The Fairchild Corporation Form 10-Q FY2006 3rd Qtr
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the Quarterly Period Ended June 30, 2006
Commission
File Number 1-6560
THE
FAIRCHILD CORPORATION
(Exact
name of Registrant as specified in its charter)
Delaware
(State
of
incorporation or organization)
34-0728587
(I.R.S.
Employer Identification No.)
1750
Tysons Boulevard, Suite 1400, McLean, VA 22102
(Address
of principal executive offices)
(703)
478-5800
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past ninety (90) days:
[X]
Yes [
] No.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer:
[
] Large
accelerated file [X] Accelerated filer [ ] Non-accelerated filer
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
[
] Yes
[X] No
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
|
Outstanding
at
|
Title
of Class
|
June
30, 2006
|
|
|
Class
A Common Stock, $0.10 Par Value
|
22,604,761
|
Class
B Common Stock, $0.10 Par Value
|
2,621,412
|
THE
FAIRCHILD CORPORATION INDEX TO QUARTERLY REPORT ON FORM
10-Q
FOR
THE PERIOD ENDED JUNE 30, 2006
|
|
Page
|
|
|
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
Condensed
Consolidated Balance Sheets as of June 30, 2006 (Unaudited)
and
|
|
|
September
30,
2005…………………………………………………………………….………..............................................
|
3
|
|
|
|
|
Condensed
Consolidated Statements of Operations and Other Comprehensive Income
(Loss)
|
|
|
(Unaudited)
for the Three and Nine Months Ended June 30, 2006 and June 30,
2005…….….....................................................
|
5
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months
Ended
|
|
|
June
30, 2006 and June 30,
2005…………………………….…………...….………………..................................................
|
6
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
(Unaudited)……………………………...............................................
|
7
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Results of Operations and Financial
Condition…….....................................................
|
20
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosure About Market
Risk……………………………………….............................................
|
29
|
|
|
|
Item
4.
|
Controls
and
Procedures……………………………………………………………………………........................................
|
30
|
|
|
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings………………………………………………………………………………….........................................
|
31
|
|
|
|
Item
1A.
|
Risk
Factors………….……………………………………………………………………………........................................
|
31
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds…………………………………….............................................
|
34
|
|
|
|
Item
5.
|
Other
Information………………………………………………………………………………….........................................
|
34
|
|
|
|
Item
6.
|
Exhibits
……………………………….……………………………………………………………......................................
|
34
|
All
references in this Quarterly Report on Form 10-Q to the terms ‘‘we,’’ ‘‘our,’’
‘‘us,’’ the ‘‘Company’’ and ‘‘Fairchild’’ refer to The Fairchild Corporation and
its subsidiaries. All references to ‘‘fiscal’’ in connection with a year shall
mean the 12 months ended September 30th.
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
THE
FAIRCHILD CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
June
30,
2006 (Unaudited) and
September 30, 2005
(In
thousands)
ASSETS
|
|
6/30/06
|
|
9/30/05
|
|
Cash
and cash equivalents
|
|
$
|
9,595
|
|
$
|
12,582
|
|
Short-term
investments, including restricted investments of $7,016 and
$4,965
|
|
|
13,329
|
|
|
15,698
|
|
Accounts
receivable-trade, less allowances of $1,273 and $2,679
|
|
|
18,434
|
|
|
18,475
|
|
Inventories
- finished goods
|
|
|
121,438
|
|
|
90,856
|
|
Current
assets of discontinued operations
|
|
|
1,828
|
|
|
1,509
|
|
Prepaid
expenses and other current assets
|
|
|
11,457
|
|
|
7,408
|
|
Total
Current Assets
|
|
|
176,081
|
|
|
146,528
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net of accumulated
|
|
|
|
|
|
|
|
depreciation
of $23,614 and $18,453
|
|
|
58,400
|
|
|
57,468
|
|
Noncurrent
assets of discontinued operations
|
|
|
78,081
|
|
|
79,373
|
|
Goodwill
and intangible assets
|
|
|
43,580
|
|
|
42,665
|
|
Investments
and advances, affiliated companies
|
|
|
2,699
|
|
|
3,786
|
|
Prepaid
pension assets
|
|
|
32,893
|
|
|
31,239
|
|
Deferred
loan costs
|
|
|
3,474
|
|
|
1,839
|
|
Long-term
investments, including restricted investments of $69,153 and
$59,419
|
|
|
77,987
|
|
|
69,652
|
|
Notes
receivable
|
|
|
6,672
|
|
|
6,787
|
|
Other
assets
|
|
|
6,092
|
|
|
7,723
|
|
TOTAL
ASSETS
|
|
$
|
485,959
|
|
$
|
447,060
|
|
The
accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
THE
FAIRCHILD CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
June
30,
2006 (Unaudited) and September 30, 2005
(In
thousands)
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
6/30/06
|
|
9/30/05
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Bank
notes payable and current maturities of long-term debt
|
|
$
|
29,215
|
|
$
|
20,902
|
|
Accounts
payable
|
|
|
43,129
|
|
|
22,602
|
|
Accrued
liabilities:
|
|
|
|
|
|
|
|
Salaries,
wages and commissions
|
|
|
10,717
|
|
|
10,187
|
|
Insurance
|
|
|
7,142
|
|
|
7,335
|
|
Interest
|
|
|
728
|
|
|
443
|
|
Other
accrued liabilities
|
|
|
21,020
|
|
|
19,406
|
|
Current
liabilities of discontinued operations
|
|
|
1,347
|
|
|
1,540
|
|
Total
Current Liabilities
|
|
|
113,298
|
|
|
82,415
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES:
|
|
|
|
|
|
|
|
Long-term
debt, less current maturities
|
|
|
68,087
|
|
|
47,990
|
|
Fair
value of interest rate contract
|
|
|
-
|
|
|
5,146
|
|
Other
long-term liabilities
|
|
|
27,934
|
|
|
27,316
|
|
Pension
liabilities
|
|
|
50,290
|
|
|
51,098
|
|
Retiree
health care liabilities
|
|
|
26,264
|
|
|
27,459
|
|
Noncurrent
income taxes
|
|
|
42,222
|
|
|
42,238
|
|
Noncurrent
liabilities of discontinued operations
|
|
|
52,945
|
|
|
53,481
|
|
TOTAL
LIABILITIES
|
|
|
381,040
|
|
|
337,143
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
Class
A common stock, $0.10 par value; 40,000 shares authorized,
|
|
|
|
|
|
|
|
30,480
shares issued and 22,605 shares outstanding;
|
|
|
|
|
|
|
|
entitled
to one vote per share
|
|
|
3,047
|
|
|
3,047
|
|
Class
B common stock, $0.10 par value; 20,000 shares authorized,
|
|
|
|
|
|
|
|
2,621
shares issued and outstanding; entitled
|
|
|
|
|
|
|
|
to
ten votes per share
|
|
|
262
|
|
|
262
|
|
Paid-in
capital
|
|
|
232,590
|
|
|
232,457
|
|
Treasury
stock, at cost, 7,875 shares
|
|
|
|
|
|
|
|
of
Class A common stock
|
|
|
(76,352
|
)
|
|
(76,352
|
)
|
Retained
earnings
|
|
|
8,671
|
|
|
20,206
|
|
Notes
due from stockholders
|
|
|
(43
|
)
|
|
(109
|
)
|
Cumulative
other comprehensive loss
|
|
|
(63,256
|
)
|
|
(69,594
|
)
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
104,919
|
|
|
109,917
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
485,959
|
|
$
|
447,060
|
|
The
accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
THE
FAIRCHILD CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
(Unaudited)
For
The
Three (3) and Nine (9) Months Ended June 30, 2006 and 2005
(In
thousands, except per share data)
|
|
Three
Months Ended
|
Nine
Months Ended
|
REVENUE:
|
|
|
06/30/06
|
|
|
06/30/05
|
|
|
06/30/06
|
|
|
06/30/05
|
|
Net
sales
|
|
$
|
105,578
|
|
$
|
112,810
|
|
$
|
219,615
|
|
$
|
256,859
|
|
Rental
revenue
|
|
|
237
|
|
|
144
|
|
|
713
|
|
|
419
|
|
|
|
|
105,815
|
|
|
112,954
|
|
|
220,328
|
|
|
257,278
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
61,376
|
|
|
66,014
|
|
|
132,440
|
|
|
158,439
|
|
Cost
of rental revenue
|
|
|
60
|
|
|
49
|
|
|
167
|
|
|
133
|
|
Selling,
general & administrative
|
|
|
43,429
|
|
|
45,843
|
|
|
105,984
|
|
|
114,224
|
|
Pension
& postretirement
|
|
|
928
|
|
|
1,484
|
|
|
2,784
|
|
|
4,453
|
|
Other
(income) expense, net
|
|
|
(2,527
|
)
|
|
(1,311
|
)
|
|
(3,811
|
)
|
|
(2,618
|
)
|
Amortization
of intangibles
|
|
|
135
|
|
|
139
|
|
|
391
|
|
|
426
|
|
|
|
|
103,401
|
|
|
112,218
|
|
|
237,955
|
|
|
275,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME (LOSS)
|
|
|
2,414
|
|
|
736
|
|
|
(17,627
|
)
|
|
(17,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(2,819
|
)
|
|
(2,954
|
)
|
|
(7,702
|
)
|
|
(9,926
|
)
|
Interest
income
|
|
|
589
|
|
|
335
|
|
|
1,494
|
|
|
1,239
|
|
Net
interest expense
|
|
|
(2,230
|
)
|
|
(2,619
|
)
|
|
(6,208
|
)
|
|
(8,687
|
)
|
Investment
income
|
|
|
396
|
|
|
1,591
|
|
|
1,713
|
|
|
6,913
|
|
Increase
in fair market value of interest rate contract
|
|
|
-
|
|
|
(316
|
)
|
|
836
|
|
|
4,018
|
|
Earnings
(loss) from continuing operations before taxes
|
|
|
580
|
|
|
(608
|
)
|
|
(21,286
|
)
|
|
(15,535
|
)
|
Income
tax provision
|
|
|
(149
|
)
|
|
(1,457
|
)
|
|
(237
|
)
|
|
(1,610
|
)
|
Equity
in loss of affiliates, net
|
|
|
(132
|
)
|
|
(200
|
)
|
|
(1,131
|
)
|
|
(400
|
)
|
Earnings
(loss) from continuing operations
|
|
|
299
|
|
|
(2,265
|
)
|
|
(22,654
|
)
|
|
(17,545
|
)
|
Loss
from discontinued operations, net
|
|
|
(2,592
|
)
|
|
(463
|
)
|
|
(2,382
|
)
|
|
(679
|
)
|
Gain
on disposal of discontinued operations, net
|
|
|
1,000
|
|
|
1,158
|
|
|
13,500
|
|
|
13,658
|
|
NET
LOSS
|
|
$
|
(1,293
|
)
|
$
|
(1,570
|
)
|
$
|
(11,536
|
)
|
$
|
(4,566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
1,966
|
|
|
(1,808
|
)
|
|
2,034
|
|
|
(514
|
)
|
Minimum
pension liability
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,125
|
)
|
Unrealized
holding changes on derivatives
|
|
|
-
|
|
|
28
|
|
|
299
|
|
|
83
|
|
Unrealized
periodic holding changes on securities
|
|
|
888
|
|
|
(792
|
)
|
|
4,005
|
|
|
(198
|
)
|
Other
comprehensive income
|
|
|
2,854
|
|
|
(2,572
|
)
|
|
6,338
|
|
|
(1,754
|
)
|
COMPREHENSIVE
INCOME (LOSS)
|
|
$
|
1,561
|
|
$
|
(4,142
|
)
|
$
|
(5,198
|
)
|
$
|
(6,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED EARNINGS (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from continuing operations
|
|
$
|
0.01
|
|
$
|
(0.09
|
)
|
$
|
(0.90
|
)
|
$
|
(0.70
|
)
|
Loss
from discontinued operations, net
|
|
|
(0.10
|
)
|
|
(0.02
|
)
|
|
(0.09
|
)
|
|
(0.02
|
)
|
Gain
on disposal of discontinued operations, net
|
|
|
0.04
|
|
|
0.05
|
|
|
0.53
|
|
|
0.54
|
|
NET
EARNINGS (LOSS)
|
|
$
|
(0.05
|
)
|
$
|
(0.06
|
)
|
$
|
(0.46
|
)
|
$
|
(0.18
|
)
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
25,226
|
|
|
25,229
|
|
|
25,226
|
|
|
25,223
|
|
The
accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
THE
FAIRCHILD CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For
The
Nine (9) Months Ended June 30, 2006 and 2005
(In
thousands)
|
|
|
6/30/06
|
|
|
6/30/05
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(11,536
|
)
|
$
|
(4,566
|
)
|
Depreciation
and amortization
|
|
|
5,057
|
|
|
4,936
|
|
Amortization
of deferred loan fees
|
|
|
815
|
|
|
1,070
|
|
Stock
compensation expense
|
|
|
133
|
|
|
-
|
|
Unrealized
holding gain on interest rate contract
|
|
|
(836
|
)
|
|
(4,018
|
)
|
Undistributed
loss of affiliates, net
|
|
|
1,131
|
|
|
400
|
|
Change
in trading securities
|
|
|
10,245
|
|
|
(8,571
|
)
|
Change
in operating assets and liabilities
|
|
|
(10,387
|
)
|
|
2,717
|
|
Non-cash
charges and working capital changes of discontinued operations
|
|
|
(13,003
|
)
|
|
(12,592
|
)
|
Net
cash used for operating activities
|
|
|
(18,381
|
)
|
|
(20,624
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(5,924
|
)
|
|
(8,103
|
)
|
Net
proceeds received from (used for) investment securities
|
|
|
(10,050
|
)
|
|
15,078
|
|
Net
proceeds received from the sale of discontinued operations
|
|
|
13,850
|
|
|
18,500
|
|
Equity
investment in affiliates
|
|
|
(44
|
)
|
|
198
|
|
Changes
in notes receivable
|
|
|
548
|
|
|
294
|
|
Investing
activities of discontinued operations
|
|
|
(98
|
)
|
|
(288
|
)
|
Net
cash provided by investing activities
|
|
|
(1,718
|
)
|
|
25,679
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from issuance of debt
|
|
|
49,503
|
|
|
14,001
|
|
Debt
repayments
|
|
|
(25,613
|
)
|
|
(23,507
|
)
|
Payment
of interest rate contract
|
|
|
(4,310
|
)
|
|
-
|
|
Payment
of financing fees
|
|
|
(2,400
|
)
|
|
(377
|
)
|
Purchase
of treasury stock
|
|
|
-
|
|
|
(193
|
)
|
Loan
repayments from stockholders'
|
|
|
66
|
|
|
947
|
|
Net
cash used for financing activities of discontinued operations
|
|
|
(504
|
)
|
|
(474
|
)
|
Net
cash provided by financing activities
|
|
|
16,742
|
|
|
(9,603
|
)
|
Effect
of exchange rate changes on cash
|
|
|
370
|
|
|
(165
|
)
|
Net
change in cash and cash equivalents
|
|
|
(2,987
|
)
|
|
(4,713
|
)
|
Cash
and cash equivalents, beginning of the year
|
|
|
12,582
|
|
|
12,849
|
|
Cash
and cash equivalents, end of the period
|
|
$
|
9,595
|
|
$
|
8,136
|
|
The
accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
THE
FAIRCHILD CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In
thousands, except share data)
1.
