tfc10kfy2007.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM
10-K
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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For
the Year Ended September 30, 2007
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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.)
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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(g) of the Act: None
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 [ X]
Yes [ ] 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 a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated
filer”, “non-accelerated filer”, and “smaller reporting company” in Rule 12b-2
of the Exchange Act. Check one: [ ] Large accelerated filer, [ ]
Accelerated filer, [X] Non-accelerated filer, [ ] Smaller reporting
company.
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
30, 2007, 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 $45.9 million (excluding shares
deemed beneficially owned by affiliates of the
Registrant
under Commission Rules).
On
January 31, 2008, the number of shares outstanding of each of the Registrant’s
classes of common stock was as follows:
Title of
Class
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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, 2007
PART
I
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Page
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Item
1.
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Item
1A.
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Item
1B.
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Item
2.
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Item
3.
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Item
4.
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PART
II
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Item
5.
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Item
6.
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Item
7.
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Item
7A.
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Item
8.
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Item
9.
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Item
9A.
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PART
III
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Item
10.
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Item
11.
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Item
12.
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Item
13.
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Item
14.
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PART
IV
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Item
15.
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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, 2007, September 30, 2006, or September
30, 2005, 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.
ITEM 1. BUSINESSS
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 leased 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
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 received additional proceeds of $12.5 million in
each of fiscal 2004, 2005, 2006, and 2007, based upon the number of commercial
aircraft delivered by Boeing and Airbus exceeding the specified annual levels in
each of the four year earn-out periods.
Financial
Information about Business Segments
Our
business segment information is incorporated herein by reference from Note 14 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, 2007, PoloExpress operated 91 retail
shops in Germany and 4 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 40% of our consolidated revenues
in fiscal 2007.
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. PoloExpress has
been transitioning from the shop partner concept to employee operated stores,
primarily in conjunction with opening larger stores. As of September
30, 2007, approximately 38% of PoloExpress stores were operated using our own
employees. Mail order and internet sales represented 6.5% of
PoloExpress sales for fiscal 2007. 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 93% of PoloExpress retail sales are to
customers in Germany and 7% 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 robust among the
retailers. We believe that key market positions are held by
PoloExpress in Germany and Switzerland.
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, 2007, 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 36% of our consolidated revenues in
fiscal 2007.
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 1.3% of Hein Gericke sales in fiscal
2007. Although a majority of revenues generated by the Hein Gericke
retail stores are Hein Gericke branded 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 Harley-Davidson, 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 45% of Hein Gericke’s retail
sales are to customers in Germany and 38% 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 Harley-Davidson, Honda, Yamaha, Harley-Davidson dealers, and
other independent dealers.
Foreign
sales, defined as revenues generated outside of the United States, and U.S.
domestic sales represented 96% and 4%, 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 many independent shop owners. There is a large market
for motorcycle enthusiasts in Europe and competition is robust among the
retailers. We believe that a key market position is 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 24% of our consolidated revenues in fiscal 2007.
Products
Products
of the aerospace operations include rotable parts, such as landing gear, 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 landing gear, pressurization, instrumentation, avionics,
aircraft accessories, and airframe components.
Sales
and Markets
Our
aerospace operations sell products in the United States and abroad to OEMs,
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 50% 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 15 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 2007, our PoloExpress and Hein Gericke segments purchased approximately
9% and 14%, respectively, of their products from Kido Industrial Co, Ltd. In
fiscal 2007, our Aerospace segment purchased approximately 14% of its products
from Universal Avionics Systems. We are not materially dependent upon any other
single supplier. We obtain our supplies from 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, 2007, we had 784 employees, of which 216 were based in the
United States and 568 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 13, “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 Securities and
Exchange Commission.
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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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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 unable to raise additional capital, or if interest rates or other
terms are unfavorable, our financial condition or results of operations
may be adversely affected. As such, our cash requirements are dependent
upon our ability to achieve and execute internal business plans,
including:
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Our
ability to accurately predict demand for our
products;
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Our
ability to negotiate favorable pricing and other terms from our
suppliers;
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Our
ability to receive timely deliveries from
suppliers;
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Our
ability to raise cash to meet seasonal and other
demands;
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Our
ability to maintain customer satisfaction, attract customers to our
stores, and deliver products of
quality;
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Our
ability to properly assess our competition;
and
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Our
ability to improve our operations to profitability
status.
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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 one or more of our core businesses, or other means. Should these
actions be insufficient, we may be forced to liquidate other non essential
assets and significantly reduce overhead expenses.
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 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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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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Government regulation.
We must comply with governmental laws and regulations that are subject to
change and may 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.
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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, 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.
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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:
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o
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political
and economic instability;
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o
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high
levels of inflation, historically the case in a number of countries in
Asia;
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o
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burdens
and costs of compliance with a variety of foreign
laws;
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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 face a competitive disadvantage due to
our marketing strategies and cost of capital. 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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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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Our success in our retail
operations depends upon the continued strength of the Hein Gericke and
Polo brands. We believe that our Hein Gericke and Polo brands are
essential 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 Polo brands could have a material adverse
effect on our business and results of
operations.
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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.
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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.
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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
intangible assets deemed to have an indefinite life 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 2007, 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, 2007, 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.
|
|
·
|
Potential limitation on use of
net operating tax losses on change in share
ownership. Under Section 382 of the Internal Revenue
Code, the Company’s ability to use it’s existing accumulated net operating
losses in the United States may be reduced if there has occurred
significant changes in ownership of shares of the
company. Similar rules exist in certain foreign jurisdictions
where the Company has tax losses.
|
|
·
|
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. For certain
instances, our insurers are defending us under “reservations of (their)
rights” and may later deny coverage, in whole or part. We have
had and are currently involved in litigations with our carriers over their
denials of coverage or failure to defend our interests. 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.
None.
As
of September 30, 2007, we owned or leased buildings totaling approximately
2,370,000 square feet, of which approximately 277,000 square feet were owned and
2,093,000 square feet were leased.
Our
PoloExpress segment’s properties consisted of approximately 848,000 square feet
which is all leased. We lease and operate 95 retail stores in Germany
and Switzerland. The stores which were in operation as of September
30, 2007 aggregated approximately 703,000 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 1,141,000 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, 2007 aggregated approximately 989,000 square feet. Hein
Gericke’s 66 stores in Germany aggregated 567,000 square feet, and our 45 stores
in the United Kingdom aggregated 135,000 square feet. The remaining 287,000
square feet are leased by the 34 stores in Austria, Belgium, France, Italy,
Luxembourg, the Netherlands, and Turkey. The Hein Gericke segment
leases 86,000 square feet of warehouse space in Germany. The primary
offices of the Hein Gericke segment are located in Düsseldorf, Germany;
Harrogate, United Kingdom; 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 approximately 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 20,000 square
feet. On October 31, 2007, we sold our property in Fullerton,
California to Alcoa for $19.0 million.
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
|
|
|
145,000 |
|
PoloExpress
|
Office
& Warehousing
|
Düsseldorf,
Germany
|
Leased
|
|
|
117,000 |
|
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
|
McLean,
Virginia
|
Leased
|
|
|
17,000 |
|
Corporate
|
Office
|
Tustin,
California
|
Leased
|
|
|
15,000 |
|
Hein
Gericke
|
Office
& Warehousing
|
Wichita,
Kansas
|
Owned
|
|
|
11,000 |
|
Aerospace
|
Distribution
|
Harrogate,
United Kingdom
|
Leased
|
|
|
5,000 |
|
Hein
Gericke
|
Office
|
A
discussion of our legal proceedings is included in Note 13, “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.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF
STOCKHOLDERS
There
were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART
II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF
COMMON
EQUITY
Market
Information
Our
Class A common stock is traded on the NYSE under the symbol
“FA”. Effective December 14, 2006, we voluntarily delisted from our
dual 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 7, “Equity Securities”, of our Consolidated
Financial Statements included in Part II, Item 8, “Financial Statements and
Supplementary Data”.
The
following table presents the high and low prices of our Class A common stock as
traded on the NYSE:
|
|
Stock
Price
|
|
|
|
High
|
|
|
Low
|
|
Fiscal
2007
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
2.69 |
|
|
$ |
2.00 |
|
Second
Quarter
|
|
|
2.47 |
|
|
|
1.75 |
|
Third
Quarter
|
|
|
2.30 |
|
|
|
1.60 |
|
Fourth
Quarter
|
|
|
2.40 |
|
|
|
1.72 |
|
|
|
|
|
|
|
|
|
|
Fiscal
2006
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
2.85 |
|
|
$ |
2.11 |
|
Second
Quarter
|
|
|
2.79 |
|
|
|
2.26 |
|
Third
Quarter
|
|
|
2.61 |
|
|
|
2.00 |
|
Fourth
Quarter
|
|
|
2.80 |
|
|
|
2.08 |
|
At
the beginning of the fiscal 2006, 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 fiscal 2006, 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 fiscal 2006, 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 fiscal 2007. Information regarding our stock
option plans is incorporated herein by referenced from Note 8, “Stock Options”,
of our Consolidated Financial Statements included in Part II, Item 8, "Financial
Statements and Supplementary Data".
Holders
of Record
We
had approximately 891 and 31 record holders of our Class A and Class B common
stock, respectively, at September 30, 2007.
Dividends
We
have not paid any dividends over the past several years. Our intention is to
retain and reinvest earnings into the Company.
Sale
of Unregistered Securities
There
were no sales or issuances of unregistered securities in the last fiscal quarter
of the 2007 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, 2007, 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
|
126,000
|
Weighted
average exercise price of outstanding options
|
$2.28
|
Number
of securities remaining available for future issuance
|
None
|
Five-Year
Financial Summary
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
Month
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition
|
|
|
|
|
|
|
Years
Ended
|
|
|
Period
Ended
|
|
|
Year
Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2003
|
|
Summary
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
355,008 |
|
|
$ |
308,641 |
|
|
$ |
341,587 |
|
|
$ |
318,132 |
|
|
$ |
14,857 |
|
|
$ |
59,633 |
|
Rental
revenue
|
|
|
950 |
|
|
|
950 |
|
|
|
656 |
|
|
|
930 |
|
|
|
260 |
|
|
|
808 |
|
Gross
margin
|
|
|
142,487 |
|
|
|
123,641 |
|
|
|
130,492 |
|
|
|
122,490 |
|
|
|
3,924 |
|
|
|
20,699 |
|
Operating
loss
|
|
|
(40,546 |
) |
|
|
(26,929 |
) |
|
|
(28,305 |
) |
|
|
(14,099 |
) |
|
|
(5,955 |
) |
|
|
(51,348 |
) |
Net
interest expense
|
|
|
11,448 |
|
|
|
8,501 |
|
|
|
11,427 |
|
|
|
10,599 |
|
|
|
662 |
|
|
|
22,328 |
|
Income
tax benefit (provision)
|
|
|
6,768 |
|
|
|
(2,176 |
) |
|
|
1,048 |
|
|
|
8,953 |
|
|
|
415 |
|
|
|
(408 |
) |
Loss
from continuing operations
|
|
|
(39,118
|
) |
|
|
(33,890 |
) |
|
|
(27,309 |
) |
|
|
(7,388 |
) |
|
|
(2,486 |
) |
|
|
(83,837 |
) |
Loss
per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$ |
(1.55 |
) |
|
$ |
(1.34 |
) |
|
$ |
(1.08 |
) |
|
$ |
(0.29 |
) |
|
$ |
(0.10 |
) |
|
$ |
(3.33 |
) |
Other
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
11,729 |
|
|
|
7,777 |
|
|
|
11,668 |
|
|
|
12,260 |
|
|
|
312 |
|
|
|
7,888 |
|
Cash
provided by (used for) operating activities
|
|
|
10,373 |
|
|
|
(71,773 |
) |
|
|
(13,060 |
) |
|
|
(13,101 |
) |
|
|
(6,971 |
) |
|
|
(122,521 |
) |
Cash
provided by (used for) investing activities
|
|
|
9,441 |
|
|
|
54,987 |
|
|
|
26,802 |
|
|
|
(97,284 |
) |
|
|
29 |
|
|
|
605,516 |
|
Cash
provided by (used for) financing activities
|
|
|
(19,463 |
) |
|
|
12,328 |
|
|
|
(13,807 |
) |
|
|
116,622 |
|
|
|
1,523 |
|
|
|
(485,842 |
) |
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
357,354 |
|
|
|
415,129 |
|
|
|
448,639 |
|
|
|
499,165 |
|
|
|
377,208 |
|
|
|
390,549 |
|
Long-term
debt, less current maturities
|
|
|
25,767 |
|
|
|
65,450 |
|
|
|
47,990 |
|
|
|
61,382 |
|
|
|
4,277 |
|
|
|
2,815 |
|
Stockholders'
equity
|
|
|
92,885 |
|
|
|
89,018 |
|
|
|
111,346 |
|
|
|
138,896 |
|
|
|
136,139 |
|
|
|
137,957 |
|
Per
outstanding common share
|
|
$ |
3.68 |
|
|
$ |
3.53 |
|
|
$ |
4.41 |
|
|
$ |
5.52 |
|
|
$ |
5.41 |
|
|
$ |
5.48 |
|
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.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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), and Fairchild Aerostructures (sold June 24, 2005).
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.
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 also 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.
During
the past twelve months, our senior management team has led an effort to enhance
shareholder value with focused goals to generate growth opportunities within our
core businesses, establish turnaround actions needed to capitalize on
improvement opportunities within our Hein Gericke segment, and liquidate
non-core assets at maximized value to reduce our high-yield debt and future cash
flow needs. To date, we have made marked progress toward achieving
these objectives. Some of the more significant steps taken in fiscal
2007 are discussed below:
|
·
|
At
our Aerospace segment, we have enhanced our efforts to develop new
products. This includes a concentration on expansion opportunities for the
products and services we offer to extend across a larger group of aircraft
fleet and customer base. In 2007, our Aerospace segment generated revenue
growth of 8.1% and operating income growth of 9.2% over the prior year.
While the impact of our work has yet to be fully realized, we are
optimistic that our expectations to achieve substantial additional growth
within our Aerospace segment can occur in the near
future.
|
|
·
|
At
our PoloExpress segment, in an effort to further strengthen the range of
our products, we introduced several third party brands, offered more
casual wear offerings, added two new stores in Switzerland, and relocated
5 store locations within Germany, optimizing store location and store
size. Excluding foreign currency factors, our PoloExpress segment
experienced revenue growth of 15.6% over the prior year. We have also
decided, that in the fall of 2008, we will move PoloExpress into a much
larger warehouse to optimize efficiency and provide sufficient space
needed to capitalize on future expansion
opportunities.
|
·
|
At
our Hein Gericke segment, we have consolidated and centralized our
warehouse facilities to one location to service all of Europe, improved
the timeliness of product deliveries from suppliers to our warehouse and
delivery to the stores, reintroduced our Hein Gericke product catalog to
expand brand awareness and attract customer traffic, and increased efforts
to optimize store location and appearance. Midway through our seasonal
period, we opened new stores in Paris and Amsterdam and relocated our
store in Vienna. Additionally, we closed 2 underperforming stores.
Recently, we have restructured our management team providing them with
clear goals to: maximize gross margins without reducing sales; optimize
inventory management by purchasing more fast moving products; reduce the
number of upscale third party brands offered; minimize the number of slow
moving or low margin products offered; and strictly maintain cash flow
within budgeted guidelines. Although margins improved slightly in fiscal
2007, an effort to reduce the level of “discontinued products” during the
last three months of the fiscal year partially offset our margin
gains.
|
|
·
|
At
Corporate, we intensified efforts to reduce corporate expenses and
maximize returns generated by the sale of non-core
assets. Accordingly, we successfully negotiated reductions in
our corporate insurance contracts. In 2007, we reduced expenses by in
excess of $2.8 million for salaries, travel expenses, and our director and
officer insurance expenses, over the costs incurred in
2006.
|
|
·
|
In
August 2007, we purchased annuities to settle the liabilities of an
overfunded pension plan, which resulted in net remaining assets of
approximately $8.7 million. This action triggered settlement accounting,
which required us to expense approximately $26.2 million relating to the
previous unrecognized actuarial losses and the costs associated with
purchasing annuity contracts. In September 2007, we would have
been required to recognize approximately $17.0 million as a reduction to
stockholders' equity upon the adoption of SFAS No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Pension Plans, to
recognized actuarial losses which were previously amortizable under the
prior accounting rules. In September 2007, the settled pension plan,
including its $8.7 million net remaining assets, was merged with one of
our underfunded pension plans. In accordance with the Pension
Protection Act of 2006, this action reduces the amount we will be required
to contribute to our underfunded pension
plan.
|
|
·
|
In
September 2007, we decided to amend certain retiree medical plans to
eliminate subsidized supplemental Medicare insurance coverage for the
current and future retirees of our non-class action retiree medical plans
effective January 1, 2008. This action provided income recognition of
approximately $11.8 million in fiscal 2007, as a result of the reduction
in our postretirement benefits
liabilities.
|
Subsequent
to September 2007, we accomplished the following:
|
·
|
On
October 31, 2007, we resolved all disputes with Alcoa related to the 2002
sale of the fastener business to Alcoa. Accordingly, $25.3
million of the escrow account was released to us and Alcoa made an
additional payment to us of $0.6 million and assumed specified liabilities
for foreign taxes, environmental matters, and worker compensation
claims. We used $20.9 million of these proceeds to fully repay
the GoldenTree loan, which carried a variable interest rate of 12.8% at
September 30, 2007. We expect the repayment of this loan will
eliminate in excess of $2.5 million in annual interest
costs.
|
|
·
|
On
October 31, 2007, we sold our property in Fullerton, California to Alcoa
for $19.0 million. We used $13.0 million of these proceeds to
fully repay the Beal Bank loan, which carried a variable interest rate of
11.2% at September 30, 2007. We expect the repayment of this
loan will eliminate in excess of $1.0 million in annual interest
costs.
|
|
·
|
In
December 2007, we decided to change the investment allocation of our
pension plan assets to a more traditional allocation of 60% in equity
securities and 40% in fixed-income securities, from the previous very
conservative allocation of 80% invested fixed income securities and 20% in
equity. Our goal is to maximize returns by taking on an additional nominal
risk. We expect this investment reallocation will significantly reduce the
actual amounts of our annual long-term future cash contribution
requirements.
|
|
·
|
During
the three months ended December 31, 2007, actions were taken to
consolidate and restructure back office functions at Hein
Gericke.
|
During
fiscal 2008, we expect to continue making significant operational
improvements. Our plans include the following:
·
|
At
our Aerospace segment, we expect to continue our growth by offering
additional products, obtaining required certifications and delivering new
products recently developed, pursuing refinancing opportunities of our
existing debt, and maximizing cash flow
opportunities.
|
·
|
At
our PoloExpress segment, we expect to continue our growth through opening
new store locations and optimizing current store locations, transitioning
to our new warehouse location, maximizing inventory management
opportunities, continuing to add to our product offerings, pursuing
refinancing opportunities, and maximizing cash flow
opportunities.
|
|
·
|
At
our Hein Gericke segment, we expect to continue cost structure
improvements by taking aggressive actions to reduce additional expenses,
including: closing stores which do not provide a positive contribution;
reducing advertising expense; and considering opportunities to further
reduce warehousing expenses. Additionally, we expect to achieve a
significant improvement in gross margin contribution, conclude the
refinancing of the GMAC loan, pursue additional refinancing opportunities,
and produce positive cash flow for the
year.
|
·
|
At
our Corporate segment, we expect to continue efforts to generate cash from
the liquidation of non-core assets, including the pending sale for $7.3
million of our Huntington Beach, California property and disposing of
additional non-core property and
investments.
|
·
|
At
our Corporate segment, we expect to continue efforts to further reduce
expenses.
|
·
|
We
may consider opportunities to dispose of one or more of our core
businesses in an effort to receive optimal values or eliminate future cash
needs. We expect to use the proceeds received from a disposal at optimal
value to pursue new acquisition opportunities or reinvest in our remaining
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.
|
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: inventory valuation; 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 recent developments, historical
experience and a variety of assumptions that we believe are appropriate. Actual
results may differ from these estimates. Senior management discussed
the development, selection, and disclosure of the following accounting policies,
considered most sensitive to changes from external factors, with the Audit
Committee of the Board of Directors.
Inventory
Valuation: Inventories are stated at the lower of cost or net
realizable value. Cost is determined using the first-in, first-out ("FIFO")
method. Net realizable value is estimated based upon assumptions made
about future demand and market conditions. We regularly review our
inventory to identify slow-moving merchandise or obsolete
components. Slow-moving or obsolete components are identified based
on the movement of the inventory by aging category. If we determine
the net realizable value of our inventory is less than the carrying value of the
inventory, we provide a reserve for the difference as a charge to cost of
sales. If actual market conditions are more or less favorable than
our estimates, adjustments to our inventory reserves may be
required.
Valuation
of Long-Lived Assets: We review our long-lived assets for impairment,
including property, plant and equipment and identifiable intangibles with finite
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 6.375% and 6.0%
at September 30, 2007 and 2006, respectively, and an estimated return on plan
assets of 8.0% and 8.5% at September 30, 2007 and 2006, respectively. Assumed
health care cost trend rates have a significant effect on the amounts reported
for health care plans. For measurement purposes, in 2007, we assumed a 9.5%
annual rate of increase in the cost per capita of claims covered under health
care benefits. In 2007, we elected to eliminate health care
assistance to retirees for whom we are not contractually obligated to provide
benefits. In 2008, we are assuming a 7.0% health care cost trend for
participants with continuing coverage under the health care plan for which we
are contractually obligated to provide benefits. The effect of any change in
these assumptions may result in a material change to the accumulated benefit
obligation.
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 corporate bond rates, which we have historically
used as our benchmark.
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, or our predecessors, 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 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.
In
June 2005, we sold our Fairchild Aerostructures operation to PCA
Aerospace. The cash received from PCA Aerospace was 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. In October 2007, we reached a settlement with PCA regarding the
purchase price adjustment related to that sale. Under the terms of
the settlement, PCA agreed to pay us $1.75 million. A payment of $0.5
million was made in October 2007, and an additional payment of $0.25 million is
due in February 2008. In addition, we agreed to finance the remaining
$1.0 million principal owed to us by PCA at an interest rate of
10%. In accordance with the financing terms, starting in November
2007, PCA began to make monthly payments to us, which are expected to continue
for a period of sixty months. We also amended our lease with PCA
Aerospace whereby we can cause PCA Aerospace to purchase the Huntington Beach
property at the greater of fair market value or $5.0 million under a put option
we hold, which can be exercised at any time through January 31, 2012. PCA
Aerospace also holds a similar purchase option. In November 2007, we
exercised our put option. Accordingly, PCA Aerospace has 6 months to
purchase the property from us at fair market value, which we have agreed with
PCA Aerospace will be $7.3 million.
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 were 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, 2005, and 2006. Accordingly, we
recognized a $12.5 million gain on disposal of discontinued
operations in fiscal 2004, 2005, 2006, and 2007. 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 was to remain in effect to
December 3, 2007. On October 31, 2007, we resolved all disputes with Alcoa
related to the 2002 sale of the fastener business to
Alcoa. Accordingly, $25.3 million of the escrow account was released
to us and Alcoa made an additional payment to us of $0.6 million and assumed
specified liabilities for foreign taxes, environmental matters, and worker
compensation claims. We used $20.9 million of these proceeds to fully
repay the GoldenTree loan. Simultaneously, on October 31, 2007, we
sold our property in Fullerton, California to Alcoa for $19.0
million. We used $13.0 million of these proceeds to fully repay the
Beal Bank loan.
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 basis for the fiscal years ended
September 30, 2007, 2006, and 2005.
