2005, we owed a remaining amount of $3.1 million to
Mr.
J. Steiner for a change of control payment. This amount is due to Mr. J. Steiner
upon his termination of employment with us. On September 30, 2006, deferred
compensation of $11,000 was due from us to Mr. E. Steiner.
In
December 2006, Mr. J. Steiner reimbursed us $40,000 for personal expenses that
we paid on his behalf, which were outstanding as of September 30, 2006. At
no
time during 2006 and 2005 did amounts due to us from Mr. J. Steiner exceed
the
amount of the after-tax salary on deferrals we owed to him.
Subject
to the approval of the Compensation and Stock Option Committee, our Unfunded
Supplemental Executive Retirement Plan (SERP) permits participants who are
over
retirement age, to elect to receive retirement advances on an actuarially
reduced basis. Mr. J. Steiner received pre-retirement distributions from the
Unfunded SERP (representing a partial distribution of his vested benefits)
in
the amount of $3.5 million in fiscal 2006; $0.5 million in fiscal 2005; and
$2.0
million in fiscal 2004. As of September 30, 2006, Mr. J. Steiner’s remaining
balance in the Unfunded SERP plan was $2.1 million.
Eric
Steiner, son of Mr. J. Steiner, is an executive officer of the Company. His
compensation is set forth in the compensation table of our proxy statement.
Natalia Hercot, daughter of Mr. J. Steiner, is a Vice President of the Company,
for which she received compensation of approximately $20,000 in fiscal 2006;
$48,000 in fiscal 2005; and $50,000 in fiscal 2004. Mrs. Hercot’s annual salary
was adjusted to $10,000 per year on December 23, 2005.
During
2006, 2005, and 2004, Phillipe Hercot, son-in-law of Mr. J. Steiner, subleased
a
room in our Paris office and paid arm's length rent to the Company.
We
paid $36,000 in 2006, $36,000 in 2005, and $35,000 in 2004 for security
protection at a Steiner family residence in France.
We
provide to Mr. J. Steiner automobiles for business use. We charged Mr. J.
Steiner $15,000 in 2006 and $15,000 in 2005 to cover personal use and the
portion of the cost of these vehicles that exceeded our reimbursement
policy.
During
fiscal 2006, 2005 and 2004, we reimbursed $0.4 million, $0.2 million, and $0.3
million, respectively, to Mr. J. Steiner, representing a portion of
out-of-pocket costs he incurred personally in connection with the entertainment
of third parties, which may benefit the Company.
Mr.
Klaus Esser’s brother is an employee of PoloExpress. His compensation (currently
€72,000) was approximately $94,000 in 2006, $94,000 in 2005 and $88,000 in 2004.
Petra Esser, an employee of PoloExpress, is a relative of Mr. K. Esser and
has a
current annual compensation of approximately €16,000.
In
December 2004, we entered into an agreement to acquire real estate in New York
City, and placed a $0.3 million deposit in connection with the acquisition.
Our
obligation to purchase the property was contingent upon our ability to acquire
adjacent properties by a certain date, which date passed without our ability
to
do so. Accordingly, we had the right to terminate the purchase agreement and
intended to do so. Mr. J. Steiner wanted to acquire the property irrespective
of
the acquisition of adjacent properties. We assigned to Mr. J. Steiner our right
to acquire the property and he paid to us the deposit. The independent members
of our Board of Directors considered the transaction, and approved the
assignment to Mr. J. Steiner.
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, 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. Pursuant to the terms of the settlement,
Mr.
J. Steiner paid the Company $3.8 million, of which $0.8 million was drawn from
Mr. Steiner’s Company SERP account, and $2.9 million was paid by him via the
Company’s D&O liability insurance carrier, in satisfaction of its
obligations to indemnify and insure Mr. Steiner.
Operating Leases
We hold certain of our facilities and equipment under long-term leases.
The minimum rental commitments under non-cancelable operating leases with lease
terms in excess of one year, for each of the five years following September
30,
2006, and thereafter, are as follows: $22.1 million for 2007; $17.5 million
for
2008; $13.2 million for 2009; $9.7 million for 2010; $7.2 million for 2011;
and
$23.7 million thereafter. Rental expense on operating leases was $22.9
million in 2006, $23.0 million in 2005, as restated, and $21.0 million for
2004,
as restated.
Capital Leases
Minimum commitments under capital leases for each of the five years following
September 30, 2006 and thereafter, are $1.9 million for 2007; $0.4 million
for
2008; $0.2 million for 2009; and $0 thereafter. At September 30, 2006, the
present value of capital lease obligations was $2.6 million. Capital assets
leased and included in property, plant, and equipment consisted of:
|
|
September
30,
|
|
(In
thousands)
|
|
2006
|
|
|
2005
|
|
Machinery
and equipment
|
|
$ |
5,177
|
|
|
$ |
7,066
|
|
Transportation
vehicles
|
|
|
-
|
|
|
|
44
|
|
Other
|
|
|
330
|
|
|
|
330
|
|
Less:
Accumulated depreciation
|
|
|
(2,910 |
) |
|
|
(1,617 |
) |
|
|
$ |
2,597
|
|
|
$ |
5,823
|
|
Leasing Operations
We own and lease to Alcoa a 208,000 square foot manufacturing facility located
in Fullerton, California, and we also own and lease to PCA Aerospace a 58,000
square foot manufacturing facility located in Huntington Beach, California.
Rental revenue is recognized as lease payments are due from tenants and the
related costs are amortized over their estimated useful life. The future minimum
lease payments to be received from non-cancelable operating leases as of
September 30, 2006 are $1.0 million in 2007; $1.0 million in 2008; $0.1 million
in 2009; and $0 thereafter. Rental property we have leased to third parties
under operating leases consists of the following:
|
|
September
30,
|
|
(In
thousands)
|
|
2006
|
|
|
2005
|
|
Land
and improvements
|
|
$ |
5,168
|
|
|
$ |
5,168
|
|
Buildings
and improvements
|
|
|
3,423
|
|
|
|
3,423
|
|
Less:
Accumulated depreciation
|
|
|
(608 |
) |
|
|
(428 |
) |
|
|
$ |
7,983
|
|
|
$ |
8,163
|
|
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,
or
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. Subsequent 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
2006, we contributed approximately $0.7 million toward this remediation, but
may
be required to pay additional amounts of up to $8.0 million over the next 20
years.
We
expensed $9.0 million, $5.3 million, and $14.1 million in discontinued
operations for environmental matters in 2006, 2005, and 2004, respectively.
As
of September 30, 2006 and 2005, the consolidated total of our recorded
liabilities for environmental matters was approximately $13.5 million and $10.8
million, respectively, which represented the estimated probable exposure for
these matters. On September 30, 2006, $1.2 million of these liabilities was
classified as other accrued liabilities, $1.0 million was classified as
noncurrent liabilities of discontinued operations, and $11.3 million was
classified as other long-term liabilities. It is reasonably possible that our
exposure for these matters could be approximately $20.7 million.
The
sales agreement with Alcoa includes an indemnification for legal and
environmental claims in excess of $8.45 million for our fastener business.
As of
September 30, 2006, Alcoa had contacted us concerning potential health and
safety claims of approximately $16.4 million. On June 25, 2007,
the Company received an arbitration ruling awarding Alcoa approximately $4.0
million from the Company’s $25.0 million escrow account for health and safety
claims, which Alcoa had to that point asserted. Accordingly, the
Company recognized an additional $4.0 million expense as of September 30,
2006.
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, more than 10 thousand
in
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
thirty nine months, we have been served directly by plaintiffs’ counsel in forty
seven cases related to the same pump business. Two of the forty seven cases
were
dismissed as to all defendants, based upon forum objections. The Company was
voluntarily dismissed from thirteen additional pump business cases during the
same period, without the repayment of any consideration to
plaintiffs. We, in coordination with our insurance carriers, intend
to aggressively defend ourselves against the remaining thirty two
claims.
During
the last thirty nine months, we, or our subsidiaries, were served with a total
of three hundred thirty claims 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, of our
former products are at issue, making it difficult to assess the merit and value,
if any, of the asserted claims. We, in coordination with our insurance
carriers, intend to aggressively defend ourselves against these
claims.
During
the same time period, we have resolved eighteen similar, non-pump,
asbestos-related lawsuits that were previously served upon us. In fourteen
cases, we were voluntarily dismissed, without the payment of any consideration
to plaintiffs. The remaining four cases were settled for a nominal
amount.
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 that the Workers Compensation Bureau of the State
of Ohio 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
$8.0 million and suggesting a meeting to discuss a settlement. With interest,
the claim could be higher. 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.
Surety
companies which had issued bonds in favor of the Ohio Bureau of Workers
Compensation have tentatively agreed to settle claims, totaling approximately
$1.0 million, of the Ohio Bureau of Workers Compensation under the bonds, and
have demanded from Fairchild payment under the bonds. Fairchild is also
contesting these claims.
Settlement
efforts to date have not been successful. We expect that the Ohio Bureau
of Workers Compensation will refer the matter to the State Attorney General
for
suit. As of September 30, 2006, we accrued $2.0 million related to the
claim made by the Ohio Bureau of Workers Compensation.
Other
Matters
In
early August 2006, three lawsuits were filed in the Delaware Court of Chancery,
purportedly on behalf of the public stockholders of the Company, regarding
a
going private proposal by FA Holdings I, LLC, a limited liability company led
by
Jeffrey Steiner and Philip Sassower, Chairman of The Phoenix Group
LLC. The defendants named in these actions included Jeffrey Steiner,
Eric Steiner, Robert Edwards, Daniel Lebard, Michael Vantusko, Didier Choix,
Glenn Myles, FA Holdings I, LLC and the Company. The
allegations in each of the complaints, which were substantially similar,
asserted that the individual defendants had breached their fiduciary duties
to
the Company’s stockholders and that the FA Holdings offer of $2.73 for each
share of the Company’s stock was inadequate and unfair. The suits
sought injunctive relief, rescission of any transaction, damages, costs and
attorneys’ fees. On September 7, 2006, the Delaware Court of Chancery
consolidated all three Delaware lawsuits into a single action, styled In re
The Fairchild Corporation Shareholders Litigation, Consolidated C.A. No.
2325-N. On September 21, 2006, the Company announced that FA Holdings
I, LLC had withdrawn its proposal, but that the parties subsequently had further
discussions and agreed to meet again. On December 5, 2006, the
Company announced that discussions with FA Holdings regarding a potential
transaction had been terminated. On March 2, 2007, plaintiffs filed a
stipulation with the Delaware Court of Chancery seeking to dismiss the
consolidated action. On March 6, 2007, the Delaware Court of Chancery
entered an order dismissing all of the claims in the consolidated
action.
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
$5.7 million of proceeds we received from Mr. J. Steiner and our insurance
carriers. 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, and July 2006, we received approximately $0.8 million and $1.1
million, respectively, from our insurance carriers to pay for certain of our
legal costs associated with this matter.
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 of approximately $16.4
million. On June 25, 2007, the Company received an arbitration ruling
awarding Alcoa approximately $4.0 million from the Company’s $25.0 million
escrow account in full settlement of Alcoa’s claims. Accordingly, the
Company recognized an additional $4.0 million expense as of September 30,
2006.
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.
16.
|
BUSINESS
SEGMENT
INFORMATION
|
Our
business consists of three segments: PoloExpress; Hein Gericke; and Aerospace.
Our PoloExpress and Hein Gericke segments are engaged in the design and retail
sale of protective clothing, helmets and technical accessories for motorcyclists
in Europe, and our Hein Gericke segment is also engaged in the design,
licensing, and distribution of apparel in the United States. Our Aerospace
segment stocks and distributes a wide variety of aircraft parts to commercial
airlines and air cargo carriers, fixed-base operators, corporate aircraft
operators and other aerospace companies worldwide.
In
fiscal 2006, we operated a Real Estate segment, which owned and leased a
shopping center located in Farmingdale, New York, and owned and rented two
improved parcels located in Southern California. During fiscal 2006,
we sold the shopping center and reclassified the remaining portions of our
Real
Estate segment into our corporate and other segment. Also during
fiscal 2006, we split our previously reported Sports & Leisure segment into
two separate segments, PoloExpress and Hein Gericke, as management began
reviewing the operating results of each and separately allocating resources
to
each in 2006.
(In
thousands)
|
|
PoloExpress
(a)
|
|
|
Hein
Gericke
(a)
|
|
|
Aerospace
|
|
|
|
|
|
Total
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
112,786
|
|
|
$ |
116,255
|
|
|
$ |
79,600
|
|
|
$ |
950
|
|
|
$ |
309,591
|
|
Operating
income (loss)
|
|
|
11,796
|
|
|
|
(22,084 |
) |
|
|
5,968
|
|
|
|
(22,609 |
) |
|
|
(26,929 |
) |
Interest
income
|
|
|
927
|
|
|
|
95
|
|
|
|
2
|
|
|
|
1,973
|
|
|
|
2,997
|
|
Interest
expense
|
|
|
(2,161 |
) |
|
|
(2,586 |
) |
|
|
(1,444 |
) |
|
|
(5,307 |
) |
|
|
(11,498 |
) |
Income
tax (provision) benefit
|
|
|
1,845
|
|
|
|
(3,685 |
) |
|
|
(11 |
) |
|
|
(325 |
) |
|
|
(2,176 |
) |
Capital
expenditures
|
|
|
1,417
|
|
|
|
5,233
|
|
|
|
332
|
|
|
|
795
|
|
|
|
7,777
|
|
Depreciation
and amortization
|
|
|
1,478
|
|
|
|
4,399
|
|
|
|
403
|
|
|
|
1,243
|
|
|
|
7,523
|
|
Identifiable
assets at Sept. 30
|
|
|
75,657
|
|
|
|
89,421
|
|
|
|
47,331
|
|
|
|
202,720
|
|
|
|
415,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
(Restated):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
111,161
|
|
|
$ |
145,933
|
|
|
$ |
84,493
|
|
|
$ |
656
|
|
|
$ |
342,243
|
|
Operating
income (loss)
|
|
|
9,895
|
|
|
|
(15,295 |
) |
|
|
6,093
|
|
|
|
(28,998 |
) |
|
|
(28,305 |
) |
Interest
income
|
|
|
-
|
|
|
|
98
|
|
|
|
-
|
|
|
|
1,618
|
|
|
|
1,716
|
|
Interest
expense
|
|
|
(1,758 |
) |
|
|
(3,632 |
) |
|
|
(1,329 |
) |
|
|
(6,424 |
) |
|
|
(13,143 |
) |
Income
tax (provision) benefit
|
|
|
(1,733 |
) |
|
|
(49 |
) |
|
|
(26 |
) |
|
|
2,856 |
|
|
|
1,048 |
|
Capital
expenditures
|
|
|
985
|
|
|
|
8,434
|
|
|
|
550
|
|
|
|
1,699
|
|
|
|
11,668
|
|
Depreciation
and amortization
|
|
|
1,395
|
|
|
|
5,006
|
|
|
|
375
|
|
|
|
1,097
|
|
|
|
7,873
|
|
Identifiable
assets at Sept. 30
|
|
|
65,405
|
|
|
|
91,624
|
|
|
|
42,848
|
|
|
|
248,762
|
|
|
|
448,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
(Restated):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
94,543
|
|
|
$ |
148,189
|
|
|
$ |
75,400
|
|
|
$ |
930
|
|
|
$ |
319,062
|
|
Operating
income (loss)
|
|
|
10,795
|
|
|
|
(3,614 |
) |
|
|
4,030
|
|
|
|
(25,310 |
) |
|
|
(14,099 |
) |
Interest
income
|
|
|
-
|
|
|
|
343
|
|
|
|
-
|
|
|
|
1,212
|
|
|
|
1,555
|
|
Interest
expense
|
|
|
(768 |
) |
|
|
(3,894 |
) |
|
|
(596 |
) |
|
|
(6,896 |
) |
|
|
(12,154 |
) |
Income
tax (provision) benefit
|
|
|
(2,118 |
) |
|
|
(1,866 |
) |
|
|
(36 |
) |
|
|
12,973
|
|
|
|
8,953
|
|
Capital
expenditures
|
|
|
2,087
|
|
|
|
8,413
|
|
|
|
277
|
|
|
|
1,483
|
|
|
|
12,260
|
|
Depreciation
and amortization
|
|
|
1,252
|
|
|
|
2,470
|
|
|
|
516
|
|
|
|
773
|
|
|
|
5,011
|
|
Identifiable
assets at Sept. 30
|
|
|
84,026
|
|
|
|
79,908
|
|
|
|
52,618
|
|
|
|
282,613
|
|
|
|
499,165
|
|
(a)
|
The
results of the PoloExpress and Hein Gericke segments reflect 11 months
of
activity in 2004 since our date of acquisition on November
1, 2003.
