UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
For
the Quarterly Period Ended December 31, 2006
Commission
File Number 1-6560
|
THE
FAIRCHILD CORPORATION
|
(Exact
name of Registrant as specified in its charter)
Delaware
(State
of
incorporation or organization)
34-0728587
(I.R.S.
Employer Identification No.)
1750
Tysons Boulevard, Suite 1400, McLean, VA 22102
(Address
of principal executive offices)
(703)
478-5800
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the Registrant (1) has filed all reports
required to be
filed by Section 13 or 15(d) of the
Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period
that the Registrant was required
to
file
such reports), and (2) has been subject to such filing requirements
for the past
ninety (90) days: [ ] Yes [X]
No.
Indicate
by check mark whether the registrant is a large accelerated filer,
an
accelerated filer, or a non-accelerated filer:
[ ]
Large accelerated file [ ] Accelerated
filer [X] 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
On
October 31, 2007, the number of shares outstanding of each of
the Registrant’s
classes of common stock was as follows:
Title
of Class
|
|
|
|
Class
A Common Stock, $0.10 Par Value
|
|
|
22,604,835
|
|
Class
B Common Stock, $0.10 Par Value
|
|
|
2,621,338
|
|
THE
FAIRCHILD CORPORATION INDEX TO QUARTERLY REPORT ON FORM
10-Q
FOR
THE PERIOD ENDED DECEMBER 31, 2006
PART
I.
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FINANCIAL
INFORMATION
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Page
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Item
1.
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Item
2.
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Item
3.
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Item
4.
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PART
II.
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OTHER
INFORMATION
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Item
1.
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Item
1A.
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Item
2.
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Item
5.
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Item
6.
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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 CONSOLIDATED SUBSIDIARIES
(In
thousands)
ASSETS
|
|
December
31, 2006
|
|
|
September
30, 2006
|
|
CURRENT
ASSETS:
|
|
(Unaudited)
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
6,016
|
|
|
$ |
8,541
|
|
Short-term
investments - unrestricted
|
|
|
34,694
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|
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50,510
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|
Short-term
investments - restricted
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34,294
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|
6,002
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|
Accounts
receivable-trade, less allowances of $1,129 and $1,083
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|
|
33,515
|
|
|
|
16,927
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|
Finished
goods inventories, less reserves of $15,573 and $15,223
|
|
|
115,606
|
|
|
|
106,718
|
|
Prepaid
expenses and other current assets
|
|
|
12,492
|
|
|
|
10,795
|
|
Total
Current Assets
|
|
|
236,617
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|
|
|
199,493
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|
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|
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Property,
plant and equipment, net of accumulated
|
|
|
|
|
|
|
|
|
depreciation
of $26,778 and $24,989
|
|
|
58,931
|
|
|
|
58,698
|
|
Goodwill
|
|
|
12,479
|
|
|
|
14,128
|
|
Amortizable
intangible assets, net of accumulated amortization
of $1,815 and
$1,673
|
|
|
1,176
|
|
|
|
1,279
|
|
Unamortizable
intangible assets
|
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|
32,130
|
|
|
|
30,969
|
|
Prepaid
pension assets
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|
|
33,798
|
|
|
|
33,373
|
|
Deferred
loan fees
|
|
|
2,839
|
|
|
|
3,170
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|
Long-term
investments - unrestricted
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|
|
3,499
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|
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|
4,370
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|
Long-term
investments - restricted
|
|
|
36,559
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|
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60,949
|
|
Notes
receivable
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|
|
3,392
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5,396
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|
Other
assets
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|
2,884
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|
|
|
3,304
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|
TOTAL
ASSETS
|
|
$ |
424,304
|
|
|
$ |
415,129
|
|
The
accompanying Notes to Condensed Consolidated Financial Statements
are an
integral part of these statements.
THE
FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except per share data)
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
December
31, 2006
|
|
|
September
30, 2006
|
|
|
|
(Unaudited)
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
Bank
notes payable and current maturities of long-term debt
|
|
$ |
52,380
|
|
|
$ |
25,492
|
|
Accounts
payable
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|
|
31,632
|
|
|
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26,325
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|
Accrued
liabilities:
|
|
|
|
|
|
|
|
|
Salaries,
wages and commissions
|
|
|
9,577
|
|
|
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10,044
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Insurance
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|
7,378
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|
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7,357
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Interest
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|
892
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|
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|
1,810
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Other
accrued liabilities
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|
30,142
|
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28,304
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Income
taxes
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|
1,175
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2,314
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Current
liabilities of discontinued operations
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-
|
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62
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|
Total
Current Liabilities
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133,176
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101,708
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LONG-TERM
LIABILITIES:
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Long-term
debt, less current maturities
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|
41,410
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65,450
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Other
long-term liabilities
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32,161
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31,750
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Pension
liabilities
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40,157
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40,622
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|
Retiree
health care liabilities
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25,345
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26,008
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Deferred
tax liability
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4,714
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4,530
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Noncurrent
income taxes
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40,397
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39,923
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Noncurrent
liabilities of discontinued operations
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16,120
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16,120
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TOTAL
LIABILITIES
|
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|
333,480
|
|
|
|
326,111
|
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|
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|
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Commitments
and contingencies
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STOCKHOLDERS'
EQUITY:
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Class
A common stock, $0.10 par value; 40,000 shares authorized,
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30,480
shares issued and 22,605 shares outstanding;
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entitled
to one vote per share
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3,047
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3,047
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Class
B common stock, $0.10 par value; 20,000 shares authorized,
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2,621
shares issued and outstanding; entitled
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to
ten votes per share
|
|
|
262
|
|
|
|
262
|
|
Paid-in
capital
|
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|
232,618
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232,612
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|
Treasury
stock, at cost, 7,875 shares of Class A common stock
|
|
|
(76,352 |
) |
|
|
(76,352 |
) |
Accumulated
deficit
|
|
|
(19,175 |
) |
|
|
(15,680 |
) |
Notes
due from stockholders
|
|
|
(43 |
) |
|
|
(43 |
) |
Accumulated
other comprehensive loss
|
|
|
(49,533 |
) |
|
|
(54,828 |
) |
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
90,824
|
|
|
|
89,018
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
424,304
|
|
|
$ |
415,129
|
|
The
accompanying Notes to Condensed Consolidated Financial Statements
are an
integral part of these statements.
THE
FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
(In
thousands, except per share data)
|
|
Three
Months Ended
December
31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
REVENUE:
|
|
|
|
|
(Restated)
|
|
Net
sales
|
|
$ |
60,386
|
|
|
$ |
51,310
|
|
Rental
revenue
|
|
|
237
|
|
|
|
237
|
|
|
|
|
60,623
|
|
|
|
51,547
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
38,010
|
|
|
|
32,088
|
|
Cost
of rental revenue
|
|
|
60
|
|
|
|
56
|
|
Selling,
general & administrative expense
|
|
|
36,279
|
|
|
|
29,042
|
|
Other
income, net
|
|
|
(3,088 |
) |
|
|
(573 |
) |
Amortization
of intangibles
|
|
|
138
|
|
|
|
128
|
|
|
|
|
71,399
|
|
|
|
60,741
|
|
|
|
|
|
|
|
|
|
|
OPERATING
LOSS
|
|
|
(10,776 |
) |
|
|
(9,194 |
) |
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(5,050 |
) |
|
|
(2,986 |
) |
Interest
income
|
|
|
1,119
|
|
|
|
348
|
|
Net
interest expense
|
|
|
(3,931 |
) |
|
|
(2,638 |
) |
Investment
income
|
|
|
1,196
|
|
|
|
928
|
|
Increase
in fair market value of interest rate contract
|
|
|
-
|
|
|
|
836
|
|
Loss
from continuing operations before taxes
|
|
|
(13,511 |
) |
|
|
(10,068 |
) |
Income
tax (provision) benefit
|
|
|
(607 |
) |
|
|
13
|
|
Equity
in earnings (loss) of affiliates, net
|
|
|
89
|
|
|
|
(41 |
) |
Loss
from continuing operations
|
|
|
(14,029 |
) |
|
|
(10,096 |
) |
Loss
from discontinued operations, net
|
|
|
(1,966 |
) |
|
|
(411 |
) |
Gain
on disposal of discontinued operations, net
|
|
|
12,500
|
|
|
|
12,500
|
|
NET
EARNINGS (LOSS)
|
|
$ |
(3,495 |
) |
|
$ |
1,993
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED EARNINGS (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(0.56 |
) |
|
$ |
(0.40 |
) |
Loss
from discontinued operations, net
|
|
|
(0.08 |
) |
|
|
(0.02 |
) |
Gain
on disposal of discontinued operations, net
|
|
|
0.50
|
|
|
|
0.50
|
|
NET
EARNINGS (LOSS) PER SHARE
|
|
$ |
(0.14 |
) |
|
$ |
0.08
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
25,226
|
|
|
|
25,226
|
|
The
accompanying Notes to Condensed
Consolidated Financial Statements are an integral part of these
statements.