FINANCIAL STATEMENTS
The
condensed consolidated balance sheet as of June 30, 2006, and the condensed
consolidated statements of operations and other comprehensive income (loss)
and
cash flows for the periods ended June 30, 2006 and 2005 have been prepared
by
us, without audit. In the opinion of management, all adjustments necessary
to
present fairly the financial position, results of operations and cash flows
at
June 30, 2006, and for all periods presented, have been made. These adjustments
include certain reclassifications to reflect as discontinued operations the
sale
of our shopping center and the sale of the remaining operations of a landfill
development partnership. The condensed consolidated balance sheet at September
30, 2005 was reclassified from the audited financial statements as of that
date.
The
condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial statements
and the Securities and Exchange Commission’s instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, certain information and footnote
disclosures normally included in complete financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or
omitted. These condensed consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in our
2005
Annual Report on Form 10-K. The results of operations for the periods ended
June
30, 2006 and 2005 are not necessarily indicative of the operating results for
the full year. Certain amounts in the prior period financial statements have
been reclassified to conform to the current presentation.
The
financial position and operating results of our foreign operations are
consolidated using, as the functional currency, the local currencies of the
countries in which they are located. The balance sheet accounts are translated
at exchange rates in effect at the end of the period, and the statement of
operations accounts are translated at average exchange rates during the period.
The resulting translation gains and losses are included as a separate component
of stockholders' equity. Foreign currency transaction gains and losses are
included in our statement of operations in the period in which they
occur.
Stock-Based
Compensation
In
December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123R, “Share-Based Payment.” Statement
123R amends certain aspects of Statement 123 and now requires a public entity
to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. In
accordance with Statement 123R, we have elected to implement Statement 123R
on a
modified prospective basis, and to use the Black-Scholes valuation model in
calculating fair value of the cost of stock-based
employee compensation plans.
That
cost will be recognized on a straight-line basis over the period during which
an
employee is required to provide service in exchange for the award, (usually
the
vesting period). No compensation cost is recognized for equity instruments
for
which employees do not render the requisite service. We adopted Statement 123R
on
October 1, 2005, and accordingly, we recognized $133 of compensation cost in
the
nine months ended June 30, 2006.
No tax
benefit and deferred tax asset were recognized on the compensation cost because
of our domestic full valuation allowance against deferred tax
assets.
As
permitted by Statement of Financial Accounting Standards No. 123, “Accounting
for Stock-Based Compensation”, and prior to adoption of Statement 123R, we used
the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, for our stock-based employee compensation
plans. Since the exercise price and the fair value of the underlying stock
were
the same on the grant date, no compensation cost was recognized for the granting
of stock options to our employees in the three and nine months ended June 30,
2005. If stock options previously granted were accounted for based on their
fair
value as determined under Statement 123, our pro forma results for the three
and
nine months ended June 30, 2005, would be as follows:
|
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
|
6/30/05
|
|
|
6/30/05
|
|
Net
loss, as reported
|
|
$
|
(1,570
|
)
|
$
|
(4,566
|
)
|
Total
stock-based employee compensation expense determined under the fair
value
based method for all awards, net of tax
|
|
|
(91
|
)
|
|
(273
|
)
|
Pro
forma net loss
|
|
$
|
(1,661
|
)
|
$
|
(4,839
|
)
|
Basic
and diluted loss per share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.06
|
)
|
$
|
(0.19
|
)
|
Pro
forma
|
|
$
|
(0.07
|
)
|
$
|
(0.19
|
)
|
The
pro
forma effects of applying SFAS 123 may not be representative of the effects
on
reported net results for future years. Our employee stock option plan ended
in
April 2006, and no new plan is being proposed at this time. We issued stock
options to exercise 3,000 and 6,000 shares of Class A common stock during the
nine months ended June 30, 2006 and June 30, 2005, respectively. On June 30,
2006, we had outstanding stock option awards of 727,087, of which 609,108 stock
option awards were vested.
2.
CASH EQUIVALENTS AND INVESTMENTS
Cash
equivalents and investments at June 30, 2006 consist primarily of investments
in
United States government securities, investment grade corporate bonds, and
equity securities which are recorded at market value. Restricted cash equivalent
investments are classified as short-term or long-term investments depending
upon
the length of the restriction period. Investments in common stock of public
corporations are recorded at fair market value and classified as trading
securities or available-for-sale securities. Other investments do not have
readily determinable fair values and consist primarily of investments in
preferred and common shares of private companies and limited partnerships.
A
summary of the cash equivalents and investments held by us follows:
|
|
June
30, 2006
|
September
30, 2005
|
|
|
|
Fair
|
|
|
Cost
|
|
|
Fair
|
|
|
Cost
|
|
|
|
|
Value
|
|
|
Basis
|
|
|
Value
|
|
|
Basis
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government securities
|
|
$
|
-
|
|
$
|
-
|
|
$
|
16
|
|
$
|
16
|
|
Money
market and other cash funds
|
|
|
9,595
|
|
|
9,595
|
|
|
12,566
|
|
|
12,566
|
|
Total
cash and cash equivalents
|
|
$
|
9,595
|
|
$
|
9,595
|
|
$
|
12,582
|
|
$
|
12,582
|
|
`
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds - restricted
|
|
$
|
7,016
|
|
$
|
7,016
|
|
$
|
4,965
|
|
$
|
4,965
|
|
Trading
securities - municipal bonds
|
|
|
5,002
|
|
|
5,002
|
|
|
-
|
|
|
|
|
Trading
securities - equity securities
|
|
|
1,311
|
|
|
1,311
|
|
|
10,733
|
|
|
10,733
|
|
Total
short-term investments
|
|
$
|
13,329
|
|
$
|
13,329
|
|
$
|
15,698
|
|
$
|
15,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government securities - restricted
|
|
$
|
5
|
|
$
|
5
|
|
$
|
9,547
|
|
$
|
9,547
|
|
Money
market funds - restricted
|
|
|
9,415
|
|
|
9,415
|
|
|
10,438
|
|
|
10,436
|
|
Corporate
bonds - restricted
|
|
|
38,435
|
|
|
39,114
|
|
|
23,741
|
|
|
24,319
|
|
Equity
securities - restricted
|
|
|
21,298
|
|
|
18,677
|
|
|
15,693
|
|
|
15,065
|
|
Available-for-sale
equity securities
|
|
|
4,635
|
|
|
825
|
|
|
5,309
|
|
|
3,612
|
|
Other
investments
|
|
|
4,199
|
|
|
4,199
|
|
|
4,924
|
|
|
4,924
|
|
Total
long-term investments
|
|
$
|
77,987
|
|
$
|
72,235
|
|
$
|
69,652
|
|
$
|
67,903
|
|
Total
cash equivalents and investments
|
|
$
|
100,911
|
|
$
|
95,159
|
|
$
|
97,932
|
|
$
|
96,183
|
|
On
June
30, 2006 and September 30, 2005, we had restricted investments of $76,169 and
$64,384 respectively, all of which are maintained as collateral for certain
debt
facilities, a put option to purchase the remaining interest in Polo,
environmental matters, and escrow arrangements. On June 30, 2006 and September
30, 2005, we had cash of $2,861 and $9,070, respectively, held by our European
subsidiaries which have debt agreements that place certain restrictions on
the
amount of cash that may be transferred outside the borrowing companies. For
additional information on Debt see Note 3.
On
June 30, 2006, we had gross unrealized holding gains from available-for-sale
securities of $6,431 and gross unrealized losses from available-for-sale
securities of $679. On September 30, 2005, we had gross unrealized holding
gains
from available-for-sale securities of $2,445 and gross unrealized losses from
available-for-sale securities of $697.
3.
DEBT
At
June
30, 2006 and September 30, 2005, notes payable and long-term debt consisted
of
the following:
|
|
June
30,
|
|
Sept.
30,
|
|
|
|
|
2006
|
|
|
2005
|
|
Revolving
credit facilities - Fairchild Sports
|
|
$
|
12,394
|
|
$
|
8,917
|
|
Other
short-term debt, collateralized by assets
|
|
|
923
|
|
|
-
|
|
Current
maturities of long-term debt
|
|
|
15,898
|
|
|
11,985
|
|
Total
notes payable and current maturities of long-term debt
|
|
|
29,215
|
|
|
20,902
|
|
Term
loan agreement - Fairchild Sports
|
|
|
19,140
|
|
|
25,301
|
|
Golden
Tree term loan - Corporate
|
|
|
30,000
|
|
|
-
|
|
Promissory
note - Real Estate
|
|
|
13,000
|
|
|
13,000
|
|
CIT
revolving credit facility - Aerospace
|
|
|
10,281
|
|
|
8,164
|
|
GMAC
credit facility - Fairchild Sports
|
|
|
3,689
|
|
|
3,650
|
|
Capital
lease obligations
|
|
|
3,044
|
|
|
4,597
|
|
Other
notes payable, collateralized by assets
|
|
|
4,831
|
|
|
5,263
|
|
Less:
current maturities of long-term debt
|
|
|
(15,898
|
)
|
|
(11,985
|
)
|
Net
long-term debt
|
|
|
68,087
|
|
|
47,990
|
|
Total
debt (a)
|
|
$
|
97,302
|
|
$
|
68,892
|
|
(a)
-
excludes $53,477 at June 30, 2006 and $53,981 at September 30, 2005 of debt
for
our shopping center classified as a discontinued operation. (See Note
8).
Term
Loan at Corporate
On
May 3,
2006, we entered a credit agreement with The Bank of New York, as administrative
agent and GoldenTree Asset Management, L.P., as collateral agent. The lenders
under the Credit Agreement were GoldenTree Capital Opportunities, L.P. and
GoldenTree Capital Solutions Fund Financing. Pursuant to the credit agreement,
we borrowed from the lenders $30.0 million. The loan matures on May 3, 2010,
subject to certain mandatory prepayment events described in the credit
agreement. Interest on the loan is LIBOR plus 7.5%, per annum, with the initial
interest rate fixed for the first nine months. Subsequent interest periods
may
be selected by us, ranging from one month to nine months, or, if consented
to by
the lenders, for 12 months. Also, we may choose to convert the method of
interest from a LIBOR based loan to a prime based loan.
The
loan
is secured by the stock of Banner Aerospace Holding Company I, Inc., (the parent
of our aerospace segment), certain undeveloped real estate owned by us in
Farmingdale, N.Y., condemnation proceeds we expect to receive for certain other
real estate in Farmingdale, N.Y., and any remaining proceeds to be received
by
us in the future from the Alcoa transaction. Upon the sale or other monetization
of the collateral, the proceeds from such collateral must be used to prepay
the
Loan. We may elect to retain 27.5% of the proceeds from the monetization of
the
collateral (instead of applying 100% of such proceeds to make a mandatory
prepayment of the loan), provided that: the remaining collateral meet or exceed
a collateral to loan value of 1.9:1, and we pay the lenders a fee of 3% of
the
retained proceeds. If the loan is voluntarily prepaid by us within the first
three years of the loan, we must pay a prepayment penalty of 3% in year one,
2%
in year two, or 1% in year three.