(In
thousands)
|
|
Years
Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
PoloExpress
|
|
$ |
140,611 |
|
|
$ |
112,786 |
|
|
$ |
111,161 |
|
Hein
Gericke
|
|
|
128,335 |
|
|
|
116,255 |
|
|
|
145,933 |
|
Aerospace
|
|
|
86,062 |
|
|
|
79,600 |
|
|
|
84,493 |
|
Corporate
and Other
|
|
|
950 |
|
|
|
950 |
|
|
|
656 |
|
Total
|
|
$ |
355,958 |
|
|
$ |
309,591 |
|
|
$ |
342,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
PoloExpress
|
|
$ |
12,131 |
|
|
$ |
11,796 |
|
|
$ |
9,895 |
|
Hein
Gericke
|
|
|
(25,926 |
) |
|
|
(22,084 |
) |
|
|
(15,295 |
) |
Aerospace
|
|
|
6,519 |
|
|
|
5,968 |
|
|
|
6,093 |
|
Corporate
and Other
|
|
|
(33,270 |
) |
|
|
(22,609 |
) |
|
|
(28,998 |
) |
Total
|
|
$ |
(40,546 |
) |
|
$ |
(26,929 |
) |
|
$ |
(28,305 |
) |
Revenues
increased by $46.4 million, or 15.0%, for fiscal 2007 compared to fiscal 2006.
Revenues increased by $27.8 million in our PoloExpress segment and by $12.1
million in our Hein Gericke segment due primarily to store openings and
relocations and the favorable affect of the increase in the strength of the
Euro. Revenue increased by $6.5 million in our Aerospace segment due
primarily to an overall improvement in the areas of the aerospace industry for
which we provide products. Revenues decreased by $32.7 million, or 9.5%, in
fiscal 2006 compared to fiscal 2005. The decrease in fiscal 2006 was due
primarily to the downsized activities of our Fairchild Sports USA business in
the Hein Gericke segment and in our Aerospace segment due to fiscal 2005
benefiting from the delivery of several unusually large one-time
orders.
Gross
margin as a percentage of revenues was 40.0%, 39.9%, and 38.1%, in fiscal 2007,
fiscal 2006, and fiscal 2005, respectively. The improvement in margins in fiscal
2007 compared to fiscal 2006 reflected increased margins at Hein Gericke offset
by decreased margins at PoloExpress. Gross margin at our Aerospace
segment was flat in 2007 compared to 2006. The increased gross margin
at Hein Gericke resulted from a shift in product mix. Specifically,
sales at Fairchild Sports USA, typified by a lower margin, decreased relative to
retail sales. Gross margin at our PoloExpress segment decreased
primarily due to expansion of third party branded products, which have lower
gross margin than Polo branded products. The change in margins in fiscal 2006
compared to fiscal 2005 reflects 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.
Selling,
general and administrative expense includes pension and postretirement expenses
of $16.7 million, $3.6 million, and $6.5 million for fiscal 2007, fiscal 2006,
and fiscal 2005, respectively. The increase in 2007 reflects primarily the
liquidation of an overfunded pension plan resulting in expense of $26.2 million
related to previously unrecognized actuarial losses, partially offset by income
recognition of $11.8 million resulting from a decision to eliminate health care
assistance to retirees for whom we are not contractually obligated to provide
benefits. We liquidated the overfunded pension plan to allow us to
access $8.7 million in excess assets in order to reduce future cash requirements
by merging the plan with our underfunded plan. Selling, general and
administrative expense, excluding pension and postretirement expense, as a
percentage of revenues was 47.8%, 49.0%, and 45.9%, in fiscal 2007, fiscal 2006,
and fiscal 2005, respectively. The improvement in fiscal 2007 compared to fiscal
2006 was due primarily to the higher volume of revenues and related economies of
scale. 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 2006 compared to fiscal 2005 was due primarily
to the lower volume of revenues as well as the impact of the settlement of the
shareholder derivative litigation.
Other
income, net decreased by $0.9 million in fiscal 2007 compared to fiscal
2006. This decrease principally resulted from a $1.3 million increase
in the foreign exchange loss, $1.1 million gain from a lease termination at our
Hein Gericke segment in 2006, and a $0.4 million decrease in charter income
related to an owned airplane, offset partially by a $2.1 million gain on
collection of a note receivable in 2007. Other income decreased by
$0.2 million in fiscal 2006 compared to fiscal 2005 due primarily to a $1.0
million gain recognized on the sale of real estate in fiscal 2005 offset
partially by a $0.7 million increase in charter income related to an owned
airplane.
Operating
loss for fiscal 2007, fiscal 2006, and fiscal 2005 was $40.5 million, $26.9
million, and $28.3 million, respectively. The $13.6 million increase in
operating loss for fiscal 2007 reflected the $13.2 million net increase in
pension and postretirement expense and fiscal 2006 benefiting from $5.1 million
net proceeds we received from the settlement of the shareholder derivative
litigation, offset partially by the improvements in gross profit in 2007. 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
margin.
Net
interest expense increased by $2.9 million, or 34.7%, in fiscal 2007 compared to
fiscal 2006 due primarily to the $30.0 million GoldenTree term loan we entered
into on May 3, 2006. Net interest expense decreased by $2.9 million,
or 25.6%, in fiscal 2006 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
GoldenTree term loan we entered into on May 3, 2006.
Investment
income was $6.0 million for fiscal 2007 and included $5.6 million of realized
gains from the sale of investments and $0.5 million of dividend
income. Investment income was $2.9 million for fiscal 2006 and
included $1.3 million of realized gains from the sale of investments, $1.1
million of dividend income, and 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.
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 and $5.9 million in fiscal
2005. The fair market value adjustment of this agreement reflected increasing
interest rates and caused the favorable change in fair market value of the
contract in these periods. We settled the interest rate contract at the end of
December 2005, and accordingly we will have no further income or loss from this
contract. The settlement allowed us to increase cash available for operations by
releasing approximately $2.5 million of cash held in escrow in excess of the
liability.
The
overall tax benefit for fiscal 2007 was $39.5 million. A $6.8 million tax
benefit from continuing operations resulted from $0.1 million of current
federal, state, and foreign taxes benefit and $6.7 million of foreign deferred
taxes benefit. Effective August 1, 2007, Hein Gericke Deutschland (now
known as Polo Holding) sold the assets of the Hein Gericke business to a new
wholly-owned sister company now known as Hein Gericke Deutschland. This resulted
in a deferred intercompany loss of approximately $33.4 million that is not
reflected in the financial statements until such time as the underlying assets
are sold to unrelated third parties. As a result of the sale, Polo
Holding will be able to utilize the cumulative combined income and trade tax
losses of $30.2 million and $28.1 million, respectively, to offset its future
profits subject to income and trade tax. As a result of the sale, there was a
release of $2.9 million in the valuation allowance against the pre-transaction
tax losses. We believe that Polo Holding will be able to utilize the accumulated
net operating losses as the company has a history of
profitability. An adjustment of $1.9 million to the basis in the
Esser Note resulted in a reduction to the foreign deferred tax liability of $0.3
million due to the resulting decrease of the tax impact of conversion of
PoloExpress from a German partnership to a German corporation. In addition, the
Company was required to record a reduction to the foreign deferred tax liability
of $1.8 million as a result of German statutory rate decreases and currency
adjustments. No Federal taxes were recognized from continuing
operations due to the domestic tax losses for which a full valuation allowance
is recorded. The $32.8 million tax benefit in gain on disposal of discontinued
operations resulted from reduction of tax liabilities due to expiration of the
related statutes of limitation and closure of the related tax
periods.
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 arose 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 allowed 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 allowed 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.
Net
loss from discontinued operations includes the results of the Airport Plaza
shopping center prior to its sale, Fairchild Aerostructures prior to its sale,
and certain legal, tax, and environmental expenses associated with our former
businesses. The loss from discontinued operations for fiscal 2007 consists
primarily of a $2.3 million increase in our accrual of environmental liabilities
at locations of operations previously sold and $4.0 million to cover legal
expenses and workers compensation obligations associated with businesses we sold
several years ago. 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.
In
fiscal 2007, we recognized a $45.3 million gain on the disposal of discontinued
operations, as a result of $32.8 million tax reserve releases following the
expiration of the related statutes of limitations and closure of the related tax
period, as well as $12.5 million of additional proceeds earned from the sale of
the fastener business. 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 a $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, primarily as a result of $12.5 million
additional proceeds earned from the sale of the fastener business and a $1.1
million gain recognized on the sale of Fairchild Aerostructures.
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
2007 comprehensive income included a $5.9 million increase in the minimum
pension liability primarily due to the effects of adopting a new accounting
standard on September 30, 2007, and a $0.1 million increase in the fair market
value of available-for-sale securities, offset partially by a $10.0 million
increase in unrealized foreign currency translations due to the strengthening of
the Euro against the U.S. dollar. 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 loss 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.
Segment
Results
PoloExpress
Segment
Our
PoloExpress segment designs and sells motorcycle apparel, protective clothing,
helmets, and technical accessories for motorcyclists. As of September
30, 2007, PoloExpress operated 91 retail shops in Germany and 4 shops in
Switzerland. While the PoloExpress retail stores primarily sell Polo 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 $27.8 million, or 24.7%, from fiscal
2006 to fiscal 2007. Retail sales per square meter was approximately
$2,892 in 2007 and $2,625 in 2006. The sales increase for 2007 resulted from an
improvement in same store sales of 7.2% and the effect of 5 stores, which were
newly opened or relocated during fiscal 2006. Foreign currency exchange rates on
the translation of European sales into U.S. dollars changed favorably and
increased our revenues by approximately $7.7 million in 2007. Additionally, the
month long World Cup soccer tournament, which was hosted by Germany beginning in
June 2006, negatively affected 2006 revenues and profits. Gross margin in 2007
decreased to 46.9% from 48.5% in 2006 primarily due to the expansion of third
party branded products which have lower gross margins compared to Polo branded
products. Operating expenses increased $10.9 million primarily due to
increased store operating costs due to newly opened or relocated stores and
incremental marketing costs. In addition, foreign currency exchange
rates on the translation of European operating expenses into U.S. dollars
increased our operating costs by approximately $3.1 million. Operating income in
our PoloExpress segment increased by $0.3 million in fiscal 2007 as compared to
fiscal 2006. The increase in fiscal 2007 was due primarily to
increased sales which more than offset the slightly lower gross margin and the
increased operating expenses.
Sales
in fiscal 2006 increased by $1.6 million, or 1.5%, from fiscal
2005. Sales gains resulted from 4 stores newly opened or relocated in
fiscal 2006 and the incremental sales resulting from the full year impact of 3
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.
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, 2007,
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 increased by $12.1 million, or 10.4%, from fiscal
2006 to fiscal 2007. Sales at Hein Gericke retail locations increased $16.9
million, or 15.8%, in 2007, as compared to 2006. The increase in Hein Gericke
retail sales reflected a same store sales increase of 7.1% for
2007. The improvement in retail sales was offset by a $4.8 million
decrease in sales at Fairchild Sports USA, whose operations were substantially
downsized in late fiscal 2006. Foreign currency exchange rates on the
translation of European sales into U.S. dollars changed favorably and increased
our revenues by approximately $6.8 million in 2007 compared to fiscal 2006.
Retail sales per square meter was approximately $2,178 in 2007 compared to
$2,017 in 2006. Gross margin in 2007 increased to 40.0% from 39.1% in 2006
primarily due to the change in product mix. Retail sales, which have
a higher gross margin percentage increased in fiscal 2007 compared to fiscal
2006. This increase was offset by the decrease in sales at Fairchild Sports USA,
which have a much lower gross margin percentage. Gross margin in our retail
operations decreased to 41.0% in 2007 from 42.8% in 2006 primarily due to
efforts to reduce inventory levels in the fourth quarter of fiscal
2007. Operating expenses increased $9.7 million primarily due to
increased store operating costs due to newly opened or relocated stores and
incremental marketing costs. In addition, foreign currency exchange
rates on the translation of European operating expenses into U.S. Dollars
increased our operating costs by approximately $4.5 million. Finally,
operating costs of Fairchild Sports USA decreased $2.0 million in fiscal 2007
compared to fiscal 2006 due to the operational downsizing in late fiscal
2006. The operating results in our Hein Gericke segment decreased by
$3.8 million in fiscal 2007 as compared to fiscal 2006 as increased sales were
more than offset by higher operating costs and the lower gross margin percentage
on our retail operations due to our efforts to reduce inventory
levels. In addition, the operating results in fiscal 2007 compared to
fiscal 2006 were negatively impacted by $0.9 million in foreign currency losses
resulting from a weakening U.S. Dollar and British Pound Sterling compared to
the Euro.
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 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.
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 increased by $6.5 million, or 8.1%, for fiscal 2007
compared to fiscal 2006. This increase reflected an overall
improvement in the areas of the aerospace industry for which we provide
products. 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.
Gross
margin remained consistent at 28.4% for fiscal 2007 compared to 28.5% for fiscal
2006. This stability in the gross margin was due primarily to
consistency in the segment’s cost structure relative to
revenue. Gross margin for fiscal 2006 increased to 28.5% from 25.5%
for fiscal 2005 principally due to a shift in product mix to higher margin
products in fiscal 2006 compared to fiscal 2005.
Operating
income increased by $0.6 million in fiscal 2007 compared to fiscal 2006. The
increase in operating income resulted from a stable gross margin for fiscal 2007
compared to fiscal 2006, offset partially by the increase in selling, general,
and administrative expenses over the same period. Operating income
remained flat at $6.0 million for fiscal 2006 compared to fiscal 2005. The
stable operating income resulted from a 3.0% improvement in gross margin for
fiscal 2006 compared to fiscal 2005, which offset the decrease in sales over the
same period.
Corporate
and Other
During
fiscal 2007, our other operations consisted of a 208,000 square foot
manufacturing facility located in Fullerton, California that we owned and leased
to Alcoa, and a 58,000 square foot manufacturing facility located in Huntington
Beach, California that we owned and leased to PCA Aerospace. On
October 31, 2007, we sold our Fullerton property to Alcoa for $19.0
million. Also in October 2007, we amended our lease with PCA
Aerospace whereby we can cause PCA Aerospace to purchase the Huntington Beach
property at the greater of fair market value or $5.0 million under a put option
we hold, which can be exercised at any time through January 31,
2012. In November 2007, we exercised our put
option. Accordingly, PCA Aerospace has 6 months to purchase the
property from us at fair market value, which we have agreed with PCA Aerospace
will be $7.3 million.
The
operating loss at corporate increased by $10.7 million in fiscal 2007 compared
to fiscal 2006. In August 2007, we purchased annuities to settle the
liabilities of an overfunded pension plan, which resulted in net remaining
assets of approximately $8.7 million. This action triggered settlement
accounting, which required us to expense approximately $26.2 million relating to
the previous unrecognized actuarial losses and the costs associated with
purchasing annuity contracts. In September 2007, we would have been
required to recognize approximately $17.0 million as a reduction to
stockholders' equity upon the adoption of SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Pension Plans, to recognize
actuarial losses which were previously amortizable under the prior accounting
rules. In September 2007, the settled pension plan, including its $8.7 million
remaining net assets, was merged with one of our underfunded pension
plans. This action was partially offset by our decision to amend
certain retiree medical plans to eliminate subsidized supplemental Medicare
insurance coverage for the current and future retirees of our non-class action
retiree medical plans, effective January 1, 2008. This action provides
income recognition of approximately $11.8 million, as a result of the reduction
in our postretirement benefits liabilities. Additionally, fiscal 2006 benefited
by $5.1 million from the settlement of shareholder derivative litigation.
Excluding these items, operating income at corporate actually decreased by $9.2
million, primarily due to reductions in salaries, travel expenses, and insurance
costs. 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.
FINANCIAL CONDITION, LIQUIDITY AND
CAPITAL RESOURCES
Our
combined debt, which includes debt of discontinued operations, and equity
(“capitalization”) as of September 30, 2007 and 2006 was $167.9 million and
$180.0 million, respectively. The fiscal 2007 change in capitalization included
a net decrease of $15.9 million in debt resulting from net debt repayment of
$19.4 million including partial repayment of the GoldenTree
note. Stockholders’ equity increased by $3.9 million, due primarily
to a foreign currency translation increase of $10.0 million and a $0.1 million
unrealized gain on available-for-sale securities, offset by our $0.3 million
reported net loss and a $5.9 million increase in minimum pension
liability. Our combined cash and investment balances totaled
$87.1 million on September 30, 2007, compared to $130.4 million on September 30,
2006, and included restricted cash and investments of $71.8 million and $67.0
million at September 30, 2007 and September 30, 2006,
respectively. Total capitalization as of September 30, 2006 and 2005
was $180.0 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 GoldenTree term loan; and
approximately $10.5 million of debt repayments, net of additional
borrowings. Stockholders’ equity decreased by $22.3 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.
Net
cash provided by operating activities for fiscal 2007 was $10.4
million. Excluding $47.2 million of net proceeds from the sale of
investments classified as “trading securities”, our net cash used for operating
activities for fiscal 2007 was $36.8 million. Our adjusted net cash
used for operating activities primarily resulted from a $3.2 million increase in
restricted cash and a $15.6 million net decrease in our pension and healthcare
liabilities. 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”, $12.7
million increase in inventory, a $11.9 million decrease in pension and
healthcare liabilities, and a $3.1 million increase in prepaid expenses and
other current assets, offset partially by a $14.4 million increase in accounts
payable and accrued liabilities, a $13.0 million increase in net other
noncurrent liabilities, and a $1.0 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 uses of cash
in 2005 included a $0.3 million increase in inventory, a $7.5 million
decrease in accounts payable and accrued liabilities and a $4.1 million decrease
in net other noncurrent liabilities, offset partially by a $9.3 million decrease
in accounts receivable, an $8.2 million increase in pension and healthcare
liabilities, and a $0.4 million decrease in prepaid expenses and other current
assets. 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 provided by investing activities for fiscal 2007 was $9.4 million, and
included primarily $12.5 million received from Alcoa as additional earn-out
proceeds from our December 2002 sale of our former fastener business, offset by
$11.7 million of capital expenditures. 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 financing activities for fiscal 2007 was $19.5 million, which
reflected a $37.3 million net decrease in debt for principal repayments, offset
partially by $17.8 million from issuance of debt. 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.
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 February 2009.
For
the year ended September 30, 2007, we reported a loss from continuing operations
of $39.1 million compared to a loss of $33.9 million in fiscal 2006. The fiscal
2007 loss from continuing operations includes the $26.2 million pre-tax loss
associated with the settlement of our pension plan offset partially by the $11.8
million gain recognized from the elimination of postretirement
benefits. The fiscal 2006 loss from continuing operations benefited
from the settlement of the shareholder derivative litigation, which improved our
results by approximately $5.1 million. Excluding these items, the reduction in
the loss from continuing operations resulted primarily from stronger
performances provided by our PoloExpress segment and our Aerospace segment. Our
net cash provided by operating activities in fiscal 2007 primarily resulted from
$47.2 million in proceeds from the sale of investments classified as “trading
securities”, without which we would have experienced an operating cash outflow
of $36.8 million. This operating cash outflow principally resulted
from the inventory demands of our PoloExpress and Hein Gericke businesses and
our consolidated operating losses. As of September 30, 2007, we have
unrestricted cash and investments of $15.2 million, and available borrowing
under lines of credit of $6.9 million.
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 remained below $75.0 million as of March 31,
2007. Accordingly, on September 30, 2007, we will continue to be
deemed a non-accelerated filer in accordance with the United States Securities
and Exchange Commission regulations and will not be required to have an external
audit of our internal controls under Section 404 of the Sarbanes-Oxley Act of
2002 in fiscal 2007. 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
increased our 2006 audit fees to $3.5 million.
Previously,
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. Additionally, in December 2007, a fund known as the Phoenix Group
led by Phillip Sassower, purchased approximately 30% of our outstanding Class A
common stock through a tender offer. In his offering, Mr. Sassower indicated he
would be taking an active shareholder role to pursue the enhancement of value
for our shareholders, and provide the Company with doors for which it may access
additional capital. We will welcome the Phoenix Group and look forward to
listening, and if appropriate, acting upon their ideas which could further
enhance value for our shareholders.
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 performance 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 one or more of our core businesses, or other means. Should these
actions be insufficient, we may be forced to liquidate other non essential
assets and significantly reduce overhead expenses.
Our
capital expenditures are principally discretionary. We are not
obligated to incur significant future capital expenditures under any contractual
arrangements. We expect to incur approximately $13.1 million for capital
expenditures in fiscal 2008.
On
September 30, 2007, approximately $0.8 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, 2007, 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)
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
Debt
|
|
$ |
48,511 |
|
|
$ |
3,864 |
|
|
$ |
21,903 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
74,278 |
|
Estimated
interest costs
|
|
|
4,797 |
|
|
|
2,900 |
|
|
|
1,608 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,305 |
|
Capital
lease obligations
|
|
|
724 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
724 |
|
Operating
lease commitments
|
|
|
27,833 |
|
|
|
22,977 |
|
|
|
17,126 |
|
|
|
13,717 |
|
|
|
11,099 |
|
|
|
54,143 |
|
|
|
146,895 |
|
Pension
contributions
|
|
|
4,700 |
|
|
|
6,500 |
|
|
|
6,500 |
|
|
|
6,300 |
|
|
|
6,100 |
|
|
|
15,300 |
|
|
|
45,400 |
|
Postretirement
benefits
|
|
|
2,553 |
|
|
|
2,346 |
|
|
|
2,276 |
|
|
|
2,190 |
|
|
|
2,097 |
|
|
|
8,715 |
|
|
|
20,177 |
|
Acquire
remaining interest in PoloExpress
|
|
|
15,369 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
15,369 |
|
Total
contractual cash obligations
|
|
$ |
104,487 |
|
|
$ |
38,587 |
|
|
$ |
49,413 |
|
|
$ |
22,207 |
|
|
$ |
19,296 |
|
|
$ |
78,158 |
|
|
$ |
312,148 |
|
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, 2007, we had contingent liabilities of $3.5 million on
commitments related to outstanding letters of credit.
Our
operations enter into purchase commitments in the normal course of
business.
We
have $41.5 million classified as Other accrued liabilities at September 30,
2007, including $15.4 million due to purchase the remaining 7.5% interest in
PoloExpress in April 2008. The remaining $26.1 million does not have
specific payment terms or other similar contractual arrangements. On February
28, 2008, Mr. Klaus Esser exercised his put option requiring the company to
acquire the remaining 7.5% interest in PoloExpress.
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 $10.9 million at September 30, 2007. 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 $32.8 million due to the expiration of the related
statutes of limitation and closure of the related tax periods and increased by
$0.5 million of interest expense.
At
September 30, 2007, we have $4.8 million of unused alternative minimum tax
credit carryforwards that do not expire and $189.9 million of federal operating
loss carryforwards expiring as follows: $8.8 million in 2018; $59.8 million in
2019; $51.3 million in 2020; $4.2 million in 2021; $11.4 million in 2023; $21.9
million in 2024: $25.4 million in 2025; and $7.1 million in 2027. 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 $135.6
million arising in years prior to 2004 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 $30.2 million of foreign
income tax loss and $28.1 million of foreign trade tax loss carryforwards that
have no expiration period and other foreign income tax loss of $26.8 million
with a full valuation allowance.
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
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
SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities, permitting
entities to elect fair value measurement for many financial instruments and
certain other items. Unrealized gains and losses on designated items will be
recognized in earnings at each subsequent period. SFAS No. 159 also establishes
presentation and disclosure requirements for similar types of assets and
liabilities measured at fair value. We are required to adopt this statement in
October 2008 and we are currently evaluating the potential impact to our
future results of operations, financial position, and cash flows.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value in
GAAP, and expands disclosures about fair value measurements. SFAS No.
157 does not require any new fair value measurements, but provides guidance on
how to measure fair value by providing a fair value hierarchy used to classify
the source of the information. We are required to adopt this statement in
October 2008, except as it relates to certain non-financial assets and
liabilities for which SFAS No. 157 is effective in fiscal 2010, and we
are currently evaluating the potential impact to our future results of
operations, financial position, and cash flows.
In
July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109. 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. 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 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 No. 48. We are required to
adopt this interpretation in October 2007, and we are currently evaluating the
impact this new standard will have on our future results of operations,
financial position, and cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
We
are exposed to certain market risks as part of our ongoing business operations,
including risks from changes in interest rates and foreign currency exchange
rates that could impact our financial condition, results of operations and cash
flows. We manage our exposure to these and other market risks through regular
operating and financing activities. We may use derivative financial instruments
on a limited basis as additional risk management tools and not for speculative
investment purposes.
Interest Rate Risk: In May
2004, we issued a floating rate note with a principal amount of €25.0 million.