|
17.
|
FOREIGN
OPERATIONS AND EXPORT
SALES
|
Our
operations are located primarily in the United States and Europe. All
rental revenue is generated in the United States. Inter-area sales are not
significant to the total sales of any geographic area. Sales by geographic
area
are attributed by country of domicile of our subsidiaries. Our financial data
by
geographic area is as follows:
|
|
United
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
States
|
|
|
Europe
|
|
|
Other
|
|
|
Total
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
by geographic area
|
|
$ |
91,341
|
|
|
$ |
218,250
|
|
|
$ |
-
|
|
|
$ |
309,591
|
|
Operating loss
by geographic area
|
|
|
(17,920 |
) |
|
|
(8,996 |
) |
|
|
(13 |
) |
|
|
(26,929 |
) |
Loss
from continuing operations before taxes
|
|
|
(18,497 |
) |
|
|
(13,161 |
) |
|
|
(13 |
) |
|
|
(31,671 |
) |
Identifiable
assets by geographic area at September 30
|
|
|
159,910
|
|
|
|
251,974
|
|
|
|
3,245
|
|
|
|
415,129
|
|
Long-lived
assets by geographic area at September 30
|
|
|
115,956
|
|
|
|
50,059
|
|
|
|
3,245
|
|
|
|
169,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
(Restated):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
by geographic area
|
|
$ |
114,516
|
|
|
$ |
227,727
|
|
|
$ |
-
|
|
|
$ |
342,243
|
|
Operating loss
by geographic area
|
|
|
(20,680 |
) |
|
|
(7,615 |
) |
|
|
(10 |
) |
|
|
(28,305 |
) |
Loss
from continuing operations before taxes
|
|
|
(13,578 |
) |
|
|
(14,092 |
) |
|
|
(200 |
) |
|
|
(27,870 |
) |
Identifiable
assets by geographic area at September 30 (a)
|
|
|
214,683
|
|
|
|
230,711
|
|
|
|
3,245
|
|
|
|
448,639
|
|
Long-lived
assets by geographic area at September 30 (b)
|
|
|
203,264
|
|
|
|
49,775
|
|
|
|
3,245
|
|
|
|
256,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
(Restated):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
by geographic area
|
|
$ |
113,489
|
|
|
$ |
205,572
|
|
|
$ |
1
|
|
|
$ |
319,062
|
|
Operating
income (loss) by geographic area
|
|
|
(17,100 |
) |
|
|
3,145
|
|
|
|
(144 |
) |
|
|
(14,099 |
) |
Loss
from continuing operations before taxes
|
|
|
(14,617 |
) |
|
|
(1,280 |
) |
|
|
(144 |
) |
|
|
(16,041 |
) |
Identifiable
assets by geographic area at September 30 (c)
|
|
|
299,714
|
|
|
|
196,271
|
|
|
|
3,180
|
|
|
|
499,165
|
|
Long-lived
assets by geographic area at September 30 (d)
|
|
|
231,249
|
|
|
|
51,440
|
|
|
|
3,180
|
|
|
|
285,869
|
|
(a)
|
Identifiable
assets related to discontinued operations in the United States were
$80,882 at September 30, 2005.
|
(b)
|
Long-lived
assets related to discontinued operations in the United States were
$79,373 at September 30, 2005.
|
(c)
|
Identifiable
assets related to discontinued operations in the United States were
$91,818 at September 30, 2004.
|
(d)
|
Long-lived
assets related to discontinued operations in the United States were
$85,791 at September 30, 2004.
|
Export
sales are defined as sales by our continuing operations located in the United
States to customers in foreign regions. Export sales were as
follows:
(In
thousands)
|
|
Europe
|
|
|
Canada
|
|
|
Japan
|
|
|
Asia
(without
Japan)
|
|
|
South
America
|
|
|
Other
|
|
|
Total
|
|
2006
|
|
$ |
10,431
|
|
|
$ |
4,052
|
|
|
$ |
12,600
|
|
|
$ |
4,496
|
|
|
$ |
3,394
|
|
|
$ |
5,234
|
|
|
$ |
40,207
|
|
2005
|
|
|
10,304
|
|
|
|
4,594
|
|
|
|
8,426
|
|
|
|
4,902
|
|
|
|
3,127
|
|
|
|
4,950
|
|
|
|
36,303
|
|
2004
|
|
|
8,227
|
|
|
|
10,577
|
|
|
|
6,489
|
|
|
|
3,087
|
|
|
|
2,771
|
|
|
|
3,176
|
|
|
|
34,327
|
|
18.
|
QUARTERLY
FINANCIAL DATA
(UNAUDITED)
|
The
following table of unaudited quarterly financial data for fiscal 2006 and fiscal
2005 has been prepared from our financial records and reflects all adjustments
which are, in the opinion of our management, necessary for a fair presentation
of the results of operations for the interim periods presented.
|
|
December
31,
2005
|
|
|
March
31,
2006
|
|
|
June
30,
2006
|
|
|
|
|
|
|
|
(In
thousands, except per share data)
|
|
Previously
Reported (a)
|
|
|
Restated
(b)
|
|
|
Previously
Reported (a)
|
|
|
Restated
(b)
|
|
|
Previously
Reported (a)
|
|
|
Restated
(b)
|
|
|
September
30, 2006
|
|
|
|
|
Net
revenues
|
|
$ |
51,547
|
|
|
$ |
51,547
|
|
|
$ |
62,964
|
|
|
$ |
62,964
|
|
|
$ |
105,815
|
|
|
$ |
105,815
|
|
|
$ |
89,265
|
|
|
|
|
Gross
margin
|
|
|
19,403
|
|
|
|
19,403
|
|
|
|
23,937
|
|
|
|
23,937
|
|
|
|
44,379
|
|
|
|
44,379
|
|
|
|
35,922
|
|
|
|
|
Operating
income (loss)
|
|
|
(9,145 |
) |
|
|
(9,193 |
) |
|
|
(10,895 |
) |
|
|
(10,918 |
) |
|
|
2,414
|
|
|
|
2,405
|
|
|
|
(9,223 |
) |
|
|
|
Tax
(provision) benefit (c)
|
|
|
(65 |
) |
|
|
13
|
|
|
|
(22 |
) |
|
|
5
|
|
|
|
(149 |
) |
|
|
(1,580 |
) |
|
|
(614 |
) |
|
|
|
Earnings
(loss) from continuing operations (c, d)
|
|
|
(10,205 |
) |
|
|
(10,095 |
) |
|
|
(12,746 |
) |
|
|
(11,687 |
) |
|
|
299
|
|
|
|
(951 |
) |
|
|
(11,157 |
) |
|
|
|
Per
basic and diluted share
|
|
|
(0.41 |
) |
|
|
(0.40 |
) |
|
|
(0.50 |
) |
|
|
(0.46 |
) |
|
|
0.01
|
|
|
|
(0.04 |
) |
|
|
(0.45 |
) |
|
|
|
Earnings
(loss) from discontinued operations, net of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax
(e, f)
|
|
|
(411 |
) |
|
|
(411 |
) |
|
|
621
|
|
|
|
622
|
|
|
|
(2,592 |
) |
|
|
(1,192 |
) |
|
|
(16,028 |
) |
|
|
|
Per
basic and diluted share
|
|
|
(0.02 |
) |
|
|
(0.02 |
) |
|
|
0.02
|
|
|
|
0.02
|
|
|
|
(0.10 |
) |
|
|
(0.04 |
) |
|
|
(0.64 |
) |
|
|
|
Net
gain (loss) on disposal of discontinued operations
|
|
|
12,500
|
|
|
|
12,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
100
|
|
|
|
|
Per
basic and diluted share
|
|
|
0.50
|
|
|
|
0.50
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.04
|
|
|
|
0.04
|
|
|
|
0.00
|
|
|
|
|
Net
earnings (loss)
|
|
|
1,883
|
|
|
|
1,993
|
|
|
|
(12,125 |
) |
|
|
(11,066 |
) |
|
|
(1,293 |
) |
|
|
(1,144 |
) |
|
|
(27,082 |
) |
|
|
|
Per
basic and diluted share
|
|
|
0.07
|
|
|
|
0.08
|
|
|
|
(0.48 |
) |
|
|
(0.44 |
) |
|
|
(0.05 |
) |
|
|
(0.05 |
) |
|
|
(1.07 |
) |
|
|
|
Market
price range of Class A stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$ |
2.85
|
|
|
$ |
2.85
|
|
|
$ |
2.79
|
|
|
$ |
2.79
|
|
|
$ |
2.61
|
|
|
$ |
2.61
|
|
|
$ |
2.80
|
|
|
|
|
Low
|
|
$ |
2.11
|
|
|
$ |
2.11
|
|
|
$ |
2.26
|
|
|
$ |
2.26
|
|
|
$ |
2.00
|
|
|
$ |
2.00
|
|
|
$ |
2.08
|
|
|
|
|
Close
|
|
$ |
2.55
|
|
|
$ |
2.55
|
|
|
$ |
2.60
|
|
|
$ |
2.60
|
|
|
$ |
2.08
|
|
|
$ |
2.08
|
|
|
$ |
2.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
2004
|
|
|
March
31,
2005
|
|
|
June
30,
2005
|
|
|
September
30,
2005
|
|
|
|
Previously
Reported (a)
|
|
|
Restated
(b)
|
|
|
Previously
Reported (a)
|
|
|
Restated
(b)
|
|
|
Previously
Reported (a)
|
|
|
Restated
(b)
|
|
|
Previously
Reported (a)
|
|
|
Restated
(b)
|
|
Net
revenues
|
|
$ |
64,489
|
|
|
$ |
64,489
|
|
|
$ |
79,834
|
|
|
$ |
79,834
|
|
|
$ |
112,954
|
|
|
$ |
112,954
|
|
|
$ |
84,966
|
|
|
$ |
84,966
|
|
Gross
margin
|
|
|
21,890
|
|
|
|
21,890
|
|
|
|
29,924
|
|
|
|
29,924
|
|
|
|
46,891
|
|
|
|
46,891
|
|
|
|
31,787
|
|
|
|
31,787
|
|
Operating
income (loss)
|
|
|
(10,388 |
) |
|
|
(10,434 |
) |
|
|
(8,127 |
) |
|
|
(8,146 |
) |
|
|
736
|
|
|
|
720
|
|
|
|
(10,030 |
) |
|
|
(10,445 |
) |
Tax
(provision) benefit (g)
|
|
|
(70 |
) |
|
|
2,895 |
|
|
|
(84 |
) |
|
|
(290 |
) |
|
|
(1,457 |
) |
|
|
(609 |
) |
|
|
(683 |
) |
|
|
(948 |
) |
Earnings
(loss) from continuing operations (g, h, j)
|
|
|
(11,984 |
) |
|
|
(9,021 |
) |
|
|
(3,297 |
) |
|
|
(3,575 |
) |
|
|
(2,265 |
) |
|
|
(1,391 |
) |
|
|
(12,339 |
) |
|
|
(13,322 |
) |
Per
basic and diluted share
|
|
|
(0.47 |
) |
|
|
(0.35 |
) |
|
|
(0.13 |
) |
|
|
(0.14 |
) |
|
|
(0.09 |
) |
|
|
(0.06 |
) |
|
|
(0.49 |
) |
|
|
(0.53 |
) |
Earnings
(loss) from discontinued operations, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of tax (i, j)
|
|
|
386
|
|
|
|
(2,779
|
) |
|
|
(602 |
) |
|
|
(602 |
) |
|
|
(463 |
) |
|
|
(463 |
) |
|
|
(4,296 |
) |
|
|
(1,787 |
) |
Per
basic and diluted share
|
|
|
0.02
|
|
|
|
0.11
|
|
|
|
(0.01 |
) |
|
|
(0.02 |
) |
|
|
(0.02 |
) |
|
|
(0.02 |
) |
|
|
(0.17 |
) |
|
|
(0.07 |
) |
Net
gain (loss) on disposal of discontinued operations
|
|
|
12,500
|
|
|
|
12,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,158
|
|
|
|
1,158
|
|
|
|
(83 |
) |
|
|
(83 |
) |
Per
basic and diluted share
|
|
|
0.50
|
|
|
|
0.50
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.05
|
|
|
|
0.05
|
|
|
|
-
|
|
|
|
(0.00 |
) |
Net
earnings (loss)
|
|
|
902
|
|
|
|
698
|
|
|
|
(3,900 |
) |
|
|
(4,177 |
) |
|
|
(1,570 |
) |
|
|
(698 |
) |
|
|
(16,716 |
) |
|
|
(15,188 |
) |
Per
basic and diluted share
|
|
|
0.04
|
|
|
|
0.03
|
|
|
|
(0.15 |
) |
|
|
(0.17 |
) |
|
|
(0.06 |
) |
|
|
(0.03 |
) |
|
|
(0.66 |
) |
|
|
(0.60 |
) |
Market
price range of Class A stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$ |
4.04
|
|
|
$ |
4.04
|
|
|
$ |
3.99
|
|
|
$ |
3.99
|
|
|
$ |
3.14
|
|
|
$ |
3.14
|
|
|
$ |
3.18
|
|
|
$ |
3.18
|
|
Low
|
|
$ |
2.96
|
|
|
$ |
2.96
|
|
|
$ |
3.00
|
|
|
$ |
3.00
|
|
|
$ |
2.11
|
|
|
$ |
2.11
|
|
|
$ |
2.20
|
|
|
$ |
2.20
|
|
Close
|
|
$ |
3.69
|
|
|
$ |
3.69
|
|
|
$ |
3.10
|
|
|
$ |
3.10
|
|
|
$ |
2.86
|
|
|
$ |
2.86
|
|
|
$ |
2.32
|
|
|
$ |
2.32
|
|
(a)
|
Certain
previously reported balances have been reclassified to conform to
the
current condensed consolidated balance sheet presentation, including
reclassification to discontinued operations those amounts related
to a
landfill development partnership, sold in April 2006, and Airport
Plaza
shopping center, sold in July
2006.