The
credit agreement defines an “Available Amount” as $30 million, plus net cash
proceeds from the sale of the Company’s shopping center, plus new money from any
equity offerings and earnings from investments. During the term of the loan,
the
aggregate of the following may not exceed the Available Amount (unless consented
to by the lenders): investments by us in our sports and leisure segment or
in
any new company or new ventures; new acquisitions; guarantees by us of
additional debt incurred by our sports and leisure segment (with an exception
for the existing guarantees); loans by us to our sports and leisure segment
(with an exception for the existing loans); and repurchases by us of our
outstanding stock. The “available amount was $27.1 million at June 30,
2006.
During
the term of the loan:
· |
We
must maintain cash, cash equivalents or public securities that meet
or
exceed a minimum liquidity threshold of between $10 million and $20
million. At June 30, 2006, our minimum liquidity requirement was
$20
million, and accordingly we have classified $20 million of qualified
investments as restricted long-term
investments.
|
· |
a
change of control whereby Jeffrey Steiner, Eric Steiner or Natalia
Hercot
cease to own a controlling interest in The Fairchild Corporation
would be
an event of default under the loan.
|
Subject
to the covenants in the credit agreement, the proceeds of the loan may be used
for general working capital purposes, investments, or stock
repurchases.
Credit
Facilities at Fairchild Sports
On
March
1, 2006, we entered into an €11.0 million ($13.8 million at June 30, 2006)
seasonal credit line with Stadtsparkasse Düsseldorf, with half of the facility
available to us for the 2006 season. Borrowings under the facility for the
2006
season were repaid prior to June 30, 2006. The seasonal credit line bears
interest at 2.75% over the three-month Euribor rate (5.32% at June 30, 2006)
and
we must pay a 1.25% per annum non-utilization fee on the available facility
during the seasonal drawing period. The seasonal financing facility is 80%
guaranteed by the German State of North Rhine-Westphalia. The seasonal facility
will reduce by €1.0 million per year and expires on June 30, 2008. We are
holding discussions with other German banks, to commit to one half of the
seasonal facility on a permanent basis, subsequent to the 2006 season, but
to
date, we have not received a positive indication from a second bank to
participate in the seasonal financing. If we are unable to obtain a €5.0 million
commitment from a second bank by October 30, 2006, we have undertaken to deposit
€5.0 million as restricted cash with Stadtsparkasse Düsseldorf in lieu of €5.0
million from the second bank, for the 2007 season. If we fail to do so,
Stadtsparkasse Düsseldorf may reduce its loan commitment for the 2007
season.
At
June
30, 2006, our German subsidiary, Hein Gericke Deutschland GmbH and its German
subsidiary, PoloExpress, had outstanding borrowings of $31.5 million due under
its credit facilities with Stadtsparkasse Düsseldorf and HSBC Trinkaus &
Burkhardt KGaA. The revolving credit facility provides a credit line of €10.0
million ($12.4 million outstanding, and $0.2 million available at June 30,
2006), at interest rates of 3.5% over the three-month Euribor (6.27% at June
30,
2006), and matures annually. Outstanding borrowings under the term loan facility
have blended interest rates, with $16.4 million bearing interest at 1% over
the
three-month Euribor rate (3.77% at June 30, 2006), with an interest rate cap
protection in which our interest expense would not exceed 6% on 50% of debt,
and
the remaining $2.7 million bearing interest at a fixed rate of 6%. The term
loans mature on March 31, 2009, and are secured by the assets of Hein Gericke
Deutschland GmbH and PoloExpress and specified guarantees provided by the German
State of North Rhine-Westphalia.
The
loan
agreements require Hein Gericke Deutschland and PoloExpress to maintain
compliance with certain covenants. The most restrictive of the covenants
requires Hein Gericke Deutschland to maintain equity of €44.5 million
($55.9 million at June 30, 2006), as defined in the loan contract. No dividends
may be paid by Hein Gericke Deutschland unless such covenants are met, and
dividends may then be paid only up to its consolidated after tax profits. As
of
June 30, 2006, Hein Gericke Deutschland and PoloExpress borrowed approximately
$18.8 million (€15.0 million) from our subsidiary, Fairchild Holding Corp.,
which is not subject to any restriction against repayment. At June 30, 2006,
we
were in compliance with the loan covenants.
At
June
30, 2006, our subsidiary, Hein Gericke UK had outstanding borrowings of $3.7
million (£2.0 million) on its £5.0 million ($9.1 million) credit facility with
GMAC. The loan bears interest at 2.25% above the base rate of Lloyds TSB Bank
Plc and matures on April 30, 2007. We must pay a 0.75% per annum non-utilization
fee on the available facility. The financing is secured by the inventory of
Hein
Gericke UK and an investment with a fair market value of $4.4 million at June
30, 2006. The credit facility requires Hein Gericke UK to maintain compliance
with certain covenants. The most restrictive covenant requires Hein Gericke
UK
to maintain a minimum earnings before interest, taxes, depreciation and
amortization (“EBITDA”) as defined. At March 31, 2006, Hein Gericke UK missed
its EBITDA target by approximately £0.3 million ($0.6 million). GMAC granted a
waiver of the covenant violation. At June 30, 2006, we were in compliance with
the loan covenants.
Credit
Facility at Aerospace Segment
At
June
30, 2006, we have outstanding borrowings of $10.3 million under a $20.0 million
asset based revolving credit facility with CIT. The amount that we can borrow
under the facility is based upon inventory and accounts receivable at our
aerospace segment and $3.4 million was available for future borrowings at June
30, 2006. Borrowings under the facility are collateralized by a security
interest in the assets of our aerospace segment. The loan bears interest at
1.0%
over prime (9.25% at June 30, 2006) and we pay a non-usage fee of 0.5%. The
credit facility matures in January 2008.
Promissory
Note - Real Estate
At
June
30, 2006, we have an outstanding loan of $13.0 million with Beal Bank, SSB.
The
loan is evidenced by a Promissory Note dated as of August 26, 2004, and is
secured by a mortgage lien on the Company’s real estate in Huntington Beach CA,
Fullerton CA and Wichita KS. Interest on the note is at the rate of one-year
LIBOR (determined on an annual basis), plus 6% (10.26% at June 30, 2006), and
is
payable monthly. The loan matures on October 31, 2007, provided that the Company
may extend the maturity date for one year, during which time the interest rate
shall be one-year LIBOR plus 8%. The promissory note contains a prepayment
penalty of 5%, if prepaid after September 2005, and before September 2006;
and
3% if prepaid between September 2006 and October 30, 2007. On June 30, 2006,
approximately $1.2 million of the loan proceeds were held in escrow to fund
specific improvements to the mortgaged property.
Guarantees
At
June
30, 2006, we included $1.3 million as debt for guarantees of retail shop
partners’ indebtedness incurred by the shop partners’ for the purchase of store
fittings in Germany. These guarantees were issued by our subsidiary in the
sports & leisure segment. In addition, at June 30, 2006, approximately $1.5
million of bank loans received by retail shop partners in the sports &
leisure segment were guaranteed by our subsidiaries and are not reflected on
our
balance sheet because these loans have not been assumed by us. These guarantees
were not assumed by us when we acquired the sports & leisure business. The
loans are secured by the store fittings purchased to outfit our retail
stores.
Letters
of Credit
We
have
entered into standby letter of credit arrangements with insurance companies
and
others, issued primarily to guarantee payment of our workers’ compensation
liabilities. At June 30, 2006, we had contingent liabilities of $3.0 million,
on
commitments related to outstanding letters of credit which were secured by
restricted cash collateral.
4.
PENSIONS AND POSTRETIREMENT BENEFITS
The
Company and its subsidiaries sponsor three qualified defined benefit pension
plans and several other postretirement benefit plans. The components of net
periodic benefit cost from these plans are as follows:
|
|
Pension
Benefits
|
|
Postretirement
Benefits
|
|
|
|
Three
Months
|
|
Nine
Months
|
|
Three
Months
|
|
Nine
Months
|
|
|
|
6/30/06
|
|
6/30/05
|
|
6/30/06
|
|
6/30/05
|
|
6/30/06
|
|
6/30/05
|
|
6/30/06
|
|
6/30/05
|
|
Service
cost
|
|
$
|
96
|
|
$
|
108
|
|
$
|
290
|
|
$
|
463
|
|
$
|
7
|
|
$
|
22
|
|
$
|
20
|
|
$
|
66
|
|
Interest
cost
|
|
|
2,626
|
|
|
3,019
|
|
|
7,877
|
|
|
8,917
|
|
|
518
|
|
|
737
|
|
|
1,555
|
|
|
2,211
|
|
Expected
return on plan assets
|
|
|
(3,405
|
)
|
|
(3,555
|
)
|
|
(10,214
|
)
|
|
(10,665
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Amortization
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service cost
|
|
|
91
|
|
|
77
|
|
|
272
|
|
|
233
|
|
|
(278
|
)
|
|
(54
|
)
|
|
(833
|
)
|
|
(162
|
)
|
Actuarial
(gain)/loss
|
|
|
894
|
|
|
810
|
|
|
2,681
|
|
|
2,430
|
|
|
379
|
|
|
320
|
|
|
1,136
|
|
|
960
|
|
Net
periodic benefit cost
|
|
$
|
302
|
|
$
|
459
|
|
$
|
906
|
|
$
|
1,378
|
|
$
|
626
|
|
$
|
1,025
|
|
$
|
1,878
|
|
$
|
3,075
|
|
Our
funding policy is to make the minimum annual contribution required by the
Employee Retirement Income Security Act of 1974, or local statutory law. Based
upon the Employee Retirement Income Security Act of 1974 and our actuary’s
current assumptions and projections, we would not have to provide additional
cash contributions to the largest pension plan until 2009. These current
actuarial projections indicate contribution requirements of $1,180 in 2009,
$1,970 in 2010 and a total of $11,420 in 2011 through 2015. Under current law,
we are required to make annual cash contributions of approximately $0.3 million
to fund a small pension plan.
5.
EARNINGS (LOSS) PER SHARE
The
following table illustrates the computation of basic and diluted earnings (loss)
per share:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
Basic
earnings (loss) per share:
|
|
6/30/06
|
|
6/30/05
|
|
6/30/06
|
|
6/30/05
|
|
Earnings
(loss) from continuing operations
|
|
$
|
299
|
|
$
|
(2,265
|
)
|
$
|
(22,654
|
)
|
$
|
(17,545
|
)
|
Weighted
average common shares outstanding
|
|
|
25,226
|
|
|
25,229
|
|
|
25,226
|
|
|
25,223
|
|
Basic
earnings (loss) from continuing operations per share
|
|
$
|
0.01
|
|
$
|
(0.09
|
)
|
$
|
(0.90
|
)
|
$
|
(0.70
|
)
|
Diluted
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from continuing operations
|
|
$
|
299
|
|
$
|
(2,265
|
)
|
$
|
(22,654
|
)
|
$
|
(17,545
|
)
|
Weighted
average common shares outstanding
|
|
|
25,226
|
|
|
25,229
|
|
|
25,226
|
|
|
25,223
|
|
Options
|
|
|
antidilutive
|
|
|
antidilutive
|
|
|
antidilutive
|
|
|
antidilutive
|
|
Total
shares outstanding
|
|
|
25,226
|
|
|
25,229
|
|
|
25,226
|
|
|
25,223
|
|
Diluted
earnings (loss) from continuing operations per share
|
|
$
|
0.01
|
|
$
|
(0.09
|
)
|
$
|
(0.90
|
)
|
$
|
(0.70
|
)
|
Stock
options entitled to purchase 758,505 and 768,530 shares of Class A common stock
were antidilutive and not included in the earnings per share calculation for
the
three and nine months ended June 30, 2006, respectively. Stock options entitled
to purchase 957,141 and 1,001,554 shares of Class A common stock were
antidilutive and not included in the earnings per share calculation for the
three and nine months ended June 30, 2005, respectively. The stock options
could
become dilutive in future periods.
6.
EQUITY SECURITIES
We
had
22,604,761 shares of Class A common stock and 2,621,412 shares of Class B common
stock outstanding at June 30, 2006. Class A common stock is traded on both
the
New York and Pacific Stock Exchanges. There is no public market for the Class
B
common stock. The shares of Class A common stock are entitled to one vote per
share and cannot be exchanged for shares of Class B common stock. The shares
of
Class B common stock are entitled to ten votes per share and can be exchanged,
at any time, for shares of Class A common stock on a share-for-share
basis.
7.
CONTINGENCIES
Environmental
Matters
Our
operations are subject to stringent government imposed environmental laws and
regulations concerning, among other things, the discharge of materials into
the
environment and the generation, handling, storage, transportation and disposal
of waste and hazardous materials. To date, such laws and regulations have had
a
material effect on our financial condition, results of operations, and net
cash
flows, and we have expended, and can be expected to expend in the future,
significant amounts for the investigation of environmental conditions and
installation of environmental control facilities, remediation of environmental
conditions and other similar matters.