Embedded within the promissory note agreement is an interest rate cap protecting
one half of the €25.0 million borrowed. The embedded interest rate cap limits to
6% the 3-month EURIBOR interest rate that we must pay on the promissory note. We
paid approximately $0.1 million to purchase the interest rate cap. In accordance
with SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, 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, 2007, 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 2007, we estimate that
approximately 74% of our total revenues were derived from customers outside of
the United States, with approximately 74% of our total revenues denominated in
currencies other than the U.S. Dollar. We estimate that revenue and operating
expenses for fiscal 2007 were higher by $19.3 million and $9.4 million,
respectively, as a result of changes in exchange rates compared to fiscal 2006.
At September 30, 2007, we had $52.2 million of working capital denominated
in foreign currencies. At September 30, 2007, 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,
2007:
|
|
|
|
|
Total
|
|
Euro
|
British
Pound
|
Swiss
Franc
|
Other
|
Exposure
|
Revenues
|
78%
|
18%
|
4%
|
0%
|
100%
|
Operating
Expenses
|
80%
|
17%
|
3%
|
0%
|
100%
|
Working
Capital
|
82%
|
14%
|
2%
|
2%
|
100%
|
A
hypothetical 10% strengthening of the U.S. Dollar during fiscal 2007 versus the
foreign currencies in which we have exposure would have reduced revenue by
approximately $24.0 million and reduced operating expenses by approximately
$11.6 million, resulting in a $0.9 million improvement in our
operating loss as compared to what was actually reported. Working capital at
September 30, 2007, would have been approximately $4.7 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 2007. However, we cannot assure you that future inflation
would not have an adverse impact on our operating results and financial
condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
The
following consolidated financial statements of the Company and the report of our
independent auditors, are set forth below.
Supplementary
information regarding “Quarterly Financial Data (Unaudited)” is set forth under
Item 8 in Note 16 to Consolidated Financial Statements.
Board of
Directors and Stockholders
The
Fairchild Corporation
McLean,
Virginia
We have
audited the accompanying consolidated balance sheet of The Fairchild Corporation
(the Company) as of September 30, 2007 and the related consolidated statements
of operations, stockholders’ equity, and cash flows for the year then
ended. We have also audited the schedule listed in Item
15(a)(2). These financial statements and the schedule are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements and the schedule based on our
audit.
We
conducted our audit 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 and the schedule are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and the schedule, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements and
schedule. We believe that our audit provides 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 at
September 30, 2007, and the results of its operations and its cash flows for the
year then ended, in
conformity with accounting principles generally accepted in the United States of
America.
Also, in
our opinion, the schedule presents fairly, in all material respects, the
information set forth therein for the year ended September 30,
2007.
As
discussed in Note 5 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 158, Employer’s Accounting for Defined
Benefit Pension and Other Postretirement Plans – An Amendment of FASB Statements No.
87, 88, 106, and 132(R).
/s/ BDO
Seidman, LLP
Bethesda,
Maryland
February 15,
2008
The Board
of Directors and Stockholders of
The
Fairchild Corporation:
We have
audited the accompanying consolidated balance sheet of The Fairchild Corporation
and subsidiaries (the “Company”) as of September 30, 2006, and the related
consolidated statements of operations, stockholders’ equity and cash flows for
each of the years in the two-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) as of September 30, 2006
and for each of the years in the two-year period ended September 30,
2006. 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 the results of their operations
and their cash flows for each of the years in the two-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.
/s/ KPMG
LLP
McLean,
Virginia
August
13, 2007
THE
FAIRCHILD CORPORATION AND SUBSIDIARIES
(In
thousands)
ASSETS
|
|
|
September
30,
|
|
|
2007
|
|
|
2006
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents - unrestricted
|
|
$ |
9,527 |
|
|
$ |
8,541 |
|
Cash
and cash equivalents - restricted
|
|
|
3,243 |
|
|
|
.- |
|
Short-term
investments - unrestricted
|
|
|
2,192 |
|
|
|
50,510 |
|
Short-term
investments - restricted
|
|
|
47,411 |
|
|
|
6,002 |
|
Accounts
receivable-trade, net
|
|
|
16,566 |
|
|
|
16,927 |
|
Inventories,
net
|
|
|
118,205 |
|
|
|
106,718 |
|
Prepaid
expenses and other current assets
|
|
|
10,085 |
|
|
|
10,795 |
|
Total
Current Assets
|
|
|
207,229 |
|
|
|
199,493 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
64,390 |
|
|
|
58,698 |
|
Goodwill
|
|
|
13,721 |
|
|
|
14,128 |
|
Amortizable
intangible assets, net of accumulated amortization of $2,322 and
$1,673
|
|
|
892 |
|
|
|
1,279 |
|
Non-amortizable
intangible assets
|
|
|
33,509 |
|
|
|
30,969 |
|
Prepaid
pension assets
|
|
|
.- |
|
|
|
33,373 |
|
Deferred
loan fees
|
|
|
1,537 |
|
|
|
3,170 |
|
Long-term
investments - unrestricted
|
|
|
3,499 |
|
|
|
4,370 |
|
Long-term
investments - restricted
|
|
|
21,190 |
|
|
|
60,949 |
|
Notes
receivable
|
|
|
3,459 |
|
|
|
5,396 |
|
Other
assets
|
|
|
7,928 |
|
|
|
3,304 |
|
TOTAL
ASSETS
|
|
$ |
357,354 |
|
|
$ |
415,129 |
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
2007
|
|
|
2006
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
Bank
notes payable and current maturities of long-term debt
|
|
$ |
49,235 |
|
|
$ |
25,492 |
|
Accounts
payable
|
|
|
32,128 |
|
|
|
26,325 |
|
Accrued
liabilities:
|
|
|
|
|
|
|
|
|
Salaries,
wages and commissions
|
|
|
10,521 |
|
|
|
10,044 |
|
Insurance
|
|
|
6,224 |
|
|
|
7,357 |
|
Interest
|
|
|
697 |
|
|
|
1,810 |
|
Other
accrued liabilities
|
|
|
41,468 |
|
|
|
28,304 |
|
Income
taxes
|
|
|
186 |
|
|
|
2,314 |
|
Current
liabilities of discontinued operations
|
|
|
- |
|
|
|
62 |
|
Total
Current Liabilities
|
|
|
140,459 |
|
|
|
101,708 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current maturities
|
|
|
25,767 |
|
|
|
65,450 |
|
Other
long-term liabilities
|
|
|
15,247 |
|
|
|
31,750 |
|
Pension
liabilities
|
|
|
34,825 |
|
|
|
40,622 |
|
Retiree
health care liabilities
|
|
|
16,231 |
|
|
|
26,008 |
|
Deferred
tax liability
|
|
|
4,884 |
|
|
|
4,530 |
|
Noncurrent
income taxes
|
|
|
10,936 |
|
|
|
39,923 |
|
Noncurrent
liabilities of discontinued operations
|
|
|
16,120 |
|
|
|
16,120 |
|
TOTAL
LIABILITIES
|
|
|
264,469 |
|
|
|
326,111 |
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
Class
A common stock, $0.10 par value; 40,000 shares authorized,
|
|
|
|
|
|
|
|
|
30,480
shares issued and 22,605 shares outstanding; entitled to one vote per
share
|
|
|
3,047 |
|
|
|
3,047 |
|
Class
B common stock, $0.10 par value; 20,000 shares authorized,
|
|
|
|
|
|
|
|
|
2,621
shares issued and outstanding; entitled to ten votes per
share
|
|
|
262 |
|
|
|
262 |
|
Paid-in
capital
|
|
|
232,639 |
|
|
|
232,612 |
|
Treasury
stock, at cost, 7,875 shares of Class A common stock
|
|
|
(76,352 |
) |
|
|
(76,352 |
) |
Accumulated
deficit
|
|
|
(16,021 |
) |
|
|
(15,680 |
) |
Note
due from stockholder
|
|
|
(43 |
) |
|
|
(43 |
) |
Accumulated
other comprehensive loss
|
|
|
(50,647 |
) |
|
|
(54,828 |
) |
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
92,885 |
|
|
|
89,018 |
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
357,354 |
|
|
$ |
415,129 |
|
|
|
|
|
|
|
|
|
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
THE
FAIRCHILD CORPORATION AND SUBSIDIARIES
(In
thousands, except share and per share data)
|
|
Years
Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
355,008 |
|
|
$ |
308,641 |
|
|
$ |
341,587 |
|
Rental
revenue
|
|
|
950 |
|
|
|
950 |
|
|
|
656 |
|
|
|
|
355,958 |
|
|
|
309,591 |
|
|
|
342,243 |
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
213,241 |
|
|
|
185,712 |
|
|
|
211,582 |
|
Cost
of rental revenue
|
|
|
230 |
|
|
|
238 |
|
|
|
169 |
|
Selling,
general & administrative
|
|
|
186,860 |
|
|
|
155,364 |
|
|
|
163,734 |
|
Other
income, net
|
|
|
(4,476 |
) |
|
|
(5,336 |
) |
|
|
(5,497 |
) |
Amortization
of intangibles
|
|
|
649 |
|
|
|
542 |
|
|
|
560 |
|
|
|
|
396,504 |
|
|
|
336,520 |
|
|
|
370,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
LOSS
|
|
|
(40,546 |
) |
|
|
(26,929 |
) |
|
|
(28,305 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(14,278 |
) |
|
|
(11,498 |
) |
|
|
(13,143 |
) |
Interest
income
|
|
|
2,830 |
|
|
|
2,997 |
|
|
|
1,716 |
|
Net
interest expense
|
|
|
(11,448 |
) |
|
|
(8,501 |
) |
|
|
(11,427 |
) |
Investment
income
|
|
|
6,019 |
|
|
|
2,923 |
|
|
|
5,920 |
|
Fair
market value increase in interest rate contract
|
|
|
- |
|
|
|
836 |
|
|
|
5,942 |
|
Loss
from continuing operations before income taxes
|
|
|
(45,975 |
) |
|
|
(31,671 |
) |
|
|
(27,870 |
) |
Income
tax (provision) benefit
|
|
|
6,768 |
|
|
|
(2,176 |
) |
|
|
1,048 |
|
Equity
in income (loss) of affiliates, net
|
|
|
89 |
|
|
|
(43 |
) |
|
|
(487 |
) |
Loss
from continuing operations
|
|
|
(39,118 |
) |
|
|
(33,890 |
) |
|
|
(27,309 |
) |
Net
loss from discontinued operations
|
|
|
(6,469 |
) |
|
|
(14,405 |
) |
|
|
(4,806 |
) |
Net
gain on disposal of discontinued operations
|
|
|
45,315 |
|
|
|
13,600 |
|
|
|
13,575 |
|
Income
tax provision from discontinued operations
|
|
|
(69 |
) |
|
|
(2,604 |
) |
|
|
(825 |
) |
NET
LOSS
|
|
$ |
(341 |
) |
|
$ |
(37,299 |
) |
|
$ |
(19,365 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED
EARNINGS (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(1.55 |
) |
|
$ |
(1.34 |
) |
|
$ |
(1.08 |
) |
Net
loss from discontinued operations
|
|
|
(0.26 |
) |
|
|
(0.58 |
) |
|
|
(0.19 |
) |
Net
gain on disposal of discontinued operations
|
|
|
1.80 |
|
|
|
0.54 |
|
|
|
0.54 |
|
Income
tax provision from discontinued operations
|
|
|
- |
|
|
|
(0.10 |
) |
|
|
(0.03 |
) |
NET
LOSS
|
|
$ |
(0.01 |
) |
|
$ |
(1.48 |
) |
|
$ |
(0.76 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
25,226 |
|
|
|
25,226 |
|
|
|
25,224 |
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
THE
FAIRCHILD CORPORATION AND SUBSIDIARIES
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Class
A
|
|
|
Class
B
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
Notes
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Paid-in
|
|
|
Treasury
|
|
|
(Accumulated
|
|
|
Due
From
|
|
|
Comprehensive
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Stock
|
|
|
Deficit)
|
|
|
Stockholders
|
|
|
Loss
|
|
|
Total
|
|
Balance,
October 1, 2004
|
|
$ |
3,038 |
|
|
$ |
262 |
|
|
$ |
232,766 |
|
|
$ |
(76,459 |
) |
|
$ |
40,984 |
|
|
$ |
(1,061 |
) |
|
$ |
(60,634 |
) |
|
$ |
138,896 |
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
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 |
|
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 unrecognized prior service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
over
additional pension liability
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,051 |
|
|
|
8,051 |
|
Net
unrealized holding changes
on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available-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 |
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(341 |
) |
|
|
- |
|
|
|
- |
|
|
|
(341 |
) |
Cumulative
translation
adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,998 |
|
|
|
9,998 |
|
Excess
of additional pension
liability over
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrecognized
prior service cost
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(864 |
) |
|
|
(864 |
) |
Net
unrealized holding changes
on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available-for-sale
securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
86 |
|
|
|
86 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,879 |
|
Compensation
expense from stock options
|
|
|
- |
|
|
|
- |
|
|
|
27 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
27 |
|
Adjustment
to initially apply SFAS No.
158
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5,039 |
) |
|
|
(5,039 |
) |
Balance,
September 30,
2007
|
|
$ |
3,047 |
|
|
$ |
262 |
|
|
$ |
232,639 |
|
|
$ |
(76,352 |
) |
|
$ |
(16,021 |
) |
|
$ |
(43 |
) |
|
$ |
(50,647 |
) |
|
$ |
92,885 |
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
THE
FAIRCHILD CORPORATION AND SUBSIDIARIES
(In
thousands)
|
|
Years
Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(341 |
) |
|
$ |
(37,299 |
) |
|
$ |
(19,365 |
) |
Depreciation
and amortization
|
|
|
9,006 |
|
|
|
7,523 |
|
|
|
7,873 |
|
Deferred
loan fees amortization
|
|
|
1,770 |
|
|
|
1,138 |
|
|
|
1,329 |
|
Provision
for doubtful accounts
|
|
|
624 |
|
|
|
1,002 |
|
|
|
629 |
|
Reserve
for inventory obsolescence
|
|
|
1,412 |
|
|
|
768 |
|
|
|
3,378 |
|
Deferred
income taxes
|
|
|
(6,669 |
) |
|
|
1,834 |
|
|
|
(2,225 |
) |
Gain
on collection of note receivable
|
|
|
(2,110 |
) |
|
|
- |
|
|
|
- |
|
(Gain)
loss on sale of property, plant, and equipment, net
|
|
|
271 |
|
|
|
(8 |
) |
|
|
(645 |
) |
Compensation
expense from stock options
|
|
|
27 |
|
|
|
155 |
|
|
|
- |
|
Loss
on sale of affiliates and equity in (income) loss of
affiliates
|
|
|
(89 |
) |
|
|
43 |
|
|
|
487 |
|
Unrealized
holding gain on interest rate contract
|
|
|
- |
|
|
|
(836 |
) |
|
|
(5,942 |
) |
Loss
from impairments
|
|
|
- |
|
|
|
- |
|
|
|
2,894 |
|
Realized
gain from sale and impairment of investments
|
|
|
(5,557 |
) |
|
|
(1,812 |
) |
|
|
(7,022 |
) |
Net
pension and postretirement settlement charge
|
|
|
14,540 |
|
|
|
- |
|
|
|
- |
|
Net
sales (purchases) of trading securities
|
|
|
47,215 |
|
|
|
(33,025 |
) |
|
|
8,102 |
|
Change
in cash and cash equivalents - restricted
|
|
|
(3,243 |
) |
|
|
- |
|
|
|
- |
|
Change
in accounts receivable
|
|
|
55 |
|
|
|
950 |
|
|
|
9,288 |
|
Change
in inventories
|
|
|
(3,166 |
) |
|
|
(12,709 |
) |
|
|
(332 |
) |
Change
in prepaid expenses and other current assets
|
|
|
3,092 |
|
|
|
(3,054 |
) |
|
|
417 |
|
Change
in other non-current assets and liabilities
|
|
|
(13,668 |
) |
|
|
12,994 |
|
|
|
(4,076 |
) |
Change
in accounts payable and accrued liabilities
|
|
|
9,880 |
|
|
|
14,405 |
|
|
|
(7,548 |
) |
Change
in pension and health care liabilities
|
|
|
(30,114 |
) |
|
|
(11,927 |
) |
|
|
8,160 |
|
Non-cash
charges and working capital changes of discontinued
operations
|
|
|
(12,562 |
) |
|
|
(11,915 |
) |
|
|
(8,462 |
) |
Net
cash provided by (used for) operating activities
|
|
|
10,373 |
|
|
|
(71,773 |
) |
|
|
(13,060 |
) |
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(11,729 |
) |
|
|
(7,777 |
) |
|
|
(11,668 |
) |
Proceeds
from sale of property, plant, and equipment
|
|
|
29 |
|
|
|
61 |
|
|
|
10,502 |
|
Purchases
of available-for-sale investment securities
|
|
|
(29,199 |
) |
|
|
(39,716 |
) |
|
|
(14,527 |
) |
Proceeds
from the sale of available-for-sale investment securities
|
|
|
35,345 |
|
|
|
43,955 |
|
|
|
24,059 |
|
Equity
(divestiture) investment in affiliates
|
|
|
- |
|
|
|
- |
|
|
|
(400 |
) |
Acquisitions,
net of cash acquired
|
|
|
(350 |
) |
|
|
- |
|
|
|
- |
|
Net
proceeds received from the sale of discontinued operations
|
|
|
12,500 |
|
|
|
54,561 |
|
|
|
18,500 |
|
Changes
in notes receivable
|
|
|
2,845 |
|
|
|
4,001 |
|
|
|
963 |
|
Investing
activities of discontinued operations
|
|
|
- |
|
|
|
(98 |
) |
|
|
(627 |
) |
Net
cash provided by investing activities
|
|
|
9,441 |
|
|
|
54,987 |
|
|
|
26,802 |
|
Cash flows from
financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of debt
|
|
|
17,830 |
|
|
|
50,068 |
|
|
|
29,894 |
|
Debt
repayments
|
|
|
(37,260 |
) |
|
|
(30,589 |
) |
|
|
(43,395 |
) |
Purchase
of treasury stock
|
|
|
- |
|
|
|
- |
|
|
|
(193 |
) |
Payment
of financing fees
|
|
|
(33 |
) |
|
|
(2,403 |
) |
|
|
(377 |
) |
Proceeds
from stockholder loan repayments
|
|
|
- |
|
|
|
66 |
|
|
|
952 |
|
Payment
of interest rate contract
|
|
|
- |
|
|
|
(4,310 |
) |
|
|
- |
|
Financing
activities of discontinued operations
|
|
|
- |
|
|
|
(504 |
) |
|
|
(688 |
) |
Net
cash provided by (used for) financing activities
|
|
|
(19,463 |
) |
|
|
12,328 |
|
|
|
(13,807 |
) |
Net
change in cash and cash equivalents
|
|
|
(351 |
) |
|
|
(4,458 |
) |
|
|
(65 |
) |
Effect
of exchange rate changes on cash
|
|
|
635 |
|
|
|
417 |
|
|
|
(202 |
) |
Cash
and cash equivalents, beginning of the year
|
|
|
8,541 |
|
|
|
12,582 |
|
|
|
12,849 |
|
Cash
and cash equivalents, end of the year
|
|
$ |
9,527 |
|
|
$ |
8,541 |
|
|
$ |
12,582 |
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
THE
FAIRCHILD CORPORATION AND SUBSIDIARIES
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 Airport
Plaza shopping center, Royal Oaks landfill, and Fairchild Aerostructures, 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 “2007”, “2006”, or “2005” 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 2007 presentation.
During
fiscal 2007, we corrected the carrying value of the liability associated with
our obligation to acquire the remaining 7.5% of PoloExpress to reflect the
liability at its estimated present value at inception in accordance with
Accounting Principles Board Opinion No. 21,
Interest on Receivables and
Payables. The correction resulted in a decrease in intangible
assets resulting from our acquisition of Hein Gericke and PoloExpress of
approximately $1.9 million and a corresponding decrease in the carrying value of
the liability. As a result of this correction, we recognized $1.3 million of
interest expense during fiscal 2007 which pertained to periods prior to October
1, 2006. In addition, the decrease in intangible assets resulted in a
reduction in our foreign deferred tax liability of approximately $0.3 million
which we recognized as a tax benefit in 2007. Management believes the impact of
this error is immaterial to each applicable period.
Liquidity: The Company has
experienced losses from operations and negative operating cash flows, after
adjusting for proceeds from sale of securities classified as “trading”, in each
of the years for the three years ended September 30, 2007. 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 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, net of
allowance for returns. Sales and related costs in our Aerospace segment are
recognized on shipment of products and when collection is probable. Revenue from
repair and overhaul services is immaterial. 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.
Concentrations of 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 24% of our products throughout the world to a large number of
customers, primarily in the aerospace industry. Our Aerospace segment accounted
for 26% and 25% of total revenues in 2006 and 2005, respectively. 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.
In
2007, 2006, and 2005, our PoloExpress segment purchased approximately 9%, 17%,
and 15%, respectively, of its products from a single supplier. In
2007, 2006, and 2005, our Hein Gericke segment purchased approximately 14%, 11%,
and 26%, respectively, of its products from the same supplier as our PoloExpress
segment. In 2007, 2006, and 2005, our Aerospace segment purchased
approximately 14%, 12%, and 28%, respectively, of its products from a single
supplier.
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)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Interest
|
|
$ |
15,391 |
|
|
$ |
10,131 |
|
|
$ |
13,488 |
|
Income
taxes
|
|
|
2,287 |
|
|
|
260 |
|
|
|
520 |
|
Restricted
Cash and Investments: On September 30, 2007 and 2006, we had restricted
cash and investments of $71.8 million and $67.0 million, respectively, all of
which are maintained as collateral for certain debt facilities, 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, 2007 and 2006 depending
upon the length of the restriction period and restricted investments 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, United States government
securities, and corporate bonds 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)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Beginning
Balance
|
|
$ |
1,083 |
|
|
$ |
2,679 |
|
|
$ |
2,775 |
|
Charges
to cost and expenses
|
|
|
624 |
|
|
|
1,002 |
|
|
|
629 |
|
Charges
(credits) to other accounts (a)
|
|
|
83 |
|
|
|
41 |
|
|
|
(183 |
) |
Amounts
written off
|
|
|
(588 |
) |
|
|
(2,639 |
) |
|
|
(542 |
) |
Ending
Balance
|
|
$ |
1,202 |
|
|
$ |
1,083 |
|
|
$ |
2,679 |
|
(a)
|
Represent recoveries
of amounts written off in prior periods and foreign currency translation
adjustments.
|
Inventories:
Inventories are stated at the lower of cost or net realizable value. Cost is
determined using the first-in, first-out ("FIFO") method. Inventories consisted
of the following:
|
|
September
30,
|
|
(In
thousands)
|
2007
|
|
2006
|
|
Finished
goods
|
|
$ |
117,704 |
|
|
$ |
106,718 |
|
Raw
materials and work-in-process
|
|
|
501 |
|
|
|
- |
|
Total
inventories
|
|
$ |
118,205 |
|
|
$ |
106,718 |
|
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)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Beginning
Balance
|
|
$ |
15,223 |
|
|
$ |
15,118 |
|
|
$ |
13,681 |
|
Charges
to cost and expenses
|
|
|
1,412 |
|
|
|
768 |
|
|
|
3,378 |
|
Charges
(credits) to other accounts (a)
|
|
|
672 |
|
|
|
196 |
|
|
|
(616 |
) |
Amounts
written off
|
|
|
(389 |
) |
|
|
(859 |
) |
|
|
(1,325 |
) |
Ending
Balance
|
|
$ |
16,918 |
|
|
$ |
15,223 |
|
|
$ |
15,118 |
|
(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. Depreciation is computed using
the straight-line method for financial reporting purposes. Building
and improvements are depreciated on a straight-line basis over an estimated
useful life of 30 years. 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. Our transportation vehicles are depreciated over a 5 to 15
year range. Furniture and fixtures is depreciated over a 3 to 10 year
range. Ordinary repairs and maintenance are expensed as incurred and
major replacements and improvements are capitalized. Depreciation
expense was $8.4 million in fiscal 2007, $7.0 million in fiscal 2006, and $7.4
million in fiscal 2005. Property, plant and equipment consisted of the
following:
|
|
September
30,
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
Land
|
|
$ |
21,607 |
|
|
$ |
21,606 |
|
Building
and improvements
|
|
|
18,724 |
|
|
|
11,482 |
|
Machinery
and equipment
|
|
|
17,948 |
|
|
|
14,866 |
|
Transportation
vehicles
|
|
|
7,150 |
|
|
|
7,134 |
|
Furniture
and fixtures
|
|
|
29,536 |
|
|
|
24,838 |
|
Construction
in progress
|
|
|
3,434 |
|
|
|
3,761 |
|
Property,
plant and equipment, at cost
|
|
|
98,399 |
|
|
|
83,687 |
|
Less:
Accumulated depreciation
|
|
|
34,009 |
|
|
|
24,989 |
|
Net
property, plant and equipment
|
|
$ |
64,390 |
|
|
$ |
58,698 |
|
Construction
in progress is related to costs incurred to prepare properties for
sale. We do not expect significant future related costs.