THE
FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
(In
thousands)
|
|
Three
Months Ended
December
31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(Restated)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
earnings (loss)
|
|
$ |
(3,495 |
) |
|
$ |
1,993
|
|
Depreciation
and amortization
|
|
|
2,020
|
|
|
|
1,746
|
|
Non-cash
interest expense
|
|
|
1,807
|
|
|
|
258
|
|
Gain
on collection of note receivable
|
|
|
(2,110 |
) |
|
|
-
|
|
Stock
compensation expense
|
|
|
6
|
|
|
|
43
|
|
Increase
in fair market value of interest rate contract
|
|
|
-
|
|
|
|
(836 |
) |
Equity
in (earnings) loss of affiliates, net of distributions
|
|
|
(89 |
) |
|
|
41
|
|
Net
loss on sale of property, plant, and equipment
|
|
|
15
|
|
|
|
-
|
|
Gain
on sale of investments
|
|
|
(1,008 |
) |
|
|
-
|
|
Net
proceeds from the sale of trading securities
|
|
|
15,803
|
|
|
|
9,456
|
|
Changes
in operating assets and liabilities
|
|
|
(20,545 |
) |
|
|
(21,594 |
) |
Non-cash
charges and working capital changes of discontinued
operations
|
|
|
(62 |
) |
|
|
926
|
|
Net
cash used for operating activities
|
|
|
(7,658 |
) |
|
|
(7,967 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(1,222 |
) |
|
|
(2,341 |
) |
Change
in available-for-sale investment securities, net
|
|
|
253
|
|
|
|
9,391
|
|
Equity
investment in affiliates
|
|
|
-
|
|
|
|
(43 |
) |
Collections
of notes receivable
|
|
|
3,923
|
|
|
|
831
|
|
Proceeds
from sale of equity investment in affiliates
|
|
|
95
|
|
|
|
-
|
|
Net
cash used for investing activities of discontinued
operations
|
|
|
-
|
|
|
|
(98 |
) |
Net
cash provided by investing activities
|
|
|
3,049
|
|
|
|
7,740
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of debt
|
|
|
7,281
|
|
|
|
12,768
|
|
Debt
repayments
|
|
|
(5,393 |
) |
|
|
(7,456 |
) |
Payment
of interest rate contract
|
|
|
-
|
|
|
|
(4,310 |
) |
Payment
of financing fees
|
|
|
(16 |
) |
|
|
(100 |
) |
Loan
repayments from stockholders
|
|
|
-
|
|
|
|
66
|
|
Net
cash used for financing activities of discontinued
operations
|
|
|
-
|
|
|
|
(165 |
) |
Net
cash provided by financing activities
|
|
|
1,872
|
|
|
|
803
|
|
Net
change in cash and cash equivalents
|
|
|
(2,737 |
) |
|
|
576
|
|
Effect
of exchange rate changes on cash
|
|
|
212
|
|
|
|
(165 |
) |
Cash
and cash equivalents, beginning of the period
|
|
|
8,541
|
|
|
|
12,582
|
|
Cash
and cash equivalents, end of the period
|
|
$ |
6,016
|
|
|
$ |
12,993
|
|
The
accompanying Notes to Condensed Consolidated Financial Statements
are an
integral part of these statements.
THE
FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
Basis
of Presentation
The
condensed consolidated balance sheet as of December 31, 2006,
and the condensed
consolidated statements of operations, and cash flows for the
periods ended
December 31, 2006 and 2005 have been prepared by us, without
audit. In the opinion of management, all adjustments necessary to
present fairly the financial position, results of operations,
and cash flows at
December 31, 2006, and for all periods presented, have been made.
These
adjustments include certain reclassifications, which reflect
the sale of our
shopping center and the sale of the remaining operations of a
landfill
development partnership as discontinued operations. These adjustments
also include restatement adjustments. For additional discussion
regarding the nature and impact of the restatement adjustments,
see Note 2 of
these condensed consolidated financial statements as well as
Notes 2 and 18 of
our audited financial statements in our 2006 Annual Report on
Form
10-K.
During
the three months ended December 31, 2006, we corrected the carrying
value of the
liability associated with our arrangement to acquire the remaining
7.5% of
PoloExpress. As a result of this correction, we recognized $1.3
million of interest expense during the three months ended December
31, 2006 that
pertained to periods prior to October 1, 2006. Management believes
the impact of this error is immaterial in each applicable prior
period.
The
condensed consolidated financial statements have been prepared
in accordance
with U.S. generally accepted accounting principles (“GAAP”) 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 GAAP 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 2006 Annual Report on Form 10-K. The results of operations for
the periods ended December 31, 2006 and 2005 are not necessarily
indicative of
the operating results for the full year. Certain amounts in the prior
period financial statements have been reclassified to conform
to the current
presentation.
The
financial position and operating results of our foreign operations
are
consolidated using, as the functional currency, the local currencies
of the
countries in which they are located. The balance sheet accounts
are translated
at exchange rates in effect at the end of the period, and the
statement of
operations accounts are translated at average exchange rates
during the
period. The resulting translation gains and losses are included as a
separate component of stockholders' equity. Foreign currency
transaction gains and losses are included in our statement of
operations in the
period in which they occur.
Liquidity
The
Company has experienced losses from operations and negative operating
cash flows
in each of the years for the three years ended September 30,
2006. Although the Company believes its financial resources are
sufficient to fund its operations and other contractual obligations
in the near
term, our cash needs could be substantially higher than
projected. The Company believes it has sufficient financial
flexibility to meet the near term liquidity needs, including
the potential to
refinance existing debt, borrow additional funds, sell non-core
assets, or
reduce operational cash disbursements. However, external factors
could impact our ability to execute these alternatives.
Stock-Based
Compensation
We
adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share
Based Payment, on October 1, 2005, and accordingly, we recognized a nominal
amount of compensation cost in the three months ended December
31, 2006 and
2005. No tax benefits and deferred tax assets were recognized
on the
compensation cost because our tax position reflects a full domestic
valuation
allowance against deferred tax assets.
Our
employee stock option plan expired in April 2006 and our non-employee
directors’
stock option plan expired in September 2006. As of December 31, 2006,
outstanding stock options on Class A common stock reflected only
those stock
options granted prior to the expiration of the plans. No stock
options were granted during the three months ended December 31,
2005. On December 31, 2006, we had outstanding stock option awards
of
325,417, of which 235,417 stock option awards were vested. No new
stock option plans are being proposed at this time.
Comprehensive
Income (Loss)
The
activity in other comprehensive income (loss), net of tax, was:
|
|
Three
Months Ended
December
31,
|
|
(In
thousands)
|
|
2006
|
|
|
2005
|
|
Net
earnings (loss) |
|
$ |
(3,495 |
) |
|
$ |
1,993 |
|
Unrealized
periodic holding gains (losses) on available-for-sale
securities
|
|
|
2,261
|
|
|
|
(1,001 |
) |
Foreign
currency translation adjustments
|
|
|
3,034
|
|
|
|
(1,047 |
) |
Unrealized
holding gains on derivatives
|
|
|
-
|
|
|
|
299
|
|
Other
comprehensive income
|
|
$ |
1,800
|
|
|
$ |
244 |
|
The
components of accumulated other comprehensive loss were:
(In
thousands)
|
|
December
31, 2006
|
|
|
September
30, 2006
|
|
Unrealized
holding gains on available-for-sale securities
|
|
$ |
7,820
|
|
|
$ |
5,559
|
|
Foreign
currency translation adjustments
|
|
|
4,670
|
|
|
|
1,636
|
|
Excess
of additional pension liability over unrecognized prior
service
costs
|
|
|
(62,023 |
) |
|
|
(62,023 |
) |
Accumulated
other comprehensive loss
|
|
$ |
(49,533 |
) |
|
$ |
(54,828 |
) |
Recently
Issued Accounting Pronouncements
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities, permitting entities
to elect fair value measurement for many financial instruments
and certain other
items. Unrealized gains and losses on designated items will be
recognized in
earnings at each subsequent period. SFAS No. 159 also establishes
presentation
and disclosure requirements for similar types of assets and liabilities
measured
at fair value. We are required to adopt this statement in October 2008 and
we are currently evaluating the potential impact to our future
results of
operations, financial position, and cash flows.
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for
measuring fair value in GAAP, and expands disclosures about fair
value
measurements. SFAS No. 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value
by providing a
fair value hierarchy used to classify the source of the information.
We are
required to adopt this statement in October 2008 and we are currently
evaluating the potential impact to our future results of operations,
financial
position, and cash flows.