In
connection with our plans to dispose of certain real estate, we must investigate
environmental conditions and we may be required to take certain corrective
action prior or pursuant to any such disposition. In addition, we have
identified several areas of potential contamination related to, or arising
from
other facilities owned, or previously owned, by us, that may require us either
to take corrective action or to contribute to a clean-up. We are also a
defendant in several lawsuits and proceedings seeking to require us to pay
for
investigation or remediation of environmental matters, and for injuries to
persons or property allegedly caused thereby, and we have been alleged to be
a
potentially responsible party at various "superfund" sites. We believe that
we
have recorded adequate accruals in our financial statements to complete such
investigation and take any necessary corrective actions or make any necessary
contributions. No amounts have been recorded as due from third parties,
including insurers, or set-off against, any environmental liability, unless
such
parties are contractually obligated to contribute and are not disputing such
liability.
In
October 2003, we learned that volatile organic compounds had been detected
in
amounts slightly exceeding regulatory thresholds in a town water supply well
in
East Farmingdale, New York. 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 the first nine
months of fiscal 2006, we contributed approximately $0.6 million toward this
remediation.
We
expensed $0.6 million in discontinued operations for environmental matters
in
the nine months ended June 30, 2006. As of June 30, 2006 and September 30,
2005,
the consolidated total of our recorded liabilities for environmental matters
was
approximately $9.7 million and $10.8 million, respectively, which represented
the estimated probable exposure for these matters. On June 30, 2006, $1.1
million of these liabilities were classified as other accrued liabilities and
$8.6 million were classified as other long-term liabilities. It is reasonably
possible that our exposure for these matters could be approximately $14.3
million.
The
sales
agreement with Alcoa includes an indemnification for legal and environmental
claims in excess of $8.45 million, for our fastener business. To date, Alcoa
has
contacted us concerning potential environmental and legal claims for
approximately $16.0 million, which, while disputed, could exceed the $8.45
million indemnification threshold included in the sales agreement. However,
we
believe that the indemnification threshold has increased by an additional amount
of approximately $2.0 million. We do not believe that we will have any liability
to Alcoa in excess of the indemnification threshold. Accordingly, we have not
recorded an additional accrual for these environmental claims at June 30, 2006.
However, Alcoa may seek to claim that amounts in excess of the threshold should
be paid from the $25.0 million held in escrow, which we would dispute. If it
becomes probable that we are liable for claims in excess of the indemnification
amount included in the sales agreement, we will, at that time record the
liability. We have commenced an arbitration action against Alcoa to determine
the validity of its claims.
Asbestos
Matters
On
January 21, 2003, we and one of our subsidiaries were served with a third-party
complaint in an action brought in New York by a non-employee worker and his
spouse alleging personal injury as a result of exposure to asbestos-containing
products. The defendant, which is one of many defendants in the action, had
purchased a pump business from us, and asserts the right to be indemnified
by us
under its purchase agreement. This case was discontinued as to all defendants,
thereby extinguishing the indemnity claim against us in the instant case.
However, the purchaser has notified us of, and claimed a right to indemnity
from
us in relation to many thousands of other asbestos-related claims filed against
it. We have not received enough information to assess the impact, if any, of
the
other claims. During the last thirty-two months, we have been served directly
by
plaintiffs’ counsel in twenty-five cases related to the same pump business. Two
of the nineteen cases were dismissed as to all defendants, based upon forum
objections. We, in coordination with our insurance carriers, intend aggressively
to defend ourselves against these claims.
We
have
been served with a total of twenty-eight separate complaints in actions filed
in
various venues by non-employee workers, alleging personal injury or wrongful
death as a result of exposure to asbestos-containing products other than those
related to the pump business. The plaintiffs’ complaints do not specify
which, if any, products are at issue, making it difficult to assess the merit
and value, if any, of the asserted claims. We have resolved eleven similar
(non-pump business) asbestos-related lawsuits that were previously served upon
us. In nine cases, we were voluntarily dismissed, without payment of
consideration to plaintiffs. The remaining two cases were settled for nominal
amounts. We, in coordination with our insurance carriers, intend aggressively
to
defend ourselves against these claims.
Our
insurance carriers have participated in the defense of all of the aforementioned
asbestos claims, both pump and non-pump related. Although insurance coverage
varies, depending upon the policy period(s) and product line involved in each
case, management believes that our insurance coverage levels are adequate,
and
that asbestos claims will not have a material adverse effect on our financial
condition, future results of operation, or net cash flow.
CL
Motor Freight Litigation
In
July
2005, we received notice from the Ohio Bureau of Workers Compensation that
it is
seeking reimbursement from us of approximately $7.3 million for CL Motor Freight
Inc. workers’ compensation claims which were insured under a self-insured
workers compensation program in Ohio from the 1950s until 1985. In March 2006,
we received a letter from the Ohio Bureau of Workers Compensation increasing
the
amount of reimbursement it is seeking from us to approximately $7.7 million
and
suggesting a meeting to discuss a settlement. With interest, the claim could
be
higher. Prior to July 2005, we had not received any communication from the
Ohio
Bureau of Workers Compensation for many years. CL Motor Freight is a former
wholly-owned subsidiary of ours, which filed for Bankruptcy protection in 1985.
We are contesting this claim.
Other
Matters
Two
actions, styled Noto
v. Steiner,
et al.,
and
Barbonel
v. Steiner, et
al.,
were
commenced on November 18, 2004, and November 23, 2004, respectively, in the
Court of Chancery of the State of Delaware in and for Newcastle County,
Delaware. The plaintiffs allege that each is, or was, a shareholder of The
Fairchild Corporation and purported to bring actions derivatively on behalf
of
the Company, claiming, among other things, that Fairchild executive officers
received excessive pay and perquisites and that the Company’s directors approved
such excessive pay and perquisites in violation of fiduciary duties to the
Company. The complaints name, as defendants, the Company’s directors, its
Chairman and Chief Executive Officer, its President and Chief Operating Officer,
its former Chief Financial Officer, and its General Counsel. While the Company
and its Officers and Directors believe it and they have meritorious defenses
to
these suits, and deny liability or wrongdoing with respect to any and all claims
alleged in the suits, it and its Officers and Directors elected to settle to
avoid onerous costs of defense, inconvenience and distraction. On April 1,
2005,
we mailed to our shareholders a Notice of Hearing and Proposed Settlement of
The
Fairchild Corporation Stockholder Derivative Litigation. On May 18, 2005, the
Court of Chancery of the State of Delaware in and for New Castle County declined
to approve that proposed settlement of the actions. On October 24, 2005, we
mailed to our shareholders a Notice of Hearing and Proposed Supplemental
Settlement of The Fairchild Corporation Stockholder Derivative Litigation.
On
November 23, 2005, the Court of Chancery of the State of Delaware in and for
New
Castle County approved the proposed settlement of these actions. The Court’s
order became final on December 23, 2005. As a result of the settlement, we
recognized a reduction in our selling, general and administrative expense for
approximately $5.7 million of proceeds we received from Mr. J. Steiner and
our
insurance carriers. As of June 30, 2006, we have liabilities of approximately
$1.3 million for legal expenses associated with the shareholder litigation,
which represented the remaining estimated and unpaid costs for these matters.
In
January 2006, we received approximately $0.9 million from our insurance carriers
to pay for the plaintiffs’ and objector’s attorneys’ fees. In April 2006 and
July 2006, we received approximately $0.8 million and $1.1 million,
respectively, from our insurance carriers to pay for certain of our legal costs
associated with this matter.
In
connection with the sale of the fasteners business to Alcoa in December 2002,
Alcoa demanded that the Company make a post-closing balance sheet adjustment
which, if accepted by us, would have entitled Alcoa to approximately $8.1
million. We rejected the adjustment and, in response, Alcoa, without our
authorization, withheld payment to us of $4.0 million of the amount due to
us
from the $12.5 million we earned based upon commercial aircraft deliveries
in
2003. We filed a claim against Alcoa in regard to the post-closing balance
sheet
matter, which was then submitted to BDO Seidman, LLP for arbitration. On
February 18, 2005, BDO Seidman resolved in our favor the dispute with Alcoa,
finding that the $8.1 million adjustment Alcoa demanded was inappropriate and
denying Alcoa’s request for reformation of the acquisition agreement entered
into by Alcoa and us. We also filed a claim against Alcoa to collect the $4.0
million Alcoa, without our authorization, held back “in escrow” which Alcoa
agreed was due to the Company, pending resolution of a post-closing balance
sheet adjustment dispute. In March 2005, Alcoa paid the $4.0 million amount
it
unilaterally withheld from us which remained outstanding for over a year. There
is no provision in the agreements between the Company and Alcoa permitting
Alcoa
to create an escrow for the disputed post-closing balance sheet adjustment,
and
we intend to continue to pursue Alcoa for adequate compensation on the amount
it
arbitrarily withheld from us, including reimbursement of damages and legal
fees.
In addition, Alcoa has asserted other claims which, if proven, would, according
to Alcoa, aggregate in excess of $5.0 million. If Alcoa is correct and these
other claims exceed $5.0 million, we may be required to reimburse Alcoa for
the
full amount, without benefit of a threshold set forth in the acquisition
agreement under which we sold our fastener business to Alcoa. To date, Alcoa
has
contacted us concerning potential environmental and legal claims for
approximately $16 million, which, while disputed, could exceed the $10.4 million
indemnification reserve included in the sales agreement. We have notified Alcoa
of our dispute of these matters and claims, and expect that resolution will
require litigation, arbitration, or alternative dispute resolution
methods.
We
are
involved in various other claims and lawsuits incidental to our business. We,
either on our own or through our insurance carriers, are contesting these
matters. In the opinion of management, the ultimate resolution of litigation
against us, including that mentioned above, will not have a material adverse
effect on our financial condition, future results of operations or net cash
flows.
8.
DISCONTINUED OPERATIONS
Shopping
Center
On
July
6, 2006, Republic Thunderbolt, LLC (an indirect, wholly-owned subsidiary of
The
Fairchild Corporation), completed the sale of Airport Plaza. The purchaser
was
Airport Plaza, LLC, an affiliate of Kimco Realty Corporation. Airport Plaza
is a
shopping center located in Farmingdale, NY. 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. As a
result of post-closing adjustments, Republic Thunderbolt, LLC expects to receive
an additional amount of approximately $0.3 million. We
decided to sell the shopping center to enhance our financial flexibility,
allowing us to invest in existing operations or pursue other opportunities,
including opportunities to take our company private, or “going dark”. We expect
to recognize a gain from this transaction. However, because of uncertain
environmental liabilities, the gain may be delayed.
Landfill
Development Partnership
On
April
28, 2006, our consolidated partnership, Eagle Environmental II, L.P., was sold
to Highstar Waste Acquisition for approximately $1.4 million. In the three
and
nine months ended June 30, 2006, we recognized a $1.0 million gain on disposal
of discontinued operations as a result of this transaction.
Aerostructures
Business
On
June
24, 2005, we completed the sale of our Fairchild Aerostructures business for
$6.0 million to PCA Aerospace. The cash received from PCA Aerospace is subject
to a post-closing adjustment based upon the net working capital of the business
on January 1, 2005, compared with its net working capital as of June 24, 2005,
which we have estimated to be approximately $1.5 million, and is included in
accounts receivable at June 30, 2006. PCA Aerospace disputes the working capital
post-closing adjustment, and also alleges that we owe PCA Aerospace $4.4
million. We have notified PCA Aerospace of our dispute of these claims. In
connection with the sale, we have deposited with an escrow agent approximately
$0.4 million to secure indemnification obligations we may have to PCA Aerospace.
The escrow period is eighteen months. We decided to sell Fairchild
Aerostructures, which was included in our aerospace segment, because we believe
we received adequate fair value for a business whose performance was below
our
expectations and because its business was unrelated to other businesses we
own.
We used $0.9 million of the proceeds from the sale to repay a portion of our
CIT
revolving credit facility and we used the remaining proceeds from the sale
to
reinvest in our existing operations. Fairchild Aerostructures was previously
included in our aerospace segment.
In
addition, we are leasing property we own located in Huntington Beach,
California, to PCA Aerospace through October 2007. We can cause PCA Aerospace
to
purchase the Huntington Beach property at the greater of fair market value
or
$6.0 million under a put option we hold which can be exercised upon the earlier
of the Beal Bank loan being paid off (currently due in October 2007, but with
extension options) or January 31, 2012. PCA Aerospace also holds a similar
purchase option. At June 30, 2006, the book value of the Huntington Beach
property was $3.0 million and we believe the current fair market value is
approximately $5.5 million.
Fastener
Business
On
December 3, 2002, we completed the sale of our fastener business to Alcoa Inc.
for approximately $657 million in cash and the assumption of certain
liabilities. During the four-year period from 2003 to 2006, we are entitled
to
receive additional cash proceeds of $0.4 million for each commercial aircraft
delivered by Boeing and Airbus in excess of stated threshold levels, up to
a
maximum of $12.5 million per calendar year. Deliveries exceeded
the threshold aircraft delivery level needed for us to earn the full $12.5
million contingent payment for each of calendar 2003 to 2005.
Accordingly, we recognized a gain of $12.5 million on the disposal of
discontinued operations in the nine months ended June 30, 2006 and June 30,
2005. The remaining threshold aircraft delivery level is 650 in calendar
2006.