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
$34.1 million, as corrected, of our purchase price associated with our fiscal
2004 acquisition of Hein Gericke, PoloExpress and Fairchild Sports USA.
Approximately $31.7 million, as corrected, 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 2 to 5 years. In
2007, 2006, and 2005, we recognized $0.6 million, $0.5 million, and $0.6
million, respectively, of amortization expense for intangible assets with finite
lives. We expect annual amortization expense will be approximately $0.7 million
in 2008, a nominal amount in each year from 2009 through 2011, and none
thereafter.
Deferred Loan Fees: 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 $1.8 million
in fiscal 2007, $1.1 million in fiscal 2006, and $1.3 million in fiscal
2005.
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. An
impairment charge of $2.9 million was recorded in 2005 due to our decision in
the fourth quarter of 2005 to no longer provide funds to our landfill
development partnership. This impairment charge was reclassified to
net loss from discontinued operations as the amount pertained to a business 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. Such liabilities are
included in Other accrued liabilities and Other long-term liabilities on the
consolidated balance sheet. 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 the extent
and method of remediation that will be required, 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 from continuing operations 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 positions
taken in various tax filings. On a quarterly basis, 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.
Other Long-Term Liabilities:
As of September 30, 2007, we have $15.2 million classified as Other long-term
liabilities, which principally consists of environmental and other liabilities
that do not have specific payment terms or other similar contractual
arrangements. 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. As of September 30, 2007, the amount due to
purchase the remaining 7.5% interest in PoloExpress totaled $15.4 million and
was reclassified to Other accrued liabilities as the amount is expected to be
settled by April 2008.
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, net in our consolidated statements of operations
in the period in which they occur. In fiscal 2007 and fiscal 2005, we recognized
$0.6 million and $0.1 million, respectively, of foreign currency transaction
losses. In fiscal 2006, we recognized $0.7 million of foreign currency
transaction gains.
Advertising Expense: We
expense the costs of advertising the first time the advertising takes place.
Advertising expense was $19.4 million in fiscal 2007, $15.0 million in fiscal
2006, and $18.6 million in fiscal 2005.
Research and Development:
Company-sponsored research and development expenditures are expensed as incurred
and were insignificant in 2007, 2006, and 2005.
Stock-Based
Compensation: In accordance with SFAS No. 123R, Share Based Payment, we have
elected 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 and a nominal amount of compensation cost in fiscal
2007. No tax benefit and no deferred tax asset were recognized on the
compensation cost because of our domestic full valuation allowance against
deferred tax assets. As of September 30, 2007, there was
approximately $0.1 million of 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 2.8 years.
As
permitted by SFAS No. 123, Accounting for Stock-Based
Compensation, 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, “Accounting for Stock Issued to
Employees”, 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. 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 would have
been as follows:
(In
thousands, except per share data)
|
|
2005
|
|
Net
loss, as reported
|
|
$ |
(19,365 |
) |
Total
stock-based employee compensation expense determined under the fair value
based method for all awards, net of tax
|
|
|
(150 |
) |
Pro
Forma
|
|
$ |
(19,515 |
) |
Basic
and diluted loss per share:
|
|
|
|
|
As
reported
|
|
$ |
(0.76 |
) |
Pro
forma
|
|
|
(0.77 |
) |
The
weighted average grant date fair value of options granted during 2006 and 2005
was $1.22 and $1.42, 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:
|
2007
|
2006
|
2005
|
Risk-free
interest rate
|
N/A
|
4.6%-5.0%
|
3.6%-4.2%
|
Expected
life in years
|
N/A
|
4.94
|
4.94
|
Expected
volatility
|
N/A
|
60%-61%
|
61%-63%
|
Expected
dividends
|
N/A
|
None
|
None
|
For
additional information on stock options see Note 8.
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 and $5.9 million in fiscal 2005. 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 4). 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, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. 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, and Fairchild
Aerostructures as discontinued operations (See Note 17).
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 Financial Liabilities, permitting entities to
elect fair value measurement for many financial instruments and certain other
items. Unrealized gains and losses on designated items will be recognized in
earnings at each subsequent period. SFAS No. 159 also establishes presentation
and disclosure requirements for similar types of assets and liabilities measured
at fair value. We are required to adopt this statement in October 2008 and
we are currently evaluating the potential impact to our future results of
operations, financial position, and cash flows.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value in
GAAP, and expands disclosures about fair value measurements. SFAS No.
157 does not require any new fair value measurements, but provides guidance on
how to measure fair value by providing a fair value hierarchy used to classify
the source of the information. We are required to adopt this statement in
October 2008, except as it relates to certain non-financial assets and
liabilities for which SFAS No. 157 is effective in fiscal 2010, and we are
currently evaluating the potential impact to our future results of operations,
financial position, and cash flows.
In
July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109. 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. 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 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 No. 48. We are required to
adopt this interpretation in October 2007 and we are currently evaluating
the potential impact to our future results of operations, financial position,
and cash flows.
2. GOODWILL
AND INTANGIBLE ASSETS
Intangible
assets with finite lives are amortized over their estimated useful
lives. Goodwill and intangible assets deemed to have an indefinite
life are 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 goodwill
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.
The
carrying value of intangible assets deemed to have an indefinite life is
considered impaired when the anticipated separately identifiable undiscounted
cash flows from the asset are less than the carrying value of the
asset. In that event, a loss is recognized based on the amount by
which the carrying value exceeds the fair value of the indefinite-lived
intangible asset. Fair value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk
involved.
Changes
in the carrying amount of goodwill by segment were as follows:
|
September
30,
|
|
Translation
|
|
September
30,
|
|
Error
|
|
Translation
|
|
September
30,
|
|
(In
thousands)
|
2005
|
|
Adjustment
|
|
2006
|
|
Correction
|
|
Adjustment
|
|
2007
|
|
PoloExpress
|
|
$ |
3,140 |
|
|
$ |
167 |
|
|
$ |
3,307 |
|
|
$ |
(728 |
) |
|
$ |
321 |
|
|
$ |
2,900 |
|
Aerospace
|
|
|
10,821 |
|
|
|
- |
|
|
|
10,821 |
|
|
|
- |
|
|
|
- |
|
|
|
10,821 |
|
Total
|
|
$ |
13,961 |
|
|
$ |
167 |
|
|
$ |
14,128 |
|
|
$ |
(728 |
) |
|
$ |
321 |
|
|
$ |
13,721 |
|
|
The
components of intangible assets, all of which pertain to our PoloExpress
and Hein Gericke segments, were as
follows:
|
|
September
30,
|
|
|
|
Translation
|
|
September
30,
|
|
|
|
Error
|
|
|
|
Translation
|
|
September
30,
|
(In
thousands)
|
2005
|
|
Amortization
|
|
Adjustment
|
|
2006
|
|
Acquisition
|
|
Correction
|
|
Amortization
|
|
Adjustment
|
|
2007
|
Trademarks
|
$ |
29,424 |
|
$ |
- |
|
$ |
1,545 |
|
$ |
30,969 |
|
$ |
- |
|
$ |
(1,467 |
) |
$ |
- |
|
$ |
4,007 |
|
$ |
33,509 |
Customer
relationships
|
|
1,721 |
|
|
(533 |
) |
|
91 |
|
|
1,279 |
|
|
323 |
|
|
(131 |
) |
|
(649 |
) |
|
70 |
|
|
892 |
Other
|
|
8 |
|
|
(8 |
) |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
Total
|
$ |
31,153 |
|
$ |
(541 |
) |
$ |
1,636 |
|
$ |
32,248 |
|
$ |
323 |
|
$ |
(1,598 |
) |
$ |
(649 |
) |
$ |
4,077 |
|
$ |
34,401 |
3. CASH
EQUIVALENTS AND INVESTMENTS
A
summary of the cash equivalents and investments held by us follows:
|
|
September
30, 2007
|
|
|
September
30, 2006
|
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
|
Fair
|
|
|
Cost
|
|
|
Fair
|
|
|
Cost
|
|
(In
thousands)
|
|
Value
|
|
|
Basis
|
|
|
Value
|
|
|
Basis
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market and other cash funds
|
|
$ |
9,527 |
|
|
$ |
9,527 |
|
|
$ |
8,541 |
|
|
$ |
8,541 |
|
Money
market and other cash funds - restricted
|
|
|
3,243 |
|
|
|
3,243 |
|
|
|
- |
|
|
|
- |
|
Total
cash and cash equivalents
|
|
|
12,770 |
|
|
|
12,770 |
|
|
|
8,541 |
|
|
|
8,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds – available-for-sale – restricted
|
|
|
33,767 |
|
|
|
33,767 |
|
|
|
6,002 |
|
|
|
6,002 |
|
Corporate
bonds – trading securities
|
|
|
- |
|
|
|
- |
|
|
|
42,919 |
|
|
|
42,919 |
|
Equity
securities – trading securities
|
|
|
- |
|
|
|
- |
|
|
|
2,459 |
|
|
|
2,459 |
|
Equity
and equivalent securities – available-for-sale
|
|
|
2,192 |
|
|
|
932 |
|
|
|
5,132 |
|
|
|
825 |
|
Equity
and equivalent securities – available-for-sale -
restricted
|
|
|
13,644 |
|
|
|
11,565 |
|
|
|
- |
|
|
|
- |
|
Total
short-term investments
|
|
|
49,603 |
|
|
|
46,264 |
|
|
|
56,512 |
|
|
|
52,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government securities – available-for-sale – restricted
|
|
|
- |
|
|
|
- |
|
|
|
512 |
|
|
|
512 |
|
Money
market funds – available-for-sale – restricted
|
|
|
6,643 |
|
|
|
6,643 |
|
|
|
10,313 |
|
|
|
10,313 |
|
Corporate
bonds – available-for-sale – restricted
|
|
|
6,300 |
|
|
|
6,300 |
|
|
|
28,934 |
|
|
|
29,326 |
|
Equity
and equivalent securities – available-for-sale –
restricted
|
|
|
8,247 |
|
|
|
5,941 |
|
|
|
9,275 |
|
|
|
7,984 |
|
Other
securities – available-for-sale - restricted
|
|
|
- |
|
|
|
- |
|
|
|
11,915 |
|
|
|
11,565 |
|
Other
investments, at cost
|
|
|
3,499 |
|
|
|
3,499 |
|
|
|
4,370 |
|
|
|
4,370 |
|
Total
long-term investments
|
|
|
24,689 |
|
|
|
22,383 |
|
|
|
65,319 |
|
|
|
64,070 |
|
Total
cash equivalents and investments
|
|
$ |
87,062 |
|
|
$ |
81,417 |
|
|
$ |
130,372 |
|
|
$ |
124,816 |
|
On
September 30, 2007 and 2006, we had restricted cash and investments of $71.8
million and $67.0 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,
2007 and 2006, cash of $8.5 million and $3.4 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 4.
On
September 30, 2007, we had gross unrealized holding gains from
available-for-sale securities of $5.6 million. 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. 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)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Gross
realized gain from sales of available-for-sale securities
|
|
$ |
3,861 |
|
|
$ |
873 |
|
|
$ |
262 |
|
Gross
realized loss from sales of available-for-sale securities
|
|
|
- |
|
|
|
- |
|
|
|
(191 |
) |
Gross
realized gain from sales of trading securities
|
|
|
1,696 |
|
|
|
667 |
|
|
|
183 |
|
Gross
realized loss from sales of trading securities
|
|
|
- |
|
|
|
(200 |
) |
|
|
(6 |
) |
Change
in unrealized holding gain from trading securities
|
|
|
- |
|
|
|
475 |
|
|
|
746 |
|
Gross
realized loss from impairments
|
|
|
- |
|
|
|
- |
|
|
|
(825 |
) |
Dividend
income
|
|
|
462 |
|
|
|
1,108 |
|
|
|
5,751 |
|
|
|
$ |
6,019 |
|
|
$ |
2,923 |
|
|
$ |
5,920 |
|
The
maturities of debt securities, including fixed maturity securities, at September
30, 2007 and 2006 were as follows:
|
September
30,
|
|
|
2007
|
|
2006
|
|
(In
thousands)
|
Fair
Value
|
|
Cost
Basis
|
|
Fair
Value
|
|
Cost
Basis
|
|
Due
in one year or less
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
29,065 |
|
|
$ |
29,457 |
|
Due
after ten years
|
|
|
6,300 |
|
|
|
6,300 |
|
|
|
43,300 |
|
|
|
43,300 |
|
|
|
$ |
6,300 |
|
|
$ |
6,300 |
|
|
$ |
72,365 |
|
|
$ |
72,757 |
|
4. NOTES
PAYABLE AND LONG-TERM DEBT
|
At
September 30, 2007 and 2006, notes payable and long-term debt consisted of the
following:
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
(In
thousands)
|
|
Amount
|
|
|
Average
Rate
|
|
|
Amount
|
|
|
Average
Rate
|
|
Revolving
credit facilities – Hein Gericke
|
|
$ |
11,410 |
|
|
|
7.7 |
% |
|
$ |
11,425 |
|
|
|
6.9 |
% |
Current
maturities of long-term debt
|
|
|
37,825 |
|
|
|
|
|
|
|
14,067 |
|
|
|
|
|
Total
notes payable and current maturities of long-term debt
|
|
|
49,235 |
|
|
|
|
|
|
|
25,492 |
|
|
|
|
|
GoldenTree
term loan – Corporate
|
|
|
20,938 |
|
|
|
12.8 |
% |
|
|
30,000 |
|
|
|
12.8 |
% |
Term
loan agreement – Hein Gericke
|
|
|
3,711 |
|
|
|
5.2 |
% |
|
|
6,090 |
|
|
|
4.4 |
% |
Term
loan agreement – PoloExpress
|
|
|
6,992 |
|
|
|
5.3 |
% |
|
|
11,292 |
|
|
|
4.7 |
% |
Promissory
note – Corporate
|
|
|
13,000 |
|
|
|
11.2 |
% |
|
|
13,000 |
|
|
|
11.5 |
% |
CIT
revolving credit facility – Aerospace
|
|
|
12,042 |
|
|
|
8.8 |
% |
|
|
9,603 |
|
|
|
9.3 |
% |
GMAC
credit facility – Hein Gericke
|
|
|
3,511 |
|
|
|
8.0 |
% |
|
|
3,118 |
|
|
|
7.0 |
% |
Other
notes payable, collateralized by assets
|
|
|
2,674 |
|
|
|
6.8 |
% |
|
|
3,837 |
|
|
|
6.7 |
% |
Capital
lease obligations
|
|
|
724 |
|
|
|
7.8 |
% |
|
|
2,577 |
|
|
|
8.9 |
% |
Less:
current maturities of long-term debt
|
|
|
(37,825 |
) |
|
|
|
|
|
|
(14,067 |
) |
|
|
|
|
Net
long-term debt
|
|
|
25,767 |
|
|
|
|
|
|
|
65,450 |
|
|
|
|
|
Total
debt
|
|
$ |
75,002 |
|
|
|
|
|
|
$ |
90,942 |
|
|
|
|
|
Term
Loan at Corporate
On
May 3, 2006, we entered into a credit agreement with The Bank of New York, as
administrative agent, and GoldenTree Asset Management, L.P., as collateral
agent. The lenders under the Credit Agreement were GoldenTree Capital
Opportunities, L.P. and GoldenTree Capital Solutions Fund
Financing. Pursuant to the credit agreement, we borrowed from the
lenders $30.0 million. The loan matures on May 3, 2010, subject to certain
mandatory prepayment events described in the credit agreement. Interest on the
loan is LIBOR plus 7.5%, per annum, 12.8% at September 30,
2007. 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 collateralized 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 3.0% 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
3.0% in year one, 2.0% in year two, or 1.0% in year three.
During
the term of the loan:
·
|
We
must maintain cash, cash equivalents, or public securities that meet or
exceed a minimum liquidity threshold of between $10.0 million and $20.0
million. At September 30, 2007, our minimum liquidity requirement was
$12.4 million, and accordingly we have classified $12.4 million of cash
and qualified investments as restricted
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 above covenants in the credit agreement, the proceeds of the loan may be
used for general working capital purposes, investments, or stock
repurchases.
Credit Facilities at PoloExpress and
Hein Gericke
On March 1, 2006, our PoloExpress segment entered into an €11.0 million ($15.7
million at September 30, 2007) seasonal credit line with Stadtsparkasse
Düsseldorf, with half of the facility available to us for the 2006 season. The
seasonal facility will reduce by €1.0 million per year and expires on September
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 allowed us to borrow the entire €10.0 million
($14.3 million at September 30, 2007) facility for the 2007
season. Borrowings under the facility for the 2007 season were repaid
prior to September 30, 2007. The seasonal credit line bears interest at 1.5%
over the three-month Euribor rate (5.66% at September 30, 2007) when utilized as
a short-term credit facility and 2.75% over the European Overnight Interest
Average rate (6.91% at September 30, 2007) when utilized as an overdraft
facility. In addition, 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.
At September 30, 2007, our German subsidiaries, Hein Gericke Deutschland GmbH
(“Hein Gericke Deutschland”) and PoloExpress GmbH, had outstanding borrowings of
$22.1 million (€15.5 million) due under its credit facilities with
Stadtsparkasse Düsseldorf and HSBC Trinkaus & Burkhardt AG, which includes a
revolving credit facility at Hein Gericke Deutschland providing a credit line of
€10.0 million ($11.4 million outstanding and $2.9 million available at September
30, 2007), at interest rates of 3.5% over the three-month Euribor (7.66% at
September 30, 2007), which matures annually. For this revolving credit
line, we must pay a 1.25% per annum non-utilization fee. Outstanding
borrowings under the term loan facilities have blended interest rates, with $9.7
million (€6.8 million) bearing interest at 1% over the three-month Euribor rate
(5.16% at September 30, 2007), with an interest rate cap protection in which our
interest expense would not exceed 6% on 50% of the debt, and the remaining $1.0
million (€0.7 million) bearing interest at a fixed rate of 6%. The term loans
mature on March 31, 2009, and are collateralized by the assets of Hein Gericke
Deutschland and PoloExpress and specified guaranties provided by the German
State of North Rhine-Westphalia.
The loan agreements require Hein Gericke Deutschland and PoloExpress to maintain
compliance with certain covenants. The most restrictive of the covenants
requires Hein Gericke Deutschland to maintain equity of €44.5 million
($63.5 million at September 30, 2007), as defined in the loan contracts.
At September 30, 2007, equity was €59.6 million ($85.1 million), which exceeded
by €15.1 million ($21.6 million) the covenant requirements. 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. In
addition, the loan covenants require Hein Gericke Deutschland and PoloExpress to
maintain inventory and receivables in excess of €50.0 million ($71.4 million at
September 30, 2007). At September 30, 2007, inventory and accounts
receivable at Hein Gericke Deutschland and PoloExpress was €52.1 million ($74.4
million), which exceeded by €2.1 million ($3.0 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
the net debt position. At September 30, 2007, we were in compliance with the
loan covenants.
At September 30, 2007, our subsidiary, Hein Gericke UK Ltd had outstanding
borrowings of $3.5 million (£1.7 million) on its £5.0 million ($10.2 million)
credit facility with GMAC. The loan bears interest at 2.25% above the base rate
of Lloyds TSB Bank Plc (8.0% at September 30, 2007) and matures on April 30,
2008. We must pay a 0.75% per annum non-utilization fee on the available
facility. The financing is collateralized by the inventory of Hein Gericke UK
Ltd and an investment with a fair market value of $5.4 million at September 30,
2007. The most restrictive covenant requires Hein Gericke UK to maintain a
maximum level of inventory turns (“Inventory Turns”) as defined. At
September 30, 2007, Hein Gericke UK was in compliance with the Inventory Turns
covenant.
Credit Facility at Aerospace
Segment
At
September 30, 2007, we had outstanding borrowings of $12.0 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 $0.6 million was available for future borrowings at
September 30, 2007. Borrowings under the facility are collateralized by a
security interest in the assets of our Aerospace segment. The loan bears
interest at 1.0% over prime (8.75% at September 30, 2007) and we pay a non-usage
fee of 0.5%. In January 2008, this credit facility was extended through
February 29, 2008, at which time the full amount of this obligation is due
unless extended an additional 12 months. We are subject to a Fixed
Charge Coverage Ratio covenant, as defined, under the terms of this
facility. At September 30, 2007, we were in compliance with the loan
covenant.
Promissory Note –
Corporate
At
September 30, 2007, 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 collateralized 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% (11.2% at September 30,
2007), and is payable monthly. On September 30, 2007, approximately
$1.3 million of the loan proceeds were held in escrow to fund specific
improvements to the mortgaged property. On October 31, 2007, the note
was repaid in full. On December 4, 2007, the $1.3 million escrow was
released to the Company.
Guaranties
At
September 30, 2007, we included $0.9 million as debt for our maximum potential
amount of future payments for guaranties assumed by us of retail shop partners’
indebtedness incurred for the purchase of store fittings in Germany. These
guaranties 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, 2007, approximately
$0.8 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, 2007, we had contingent liabilities of $3.5
million on commitments related to outstanding letters of credit which were
collateralized 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, 2007, are as follows: $48.5 million for 2008; $3.9 million for
2009; $21.9 million for 2010; and none thereafter.