In
September 2006, the FASB published SFAS No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Pension Plans
– an amendment of
FASB Statements No. 87, 88, 106, and 132(R). SFAS No. 158
requires an employer to recognize in its statement of financial
position the
overfunded or underfunded status of a defined benefit postretirement
plan
measured as the difference between the fair value of plan assets
and the benefit
obligation. Employers must also recognize as a component of other
comprehensive
income, net of tax, the actuarial gains and losses and the prior
service costs
and credits that arise during the period. SFAS No. 158 is effective
for fiscal
years ending after December 15, 2006 and will be adopted by the
Company as of
September 30, 2007. If SFAS No. 158 was adopted as of September 30,
2006, the Company would have recorded a reduction in prepaid
assets and other
assets of $18.1 million and $1.5 million, respectively, a decrease
in pension
liabilities of $2.6 million, and a charge to other comprehensive
income (loss)
of $17.0 million.
In
July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in
Income Taxes – an interpretation of FASB Statement No. 109. FIN
No. 48 requires the use of a two-step approach for recognizing
and measuring tax
benefits taken or expected to be taken in a tax return and disclosures
regarding
uncertainties in income tax positions. We are required to adopt
FIN No. 48
effective October 1, 2007. The cumulative effect of initially adopting FIN
No. 48 will be recorded as an adjustment to opening retained
earnings in the
year of adoption and will be presented separately. Only tax positions
that meet
the more likely than not recognition threshold at the effective
date may be
recognized upon adoption of FIN No. 48. We are currently evaluating
the impact
this new standard will have on our future results of operations,
financial
position, and cash flows.
During
the course of our fiscal 2006 audit and based upon discussions
with our external
independent registered public accounting firm and management,
the Audit
Committee of our Board of Directors concluded in January 2007
that our
previously filed interim and audited consolidated financial statements
should
not be relied upon since they were prepared applying accounting
practices in
accounting for income taxes that did not comply with U.S. generally
accepted
accounting principles (“GAAP”) and, consequently, we would restate our
consolidated financial statements. During the course of the Company’s review of
its historical financial statements, additional errors were
identified. The consolidated financial statements for the three
months ended December 31, 2005 included in this Quarterly Report
on
Form 10-Q include restatement adjustments that we have categorized
into the
following three areas: our accounting for income taxes; our accounting
for
commitments and contingencies; and our accounting for long-term
investments.
As
a result of the restatement, originally reported net earnings
for the three
months ended December 31, 2005 increased by $0.1 million ($0.01
per
share). The cumulative impact of errors related to periods prior to
September 30, 2005 of $1.4 million has been reflected as an adjustment
to
beginning retained earnings as of October 1, 2005.
The
following table summarizes the impact of the restatement adjustments
on net
earnings and basic and diluted earnings per share for the three
months ended
December 31, 2005.
|
|
Three
Months Ended
|
|
(In
thousands, except per share data)
|
|
December
31, 2005
|
|
Net
earnings, as previously reported
|
|
$ |
1,883
|
|
Restatement
adjustments for:
|
|
|
|
|
Commitments
and contingencies
|
|
|
5
|
|
Long-term
investments
|
|
|
27
|
|
Income
taxes
|
|
|
78
|
|
Net
earnings, as restated
|
|
$ |
1,993
|
|
|
|
|
|
|
Basic
and diluted earnings per share:
|
|
|
|
|
As
previously reported
|
|
$ |
0.07
|
|
Total
impact of restatement adjustments
|
|
|
0.01
|
|
As
restated
|
|
$ |
0.08
|
|
Financial
Statement Impact
Statement
of Operations Impact
The
following table displays the cumulative impact of the restatement
on the
condensed consolidated statements of operations for the three
months ended
December 31, 2005.
|
|
|
|
|
Restatement
Adjustments for:
|
|
|
|
|
|
|
|
(In
thousands)
|
|
As
Previously Reported (a)
|
|
|
Income
Taxes
|
|
|
Commitments
and Contingencies
|
|
|
Long-term
Investments
|
|
|
Total
Restatement Adjustments
|
|
|
As
Restated
|
|
Revenues
|
|
$ |
51,547
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
51,547
|
|
Cost
of revenues
|
|
|
32,144
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,144
|
|
Other
operating expenses
|
|
|
28,549
|
|
|
|
-
|
|
|
|
48
|
|
|
|
-
|
|
|
|
48
|
|
|
|
28,597
|
|
Operating
loss
|
|
|
(9,146 |
) |
|
|
-
|
|
|
|
(48 |
) |
|
|
-
|
|
|
|
(48 |
) |
|
|
(9,194 |
) |
Net
interest expense
|
|
|
(2,718 |
) |
|
|
-
|
|
|
|
53
|
|
|
|
27
|
|
|
|
80
|
|
|
|
(2,638 |
) |
Investment
income
|
|
|
928
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
928
|
|
Increase
in fair market value of interest rate contract
|
|
|
836
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
836
|
|
Loss
from continuing operations before taxes
|
|
|
(10,100 |
) |
|
|
-
|
|
|
|
5
|
|
|
|
27
|
|
|
|
32
|
|
|
|
(10,068 |
) |
Income
tax (provision) benefit
|
|
|
(65 |
) |
|
|
78
|
|
|
|
-
|
|
|
|
-
|
|
|
|
78
|
|
|
|
13
|
|
Equity
in loss of affiliates, net
|
|
|
(41 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(41 |
) |
Loss
from continuing operations
|
|
|
(10,206 |
) |
|
|
78
|
|
|
|
5
|
|
|
|
27
|
|
|
|
110
|
|
|
|
(10,096 |
) |
Loss
from discontinued operations, net
|
|
|
(411 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(411 |
) |
Gain
on disposal of discontinued operations, net
|
|
|
12,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,500
|
|
Net
earnings
|
|
$ |
1,883
|
|
|
$ |
78
|
|
|
$ |
5
|
|
|
$ |
27
|
|
|
$ |
110
|
|
|
$ |
1,993
|
|
(a)
|
Certain
previously reported balances have been reclassified
to conform to the
current condensed consolidated balance sheet presentation,
including
reclassification to discontinued operations of those
assets and
liabilities related to a landfill development partnership,
sold in April
2006, and Airport Plaza shopping center, sold in July
2006.
|
3.
|
CASH
EQUIVALENTS AND
INVESTMENTS
|
Management
determines the appropriate classification of our investments
at the time of
acquisition and reevaluates such determination at each balance
sheet
date. Cash equivalents and investments consist primarily of money
market accounts, investments in United States government securities,
investment
grade corporate bonds, credit derivative obligations, and equity
securities. Investments in common stock of public corporations are
recorded at fair market value and classified as trading securities
or
available-for-sale securities. Investments in credit derivative
obligations, characterized as other securities, are recorded
at fair market
value and classified as available-for-sale securities. Other
long-term
investments do not have readily determinable fair values and
consist primarily
of investments in preferred and common shares of private companies
and limited
partnerships.
Available-for-sale
securities are carried at fair value, with unrealized holding
gains and losses
reported as a separate component of stockholders' equity, except
to the extent
that unrealized losses are deemed to be other than temporary,
in which case such
unrealized losses are reflected in earnings. Trading securities are
carried at fair value, with unrealized holding gains and losses
included in
investment income. Investments in equity securities and limited
partnerships that do not have readily determinable fair values
are stated at
cost and are categorized as other investments. Realized gains
and losses are
determined using the specific identification method based on
the trade date of a
transaction. Interest on government and corporate obligations are
accrued at the balance sheet date. Investments in companies in
which ownership
interests range from 20 to 50 percent are accounted for using
the equity
method.