On
December 3, 2002, we deposited with an escrow agent $25 million to secure
indemnification obligations we may have to Alcoa. The escrow period remains
in
effect to December 3, 2007, but funds may be held longer if claims are timely
asserted and remain unresolved. The escrow is classified in long-term
investments on our balance sheet. In addition, for a period ending on December
3, 2007, we are required to maintain our corporate existence, take no action
to
cause our own liquidation or dissolution, and take no action to declare or
pay
any dividends on our common stock.
The
results of the shopping center, landfill development partnership, Fairchild
Aerostructures, and the fastener business are recorded as earnings from
discontinued operations, the components of which are as follows:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
6/30/06
|
|
6/30/05
|
|
6/30/06
|
|
6/30/05
|
|
Net
revenues
|
|
|
2,431
|
|
|
5,186
|
|
|
7,319
|
|
|
14,688
|
|
Cost
of revenues
|
|
|
915
|
|
|
4,567
|
|
|
3,463
|
|
|
12,855
|
|
Gross
margin
|
|
|
1,516
|
|
|
619
|
|
|
3,856
|
|
|
1,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general & administrative expense
|
|
|
3,355
|
|
|
1,741
|
|
|
4,020
|
|
|
2,820
|
|
Other
(income) expense, net
|
|
|
(36
|
)
|
|
(1,521
|
)
|
|
(208
|
)
|
|
(2,338
|
)
|
Operating
income (loss)
|
|
|
(1,803
|
)
|
|
399
|
|
|
44
|
|
|
1,351
|
|
Net
interest expense
|
|
|
(789
|
)
|
|
(862
|
)
|
|
(2,411
|
)
|
|
(2,533
|
)
|
Earnings
(loss) from discontinued operations before taxes
|
|
|
(2,592
|
)
|
|
(463
|
)
|
|
(2,367
|
)
|
|
(1,182
|
)
|
Income
tax (provision) benefit
|
|
|
-
|
|
|
-
|
|
|
(15
|
)
|
|
503
|
|
Net
earnings (loss) from discontinued operations
|
|
|
(2,592
|
)
|
|
(463
|
)
|
|
(2,382
|
)
|
|
(679
|
)
|
The
assets and liabilities of our Shopping Center and landfill development
partnership are being reported as assets and liabilities of discontinued
operations at June 30, 2006 and September 30, 2005, and were as
follows:
|
|
6/30/06
|
|
9/30/05
|
|
Current
assets of discontinued operations:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
18
|
|
$
|
60
|
|
Prepaid
expenses and other current assets
|
|
|
1,810
|
|
|
1,449
|
|
|
|
|
1,828
|
|
|
1,509
|
|
Noncurrent
assets of discontinued operations:
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
90,741
|
|
|
91,031
|
|
Accumulated
depreciation
|
|
|
(16,346
|
)
|
|
(15,571
|
)
|
Deferred
loan costs
|
|
|
769
|
|
|
832
|
|
Other
assets
|
|
|
2,917
|
|
|
3,081
|
|
|
|
|
78,081
|
|
|
79,373
|
|
Current
liabilities of discontinued operations:
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
|
(700
|
)
|
|
(668
|
)
|
Accounts
payable
|
|
|
(228
|
)
|
|
(425
|
)
|
Accrued
liabilities
|
|
|
(419
|
)
|
|
(447
|
)
|
|
|
|
(1,347
|
)
|
|
(1,540
|
)
|
Noncurrent
liabilities of discontinued operations:
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
(52,777
|
)
|
|
(53,313
|
)
|
Other
long-term liabilities
|
|
|
(168
|
)
|
|
(168
|
)
|
|
|
|
(52,945
|
)
|
|
(53,481
|
)
|
|
|
|
|
|
|
|
|
Total
net assets of discontinued operations
|
|
$
|
25,617
|
|
$
|
25,861
|
|
Term
Loan Agreement - Shopping Center
At
June
30, 2006, our subsidiary, Republic Thunderbolt, LLC, had outstanding borrowings
of $53.5 million on a non-recourse 10-year term loan financing of our Airport
Plaza shopping center in Farmingdale, New York. The interest rate was fixed
at
6.2% for the term of the loan with a loan maturity date of January 2014. The
loan was secured by the assets of our shopping center. On June 30, 2006,
approximately $6.0 million of the loan proceeds were being invested in a
long-term escrow account as collateral to fund certain contingent environmental
matters. The loan was assumed by the purchaser of Airport Plaza on July 6,
2006.
9.
BUSINESS SEGMENT INFORMATION
We
currently report in three principal business segments: sports & leisure,
aerospace, and real estate operations. The following table provides the
historical results of our operations for the three and nine months ended June
30, 2006 and 2005, respectively.
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
6/30/06
|
|
6/30/05
|
|
6/30/06
|
|
6/30/05
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sports
& Leisure Segment
|
|
$
|
85,092
|
|
$
|
91,501
|
|
$
|
162,837
|
|
$
|
191,014
|
|
Aerospace
Segment
|
|
|
20,486
|
|
|
21,309
|
|
|
56,778
|
|
|
65,845
|
|
Real
Estate Operations Segment
|
|
|
259
|
|
|
259
|
|
|
777
|
|
|
777
|
|
Intercompany
Eliminations
|
|
|
(22
|
)
|
|
(115
|
)
|
|
(64
|
)
|
|
(358
|
)
|
Total
|
|
$
|
105,815
|
|
$
|
112,954
|
|
$
|
220,328
|
|
$
|
257,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sports
& Leisure Segment
|
|
$
|
6,534
|
|
$
|
7,534
|
|
$
|
(7,116
|
)
|
$
|
(795
|
)
|
Aerospace
Segment
|
|
|
1,437
|
|
|
1,740
|
|
|
3,235
|
|
|
5,133
|
|
Real
Estate Operations Segment
|
|
|
191
|
|
|
122
|
|
|
388
|
|
|
377
|
|
Corporate
and Other
|
|
|
(5,748
|
)
|
|
(8,660
|
)
|
|
(14,134
|
)
|
|
(22,494
|
)
|
Total
|
|
$
|
2,414
|
|
$
|
736
|
|
$
|
(17,627
|
)
|
$
|
(17,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(Loss) From Continuing
Operations
Before Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sports
& Leisure Segment
|
|
$
|
5,483
|
|
$
|
6,155
|
|
$
|
(9,889
|
)
|
$
|
(4,529
|
)
|
Aerospace
Segment
|
|
|
1,055
|
|
|
1,393
|
|
|
2,186
|
|
|
4,136
|
|
Real
Estate Operations Segment
|
|
|
(53
|
)
|
|
(177
|
)
|
|
(562
|
)
|
|
(515
|
)
|
Corporate
and Other
|
|
|
(5,905
|
)
|
|
(7,979
|
)
|
|
(13,021
|
)
|
|
(14,627
|
)
|
Total
|
|
$
|
580
|
|
$
|
(608
|
)
|
$
|
(21,286
|
)
|
$
|
(15,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
6/30/06
|
|
|
9/30/05
|
|
|
|
|
|
|
|
Sports
& Leisure Segment
|
|
$
|
180,940
|
|
$
|
154,648
|
|
|
|
|
|
|
|
Aerospace
Segment
|
|
|
47,318
|
|
|
42,848
|
|
|
|
|
|
|
|
Real
Estate Operations Segment
|
|
|
115,585
|
|
|
117,226
|
|
|
|
|
|
|
|
Corporate
and Other
|
|
|
142,116
|
|
|
132,338
|
|
|
|
|
|
|
|
Total
|
|
$
|
485,959
|
|
$
|
447,060
|
|
|
|
|
|
|
|
10.
SUBSEQUENT EVENTS
On
July
6, 2006, Republic Thunderbolt, LLC (an indirect, wholly-owned subsidiary of
The
Fairchild Corporation), completed the sale of Airport Plaza. The purchaser
was
Airport Plaza, LLC, an affiliate of a joint venture between Kimco Realty
Corporation and a major investment bank. Airport Plaza is a shopping center
located in Farmingdale, NY. 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. As a result of post-closing
adjustments, Republic Thunderbolt, LLC expects to receive an additional amount
of approximately $0.3 million. We
decided to sell the shopping center to enhance our financial flexibility,
allowing us to invest in existing operations or pursue other opportunities,
including opportunities to take our company private, or “going dark”. We expect
to recognize a gain from this transaction. However, because of uncertain
environmental liabilities, the gain may be delayed.
On
August
7, 2006, we announced that FA Holdings, LLC, a Delaware limited liability
company led by Philip Sassower, Chairman of The Phoenix Group LLC, and Jeffrey
Steiner, Chairman and Chief Executive Officer of the Company, has made a
proposal to acquire all of the outstanding shares of the Company for $2.73
per
share in cash.
Our
Board
of Directors had previously formed a Special Committee of independent directors
to consider any proposal received. The Committee has retained independent
financial advisors and legal counsel to assist it in its work. Our Board of
Directors cautions the Company’s stockholders and others considering trading in
its securities that the Board has just received the proposal and no decisions
have been made by the Board with respect to the Company’s response to the
proposal. There can be no assurance that any definitive agreement will be
executed or that any transaction will be approved or consummated.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
The
Fairchild Corporation was incorporated in October 1969, under the laws of the
State of Delaware. We have 100% ownership interests (directly and indirectly)
in
Fairchild Holding Corp., Republic Thunderbolt, LLC, and Banner Aerospace Holding
Company I, Inc. Fairchild Holding Corp. is the owner of Hein Gericke,
PoloExpress, and IFW. Our principal operations are conducted through these
entities. Our consolidated financial statements present the results of our
shopping center (sold July 7, 2006), our former fastener business (sold December
3, 2002), Fairchild Aerostructures (sold June 24, 2005), and a landfill
partnership (sold April 28, 2006), as discontinued operations.
The
following discussion and analysis provide information which management believes
is relevant to the assessment and understanding of our consolidated results
of
operations and financial condition. The discussion should be read in conjunction
with the consolidated financial statements and notes thereto included elsewhere
in this report.
CAUTIONARY
STATEMENT
Certain
statements in this filing contain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect
to
our financial condition, results of operation and business. These statements
relate to analyses and other information, which are based on forecasts of future
results and estimates of amounts not yet determinable. These statements also
relate to our future prospects, developments and business strategies. These
forward-looking statements are identified by their use of terms and phrases
such
as ‘‘anticipate,’’ ‘‘believe,’’ ‘‘could,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘intend,’’
‘‘may,’’ ‘‘plan,’’ ‘‘predict,’’ ‘‘project,’’ ‘‘will’’ and similar terms and
phrases, including references to assumptions. These forward-looking statements
involve risks and uncertainties, including current trend information,
projections for deliveries, backlog and other trend estimates that may cause
our
actual future activities and results of operations to be materially different
from those suggested or described in this financial discussion and analysis
by
management. These risks include: our ability to finance and successfully operate
our retail businesses; our ability to accurately predict demand for our
products; our ability to receive timely deliveries from vendors; our ability
to
raise cash to meet seasonal demands; our dependence on the retail and aerospace
industries; our ability to maintain customer satisfaction and deliver products
of quality; our ability to properly assess our competition; our ability to
improve our operations to profitability status; our ability to liquidate
non-core assets to meet cash needs; our ability to attract and retain highly
qualified executive management; our ability to achieve and execute internal
business plans; weather conditions in Europe during peak business season and
on
weekends; labor disputes; competition; foreign currency fluctuations; worldwide
political instability and economic growth; military conflicts, including
terrorist activities; infectious diseases; new proposed legislation which may
cause us to be required to fund our pension plan earlier than we had expected;
and the impact of any economic downturns and inflation.
If
one or
more of these and other risks or uncertainties materialize, or if underlying
assumptions prove incorrect, our actual results may vary materially from those
expected, estimated or projected. Given these uncertainties, users of the
information included in this financial discussion and analysis by management,
including investors and prospective investors, are cautioned not to place undue
reliance on such forward-looking statements. We do not intend to update the
forward-looking statements included in this filing, even if new information,
future events or other circumstances have made them incorrect or
misleading.
EXECUTIVE
OVERVIEW
Our
business consists of three segments: sports & leisure, aerospace, and real
estate operations. Our sports & leisure segment is engaged in the design and
retail sale of protective clothing, helmets and technical accessories for
motorcyclists in Europe and the design and distribution of such apparel and
helmets in the United States. Our aerospace segment stocks a wide variety of
aircraft parts, then distributes them to commercial airlines and air cargo
carriers, fixed-base operators, corporate aircraft operators and other aerospace
companies worldwide. Our real estate operations segment owns and leases a
shopping center located in Farmingdale, New York (under contract to sell),
and
owns and rents two improved parcels located in Southern California.
For
the
nine months ended June 30, 2006, we reported a loss from continuing operations
before income taxes of $21.3 million, as compared to a loss of $15.5 million
for
the nine months ended June 30, 2005. The current nine months loss from
continuing operations benefited from the settlement of the shareholder
derivative litigation, which improved results by approximately $5.7 million.