5. 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)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Change
in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$ |
178,339 |
|
|
$ |
198,441 |
|
|
$ |
26,185 |
|
|
$ |
34,859 |
|
Service
cost
|
|
|
322 |
|
|
|
391 |
|
|
|
11 |
|
|
|
26 |
|
Interest
cost
|
|
|
9,749 |
|
|
|
10,589 |
|
|
|
1,521 |
|
|
|
1,920 |
|
Plan
participants’ contributions
|
|
|
- |
|
|
|
- |
|
|
|
1,052 |
|
|
|
791 |
|
Amendments
|
|
|
(108 |
) |
|
|
(3 |
) |
|
|
- |
|
|
|
(2,569 |
) |
Actuarial
(gain) loss
|
|
|
6,145 |
|
|
|
(9,530 |
) |
|
|
5,784 |
|
|
|
(3,989 |
) |
Settlements
|
|
|
- |
|
|
|
- |
|
|
|
(11,797 |
) |
|
|
- |
|
Benefits
paid
|
|
|
(19,307 |
) |
|
|
(21,549 |
) |
|
|
(4,370 |
) |
|
|
(4,853 |
) |
Medicare
subsidy received
|
|
|
- |
|
|
|
- |
|
|
|
320 |
|
|
|
- |
|
Benefit
obligation at end of year
|
|
|
175,140 |
|
|
|
178,339 |
|
|
|
18,706 |
|
|
|
26,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
|
150,612 |
|
|
|
163,282 |
|
|
|
- |
|
|
|
- |
|
Actual
return on plan assets
|
|
|
5,866 |
|
|
|
4,630 |
|
|
|
- |
|
|
|
- |
|
Employer
contribution
|
|
|
2,745 |
|
|
|
4,251 |
|
|
|
3,318 |
|
|
|
4,062 |
|
Plan
participants’ contributions
|
|
|
- |
|
|
|
- |
|
|
|
1,052 |
|
|
|
791 |
|
Expenses
|
|
|
- |
|
|
|
(2 |
) |
|
|
- |
|
|
|
- |
|
Benefits
paid
|
|
|
(19,307 |
) |
|
|
(21,549 |
) |
|
|
(4,370 |
) |
|
|
(4,853 |
) |
Fair
value of plan assets at end of year
|
|
|
139,916 |
|
|
|
150,612 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status
|
|
|
(35,224 |
) |
|
|
(27,727 |
) |
|
|
(18,706 |
) |
|
|
(26,185 |
) |
Unrecognized
net actuarial loss
|
|
|
- |
|
|
|
80,691 |
|
|
|
- |
|
|
|
16,414 |
|
Unrecognized
prior service cost
|
|
|
- |
|
|
|
1,513 |
|
|
|
- |
|
|
|
(19,588 |
) |
Net
amount recognized
|
|
$ |
(35,224 |
) |
|
$ |
54,477 |
|
|
$ |
(18,706 |
) |
|
$ |
(29,359 |
) |
(a)
|
Exclusive
of death benefit obligation discussed
below.
|
Information
for amounts recognized in our consolidated balance sheets and for pension plans
with an accumulated benefit obligation in excess of plan assets at September 30,
2007 and 2006 are as follows:
|
|
Pension
Benefits
|
|
|
Postretirement
Benefits
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Amounts
recognized in our consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
benefit cost
|
|
$ |
- |
|
|
$ |
33,373 |
|
|
$ |
- |
|
|
$ |
- |
|
Accrued
liabilities
|
|
|
(399 |
) |
|
|
- |
|
|
|
(2,475 |
) |
|
|
(3,351 |
) |
Accrued
benefit cost
|
|
|
(34,825 |
) |
|
|
(42,432 |
) |
|
|
(16,231 |
) |
|
|
(26,008 |
) |
Intangible
assets
|
|
|
- |
|
|
|
1,513 |
|
|
|
- |
|
|
|
- |
|
Accumulated
other comprehensive loss
|
|
|
- |
|
|
|
62,023 |
|
|
|
- |
|
|
|
- |
|
Net
amount recognized
|
|
$ |
(35,224 |
) |
|
$ |
54,477 |
|
|
$ |
(18,706 |
) |
|
$ |
(29,359 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
recognized in accumulated other comprehensive income
(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
prior service costs
|
|
$ |
1,253 |
|
|
|
|
|
|
$ |
- |
|
|
|
|
|
Unamortized
net gains and other
|
|
|
63,228 |
|
|
|
|
|
|
|
3,445 |
|
|
|
|
|
Total
amount recognized
|
|
$ |
64,481 |
|
|
|
|
|
|
$ |
3,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
plans with an accumulated benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
excess of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected
benefit obligation
|
|
$ |
127,249 |
|
|
$ |
134,184 |
|
|
|
|
|
|
|
|
|
Accumulated
benefit obligation
|
|
|
126,259 |
|
|
|
133,623 |
|
|
|
|
|
|
|
|
|
Fair
value of plan assets
|
|
|
92,025 |
|
|
|
91,191 |
|
|
|
|
|
|
|
|
|
The
following are weighted-average assumptions used to determine benefit obligations
at September 30, 2007 and 2006:
|
|
Pension
Benefits
|
|
|
Postretirement
Benefits
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Discount
rate
|
|
|
6.375 |
% |
|
|
6.000 |
% |
|
|
6.375 |
% |
|
|
6.000 |
% |
Rate
of compensation increase
|
|
|
3.750 |
% |
|
|
3.750 |
% |
|
|
N/A |
|
|
|
N/A |
|
At
September 30, 2007, we reviewed the funded position of our qualified pension
plans and recognized a $5.9 million decrease in equity, as a result of the
accumulated benefit obligation for the qualified pension plans exceeding the
fair value of the plan assets by $35.2 million compared to $42.4 million at
September 30, 2006. The accumulated benefit obligation for our defined benefit
pension plans was $126.3 million and $177.8 million at September 30, 2007 and
September 30, 2006, 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 2007, 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 2007 and 2006:
|
Pension
Benefits
|
|
Postretirement
Benefits
|
|
September
30,
|
|
September
30,
|
|
2007
|
2006
|
|
2007
|
2006
|
Discount
rate
|
6.000%
|
5.625%
|
|
6.000%
|
5.625%
|
Expected
long-term return on plan assets
|
8.000%
|
8.500%
|
|
N/A
|
N/A
|
Rate
of compensation increase
|
3.750%
|
3.750%
|
|
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 2007. In 2007, we elected to
eliminate health care assistance to retirees for whom we are not contractually
obligated to provide benefits. In 2008, we are assuming a 7.0% health
care cost trend for participants with continuing coverage under our remaining
health care plan.
The
components of net periodic benefit cost are as follows for 2007, 2006, and
2005:
|
|
Pension
Benefits
|
|
|
Postretirement
Benefits
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Service
cost
|
|
$ |
322 |
|
|
$ |
391 |
|
|
$ |
534 |
|
|
$ |
11 |
|
|
$ |
26 |
|
|
$ |
42 |
|
Interest
cost
|
|
|
9,749 |
|
|
|
10,589 |
|
|
|
11,529 |
|
|
|
1,521 |
|
|
|
1,920 |
|
|
|
2,901 |
|
Expected
return on assets
|
|
|
(11,693 |
) |
|
|
(13,675 |
) |
|
|
(14,443 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Amortization
of prior service cost
|
|
|
260 |
|
|
|
260 |
|
|
|
314 |
|
|
|
(1,566 |
) |
|
|
(1,111 |
) |
|
|
(217 |
) |
Amortization
of actuarial (gain)/loss
|
|
|
3,109 |
|
|
|
3,675 |
|
|
|
3,509 |
|
|
|
1,055 |
|
|
|
1,301 |
|
|
|
1,306 |
|
Net
periodic pension cost
|
|
|
1,747 |
|
|
|
1,240 |
|
|
|
1,443 |
|
|
|
1,021 |
|
|
|
2,136 |
|
|
|
4,032 |
|
Curtailment
charge (a)
|
|
|
- |
|
|
|
- |
|
|
|
970 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Settlement
(income)/charge (b)
|
|
|
26,337 |
|
|
|
524 |
|
|
|
750 |
|
|
|
(11,797 |
) |
|
|
- |
|
|
|
- |
|
Total
net pension cost
|
|
$ |
28,084 |
|
|
$ |
1,764 |
|
|
$ |
3,163 |
|
|
$ |
(10,776 |
) |
|
$ |
2,136 |
|
|
$ |
4,032 |
|
(a)
|
The
curtailment charge reflects the freezing of our SERP plan for the
remaining active employee participants who were executive officers as of
December 31, 2004.
|
(b)
|
The
pension settlement charge in 2007 reflects primarily recognition of
accumulated actuarial losses resulting from the closure of an overfunded
pension plan and merger with an underfunded pension plan. The
$11.8 million postretirement income recognition in 2007 resulted from a
decision to eliminate health care assistance to retirees for whom we are
not contractually obligated to provide benefits. These 2007
amounts were recorded in selling, general, and administrative
expense. 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 do not have a significant effect on the amounts
reported for the healthcare plan as the remaining covered retirees participate
in a plan with a contractually fixed trend rate of 7.0%.
Our
pension plans weighted-average asset allocations at September 30, 2007 and 2006
by asset category are as follows:
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
Asset
Category:
|
|
|
|
|
|
|
Equity
securities
|
|
|
18.2 |
% |
|
|
13.1 |
% |
Debt
securities
|
|
|
72.5 |
% |
|
|
81.8 |
% |
Other
|
|
|
9.3 |
% |
|
|
5.1 |
% |
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Our
target asset allocation as of September 30, 2007, 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. In November 2007, the Board
approved a change to the target asset allocation increasing the allowable equity
securities allocation to 60% and decreasing the allowable debt securities to
40%.
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
$1.3 million (1.4% of total plan assets) and $1.7 million (1.1% of total plan
assets) at September 30, 2007 and 2006, respectively.
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
|
|
Pension
|
|
|
Postretirement
|
|
(In
thousands)
|
|
Benefits
|
|
|
Benefits
|
|
2008
|
|
$ |
10,990 |
|
|
$ |
2,553 |
|
2009
|
|
|
10,567 |
|
|
|
2,346 |
|
2010
|
|
|
10,330 |
|
|
|
2,276 |
|
2011
|
|
|
10,191 |
|
|
|
2,190 |
|
2012
|
|
|
10,151 |
|
|
|
2,097 |
|
2013
– 2015
|
|
|
47,534 |
|
|
|
8,715 |
|
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 to this plan of $4.4 million
in 2008, $6.2 million in 2009, $6.2 million in 2010, $6.0 million in 2011, $5.8
million in 2012, and a total of $14.4 million from 2013 through 2015, when the
plan is estimated to be fully funded. In addition, we are required to make
annual cash contributions of approximately $0.3 million to fund a separate 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. In September 2007, we decided to amend certain
retiree medical plans to eliminate subsidized supplemental Medicare insurance
coverage for the current and future retirees of our non-class action retiree
medical plans effective January 1, 2008. This action provided income recognition
of approximately $11.8 million in fiscal 2007, as a result of the reduction in
our postretirement benefits liabilities. In 2006, we adjusted our
liability to reflect benefits available to us from the Medicare Prescription
Subsidy available for the 1991 class action settlement. In 2007 we
received $0.3 million for the Medicare Prescription Subsidy and we expect to
receive $0.4 million in each of the next 5 years for the Medicare Prescription
Subsidy.
In
September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements
No. 87, 88, 106, and 132(R). This standard requires employers
that sponsor defined benefit plans to recognize the over-funded or under-funded
status of a defined benefit postretirement plan as an asset or liability in its
balance sheet and to recognize changes in that funded status in the year in
which the changes occur. Unrecognized prior service credits/costs and
net actuarial gains/losses are recognized as a component of Accumulated other
comprehensive income/(loss). Additional minimum pension liabilities
and related intangible assets are eliminated upon adoption of the new
standard. SFAS No. 158 requires prospective application and is
effective for financial statements issued for fiscal years ending after December
15, 2006. The following table summarizes the effect of the initial
adoption of SFAS No. 158:
(In
thousands)
|
|
Prior
to SFAS 158 Adjustment
|
|
|
SFAS
158 Adjustment
|
|
|
Post
SFAS 158 Adjustment
|
|
Accrued
liabilities
|
|
$ |
(61,297 |
) |
|
$ |
7,367 |
|
|
$ |
(53,930 |
) |
Intangible
assets
|
|
|
1,253 |
|
|
|
(1,253 |
) |
|
|
- |
|
Accumulated
other comprehensive loss (pre tax)
|
|
|
62,887 |
|
|
|
5,039 |
|
|
|
67,926 |
|
The
amounts in Accumulated other comprehensive income/(loss) that are expected to be
recognized as components of net expense/(income) during the next year
are as follows:
|
|
|
|
Postretirement
|
|
|
|
|
(In
thousands)
|
Pension
Benefits
|
|
Benefits
|
|
Total
|
|
Prior
service cost/(credit)
|
|
$ |
260 |
|
|
$ |
- |
|
|
$ |
260 |
|
(Gains)/losses
and other
|
|
|
2,968 |
|
|
|
174 |
|
|
|
3,142 |
|
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. During
both fiscal 2007 and fiscal 2006, we recorded expense of $0.3 million in
continuing operations for cash contributions we made to the 401(k) Savings Plan.
During fiscal 2005, we recorded expense of $0.2 million in continuing 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 2007, 2006, and
2005, we made associated death benefit payments of $0.1 million, $0.2 million,
and $0.1 million, respectively. As of September 30, 2007, our
remaining obligation was $1.7 million and is included in Other long-term
liabilities.
6. INCOME
TAXES
The
total income tax provision (benefit) is allocated as follows:
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(Earnings)
loss from continuing operations
|
|
$ |
(6,768 |
) |
|
$ |
2,176 |
|
|
$ |
(1,048 |
) |
Net
(gain) on disposal of discontinued operations
|
|
|
(32,815 |
) |
|
|
- |
|
|
|
- |
|
(Earnings)
loss from discontinued operations
|
|
|
69 |
|
|
|
2,604 |
|
|
|
825 |
|
|
|
$ |
(39,514 |
) |
|
$ |
4,780 |
|
|
$ |
(223 |
) |
The
overall tax benefit for fiscal 2007 was $39.5 million. A $6.8 million tax
benefit from continuing operations resulted from $0.1 million of current
federal, state, and foreign taxes benefit and $6.7 million of foreign deferred
taxes benefit. Effective August 1, 2007, Hein Gericke Deutschland (now
known as Polo Holding) sold the assets of the Hein Gericke business to a new
wholly-owned sister company now known as Hein Gericke Deutschland. This resulted
in a deferred intercompany loss of approximately $33.4 million that is not
reflected in the financial statements until such time as the underlying assets
are sold to unrelated third parties. As a result of the sale, Polo
Holding will be able to utilize the cumulative combined income and trade tax
losses of $30.2 million and $28.1 million, respectively, to offset its future
profits subject to income and trade tax. As a result of the sale, there was a
release of $2.9 million in the valuation allowance against the pre-transaction
tax losses. We believe that Polo Holding will be able to utilize the accumulated
net operating losses as the company has a history of
profitability. The adjustment of $1.9 million to the basis in the
Esser Note resulted in a reduction to the foreign deferred tax liability of $0.3
million due to the resulting decrease of the tax impact of conversion of
PoloExpress from a German partnership to a German corporation. In addition, the
Company was required to record a reduction to the foreign deferred tax liability
of $1.8 million as a result of German statutory rate decreases and currency
adjustments. No Federal taxes were recognized from continuing
operations due to the domestic tax losses for which a full valuation allowance
is recorded. The $32.8 million tax benefit in gain on disposal of discontinued
operations resulted from reduction of tax liabilities due to expiration of the
related statutes of limitation and closure of the related tax
periods.
Significant components of the provision (benefit) for income taxes attributable
to our continuing operations are as follows:
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
474 |
|
|
$ |
94 |
|
|
$ |
- |
|
State
|
|
|
(655 |
) |
|
|
160 |
|
|
|
241 |
|
Foreign
|
|
|
82 |
|
|
|
88 |
|
|
|
936 |
|
Total current
|
|
|
(99 |
) |
|
|
342 |
|
|
|
1,177 |
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
- |
|
|
|
- |
|
|
|
(3,167 |
) |
State
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Foreign
|
|
|
(6,669 |
) |
|
|
1,834 |
|
|
|
942 |
|
Total deferred
|
|
|
(6,669 |
) |
|
|
1,834 |
|
|
|
(2,225 |
) |
Total
tax provision (benefit)
|
|
$ |
(6,768 |
) |
|
$ |
2,176 |
|
|
$ |
(1,048 |
) |
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)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Tax
at United States statutory rates
|
|
$ |
(16,091 |
) |
|
$ |
(11,085 |
) |
|
$ |
(9,755 |
) |
State
income taxes, net of federal tax benefit
|
|
|
(1,893 |
) |
|
|
104 |
|
|
|
157 |
|
Effect
of foreign operations
|
|
|
(48 |
) |
|
|
129 |
|
|
|
32 |
|
NOLs
untilized by discontinued operations
|
|
|
2,358 |
|
|
|
- |
|
|
|
- |
|
Change
in valuation allowance
|
|
|
13,054 |
|
|
|
10,846 |
|
|
|
7,996 |
|
Extraterritorial
income exclusion
|
|
|
(272 |
) |
|
|
(307 |
) |
|
|
(281 |
) |
Rate
change
|
|
|
(4,131 |
) |
|
|
- |
|
|
|
- |
|
Effect
of change in tax status
|
|
|
- |
|
|
|
1,970 |
|
|
|
- |
|
Other,
net
|
|
|
255 |
|
|
|
519 |
|
|
|
803 |
|
Net
tax provision (benefit)
|
|
$ |
(6,768 |
) |
|
$ |
2,176 |
|
|
$ |
(1,048 |
) |
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, 2007
and 2006 are as follows:
|
|
September
30,
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Accrued expenses
|
|
$ |
4,018 |
|
|
$ |
3,786 |
|
Asset basis differences
|
|
|
1,650 |
|
|
|
5,629 |
|
Inventory
|
|
|
4,969 |
|
|
|
4,371 |
|
Employee compensation and benefits
|
|
|
3,332 |
|
|
|
2,962 |
|
Environmental reserves
|
|
|
5,529 |
|
|
|
4,895 |
|
Postretirement health benefits
|
|
|
7,917 |
|
|
|
11,182 |
|
Net operating loss and credit carryforwards
|
|
|
100,898 |
|
|
|
82,511 |
|
Other
|
|
|
3,806 |
|
|
|
1,904 |
|
Pensions
|
|
|
40,720 |
|
|
|
39,355 |
|
Total deferred tax assets
|
|
|
172,839 |
|
|
|
156,595 |
|
Less: Valuation allowance (a)
|
|
|
(150,828 |
) |
|
|
(128,155 |
) |
Net deferred tax assets
|
|
|
22,011 |
|
|
|
28,440 |
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Asset basis differences
|
|
|
(9,129 |
) |
|
|
(19,325 |
) |
Pensions
|
|
|
(11,283 |
) |
|
|
(13,645 |
) |
Total
deferred tax liabilities
|
|
|
(20,412 |
) |
|
|
(32,970 |
) |
Net
deferred tax assets (liabilities)
|
|
$ |
1,599 |
|
|
$ |
(4,530 |
) |
(a)
|
Includes
$12.5 million correction to the amount of state NOLs and $2.9 million
true-up of prior years' balances.
|
The net changes in the total valuation allowance were an increase of $22.7
million in 2007 and a decrease of $5.3 million in 2006. 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, 2007, we have established a full valuation allowance against all
net domestic deferred tax assets and established a nominal net deferred tax
asset in 2007 and a net deferred tax liability of $4.5 million in 2006 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 and
liabilities.
Under
Section 382 of the Internal Revenue Code, the Company’s ability to use it’s
existing accumulated net operating losses in the United States may be reduced if
there has occurred significant changes in ownership of shares of the
Company. Similar rules exist in certain foreign jurisdictions where
the Company has tax losses.
The amounts included in the balance sheet are as follows:
|
|
September
30,
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
Current
deferred tax assets included in Prepaid expenses and other current
assets
|
|
$ |
1,445 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Noncurrent
deferred tax assets included in Other assets
|
|
$ |
5,038 |
|
|
$ |
- |
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Other current
|
|
$ |
186 |
|
|
$ |
2,314 |
|
|
|
$ |
186 |
|
|
$ |
2,314 |
|
Noncurrent
income tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
$ |
4,884 |
|
|
$ |
4,530 |
|
Other noncurrent
|
|
|
10,936 |
|
|
|
39,923 |
|
|
|
$ |
15,820 |
|
|
$ |
44,453 |
|
Our other noncurrent income tax liabilities of $10.9 million at September 30,
2007 includes additional tax and interest we may be required to pay if certain
tax positions are not sustained.
We maintain a very complex structure in the United States and overseas, 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, 2007, we have $4.8 million of unused alternative minimum tax
credit carryforwards that do not expire and $189.9 million of federal operating
loss carryforwards expiring as follows: $8.8 million in 2018; $59.8 million in
2019; $51.3 million in 2020; $4.2 million in 2021; $11.4 million in 2023; $21.9
million in 2024: $25.4 million in 2025; and $7.1 million in 2027. 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 $135.6
million arising in years prior to 2004 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 $30.2 million of foreign
income tax loss and $28.1 million of foreign trade tax loss carryforwards that
have no expiration period and other foreign income tax loss of $26.8 million
with a full valuation allowance.
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.
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, 2005 through September 30, 2007, 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 22,604,835 shares of Class A common stock and 2,621,338 shares of Class B
common stock outstanding at September 30, 2007. 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 would not declare or pay
any dividends on our common stock. Our intention is to retain and
reinvest earnings into the Company.
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 was 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, 2007, all our stock option plans had expired.
However, stock options outstanding as of September 30, 2007 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, 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, 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 |
|
Expired
|
|
|
(210,359 |
) |
|
|
4.86 |
|
Outstanding
at September 30, 2007
|
|
|
126,000 |
|
|
$ |
2.28 |
|
Exercisable
at September 30, 2005
|
|
|
664,497 |
|
|
$ |
3.71 |
|
Exercisable
at September 30, 2006
|
|
|
246,359 |
|
|
$ |
4.53 |
|
Exercisable
at September 30, 2007
|
|
|
58,500 |
|
|
$ |
2.42 |
|
A
summary of options outstanding and exercisable at September 30, 2007 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 |
|
|
|
122,000 |
|
|
$ |
2.22 |
|
3.9
years
|
|
|
54,500 |
|
|
$ |
2.28 |
|
1.8
years
|
$
3.00 - $ 3.99 |
|
|
|
2,000 |
|
|
|
3.49 |
|
2.4
years
|
|
|
2,000 |
|
|
|
3.49 |
|
2.4
years
|
$
4.00 - $ 4.99 |
|
|
|
1,000 |
|
|
|
4.99 |
|
0.1
years
|
|
|
1,000 |
|
|
|
4.99 |
|
0.1
years
|
$
5.00 - $ 5.11 |
|
|
|
1,000 |
|
|
|
5.11 |
|
1.1
years
|
|
|
1,000 |
|
|
|
5.11 |
|
1.1
years
|
$
2.17 - $ 5.11 |
|
|
|
126,000 |
|
|
$ |
2.28 |
|
3.8
years
|
|
|
58,500 |
|
|
$ |
2.42 |
|
1.8
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, 2007:
|
|
1996
|
|
|
2001
|
|
|
Stock
|
|
|
|
|
|
|
Directors
|
|
|
Directors
|
|
|
Deferral
|
|
|
|
|
Securities to be
issued upon:
|
|
Plan
|
|
|
Plan
|
|
|
Plan
|
|
|
Total
|
|
Exercise
of outstanding options
|
|
|
96,000 |
|
|
|
30,000 |
|
|
|
- |
|
|
|
126,000 |
|
Weighted
average option exercise price
|
|
$ |
2.26 |
|
|
$ |
2.35 |
|
|
$ |
- |
|
|
$ |
2.28 |
|
Issuance
of deferred compensation units
|
|
|
- |
|
|
|
- |
|
|
|
177,657 |
|
|
|
177,657 |
|
Shares
available for future issuance
|
|
|
96,000 |
|
|
|
30,000 |
|
|
|
177,657 |
|
|
|
303,657 |
|
9. 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)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Basic
loss per share:
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(39,118 |
) |
|
$ |
(33,890 |
) |
|
$ |
(27,309 |
) |
Weighted
average common shares outstanding
|
|
|
25,226 |
|
|
|
25,226 |
|
|
|
25,224 |
|
Basic
loss from continuing operations per share
|
|
$ |
(1.55 |
) |
|
$ |
(1.34 |
) |
|
$ |
(1.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(39,118 |
) |
|
$ |
(33,890 |
) |
|
$ |
(27,309 |
) |
Weighted
average common shares outstanding
|
|
|
25,226 |
|
|
|
25,226 |
|
|
|
25,224 |
|
Diluted
effect of options
|
|
antidilutive
|
|
|
antidilutive
|
|
|
antidilutive
|
|
Total
shares outstanding
|
|
|
25,226 |
|
|
|
25,226 |
|
|
|
25,224 |
|
Diluted
loss from continuing operations per share
|
|
$ |
(1.55 |
) |
|
$ |
(1.34 |
) |
|
$ |
(1.08 |
) |
The
computation of diluted loss from continuing operations per share for 2007, 2006,
and 2005 excluded the effect of 126,000, 336,359, and 815,087 incremental common
shares, respectively, attributable to the potential exercise of common stock
options outstanding because the effect was antidilutive.
10.
ACCUMULATED OTHER COMPREHENSIVE LOSS
The
components of accumulated other comprehensive loss were:
|
|
September
30,
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Excess
of additional pension liability over unrecognized prior service
costs
|
|
$ |
(67,926 |
) |
|
$ |
(62,023 |
) |
|
$ |
(70,074 |
) |
Net
unrealized holding gains on available-for-sale securities
|
|
|
5,645 |
|
|
|
5,559 |
|
|
|
1,749 |
|
Foreign
currency translation adjustments
|
|
|
11,634 |
|
|
|
1,636 |
|
|
|
(955 |
) |
Other
|
|
|
- |
|
|
|
- |
|
|
|
(298 |
) |
Accumulated
other comprehensive loss
|
|
$ |
(50,647 |
) |
|
$ |
(54,828 |
) |
|
$ |
(69,578 |
) |
11. 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 December 2007, or
becomes due and payable immediately upon the termination of employment if prior
to such maturity date. On September 30, 2007, 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 2007, the sole
aggregate balance of indebtedness outstanding under the officer and director
stock purchase program was approximately $50,000 from Mr. Kelley. In accordance
with the Sarbanes-Oxley Act of 2002, no new loans will be made to executive
officers or directors.