A
summary of the cash equivalents and investments held by us follows:
|
|
December
31, 2006
|
|
|
September
30, 2006
|
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
|
Fair
|
|
|
Cost
|
|
|
Fair
|
|
|
Cost
|
|
(In
thousands)
|
|
Value
|
|
|
Basis
|
|
|
Value
|
|
|
Basis
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market and other cash funds
|
|
$ |
6,016
|
|
|
$ |
6,016
|
|
|
$ |
8,541
|
|
|
$ |
8,541
|
|
Total
cash and cash equivalents
|
|
|
6,016
|
|
|
|
6,016
|
|
|
|
8,541
|
|
|
|
8,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds – available-for-sale – restricted
|
|
|
8,203
|
|
|
|
8,203
|
|
|
|
6,002
|
|
|
|
6,002
|
|
Corporate
bonds – available-for-sale – restricted
|
|
|
23,692
|
|
|
|
23,981
|
|
|
|
-
|
|
|
|
-
|
|
Corporate
bonds – trading securities
|
|
|
30,577
|
|
|
|
30,577
|
|
|
|
42,919
|
|
|
|
42,919
|
|
Equity
securities – trading securities
|
|
|
-
|
|
|
|
-
|
|
|
|
2,459
|
|
|
|
2,459
|
|
Equity
and equivalent securities – available-for-sale
|
|
|
4,117
|
|
|
|
825
|
|
|
|
5,132
|
|
|
|
825
|
|
Equity
and equivalent securities – available-for-sale –
restricted
|
|
|
2,399
|
|
|
|
1,021
|
|
|
|
-
|
|
|
|
-
|
|
Total
short-term investments
|
|
|
68,988
|
|
|
|
64,607
|
|
|
|
56,512
|
|
|
|
52,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government securities – available-for-sale – restricted
|
|
|
-
|
|
|
|
-
|
|
|
|
512
|
|
|
|
512
|
|
Money
market funds – available-for-sale – restricted
|
|
|
9,181
|
|
|
|
9,181
|
|
|
|
10,313
|
|
|
|
10,313
|
|
Corporate
bonds – available-for-sale – restricted
|
|
|
4,390
|
|
|
|
4,390
|
|
|
|
28,934
|
|
|
|
29,326
|
|
Equity
and equivalent securities – available-for-sale –
restricted
|
|
|
10,470
|
|
|
|
7,985
|
|
|
|
9,275
|
|
|
|
7,984
|
|
Other
securities – available-for-sale - restricted
|
|
|
12,518
|
|
|
|
11,565
|
|
|
|
11,915
|
|
|
|
11,565
|
|
Other
investments, at cost
|
|
|
3,499
|
|
|
|
3,499
|
|
|
|
4,370
|
|
|
|
4,370
|
|
Total
long-term investments
|
|
|
40,058
|
|
|
|
36,620
|
|
|
|
65,319
|
|
|
|
64,070
|
|
Total
cash equivalents and investments
|
|
$ |
115,062
|
|
|
$ |
107,243
|
|
|
$ |
130,372
|
|
|
$ |
124,816
|
|
On
December 31, 2006 and September 30, 2006, we had restricted investments
of $70.9
million and $67.0 million, respectively, all of which are maintained
as
collateral for certain debt facilities, the Esser put option,
environmental
matters, and escrow arrangements. On December 31, 2006 and September
30, 2006,
cash of $2.2 million and $3.4 million, respectively, is 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 4.
On
December 31, 2006, we had gross unrealized holding gains from
available-for-sale
securities of $8.1 million and gross unrealized losses from available-for-sale
securities of $0.3 million. On September 30, 2006, we had gross
unrealized
holding gains from available-for-sale securities of $5.9 million
and gross
unrealized losses from available-for-sale securities of $0.4
million. We use the
specific identification method to determine the gross realized
gains (losses)
from sales of available-for-sale securities.
At
December 31, 2006 and September 30, 2006, notes payable and long-term
debt
consisted of the following:
(In
thousands)
|
|
December
31, 2006
|
|
|
September
30, 2006
|
|
Revolving
credit facilities – Hein Gericke
|
|
$ |
11,563
|
|
|
$ |
11,425
|
|
Revolving
credit facilities – PoloExpress
|
|
|
1,452
|
|
|
|
-
|
|
Current
maturities of long-term debt
|
|
|
39,365
|
|
|
|
14,067
|
|
Total
notes payable and current maturities of long-term debt
|
|
|
52,380
|
|
|
|
25,492
|
|
GoldenTree
term loan – Corporate
|
|
|
30,000
|
|
|
|
30,000
|
|
Term
loan agreement – Hein Gericke
|
|
|
5,611
|
|
|
|
6,090
|
|
Term
loan agreement – PoloExpress
|
|
|
10,430
|
|
|
|
11,292
|
|
Promissory
note – Corporate
|
|
|
13,000
|
|
|
|
13,000
|
|
CIT
revolving credit facility – Aerospace
|
|
|
12,966
|
|
|
|
9,603
|
|
GMAC
credit facility – Hein Gericke
|
|
|
2,775
|
|
|
|
3,118
|
|
Other
notes payable, collateralized by assets
|
|
|
3,885
|
|
|
|
3,837
|
|
Capital
lease obligations
|
|
|
2,108
|
|
|
|
2,577
|
|
Less:
current maturities of long-term debt
|
|
|
(39,365 |
) |
|
|
(14,067 |
) |
Net
long-term debt
|
|
|
41,410
|
|
|
|
65,450
|
|
Total
debt
|
|
$ |
93,790
|
|
|
$ |
90,942
|
|
Term
Loan at Corporate
On
May 3, 2006, we entered into a credit agreement with The Bank
of New York, as
administrative agent, and GoldenTree Asset Management, L.P.,
as collateral
agent. The lenders under the Credit Agreement were GoldenTree
Capital
Opportunities, L.P. and GoldenTree Capital Solutions Fund
Financing. Pursuant to the credit agreement, we borrowed from the
lenders $30.0 million. The loan matures on May 3, 2010, subject
to certain
mandatory prepayment events described in the credit agreement.
Interest on the
loan is LIBOR plus 7.5%, per annum, with an initial interest
rate of 12.75%
fixed through November 2006. As of December 31, 2006, the applicable
interest rate increased to 12.9%. Subsequent interest periods may be
selected by us, ranging from one month to nine months, or, if
consented to by
the lenders, for 12 months. Also, we may choose to convert the
method of
interest from a LIBOR based loan to a prime based loan.
The
loan is collateralized by the stock of Banner Aerospace Holding
Company I, Inc.,
(the parent of our Aerospace segment), certain undeveloped real
estate owned by
us in Farmingdale, N.Y., condemnation proceeds we expect to receive
for certain
other real estate in Farmingdale, N.Y., and any remaining proceeds
to be
received by us in the future from the Alcoa transaction. Upon
the sale or other
monetization of the collateral, the proceeds from such collateral
must be used
to prepay the loan. We may elect to retain 27.5% of the proceeds
from the
monetization of the collateral (instead of applying 100% of such
proceeds to
make a mandatory prepayment of the loan), provided that the remaining
collateral
meets or exceeds a collateral to loan value of 1.9:1 and we pay
the lenders a
fee of 3.0% of the retained proceeds. If the loan is voluntarily
prepaid by us
within the first three years of the loan, we must pay a prepayment
penalty of
3.0% in year one, 2.0% in year two, or 1.0% in year three.
The
credit agreement defines an “Available Amount” as $30.0 million, plus net cash
proceeds from the sale of the Company’s shopping center, plus new money from any
equity offerings and earnings from investments. During the term of
the loan, the aggregate of the following may not exceed the Available
Amount
(unless consented to by the lenders): additional investments
by us in our
PoloExpress or Hein Gericke segments or in any new company or
new ventures; new
acquisitions; guarantees by us of additional debt incurred by
our PoloExpress or
Hein Gericke segments (with an exception for the existing guarantees);
loans by
us to our sports and leisure segment (with an exception for the
existing loans);
and repurchases by us of our outstanding stock. The Available
Amount was $49.5
million at December 31, 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 $10.0
million and $20.0
million. At December 31, 2006, our minimum liquidity
requirement was $10.0
million, and accordingly we have classified $10.0 million
of qualified
investments as restricted long-term
investments.
|
·
|
A
change of control whereby Jeffrey Steiner, Eric Steiner,
or Natalia Hercot
cease to own a controlling interest in The Fairchild
Corporation would be
an event of default under the loan.
|
Subject
to the covenants in the credit agreement, the proceeds of the
loan may be used
for general working capital purposes, investments, or stock
repurchases.
Credit
Facilities at Hein Gericke and PoloExpress
On
March 1, 2006, our PoloExpress segment entered into an €11.0 million ($14.5
million at December 31, 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 1.5% over the
three-month
Euribor rate (4.88% at December 31, 2006) when utilized as a
short-term credit
facility and 2.75% over the European Overnight Interest Average
rate (6.44% at
December 31, 2006) when utilized as an overdraft facility. In
addition, we must pay a 1.25% per annum non-utilization fee on
the available
facility during the seasonal drawing period. The seasonal financing
facility is
80% guaranteed by the German State of North Rhine-Westphalia.
The seasonal
facility reduces by €1.0 million per year and expires on June 30,
2008. On November 30, 2006, we amended the seasonal credit line with
Stadtsparkasse Düsseldorf to include HSBC Trinkaus & Burkhardt AG as a
second lender. This amendment allows us to borrow the entire
€10.0 million
($13.2 million at December 31, 2006) facility for the 2007 season.