|
(b)
|
Amounts
have been restated as described in Note
2.
|
(c)
|
$1.4
million of the increase in the tax provision for quarter ended June
30,
2006 resulted from the restatement of deferred tax liabilities associated
with the acquisition of indefinite lived intangibles in foreign taxing
jurisdictions. This restatement adjustment was also the
principal reason for the $1.2 million shift to loss from continuing
operations for the quarter ended June 30,
2006.
|
(d)
|
$1.0
million of the improvement in loss from continuing operations for
the
quarter ended March 31, 2006 resulted from the recharacterization
of our
interest in Voyager Kibris, including elimination of the related
loss
during the quarter ended March 31,
2006.
|
(e)
|
The
$1.4 million decrease in loss from discontinued operations, net of
tax for
the quarter ended June 30, 2006 resulted from the decrease in the
accrual
for the claim made by the Ohio Bureau of Workers
Compensation.
|
(f)
|
The
$15.0 million loss from discontinued operations, net of tax for the
quarter ended September 30, 2006 was primarily comprised of $4.1
million
of additional environmental accruals, $4.0 million accrued for the
settlement of health and safety claims with Alcoa, and a $1.4 million
additional accrual for the claim made by the Ohio Bureau of Workers
Compensation.
|
(g)
|
$0.8
million of the decrease in the tax provision for quarter ended June
30,
2005 resulted from the change in restated deferred tax liabilities
associated with the acquisition of indefinite lived intangibles in
foreign
taxing jurisdictions. This restatement adjustment was also the
principal reason for the $0.9 million improvement in the loss from
continuing operations for the quarter ended June 30,
2005.
|
(h)
|
Loss
from continuing operations for the quarter ended September 30, 2005
increased by $1.0 million due primarily to elimination of $0.3 million
of
equity earnings associated with our recharacterized interest in Voyager
Kibris, $0.4 million decrease to other income associated with the
restructured note, and $0.3 million decrease to tax provision for
the
quarter ended September 30, 2005 due to the change in restated deferred
tax liabilities associated with the acquisition of indefinite lived
intangibles in foreign taxing
jurisdictions.
|
(i)
|
$1.5
million of the decrease in loss from discontinued operations, net
of tax
for the quarter ended September 30, 2005 resulted from reversal of
the
accrual for the claim made by the Ohio Bureau of Workers
Compensation.
|
(j) |
$3.2
million of the decrease in the loss from continuing operations for
the
quarter ended December 31, 2004 resulted from the reallocation of
tax
benefit from discontinued operations to continuing operations. This
restatement adjustment was also the principal reason for the $3.2
million
decrease in earnings from discontinued operations, net of tax for
the
quarter ended December 31,
2004.
|
19.
|
PRO
FORMA FINANCIAL STATEMENTS
(UNAUDITED)
|
The
following table sets forth our unaudited pro forma results of operations for
2004 reflecting our acquisition of Hein Gericke, PoloExpress and Fairchild
Sports USA, which we completed on November 1, 2003. The pro forma results are
based on our historical financial statements and the historical financial
statements of the operations and entities we acquired. The prior period
historical results of the operations and entities we acquired are based upon
the
best information available to us, but these financial statements were not
audited. The unaudited pro forma statements of operations give effect to each
of
these transactions as if the transactions occurred at the beginning of each
reporting period. The pro forma financial results are presented for
informational purposes only and are not intended to be indicative of either
future results of our operations or results that might have been achieved had
the transactions actually occurred since the beginning of each reporting
period.
(In
thousands, except per share data)
|
|
2004
|
|
|
|
(Restated)
|
|
Net
revenues
|
|
$ |
330,148
|
|
Operating
loss
|
|
|
(14,763 |
) |
Earnings
(loss) from continuing operations
|
|
|
(9,835 |
) |
Earnings
(loss) from continuing operations, per share
|
|
$ |
(0.39 |
) |
Restructuring charges of $0.6 million in 2004 included the costs to close all
fifteen of the GoTo Helmstudio retail locations of our Hein Gericke segment
in
Germany. All of the charges were the direct result of activities that occurred
as of June 30, 2004. The restructuring charges included an accrual of $0.4
million for the remaining lease costs of the closed stores, $0.1 million for
the
write-off of store fittings and a nominal amount for severance. These costs
were
classified as restructuring and were the direct result of a formal plan to
close
the GoTo Helmstudio locations and terminate its employees. Such costs are
nonrecurring in nature. Other than a reduction in our existing cost structure,
none of the restructuring costs will result in future increases in earnings
or
represent an accrual of future costs of our ongoing business.
Shopping
Center
On
July 6, 2006, Republic Thunderbolt, LLC (an indirect, wholly-owned subsidiary
of
the Company) completed the sale of Airport Plaza, a shopping center located
in
Farmingdale, New York, to an affiliate of Kimco Realty
Corporation. We decided to sell the shopping center to enhance our
financial flexibility, allowing us to pursue other opportunities. We
received net proceeds of approximately $40.7 million from the sale. As a
condition to closing, the buyer assumed our existing mortgage loan on Airport
Plaza that had an outstanding principal balance of approximately $53.5 million
on the closing date. Also as a condition to closing, we provided the
buyer with an environmental indemnification and agreed to remediate an
environmental matter that was identified, the costs of which are estimated
to be
between $1.0 million and $2.7 million. We expect to recognize a gain of
approximately $15.1 million from this transaction. However, because of the
uncertain environmental liabilities that we retained, the gain recognition
is
required to be delayed until the remediation efforts are complete.
Landfill
Development Partnership
On
April 28, 2006, our consolidated partnership, Eagle Environmental, L.P. II,
completed the sale of its Royal Oaks landfill to Highstar Waste Acquisition
for
approximately $1.4 million. This transaction concludes the operating activity
of
Eagle Environmental L.P.
II,
and there is no requirement or current intent by us to pursue any new operating
activities through this partnership. In fiscal 2006, we recognized a $1.1
million gain on disposal of discontinued operations as a result of this
transaction.
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 June 30, 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 deposited with an escrow agent
approximately $0.4 million to secure indemnification obligations we may have
to
PCA Aerospace, which was returned to us, with interest, after termination of
the
18-month escrow period. 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.
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 September 30, 2006, the book value of the Huntington Beach
property was $2.9 million and we believe the current fair market value is
greater than $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 year. Deliveries exceeded the threshold
aircraft delivery level needed for us to earn the full $12.5 million contingent
payment for 2003, 2004, and 2005. Accordingly, we recognized a
$12.5 million gain on disposal of discontinued operations in fiscal
2004, 2005, and 2006. In February 2007, we received from Alcoa the
final $12.5 million payment related to the sale of this business. Of
this amount received, we repaid debt of approximately $9.1 million.
On
December 3, 2002, we deposited with an escrow agent $25.0 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. On June 25, 2007, the Company received an
arbitration ruling awarding Alcoa approximately $4.0 million from the Company’s
$25.0 million escrow account for health and safety claims, which Alcoa had
to
that point asserted. Accordingly, the Company recognized an
additional $4.0 million expense as of September 30, 2006. The escrow
is classified in long-term investments on our balance sheet. In addition, for
the period through 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.
APS
On
January 23, 2004, we consummated a sale of substantially all of the assets
of
APS, for a nominal amount.
The
results of the shopping center, landfill development partnership, Fairchild
Aerostructures, the fastener business, and APS are recorded as earnings from
discontinued operations, the components of which are as follows:
(In
thousands)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Net
sales
|
|
$ |
7,450
|
|
|
$ |
17,745
|
|
|
$ |
19,223
|
|
Cost
of goods sold
|
|
|
3,524
|
|
|
|
14,510
|
|
|
|
16,564
|
|
Gross
margin
|
|
|
3,926
|
|
|
|
3,235
|
|
|
|
2,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general & administrative expense
|
|
|
16,638
|
|
|
|
5,062
|
|
|
|
13,331
|
|
Other expense,
net
|
|
|
(1,008 |
) |
|
|
(402 |
) |
|
|
(175 |
) |
Operating loss
|
|
|
(11,704 |
) |
|
|
(1,425 |
) |
|
|
(10,497 |
) |
Net
interest expense
|
|
|
(2,701 |
) |
|
|
(3,381 |
) |
|
|
(3,416 |
) |
Loss
from discontinued operations before income taxes
|
|
|
(14,405 |
) |
|
|
(4,806 |
) |
|
|
(13,913 |
) |
Income
tax (provision) benefit
|
|
|
(2,604 |
) |
|
|
(825
|
) |
|
|
14,010
|
|
Net
(income) loss from discontinued operations
|
|
$ |
(17,009 |
) |
|
$ |
(5,631 |
) |
|
$ |
97
|
|
The
assets and liabilities of the shopping center and landfill development
partnership are being reported as assets and liabilities of discontinued
operations at September 30, 2006 and 2005, and were as follows:
|
|
September
30,
|
|
(In
thousands)
|
|
2006
(a)
|
|
|
2005
|
|
Current
assets of discontinued operations:
|
|
|
|
|
|
|
Accounts
receivable
|
|
$ |
-
|
|
|
$ |
60
|
|
Prepaid
expenses and other current assets
|
|
|
-
|
|
|
|
1,449
|
|
|
|
|
-
|
|
|
|
1,509
|
|
Noncurrent
assets of discontinued operations:
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
-
|
|
|
|
91,031
|
|
Accumulated
depreciation
|
|
|
-
|
|
|
|
(15,571 |
) |
Deferred
loan costs
|
|
|
-
|
|
|
|
832
|
|
Other
assets
|
|
|
-
|
|
|
|
3,081
|
|
|
|
|
-
|
|
|
|
79,373
|
|
Current
liabilities of discontinued operations:
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
|
-
|
|
|
|
(668 |
) |
Accounts
payable
|
|
|
(62 |
) |
|
|
(425 |
) |
Accrued
liabilities
|
|
|
-
|
|
|
|
(447 |
) |
|
|
|
(62 |
) |
|
|
(1,540 |
) |
Noncurrent
liabilities of discontinued operations:
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
-
|
|
|
|
(53,313 |
) |
Other
long-term liabilities
|
|
|
(16,120 |
) |
|
|
(168 |
) |
|
|
|
(16,120 |
) |
|
|
(53,481 |
) |
Total
net assets of discontinued operations
|
|
$ |
(16,182 |
) |
|
$ |
25,861
|
|
|
(a)
|
Represents
a $15.1 million deferred gain on the sale of the shopping center
and $1.0
million for the estimated minimum cost to remediate environmental
matters.
|
On
October 18, 2006, we collected $2.75 million in cash in full payment of our
note
receivable from Voyager Kibris. We expect to recognize a gain of approximately
$2.1 million in the first quarter of fiscal 2007.
None
Evaluation
of Disclosure Controls and Procedures
The
term “disclosure controls and procedures” is defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). 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. Disclosure controls and procedures
include controls and procedures designed to ensure that information required
to
be disclosed by a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the issuer's management,
including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required
disclosures.
Our
Chief Executive Officer and our Chief Financial Officer have performed an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures as of September 30, 2006, which we refer to as the
“evaluation date”. Based on that evaluation and the material
weaknesses described below, management has concluded that our disclosure
controls and procedures were ineffective as of September 30, 2006.
We
identified the following material weaknesses as of
September 30, 2006:
Controls
associated with accounting for income taxes in accordance with U.S. generally
accepted accounting principles were ineffective. Specifically, we did
not possess the appropriate number of tax personnel necessary to adequately
review related tax accounts. This control deficiency contributed to errors
resulting in the restatement of the Company’s consolidated financial statements
for 2004 and 2005, each of the interim periods in 2005, and the first three
quarters of 2006. This material weakness could result in a
more than remote likelihood that a material misstatement in accounts or
disclosures may not be prevented or detected.
Controls
associated with identifying and accounting for complex and non-routine
transactions in accordance with U.S. generally accepted accounting principles
were ineffective. Specifically, we did not possess the appropriate number
of personnel necessary to aequately identify and account for these
transactions. This control deficiency contributed to errors resulting in
the restatement of the Company's consolidated financial statements for 2004
and
2005, each of the interim periods in 2005, and the first three quarters of
2006. This material weakness could result in a more than remote likelihood
that a material misstatement in accounts or disclosures may not be prevented
or
detected.
Plan
for Remediation of the Material Weaknesses
Subsequent
to September 30, 2006, we have taken steps to enhance our controls relating
to
accounting for income taxes and 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. Specifically, we hired
two personnel, one with significant technical accounting experience
and the other with significant tax experience and we accelerated the timing
of internal communication to discuss the accounting for non-routine or complex
transactions. However, a determination that these material weaknesses
have been corrected can only be substantiated by the passage of time and
displayed by staff performance.
Notwithstanding
the material weaknesses discussed above, management believes that the financial
statements included in this report present fairly, in all material respects,
our
financial position, results of operations, and cash flows for the periods
presented in accordance with U.S. generally accepted accounting
principles.
Elimination
of a Prior Period Material Weakness
As
of September 30, 2005, we did not have effective policies and procedures in
place to review and approve the propriety of certain journal entries prepared
by
two of the Company's material subsidiaries. During 2006 we implemented policies
and procedures that document adequately the review and approval process of
journal entries at those two subsidiaries. Accordingly, we believe we have
sufficiently corrected this material weakness as of September 30,
2006.
Changes
in Internal Control over Financial Reporting
There
have not been any changes in our internal control over financial reporting
(as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act) during the fiscal quarter ended September 30, 2006 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Future
Assessment of Internal Controls Over Financial
Reporting
In
accordance with current regulations, beginning with our Annual Report on Form
10-K for the fiscal year ending September 30, 2008, we will be subject to the
provisions of Section 404 of the Sarbanes-Oxley Act of 2002 that require an
annual management assessment of our internal controls over financial
reporting. Beginning with the fiscal year ending September 30, 2009,
we will be subject to a related attestation by external auditors from an
independent registered public accounting firm. Should our market
capitalization exceed $75.0 million on March 31, 2008, we may be subject to
external audit of our internal controls over financial reporting for the fiscal
year ending September 30, 2008.
Limitations
on Effectiveness of Internal Controls
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
PART
III
DIRECTORS
STANDING FOR ELECTION
All
of
the nominees are currently directors of the Company. Each has agreed to be
named
and to serve as a director if elected. All nominees have been designated as
“Continuing Directors” as defined in the Company’s Certificate of
Incorporation. Ages are stated as of July 15, 2007.
Name
|
|
Age
|
|
Position
|
Didier
Choix
|
|
50
|
|
Director
|
Robert
E. Edwards
|
|
59
|
|
Director
|
Daniel
Lebard
|
|
68
|
|
Director
|
Glenn
Myles
|
|
52
|
|
Director
|
Eric
I. Steiner
|
|
45
|
|
President,
Chief Operating Officer and Director
|
Jeffrey
J. Steiner
|
|
70
|
|
Chairman
of the Board and Chief Executive Officer
|
Michael
J. Vantusko
|
|
50
|
|
Director
|
Didier
Choix. Director since 2006. Member and President
of DDA & Company, LLC, a corporate finance advisory boutique with offices in
New York, New York, and Paris, France. Mr. Choix has been advising small and
mid-cap companies contemplating acquisitions or divestitures, mainly in a
cross-border environment from 1997 to present. In addition, from 2002
to 2004, Mr. Choix was President of the Executive Board (“Directoire”) of
Basaltes SA (Paris, France), the largest French independent producer of
aggregates.