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 2005, 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.
On
September 30, 2007 and 2006, 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 and is included in accrued salaries,
wages, and commissions on the consolidated balance sheets. On September 30, 2007
and September 30, 2006, deferred compensation of $11,000 was due from us to Mr.
E. Steiner.
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) of
$1.4 million in fiscal 2007, $3.5 million in fiscal 2006, and $0.5 million in
fiscal 2005. Mr. D. Miller received pre-retirement distributions from the
Unfunded SERP (representing a full distribution of his vested benefits) in the
amount of approximately $0.9 million in fiscal 2007. As of September 30,
2007, the remaining balance in the Unfunded SERP plan owed to executive officers
of the Company was $0.7 million to Mr. J. Steiner and $0.9 million to Mr. E.
Steiner. Mr. E Steiner has not attained retirement age.
In
December 2007, Mr. J. Steiner reimbursed us $0.7 million for personal expenses
that we paid on his behalf, which were outstanding as of September 30,
2007. 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 2007 and 2006 did amounts due
to us from Mr. J. Steiner exceed the amount of the after-tax salary on deferrals
we owed to him.
During
2005, 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 and 2005 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 2007, 2006, and 2005 to cover personal use and the portion of
the cost of these vehicles that exceeded our reimbursement policy.
During
fiscal 2007, 2006 and 2005, we reimbursed $0.5 million, $0.4 million, and $0.2
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.
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.
12. LEASES
Operating Leases
We hold certain of our facilities and equipment under long-term leases expiring
in various years through September 2021. 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, 2007, and thereafter, are as
follows: $27.8 million for 2008; $23.0 million for 2009; $17.1 million for 2010;
$13.7 million for 2011; $11.1 million for 2012; and $54.1 million
thereafter. Rental expense on operating leases was $26.9 million in 2007,
$22.9 million in 2006, and $23.0 million in 2005.
Capital Leases
Minimum commitments under capital leases for each of the five years following
September 30, 2007 and thereafter, are $0.7 million for 2008 and none
thereafter. At September 30, 2007, the present value of capital lease
obligations was $0.7 million. Capital assets leased and included in property,
plant, and equipment consisted of:
|
|
September
30,
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
Machinery
and equipment
|
|
$ |
6,556 |
|
|
$ |
5,177 |
|
Other
|
|
|
- |
|
|
|
330 |
|
Less:
Accumulated depreciation
|
|
|
(3,848 |
) |
|
|
(2,910 |
) |
|
|
$ |
2,708 |
|
|
$ |
2,597 |
|
Leasing Operations
We own and lease to Alcoa a manufacturing facility located in Fullerton,
California, and we also own and lease to PCA Aerospace a 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, 2007 are $0.1 million in
2008 and none thereafter. On October 31, 2007, we sold our property in
Fullerton, California to Alcoa for $19.0 million. Also on October 31,
2007, the lease on our Huntington Beach, California property
ended. The tenant continued the lease on a month-to-month
basis.
Rental
property we have leased to third parties under operating leases consists of the
following:
|
|
September
30,
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
Land
and improvements
|
|
$ |
5,168 |
|
|
$ |
5,168 |
|
Buildings
and improvements
|
|
|
3,423 |
|
|
|
3,423 |
|
Less:
Accumulated depreciation
|
|
|
(725 |
) |
|
|
(608 |
) |
|
|
$ |
7,866 |
|
|
$ |
7,983 |
|
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.
We,
either on our own or through our insurance carriers, are contesting these
matters. For certain instances, our insurers are defending us under
“reservations of (their) rights” and may later deny coverage, on whole or
part. We have had and are currently involved in litigations with our
carriers over their denials of coverage or failure to defend our
interests. 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.
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
2007, we contributed approximately $0.5 million toward this remediation, but may
be required to pay additional amounts of up to $7.2 million over the next 20
years, including approximately $0.5 million in 2008. As of September
30, 2007 and 2006, we accrued $7.2 million and $7.7 million, respectively, for
this remediation.
We
expensed $2.3 million, $9.0 million, and $5.3 million in discontinued operations
for environmental matters in 2007, 2006, and 2005, respectively. As of September
30, 2007 and 2006, the consolidated total of our recorded liabilities for
environmental matters was approximately $15.0 million and $13.5 million,
respectively, which represented the estimated probable exposure for these
matters. On September 30, 2007, $3.4 million of these liabilities was classified
as other accrued liabilities, $1.0 million was classified as noncurrent
liabilities of discontinued operations, and $10.6 million was classified as
other long-term liabilities. It is reasonably possible that our exposure for
these matters could be approximately $20.8 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 June 30, 2007, Alcoa contacted us concerning
additional potential health and safety claims of approximately $22.6
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. On October 31, 2007, the Company and Alcoa resolved
all disputes related to the 2002 sale of the fastener business to
Alcoa. Accordingly, $25.3 million of the escrow account was released
to us and Alcoa paid us an additional $0.6 million. As of September
30, 2007 and 2006, we accrued $4.0 million for this issue as Other accrued
liabilities.
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, who is one of many defendants in the action,
purchased a pump business from us, and asserts the right to be indemnified by us
under its purchase agreement. The aforementioned case was
discontinued as to all defendants, thereby extinguishing the indemnity claim
against us in the instant case. However, in September 2003, the purchaser
notified us of, and claimed a right to indemnity from us in relation to
thousands of other asbestos-related claims filed against it. We have
not received enough information to assess the impact, if any, of the other
claims. During the last forty nine months, the Company has been served directly
by plaintiffs’ counsel in cases related to the same pump business. A couple of
these cases were dismissed as to all defendants based upon forum objections. The
Company was voluntarily dismissed from additional pump business cases during the
same period, without the payment of any consideration to plaintiffs. The
Company, in coordination with its insurance carriers, intends to aggressively
defend against the remaining claims.
During
the last 49 months, the Company, or its subsidiaries, has been served with
separate complaints in actions filed in various venues by non-employee workers,
alleging personal injury or wrongful death as a result of exposure to
asbestos-containing products other than those related to the pump
business. The plaintiffs’ complaints do not specify which, if any, of the
Company’s former products are at issue, making it difficult to assess the merit
and value, if any, of the asserted claims. The Company, in coordination
with its insurance carriers, intends to aggressively defend against these
claims. However, the Company’s insurers are defending the Company
under a so called “reservation of rights”.
During
the same time period, the Company has resolved similar, non-pump,
asbestos-related lawsuits that were previously served upon the Company. In most
of the cases, the Company was voluntarily dismissed, without the payment of any
consideration to plaintiffs. The remaining few cases were settled for
a nominal amount.
The
Company’s insurance carriers have participated in the defense of all of the
aforementioned asbestos claims, both pump and non-pump related. Although
insurance coverage amounts vary, depending upon the policy period(s) and product
line involved in each case, management believes that the Company’s 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. However, the Company’s insurers are defending the Company
under a so called “reservation of rights”.
Commercial
Lovelace Motor Freight Litigation
In
July 2005, we received notice that The Ohio Bureau of Workers’ Compensation (the
“Bureau”) is seeking reimbursement from us of approximately $7.3 million for
Commercial Lovelace 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 Bureau
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. For many years prior to July
2005, we had not received any communication from the Bureau. Commercial Lovelace
Motor Freight is a former wholly-owned subsidiary of ours, which filed for
Bankruptcy protection in 1985. Recently, two surety companies which
had issued bonds in favor of the Bureau settled claims of the Bureau, and they
too demanded from the Company payment in respect of the amounts they
paid.
Settlement
efforts to date have not been successful with either the Bureau or the two
surety companies. On August 17, 2007, the Attorney General of Ohio filed a
lawsuit on behalf of the Bureau in the Court of Common Pleas of Franklin County,
Ohio, seeking to recover from the Company $5.8 million, including interest to
that date and other costs. This claim represents the amount remaining
after the Bureau’s settlements with the two surety companies. On
August 21, 2007, the two surety companies sued the Company to recover on
indemnification obligations allegedly due to them, in the aggregate amount of
$1.1 million, including interest to that date and other costs.
The
Company has filed answers to the three complaints and a motion to consolidate
the three actions is pending. The Company intends to vigorously
defend these actions. As of September 30, 2007, we accrued $2.0
million related to the claim made by the Bureau as Other long-term
liabilities.
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 Newcastle 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
Newcastle 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.
Alcoa
and the Company had certain disputes related to the sale of the fasteners
business to Alcoa in December 2002. On October 31, 2007, the Company
and Alcoa resolved all related disputes, and $25.3 million of an escrow account
established at the time of the sale was released to us and Alcoa paid us an
additional $0.6 million.
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.
14.
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.
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
(In
thousands)
|
|
PoloExpress
|
|
|
Hein
Gericke
|
|
|
Aerospace
|
|
|
and
Other
|
|
|
Total
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
140,611 |
|
|
$ |
128,335 |
|
|
$ |
86,062 |
|
|
$ |
950 |
|
|
$ |
355,958 |
|
Operating
income (loss)
|
|
|
12,131 |
|
|
|
(25,926 |
) |
|
|
6,519 |
|
|
|
(33,270 |
) |
|
|
(40,546 |
) |
Interest
income
|
|
|
520 |
|
|
|
87 |
|
|
|
- |
|
|
|
2,223 |
|
|
|
2,830 |
|
Interest
expense
|
|
|
(1,431 |
) |
|
|
(4,379 |
) |
|
|
(1,394 |
) |
|
|
(7,074 |
) |
|
|
(14,278 |
) |
Income
tax (provision) benefit
|
|
|
6,702 |
|
|
|
(33 |
) |
|
|
(5 |
) |
|
|
104 |
|
|
|
6,768 |
|
Capital
expenditures
|
|
|
7,967 |
|
|
|
3,067 |
|
|
|
588 |
|
|
|
107 |
|
|
|
11,729 |
|
Depreciation
and amortization
|
|
|
2,303 |
|
|
|
5,042 |
|
|
|
472 |
|
|
|
1,189 |
|
|
|
9,006 |
|
Identifiable
assets at Sept. 30
|
|
|
96,208 |
|
|
|
95,897 |
|
|
|
49,093 |
|
|
|
116,156 |
|
|
|
357,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
15. 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
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
by geographic area
|
|
$ |
91,753 |
|
|
$ |
264,205 |
|
|
$ |
- |
|
|
$ |
355,958 |
|
Operating
loss by geographic area
|
|
|
(24,913 |
) |
|
|
(15,469 |
) |
|
|
(164 |
) |
|
|
(40,546 |
) |
Loss
from continuing operations before taxes
|
|
|
(34,417 |
) |
|
|
(11,670 |
) |
|
|
(164 |
) |
|
|
(45,935 |
) |
Identifiable
assets by geographic area at September 30
|
|
|
47,946 |
|
|
|
306,163 |
|
|
|
3,245 |
|
|
|
357,354 |
|
Long-lived
assets by geographic area at September 30
|
|
|
50,876 |
|
|
|
47,882 |
|
|
|
3,245 |
|
|
|
102,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
(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.
|
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:
|
|
|
|
|
|
|
|
|
|
Asia-Pacific
|
|
South
|
|
|
|
|
|
|
|
(In
thousands)
|
Europe
|
|
Canada
|
|
Japan
|
|
(without
Japan)
|
|
America
|
|
Other
|
|
Total
|
|
2007
|
|
$ |
11,855 |
|
|
$ |
4,690 |
|
|
$ |
12,413 |
|
|
$ |
4,782 |
|
|
$ |
4,306 |
|
|
$ |
5,667 |
|
|
$ |
43,713 |
|
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 |
|
16. QUARTERLY
FINANCIAL DATA (UNAUDITED)
The
following table of unaudited quarterly financial data for fiscal 2007 and fiscal
2006 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,
|
|
March
31,
|
|
June
30,
|
|
September
30,
|
|
(In
thousands, except per share data) |
2006
|
|
2007
|
|
2007
|
|
2007
|
|
Net
revenues
|
|
$ |
60,623 |
|
|
$ |
81,012 |
|
|
$ |
118,165 |
|
|
$ |
96,158 |
|
Gross
margin
|
|
|
22,553 |
|
|
|
31,685 |
|
|
|
52,216 |
|
|
|
36,033 |
|
Operating
income (loss) (a)
|
|
|
(10,776 |
) |
|
|
(8,156 |
) |
|
|
3,037 |
|
|
|
(24,651 |
) |
Income
tax (provision) benefit
|
|
|
(607 |
) |
|
|
(49 |
) |
|
|
(110 |
) |
|
|
7,534 |
|
Earnings
(loss) from continuing operations (b)
|
|
|
(14,029 |
) |
|
|
(10,935 |
) |
|
|
4,412 |
|
|
|
(18,566 |
) |
Per
basic and diluted share
|
|
|
(0.56 |
) |
|
|
(0.43 |
) |
|
|
0.18 |
|
|
|
(0.74 |
) |
Loss
from discontinued operations, net of tax
|
|
|
(1,966 |
) |
|
|
(778 |
) |
|
|
(1,934 |
) |
|
|
(1,860 |
) |
Per
basic and diluted share
|
|
|
(0.08 |
) |
|
|
(0.03 |
) |
|
|
(0.08 |
) |
|
|
(0.07 |
) |
Net
gain on disposal of discontinued operations (c)
|
|
|
12,500 |
|
|
|
32,815 |
|
|
|
- |
|
|
|
- |
|
Per
basic and diluted share
|
|
|
0.50 |
|
|
|
1.30 |
|
|
|
- |
|
|
|
- |
|
Net
earnings (loss)
|
|
|
(3,495 |
) |
|
|
21,102 |
|
|
|
2,478 |
|
|
|
(20,426 |
) |
Per
basic and diluted share
|
|
|
(0.14 |
) |
|
|
0.84 |
|
|
|
0.10 |
|
|
|
(0.81 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
March
31,
|
|
June
30,
|
|
September
30,
|
|
(In
thousands, except per share data) |
2005
|
|
2006
|
|
2006
|
|
2006
|
|
Net
revenues
|
|
$ |
51,547 |
|
|
$ |
62,964 |
|
|
$ |
105,815 |
|
|
$ |
89,265 |
|
Gross
margin
|
|
|
19,403 |
|
|
|
23,937 |
|
|
|
44,379 |
|
|
|
35,922 |
|
Operating
income (loss)
|
|
|
(9,193 |
) |
|
|
(10,918 |
) |
|
|
2,405 |
|
|
|
(9,223 |
) |
Income
tax (provision) benefit (d)
|
|
|
13 |
|
|
|
5 |
|
|
|
(1,580 |
) |
|
|
(614 |
) |
Loss
from continuing operations (d) (e)
|
|
|
(10,095 |
) |
|
|
(11,687 |
) |
|
|
(951 |
) |
|
|
(11,157 |
) |
Per
basic and diluted share
|
|
|
(0.40 |
) |
|
|
(0.46 |
) |
|
|
(0.04 |
) |
|
|
(0.45 |
) |
Earnings
(loss) from discontinued operations, net of tax (f) (g)
|
|
|
(411 |
) |
|
|
622 |
|
|
|
(1,192 |
) |
|
|
(16,028 |
) |
Per
basic and diluted share
|
|
|
(0.02 |
) |
|
|
0.02 |
|
|
|
(0.04 |
) |
|
|
(0.64 |
) |
Net
gain on disposal of discontinued operations
|
|
|
12,500 |
|
|
|
- |
|
|
|
1,000 |
|
|
|
100 |
|
Per
basic and diluted share
|
|
|
0.50 |
|
|
|
- |
|
|
|
0.04 |
|
|
|
- |
|
Net
earnings (loss)
|
|
|
1,993 |
|
|
|
(11,066 |
) |
|
|
(1,144 |
) |
|
|
(27,082 |
) |
Per
basic and diluted share
|
|
|
0.08 |
|
|
|
(0.44 |
) |
|
|
(0.05 |
) |
|
|
(1.07 |
) |
(a)
|
The
$15.4 million increase in operating loss for the quarter ended September
30, 2007 compared to the quarter ended September 30, 2006 resulted from a
$26.2 million pension settlement charge in 2007 from the liquidation of an
overfunded pension plan, offset partially by income recognition of $11.8
million in 2007 from a decision to eliminate health care assistance to
retirees for whom we are not contractually obligated to provide
benefits.
|
(b)
|
The
items discussed in (a) above were also the principal reason for the $7.4
million increase in loss from continuing operations for the quarter ended
September 30, 2007 compared to the year-ago period. In addition, we
recorded an adjustment in the first quarter of fiscal 2007 to correct the
carrying value of the liability associated with our obligation to acquire
the remaining 7.5% of PoloExpress to reflect the liability at its
estimated present value. As a result of this correction, we
recognized $1.3 million of interest expense. The related tax
benefit of $0.3 million was recognized in the fourth quarter of fiscal
2007.
|
(c)
|
The
$32.8 million net gain on disposal of discontinued operations in the
quarter ended March 31, 2007 resulted from reduction of tax liabilities
due to expiration of the related
statutes of limitation and closure of the related tax periods related to
previously disposed of operations.
|
(d)
|
$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.
|
(e)
|
$1.0
million of the improvement in loss from continuing operations for the
quarter ended March 31, 2006 compared to the year-ago period resulted from
the recharacterization
of our interest in Voyager Kibris, including elimination of the related
loss during the quarter ended March 31, 2006.
|
(f)
|
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.
|
(g)
|
The
$16.0 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 arbitration award of health and safety
claims to Alcoa, and a $1.4 million additional accrual for the claim
made by the Ohio Bureau of Workers
Compensation.
|
17. DISCONTINUED
OPERATIONS
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. The deferred gain is included in Noncurrent liabilities of
discontinued operations on our consolidated balance sheets, together with the
accrual of $1.0 million for estimated remediation costs.
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
In
June 2005, we sold our Fairchild Aerostructures operation to PCA Aerospace and
recognized a $1.8 million gain. The cash received from PCA Aerospace
was 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. In October 2007, we reached a settlement with PCA
regarding the purchase price adjustment related to that sale. Under
the terms of the settlement PCA agreed to pay us $1.75 million. A
payment of $0.5 million was made in October 2007, and an additional payment of
$0.25 million is due in February 2008. In addition, we agreed to
finance the remaining $1.0 million principal owed to us by PCA at an interest
rate of 10%. In accordance with the financing terms, starting in
November 2007, PCA began to make monthly payments to us, which are expected to
continue for a period of sixty months. We also amended our lease with
PCA Aerospace whereby we can cause PCA Aerospace to purchase the Huntington
Beach property at the greater of fair market value or $5.0 million under a put
option we hold, which can be exercised at any time through January 31, 2012. PCA
Aerospace also holds a similar purchase option. In November 2007, we
exercised our put option. Accordingly, PCA Aerospace has 6 months to
purchase the property from us at fair market value, which we have agreed with
PCA Aerospace will be $7.3 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 were 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, 2005, and 2006. Accordingly, we
recognized a $12.5 million gain on disposal of discontinued
operations for 2007, 2006, and 2005. 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 approximately $9.1
million of our loan from GoldenTree Asset Management.
On
December 3, 2002, we deposited with an escrow agent $25.0 million to secure
indemnification obligations we may have to Alcoa. On October 31,
2007, the Company and Alcoa resolved all related
disputes. Accordingly, $25.3 million of the escrow account was
released to us and Alcoa made an additional payment to us of $0.6
million.
The
components of net loss from discontinued operations are as follows:
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Net
sales
|
|
$ |
- |
|
|
$ |
7,450 |
|
|
$ |
17,745 |
|
Cost
of goods sold
|
|
|
- |
|
|
|
(3,524 |
) |
|
|
(14,510 |
) |
Gross
margin
|
|
|
- |
|
|
|
3,926 |
|
|
|
3,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general & administrative expense
|
|
|
(6,633 |
) |
|
|
(16,638 |
) |
|
|
(5,062 |
) |
Other
income, net
|
|
|
164 |
|
|
|
1,008 |
|
|
|
402 |
|
Operating
loss
|
|
|
(6,469 |
) |
|
|
(11,704 |
) |
|
|
(1,425 |
) |
Net
interest expense
|
|
|
- |
|
|
|
(2,701 |
) |
|
|
(3,381 |
) |
Loss
from discontinued operations before income taxes
|
|
|
(6,469 |
) |
|
|
(14,405 |
) |
|
|
(4,806 |
) |
Income
tax provision
|
|
|
(69 |
) |
|
|
(2,604 |
) |
|
|
(825 |
) |
Net
loss from discontinued operations
|
|
$ |
(6,538 |
) |
|
$ |
(17,009 |
) |
|
$ |
(5,631 |
) |
Net
loss from discontinued operations includes the results of the Airport Plaza
shopping center prior to its sale, Fairchild Aerostructures prior to its sale,
and certain legal, tax, and environmental expenses associated with our former
businesses. The loss from discontinued operations for fiscal 2007 consists
primarily of a $2.3 million increase in our accrual of environmental liabilities
at locations of operations previously sold and $4.0 million to cover legal
expenses and workers compensation obligations associated with businesses we sold
several years ago. 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
liabilities of the shopping center and landfill development partnership are
being reported as liabilities of discontinued operations at September 30, 2007
and 2006, and were as follows:
|
|
September
30,
|
|
(In
thousands)
|
2007
(a)
|
|
2006
(a)
|
|
Current
liabilities of discontinued operations
|
|
$ |
- |
|
|
$ |
62 |
|
Noncurrent
liabilities of discontinued operations
|
|
|
16,120 |
|
|
|
16,120 |
|
Total
net liabilities of discontinued operations
|
|
$ |
16,120 |
|
|
$ |
16,182 |
|
(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.
|
Net
gain on disposal of discontinued operations was comprised of the following for
2007, 2006, and 2005:
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Earnout
on sale of fasteners
|
|
$ |
12,500 |
|
|
$ |
12,500 |
|
|
$ |
12,500 |
|
Release
of income tax reserves
|
|
|
32,815 |
|
|
|
- |
|
|
|
- |
|
Gain
on sale of landfill
|
|
|
- |
|
|
|
1,100 |
|
|
|
- |
|
Gain
on sale of Aerostructures
|
|
|
- |
|
|
|
- |
|
|
|
1,825 |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
(750 |
) |
|
|
$ |
45,315 |
|
|
$ |
13,600 |
|
|
$ |
13,575 |
|
On
October 31, 2007, the Company and Alcoa resolved all disputes related to the
2002 sale of the fastener business to Alcoa. Accordingly, $25.3
million of the escrow account was released to us and Alcoa made an additional
payment to us of $0.6 million and assumed specified liabilities for foreign
taxes, environmental matters, and worker compensation claims. We used
$20.9 million of these proceeds to fully repay the GoldenTree
loan. On October 31, 2007, we sold our property in Fullerton,
California to Alcoa for $19.0 million. We used $13.0 million of these
proceeds to fully repay the Beal Bank loan. We expect to
recognize a pre-tax gain of approximately $26.0 million from these transactions
with Alcoa in the quarter ending December 31, 2007.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
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. Management
is responsible for establishing and maintaining adequate internal control over
our financial reporting.
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, 2007, 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, 2007.
We
identified the following material weaknesses as of September 30,
2006. As noted in the Plan for Remediation section below, we have
taken certain steps to address the material weaknesses noted as of September 30,
2006. However, these material weaknesses also existed as of September
30, 2007 and more time is required to remediate these material weaknesses. No
additional material weaknesses were identified as of September 30,
2007.
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 also existed as of September
30, 2007 and more time is required to remediate this material weakness. 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 adequately 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 also existed as of September 30, 2007 and more time
is required to remediate this material weakness. 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 took 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, certain of the material weaknesses continued
as of September 30, 2007, so more time is required to have these steps remediate
the matters discussed above.
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.
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 three months ended September 30, 2007 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
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE
DIRECTORS
STANDING FOR ELECTION
All of
the nominees are currently directors of the Company. Each has agreed to be named
in this Annual Report on Form 10-K 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
December 31, 2007.