At
December 31, 2006, our German subsidiary, Hein Gericke Deutschland
GmbH, and its
German subsidiary, PoloExpress, had outstanding borrowings of
€22.0 million
($29.1 million) due under its credit facilities with Stadtsparkasse
Düsseldorf
and HSBC Trinkaus & Burkhardt AG, which includes a revolving credit facility
at Hein Gericke GmbH providing a credit line of €10.0 million ($11.6 million
outstanding and $1.6 million available at December 31, 2006),
at interest rates
of 3.5% over the three-month Euribor (6.88% at December 31, 2006),
which matures
annually. For this revolving credit line, we must pay a 1.25% per
annum non-utilization fee. Outstanding borrowings under the term loan
facility have blended interest rates, with $13.9 million (€10.6 million) bearing
interest at 1% over the three-month Euribor rate (4.38% at December
31, 2006),
with an interest rate cap protection in which our interest expense
would not
exceed 6% on 50% of debt, and the remaining $2.1 million (€1.6 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
($58.8 million at December 31, 2006), as defined in the loan
contracts. At December 31, 2006, equity was €59.0 million ($77.9
million), which exceeded by €14.5 million ($19.1 million) the covenant
requirements. No dividends may be paid by Hein Gericke Deutschland
unless such covenants are met and dividends may be paid only
up to its
consolidated after tax profits. As of December 31, 2006, Hein
Gericke borrowed
approximately $14.2 million (€10.8 million) from our subsidiary, Fairchild
Holding Corp., which is not subject to restriction against
repayment. The loan agreements have certain restrictions on other
forms of cash flow from Hein Gericke Deutschland. In addition,
the loan
covenants require Hein Gericke Deutschland and PoloExpress to
maintain inventory
and receivables in excess of €50.0 million ($66.0 million). At December 31,
2006, inventory and accounts receivable at Hein Gericke Deutschland
and
PoloExpress were €68.2 million ($90.0 million), which exceeded by €18.2 million
($24.0 million), the covenant requirement. The loan covenants
also require Hein
Gericke Deutschland to maintain inventory and accounts receivable
at a rate of
one and one half times the net debt position. At December 31,
2006, we were in
compliance with the loan covenants.
At
December 31, 2006, our subsidiary, Hein Gericke UK Ltd had outstanding
borrowings of $2.8 million (£1.4 million) on its £5.0 million ($9.8 million)
credit facility with GMAC. The loan bears interest at 2.25% above
the base rate
of Lloyds TSB Bank Plc (7.25% at December 31, 2006) and matures
on April 30,
2008. We must pay a 0.75% per annum non-utilization fee on the
available
facility. The financing is secured by the inventory of Hein Gericke
UK Ltd and
an investment with a fair market value of $4.9 million at December
31, 2006. The
most restrictive covenant requires Hein Gericke UK to maintain
a maximum level
of inventory turns (“Inventory Turns”) as defined. At December 31,
2006, Hein Gericke UK was in compliance with the Inventory Turns
covenant.
Credit
Facility at Aerospace Segment
At
December 31, 2006, we had outstanding borrowings of $13.0 million
on a $20.0
million asset based revolving credit facility with CIT. The amount
that we can
borrow under the facility is based upon inventory and accounts
receivable at our
Aerospace segment, and $2.1 million was available for future
borrowings at
December 31, 2006. Borrowings under the facility are collateralized
by a
security interest in the assets of our Aerospace segment. The
loan bears
interest at 1.0% over prime (9.25% at December 31, 2006) and
we pay a non-usage
fee of 0.5%. The credit facility matures in January 2008. The credit
facility requires our Aerospace segment maintain compliance with
certain
covenants. The most restrictive of the covenants requires the borrowing
company, a subsidiary of our Aerospace segment, to maintain a
minimum net worth
on a quarterly basis, of $14.0 million, plus 25% of cumulative
net earnings
through the end of the fiscal period. At December 31, 2006, the net worth
of the borrowing company was short of the covenant requirement
by approximately
$0.3 million, which, at CIT’s option could result in an acceleration of the
maturity of the loan. However, we were in compliance with all
covenants under
this credit agreement, including the minimum net worth covenant,
on March 31,
2007 and June 30, 2007. We are currently involved in discussions
with CIT to
extend the maturity of the loan and to receive a waiver from
the minimum net
worth covenant compliance for December 31, 2006. Management expects
to continue under the current terms and conditions of the arrangement
until
renegotiation of the credit facility is completed.
Promissory
Note – Corporate
At
December 31, 2006, we had an outstanding loan of $13.0 million
with Beal Bank,
SSB. The loan is evidenced by a Promissory Note dated as of August
26, 2004, and
is secured by a mortgage lien on the Company’s real estate in Huntington Beach,
California, Fullerton, California, and Wichita, Kansas. Interest
on the note is
at the rate of one-year LIBOR (determined on an annual basis),
plus 6% (11.47%
at December 31, 2006), and is payable monthly. The loan matures
on October 31,
2007, provided that the Company may extend the maturity date
for one year,
during which time the interest rate will be one-year LIBOR plus
8%. The
promissory note agreement contains a prepayment penalty of 3%
if prepaid between
September 2006 and October 30, 2007. On December 31, 2006, approximately
$1.2
million of the loan proceeds were held in escrow to fund specific
improvements
to the mortgaged property.
Guarantees
At
December 31, 2006, we included $1.4 million as debt for guarantees
assumed by us
of retail shop partners’ indebtedness incurred for the purchase of store
fittings in Germany. These guarantees were issued by our subsidiaries
in the
PoloExpress segment and are collateralized by the fittings in
the stores of the
shop partners for whom we have guaranteed indebtedness. In addition,
at December
31, 2006, approximately $1.2 million of bank loans received by
retail shop
partners in the PoloExpress segment were guaranteed by our subsidiaries
prior to
our acquisition of the PoloExpress business and are not reflected
on our balance
sheet because these loans have not been assumed by us.
Letters
of Credit
We
have entered into standby letter of credit arrangements with
insurance companies
and others, issued primarily to guarantee payment of our workers’ compensation
liabilities. At December 31, 2006, we had contingent liabilities
of $3.0
million, on commitments related to outstanding letters of credit
which were
secured by restricted cash collateral.
5.
|
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 Ended
December
31,
|
|
|
Three
Months Ended
December
31,
|
|
(In
thousands)
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Service
cost
|
|
$ |
79
|
|
|
$ |
97
|
|
|
$ |
3
|
|
|
$ |
6
|
|
Interest
cost
|
|
|
2,382
|
|
|
|
2,626
|
|
|
|
380
|
|
|
|
519
|
|
Expected
return on plan assets
|
|
|
(3,047 |
) |
|
|
(3,405 |
) |
|
|
-
|
|
|
|
-
|
|
Amortization
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service cost
|
|
|
65
|
|
|
|
90
|
|
|
|
(392 |
) |
|
|
(278 |
) |
Actuarial
loss
|
|
|
800
|
|
|
|
894
|
|
|
|
264
|
|
|
|
379
|
|
Net
periodic benefit cost
|
|
|
279
|
|
|
|
302
|
|
|
$ |
255
|
|
|
$ |
626
|
|
Settlement
charge (a)
|
|
|
274
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
net pension cost
|
|
$ |
553
|
|
|
$ |
302
|
|
|
|
|
|
|
|
|
|
(a)
|
Represents
the settlement charge from a $1.4 million distribution
of entitled
benefits under our supplemental executive retiree plan,
which requires us
to expense a portion of the unrecognized actuarial
loss and prior service
costs during the three months ended December 31,
2006.
|
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 our actuary’s current assumptions and projections, we do not expect
additional cash contributions to the largest pension plan to
be required until
2008. Current actuarial projections indicate cash contribution
requirements of
$5.1 million in 2008, $7.2 million in 2009, $7.4 million in 2010,
$7.4 million
in 2011, and $18.9 million thereafter. We are required to make
annual cash
contributions of approximately $0.3 million to fund a small pension
plan.
In
December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act
of 2003 became law in the United States. The Prescription Drug,
Improvement and
Modernization Act of 2003 introduces a prescription drug benefit
under Medicare
as well as a federal subsidy to sponsors of retiree health care
benefit plans
that provide a benefit that is at least actuarially equivalent
to the Medicare
benefit. The Medicare Prescription Drug Improvement Act of 2003 is
expected to result in improved financial results for employers,
including us,
that provide prescription drug benefits for their Medicare-eligible
retirees. In
October 2005, we amended our non-class action retiree medical
plans to terminate
the prescription drug coverage for Medicare eligible participants,
effective
January 1, 2006, and we have increased our retiree contributions
from 35% to 50%
and from 50% to 66.7% for the retiree medical plan costs in 2006
and 2007,
respectively. The plan amendment had an estimated effect of reducing
our
postretirement liabilities by approximately $15.6 million. The
reduction in
liabilities will be recognized over 13 years and our postretirement
benefit
expense will be reduced by approximately $1.4 million in fiscal
2007 as a result
of this plan amendment. In 2006, we have adjusted our liability to
reflect benefits available to us from the Medicare Prescription
Subsidy
available for the 1991 class action settlement. We expect to receive
$0.4 million in each of the next 5 years for the Medicare Prescription
Subsidy.