Excluding this item, the increased loss from continuing operations resulted
primarily from lower revenues in our sports & leisure and aerospace
segments. The seasonal inventory demands of our sports & leisure business
and the operating losses have contributed primarily to our $18.4 million use
of
cash in our operating activities in the nine months ended June 30, 2006. As
of
June 30, 2006, we have unrestricted cash, cash equivalents and short-term
investments of $15.9 million, and available borrowing under lines of credit
of
$3.6 million.
In
order
to improve our liquidity, on December 21, 2005, we signed a definitive agreement
to sell our shopping center, Airport Plaza located in Farmingdale, NY, to KRC
Acquisition Corp., acting on behalf of a joint venture comprised of Kimco Realty
Corporation and a fund managed by a major investment bank. On July 6, 2006,
we
completed the sale of Airport Plaza. The purchaser was Airport Plaza, LLC,
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. The sale does not
include several other undeveloped parcels of real estate that we own in
Farmingdale, New York, the largest of which is under contract of sale to the
market chain, Stew Leonards. We decided to sell the shopping center to enhance
our financial flexibility, allowing us to invest in existing operations or
pursue other opportunities.
On
May 3,
2006, we decided to borrow $30.0 million from GoldenTree Capital Opportunities,
L.P. and GoldenTree Capital Solutions Fund Financing to further improve our
liquidity and provide us with flexible opportunities to:
· |
Invest
in our existing operations
|
· |
Pursue
acquisitions opportunities.
|
· |
Provide
a guarantee for any additional debt incurred by our sports & leisure
segment
|
· |
Repurchase
our outstanding stock.
|
We
expect
that cash on hand, which includes cash proceeds received from the stockholder
derivative litigation, the Alcoa earn-out, $30.0 million of proceeds received
from a new term loan at Corporate, cash available from lines of credit, and
proceeds received from dispositions of short-term investments and our shopping
center, will be adequate to satisfy our cash requirements during the next twelve
months.
Our
cash
needs at our sports & leisure segment are generally the highest during the
first and second quarters of our fiscal year, when our sports and leisure
segment purchases inventory in advance of the spring and summer selling
seasons.
On
March
1, 2006, we entered into an €11.0 million ($13.2 million at June 30, 2006)
seasonal credit line with Stadtsparkasse Düsseldorf, with half of the facility
available to us for the 2006 season. The seasonal credit line bears interest
at
2.75% over the three-month Euribor rate (5.24% at June 30, 2006) and we must
pay
a 1.25% per annum non-utilization fee on the available facility during the
seasonal drawing period. The seasonal financing facility is 80% guaranteed
by
the German State of North Rhine-Westphalia. The seasonal facility will reduce
by
€1.0 million per year and expires on June 30, 2008. We are holding discussions
with other German banks, to commit to one half of the seasonal facility on
a
permanent basis, subsequent to the 2006 season, but to date, we have not
received a positive indication from a second bank to participate in the seasonal
financing. If we are unable to obtain a €5.0 million commitment from a second
bank by October 30, 2006, we have undertaken to deposit €5.0 million as
restricted cash with Stadtsparkasse Düsseldorf in lieu of €5.0 million from the
second bank, for the 2007 season. If we fail to do so, Stadtsparkasse Düsseldorf
may reduce its loan commitment for the 2007 season.
In
the
event that our cash needs are substantially higher than projected, particularly
during our seasonal trough, we will take additional actions to generate the
required cash. These actions may include one or any combination of the
following:
· |
Liquidating
investments and other non-core
assets.
|
· |
Obtaining
additional borrowings from new
lenders.
|
· |
Eliminating,
reducing, or delaying all non-essential services provided by outside
parties, including consultants.
|
· |
Significantly
reducing our corporate overhead
expenses.
|
· |
Delaying
purchases of inventory.
|
During
the next several months, we plan to:
· |
Generate
additional cash from borrowings and/or the sale of other non-core
assets
to support our operations and corporate
needs.
|
· |
Enhance
operational efficiency by eliminating unprofitable product
lines.
|
· |
Pursue
potential investment partners and consider opportunities to go private
or
“dark”.
|
RESULTS
OF OPERATIONS
Business
Transactions
On
April
28, 2006, our consolidated partnership, Eagle Environmental, L.P., 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. and there is no requirement or current intent by us to pursue
any new operating activities through this partnership. In the three and nine
months ended June 30, 2006, we recognized a $1.0 million gain on disposal of
discontinued operations as a result of this transaction.
On
June
24, 2005, we completed the sale of our Fairchild Aerostructures business for
$6.0 million to PCA Aerospace. The cash received from PCA Aerospace is subject
to a post-closing adjustment based upon the net working capital of the business
on January 1, 2005, compared with its net working capital as of June 24, 2005,
which we have estimated to be approximately $1.5 million, and is included in
accounts receivable at June 30, 2006. PCA Aerospace disputes the working capital
post-closing adjustment, and also alleges that we owe PCA Aerospace $4.4
million. We have notified PCA Aerospace of our dispute of these claims. In
connection with the sale, we deposited with an escrow agent approximately $0.4
million to secure indemnification obligations we may have to PCA Aerospace.
The
escrow period is eighteen months. We decided to sell Fairchild Aerostructures,
which was included in our aerospace segment, because we believe we received
adequate fair value for a business whose performance was below our expectations
and because its business was unrelated to other businesses we own. We used
$0.9
million of the proceeds from the sale to repay a portion of our CIT revolving
credit facility and we used the remaining proceeds from the sale to reinvest
in
our existing operations.
Consolidated
Results
We
currently report in three principal business segments: sports & leisure,
aerospace, and real estate operations. Because
Fairchild Sports is a highly seasonal business, with an historic trend of a
higher volume of sales and profits during the months of March through September,
the discussion below should not be relied upon as a trend of our future results.
The
following table provides the revenues and operating income (loss) of our
segments:
(In
thousands)
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
6/30/06
|
|
6/30/05
|
|
6/30/06
|
|
6/30/05
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sports
& Leisure Segment
|
|
$
|
85,092
|
|
$
|
91,501
|
|
$
|
162,837
|
|
$
|
191,014
|
|
Aerospace
Segment
|
|
|
20,486
|
|
|
21,309
|
|
|
56,778
|
|
|
65,845
|
|
Real
Estate Operations Segment
|
|
|
259
|
|
|
259
|
|
|
777
|
|
|
777
|
|
Intercompany
Eliminations
|
|
|
(22
|
)
|
|
(115
|
)
|
|
(64
|
)
|
|
(358
|
)
|
Total
|
|
$
|
105,815
|
|
$
|
112,954
|
|
$
|
220,328
|
|
$
|
257,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sports
& Leisure Segment
|
|
$
|
6,534
|
|
$
|
7,534
|
|
$
|
(7,116
|
)
|
$
|
(795
|
)
|
Aerospace
Segment
|
|
|
1,437
|
|
|
1,740
|
|
|
3,235
|
|
|
5,133
|
|
Real
Estate Operations Segment
|
|
|
191
|
|
|
122
|
|
|
388
|
|
|
377
|
|
Corporate
and Other
|
|
|
(5,748
|
)
|
|
(8,660
|
)
|
|
(14,134
|
)
|
|
(22,494
|
)
|
Total
|
|
$
|
2,414
|
|
$
|
736
|
|
$
|
(17,627
|
)
|
$
|
(17,779
|
)
|
Revenues
decreased by $7.1 million, or 6.3%, in the third quarter of fiscal 2006, as
compared to the third quarter of fiscal 2005. Revenues decreased by $37.0
million, or 14.4%, in the first nine months of fiscal 2006, as compared to
the
first nine months of fiscal 2005. The first nine months of fiscal 2006, included
reduced revenues of $28.2 million and $9.1 million in our sports & leisure
segment and our aerospace segment, respectively. See segment discussion below
for further details.
Gross
margin as a percentage of sales improved to 41.9% in the three months ended
June
30, 2006, as compared to 41.5% in the three months ended June 30, 2005. Gross
margin as a percentage of sales improved to 39.7% in the first nine months
of
fiscal 2006, as compared to 38.3% in the first nine months of fiscal 2005.
The
increase in margins at our sports & leisure segment helped to partially
offset the lower sales. Gross margins also improved at our aerospace segment
due
primarily to a change in product mix.
Selling,
general and administrative expense as a percentage of sales increased to 41.0%
for the three months ended June 30, 2006, as compared to 40.6% in the three
months of fiscal 2005, due primarily to the lower volume of revenues. Selling,
general and administrative expense as a percentage of sales increased to 48.1%
for the nine months ended June 30, 2006, as compared to 44.4% in the first
nine
months of fiscal 2005, due primarily to the lower volume of revenues. Selling,
general and administrative expense for the three and nine months ended June
30,
2006, also benefited from $1.1 million and $5.7 million, respectively, received
by us from the settlement of the shareholder derivative litigation, offset
partially by $0.6 million of related legal fees.
Net
interest expense was $2.2 million and $2.6 million for the three months ended
June 30, 2006 and June 30, 2005, respectively. Net interest expense was $6.2
million and $8.7 million for the nine months ended June 30, 2006 and June 30,
2005, respectively. The decrease was due primarily to lower interest expense
on
the $100 million interest rate contract, which we settled in December 2005,
partially offset by interest from the $30.0 million Golden Tree term loan we
entered into on May 3, 2006.
Investment
income decreased by $5.2 million for
the
nine months ended June 30, 2006 as compared to the nine months ended June 30,
2005, due primarily to the prior period including
$6.9 million of investment income recognized from stock and dividends received
from the demutalization of an insurance company.
The
fair
market value adjustment of our position in a ten-year $100 million interest
rate
contract improved by $0.8 million in the first nine months of fiscal 2006,
as
compared to $4.0 million in the same period in fiscal 2005.
The
fair
market value adjustment of this agreement reflected increasing interest rates
and caused the favorable change in fair market value of the contract in these
periods. We
settled the interest rate contract at the end of December 2005, and accordingly
we will have no further income or loss from this contract. The settlement
allowed us to increase cash available for operations by releasing approximately
$2.5 million of cash held in escrow in excess of the liability.
The
tax
provision for the nine months ended June 30, 2006, represents $0.2 million
of
state taxes. No tax benefit was accrued, due to our domestic operations
reporting a loss for the first nine months and our annual projected loss for
domestic operations and efficient tax planning strategies that are currently
being put into place at our foreign locations. The tax provision for the nine
months ended June 30, 2005, represents foreign taxes withheld and state
taxes.
Earnings
(loss) from discontinued operations include the results of our shopping center,
operations of a landfill development partnership, and Fairchild Aerostructures
prior to their sale, certain accounts receivable recovery efforts, and legal
and
environmental expenses associated with our former businesses. The loss from
discontinued operations for the first nine months of fiscal 2006 reflected
$1.2
million of earnings recognized by our shopping center, prior to its sale, due
primarily to the discontinuance of depreciation expense on this asset held
for
sale, offset by $2.5 million of legal expense, and $0.6 million of environmental
expenses. The loss from discontinued operations for the first nine months of
fiscal 2005 resulted primarily from net losses of $0.4 million reported by
our
shopping center and $1.2 million from Fairchild Aerostructures, and $1.4 million
of legal and environmental expenses associated with our former businesses offset
partially by $1.5 million of collections on retained accounts receivable that
were previously written-off by a former subsidiary, and a tax benefit of $0.5
million realized from the carryback of environmental remediation
payments.
We
recognized a $12.5 million gain on the disposal of discontinued operations
in
each of the nine months ended June 30, 2006 and June 30, 2005, due to $12.5
million of additional proceeds earned from the sale of the fastener business.
In
the three and nine months ended June 30, 2006, we recognized a gain of $1.0
million gain form the sale of a landfill partnership. No income tax expense
was
recorded due to our overall tax loss in the United States.
Segment
Results
Sports
& Leisure Segment
Our
sports & leisure segment designs and sells motorcycle apparel, protective
clothing, helmets, and technical accessories for motorcyclists. Primary brand
names of our products include Hein Gericke and Polo. Hein Gericke currently
operates 147 retail shops in Austria, Belgium, France, Germany, Italy,
Luxembourg, the Netherlands, and the United Kingdom. Polo currently operates
89
retail shops in Germany and two shops in Switzerland. For the most part, the
Hein Gericke retail stores sell Hein Gericke brand items, and the Polo retail
stores sell Polo brand products. Both the Hein Gericke and Polo retail stores
sell products of other manufacturers, the inventory of which is owned by the
Company. IFW, located in Tustin, California, is a designer and distributor
of
motorcycle apparel, boots and helmets under several labels, including Hein
Gericke. In addition, IFW designs and produces apparel under private labels
for
third parties. The
sports and leisure segment is a seasonal business, with an historic trend of
a
higher volume of sales and profits during March through September.
Sales in
our sports & leisure segment decreased by $6.4 million and $28.2 million
during the three and nine months ended June 30, 2006, respectively, as compared
to the three and nine months ended June 30, 2005. Sales at IFW represented
$4.5
million and $15.8 million of the decrease during the three and nine months
ended
June 30, 2006, respectively, as compared to the three and nine months ended
June
30, 2005, due to a reduction in sales to Harley-Davidson and Tucker-Rocky.