Name
|
|
Age
|
|
Position
|
Didier
Choix
|
|
50
|
|
Director
|
Robert
E. Edwards
|
|
59
|
|
Director
|
Andrea
Goren
|
|
40
|
|
Director
|
Daniel
Lebard
|
|
68
|
|
Director
|
Glenn
Myles
|
|
52
|
|
Director
|
Philip
S. Sassower
|
|
68
|
|
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: 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.
Andrea
Goren. Director since 2008. Mr. Goren is a
Managing Director of SG Phoenix LLC, a private equity firm, has served in that
capacity since May 2003, and has been associated with Phoenix Enterprises
LLC since January 2003. Prior to that, Mr. Goren served as Vice
President of Shamrock International, Ltd., a private equity firm, from
June 1999 to December 2002. Mr. Goren has been a member of the
Board of Directors of Xplore Technologies Corp. since
December 2004.
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. Member of
Board and Audit Committee of Compagnie Lebon, Paris, France, a public investment
company with interests in real estate and hotels: 2007 to
present.
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.
Philip
S. Sassower. Director since 2008. Mr. Sassower
has served as the Chief Executive Officer of Xplore Technologies Corp. since
February 2006, and has been Chairman of the Board of Xplore since
December 2004. Mr. Sassower is also the Chief Executive
Officer of SG Phoenix LLC, a private equity firm, and has served in that
capacity since May 2003. Mr. Sassower has also been Chief Executive
Officer of Phoenix Enterprises LLC, a private equity firm, and has served in
that capacity since 1996. Mr. Sassower served as Chairman of the Board of
Communication Intelligence Corp., an electronic signature solution provider,
from 1998 to 2002 and Chairman of the Board of Newpark Resources, Inc., an
environmental services company, from 1987 to 1996.
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 a Director of Aqua Bounty Technologies, Inc.
(ABTX), a U.S. company traded on the AIM exchange in the United
Kingdom. The Company has an investment in Aqua Bounty. 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 certain legal proceedings in France involving Mr. J.
Steiner, Chairman and Chief Executive Officer of the Company. This matter is
closed and all of the charges against Mr. J. 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. J. Steiner was given a suspended sentence and ordered to pay a fine of
€500,000 by the French Court. This decision has resulted in no penal record in
France. The Company and Mr. J. 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” and under “Corporate Governance Matters.”
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 21, 2006, the Company announced that FA
Holdings I, LLC had withdrawn its proposal, and on December 5, 2006, 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, and on
March 6, 2007, the Delaware Court of Chancery so ordered.
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 Elected:
Pursuant to the Derivative Settlement, the Board of Directors of the
Company elected two new independent directors as soon as
practicable. Pursuant to the Derivative Settlement, Jeffrey
Steiner and Eric Steiner (on behalf of themselves and their affiliates) agreed
that they would not take actions as stockholders to remove any such independent
directors prior to the Company’s 2007 annual meeting of stockholders. In addition, the
Board elected a third independent director to replace an outgoing
director.
Two Additional
Independent Directors Elected in 2008: In January, 2008, the
Board elected two further independent directors, Andrea Goren and Philip S.
Sassower. Their biographies are listed among the other directors
above, all in alphabetical order.
COMMITTEES
OF THE BOARD OF DIRECTORS
The Board has five standing committees
and a sixth standing committee which did not act during fiscal years 2006 or
2007; the Board also has had one special committee to evaluate the “going
private” negotiations, which disbanded effective December 12, 2006, and a second
special committee which developed the response to a tender offer for shares of
the Company’s Class A Common Stock. The following chart describes the function
and membership of each standing committee and the special committee and the
number of times each met during the 2006 and 2007 fiscal years:
Audit
Committee
(FY
2006 – held 6 meetings;
FY
2007—held 6 meetings and acted once by written consent)
|
|
|
|
Function
|
|
Members
|
|
|
|
|
|
Responsible
for the appointment, compensation and oversight of the Company’s outside
auditors and resolution of disagreements, if any, between outside auditors
and management.
|
|
Michael
J. Vantusko (Chairman) (appointed 7/19/2006)
Didier
Choix (appointed 7/19/2006)
Robert
E. Edwards (appointed 3/8/2006)
Daniel
Lebard (appointed 3/8/2006)
Steven
L. Gerard resigned from the Board on 7/13/2006.
|
|
Receives
and responds to complaints (which may be submitted confidentially or
anonymously) regarding accounting, internal account control or auditing
matters.
|
|
Examines
and considers (and, where appropriate, pre-approves) matters relating to
the internal and external audits of the Company’s accounts and its
financial affairs.
|
|
Selects
the Company’s independent auditors.
|
|
Reviews
the Company’s auditing, financial reporting and internal control
functions.
|
The Audit
Committee has been established in accordance with Section 10A(m) of the
Exchange Act which (among other things) requires companies to establish a
committee of board members for the purpose of overseeing the accounting and
financial reporting processes of the company and audits of the financial
statements of the company.
Financial
Expert: The Board of Directors has determined that Michael J.
Vantusko, a member of the Audit Committee, is a “financial expert” as defined in
Securities and Exchange Commission Rules. Such determination was based, in part,
on the following qualifications:
|
|
He
has served since February 2000 as President of Grantwood Consulting, LLC,
a financial advisory and consulting firm, and of Grantwood Capital, LLC, a
private equity investing firm.
|
|
|
He
served from 1996 to 2000 as Chief Financial Officer & Senior Vice
President of Waterlink, Inc. (NYSE: WLK), an international equipment
consolidator, and from 1995 to 1996 as Chief Financial Officer of Waxman
Industries, Inc. (NYSE: WAX), a products
distributor.
|
|
|
He
also served The Fairchild Corporation in a variety of roles, including
Vice President and Chief Financial Officer of a former $300 million
division of the Company, between 1979 and
1994.
|
|
|
He
is a Certified Public Accountant.
|
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 in this proxy statement under the heading “Certain
Transactions.” Ages are stated as of December 31,
2007.
Klaus Esser, 55, has served as
the Managing Director of PoloExpress since 1980. Fairchild acquired PoloExpress
in November
2003.
Michael L. McDonald, 43, 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.
Richard P. Nyren, 37, has
served as Controller of the Company since September 2007 and from October 2006
through August 2007, as Assistant Controller of the Company. Between
2005 and 2006, he was Assistant Controller at Cybertrust Incorporated and from
2004 to 2005, a Senior Analyst at the Center for Financial Research &
Analysis. From 2002 to 2004, he attended the University of
Maryland-College Park, where he earned a master’s degree in business
administration. Mr. Nyren is a Certified Public
Accountant.
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 September 2006. 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 and the 2007 fiscal years all such 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 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 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 fiscal years 2006 and 2007and 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 was as follows in the most
recent fiscal year:
Fiscal
2007
|
Name
|
Fees
Earned or Paid in Cash
($)
|
Option
Awards ($)(1)
|
All Other ($)
|
Total ($)
|
|
|
|
|
|
Didier
Choix
|
55,230
|
-
|
-
|
55,230
|
Robert
E. Edwards
|
59,000
|
-
|
-
|
59,000
|
Daniel
Lebard
|
46,000
|
-
|
-
|
46,000
|
Glenn
Myles
|
31,730
|
-
|
-
|
31,730
|
Michael
J. Vantusko
|
75,230
|
-
|
-
|
75,230
|
(1) No options
were awarded in fiscal 2007, however, previously awarded options are still held
by the non-management directors as follows:
Didier
Choix 30,000
@
$2.17 7,500
are vested
Robert E.
Edwards 1,000
@
$3.49 1,000
are vested
1,000 @
$2.46 1,000
are vested
Daniel
Lebard 30,000
@
$2.35 30,000
are vested
1,000 @
$5.11 1,000
are vested
1,000 @
$4.99 1,000
are vested
1,000 @
$3.49 1,000
are vested
1,000 @
$2.46 1,000
are vested
Glenn
Myles 30,000
@
$2.17 7,500
are vested
Michael
J.
Vantusko 30,000
@
$2.17 7,500
are vested
Compensation for Directors who are not
salaried employees of the Company is based on the following standard fees per
committee membership and membership on the full Board, and on meetings of such
committees and the full Board as described immediately below.
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.
Reimbursed
travel expenses related to attendance at meetings.
|
|
|
|
Stock
Options:
|
|
Under
the 1996 Non-Employee Directors Stock Option Plan (the “1996 NED Plan”)
each non-employee director was issued stock options for 30,000 shares at
the time he or she was first elected as a director. Thereafter, each
director was 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).
|
|
|
|
ChChairman
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.
The
Compensation Discussion and Analysis is set forth beginning on the next
page.
The
Committee has reviewed and discussed with management the Compensation Discussion
and Analysis required by 17 CFR Section 229.402(b) of Securities Regulation
S-K. Based upon this review and these discussions, the Committee has
recommended to the Board of Directors that the Compensation Discussion and
Analysis set forth in this report should be included in the proxy
statement.
Respectfully
submitted by the members of the Compensation and Stock Option Committee of the
Board of Directors, as of January 10, 2008:
Daniel
Lebard, Chairman
Michael
J. Vantusko
Robert E.
Edwards
COMPENSATION DISCUSSION AND
ANALYSIS
Compensation
Objectives; What the Compensation Program Is Designed to Reward
The
Compensation Committee’s goals are to:
·
|
Provide
compensation competitive with other companies facing similar
challenges.
|
·
|
Encourage
executives to increase profitability and shareholder
value.
|
·
|
Promote
the success of business units of the
Company.
|
·
|
Directly
relate compensation to Company performance and/or the objective value of
individual service.
|
Elements
of Executive Officer Compensation: Base Salary and Annual Incentive
Bonus
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. In fiscal 2007 and 2006, no non-cash compensation
was awarded to executive officers.
Why
the Company Chooses to Pay Each Element: 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
Settlement Agreement has resulted in the compensation for Mr. J. Steiner and Mr.
E. Steiner being fixed, however, pending renegotiation with the Compensation
Committee.
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
Compensation Committee engaged Hewitt Associates LLC to serve as an independent
consultant to review the compensation of the Company’s senior executives and,
where appropriate, recommend to the Compensation Committee changes to such
senior executives’ compensation based on comparable arrangements for similarly
situated senior executives in comparable companies in similar circumstances and
facing comparable challenges.
How
the Company Determines the Amounts of Each Element to Pay
The
Company manages the total cash compensation to provide median levels of cash
compensation at average levels of corporate, business unit, or individual
performance. The Compensation Committee considers the past
compensation of each executive officer in determining the amount of each element
of future pay.
For two
named executive officers, Messrs. Esser and Persavich, contractual provisions
govern their compensation, as described below under the heading “Employment
Agreements and Change of Control Arrangements”. For Messrs. J.
Steiner and E. Steiner, the Settlement Agreement limits their compensation.
There is no set formula or written contract for determining the amounts of
payments to Mr. McDonald or Mr. Miller.
How
the Company Decides How Each Compensation Element Fits into the Overall
Compensation Objectives and Affects Decisions Regarding Other
Elements
The
higher proportion of contingent cash compensation, in the form of bonuses, for
higher job-grade executives, is consistent with the Company’s desire to reward
excellence, maintain compensation at competitive levels in relation to other
companies, and ultimately to increase shareholder value.
Long-term and Short-term
Compensation
The Committee is currently keeping the
formula for the Retirement Plan unchanged. All benefits under the
Supplementary Executive Retirement Plan (SERP) have been frozen and there is no
plan to adopt another SERP. No proposals regarding long-term
compensation are currently under consideration.
Cash
and Non-cash Compensation
Compensation decisions are currently
made solely with regard to short-term cash compensation. No stock
options were granted to executive officers during the fiscal 2007 or
2006. Bonuses and other cash and non-cash compensation are determined
based on a combination of job-grade, where a higher job grade makes more income
at risk, and individual performance, which is measured in terms of success of an
executive officer within assigned areas of responsibility, and employment
contracts.
Timing of Compensation
Awards
Awards of compensation are currently
made after the end of each fiscal year, and upon promotions of
officers. Since all of the compensation is currently made in cash,
there is no issue as to the timing of non-cash compensation.
Specific
Items of Corporate Performance Taken Into Account in Setting Compensation
Policies and Making Compensation Decisions
Operating revenues, EBITDA, enterprise
value, and profitability of divisions and/or subsidiaries are the primary
measure of executive officer performance in terms of meeting specific items of
corporate performance. An example of corporate performance taken into
account in setting compensation is that of the Aerospace Division’s
profitability, leading to additional compensation for Mr. Persavich, and of the
performance of the PoloExpress business, leading to additional compensation and
a re-negotiated contract for Mr. Esser, as described below under the heading
“Employment Agreements and Change of Control
Arrangements”. Except for the compensation for Mr. Esser and
Mr. Persavich, all awards based on operating performance were based on
discretion of the Compensation Committee, rather than on any
formula.
Individual
Performance and/or Contributions to These Items of the Company’s Performance
Taken Into Account for Company Profitability
Individual contributions to
profitability often take the form of specialized services that are highly
compensated in the outside market for professional services. An
example of specialized services value is the fiscal 2006 bonus for Mr. Miller,
Executive Vice President, Secretary, and General Counsel, who led the legal
teams which developed, cleared, and closed the sale of the Airport Plaza
shopping center in Long Island, New York in fiscal 2006. When
acquisitions or divestitures of businesses are completed, those participating in
the transactions may receive bonus payments due to the high value accorded to
managerial and merger and acquisition experience.
Factors
Considered in Decisions to Increase or Decrease Compensation
Materially
The measures described in the two
paragraphs immediately above, on corporate performance and individual
contributions, are the primary factors on which compensation decisions are
based.
Role
of Executive Officers in Determining Executive Compensation
The Compensation Committee from time to
time invites various executive officers of the Company and/or its subsidiaries
to meetings of the Committee to gather information about proposals for
compensation and takes into account recommendations from the CEO and Chairman of
the Board, Mr. J. Steiner, who is not a member of the Committee.
Total
Compensation Program
The Committee believes that the total
compensation program for executives of the Company (cash compensation and
bonuses) 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.
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.
Compensation
of CEO
Mr. J. 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. J. Steiner’s
salary and target bonus levels, 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. J. 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
his investment banking acumen.
Base Compensation—Mr. J.
Steiner’s aggregate base compensation for fiscal 2006 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 $1,325,000 per year,
effective as of January 12, 2006. Such reduction in compensation will
remain in place until such time as the Compensation Committee and Mr. J.
Steiner agree on the terms of a new or amended employment
agreement.
Stock Option Grants—No stock
options were granted to Mr. J. Steiner during fiscal 2007 or
2006.
Incentive Compensation for fiscal
2007 and 2006—The Committee determined that Mr. J. Steiner should
receive no incentive compensation for fiscal 2007 or 2006.
SUMMARY COMPENSATION TABLE
FISCAL 2007, 2006, 2005
Name & Principal
Position
|
Fiscal Year
|
|
Salary ($)
|
|
|
Bonus ($) (5)
|
|
|
Non-Equity
Incentive Plan Compensation ($)
(1)
|
|
|
Change
in Pension Value & Nonqualified Deferred Compensation Earnings ($)
|
|
|
All
Other Compensation ($)
(2)
|
|
|
Total ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey
Steiner, Chairman & CEO (3) (4)
|
2007
|
|
|
1,325,000 |
|
|
|
52,394 |
|
|
|
- |
|
|
|
(241,172 |
) |
|
|
23,389 |
|
|
|
1,159,611 |
|
|
2006
|
|
|
1,542,596 |
|
|
|
52,394 |
|
|
|
- |
|
|
|
79,833 |
|
|
|
26,899 |
|
|
|
1,701,722 |
|
|
2005
|
|
|
2,500,005 |
|
|
|
- |
|
|
|
- |
|
|
|
100,125 |
|
|
|
27,787 |
|
|
|
2,627,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Klaus
Esser, Managing Director of Polo Express, GmbH (6)
|
2007
|
|
|
399,185 |
|
|
|
- |
|
|
|
675,292 |
|
|
NA
|
|
|
|
18,100 |
|
|
|
1,092,577 |
|
|
2006
|
|
|
283,086 |
|
|
|
- |
|
|
|
529,248 |
|
|
NA
|
|
|
|
16,837 |
|
|
|
829,171 |
|
|
2005
|
|
|
254,516 |
|
|
|
- |
|
|
|
585,386 |
|
|
NA
|
|
|
|
17,409 |
|
|
|
857,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael
McDonald, Sr. Vice President & CFO
|
2007
|
|
|
239,101 |
|
|
|
- |
|
|
|
- |
|
|
|
7,598 |
|
|
|
22,277 |
|
|
|
268,976 |
|
|
2006
|
|
|
159,723 |
|
|
|
- |
|
|
|
- |
|
|
|
2,720 |
|
|
|
14,710 |
|
|
|
177,153 |
|
|
2005
|
|
|
143,580 |
|
|
|
13,500 |
|
|
|
- |
|
|
|
15,286 |
|
|
|
14,674 |
|
|
|
187,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Donald
Miller, Exec. Vice President & General
Counsel (3)
|
2007
|
|
|
355,003 |
|
|
|
- |
|
|
|
- |
|
|
|
87,684 |
|
|
|
24,206 |
|
|
|
466,893 |
|
|
2006
|
|
|
375,003 |
|
|
|
200,000 |
|
|
|
- |
|
|
|
74,700 |
|
|
|
20,176 |
|
|
|
669,879 |
|
|
2005
|
|
|
375,250 |
|
|
|
- |
|
|
|
- |
|
|
|
147,206 |
|
|
|
21,877 |
|
|
|
544,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warren
Persavich, President, Aerospace Division
|
2007
|
|
|
226,289 |
|
|
|
- |
|
|
|
177,600 |
|
|
|
28,881 |
|
|
|
20,459 |
|
|
|
453,229 |
|
|
2006
|
|
|
226,289 |
|
|
|
- |
|
|
|
155,400 |
|
|
|
24,868 |
|
|
|
24,137 |
|
|
|
430,694 |
|
|
2005
|
|
|
226,289 |
|
|
|
- |
|
|
|
43,290 |
|
|
|
92,042 |
|
|
|
19,351 |
|
|
|
380,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eric
Steiner, President & COO
|
2007
|
|
|
535,500 |
|
|
|
- |
|
|
|
- |
|
|
|
12,324 |
|
|
|
40,500 |
|
|
|
588,324 |
|
|
2006
|
|
|
588,707 |
|
|
|
- |
|
|
|
- |
|
|
|
9,769 |
|
|
|
32,142 |
|
|
|
630,618 |
|
|
2005
|
|
|
714,802 |
|
|
|
- |
|
|
|
- |
|
|
|
53,412 |
|
|
|
34,651 |
|
|
|
802,865 |
|
__________________________________________________
|
FY
2007 = Fiscal Year from October 1, 2006 to September 30,
2007.
|
|
FY
2006 = Fiscal Year from October 1, 2005 to September 30,
2006.
|
|
FY
2005 = Fiscal Year from October 1, 2004 to September 30,
2005.
|
(1)
|
Mr. Esser and Mr.
Persavich receive non-equity incentive-based compensation pursuant to
contracts with the Company, which are described in the tables of contract
terms following the Grants of Plan Based Awards Table
below.
|
(2)
|
Includes
for Mr. E. Steiner $11,154 which was earned in fiscal 2005, but payment of
which has been deferred. The aggregate amounts of perquisites
included in the Summary Compensation Table under the heading “All Other
Compensation” for fiscal 2007 consist of: 401(k) match;
financial services; personal W-2 auto; and life and disability
insurance. Personal W-2 auto for Mr. E. Steiner was $27,966 in
fiscal 2007, based on one vehicle in Germany for part of fiscal 2007 and
one in the United States for part of fiscal 2007. The Euro amount for the
German auto was converted to US Dollars based on the monthly average
interbank rates posted on the OANDA.com website. The
incremental cost to the Company for all vehicles was calculated based on
the miles driven for personal and for company
use.
|
(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 Mr. J. Steiner are as follows:
|
Fiscal
2007
|
|
$ |
1,400,000 |
|
Fiscal
2006
|
|
$ |
3,459,283 |
|
Fiscal
2005
|
|
$ |
477,222 |
|
Advances under the Unfunded SERP for Mr. Miller were $919,131 in
fiscal 2007 and not in fiscal 2006. See disclosure under Certain
Transactions. No further Unfunded SERP payment are owed to Mr.
Miller.
(4)
|
Table
does not include a remaining $3,140,000 change in control payment due to
Mr. J. Steiner upon termination of
employment.
|
(5)
|
For
Mr. J. Steiner, represents payment under a release of claims required by
the Derivative Settlement in connection with a former split-dollar life
insurance premium. These payments were $52,394 in each of
fiscal 2007 and 2006.
|
(6)
|
Mr.
Esser is paid in Euros. The US Dollar values given are based on
monthly average interbank rates posted on the OANDA.com
website.
|
Table: Grants of
Plan-Based Awards
Name
|
|
Grant
Date
|
|
Threshold ($)
|
|
Estimated
Future Payouts Under Non-Equity Incentive Plan Awards
Target ($)
|
|
Maximum
($)
|
|
|
|
|
|
|
|
|
|
Klaus
Esser
|
|
January
1, 2006
|
|
See
agreement
|
|
700,000
|
|
none
|
Warren
Persavich
|
|
October
1, 2006
|
|
*
|
|
177,600
|
|
177,600
|
*Based on
a return on capital employed.
EMPLOYMENT
AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
The
following discussion of executive employment contracts summarizes employment
agreements and change of control agreements. These agreements are the
sources of the Plan-Based Awards to Messrs. Persavich and Esser as well as the
salary and bonus payments of all other named executive officers.
There are no remaining awards of change
of control payments due under current contracts. All previously
earned change of control payments have been paid, except for $3,140,000 due to
Mr. J. Steiner upon termination of his employment with the
Company. Mr. E. Steiner has relinquished any future change of control
payments.
·
|
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 or amended 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 December 3, 2002, 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.
|
|
|
Confidentiality
and
Non-competition:
|
The
employment agreement is subject to a three year confidentiality obligation
and a two year non-competition obligation. No special waiver
provisions apply to these duties.
|
·
|
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 or amended
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., the termination of which branch was
registered on December 5, 2007.
|
|
|
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 or amended 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. The Derivative Settlement
did not affect his prior employment contract’s provision that his
employment will extend by one year terms as long as neither party has
given 90 days notice of termination. This provision runs from
August 1 to August 1, rather than from January 12 to January
12.
|
|
|
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 or amended
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.
|
|
|
Payments
in the event of
a
“change in control”:
|
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.
|
|
|
Confidentiality
and
non-competition:
|
The
contract is subject to a permanent confidentiality obligation and a one
year non-competition obligation. No special waiver provisions
apply to these duties.
|
·
|
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.
|
|
|
Payments
in the event of
a
“change in control”:
|
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:
|
The
initial agreement provided for a term of 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 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 of
PoloExpress. 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:
|
|
FiscalYears
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
|
PercentageBonus
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 30,000 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. |
|
|
Confidentiality
and
non-competition:
|
The
contract is subject to a permanent confidentiality obligation and a six
month non-competition obligation. No special waiver provisions
apply to these duties.
|
Table: Options
Granted, Option Exercises, and Year-End Value
No stock
options were granted to or exercised by the named executive officers during
fiscal 2007 or 2006. Additionally, all options issued to named
executive officers expired in fiscal 2007 or 2006. There was thus a
year-end value of $0.
PENSION
BENEFITS
Name
|
Plan
Name
|
Number of
Years of Credited
Service
|
September 30,
2007 Present Value of Accumulated
Benefit
|
Payments During Last
FY
|
|
|
|
|
|
Jeffrey
Steiner
|
Retirement
Plan For
|
17
|
$
174,550
|
04/18/2007 $150,000
|
Chairman
& CEO
|
Employees
of The
|
|
|
05/29/2007 $225,000
|
|
Fairchild
Corporation
|
|
|
|
|
|
|
|
|
Klaus
Esser
|
Does
not participate in the
|
|
|
|
U.S.