6.
|
EARNINGS
(LOSS) PER SHARE
|
The
following table illustrates the computation of basic and diluted
loss per
share:
|
|
Three
Months Ended
December
31,
|
|
(In
thousands, except per share data)
|
|
2006
|
|
|
2005
|
|
Basic
loss per share:
|
|
|
|
|
(Restated)
|
|
Loss
from continuing operations
|
|
$ |
(14,029 |
) |
|
$ |
(10,096 |
) |
Weighted
average common shares outstanding
|
|
|
25,226
|
|
|
|
25,226
|
|
Basic
loss from continuing operations per share
|
|
$ |
(0.56 |
) |
|
$ |
(0.40 |
) |
Diluted
loss per share:
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(14,029 |
) |
|
$ |
(10,096 |
) |
Weighted
average common shares outstanding
|
|
|
25,226
|
|
|
|
25,226
|
|
Options
|
|
antidilutive
|
|
|
antidilutive
|
|
Total
shares outstanding
|
|
|
25,226
|
|
|
|
25,226
|
|
Diluted
loss from continuing operations per share
|
|
$ |
(0.56 |
) |
|
$ |
(0.40 |
) |
The
computation of diluted loss from continuing operations per share
for the three
months ended December 31, 2006 and 2005 excluded the effect of
325,417 and
781,413 incremental common shares, respectively, attributable
to the potential
exercise of common stock options outstanding because the effect
was
antidilutive.
We
had 22,604,835 shares of Class A common stock and 2,621,338 shares
of Class B
common stock outstanding at December 31, 2006. Class A common stock
is traded on the New York Stock Exchange. 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.
Environmental
Matters
Our
operations are subject to stringent government imposed environmental
laws and
regulations concerning, among other things, the discharge of
materials into the
environment and the generation, handling, storage, transportation,
and disposal
of waste and hazardous materials. To date, such laws and regulations
have had a material effect on our financial condition, results
of operations, or
net cash flows, and we have expended, and can be expected to
expend in the
future, significant amounts for the investigation of environmental
conditions
and installation of environmental control facilities, remediation
of
environmental conditions and other similar matters.
In
connection with our plans to dispose of certain real estate,
we must investigate
environmental conditions and we may be required to take certain
corrective
action prior or pursuant to any such disposition. In addition,
we have
identified several areas of potential contamination related to,
or arising from
other facilities owned, or previously owned, by us, that may
require us either
to take corrective action or to contribute to a clean-up. We
are also a
defendant in several lawsuits and proceedings seeking to require
us to pay for
investigation or remediation of environmental matters, and for
injuries to
persons or property allegedly caused thereby, and we have been
alleged to be a
potentially responsible party at various "superfund" sites. We
believe that we
have recorded adequate accruals in our financial statements to
complete such
investigation and take any necessary corrective actions or make
any necessary
contributions. No amounts have been recorded as due from third
parties,
including insurers, or set-off against, any environmental liability,
unless such
parties are contractually obligated to contribute and are not
disputing such
liability.
In
October 2003, we learned that volatile organic compounds had
been detected in
amounts slightly exceeding regulatory thresholds in a town water
supply well in
East Farmingdale, New York. Subsequent sampling of groundwater
from the
extraction wells to be used in the remediation system for this
site has
indicated that contaminant levels at the extraction point are
significantly
higher than previous sampling results indicated. These compounds may,
to an as yet undetermined extent, be attributable to a groundwater
plume
containing volatile organic compounds, which may have had its
source, at least
in part, from plant operations conducted by a predecessor of
ours in
Farmingdale. We are aiding East Farmingdale in its investigation
of the source
and extent of the volatile organic compounds, and may assist
it in treatment. In
the three months ended December 31, 2006, we contributed approximately
$0.1
million toward this remediation, but may be required to pay additional
amounts
of up to $7.7 million over the next 20 years.
We
incurred $1.5 million of expense in discontinued operations for
environmental
matters in the three months ended December 31, 2006. As of December
31, 2006 and
September 30, 2006, the consolidated total of our recorded liabilities
for
environmental matters was approximately $14.6 million and $13.5
million,
respectively, which represented the estimated probable exposure
for these
matters. At December 31, 2006, $1.2 million of these liabilities were
classified as other accrued liabilities and $13.4 million were
classified as
other long-term liabilities. It is reasonably possible that our
exposure for
these matters could be approximately $21.0 million.
The
sales agreement with Alcoa includes an indemnification for legal
and
environmental claims in excess of $8.45 million, for our fastener
business. As
of December 31, 2006, Alcoa had contacted us concerning potential
health and
safety claims of approximately $16.4 million. On June 25, 2007, the
Company received an arbitration ruling awarding Alcoa approximately
$4.0 million
from the Company’s $25.0 million escrow account. On October 31, 2007,
the Company and Alcoa resolved all disputes related to the 2002
sale of the
fastener business to Alcoa. Accordingly, $25.3 million of the escrow
account was released to us and Alcoa paid us an additional $0.6
million.
Asbestos
Matters
On
January 21, 2003, we and one of our subsidiaries were served
with a third-party
complaint in an action brought in New York by a non-employee
worker and his
spouse alleging personal injury as a result of exposure to asbestos-containing
products. The defendant, who is one of many defendants in the action,
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, in September 2003, the purchaser notified
us of, and
claimed a right to indemnity from us in relation to more than
10 thousand other
asbestos-related claims filed against it. We have not received enough
information to assess the impact, if any, of the other claims.
During the last
thirty nine months, we have been served directly by plaintiffs’ counsel in forty
seven cases related to the same pump business. Two of the forty
seven cases were
dismissed as to all defendants, based upon forum objections.
The Company was
voluntarily dismissed from thirteen additional pump business
cases during the
same period, without the payment of any consideration to plaintiffs.
We, in
coordination with our insurance carriers, intend to aggressively
defend
ourselves against the remaining thirty two claims.
During
the last thirty nine months, we, or our subsidiaries, were served
with a total
of three hundred thirty claims filed in various venues by non-employee
workers,
alleging personal injury or wrongful death as a result of exposure
to
asbestos-containing products other than those related to the
pump
business. The plaintiffs’ complaints do not specify which, if any, of our
former products are at issue, making it difficult to assess the
merit and value,
if any, of the asserted claims. We, in coordination with our insurance
carriers, intend to aggressively defend ourselves against these
claims.
During
the same time period, we have resolved eighteen similar, non-pump,
asbestos-related lawsuits that were previously served upon us.
In fourteen
cases, we were voluntarily dismissed, without the payment of
any consideration
to plaintiffs. The remaining four cases were settled for a nominal
amount.
Our
insurance carriers have participated in the defense of all of
the aforementioned
asbestos claims, both pump and non-pump related. Although insurance
coverage
varies, depending upon the policy period(s) and product line
involved in each
case, management believes that our insurance coverage levels
are adequate, and
that asbestos claims will not have a material adverse effect
on our financial
condition, future results of operations, or net cash flow.
Commercial
Lovelace Motor Freight Litigation
In
July 2005, we received notice that The Ohio Bureau of Workers’ Compensation (the
“Bureau”) is seeking reimbursement from us of approximately $7.3 million
for
Commercial Lovelace Motor Freight Inc. workers’ compensation claims which were
insured under a self-insured workers compensation program in
Ohio from the 1950s
until 1985. In March 2006, we received a letter from the Bureau
increasing the amount of reimbursement it is seeking from us
to approximately
$8.0 million and suggesting a meeting to discuss a settlement. With
interest, the claim could be higher. For many years prior to July
2005, we had not received any communication from the Bureau.
Commercial Lovelace
Motor Freight is a former wholly-owned subsidiary of ours, which
filed for
Bankruptcy protection in 1985. Recently, two surety companies which
had issued bonds in favor of the Bureau settled claims of the
Bureau, and they
too demanded from the Company payment in respect of the amounts
they
paid.
Settlement
efforts to date have not been successful with either the Bureau
or the two
surety companies. On August 17, 2007, the Attorney General of Ohio filed a
lawsuit on behalf of the Bureau in the Court of Common Pleas
of Franklin County,
Ohio, seeking to recover from the Company $5.8 million, including
interest to
that date and other costs. This claim represents the amount remaining
after the Bureau’s settlements with the two surety companies. On
August 21, 2007, the two surety companies sued the Company to
recover on
indemnification obligations allegedly due to them, in the aggregate
amount of
$1.1 million, including interest to that date and other costs.
The
Company has filed answers to the three complaints and a motion
to consolidate
the three actions is pending. The Company intends to vigorously
defend these actions. As of December 31, 2006, we accrued $2.0
million related to the claim made by the Bureau.