Robert
E. Edwards. Director since 1998. Executive Vice
President of Fairchild Fasteners: March 1998 to January 2001. Chief Operating
Officer of Fairchild Fasteners U.S. Operations: January 2000 to January 2001.
Chief Executive Officer of Fairchild Fasteners Direct: March 1998 to December
1999. President and Chief Executive Officer of Edwards and Lock Management
Corporation (predecessor of Fairchild Fasteners Direct): 1983 to 1998. Pursuant
to the merger agreement by which the Company acquired Fairchild Fasteners
Direct, Mr. Edwards is to be nominated for election as a director every
year as long as he continues to own at least 541,258 shares of Class A
common stock.
Daniel
Lebard. Director since 1996. Chairman of
Supervisory Board of Daniel Lebard Management Development SA, a consulting
firm
in Paris, France, which performs management services: 1982 to Present. Chief
Executive Officer of ISPG and Executive Chairman of Albright & Wilson
plc (manufacturer of added value phosphate products): 1999.
Glenn
Myles. Director since 2006. President and CEO of
First Wall Street Capital International, an investment banking firm: November
1999 to present. In connection with these positions, Mr. Myles has
held various ownership positions in diverse businesses such as retail, auto
parts, finance, shopping centers, hotels, oil drilling, music businesses and
movie production companies. Mr. Myles also served as Senior Vice
President of the Davis Companies, the holding company of Marvin
Davis: 1995-2000.
Dr. Eric I.
Steiner. Director since 1988. President of the
Company: September 1998 to Present. Chief Operating Officer of the Company:
November 1996 to Present. Executive Vice President of the Company: November
1996
to September 1998. Senior Vice President, Operations of the Company: May 1992
to
November 1996. Dr. Steiner is the son of Jeffrey J. Steiner.
Jeffrey
J. Steiner. Director since 1985. Chairman of the
Board and Chief Executive Officer of the Company: December 1985 to Present.
President of the Company: July 1991 to September 1998. Director of Global
Sources Ltd.
Michael
J. Vantusko. Director since 2006. President of
Grantwood Consulting, LLC, a financial advisory and consulting
firm: February 2000 to present. Chief Financial Officer
and Senior Vice President of Waterlink, Inc. (NYSE: WLK), an international
equipment consolidator: 1996 to 2000. Chief Financial
Officer for Waxman Industries, Inc. (NYSE: WAX), a products
distributor: 1995 to 1996.
Legal
Proceedings Involving Jeffrey Steiner: Over the past
several years, we have disclosed legal proceedings in France involving
Mr. Jeffrey Steiner, Chairman and Chief Executive Officer of the Company.
This matter is closed and all of the charges against Mr. Steiner, which
resulted from these proceedings, were dismissed except for one, relating to
the
unjustified use in 1990 of corporate funds of Elf-Acquitaine, a French oil
company. Mr. Steiner was given a suspended sentence and ordered to pay a
fine of 500,000 Euros by the French Court. This decision has resulted in no
penal record in France. The Company and Mr. Steiner’s respective rights and
obligations with respect to each other as a result of his defense in these
proceedings were resolved in connection with the Derivative Settlement referred
to below.
Derivative
Shareholder Actions: 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 alleged 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 their fiduciary
duties to the Company. The complaints named as defendants all of the Company’s
directors, its Chairman and Chief Executive Officer, its President and Chief
Operating Officer, its then Chief Financial Officer, and its General Counsel.
On
October 24, 2005, a copy of a “Notice of Hearing and Proposed Supplemental
Settlement of The Fairchild Corporation Stockholder Derivative Litigation” (the
“Derivative Settlement”) was mailed to all
shareholders and was filed with the SEC on a Form 8-K report. On
November 23, 2005, the Court of Chancery approved the Derivative
Settlement, which approval became final on December 23, 2005. The
Derivative Settlement is further discussed below under “Certain
Transactions”.
Class
Action Litigation: In early August 2006, three
lawsuits were filed in the Delaware Court of Chancery, purportedly on behalf
of
the public stockholders of the Company, regarding a going private proposal
by FA
Holdings I, LLC, a limited liability company led by Jeffrey Steiner and Philip
Sassower, Chairman of The Phoenix Group LLC. The defendants named in
these actions included Jeffrey Steiner, Eric Steiner, Robert Edwards, Daniel
Lebard, Michael Vantusko, Didier Choix, Glenn Myles, FA Holdings I, LLC and
the
Company.
The allegations in each of the complaints, which were substantially similar,
asserted that the individual defendants had breached their fiduciary duties
to
the Company’s stockholders and that the FA Holdings offer of $2.73 for each
share of the Company’s stock was inadequate and unfair. The suits
sought injunctive relief, rescission of any transaction, damages, costs and
attorneys’ fees. On September 7, 2006, the Delaware Court of Chancery
consolidated all three Delaware lawsuits into a single action, styled In re
The Fairchild Corporation Shareholders Litigation, Consolidated C.A. No.
2325-N. On September 21, 2006, the Company announced that FA Holdings
I, LLC had withdrawn its proposal, but that the parties subsequently had further
discussions and agreed to meet again. On December 5, 2006, the
Company announced that discussions with FA Holdings regarding a potential
transaction had been terminated. On March 2, 2007, plaintiffs filed a
stipulation with the Delaware Court of Chancery seeking to dismiss the
consolidated action. On March 6, 2007, the Delaware Court of Chancery
entered an order dismissing all of the claims in the consolidated
action.
Director
Independence: Except for Eric Steiner and Jeffrey
Steiner, all director nominees are “independent” as defined in the listing
standards of the New York Stock Exchange, applicable Securities and Exchange
Commission Rules, and the Company’s Corporate Governance
Guidelines.
Two
New Independent Directors Appointed: Pursuant to
the Derivative Settlement, the Company agreed to nominate and appoint two new
independent directors as soon as practicable. The Board of Directors
did so. Pursuant to the Derivative Settlement, Jeffrey Steiner and
Eric Steiner (on behalf of themselves and their affiliates) agreed that they
will not take actions as stockholders to remove any such independent directors
prior to the Company’s 2007 annual meeting of stockholders.
INFORMATION
AS TO EXECUTIVE OFFICERS
Set
forth
below is certain information about each current executive officer of the Company
who is not a director of the Company. Related party transactions between the
Company and certain officers (or their immediate family members or affiliates)
are set forth under the heading “Certain Transactions.”
Klaus
Esser, 55, has served as the Managing Director of Polo Express since
1980. Fairchild acquired Polo Express in November, 2003.
Michael
L. McDonald, 42, has served as Chief Financial Officer of the Company
since August 2006, as Senior Vice President since October 2006, as Vice
President of the Company from May 2002 until October 2006 and as Controller
of
the Company from July 2000 to August 2006. He served as Assistant Controller
from 1997 to July 2000. Mr. McDonald has been employed by the Company since
1989.
Donald
E. Miller, 60, has served as Executive Vice President of the Company
since September 1998, as General Counsel since January 1991 and as Corporate
Secretary since January 1995. He served as Senior Vice President of the Company
from January 1991 through September 1998.
Warren
D. Persavich, 54, has served as President of the Company’s Aerospace
Division since April 1999, and as Senior Vice President and Chief Operating
Officer of Banner Aerospace, Inc. from May 1998 through May 2003. Prior to
that,
he served as Senior Vice President and Chief Financial Officer of Banner
Aerospace from June 1990 through May 1998, and as Vice President of Banner
Aerospace from March 1990 through June 1990.
SECTION
16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a)
of the Securities and Exchange Act of 1934 requires the Company’s directors and
officers to file reports (on Forms 3, 4 and 5) with the Securities and Exchange
Commission, disclosing their ownership, and changes in their ownership, of
stock
in the Company. Copies of these reports must also be furnished to the Company.
Based solely on a review of these copies, the Company believes that during
the
2006 Fiscal Year all reports were filed on a timely basis.
BUSINESS
CONDUCT POLICIES AND CODE OF ETHICS
The
Board
of Directors has adopted a Code of Business Conduct and Ethics, applicable
to
all employees, officers and directors of the corporation. The code is posted
on
the Company’s website (www.fairchild.com). You may also request a copy
from the Company’s Corporate Secretary.
The
Board
has also adopted a Code of Ethics for Senior Financial Officers (including
the
Chief Executive Officer, the Chief Financial Officer, the Principal Accounting
Officer or Controller, and all persons performing similar functions on behalf
of
the Company). The code is posted on the Company’s website
(www.fairchild.com). You may also request a copy from the Company’s
Corporate Secretary. The officers subject to this code were surveyed for 2006
and will be surveyed annually for compliance. Only the Board of Directors can
amend or grant waivers from the provisions of the code, and any such amendments
or waivers will be promptly posted on the Company’s website.
DIRECTORS
COMPENSATION
Board
members who are not salaried employees of the Company receive separate
compensation for Board service. That compensation includes:
|
|
Annual
Retainer:
|
$20,000.
|
|
|
Attendance
Fees:
|
$2,500
for each Board meeting.
$2,500
for each Audit Committee meeting.
$1,000
per meeting for all other Board Committee meetings.
Expenses
related to attendance.
|
|
|
Stock
Options:
|
Under
the 1996 Non-Employee Directors Stock Option Plan (the “1996 NED Plan”)
each non-employee director is issued stock options for 30,000 shares
at
the time he or she is first elected as a director. Thereafter, each
director is issued stock options for 1,000 shares on an annual basis
(immediately after each Annual Meeting). The 1996 NED Plan expired
in
September 2006 and there is no current proposal to adopt a new stock
option plan in its place. Outstanding options continue in full
force and effect.
|
|
|
Special
Committee:
|
$25,000
to each member, one time retainer
$30,000
to the Chairman, one time retainer
$1,000
attendance fee for each meeting (member)
$1,250
attendance fee for each meeting (Chairman)
|
|
|
ChCChairman
of Audit Committee:
|
$10,000
a year.
|
REPORT
OF THE COMPENSATION AND STOCK OPTION COMMITTEE
The
following report does not constitute solicitation material and is not considered
filed or incorporated by reference into any other Company filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934, unless we state
otherwise.
The
Compensation and Stock Option Committee is composed of at least three
independent Directors. It has initial responsibility for all compensation
actions affecting the Company’s executive officers, including base salaries,
bonus awards, stock option awards and the terms and conditions of their
employment.
Compensation
Philosophy
The
Committee’s goals are to:
·
|
Provide
compensation competitive with other similar
companies.
|
·
|
Encourage
executives to increase shareholder
value.
|
·
|
Directly
relate compensation to Company performance and/or the objective value
of
individual service.
|
Components
of Executive Officer Compensation
Cash
Compensation (Base Salary and Annual Incentive Bonus)—The Company manages
the total cash compensation to provide median levels of cash compensation at
average levels of corporate, business unit, or individual performance. Cash
compensation consists of two components: (i) a base salary that is at least
competitive with that paid by companies facing similar challenges, and
(ii) an annual incentive opportunity that is variable and is reflective of
the financial performance of the Company and/or the individual performance
of
the executive officer. When high levels of performance are achieved, the level
of cash compensation may well exceed the median of the market. Conversely,
when
the Company, business unit, or the individual falls short of realizable goals,
the level of cash compensation may be below the market median. The objective
of
this mix is to deliver total annual cash compensation competitive with
compensation offered at other companies facing similar challenges for similar
positions.
Mix
Between Salary and Annual Incentive Pay—The mix between salary and annual
incentive pay is related to an executive’s job grade. Executives at higher grade
levels in the Company may have a greater percentage of their total cash
compensation contingent on the accomplishment of assigned business objectives,
i.e. the higher the executive grade level, the greater the proportion of annual
compensation that may be “at risk.” The award and size of the performance bonus
are based upon: (i) the executive officer’s performance against goals
determined by the Company’s Chief Executive Officer; and/or (ii) the
performance of the executive officer’s unit within the Company against that
unit’s goals; or (iii) the performance of the Company against Company
goals. Goals vary from year to year and from unit to unit and, with regard
to
individual goals of executive officers, usually include both quantitative and
qualitative factors.
The
Committee approved salary and annual incentive pay for the Company’s named
executive officers as set forth under the Summary Compensation Table of this
Proxy Statement.
Stock
Option Grants—No stock options were granted to executive officers during
the 2006 Fiscal Year.
Total
Compensation Program—The Committee believes that the total compensation
program for executives of the Company (cash compensation, bonuses and stock
option grants) is on a level with the compensation programs provided by other
companies facing similar challenges. The Committee believes that any amounts
paid under the annual incentive plan will be appropriately related to corporate
and individual performance.
Pursuant
to the Derivative Settlement, after taking into account the compensation
policies of comparable companies facing comparable challenges, the Board shall
adopt policies requiring that regular and bonus compensation (in any form)
be
directly related to the Company’s performance and/or the objective value of the
officer’s services.
Compensation
of CEO
Jeffrey
Steiner has served as Chairman of the Board and Chief Executive Officer of
the
Company since 1985, and as President from July 1991 through September 1998.
In
fixing Mr. Steiner’s salary and target bonus levels, as well as determining
the size of stock option awards, if any, the Committee and the Board typically
review the strategic direction and financial performance of the Company,
including enterprise value, revenue and profit levels. In addition, the
Committee reviews Mr. Steiner’s performance as Chairman of the Board and
Chief Executive Officer, his importance to the Company and his success in
implementing its strategic goals both through his entrepreneurial actions and
investment banking acumen.
Base
Compensation—Mr. Steiner’s aggregate base compensation for the 2006 Fiscal
Year was at the rate of $2,500,000 per year for the first three months and
eleven days of the fiscal year, consisting of (i) $1,700,000 pursuant to
his employment agreement with the Company, (ii) $400,000 per year pursuant
to his employment agreement with Banner Aerospace, plus (iii) $400,000 for
services in Switzerland with respect to the Company’s European operations.
Pursuant to the Derivative Settlement, this compensation was reduced to
$1,325,000 per year, effective as of January 12, 2006. Such reduction in
compensation will remain in place until such time as the Compensation Committee
and Mr. Steiner agree on the terms of a new employment
agreement.
Stock
Option Grants—No stock options were granted to Mr. Steiner during the
2006 Fiscal Year.
Incentive
Compensation for 2006 Fiscal Year—The Committee determined that
Mr. Steiner should receive no incentive compensation for the 2006 Fiscal
Year.
Respectfully
submitted by the members of the Compensation and Stock Option Committee of
the
Board of Directors, as of December 12, 2006:
EMPLOYMENT
AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
The
following summarizes employment agreements and change of control
agreements.
·
|
Employment
Agreement between the Company and Jeffrey
Steiner:
|
|
|
Term
of the Agreement:
|
Pursuant
to the Derivative Settlement, the term under this employment agreement
is
thirty (30) months, extended annually by an additional 12 months
unless
either party gives timely notice not to extend the
agreement.
|
|
|
Minimum
Base Salary Under the Agreement:
|
As
determined by the Board of Directors. However, see description immediately
below regarding current base salary.
|
|
|
Current
Base Salary:
|
Pursuant
to the terms of the Derivative Settlement, effective as of January
12,
2006, Jeffrey Steiner’s aggregate base-pay compensation under all his
employment agreements was reduced to $1,325,000 per year. Such reduction
shall remain in place until such time as the Compensation Committee
and
Jeffrey Steiner agree on the terms of a new employment agreement.