Pension Plan.
|
|
|
|
|
|
|
|
|
Michael
McDonald, Sr.
|
Retirement
Plan For
|
17
|
$
71,270
|
$
-
|
Vice
President & CFO
|
Employees
of The
|
|
|
|
|
Fairchild
Corporation
|
|
|
|
|
|
|
|
|
Donald
Miller, Exec.
|
Retirement
Plan For
|
16
|
$
983,093
|
$
-
|
Vice
President and
|
Employees
of The
|
|
|
|
General
Counsel
|
Fairchild
Corporation
|
|
|
|
|
|
|
|
|
Warren
Persavich,
|
Retirement
Plan For
|
30
|
$
565,341
|
$
-
|
President,
Aerospace
|
Employees
of The
|
|
|
|
Division
|
Fairchild
Corporation
|
|
|
|
|
|
|
|
|
Eric
Steiner, President
|
Retirement
Plan For
|
16
|
$
258,303
|
$
-
|
&
COO
|
Employees
of The
|
|
|
|
|
Fairchild
Corporation
|
|
|
|
ACCRUED BENEFIT AS
OF: (1)
|
|
September
30,
|
|
Name
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Jeffrey Steiner, Chairman
& CEO
|
|
$ |
1,679 |
|
|
$ |
3,787 |
|
|
$ |
2,895 |
|
Michael McDonald, Sr. Vice
President & CFO
|
|
$ |
2,306 |
|
|
$ |
1,964 |
|
|
$ |
1,779 |
|
Donald Miller, Exec. Vice
President & General Counsel
|
|
$ |
10,786 |
|
|
$ |
9,965 |
|
|
$ |
9,193 |
|
Warren Persavich, President,
Aerospace Division
|
|
$ |
8,849 |
|
|
$ |
8,346 |
|
|
$ |
7,850 |
|
Eric Steiner, President &
COO
|
|
$ |
6,979 |
|
|
$ |
6,403 |
|
|
$ |
5,877 |
|
|
(1)
Footnote 5 of the Financial Statements included in the 2007 Annual
Report which accompanies this Proxy Statement sets forth the valuation
method and assumptions used to calculate accrued
benefits.
|
Defined Benefit Pension
Plan
A defined
benefit pension plan, the Retirement Plan for Employees of The Fairchild
Corporation (“Plan”), is maintained for eligible employees and executives in the
United States. Benefits are paid to plan participants under a formula
based on credited service and average earnings for the highest five consecutive
years of compensation out of the last ten years prior to retirement or other
termination of employment. After completing one year of eligibility
service, participants earn a year of credited service for each Plan year during
which they complete 1,000 hours of service. Eligible earnings include
base salary and, where applicable, incentive awards or bonuses, if any,
overtime, off-shift differentials and sales commissions.
Certain key executives have an
additional Plan benefit equal to an annual benefit determined by multiplying the
participants’ years of credited service times a fixed amount. The
amount varies by executive. Their additional benefit is referred to
as the “Funded SERP” (see below). Normal retirement age under the
plan is the earlier of attainment of age 65, or age 64 with 10 or more years of
service. The normal form of payment under the Plan for a participant
who is not married is a Single Life Annuity. Other actuarially
equivalent forms of payment, including a lump sum, are provided for under the
Plan. A subsidized early retirement benefit is available to
participants who retire after attaining age 55 with 10 or more years of
service. Under the early retirement formula, a participant who
retires at age 55 having completed 10 or more years of service would receive 72%
of their normal retirement age benefit. This percentage increases 4%
for each year closer to age 65 that retirement occurs, with 100% payable at age
62. The percentage payable is adjusted pro-rata for payments at
intermediate ages.
Federal laws place limitations on
compensation amounts that may be included under a qualified pension plan
($220,000 in 2007) as well as limitations on the total benefit that may be paid
from such plans. Pension benefits within the limit are funded by a
pension trust that is separate from the general assets of The Fairchild
Corporation.
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 (including the Funded SERP), 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 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 Unfunded SERP benefits at December 31,
2004 payable by the Company to all executive officers except Mr. M. McDonald,
who was not an executive officer at the time the SERP was frozen, and Mr. Esser,
who is not a U.S. participant. 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. SERP benefits can be paid in a lump sum or as an actuarially
equivalent annuity.
Mr. 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.
Subject
to the approval of the Compensation Committee, the plan permits participants to
elect to receive retirement advances.
POTENTIAL
PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL
Individually negotiated payments due to
Named Executive Officers upon termination of employment are set forth in detail
under the heading “Employment Agreements and Change of Control Arrangements”,
above.
In addition to these specifically
negotiated provisions, the benefits programs of the Company, such as health
insurance, are provided to Named Executive Officers on the same terms as all
salaried employees. These benefits cannot be provided as a lump
sum. Other perquisites, such as auto compensation, are discontinued
when there is no continuing business use of the vehicle.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
STOCK
OWNERSHIP
The
following table shows the number of shares beneficially owned (as of January 16,
2008) 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
|
|
*
|
|
-
|
|
0.00%
|
Robert
E. Edwards (2)
|
|
999,695
|
|
4.42%
|
|
-
|
|
0.00%
|
Andrea
Goren (3)
|
|
6,902,588
|
|
30.54%
|
|
-
|
|
0.00%
|
Daniel
Lebard (2)
|
|
48,356
|
|
*
|
|
-
|
|
0.00%
|
Glenn
Myles (2)
|
|
7,500
|
|
*
|
|
-
|
|
0.00%
|
Philip
S. Sassower (3)
|
|
6,902,588
|
|
30.54%
|
|
-
|
|
0.00%
|
Eric
Steiner (3)(6)
|
|
5,957,120
|
|
23.68%
|
|
2,548,996
|
|
97.24%
|
Jeffrey
J. Steiner (3)(4)
|
|
73,544
|
|
*
|
|
30,000
|
|
1.14%
|
Michael
J. Vantusko (2)
|
|
7,500
|
|
*
|
|
-
|
|
0.00%
|
|
|
|
|
|
|
|
|
|
Other
Named Executive Officers:
|
Klaus
Esser
|
|
-
|
|
0.00%
|
|
-
|
|
0.00%
|
Donald
E. Miller (3)
|
|
90,076
|
|
*
|
|
-
|
|
0.00%
|
Warren
D. Persavich
|
|
-
|
|
0.00%
|
|
-
|
|
0.00%
|
Michael
L. McDonald
|
|
5,258
|
|
*
|
|
-
|
|
0.00%
|
|
|
|
|
|
|
|
All
Directors and Executive Officers as a Group:
|
(13
persons including the foregoing) (2)
|
|
14,099,137
|
|
55.86%
|
|
2,578,996
|
|
98.38%
|
|
|
|
|
|
|
|
|
|
Other
5% Beneficial Owners: (5)
|
Dimensional
Fund Advisors, Inc.
|
|
1,954,931
|
|
8.65%
|
|
-
|
|
0.00%
|
GAMCO
Investors, Inc.
|
|
4,236,092
|
|
18.74%
|
|
-
|
|
0.00%
|
Natalia
Hercot (3)(6)
|
|
5,794,521
|
|
23.04%
|
|
2,548,996
|
|
97.24%
|
Phoenix
FA Holdings, LLC (7)
|
|
6,902,588
|
|
30.54%
|
|
-
|
|
0.00%
|
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 January 16, 2008, 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, 33,000 shares; G. Myles, 7,500 shares; M. Vantusko, 7,500
shares; Directors and Executive Officers as a group, 57,500
shares.
|
(3)
|
Includes
shares beneficially owned, as
follows:
|
|
A.
Goren and P. Sassower—6,902,588 Class A shares held by Phoenix FA
Holdings, LLC. In Form 3’s filed on January 16 2008, Mr. Goren
and Mr. Sassower each reported indirect beneficial ownership of these
shares but disclaimed any beneficial ownership of these securities except
to the extent of their respective pecuniary interest
therein. (See Footnote
7.)
|
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; 29,166 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. This is pre-Tender Offer information.
GAMCO
Investors, Inc. (an affiliate of Gabelli Funds, LLC,) and its affiliates, One
Corporate Center, Rye, NY 10580-1434. Information as of December 26, 2007,
contained in a Schedule 13D/A-31, filed on December 28, 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)
Phoenix
FA Holdings, LLC (“Filing Party” ), SG Phoenix Ventures IV LLC, Philip S.
Sassower, and Andrea Goren (collectively, the “Filing Persons”). 110 East
59th
Street, Suite 1901, New York, New York, 10022. Information contained
in Amendment No. 2 to Schedule TO (Tender Offer Statement) originally filed by
Phoenix FA Holdings, LLC (the “Purchaser”) on November 19, 2007, as amended on
December 19, 2007 (See Footnote 7.) Since January 12, 2005, Roscoe
Avenue Holdings, an affiliate of J. Steiner’s by virtue of the fact that it is
owned by a trust of which he is a beneficiary, has owned a six percent limited
partnership interest in Phoenix Venture Fund LLC (the “Venture
Fund”). Neither J. Steiner, nor any of his family or affiliates, has
any management responsibility or investment decision making authority in the
Venture Fund.
(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. J. Steiner
was the sole manager of the LLC, and therefore reported beneficial ownership of
the shares held by the LLC. On December 31, 2003, Mr. J. Steiner resigned
as the sole manager of the LLC, and Mr. E. Steiner and Ms. N. Hercot become the
sole co-managers of the LLC. In this capacity, Mr. E. Steiner and
Ms. N. 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, Mr.
E. Steiner and Ms. N. 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) 79% is held by The Jeffrey Steiner Family Trust, a trust created for
the benefit of the issue of Jeffrey Steiner; (ii) 20% is held by Bayswater
Ventures, LP, a partnership owned by four different trusts, of which Jeffrey
Steiner is a beneficiary; and (iii) the remaining 1% membership
interest in the LLC is held by one of the four partners of Bayswater
Ventures, LP. 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.
(7)
|
On
November 21, 2007, Phoenix FA Holdings, LLC, a Delaware limited
liability company, (“Phoenix”), filed a 13D stating
that SG Phoenix Ventures IV LLC, the Managing Member of Phoenix, reported
beneficial ownership of the Fairchild shares held by Phoenix (the
“Shares”). The Form 13D stated that Mr. Andrea Goren and Mr.
Philip S. Sassower, as co-managers of SG Phoenix Ventures IV LLC, may be
deemed to be the beneficial owners of the Shares. On December
21, 2007, Phoenix filed a Form 3 reporting direct beneficial ownership of
6,902,588 shares of Fairchild Class A Common Stock (the “Fairchild
Shares”). In Form 3’s filed on January 16, 2008, Messrs.
Goren and Sassower each reported indirect beneficial ownership of the
Fairchild Shares, but disclaimed beneficial ownership of the Fairchild
Shares except to the extent of their pecuniary interest
therein.
|
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
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 approximately one year, 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 a
non-executive 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. During 2007, the balance of indebtedness
outstanding under the officer and director stock purchase program was
approximately $50,000 due from a single, non-executive officer. In fiscal
2003, the Board of Directors extended, by five years, the expiration date
of the loan to that officer, after confirming he 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, 2007, 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.
|
·
|
On
September 30, 2007 and 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, 2007, deferred compensation of $11,000 was due from us to
Mr. E. Steiner.
|
·
|
In
December 2007, Mr. J. Steiner reimbursed us $704,000 for personal expenses
that we paid on his behalf, which were outstanding as of September 30,
2007. 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 2007 and 2006 did amounts due
to us from Mr. J. Steiner or Mr. E. Steiner exceed the amount of the
after-tax salary on deferrals we owed to either Mr. J. Steiner or Mr. E.
Steiner.
|
·
|
Subject
to the approval of the Compensation and Stock Option Committee, our
Unfunded Supplemental Executive Retirement Plan (SERP) permits
participants 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 $1,400,000 in fiscal 2007 and $3,500,000 in
fiscal 2006. As of September 30, 2007, Mr. J. Steiner’s
remaining balance in the Unfunded SERP plan was $704,300. Mr.
D. Miller also took an advance from the Unfunded SERP plan in fiscal 2007
in the amount of $919,131, representing his full balance in the Unfunded
SERP. Mr. E. Steiner’s unfunded SERP account has
$861,763.
|
·
|
Mr.
E. Steiner, son of 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 J. Steiner, is a
Vice President of the Company, for which she received compensation of
approximately $13,500 in fiscal 2007 and $20,000 in fiscal
2006. Mrs. Hercot’s annual salary was adjusted to $10,000 per
year on December 23, 2005. Her income exceeded $10,000 per year
in fiscal 2007 due to being reimbursed for previously untaken vacation
time. Her monthly salary has been reduced to an amount of Euros
that will keep her compensation at approximately $10,000 per
year.
|
·
|
During
2005, 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 and $36,000 in 2005 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 2007 and $15,000 in 2006 to cover personal use and the
cost of these vehicles that exceeded our reimbursement
policy.
|
·
|
During
2007 and 2006, we reimbursed $0.5 million and $0.4 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 fiscal 2007 and $94,000
in fiscal 2006. Petra Esser is a relative of Mr. K. Esser and has current
annual compensation of approximately
€16,000.
|
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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
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. On September 10, 2007, upon the
recommendation of the Audit Committee, the Company dismissed KPMG LLP and
appointed BDO Seidman, LLP to serve as its independent auditors for the fiscal
year ended September 30, 2007. On January 10, 2008, the Audit
Committee of the Company appointed BDO Seidman, LLP for the current fiscal year,
which ends on September 30, 2008. Representatives of BDO Seidman, LLP
will be available at the annual meeting to make a statement, if they so desire,
and to respond to appropriate questions. There have been no
disagreements with KPMG during the Company’s last two fiscal years or
during the interim period since September 30, 2006. During
the two fiscal years ended September 30, 2006, there were no “reportable
events”, as defined in Item 304(a)(1)(v) of Regulation S-K, except that KPMG
advised the Company of the material weaknesses noted in Item 9A of this Annual
Report.
Audit
Fees
2007 Audit
Fees: The aggregate fees billed by BDO Seidman, LLP for
professional services rendered for the 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, 2007 were
$1,200,000.
2006 Audit
Fees: The aggregate fees billed by KPMG LLP, for professional
services rendered for the 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.
Audit
Related Fees
2007 Audit
Related Fees: The aggregate fees billed by BDO Seidman, LLP
for the fiscal year ended September 30, 2007, 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 none.
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 none.
Tax
Fees:
2007 Tax Fees:
The aggregate fees billed by BDO Seidman, LLP for the fiscal year ended
September 30, 2007, for tax return preparation and review services were
none.
2006 Tax
Fees: The aggregate fees billed by KPMG LLP 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.
All
Other Fees:
None. There
were no other fees paid to the Company’s auditors in fiscal 2007 or fiscal
2006.
Policy
Regarding Non-Audit Services by Outside Auditors; Procedures for Assuring
Auditor Independence:
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 LLP did not conduct any non-audit service for the Company
during fiscal 2006. BDO Seidman, LLP did not conduct any
non-audit service for the Company during fiscal 2007 and is not expected to
provide any non-audit service during fiscal 2008. No waivers of the approval
process for audit, review or attest services were made in fiscal 2007 or fiscal
2006.
PART
IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
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 31).
(a)(2) Financial
Statement Schedule.
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
(In
thousands)
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
805 |
|
|
$ |
4,308 |
|
Short-term
investments
|
|
|
25,814 |
|
|
|
45,378 |
|
Accounts
receivable
|
|
|
805 |
|
|
|
447 |
|
Prepaid
expenses and other current assets
|
|
|
64 |
|
|
|
58 |
|
Total
current assets
|
|
|
27,488 |
|
|
|
50,191 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
1,451 |
|
|
|
1,809 |
|
Investments
in subsidiaries
|
|
|
141,895 |
|
|
|
136,125 |
|
Deferred
loan fees
|
|
|
1,027 |
|
|
|
2,044 |
|
Marketable
securities - long term
|
|
|
7,978 |
|
|
|
34,173 |
|
Other
assets
|
|
|
33 |
|
|
|
39 |
|
Total
assets
|
|
$ |
179,872 |
|
|
$ |
224,381 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
maturities of long term liabilities
|
|
$ |
64 |
|
|
$ |
69 |
|
Accounts
payable
|
|
|
- |
|
|
|
19 |
|
Other
accrued expenses
|
|
|
4,009 |
|
|
|
6,897 |
|
Total
current liabilities
|
|
|
4,073 |
|
|
|
6,985 |
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities
|
|
|
21,641 |
|
|
|
30,781 |
|
Noncurrent
income taxes
|
|
|
7,582 |
|
|
|
39,923 |
|
Other
long-term liabilities
|
|
|
2,033 |
|
|
|
2,045 |
|
Total
liabilities
|
|
|
35,329 |
|
|
|
79,734 |
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Class
A common stock
|
|
|
3,047 |
|
|
|
3,047 |
|
Class
B common stock
|
|
|
262 |
|
|
|
262 |
|
Paid-in
capital
|
|
|
232,639 |
|
|
|
232,612 |
|
Treasury
stock
|
|
|
(76,352 |
) |
|
|
(76,352 |
) |
Accumulated
deficit
|
|
|
(16,021 |
) |
|
|
(15,680 |
) |
Accumulated
other comprehensive income
|
|
|
968 |
|
|
|
758 |
|
Total
stockholders' equity
|
|
|
144,543 |
|
|
|
144,647 |
|
Total
liabilities and stockholders' equity
|
|
$ |
179,872 |
|
|
$ |
224,381 |
|
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 OPERATIONS (NOT CONSOLIDATED)
(In
thousands)
|
|
Years
Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
|
|
Selling,
general & administrative
|
|
$ |
7,359 |
|
|
$ |
12,192 |
|
|
$ |
11,648 |
|
|
|
|
7,359 |
|
|
|
12,192 |
|
|
|
11,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(7,359 |
) |
|
|
(12,192 |
) |
|
|
(11,648 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest expense
|
|
|
(2,761 |
) |
|
|
(2,548 |
) |
|
|
(2,980 |
) |
Investment
income
|
|
|
5,146 |
|
|
|
851 |
|
|
|
112 |
|
Fair
market value adjustment – interest rate contract
|
|
|
- |
|
|
|
836 |
|
|
|
5,942 |
|
Loss
from continuing operations before income taxes
|
|
|
(4,974 |
) |
|
|
(13,053 |
) |
|
|
(8,574 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (benefit) provision
|
|
|
208 |
|
|
|
(244 |
) |
|
|
2,953 |
|
Loss
from discontinued operations, net of tax
|
|
|
(71 |
) |
|
|
(8,594 |
) |
|
|
(735 |
) |
Equity
in income (loss) of affiliates
|
|
|
89 |
|
|
|
- |
|
|
|
(87 |
) |
Loss
before equity in loss of subsidiaries
|
|
|
(4,748 |
) |
|
|
(21,891 |
) |
|
|
(6,443 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in earnings (loss) of subsidiaries
|
|
|
4,407 |
|
|
|
(15,408 |
) |
|
|
(12,922 |
) |
Net
loss
|
|
$ |
(341 |
) |
|
$ |
(37,299 |
) |
|
$ |
(19,365 |
) |
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 CASH FLOWS (NOT CONSOLIDATED)
(In
thousands)
|
|
Years
Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by (used for) operations
|
|
$ |
7,082 |
|
|
$ |
(62,790 |
) |
|
$ |
(13,841 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(44 |
) |
|
|
(724 |
) |
|
|
(1,146 |
) |
Net amounts
advanced to subsidiaries
|
|
|
(1,363 |
) |
|
|
41,572 |
|
|
|
13,498 |
|
Net
cash provided by (used for) investing activities
|
|
|
(1,407 |
) |
|
|
40,848 |
|
|
|
12,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of debt
|
|
|
- |
|
|
|
31,552 |
|
|
|
961 |
|
Debt
repayments
|
|
|
(9,145 |
) |
|
|
(1,649 |
) |
|
|
(70 |
) |
Payment
of interest rate contract
|
|
|
- |
|
|
|
(4,310 |
) |
|
|
- |
|
Payment
of financing fees
|
|
|
(33 |
) |
|
|
(2,217 |
) |
|
|
- |
|
Purchase
of treasury stock
|
|
|
- |
|
|
|
- |
|
|
|
(193 |
) |
Net
cash provided by (used for) financing activities
|
|
|
(9,178 |
) |
|
|
23,376 |
|
|
|
698 |
|
Net
change in cash and cash equivalents
|
|
|
(3,503 |
) |
|
|
1,434 |
|
|
|
(791 |
) |
Cash
and cash equivalents, beginning of the year
|
|
|
4,308 |
|
|
|
2,874 |
|
|
|
3,665 |
|
Cash
and cash equivalents, end of the year
|
|
$ |
805 |
|
|
$ |
4,308 |
|
|
$ |
2,874 |
|
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,
|
|
|
|
2007
|
|
|
2006
|
|
GoldenTree
term loan
|
|
$ |
20,938 |
|
|
$ |
30,000 |
|
Other
term debt
|
|
|
767 |
|
|
|
845 |
|
Capital
lease obligations
|
|
|
- |
|
|
|
5 |
|
Total
debt
|
|
|
21,705 |
|
|
|
30,850 |
|
Less:
Current maturities of long-term debt
|
|
|
(64 |
) |
|
|
(69 |
) |
Total
long-term debt
|
|
$ |
21,641 |
|
|
$ |
30,781 |
|
Long-term
debt maturing over the next five years is as follows: $64 in 2008; $64 in 2009;
$21,577 in 2010; and none thereafter.
On
October 31, 2007, the Company and Alcoa resolved all disputes related to the
2002 sale of the fastener business to Alcoa. Accordingly, $25.3
million of the escrow account was released to us and Alcoa made an additional
payment to us of $0.6 million and assumed specified liabilities for foreign
taxes, environmental matters, and worker compensation claims. We used
$20.9 million of these proceeds to fully repay the GoldenTree loan.
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.
4. SUPPLEMENTAL
CASH FLOW INFORMATION
The
parent company made the following cash payments for interest and taxes in fiscal
2007, 2006, and 2005:
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Interest
|
|
$ |
5,709 |
|
|
$ |
1,676 |
|
|
$ |
4,441 |
|
Income
taxes
|
|
|
1,144 |
|
|
|
150 |
|
|
|
102 |
|
(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).
|
10.30
|
Settlement
and Mutual Release dated October 31, 2007 between The Fairchild
Corporation, Fairchild Holding Corp. and Sheepdog, Inc. (the “Fairchild
Parties”) and Alcoa Inc. to settle all claims between them and to sell to
Alcoa a building previously rented by Alcoa Inc. from one of the Fairchild
Parties (incorporated by reference from our Form 8-K dated as of November
5, 2007).
|
11.
|
Computation
of net loss per share (found at Note 9 in Item 8 to Registrant's
Consolidated Financial Statements for the fiscal years ended September 30,
2007, September 30, 2006, and September 30,
2005).
|
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: March
4, 2008
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
|
March
4, 2008
|
|
|
Jeffrey
J. Steiner
|
Officer
and Director
|
|
|
|
|
|
|
By:
|
/s/
|
DIDIER
CHOIX
|
Director
|
March
4, 2008
|
|
|
Didier
Choix
|
|
|
|
|
|
|
|
By:
|
/s/
|
ROBERT
E. EDWARDS
|
Director
|
March
4, 2008
|
|
|
Robert
E. Edwards
|
|
|
|
|
|
|
|
By:
|
/s/
|
ANDREA
GOREN
|
Director
|
March
4, 2008
|
|
|
Andrea
Goren
|
|
|
|
|
|
|
|
By:
|
/s/
|
DANIEL
LEBARD
|
Director
|
March
4, 2008
|
|
|
Daniel
Lebard
|
|
|
|
|
|
|
|
By:
|
/s/
|
GLENN
MYLES
|
Director
|
March
4, 2008
|
|
|
Glenn
Myles
|
|
|
|
|
|
|
|
By:
|
/s/
|
PHILIP
S. SASSOWER
|
Director
|
March
4, 2008
|
|
|
Philip
S. Sassower
|
|
|
|
|
|
|
|
By:
|
/s/
|
MICHAEL
J. VANTUSKO
|
Director
|
March
4, 2008
|
|
|
Michael
J. Vantusko
|
|
|
|
|
|
|
|
By:
|
/s/
|
ERIC
I. STEINER
|
President,
Chief Operating
|
March
4, 2008
|
|
|
Eric
I. Steiner
|
Officer
and Director
|
|