Other
Matters
In
early August 2006, three lawsuits were filed in the Delaware
Court of Chancery,
purportedly on behalf of the public stockholders of the Company,
regarding a
going private proposal by FA Holdings I, LLC, a limited liability
company led by
Jeffrey Steiner and Philip Sassower, Chairman of The Phoenix
Group
LLC. The defendants named in these actions included Jeffrey Steiner,
Eric Steiner, Robert Edwards, Daniel Lebard, Michael Vantusko,
Didier Choix,
Glenn Myles, FA Holdings I, LLC and the Company.
The
allegations in each of the complaints, which were substantially
similar,
asserted that the individual defendants had breached their fiduciary
duties to
the Company’s stockholders and that the FA Holdings offer of $2.73 for each
share of the Company’s stock was inadequate and unfair. The suits
sought injunctive relief, rescission of any transaction, damages,
costs and
attorneys’ fees. On September 7, 2006, the Delaware Court of Chancery
consolidated all three Delaware lawsuits into a single action,
styled In re
The Fairchild Corporation Shareholders Litigation, Consolidated C.A. No.
2325-N. On September 21, 2006, the Company announced that FA Holdings
I, LLC had withdrawn its proposal, but that the parties subsequently
had further
discussions and agreed to meet again. On December 5, 2006, the
Company announced that discussions with FA Holdings regarding
a potential
transaction had been terminated. On March 2, 2007, plaintiffs filed a
stipulation with the Delaware Court of Chancery seeking to dismiss
the
consolidated action. On March 6, 2007, the Delaware Court of Chancery
entered an order dismissing all of the claims in the consolidated
action.
Two
actions, styled Noto v. Steiner, et al., and
Barbonel v. Steiner, et al.,
were commenced on
November 18, 2004, and November 23, 2004, respectively, in the
Court of Chancery
of the State of Delaware in and for Newcastle County, Delaware.
The plaintiffs
allege that each is, or was, a shareholder of The Fairchild Corporation
and
purported to bring actions derivatively on behalf of the Company,
claiming,
among other things, that Fairchild executive officers received
excessive pay and
perquisites and that the Company’s directors approved such excessive pay and
perquisites in violation of fiduciary duties to the Company.
The complaints
name, as defendants, all of the Company’s directors, its Chairman and Chief
Executive Officer, its President and Chief Operating Officer,
its former Chief
Financial Officer, and its General Counsel. While the Company
and its Officers
and Directors believe it and they have meritorious defenses to
these suits, and
deny liability or wrongdoing with respect to any and all claims
alleged in the
suits, it and its Officers and Directors elected to settle to
avoid onerous
costs of defense, inconvenience and distraction. On April 1,
2005, we mailed to
our shareholders a Notice of Hearing and Proposed Settlement
of The Fairchild
Corporation Stockholder Derivative Litigation. On May 18, 2005,
the Court of
Chancery of the State of Delaware in and for Newcastle County
declined to
approve that proposed settlement of the actions. On October 24,
2005, we mailed
to our shareholders a Notice of Hearing and Proposed Supplemental
Settlement of
The Fairchild Corporation Stockholder Derivative Litigation.
On November 23,
2005, the Court of Chancery of the State of Delaware in and for
Newcastle County
approved the proposed settlement of these actions. The Court’s order became
final on December 23, 2005. As a result of the settlement, we
recognized a
reduction in our selling, general and administrative expense
for approximately
$5.7 million of proceeds we received from Mr. J. Steiner and
our insurance
carriers. In January 2006, we received approximately $0.9 million
from our
insurance carriers to pay for the plaintiffs’ and objector’s attorneys’ fees. In
April 2006, and July 2006, we received approximately $0.8 million
and $1.1
million, respectively, from our insurance carriers to pay for
certain of our
legal costs associated with this matter.
Alcoa
and the Company had certain disputes related to the sale of the
fasteners
business to Alcoa in December 2002. On October 31, 2007, the Company
and Alcoa resolved all related disputes, and $25.3 million of
an escrow account
established at the time of the sale was released to us and Alcoa
paid us an
additional $0.6 million.
We
are involved in various other claims and lawsuits incidental
to our
business. We, either on our own or through our insurance carriers,
are contesting these matters. In the opinion of management, the
ultimate resolution of litigation against us, including that
mentioned above,
will not have a material adverse effect on our financial condition,
future
results of operations or net cash flows.
9.
|
DISCONTINUED
OPERATIONS
|
Shopping
Center
On
July 6, 2006, Republic Thunderbolt, LLC (an indirect, wholly-owned
subsidiary of
the Company) completed the sale of Airport Plaza, a shopping
center located in
Farmingdale, New York, to an affiliate of Kimco Realty
Corporation. We decided to sell the shopping center to enhance our
financial flexibility, allowing us to pursue other opportunities. We
received net proceeds of approximately $40.7 million from the
sale. As a
condition to closing, the buyer assumed our existing mortgage
loan on Airport
Plaza that had an outstanding principal balance of approximately
$53.5 million
on the closing date. Also as a condition to closing, we provided the
buyer with an environmental indemnification and agreed to remediate
an
environmental matter that was identified, the costs of which
are estimated to be
between $1.0 million and $2.7 million. We expect to recognize
a gain of
approximately $15.1 million from this transaction. However, because
of the
uncertain environmental liabilities that we retained, the gain
recognition is
required to be delayed until the remediation efforts are complete.
Landfill
Development Partnership
On
April 28, 2006, our consolidated partnership, Eagle Environmental,
L.P. II,
completed the sale of its Royal Oaks landfill to Highstar Waste
Acquisition for
approximately $1.4 million. This transaction concludes the operating
activity of
Eagle Environmental L.P. II, and there is no requirement or current
intent by us
to pursue any new operating activities through this partnership.
In fiscal 2006,
we recognized a $1.1 million gain on disposal of discontinued
operations as a
result of this transaction.
Fastener
Business
On
December 3, 2002, we completed the sale of our fastener business
to Alcoa Inc.
for approximately $657 million in cash and the assumption of
certain
liabilities. During the four-year period from 2003 to 2006, we
are entitled to
receive additional cash proceeds of $0.4 million for each commercial
aircraft
delivered by Boeing and Airbus in excess of stated threshold
levels, up to a
maximum of $12.5 million per year. Deliveries exceeded the threshold
aircraft delivery level needed for us to earn the full $12.5
million contingent
payment for 2003, 2004, 2005, and 2006. Accordingly, we
recognized a $12.5 million gain on disposal of discontinued
operations for the three months ended December 31, 2006 and December 31,
2005. In February 2007, we received from Alcoa the final $12.5
million payment related to the sale of this business. Of this amount
received, we repaid approximately $9.1 million of our loan from
GoldenTree Asset
Management.
On
December 3, 2002, we deposited with an escrow agent $25.0 million
to secure
indemnification obligations we may have to Alcoa. On October 31,
2007, the Company and Alcoa resolved all related
disputes. Accordingly, $25.3 million of the escrow account was
released to us and Alcoa made an additional payment to us of
$0.6
million.
The
results of the shopping center, landfill development partnership,
and the
fastener business are recorded as earnings from discontinued
operations, the
components of which are as follows:
|
|
Three
Months Ended
December
31,
|
|
(In
thousands)
|
|
2006
|
|
|
2005
|
|
Net
revenues
|
|
$ |
-
|
|
|
$ |
2,391
|
|
Cost
of revenues
|
|
|
-
|
|
|
|
1,617
|
|
Gross
margin
|
|
|
-
|
|
|
|
774
|
|
|
|
|
|
|
|
|
|
|
Selling,
general & administrative expense
|
|
|
1,966
|
|
|
|
448
|
|
Other
income, net
|
|
|
-
|
|
|
|
(108 |
) |
Operating
income (loss)
|
|
|
(1,966 |
) |
|
|
434
|
|
Investment
income
|
|
|
-
|
|
|
|
23
|
|
Net
interest expense
|
|
|
-
|
|
|
|
(860 |
) |
Loss
from discontinued operations before taxes
|
|
|
(1,966 |
) |
|
|
(403 |
) |
Income
tax provision
|
|
|
-
|
|
|
|
(8 |
) |
Loss
from discontinued operations, net
|
|
$ |
(1,966 |
) |
|
$ |
(411 |
) |
Certain
liabilities remaining from the sale of our shopping center that
occurred in July
2006 are being reported as liabilities of discontinued operations
at December
31, 2006 and September 30, 2006, and were as follows:
(In
thousands)
|
|
December
31, 2006
|
|
|
September
30, 2006
|
|
Current
liabilities of discontinued operations
|
|
$ |
-
|
|
|
$ |
(62 |
) |
|
|
|
-
|
|
|
|
(62 |
) |
Noncurrent
liabilities of discontinued operations:
|
|
|
|
|
|
|
|
|
Other
long-term liabilities (a)
|
|
|
(16,120 |
) |
|
|
(16,120 |
) |
|
|
|
(16,120 |
) |
|
|
(16,120 |
) |
Total
net liabilities of discontinued operations
|
|
$ |
(16,120 |
) |
|
$ |
(16,182 |
) |
(a)
|
Represents
a $15.1 million deferred gain on the sale of the shopping
center and $1.0
million for the estimated minimum cost to remediate
environmental
matters.
|
10.
|
BUSINESS
SEGMENT INFORMATION
|
Our
business consists of three segments: PoloExpress; Hein Gericke;
and Aerospace.