Prior to
January 12, 2006, Jeffrey Steiner’s aggregate base salary under all his
employment agreements was $2,500,000 per annum.
|
|
|
Payments
in Event of Death:
|
Estate
to receive an amount equal to one year’s base salary, plus bonuses for the
fiscal year in which death occurred.
|
|
|
Payments
in Event of Termination
Due
to Disability:
|
Base
salary until the date of termination, and fifty percent of base salary
for
two years thereafter, plus bonuses for the fiscal year in which disability
occurred. |
|
|
Change
in Control Payments:
|
In
connection with the sale of Fairchild Fasteners to Alcoa Inc., our
Board
of Directors determined that Jeffrey Steiner was entitled to a change
of
control payment in the amount of $6,280,000. Fifty percent (50%)
of such
payment was made to Jeffrey Steiner during January to June 2003.
The
remaining 50% ($3,140,000) will be paid upon Jeffrey Steiner’s termination
of employment with Fairchild. No other change of control payments
are
provided for in Jeffrey Steiner’s employment agreement.
|
|
|
Split-Dollar
Life Insurance:
|
Pursuant
to the Derivative Settlement, the Company and Jeffrey Steiner executed
an
agreement confirming that the Company’s obligations under Jeffrey
Steiner’s split-dollar life insurance policy are irrevocably terminated
and released.
|
·
|
Employment
Agreement between Banner Aerospace (a Company Subsidiary) and Jeffrey
Steiner:
|
|
|
Term
of the Agreement:
|
Pursuant
to the Derivative Settlement, the term under this employment agreement
is
thirty (30) months, extended annually by an additional 12 months
unless
either party gives timely notice not to extend the
agreement.
|
Minimum
Base Salary Under the Agreement:
|
Not
less than $250,000 per year. However, see description immediately
below
regarding current base salary.
|
|
|
|
Current
Base Salary:
|
Pursuant
to the terms of the Derivative Settlement, effective as of
January 12, 2006, Jeffrey Steiner’s aggregate base-pay compensation
under all his employment agreements was reduced to $1,325,000 per
year.
Such reduction shall remain in place until such time as the Compensation
Committee and Jeffrey Steiner agree on the terms of a new employment
agreement. Prior to January 12, 2006, Jeffrey Steiner’s aggregate
base salary under all his employment agreements was $2,500,000
per
annum.
|
Payments
in Event of Death:
|
Estate
to receive an amount equal to one year’s base salary, plus bonuses for the
fiscal year in which death occurred.
|
|
|
Payments
in Event of Termination Due
to
Disability:
|
Base
salary until the date of termination, and fifty percent of base
salary for two years thereafter, plus bonuses for the fiscal year
in which
disability occurred.
|
|
·
|
Service
Agreement between Fairchild Switzerland, Inc. (Company Subsidiary)
and
Jeffrey Steiner:
|
|
|
Term
of the Agreement:
|
Year
to year, terminated in 2006 due to the planned closure of the Swiss
branch
of Fairchild Switzerland, Inc.
|
|
|
Minimum
Base Salary Under the Agreement:
|
Greater
of $400,000 or 680,000 Swiss Francs per year, but not more than
$400,000.
However, see description immediately below regarding current base
salary.
|
|
|
|
Current
Base Salary:
|
Pursuant
to the terms of the Derivative Settlement, effective as of January
12,
2006, Jeffrey Steiner’s aggregate base-pay compensation under all his
employment agreements was reduced to $1,325,000 per year. Such
reduction
shall remain in place until such time as the Compensation Committee
and
Jeffrey Steiner agree on the terms of a new employment agreement.
Prior to
January 12, 2006, Jeffrey Steiner’s aggregate base salary under all his
employment agreements was $2,500,000 per
annum.
|
·
|
Employment
Agreement between the Company and Eric
Steiner:
|
|
|
Term
of the Agreement:
|
Pursuant
to the Derivative Settlement, the term under this employment agreement
is
two years, expiring January 12, 2008.
|
|
|
Minimum
Base Salary Under the Agreement:
|
$540,000.
However, see description immediately below regarding current base
salary.
|
|
|
Current
Base Salary:
|
Pursuant
to the terms of the Derivative Settlement, effective as of January
12,
2006, Eric Steiner’s base-pay was reduced to $535,500 per year. Such
reduction shall remain in place until such time as the Compensation
Committee and Eric Steiner agree on the terms of a new employment
agreement. Prior to January 12, 2006, Eric Steiner’s base salary was
$725,000 per annum.
|
|
|
Payments
in Event of Death:
|
Same
as the Company’s CEO.
|
|
|
Payments
in Event of Termination Due
to
Disability:
|
Same
as the Company’s CEO.
|
|
|
Change
in Control Payments:
|
In
connection with the sale of Fairchild Fasteners to Alcoa Inc.,
our Board
of Directors determined that Eric Steiner was entitled to a change
of
control payment in the amount of $5,434,000. Fifty percent
(50%) of such payment was made to Eric Steiner in January
2003. The remaining 50% was paid in four equal and consecutive
quarterly installments, with the first installment made on March
3, 2003,
and the last installment made in January 2004.
In
connection with such change of control award, Eric Steiner’s employment
agreement was amended, pursuant to which he relinquished any future
change
of control payments under such employment
agreement.
|
·
|
Letter
Agreement between the Company and Donald
Miller
|
|
|
Payments
in the event of Termination Without Cause:
|
Two
(2) times then current annual base salary, plus 1 times current
annual
base salary in lieu of bonus.
|
|
|
Change
in Control Payments:
|
In
connection with the sale of Fairchild Fasteners to Alcoa Inc., our
Board
of Directors determined that Mr. Miller was entitled to a change
of
control payment in the amount of $1,125,000. Fifty percent (50%)
of such
payment was made to Mr. Miller in December 2002. The remaining 50%
was
paid in four equal and consecutive quarterly installments, with the
first
installment made on March 3, 2003, and the last installment made
in
January, 2004.
|
|
|
|
In
connection with such change of control award, the letter agreement
between
the Company and Mr. Miller was amended, pursuant to which
Mr. Miller relinquished any future change of control payments under
such letter agreement.
|
·
|
Employment
Agreement between PoloExpress and Klaus
Esser
|
On
May
30, 2007, Mr. Esser’s employment agreement was amended and restated
retroactively to January 1, 2006, as described in a Form 8-K filed June 5,
2007
by the Company. The initial and amended and restated agreements are
summarized below.
|
|
Term
of the Agreement:
|
Initially
for three years ending on December 31, 2008. Either party could
elect to
terminate the contract as of December 31, 2008 by giving nine (9)
months
prior written notice. If the contract was not terminated as of
December
31, 2008, it continued in place until either party gave twelve
(12) months
prior written notice of termination. The initial term of the
amended and restated agreement is 7 years, beginning on January
1, 2006,
and ending on December 31, 2012, subject to certain provisions
for
automatic renewal.
|
|
|
Base
Salary and Bonuses:
|
Base
pay compensation to Mr. Esser during fiscal year 2006 initially
was
240,000 Euros per year. In addition, if PoloExpress had an annual
EBITDA
of more than 6 million Euros, Mr. Esser was entitled to a bonus
for such
year equal to 5% of the total EBITDA. The amended and restated
agreement provides for an increase in base salary of 60,000 Euros,
to
300,000 Euros per year, and bonus amounts payable as follows:
|
|
Fiscal
years
Ending
until September 30, 2008
September
30, 2009
After
September 30, 2009
|
EBITDA
threshold
5
Million Euros or more
6
Million Euros or more
7
Million Euros or
more
|
Percentage
Bonus
5%
of EBITDA
6%
of EBITDA
6%
of EBITDA
|
|
The
bonus for each year is payable in monthly installments. The actual
bonus
amount is determined at the end of each year, after EBITDA is confirmed.
If the aggregate monthly installments paid are less than or more
than the
amounts due, the Company or Mr. Esser, respectively, shall repay
the other
party for the difference.
|
|
|
Non-Compete
Payments:
|
Following
termination of employment, Mr. Esser shall not compete for a period
of 24
months, provided that PoloExpress continues to compensate Mr. Esser
during
such period at the rate of fifty percent (50%) of his average
compensation. Average compensation is based on the last three years
of
employment, and includes base pay and bonuses. Within twenty-eight
(28)
days of the termination of employment, PoloExpress may elect not
to
enforce the two-year non-compete covenant, in which case Mr. Esser
shall
not compete for a period of one year (as specified in Paragraph
75a of the
German Commercial Code) and PoloExpress will compensate Mr. Esser
at the
rate of 14,000 Euros per month during such one year
period. Under the amended and restated agreement, starting
January 1, 2009, following termination of employment, the PoloExpress
option to elect not to enforce the two-year non-compete provision
is
terminated.
|
·
|
Employment
Agreement between Banner Aerospace, Inc. and Warren D.
Persavich
|
Term
of the Agreement:
|
Currently
under an extended “rolling term” of at least 730 days, with one day added
to the term for each day there is no notice by either party to terminate
the agreement.
|
Base
Salary and Bonuses:
|
|
Not
less than $155,000 per year, with a 50% bonus upon achievement of
goals
designated from time to time by the Compensation Committee, plus
any other
bonuses, such as transaction related
bonuses.
|
|
|
Current
Base Salary:
|
As
determined by the Board of Directors. See the Summary
Compensation Chart.
|
|
|
Payments
in Event of Death:
|
Estate
to receive an amount equal to six month’s base salary, plus bonuses for
the fiscal year in which death occurred.
|
Payments
in Event of
Termination
Due to Disability:
|
|
Base
salary until the date of termination, and bonuses for the fiscal
year in
which termination occurred, provided that the foregoing payments
shall be
made only to the extent that such payments, plus disability insurance
proceeds, would not exceed 100% of base salary for the applicable
period.
|
PENSION
AND RETIREMENT BENEFITS
Fairchild
Retirement Plan. The following table illustrates the
amount of estimated annual fixed retirement benefits payable under the Fairchild
Retirement Plan to an employee retiring in 2005, at age 65, at various salary
levels (average of highest five consecutive years out of last ten years of
service) and years of service. The Fairchild Retirement Plan defines salary
as
total compensation, subject to the Internal Revenue Service’s limit on the
amount of compensation that may be used to compute benefits under qualified
pension plans. This limit is equal to $220,000 for 2006.
Annual
Salary
|
|
|
10 Years
of Service
|
|
|
20 Years
of Service
|
|
|
30 Years
of Service
|
|
|
40 Years
of Service
|
|
$ |
25,000
|
|
|
$ |
2,000
|
|
|
$ |
4,000
|
|
|
$ |
6,000
|
|
|
$ |
7,313
|
|
|
50,000
|
|
|
|
4,000
|
|
|
|
8,000
|
|
|
|
12,000
|
|
|
|
14,625
|
|
|
100,000
|
|
|
|
9,950
|
|
|
|
19,900
|
|
|
|
29,850
|
|
|
|
36,075
|
|
|
150,000
|
|
|
|
15,950
|
|
|
|
31,900
|
|
|
|
47,850
|
|
|
|
57,700
|
|
|
200,000
|
|
|
|
21,950
|
|
|
|
43,900
|
|
|
|
65,850
|
|
|
|
79,325
|
|
|
250,000
|
|
|
|
22,790
|
|
|
|
45,580
|
|
|
|
68,370
|
|
|
|
82,352
|
|
For
purposes of determining benefits under the Fairchild Retirement Plan, the
following executive officers have years of credit and average salaries as
follows:
Officer
|
|
Average
Salary
|
|
Years
of Credit
|
Jeffrey
Steiner
|
|
$ |
207,000
|
|
16
years
|
Donald
Miller
|
|
|
207,000
|
|
15
years
|
Eric
Steiner
|
|
|
207,000
|
|
15
years
|
Warren
Persavich
|
|
|
207,000
|
|
29
years
|
Supplemental
Executive Retirement Plans. We have two supplemental
executive retirement plans for key executives which provide additional
retirement benefits based on final average earnings and years of service, as
follows:
|
Unfunded
SERP
|
|
Funded
SERP
|
|
|
|
|
Retirement
Benefits
|
Provides
a maximum retirement benefit (in the aggregate for both Supplemental
Executive Retirement Plans) equal to the difference between (i) sixty
percent (60%) of the participant’s highest base salary for five
consecutive years of the last ten years of employment, and (ii) the
aggregate of other pension benefits, profit sharing benefits, and
primary
Social Security payments to which the participant is
entitled.
|
|
An
annual retirement benefit determined by multiplying the participant’s
years of credited service times a fixed amount. The amount varies
by
participant.
|
|
|
|
|
Funding
|
This
is an unfunded obligation of the Company, not subject to ERISA
regulations. The Company makes discretionary contributions to a “Rabbi
Trust” to help meet its obligations under this plan, but the assets under
such trust are subject to the claims of the Company’s
creditors.
|
|
This
benefit is a part of the Retirement Plan for Employees of the Fairchild
Corporation. It is a funded obligation of the Company. Such funding
contributions are not assets available to the creditors of the
Company.
|
|
|
|
|
Pre-Retirement
Distributions
|
Subject
to the approval of the Compensation Committee, the plan permits
participants who have reached retirement age, to elect to receive
retirement advances.
|
|
At
the participant’s request upon attainment of Normal Retirement Age as
defined in the Plan.
|
|
|
|
|
Participants
|
Executive
Officers. All persons named in the Summary Compensation Table are
eligible
for participation in this plan except Mr. Klaus Esser.
|
|
Same
as the unfunded plan.
|
|
|
|
|
Special
Years of Service Accreditation
|
Pursuant
to a letter agreement with Mr. Miller, for purposes of determining
years
of service with the Company under the Supplemental Executive Retirement
Plans, Mr. Miller will be credited with two years of service for
each of
the first ten years he is employed by the Company.
|
|
None.
|
The
Company has frozen (will make no additional contributions to) the SERP benefits
at December 31, 2004 payable by the Company to all executive officers.
Pursuant to the Derivative Settlement, no new SERP plan shall be created for
any
existing senior officer of the Company without the prior approval of two-thirds
of the Compensation Committee. As to SERP plans for individuals who are not
executive officers, the Company intends to amend such SERP plans in order to
be
in compliance with tax laws.
Klaus
Esser does not participate in the above described retirement plans. Under his
employment agreement, Mr. Esser is entitled to receive such retirement
benefits as provided under German law.