Same
store sales at our retail stores decreased by 6.0% in the current nine month
period. Additionally, foreign currency exchange rates on the translation of
European sales into U.S. dollars changed unfavorably by approximately $7.3
million, or 4.4%, in the nine month period. Retail sales per average square
meter was $1,634.69 in the nine months ended June 30, 2006, as compared to
$1,814.21 in the nine months ended June 30, 2005. Sales were down at Hein
Gericke due to delays in inventory receipts which resulted in out-of-stock
conditions on certain high demand items; a shift in the timing of an advertising
campaign from March to April; and unusually harsh weather during March in
Europe. Sales were down at Polo due to the harsh weather in March in Germany
and
higher sales generated in the prior period resulting from Polo celebrating
its
25th
anniversary. Additionally, the month long world cup soccer tournament, which
was
hosted by Germany beginning in June, negatively affected revenues and profits.
Operating income decreased by $1.0 million, or 13.3%, to $6.5 million in the
three months ended June 30, 2006, as compared to $7.5 million in the three
months ended June 30, 2005. The operating loss was $7.1 million for the nine
months ended June 30, 2006, as compared to $0.8 million for the nine months
ended June 30, 2005, respectively. The decrease in the operating results in
the
current periods was due primarily to the aforementioned sales decreases and
the
reduction in business at IFW. The business improved its gross margins as a
percentage of sales by 1.3% over the nine months ended June 30, 2006, which
offset partially the reduction in revenues during this period.
We
have
continued a program to focus on optimal store location. This includes closing
or
relocating low performing stores, and opening new stores in England and
elsewhere in Western Europe. We have also redesigned several stores to better
present our products to customers. Recently, we have taken action to
significantly reduce the staff at IFW and focus its future efforts on designing
for private labels and its licensing business.
Aerospace
Segment
Our
aerospace segment has five locations in the United States, and is an
international supplier to the aerospace industry. Four locations specialize
in
the distribution of avionics, airframe accessories, and other components, and
one location provides overhaul and repair capabilities. The products distributed
include: navigation and radar systems, instruments, and communication systems,
flat panel technologies and rotables. Our location in Titusville, Florida,
overhauls and repairs landing gear, pressurization components, instruments,
and
avionics. Customers include original equipment manufacturers, commuter and
regional airlines, corporate aircraft and fixed-base operators, air cargo
carriers, general aviation suppliers and the military. Sales in our aerospace
segment decreased by $0.8 million, or 3.9%, in the three months ended June
30,
2006, as compared to the three months ended June 30, 2005.
Sales in
our aerospace segment decreased by $9.1 million, or 13.8%, in the first nine
months of fiscal 2006, as compared to the first nine months of fiscal
2005.
Sales in
our aerospace segment benefited in the nine months ended June 30, 2005, from
the
delivery of several unusually large orders. Demand in the aerospace industry
for
the products we sell continues to be adversely
affected by the financial
difficulties of commercial airlines.
Operating
income decreased by $0.3 million and $1.9 million, in the three and nine months
ended June 30, 2006, respectively, as compared to the same periods in fiscal
2005. The change was due
primarily to the decrease in volume of sales, offset partially by a 1.8%
increase in gross margin as a percentage of sales
in the
nine months ended June 30, 2006, as compared to the same period in fiscal
2005,
reflecting margin increases at two of the five locations.
Real
Estate Operations Segment
Our real estate operations segment owns and operates a 451,000 square foot
shopping center located in Farmingdale, New York, owns and leases to Alcoa
a
208,000 square foot manufacturing facility located in Fullerton, California,
and
also owns and leases to PCA Aerospace a 58,000 square foot manufacturing
facility located in Huntington Beach, California.
The
Fullerton property is leased to Alcoa through October 2007, and is expected
to
generate revenues and operating income in excess of $0.5 million per year.
The
Huntington Beach property is leased to PCA Aerospace through October 2007,
and
is expected to generate revenues and operating income of $0.4 million per year.
We can cause PCA Aerospace to purchase the Huntington Beach property at the
greater of fair market value or $6.0 million under a put option we hold which
can be exercised upon the earlier of the time when a mortgage loan, which
encumbers the property, is paid off (currently due in October 2007, but with
extension options) or January 31, 2012. PCA Aerospace also holds a similar
purchase option. At June 30, 2006, the book value of the Huntington Beach
property was $3.0 million and we believe the current fair market value is
in excess of $5.5 million.
In
April
2005, we engaged Eastdil Realty Company, LLC, to explore opportunities for
the
sale of our Farmingdale, New York shopping center, Airport Plaza. In October
2005, our Board of Directors’ authorized management to sell the shopping center,
and on December 21, 2005, we signed a definitive agreement to sell our center
to
KRC Acquisition Corp., acting on behalf of a joint venture comprised of Kimco
Realty Corporation and a fund managed by a major investment bank. On July 6,
2006, we completed the sale of Airport Plaza and 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. We decided
to sell the shopping center to enhance our financial flexibility, allowing
us to
invest in existing operations or pursue other opportunities, including
opportunities to take our company private, or “going dark”. We expect to
recognize a gain from this transaction. However, because of uncertain
environmental liabilities, the gain may be delayed.
Corporate
The
operating loss at corporate was reduced by $2.9 million and $8.4 million in
the
three and nine months ended June 30, 2006, respectively, as compared to the
same
periods of fiscal 2005, due primarily to the settlement of the shareholder
derivative litigation. We recognized a net reduction in general and
administrative expenses of $1.1 million and $5.7 million in the three and nine
months ended June 30, 2006, respectively, from proceeds received as a result
of
the shareholder settlement.
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total
capitalization as of June 30, 2006 and September 30, 2005 was $202.2 million
and
$178.8 million, respectively. The nine-month change in capitalization included
a
$28.4 million net increase in debt resulting from additional borrowings from
the
$30.0 million term loan entered into in May 2006, and $8.5 million of borrowings
from revolving lines of credit, offset partially by approximately $10.7 million
of term debt repayments. Equity decreased by $5.0 million, reflecting our $11.5
million net loss, offset partially by a $6.4 million increase in other
comprehensive income, primarily reflecting a $4.0 million increase fair market
value of available-for-sale investment securities and a $2.0 million improvement
in foreign currency translation adjustments. Our combined cash and investment
balances totaled $100.9 million on June 30, 2006, as compared to $97.9 million
on September 30, 2005, and included restricted investments of $76.2 million
and
$64.4 million at June 30, 2006 and September 30, 2005,
respectively.
Net
cash
used for operating activities for the nine months ended June 30, 2006, was
$18.4
million, and included a $10.4 million increase in net operating assets,
principally related to a $30.6 million increase in inventory, offset partially
by $22.8 million increase in accounts payable and other accrued
liabilities.
Net cash
used for operating activities for the nine months ended June 30, 2005, was
$20.6
million and principally reflected a $14.8 million increase in inventory and
a
$8.6 million increase in trading securities.
Net
cash
used for investing activities for the nine months ended June 30, 2006 was $1.7
million, and included $10.1 million to purchase investment securities and $5.9
million of capital expenditures, offset partially by $13.9 million of cash
received from the sale of discontinued operations, including $12.5 million
received from the calendar 2005 earn-out associated with our 2002 disposition
of
our fasteners business to Alcoa. Net cash provided by investing activities
for
the nine months ended June 30, 2005 was $25.7 million, and included $12.5
million received from the calendar 2004 earn-out associated with our 2002
disposition of our fasteners business to Alcoa, $6.0 million received from
the
sale of Fairchild Aerostructures in June 2005, and $15.1 million of proceeds
received from investment securities liquidated, offset partially by $8.1 million
of capital expenditures.
Net
cash
provided by financing activities was $16.7 million for the nine months ended
June 30, 2006, which reflected a $23.9 million net increase in debt from
additional borrowings, offset partially by $2.5 million in loan fees and $0.5
million of term loan repayments associated with our shopping center being
classified as a discontinued operation. Net cash used for financing activities
was $9.6 million for the nine months ended June 30, 2005, which primarily
reflects $9.5 million of net debt repayments, offset partially by $0.9 million
received on repayment of shareholder loans.
Our
principal cash requirements include supporting our current operations, general
and administrative expenses, capital expenditures, and the payment of other
liabilities including pension and postretirement benefits, environmental
investigation and remediation costs, and litigation related costs. We expect
that cash on hand, cash generated from the sale of our shopping center, cash
available from lines of credit, and proceeds received from dispositions of
short-term investments, will be adequate to satisfy our cash requirements during
the next twelve months.
In
order
to improve our liquidity, on December 21, 2005, we signed a definitive agreement
to sell our shopping center, Airport Plaza located in Farmingdale, NY, to KRC
Acquisition Corp., acting on behalf of a joint venture comprised of Kimco Realty
Corporation and a fund managed by a major investment bank. On July 6, 2006,
we
completed the sale of Airport Plaza. The purchaser was Airport Plaza, LLC,
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. The sale does not
include several other undeveloped parcels of real estate that we own in
Farmingdale, New York, the largest of which is under contract of sale to the
market chain, Stew Leonards. We decided to sell the shopping center to enhance
our financial flexibility, allowing us to invest in existing operations or
pursue other opportunities.
On
May 3,
2006, we decided to borrow $30.0 million from GoldenTree Capital Opportunities,
L.P. and GoldenTree Capital Solutions Fund Financing to further improve our
liquidity and provide us with flexible opportunities to:
· |
Invest
in our existing operations
|
· |
Pursue
acquisitions opportunities.
|
· |
Provide
a guarantee for any additional debt incurred by our sports & leisure
segment
|
· |
Repurchase
our outstanding stock.
|
The
costs
of being a small to mid-sized public company have increased substantially with
the introduction and implementation of controls and procedures mandated by
the
Sarbanes Oxley Act of 2002. Audit fees and audit related fees have significantly
increased over the past two years. Our increased costs also include the effects
of acquisitions and additional costs related to compliance with various
financing agreements. The costs to comply with Section 404 of the Sarbanes
Oxley
Act of 2002 alone substantially increased our audit and related costs to
approximately $3.1 million in fiscal 2005, as compared to only $1.6 million
in
fiscal 2004. This increase is significant for a company of our size. However,
on
March
31, 2006, our market capitalization was below the $50.0 million threshold and
accordingly, on September 30, 2006, we will cease to be deemed an accelerated
filer in accordance with the United States Securities and Exchange Commission
regulations and will not be required to comply
with Section 404 of the Sarbanes Oxley Act of 2002 in fiscal 2006. We will
likely choose not to comply with some or all of the provisions of Section 404,
and specifically do not plan to have an audit of our internal controls and,
accordingly, we expect a substantial reduction in our audit fees in fiscal
2006.
We are also considering additional longer term options for reducing our public
costs in the coming year, including opportunities to take our company private,
or “going dark”.
In
February 2005, we announced our intention to purchase up to 500,000 shares
of
our outstanding Class A Common Stock. Through June 30, 2006, we acquired 61,800
shares at an average price of $3.12 per share, and have not purchased any shares
since May 11, 2005.
Off
Balance Sheet Items
On
June
30, 2006, approximately $1.5 million of bank loans received by retail shop
partners in the sports & leisure segment were guaranteed by our subsidiaries
and are not reflected on our balance sheet because these loans have not been
assumed by us. These guarantees were not assumed by us when we acquired the
sports & leisure business. We have guaranteed loans to shop partners for the
purchase of store fittings in certain locations where we sell our products.
The
loans are secured by the store fittings purchased to outfit our retail
stores.
Contractual
and Other Obligations
At
June
30, 2006, we had contractual commitments to repay long-term debt, including
capital lease obligations. Payments due under these long-term obligations for
the fiscal years ending September 30 are as follows: $3.5 million for 2006;
$15.1 million for 2007; $19.1 million for 2008; $15.3 million for 2009; $31.0
million for 2010.
We
have
entered into standby letter of credit arrangements with insurance companies
and
others, issued primarily to guarantee our future performance of contracts.
At
June 30, 2006, we had contingent liabilities of $3.0 million on commitments
related to outstanding letters of credit.
Our
operations enter into purchase commitments in the normal course of business.
Based
upon the Employee Retirement Income Security Act of 1974 and our actuary’s
assumptions and projections completed for last fiscal year, we would not have
to
provide additional cash contributions to our largest pension plan until 2009.
These actuarial projections indicated contribution requirements of $1.2 million
in 2009, $2.0 million in 2010 and a total of $11.4 million in 2011 through
2015.
However, recently the Pension Protection Act of 2006 was enacted into law.
The
Pension Protection Act of 2006 will change significantly the timing and amount
of our annual contribution requirements from those we previously disclosed
under
the Employee Retirement Income Security Act of 1974. Our actuaries are currently
projecting the timing and amount of our future contribution requirements under
the Pension Protection Act of 2006.
In
addition, we are required to make annual cash contributions of approximately
$0.3 million to fund a small pension plan.
In
addition, we have $27.9 million classified as other long-term liabilities at
June 30, 2006, including $13.8 million due to purchase the remaining 7.5%
interest in PoloExpress in April 2008. The remaining $14.1 million of other
long-term liabilities include environmental and other liabilities, which do
not
have specific payment terms or other similar contractual arrangements.
Currently,
we are not being audited by the IRS for any years. However, we are currently
being audited in Germany for 1997 through 2002. Our tax liability was $42.2
million at June 30, 2006. However, based on tax planning strategies, we do
not
anticipate having to satisfy the tax liability over the short-term.
Should
any of these liabilities become immediately due, we may be obligated to obtain
financing, raise capital, and/or liquidate assets to satisfy our
obligations.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In
March
2005, The Financial Accounting Standards Board published FASB Interpretation
No.
47,“Accounting
for Conditional Asset Retirement Obligation”,
to
clarify that an entity must recognize a liability for the fair value of a
conditional asset retirement obligation when incurred if the liability's fair
value can be reasonably estimated. FIN 47 also defines when an entity would
have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. FIN 47 is intended to provide a more consistent
recognition of liabilities relating to asset retirement obligations, additional
information about expected future cash outflows associated with those
obligations, and additional information about investments in long-lived assets,
because it recognizes additional asset retirement costs as part of the assets'
carrying amounts. FIN 47 is effective no later than the end of our fiscal year
ending September 30, 2006. We are currently assessing the possible impact,
if
any, of implementing this standard.
In
July
2006, the Financial Accounting Standards Board (FASB) issued Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48
requires the use of a two-step approach for recognizing and measuring tax
benefits taken or expected to be taken in a tax return and disclosures regarding
uncertainties in income tax positions. We are required to adopt FIN 48 effective
October 1, 2007. The cumulative effect of initially adopting FIN 48 will be
recorded as an adjustment to opening retained earnings in the year of adoption
and will be presented separately. Only tax positions that meet the more likely
than not recognition threshold at the effective date may be recognized upon
adoption of FIN 48. We are currently evaluating the impact this new standard
will have on our future results of operations and financial position.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
We
are
exposed to certain market risks as part of our ongoing business operations,
including risks from changes in interest rates and foreign currency exchange
rates that could impact our financial condition, results of operations and
cash
flows. We manage our exposure to these and other market risks through regular
operating and financing activities. We may use derivative financial instruments
on a limited basis as additional risk management tools and not for speculative
investment purposes.
Interest
Rate Risk:
In May
2004, we issued a floating rate note with a principal amount of €25.0 million.
Embedded within the promissory note agreement is an interest rate cap protecting
one half of the €25.0 million borrowed. The embedded interest rate cap limits to
6%, the 3-month EURIBOR interest rate that we must pay on the promissory note.
We paid approximately $0.1 million to purchase the interest rate cap. In
accordance with SFAS 133, the embedded interest rate cap is considered to be
clearly and closely related to the debt of the host contract and is not required
to be separated and accounted for separately from the host contract. We are
accounting for the hybrid contract, comprised of the variable rate note and
the
embedded interest rate cap, as a single debt instrument. At June 30, 2006,
the
fair value of this instrument is nominal.
Foreign
Currency Risk: We
are
exposed to foreign currency risks that arise from normal business operations.
These risks include the translation of local currency balances of our foreign
subsidiaries, intercompany loans with foreign subsidiaries and transactions
denominated in foreign currencies. Our objective is to minimize our exposure
to
these risks through our normal operating activities and, if we determine
appropriate, we may consider utilizing foreign currency forward contracts in
the
future. For the nine months ended June 30, 2006, we estimate that approximately
74% of our total revenues were derived from customers outside of the United
States, with approximately 63% of our total revenues denominated in currencies
other than the United States dollar. We estimate that revenue and operating
expenses for the nine months ended June 30, 2006 were lower by $7.3 million
and $3.5 million, respectively, as a result of changes in exchange rates as
compared to the nine months ended June 30, 2005. At June 30, 2006, we had
$36.1 million of working capital denominated in foreign currencies. At June
30, 2006, we had no outstanding foreign currency forward contracts. The
following table shows the approximate split of these foreign currency exposures
by principal currency at June 30, 2006:
|
|
|
|
Total
|
|
Euro
|
UK
Pound
|
Swiss
Franc
|
Exposure
|
Revenues
|
80%
|
18%
|
2%
|
100%
|
Operating
Expenses
|
82%
|
17%
|
1%
|
100%
|
Working
Capital
|
79%
|
19%
|
2%
|
100%
|
A
hypothetical 10% strengthening of the dollar during the nine months ended June
30, 2006 versus the foreign currencies in which we have exposure would have
reduced revenue by approximately $14.1 million and reduced operating
expenses by approximately $6.9 million, resulting in a $0.2 million
improvement in our operating loss as compared to what was actually reported.
Working capital at June 30, 2006, would have been approximately
$3.3 million lower than actually reported, if we had used this hypothetical
stronger United States dollar. These numbers were estimated using the different
hypothetical rate for the entire year and applying it evenly to all non United
States dollar transactions.
Inflation:
We
believe that inflation has not had a material impact on our results of
operations for the nine months ended June 30, 2006. However, we cannot assure
you that future inflation would not have an adverse impact on our operating
results and financial condition.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
The
term
“disclosure controls and procedures” is defined in Rules 13a-14(c) and 15d-14(c)
of the Securities Exchange Act of 1934. These rules refer to the controls and
other procedures of a company that are designed to ensure that information
required to be disclosed by a company in the reports that it files under the
Exchange Act is recorded, processed, summarized and reported within required
time periods. Our Chief Executive Officer and our Chief Financial Officer have
evaluated the effectiveness of our disclosure controls and procedures as of
a
date within 90 days before the filing of this quarterly report, which we refer
to as the Evaluation Date. They have concluded that, as of the Evaluation Date,
such controls and procedures were ineffective at ensuring that the required
information was disclosed on a timely basis in our reports filed under the
Exchange Act, due to the two material weaknesses noted in our annual report
at
September 30, 2005.
Changes
in Internal Controls
Our
Chief
Executive Officer and our Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this quarterly report, which we refer to as the evaluation
date. We aim to maintain a system of internal accounting controls that are
designed to provide reasonable assurance that our books and records accurately
reflect our transactions and that our established policies and procedures are
followed. Our disclosure controls and procedures were not effective at September
30, 2005, due to two material weaknesses noted in our annual report. We
implemented policies and procedures that will document adequately the review
and
approval process of journal entries at our two subsidiaries which were found
to
have a material weakness as of September 30, 2005. Additionally, we have
enhanced our procedures relating to accounting for complex and non-routine
transactions in accordance with U.S. generally accepted accounting principles,
to reduce the likelihood that a misstatement of our annual or interim financial
statements that is more than inconsequential could occur. Furthermore, we our
currently seeking additional accounting staff support in this regard. While
we
believe we may have sufficiently corrected these two material weaknesses, this
determination can only be substantiated over the passage of time. There were
no
other significant changes to our internal controls or in other factors that
could significantly affect our internal controls during the quarter ended June
30, 2006.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
The
information required to be disclosed under this Item is set forth in Footnote
7
(Contingencies) of the Consolidated Financial Statements (Unaudited) included
in
this Report.
Item
1A. Risk Factors
An
investment in our Company involves risks, including, but not limited to,
those
discussed below. These risk factors should be considered carefully before
deciding whether to invest in our Company.
Certain
statements in this filing contain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect
to
our financial condition, results of operation and business. These statements
relate to analyses and other information, which are based on forecasts of
future
results and estimates of amounts not yet determinable. These statements also
relate to our future prospects, developments and business strategies. These
forward-looking statements are identified by their use of terms and phrases
such
as ‘‘anticipate,’’ ‘‘believe,’’ ‘‘could,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘intend,’’
‘‘may,’’ ‘‘plan,’’ ‘‘predict,’’ ‘‘project,’’ ‘‘will’’ and similar terms and
phrases, including references to assumptions.
These
forward-looking statements involve risks and uncertainties, including current
trend information, projections for deliveries, backlog and other trend estimates
that may cause our actual future activities and results of operations to
be
materially different from those suggested or described in this report.
|
·
|
Our
operations are primarily dependant 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.
|
|
·
|
Our
company is highly leveraged.
Our ability to access additional capital or liquidate non-core
assets may
be limited and require significant lead time. As such, our cash
requirements are dependant upon our ability to achieve and execute
internal business plans, including:
|
|
o
|
Our
ability to accurately predict demand for our
products;
|
|
o
|
Our
ability to receive timely deliveries from
vendors;
|
|
o
|
Our
ability to raise cash to meet seasonal demands;
|
|
o
|
Our
ability to maintain customer satisfaction and deliver products
of quality;
|
|
o
|
Our
ability to properly assess our
competition;
|
|
o
|
Our
ability to improve our operations to profitability
status;
|
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.
|
·
|
Foreign
exchange rate risks.
We purchase and sell a significant amount of our products internationally
and in most markets those purchases are made in currencies other
than the
local currency and sales are made in the foreign country’s local
currency. We do not place a significant reliance on the use
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.
|
|
·
|
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.
|
|
·
|
Government
Regulation.
We
must comply with governmental laws and regulations that are subject
to
change and involve significant costs. Our
sales and operations in areas outside the U.S. 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 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 disclose certain
information that could put us at a competitive disadvantage to our principal
competitors.
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Economical,
Political and Other Risks associated with Business Activities in
Foreign
Countries. Because
we plan to continue using foreign contract manufacturers, our operating
results could be harmed by economic, political, regulatory and
other
factors in foreign countries. We
currently use contract manufacturers in Asia to manufacture the
most of
the products we sell, and we plan to continue using foreign manufacturers
to manufacture these products. These international operations are
subject
to inherent risks, which may adversely affect us,
including:
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political
and economic instability;
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high
levels of inflation, historically the case in a number of countries
in
Asia;
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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 for 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.
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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 consumers,
we may have
a competitive disadvantage. Failure to adequately address and
quickly respond to these competitive pressures could have a material
adverse effect on our business and results of
operations.
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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, younger riders and
more
ethnically diverse 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 have significantly
contributed to the success of our business and that maintaining
and
enhancing the brand is critical to maintaining and expanding our
customer
base. Failure to protect the brand 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 effectively compete
could have
a material adverse effect on our business and results of
operations.
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Quarterly
Fluctuations. Quarterly
results of our sports & leisure segment’s operations have historically
fluctuated as a result of retail consumers purchasing patterns,
with the
highest quarter in terms of sales and profitability being our third
and
fourth quarters. Any economic downturn occurring in our third and
fourth
quarter 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 may change. Any 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 position us in a situation of competitive
disadvantage.
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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 have significantly increased over the
past two
years. These increases, and any addition burden place by future
legislation could have a material adverse effect on our financial
condition, future results of operations or net cash flows.
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Environmental
Matters.
As
an owner and former owner and operator of property, including those
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 concern locations of our former operations.
We
cannot provide assurance that unexpected environmental liabilities
will
not arise.
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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. 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.
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If
one or
more of these and other risks or uncertainties materializes, or if underlying
assumptions prove incorrect, our actual results may vary materially from
those
expected, estimated or projected. 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.
Item
2. Changes
in Securities and Use of Proceeds
Pursuant
to the sale of our fastener business to Alcoa, we have agreed that the Company
may not declare dividends on its common stock for a period of five years
ending
on December 3, 2007.
Pursuant
to the $30 Million Credit Agreement dated May 3, 2006, with The Bank of New
York, as administrative agent and GoldenTree Asset Management, L.P., as
collateral agent, the Company may not declare any dividends while the loan
is
still in place. The loan matures on May 3, 2010,
Item
5. Other Information
The
Board
of Directors has established a Governance and Nominating Committee consisting
of
non-employee independent directors, which, among other functions, identifies
individuals qualified to become board members, and selects, or recommends
that
the Board select, the director nominees for the next annual meeting of
shareholders. As part of its director selection process, the Committee
considers recommendations from many sources, including: management, other
board members and the Chairman. The Committee will also consider nominees
suggested by stockholders of the Company. Stockholders wishing to nominate
a
candidate for director may do so by sending the candidate’s name, biographical
information and qualifications to the Chairman of the Governance and Nominating
Committee c/o the Corporate Secretary, The Fairchild Corporation, 1750 Tysons
Blvd., Suite 1400, McLean VA 22102.
In
identifying candidates for membership on the Board of Directors, the Committee
will take into account all factors it considers appropriate, which may include
(a) ensuring that the Board of Directors, as a whole, is diverse and consists
of
individuals with various and relevant career experience, relevant technical
skills, industry knowledge and experience, financial expertise, including
expertise that could qualify a director as a “financial expert,” as that term is
defined by the rules of the SEC, local or community ties, (b) minimum individual
qualifications, including strength of character, mature judgment, familiarity
with the Company's business and industry, independence of thought and an
ability
to work collegially, and (c) appreciation of contemporary forms of governance,
and the current regulatory environment. The
Committee also may consider the extent to which the candidate would fill
a
present need on the Board of Directors.
Item
6. Exhibits
10.1
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 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).
*
31 Certifications
required by Section 302 of the Sarbanes-Oxley Act.
*
32 Certifications
required by Section 906 of the Sarbanes-Oxley Act.
*
Filed
herewith.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Company has
duly
caused this report to the signed on its behalf by the undersigned hereunto
duly
authorized.
For
THE
FAIRCHILD CORPORATION
(Registrant)
and as its Chief
Financial
Officer:
By:
/s/
MICHAEL L. McDONALD
Michael
L. McDonald
Senior
Vice President and
Chief
Financial Officer
Date: August
9,
2006