EXECUTIVE
COMPENSATION
Table: Summary
Compensation
|
|
|
|
Annual
Compensation
|
|
|
Long-Term
Compensation Awards
|
|
Name
and Principal
|
|
Fiscal
|
|
Salary
|
|
|
Bonus
|
|
|
Other
Annual Compensation
|
|
|
Securities
Underlying Options
|
|
|
All
Other Compensation
|
|
Position
|
|
Year
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
|
(#)
|
|
|
($)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey
Steiner,
|
|
FY
2006
|
|
$ |
1,542,596
|
|
|
|
-
|
|
|
$ |
52,394 |
(5) |
|
|
-
|
|
|
$ |
6,027 |
(3) |
Chairman &
|
|
FY
2005
|
|
|
2,500,005
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,317 |
(3) |
CEO(4)
|
|
FY
2004
|
|
|
2,500,005
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,937 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Klaus
Esser
|
|
FY
2006
|
|
|
283,086
|
|
|
$ |
529,248
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Managing
Director,
|
|
FY
2005
|
|
|
254,516
|
|
|
|
585,386
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
PoloExpress
GmbH
|
|
FY
2004
|
|
|
204,030
|
|
|
|
497,732
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Donald
Miller,
|
|
FY
2006
|
|
|
375,003
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,010
|
|
Executive
VP, General Counsel &
|
|
FY
2005
|
|
|
375,250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,250
|
|
Secretary
|
|
FY
2004
|
|
|
422,311
|
|
|
|
-
|
|
|
|
112,500
|
|
|
|
-
|
|
|
|
2,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warren
Persavich,
|
|
FY
2006
|
|
|
226,289
|
|
|
|
155,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,463
|
|
President,
|
|
FY
2005
|
|
|
226,289
|
|
|
|
43,290
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,629
|
|
Aerospace
Division
|
|
FY
2004
|
|
|
232,693
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eric
Steiner,
|
|
FY
2006
|
|
|
588,707
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,029
|
|
President &
COO
|
|
FY
2005
|
|
|
725,005 |
(2) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,308
|
|
|
|
FY
2004
|
|
|
725,005
|
|
|
|
-
|
|
|
|
543,400
|
|
|
|
-
|
|
|
|
2,937
|
|
|
FY
2006 = Fiscal Year for October 1, 2005 to September 30,
2006.
|
|
FY
2005 = Fiscal Year for October 1, 2004 to September 30,
2005.
|
|
FY
2004 = Fiscal Year for October 1, 2003 to September 30,
2004.
|
(1)
|
For
FY 2006, includes imputed interest on loans to officers, as
follows:
|
J.
Steiner
|
$ -
|
D.
Miller
|
-
|
W.
Persavich
|
-
|
E.
Steiner
|
-
|
|
New
loans to executive officers are no longer permitted as of July 30,
2002. |
(2)
|
Includes
$11,154 which was earned in FY 2005, but which payment has been
deferred.
|
(3)
|
Does
not include advances, before retirement of earned benefits under
the
Company’s Unfunded SERP (Supplemental Executive Retirement Plan). See
disclosure under Certain Transactions. Advances under the
Unfunded SERP for Jeffrey Steiner are as
follows:
|
FY
2006
|
$ 3,459,283
|
FY
2005
|
477,222
|
FY
2004
|
1,990,028
|
(4)
|
Table
does not include a remaining $3,140,000 change in control payment
due to
Mr. Jeffrey Steiner upon
termination
of employment.
|
(5)
|
Represents
payment under a release of claims required by the Derivative Settlement
in
connection with a former
split-dollar
life insurance premium.
|
Table: Options
Granted
No
stock
options were granted to the named executive officers during the 2006 Fiscal
Year.
Table: Option
Exercises and Year-End Value
|
|
Shares
Acquired
|
|
|
|
|
|
Number
of Securities
Underlying
Unexercised Options at
September
30, 2006
|
|
|
Value
of Unexercised
In-the-Money Options
at
September
30, 2006
|
|
Name
|
|
on
Exercise
(#)
|
|
|
Value
Realized
($)
|
|
|
Exercisable
(#)
|
|
|
Unexercisable
(#)
|
|
|
Exercisable
($)
|
|
|
Unexercisable
($)
|
|
Jeffrey
Steiner |
|
|
— |
|
|
|
— |
|
|
|
145,518
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Warren
Persavich |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Klaus
Esser |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Donald
Miller |
|
|
— |
|
|
|
— |
|
|
|
13,333 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Eric
Steiner |
|
|
— |
|
|
|
— |
|
|
|
26,400 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
STOCK
PERFORMANCE GRAPH
The
following stock performance graph does not constitute solicitation material
and
is not considered filed or incorporated by reference into any other Company
filing under the Securities Act of 1933 or the Securities Exchange Act of 1934,
unless we state otherwise.
STOCK
OWNERSHIP
The
following table shows the number of shares beneficially owned (as of June 30,
2007) by:
·
|
each
executive officer named in the Summary Compensation
Table;
|
·
|
the
directors and executive officers as a group;
and
|
·
|
each
person who we know beneficially owns more than 5% of the common
stock.
|
Name
|
|
Number
of Shares of Class A Stock (1)
|
|
|
Percentage
of Class
|
|
|
Number
of Shares of Class B Stock (1)
|
|
|
Percentage
of Class
|
|
Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
Didier
Choix(2)
|
|
|
7,500
|
|
|
|
*
|
|
|
|
-
|
|
|
|
-
|
|
Robert
E. Edwards(2)
|
|
|
999,695
|
|
|
|
4.42 |
% |
|
|
-
|
|
|
|
-
|
|
Daniel
Lebard(2)
|
|
|
49,356
|
|
|
|
*
|
|
|
|
-
|
|
|
|
-
|
|
Glenn
Myles(2)
|
|
|
7,500
|
|
|
|
*
|
|
|
|
-
|
|
|
|
-
|
|
Eric
Steiner(2)(3)(6)
|
|
|
5,978,622
|
|
|
|
23.74 |
% |
|
|
2,548,996
|
|
|
|
97.24 |
% |
Jeffrey
J. Steiner(2)(3)(4)
|
|
|
219,062
|
|
|
|
0.96 |
% |
|
|
30,000
|
|
|
|
1.14 |
% |
Michael
J. Vantusko(2)
|
|
|
7,500
|
|
|
|
*
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Named Executive Officers:
|
|
Klaus
Esser
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Donald
E. Miller(2)(3)
|
|
|
103,409
|
|
|
|
*
|
|
|
|
-
|
|
|
|
-
|
|
Warren
D. Persavich
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Directors and Executive Officers as a Group:
|
|
(11
persons including the foregoing)(2)
|
|
|
7,377,904
|
|
|
|
29.02 |
% |
|
|
2,578,996
|
|
|
|
98.38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
5% Beneficial Owners:(5)
|
|
Dimensional
Fund Advisors, Inc.
|
|
|
1,954,931
|
|
|
|
8.65 |
% |
|
|
-
|
|
|
|
-
|
|
GAMCO
Investors, Inc.
|
|
|
4,280,132
|
|
|
|
18.93 |
% |
|
|
-
|
|
|
|
-
|
|
Natalia
Hercot(3)(6)
|
|
|
5,794,521
|
|
|
|
23.04 |
% |
|
|
2,548,996
|
|
|
|
97.24 |
% |
The
Steiner Group LLC(6)
|
|
|
5,727,684
|
|
|
|
22.78 |
% |
|
|
2,533,996
|
|
|
|
96.67 |
% |
*Represents
less than one percent.
Footnotes
to Stock Ownership Chart:
(1)
|
The
Class A Stock Column includes shares of Class B Stock, which are
immediately convertible into Class A Stock on a share-for-share
basis. Options that are exercisable immediately or within sixty
days after June 30, 2007, appear in the Class A Stock column.
Excludes Deferred Compensation Units (“DCUs”) to be paid out on
February 28, 2010 in the form of one share of Class A Common
Stock for each DCU as follows: E. Steiner, 42,826 shares; J. Steiner,
134,831 shares.
|
(2)
|
Includes
exercisable stock options to purchase Class A Stock as
follows: D. Choix, 7,500 shares; R. Edwards, 2,000 shares; D.
Lebard, 34,000 shares; D. Miller, 13,333 shares; G. Myles, 7,500
shares;
E. Steiner, 26,400 shares; J. Steiner, 145,518 shares M. Vantusko,
7,500
shares; Directors and Executive Officers as a group, 243,751
shares.
|
(3)
|
Includes
shares beneficially owned, as
follows:
|
D.
Miller
— 300 shares of Class A Stock owned by Mr. Miller as custodian for his
child; Mr. Miller disclaims any beneficial interest therein.
E.
Steiner — 80,000 shares of Class A Stock held in The Steiner Children’s
Trust; 24,268 Class A shares held in 401K Savings Plan. In addition, Eric
Steiner reports beneficial ownership of the Class A and Class B shares held
by The Steiner Group LLC (see Footnote 6).
N.
Hercot
— 10,000 shares of Class A Stock held by her husband. In addition Natalia
Hercot reports beneficial ownership of the Class A and Class B shares held
by The Steiner Group LLC (see Footnote 6).
J.
Steiner — 38,500 shares of Class A Stock owned by Mr. Steiner as
custodian for his children; 30,000 shares of Class B Stock (convertible on
a
one-to-one basis to Class A Stock) owned by Mr. Steiner as custodian
for his children; 2,400 shares of Class A Stock owned by the Jeffrey
Steiner Family Foundation; and 2,644 shares of Class A Stock held in his
401k Savings Plan. Mr. Steiner disclaims beneficial ownership of shares
owned by the Jeffrey Steiner Family Foundation, and shares owned by him as
custodian for his children.
(4)
|
Mr. Jeffrey
Steiner, c/o The Fairchild Corporation, 1750 Tysons Boulevard, Suite
1400,
McLean, VA 22102.
|
(5)
|
Based
on the following information:
|
Dimensional
Fund Advisors Inc., 1299 Ocean Avenue, 11th Floor, Santa Monica, CA 90401.
Information as of December 31, 2006 contained in a Schedule 13G/A-7 filed
on February 8, 2007 with the SEC by Dimensional Fund Advisors,
Inc.
GAMCO
Investors, Inc. (an affiliate of Gabelli Funds, LLC,) and its affiliates, One
Corporate Center, Rye, NY 10580-1434. Information as of June 15, 2007 contained
in a Schedule 13D/A-29, filed on June 19, 2007.
Natalia
Hercot, c/o The Fairchild Corporation, 1750 Tysons Boulevard, Suite 1400,
McLean, VA 22102. Information as of December 5, 2006 contained in a Schedule
13D/A-27 filed on December 22, 2006 by The Steiner Group LLC. (See
Footnote 6).
The
Steiner Group LLC, c/o Withers Bergman LLP, 430 Park Avenue, 10th Floor,
New York,
NY 10022. Information as of December 5, 2006 contained in a Schedule 13D/A-27
filed on December 22, 2006 by The Steiner Group LLC. (See Footnote
6)
(6)
|
Controlling
Interest held by LLC: The Steiner Group LLC (a Delaware
limited liability company) (the “LLC”) holds 3,193,688 shares of
Class A Stock and 2,533,996 shares of Class B Stock. It holds a
controlling interest in the
Company.
|
Change
of Control: Prior to December 31, 2003, Mr. Jeffrey
Steiner was the sole manager of the LLC, and therefore reported beneficial
ownership of the shares held by the LLC. On December 31, 2003, Jeffrey
Steiner resigned as the sole manager of the LLC, and Eric Steiner and Natalia
Hercot become the sole co-managers of the LLC. In this capacity, Mr. Eric
Steiner and Ms. Natalia Hercot have the ability to vote and to direct the
disposition of the Fairchild shares held by the LLC. Therefore, as of
December 31, 2003, Eric Steiner and Natalia Hercot report beneficial
ownership of the shares held by the LLC.
Membership
Interest Held in the LLC: The membership interests in the LLC
are held as follows: (i) 20% is held by Bayswater Ventures L.P., a
partnership owned by four different trusts, of which Jeffrey Steiner is a
beneficiary; and (ii) the remaining 80% membership interest in the LLC is
held by The J.S. Family Trust, a trust created for the benefit of the issue
of
Jeffrey Steiner. The members of the LLC do not directly have the
right to vote or to direct the disposition of the Fairchild shares held by
the
LLC.
CERTAIN
TRANSACTIONS
·
|
The
Company provided a surety for Mr. Steiner and paid his expenses in
connection with legal proceedings in France, totaling approximately
$5.645
million, and Mr. Steiner undertook to repay such amounts to the
Company if it were ultimately determined that he was not entitled
to
indemnification under Delaware law (the “Undertaking”). Pursuant
to the Derivative Settlement, the Company and Mr. Steiner agreed to
mutually resolve Mr. Steiner’s claims for indemnity and his
obligations to the Company under the Undertaking, by paying the Company
$3,763,333, of which $833,333 was withdrawn from Mr. Steiner’s
Company SERP account, and $2,930,000 was paid by him via the Company’s
D&O liability insurance carrier, in satisfaction of its obligations
to
indemnify and insure
Mr. Steiner.
|
·
|
Previously,
we have extended loans to purchase our Class A common stock to certain
members of our senior management and Board of Directors, for the
purpose
of encouraging ownership of our stock, and to provide additional
incentive
to promote our success. The loans are non-interest bearing, and have
all
been fully repaid except for one. The remaining outstanding
loan is non-interest bearing, and matures in 1¼ years, or becomes due and
payable immediately upon the termination of employment if prior to
such
maturity date. On September 30, 2006, the borrower, who is an officer
of
the Company, owed us approximately $50,000. In fiscal 2006, Mr. Steven
Gerard, a former director, repaid, when due, his outstanding loan.
All
other loans to directors and executive officers were repaid in full
prior
to September 30, 2005. During 2006, the largest aggregate balance
of
indebtedness outstanding under the officer and director stock purchase
program was approximately $66,000 from Mr. Gerard, and $50,000 from
the
officer. In fiscal 2003, the Board of Directors extended, by five
years,
the expiration date of the loan to the officer, who was not deemed
an
executive officer. In accordance with the Sarbanes-Oxley Act of 2002,
no
new loans will be made to executive officers or
directors.
|
·
|
On
September 30, 2006, we owed a remaining amount for change of control
payments of $3.1 million to Mr. J. Steiner. The amount owed to Mr.
J.
Steiner is payable to him upon his termination of employment with
us. On
September 30, 2006, deferred compensation of $11,000 was due from
us to
Mr. E. Steiner.
|
·
|
In
December 2006, Mr. J. Steiner reimbursed us $40,000 for personal
expenses
that we paid on his behalf, which were outstanding as of September
30,
2006. At no time during 2006 did amounts due to us from Mr. J.
Steiner exceed the amount of the after-tax salary on deferrals we
owed to
him.
|
·
|
Subject
to the approval of the Compensation and Stock Option Committee, our
Unfunded Supplemental Executive Retirement Plan (SERP) permits
participants who are over retirement age to elect to receive retirement
advances on an actuarially reduced basis. Mr. J. Steiner received
pre-retirement distributions from the Unfunded SERP (representing
a
partial distribution of his vested benefits) in the amount of $3.5
million
in fiscal 2006. As of September 30, 2006, Mr. J. Steiner’s remaining
balance in the Unfunded SERP plan was $2.1
million.
|
·
|
Eric
Steiner, son of Mr. J. Steiner, is an executive officer of the Company.
His compensation is set forth in the compensation table of our proxy
statement. Natalia Hercot, daughter of Mr. J. Steiner, is a Vice
President
of the Company, for which she received compensation of approximately
$20,000 in fiscal 2006. Mrs. Hercot’s annual salary was adjusted to
$10,000 per year on December 23,
2005.
|
·
|
During
2006, Phillipe Hercot, son-in-law of Jeffrey Steiner, subleased a
room in
our Paris office and paid arm's length rent to the
Company.
|
·
|
We
paid $36,000 in 2006 for security protection at the Steiner Family
residence in France.
|
·
|
We
provide to Mr. J. Steiner automobiles for business use. We charged
Mr. J.
Steiner $15,000 in 2006 to cover personal use and the cost of these
vehicles that exceeded our reimbursement
policy.
|
·
|
During
fiscal 2006, we reimbursed $0.4 million to Mr. J. Steiner, representing
a
portion of out-of-pocket costs he incurred personally in connection
with
the entertainment of third parties, which may benefit the
Company.
|
·
|
Mr.
Klaus Esser’s brother is an employee of PoloExpress. His compensation
(currently €72,000) was approximately $94,000 in 2006. Petra Esser is a
relative of Mr. K. Esser and has current annual compensation of
approximately €16,000.
|
RELATIONSHIP
WITH INDEPENDENT ACCOUNTANTS
Principal
Accountants
On
December 7, 2005, upon the recommendation of the Audit Committee, the
Company appointed KPMG LLP to serve as its independent auditors for the fiscal
year ended on September 30, 2006. The Audit Committee has yet to
make a recommendation to appoint the Company’s independent auditors for the
current fiscal year, which ends on September 30,
2007. Representatives of KPMG will be available at the annual meeting
to make a statement, if they so desire, and to respond to appropriate
questions.
Audit
Fees
2006
Audit Fees: The aggregate fees billed by KPMG LLP for
professional services rendered for the integrated audit of the Company’s annual
financial statements, reviews of consolidated financial statements included
in
the Company’s Form 10-Q and services in connection with statutory audits and
regulatory filings for the fiscal year ended September 30, 2006 were
$3,538,000. More than 50% of the Fiscal 2006 audit work was performed by
full-time employees of KPMG.
2005
Audit Fees: The aggregate fees billed by KPMG LLP, for
professional services rendered for the integrated audit of the Company’s annual
financial statements, reviews of consolidated financial statements included
in
the Company’s Form 10-Q and services in connection with statutory audits and
regulatory filings for the fiscal year ended September 30, 2005 were
$3,147,000. More than 50% of the Fiscal 2005 audit work was performed by
full-time employees of KPMG.
Audit
Related Fees
2006
Audit Related Fees: The aggregate fees billed by KPMG
for the fiscal year ended September 30, 2006, for assurance and related
services by such accountant that were reasonably related to the performance
of
the audit or review of the Company’s financial statements and are not reported
under the caption “Audit Fees” above, were $0.
2005
Audit Related Fees: The aggregate fees billed by KPMG
for the fiscal year ended September 30, 2005, for assurance and related
services by such accountant that were reasonably related to the performance
of
the audit or review of the Company’s financial statements and are not reported
under the caption “Audit Fees” above, were $5,000. The nature of the services
comprising the fees disclosed under this category was related to an audit of
the
Company’s benefit plans.
Tax
Fees:
2006
Tax Fees: The aggregate fees billed by KPMG for the fiscal year
ended September 30, 2006, for tax return preparation and review services
were $59,000. The nature of the services comprising the fees
disclosed under this category was preparation of the statutory tax returns
for
the Company’s subsidiaries in the United Kingdom.
2005
Tax Fees: The aggregate fees billed by KPMG for the
fiscal year ended September 30, 2005, for tax return preparation and review
services were $17,100. The nature of the services comprising the fees disclosed
under this category was preparation of the statutory tax returns for the
Company’s subsidiaries in the United Kingdom.
Policy
Regarding Non-Audit Services by Outside Auditors
The
Audit
Committee has appointed its Chairman to overview and pre-approve all non-audit
services provided by the Company’s outside auditors, with the main objective
being the assurance of the Company’s outside auditors’ unimpaired independence.
All outside non-audit services which are less than $5,000 must be approved
in
advance by the Chairman of the Audit Committee and then ratified by the Audit
Committee. Any outside non-audit services in excess of $5,000 must first be
approved by the full Audit Committee. Except for the tax related services
disclosed above, KPMG did not conduct any non-audit service for the Company
during the 2006 Fiscal Year, and is not expected to provide any non-audit
service during the 2007 Fiscal Year other than nominal tax related
services.
Procedures
For Submitting Shareholder Proposals
If
you
want to include a shareholder proposal in the proxy statement for this year’s
annual meeting, it must be delivered to the Company before September 12,
2007.
If
such
notice is not received by September 12, 2007, the proposal shall be considered
untimely and shall not be presented at the 2007 annual meeting.
All
shareholder proposals must conform to the requirements set forth in Regulation
14A under the Securities Exchange Act of 1934, and should be submitted to the
Company’s headquarters, 1750 Tysons Boulevard, Suite 1400, McLean, VA 22102,
Attention: Secretary.
PART
IV
The
following documents are filed as part of this Report:
(a)(1) Financial
Statements.
All
financial statements of the registrant as set forth under Item 8 of this report
on Form 10-K (see index on Page 32).
(a)(2) Financial
Statement Schedules.
Schedule
Number
|
Description |
Page |
|
|
|
I
|
Condensed
Financial Information of Parent Company |
100 |
All
other schedules are omitted because they are not required.
SCHEDULE
I – CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE
FAIRCHILD CORPORATION
CONDENSED
FINANCIAL STATEMENTS OF THE PARENT COMPANY
BALANCE
SHEETS (NOT CONSOLIDATED)
(In
thousands)
|
|
September
30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Restated)
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
4,308
|
|
|
$ |
2,874
|
|
Marketable
Securities
|
|
|
45,378
|
|
|
|
4,774
|
|
Accounts
receivable
|
|
|
447
|
|
|
|
261
|
|
Prepaid
expenses and other current assets
|
|
|
58
|
|
|
|
197
|
|
Total
current assets
|
|
|
50,191
|
|
|
|
8,106
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, less accumulated depreciation
|
|
|
1,809
|
|
|
|
1,516
|
|
Investments
in subsidiaries
|
|
|
136,125
|
|
|
|
177,697
|
|
Deferred
loan fees
|
|
|
2,044
|
|
|
|
-
|
|
Investments
|
|
|
34,173
|
|
|
|
38,601
|
|
Other
assets
|
|
|
39
|
|
|
|
1,313
|
|
Total
assets
|
|
$ |
224,381
|
|
|
$ |
227,233
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
maturities of long term debt
|
|
$ |
69
|
|
|
$ |
85
|
|
Accounts
payable
|
|
|
19
|
|
|
|
14
|
|
Other
accrued expenses
|
|
|
6,897
|
|
|
|
658
|
|
Total
current liabilities
|
|
|
6,985
|
|
|
|
757
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
30,781
|
|
|
|
862
|
|
Fair
market value of interest rate contract
|
|
|
-
|
|
|
|
5,146
|
|
Noncurrent
income taxes
|
|
|
39,923
|
|
|
|
38,383
|
|
Other
long-term liabilities
|
|
|
2,045
|
|
|
|
39
|
|
Total
liabilities
|
|
|
79,734
|
|
|
|
45,187
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Class
A common stock
|
|
|
3,047
|
|
|
|
3,047
|
|
Class
B common stock
|
|
|
262
|
|
|
|
262
|
|
Notes
due from Stockholders
|
|
|
-
|
|
|
|
-
|
|
Treasury
Stock
|
|
|
(76,352 |
) |
|
|
(76,352 |
) |
Accumulated
other comprehensive income
|
|
|
758
|
|
|
|
858
|
|
Paid-in
capital
|
|
|
232,612
|
|
|
|
232,612
|
|
Retained
earnings (accumulated deficit)
|
|
|
(15,680 |
) |
|
|
21,619
|
|
Total
stockholders' equity
|
|
|
144,647
|
|
|
|
182,046
|
|
Total
liabilities and stockholders' equity
|
|
$ |
224,381
|
|
|
$ |
227,233
|
|
The
accompanying notes are an integral part of these condensed financial
statements.
Schedule
I
THE
FAIRCHILD CORPORATION
CONDENSED
FINANCIAL STATEMENTS OF THE PARENT COMPANY
STATEMENTS
OF EARNINGS (NOT CONSOLIDATED)
(In
thousands)
|
|
Years
Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
|
|
Selling,
general & administrative
|
|
$ |
12,192
|
|
|
$ |
11,648
|
|
|
$ |
5,790
|
|
|
|
|
12,192
|
|
|
|
11,648
|
|
|
|
5,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(12,192 |
) |
|
|
(11,648 |
) |
|
|
(5,790 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest expense
|
|
|
(2,548 |
) |
|
|
(2,980 |
) |
|
|
(4,772 |
) |
Investment
income
|
|
|
851
|
|
|
|
112
|
|
|
|
74
|
|
Fair
market value adjustment – interest rate contract
|
|
|
836
|
|
|
|
5,942
|
|
|
|
4,924
|
|
Loss
from continuing operations before taxes
|
|
|
(13,053 |
) |
|
|
(8,574 |
) |
|
|
(5,564 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (provision) benefit
|
|
|
(244 |
) |
|
|
(2,953 |
) |
|
|
27,053
|
|
Income
(loss) from discontinued operations, net of tax
|
|
|
(8,594 |
) |
|
|
(735
|
) |
|
|
405
|
|
Equity
in loss of affiliates
|
|
|
-
|
|
|
|
(87 |
) |
|
|
-
|
|
Loss
before equity in earnings (loss) of subsidiaries
|
|
|
(21,891 |
) |
|
|
(6,443 |
) |
|
|
21,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in loss of subsidiaries
|
|
|
(15,408 |
) |
|
|
(12,922 |
) |
|
|
(19,663 |
) |
Net
earnings (loss)
|
|
$ |
(37,299 |
) |
|
$ |
(19,365 |
) |
|
$ |
2,231
|
|
The
accompanying notes are an integral part of these condensed financial
statements.
Schedule
I
CONDENSED
FINANCIAL STATEMENTS OF THE PARENT COMPANY
STATEMENTS
OF CASH FLOWS (NOT CONSOLIDATED)
(In
thousands)
|
|
Years
Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by (used for) operations
|
|
$ |
(62,790 |
) |
|
$ |
(13,841 |
) |
|
$ |
5,968
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(724 |
) |
|
|
(1,146 |
) |
|
|
(135 |
) |
Net
change in investments in subsidiaries
|
|
|
41,572
|
|
|
|
13,498
|
|
|
|
(6,329 |
) |
Net
proceeds received from investment securities, net
|
|
|
-
|
|
|
|
-
|
|
|
|
1,690
|
|
Net
cash provided by (used for) investing activities
|
|
|
41,848
|
|
|
|
12,352
|
|
|
|
(4,774 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of debt
|
|
|
31,552
|
|
|
|
961
|
|
|
|
-
|
|
Debt
repayments
|
|
|
(1,649 |
) |
|
|
(70 |
) |
|
|
(3,500 |
) |
Payment
of interest rate contract
|
|
|
(4,310 |
) |
|
|
-
|
|
|
|
-
|
|
Payment
of financing fees
|
|
|
(2,217 |
) |
|
|
-
|
|
|
|
-
|
|
Issuance
of common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
26
|
|
Purchase
of treasury stock
|
|
|
-
|
|
|
|
(193 |
) |
|
|
-
|
|
Loan
repayments from stockholders'
|
|
|
-
|
|
|
|
-
|
|
|
|
394
|
|
Net
cash provided by (used for) financing activities
|
|
|
23,376
|
|
|
|
698
|
|
|
|
(3,080 |
) |
Net
change in cash and cash equivalents
|
|
|
1,434
|
|
|
|
(791 |
) |
|
|
(1,886 |
) |
Cash
and cash equivalents, beginning of the year
|
|
|
2,874
|
|
|
|
3,665
|
|
|
|
5,551
|
|
Cash
and cash equivalents, end of the year
|
|
$ |
4,308
|
|
|
$ |
2,874
|
|
|
$ |
3,665
|
|
The
accompanying notes are an integral part of these condensed financial
statements.
Schedule
I
THE
FAIRCHILD CORPORATION
CONDENSED
FINANCIAL STATEMENTS OF THE PARENT COMPANY
NOTES
TO FINANCIAL STATEMENTS (NOT CONSOLIDATED)
(In
thousands)
1. BASIS
OF PRESENTATION
In
accordance with the requirements of Regulation S-X of the Securities and
Exchange Commission, our financial statements are condensed and omit many
disclosures presented in the consolidated financial statements and the notes
thereto.
2.
LONG-TERM DEBT
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2005
|
|
Golden
Tree term loan
|
|
$ |
30,000
|
|
|
$ |
-
|
|
Other
term debt
|
|
|
845
|
|
|
|
921
|
|
Capital
lease obligations
|
|
|
5
|
|
|
|
26
|
|
Total
Debt
|
|
|
30,850
|
|
|
|
947
|
|
Less:
Current maturities of long-term debt
|
|
|
(69 |
) |
|
|
(85 |
) |
Total
Long-Term Debt
|
|
$ |
30,781
|
|
|
$ |
862
|
|
Long-term
debt maturing over the next five years is as follows: $69 in 2007, $64 in 2008,
$64 in 2009, and $30,064 in 2010.
3. CONTINGENCIES
We
are involved in various other claims and lawsuits incidental to our business,
some of which involve substantial amounts. We, either on our own or
through our insurance carriers, are contesting these matters. In the
opinion of management, the ultimate resolution of the legal proceedings will
not
have a material adverse effect on our financial condition, or future results
of
operations or net cash flows.
(a)(3) Exhibits.
2 Material
Agreements of Acquisition or Disposition
2.1
|
Acquisition
Agreement dated as of July 16, 2002 among Alcoa Inc., The Fairchild
Corporation, Fairchild Holding Corp. and Sheepdog, Inc., with Exhibit
A
(Conveyance, Assignment, Transfer and Bill of Sale), Exhibit B
(Undertaking and Indemnity Agreement) and Exhibit C (Escrow Agreement)
attached thereto (incorporated by reference to Exhibit 2.1 to the
Current
Report on Form 8-K dated July 16, 2002) (incorporated by reference
to the
Registrant's Report on Form 8-K dated December 3,
2002).
|
2.2
|
Amendment
No. 1 to the Acquisition Agreement, dated as of December 3, 2002,
to the
Acquisition Agreement, dated as of July 16, 2002, among Alcoa Inc.,
The
Fairchild Corporation, Fairchild Holding Corp. and Sheepdog, Inc.
(incorporated by reference to the Registrant's Report on Form 8-K
dated
December 3, 2002) (incorporated by reference to the Registrant's
Report on
Form 8-K dated December 3, 2002).
|
2.3
|
Purchase
Contract, relating to the assets of Hein Gericke (the “Hein Gericke
Purchase Contract”) executed October 11, 2003, among Fairchild Textile
GmbH (as Purchaser), Eurobike Vermögensverwaltungs GmbH (as a Seller) and
(as additional Sellers) the insolvency administrator Dr. Biner Bähr,
acting in his capacity as insolvency administrator over the assets
of (i)
Hein Gericke-Holding GmbH, (ii) Hein Gericke Vertriebs GmbH, (iii)
Paul A
Boy GmbH and (iv) Eurobike AG (incorporated by reference to the
Registrant's Report on Form 8-K dated November 14,
2003).
|
2.4
|
Amendment
to Purchase Contract, dated November 1, 2003, amending the Hein Gericke
Purchase Contract referred to immediately above (incorporated by
reference
to the Registrant's Report on Form 8-K dated November 14,
2003).
|
2.5
|
Purchase
Contract, relating to the Sellers ownership interest in PoloExpress
(the
“PoloExpress Purchase Contract”), executed October 11, 2003, among
Fairchild Textile GmbH (as Purchaser) and the following Sellers,
Helmet
House GmbH , BMJ Motorsport Vertriebs GmbH, and Eurobike AG (incorporated
by reference to the Registrant's Report on Form 8-K dated November
14,
2003).
|
2.6
|
Amendment
to Purchase Contract, dated November 1, 2003, amending the PoloExpress
Purchase Contract referred to immediately above (incorporated by
reference
to the Registrant's Report on Form 8-K dated November 14,
2003).
|
2.7
|
Guaranties
by The Fairchild Corporation, each dated November 1, 2003, to the
Sellers
of the Polo Express business, guaranteeing the deferred purchase
price
under the PoloExpress Purchase Contract (aggregate of EUR 20,000
Million)
due no later than April 30, 2004 (incorporated by reference to the
Registrant's Report on Form 8-K dated November 14,
2003).
|
2.8
|
Contract,
relating to Mr. Klaus Esser’s Ownership interest in PoloExpress ,executed
October 11, 2003, between Fairchild Textile GmbH (as Purchaser) and
Mr.
Klaus Esser (as Seller) (incorporated by reference to the Registrant's
Report on Form 8-K dated November 14,
2003).
|
3 Articles
of Incorporation, Bylaws, and Instruments Defining Rights of
Securities
3.1
|
Registrant's
Restated Certificate of Incorporation (incorporated by reference
to
Exhibit "C" of Registrant's Proxy Statement dated October 27,
1989).
|
3.2
|
Certificate
of Amendment to Registrant’s Certificate of Incorporation, dated November
16, 1990, changing name from Banner Industries, Inc. to The Fairchild
Corporation.
|
3.3
|
Registrant's
Amended and Restated By-Laws, as amended as of November 21, 1996
(incorporated by reference to the Registrant's Quarterly Report on
Form
10-Q for the quarter ended December 29,
1996).
|
3.4
|
Amendment
to the Company's By-Laws, dated as of February 12, 1999 (incorporated
by
reference to Registrant's Annual Report on Form 10-K for the fiscal
year
ended June 30, 1999).
|
3.5
|
Amendment
to the Company's By-Laws, dated December 23, 2005 (incorporated by
reference to Registrant's Annual Report on Form 10-K for the fiscal
year
ended September 30, 2005).
|
3.6
|
Amended
and Restated Charter of the Audit Committee dated January 31, 2005
(incorporated by reference to Registrant's Annual Report on Form
10-K for
the fiscal year ended September 30,
2005).
|
4
|
Instruments
Defining the Rights of Security Holders, Including
Indentures
|
4.1
|
Specimen
of Class A Common Stock certificate (incorporated by reference to
Registration Statement No. 33-15359 on Form
S-2).
|
4.2
|
Specimen
of Class B Common Stock certificate (incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30,
1989).
|
4.3
|
Savings
Plan for Employees of The Fairchild Corporation, amended and restated
as
of February 28, 2002 (incorporated by reference to the Registrant’s Report
on Form S-8 dated August 6, 2002).
|
4.4
|
Savings
Plan for Employees of The Fairchild Corporation Trust Agreement,
dated
February 1, 2002, between The Fairchild Corporation and Putnam Fiduciary
Trust Company (incorporated by reference to the Registrant’s Report on
Form S-8 dated August 6, 2002).
|
4.5
|
Notice
of Hearing and Proposed Settlement of The Fairchild Corporation
Stockholder Derivative Litigation, dated April 1, 2005 (incorporated
by
reference to the Registrant's Report on Form 8-K dated April 1,
2005).
|
4.6
|
Notice
of Hearing and Proposed Supplemental Settlement of The Fairchild
Corporation Stockholder Derivative Litigation, dated October 24,
2005
(incorporated by reference to the Registrant's Report on Form 8-K
dated
October 24, 2005).
|
10(a)
|
(Stock
Option Plans)
|
10.1
|
Amended
and Restated 1986 Non-Qualified and Incentive Stock Option Plan,
dated as
of February 9, 1998 (incorporated by reference to Exhibit B of
Registrant's Proxy Statement dated October 9,
1998).
|
10.2
|
Amendment
Dated May 7, 1998 to the 1986 Non-Qualified and Incentive Stock Option
Plan (incorporated by reference to Exhibit A of Registrant's Proxy
Statement dated October 9, 1998).
|
10.3
|
1996
Non-Employee Directors Stock Option Plan (incorporated by reference
to
Exhibit B of Registrant's Proxy Statement dated October 7,
1996).
|
10.4
|
Stock
Option Deferral Plan dated February 9, 1998 (for the purpose of allowing
deferral of gain upon exercise of stock options) (incorporated by
reference to Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 29, 1998).
|
10.5
|
Amendment
to the Stock Option Deferral Plan, dated June 28, 2000 (for the purpose
of
making an equitable adjustment in connection with the spin off of
Fairchild Bermuda and the receipt of Global Sources shares) (incorporated
by reference to Registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 2000).
|
10.6
|
Amendment
dated May 21, 1999, amending the 1996 Non-Employee Directors Stock
Option
Plan (for the purpose of allowing deferral of gain upon exercise
of stock
options) (incorporated by reference to Registrant's Annual Report
on Form
10-K for the fiscal year ended June 30,
1999).
|
10.7
|
2000
Non-Employee Directors Stock Option Plan (incorporated by reference
to
Appendix 2 of Registrant's Proxy Statement dated October 10,
2000).
|
10.8
|
2001
Non-Employee Directors Stock Option Plan (incorporated by reference
to
Appendix 1 of Registrant's Proxy Statement dated October 10,
2000).
|
10(b)
|
(Employee
Agreements)
|
10.9
|
Amended
and Restated Employment Agreement between Registrant and Jeffrey
J.
Steiner dated September 10, 1992 (incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30,
1993).
|
10.10
|
Employment
Agreement between Banner Aerospace, Inc. and Jeffrey J. Steiner,
dated
September 9, 1992.
|
10.11
|
Restated
and Amended Service Agreement between Fairchild Switzerland, Inc.
and
Jeffrey J. Steiner, dated April 1,
2001.
|
10.12
|
Letter
Agreement dated February 27, 1998, between Registrant and Donald
E. Miller
(incorporated by reference to Registrant's Quarterly Report on Form
10-Q
for the quarter ended March 29,
1998).
|
10.13
|
Officer
Loan Program, dated as of February 5, 1999, lending up to $750,000
to
officers for the purchase of Company Stock (incorporated by reference
to
Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30,
1999).
|
10.14
|
Director
and Officer Loan Program, dated as of August 12, 1999, lending up
to
$2,000,000 to officers and directors for the purchase of Company
Stock
(incorporated by reference to Registrant's Annual Report on Form
10-K for
the fiscal year ended June 30,
1999).
|
10.15
|
Employment
Agreement between Eric Steiner and The Fairchild Corporation, dated
as of
August 1, 2000 (incorporated by reference to Registrant's Annual
Report on
Form 10-K for the fiscal year ended June 30,
2000).
|
10.16
|
Employment
Agreement between Banner Aerospace, Inc. and Warren D. Persavich
(together
with Amendment No. 1 to such Agreement) (incorporated by reference
to
Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30,
2000).
|
10.17
|
Amendment
to Employment Agreements between the Company and Jeffrey Steiner,
dated
January 22, 2003 (for the purpose of amending change of control payments)
(incorporated by reference to Registrant's Quarterly Report on Form
10-Q
for the quarter ended December 29,
2002).
|
10.18
|
Amendment
to Employment Agreement between the Company and Eric Steiner, dated
January 22, 2003 (for the purpose of amending change of control payments)
(incorporated by reference to Registrant's Quarterly Report on Form
10-Q
for the quarter ended December 29,
2002).
|
10.19
|
Amendment
to Incentive Contract between the Company and Donald Miller, dated
January
22, 2003 (for the purpose of amending change of control payments)
(incorporated by reference to Registrant's Quarterly Report on Form
10-Q
for the quarter ended December 29,
2002).
|
10.20
|
Employment
Agreement dated October 18, 2005, between PoloExpress and Klaus Esser
(incorporated by reference to the Registrant's Report on Form 8-K
dated
October 18, 2005).
|
10.21
|
Amendment
to Employment Agreement between PoloExpress and Klauss Esser, dated
May
30, 2007 (incorporated by reference to the Registrant’s Report on Form 8-K
dated May 30, 2007).
|
10(c)
|
(Credit
Agreements)
|
10.22
|
Promissory
Note dated as of August 26, 2004 issued by The Fairchild Corporation
to
Beal Bank, SSB in connection with $13,000,000 loan secured by the
Company’s real estate in Huntington Beach CA, Fullerton CA, and Wichita KS
(incorporated by reference to the Registrant's Annual Report on Form
10-K
dated September 30, 2004).
|
10.23
|
Loan
Agreement (English Translation) dated April 21, 2004, between Hein
Gericke
and Polo Express (as Borrower) and Stadtsparkasse Düsseldorf and HSBC
Trinkaus & Burkhardt AG (as Lenders) relating to €31,000,000 loan, as
reported by the Company in the Registrant’s Report on Form 8-K dated May
6, 2004 (incorporated by reference to the Registrant's Report on
Form 10-Q
dated August 4, 2004).
|
10.24
|
Working
Capital Loans (English Translation) dated April 21, 2004, between
Hein
Gericke (as Borrower) and Stadtsparkasse Düsseldorf relating to €5,000,000
loan, as reported by the Company in the Registrant’s Report on Form 8-K
dated May 6, 2004 (incorporated by reference to the Registrant's
Report on
Form 10-Q dated August 4, 2004).
|
10.25
|
Working
Capital Loans (English Translation) dated April 21, 2004, between
Hein
Gericke (as Borrower) and HSBC Trinkaus & Burkhardt AG relating to
€5,000,000 loan, as reported by the Company in the Registrant’s Report on
Form 8-K dated May 6, 2004 (incorporated by reference to the Registrant's
Report on Form 10-Q dated August 4,
2004).
|
10.26
|
Loan
Agreement dated December 26, 2003, between Republic Thunderbolt LLC,
as
borrower and Column Financial, Inc. as lender, relating to $55,000,000
loan secured by Airport Plaza Shopping Center, Farmingdale
NY (incorporated by reference to the Registrant's Report on
Form 10-Q dated February 12, 2004).
|
10.27
|
Loan
Agreement dated April 30, 2004, between Hein Gericke UK, as borrower,
and
GMAC Commercial Finance PLC, as lender, relating to inventory loan
to Hein
Gericke UK (incorporated by reference to the Registrant's Report
on Form
10-Q dated August 4, 2004).
|
10.28
|
Loan
Agreement dated January 12, 2004, between Banner Aerospace Holding
Corp.
I, as borrower, and CIT Group/Business Credit, Inc., as lender, relating
to inventory loan to Banner (incorporated by reference to the Registrant's
Report on Form 10-Q dated May 13,
2004).
|
10.29
|
Credit
Agreement dated May 3, 2006, between The Fairchild Corporation, as
borrower, The Bank of New York, as Administrative Agent, and GoldenTree
Asset management L.P., as Collateral Agent, for a four-year term
loan in
the original principal amount of $30,000,000 (incorporated by reference
to
the Registrant’s Report on Form 8-K dated May 3,
2006).
|
11.
|
Computation
of net loss per share (found at Note 11 in Item 8 to Registrant's
Consolidated Financial Statements for the fiscal years ended September
30,
2006, September 30, 2005, and September 30,
2004).
|
14
|
Corporate
Governance Matters
|
14.1
|
Corporate
Governance and Committee Charter: The Company’s Board of
Directors has adopted a written charter for the Corporate Governance
and
Nominating. Committee. The charter is posted on the Company’s
website (www.fairchild.com). A copy may
also be obtained upon request from the Company’s Corporate
Secretary.
|
14.2
|
Compensation
Committee Charter: The Company’s Board of Directors has adopted
a written charter for the Compensation Committee. The charter
is posted on the Company’s website
(www.fairchild.com). A copy may also be obtained upon
request from the Company’s Corporate
Secretary.
|
14.3
|
Audit
Committee Charter: The Company’s Board of Directors has adopted
a written charter for the Audit Committee. The charter is
posted on the Company’s website (www.fairchild.com). A
copy may also be obtained upon request from the Company’s Corporate
Secretary.
|
14.4
|
On
January 31, 2005, the Company’s Board of Directors adopted an Amended and
Restated Corporate Governance Guidelines. The full text of the
Corporate Governance Guidelines can be found on the Company’s website
www.fairchild.com). A copy may also be obtained upon
request from the Company’s Corporate
Secretary.
|
14.5
|
On
August 2, 2004, the Company’s Board of Directors adopted an Amended and
Restated Code of Business Conduct and Ethics, applicable to all employees,
officers and directors of the corporation. The code is posted
on the Company’s website (www.fairchild.com). A copy may
also be obtained upon request from the Company’s Corporate
Secretary.
|
14.6
|
In
November 2003, the Company’s Board of Directors adopted the Code of Ethics
for Senior Financial Officers (including the Chief Executive Officer,
the
Chief Finical Officer, the Principal Accounting Officer or Controller,
and
all persons performing similar functions on behalf of the Company).
The
code is posted on the Company’s website (www.fairchild.com). A copy
may also be obtained upon request from the Company’s Corporate
Secretary.
|
14.9
|
Pre-Approval
Policy by the Audit Committee Re Audit and Non-Audit Services,
incorporated by reference to the Fiscal 2005 Proxy
Statement.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, we have duly caused this report to be signed on our behalf by the
undersigned, thereunto duly authorized.
THE
FAIRCHILD CORPORATION
By: /s/
MICHAEL
McDONALD
Michael
McDonald
Chief
Financial Officer
Date: August
13, 2007
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant, in their
capacities and on the dates indicated.
By:
|
/s/
|
JEFFREY
J. STEINER
|
Chairman,
Chief Executive
|
August
13, 2007
|
|
|
Jeffrey
J. Steiner
|
Officer
and Director
|
|
|
|
|
|
|
By:
|
/s/
|
DIDIER
CHOIX
|
Director
|
August
13, 2007
|
|
|
Didier
Choix
|
|
|
|
|
|
|
|
By:
|
/s/
|
ROBERT
E. EDWARDS
|
Director
|
August
13, 2007
|
|
|
Robert
E. Edwards
|
|
|
|
|
|
|
|
By:
|
/s/
|
DANIEL
LEBARD
|
Director
|
August
13, 2007
|
|
|
Daniel
Lebard
|
|
|
|
|
|
|
|
By:
|
/s/
|
GLENN
MYLES
|
Director
|
August
13, 2007
|
|
|
Glenn
Myles
|
|
|
|
|
|
|
|
By:
|
/s/
|
MICHAEL
J. VANTUSKO
|
Director
|
August
13, 2007
|
|
|
Michael
J. Vantusko
|
|
|
|
|
|
|
|
By:
|
/s/
|
ERIC
I. STEINER
|
President,
Chief Operating
|
August
13, 2007
|
|
|
Eric
I. Steiner
|
Officer
and Director
|
|