Our PoloExpress and Hein Gericke segments are engaged in the
design and retail
sale of protective clothing, helmets and technical accessories
for motorcyclists
in Europe, and our Hein Gericke segment is also engaged in the
design,
licensing, and distribution of apparel in the United States.
Our Aerospace
segment stocks and distributes a wide variety of aircraft parts
to commercial
airlines and air cargo carriers, fixed-base operators, corporate
aircraft
operators and other aerospace companies worldwide.
In
fiscal 2006, we operated a Real Estate segment, which owned and
leased a
shopping center located in Farmingdale, New York, and owned and
rented two
improved parcels located in Southern California. During fiscal 2006,
we sold the shopping center and reclassified the remaining portions
of our Real
Estate segment into our corporate and other segment.
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
(In
thousands)
|
|
PoloExpress
|
|
|
Hein
Gericke
|
|
|
Aerospace
|
|
|
and
Other
|
|
|
Total
|
|
Three
Months Ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
18,210
|
|
|
$ |
20,535
|
|
|
$ |
21,641
|
|
|
$ |
237
|
|
|
$ |
60,623
|
|
Operating
income (loss)
|
|
|
(1,157 |
) |
|
|
(7,542 |
) |
|
|
1,363
|
|
|
|
(3,440 |
) |
|
|
(10,776 |
) |
Total
assets at December 31
|
|
|
80,422
|
|
|
|
92,837
|
|
|
|
48,980
|
|
|
|
202,065
|
|
|
|
424,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
13,845
|
|
|
$ |
20,585
|
|
|
$ |
16,880
|
|
|
$ |
237
|
|
|
$ |
51,547
|
|
Operating
income (loss) (restated)
|
|
|
(1,016 |
) |
|
|
(6,084 |
) |
|
|
567
|
|
|
|
(2,661 |
) |
|
|
(9,194 |
) |
Total
assets at December 31 (restated)
|
|
|
70,272
|
|
|
|
88,314
|
|
|
|
45,591
|
|
|
|
247,964
|
|
|
|
452,141
|
|
11. SUBSEQUENT
EVENTS
In
March 2007, we recognized an income tax benefit of $32.8 million
from the
reversal of an accrual due to the expiration of the related statute
of
limitations and closure of the related tax period.
In
August 2007, we purchased annuities to settle the liabilities
of an overfunded
pension plan, which resulted in net remaining assets of approximately
$7.3
million. This action triggered settlement accounting, which requires
us to expense approximately $27.9 million relating to the previous
unrecognized
actuarial losses and the costs associated with purchasing annuity
contracts. In September 2007, the pension plan, including its $7.3
million net remaining assets, was merged with one of our underfunded
pension
plans. This action reduced the amount we will be required to
contribute to our underfunded pension plan by in excess of $1.0
million
annually, in accordance with the Pension Protection Act of 2006.
On
October 31, 2007, the Company and Alcoa resolved all disputes
related to the
2002 sale of the fastener business to Alcoa. Accordingly, $25.3
million of an escrow account established at the time of sale
was released to us,
and Alcoa made an additional payment to us of $0.6 million, and
assumed
specified liabilities for foreign taxes, environmental matters,
and workers
compensation claims. We used $20.9 million of these proceeds to repay
fully the GoldenTree loan. On October 31, 2007, we sold our property
in Fullerton, California to Alcoa for $19.0 million. We used $13.0
million of these proceeds to repay fully the Beal Bank
loan. We expect to recognize a pre-tax gain of
approximately $26.0 million from these transactions with Alcoa
in the quarter
ending December 31, 2007.
In November 2007, we amended certain retiree medical plans to
eliminate
supplemental Medicare insurance coverage for all of our current
and future
retirees effective January 1, 2008. This action provides income
recognition of approximately $11.9 million, as a result of the
reduction in our
postretirement benefits liabilities.
CAUTIONARY
STATEMENT
The
discussion below contains forward-looking statements, which are
subject to safe
harbors under the Securities Act of 1933 and the Securities Exchange
Act of
1934. Forward-looking statements include references to the expected
results of
the cost reduction program that was announced in January 2007
and statements
including words such as “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “projects,” and similar expressions. In addition,
statements that refer to projections of our future financial
performance,
anticipated growth and trends in our businesses and in our industries,
the
anticipated impacts of acquisitions, and other characterizations
of future
events or circumstances are forward-looking statements. These
statements are
only predictions, based on our current expectations about future
events and may
not prove to be accurate. We do not undertake any obligation
to update these
forward-looking statements to reflect events occurring or circumstances
arising
after the date of this report. These forward-looking statements
involve risks
and uncertainties, and our actual results, performance, or achievements
could
differ materially from those expressed or implied by the forward-looking
statements on the basis of several factors, including those that
we discuss
in Risk Factors, set forth in Part II, Item 1A of this
Quarterly Report and in Part I, Item 1A, of our Annual Report on
Form 10-K for the fiscal year ended September 30, 2006. We encourage
you to
read these sections carefully.
FINANCIAL
RESTATEMENT
This
report contains our condensed consolidated financial statements
and related
notes as of, and for the three months ended, December 31, 2006
as well as a
restatement of our previously issued condensed consolidated financial
statements
for the three months ended December 31, 2005.
Based
upon discussions with our external independent registered public
accounting firm
and management during the course of our fiscal 2006 audit, the
Audit Committee
of our Board of Directors concluded in January 2007 that our
previously filed
interim and audited consolidated financial statements should
not be relied upon
since they were prepared applying accounting practices in accounting
for income
taxes that did not comply with U.S. generally accepted accounting
principles
(“GAAP”) and, consequently, we would restate our consolidated financial
statements. During the course of the Company’s review of its historical
financial statements, additional errors were identified. The
condensed consolidated financial statements for the three months
ended December
31, 2005 included in this Quarterly Report on Form 10-Q include restatement
adjustments that we have categorized into the following three
areas: our
accounting for income taxes; our accounting for commitments and
contingencies;
and our accounting for long-term investments. See Note 2 of our
condensed consolidated financial statements included in this
Form 10-Q for
additional information regarding the restatement of our condensed
consolidated
financial statements for the three months ended December 31,
2005.
As
a result of the restatement, originally reported net income for
the three months
ended December 31, 2005 increased by $0.1 million ($0.01 per
share). The cumulative impact of errors related to periods prior to
September 30, 2005 of $1.4 million has been reflected as an increase
to
beginning retained earnings as of October 1, 2005.
EXECUTIVE
OVERVIEW
The
Fairchild Corporation was incorporated in October 1969, under
the laws of the
State of Delaware. Our business consists of three segments: PoloExpress;
Hein
Gericke; and Aerospace. Both our PoloExpress and Hein Gericke
segments are engaged in the design and retail sale of motorcycle
apparel,
protective clothing, helmets, and technical accessories for motorcyclists
in
Europe. In addition, Hein Gericke is engaged in the design and
distribution of
motorcycle apparel in the United States. Our Aerospace segment stocks
a wide variety of aircraft parts and distributes them to commercial
airlines and
air cargo carriers, fixed-base operators, corporate aircraft
operators, and
other aerospace companies worldwide. Additionally, our Aerospace
segment
performs component repair and overhaul services. In fiscal 2006, we
operated a Real Estate segment, which owned and leased a shopping
center located
in Farmingdale, New York, and owned and rented two improved parcels
located in
Southern California. During fiscal 2006, we sold the shopping center
and reclassified the remaining portions of our Real Estate segment
into our
corporate and other segment.
On
July 6, 2006, we completed the sale of our Farmingdale, New York,
shopping
center, Airport Plaza, to an affiliate of Kimco Realty
Corporation. We received net proceeds of approximately $40.7 million
from the sale. As a condition to closing, the buyer assumed our
existing
mortgage loan on Airport Plaza that had an outstanding principal
balance of
approximately $53.5 million on the closing date.
On
December 3, 2002, we completed the sale of our fastener business
to Alcoa Inc.
for approximately $657.0 million in cash and the assumption of
certain
liabilities. In addition, we earned additional proceeds of $12.5
million in each
of fiscal 2004, 2005, and 2006 as the number of commercial aircraft
delivered by
Boeing and Airbus exceeded specified annual levels. We received this
final $12.5 million earn-out payment in February 2007.
Financial
Results and Trends
For
the three months ended December 31, 2006, we reported a loss
from continuing
operations before taxes of $13.5 million, as compared to a loss
of $10.1 million
for the three months ended December 31, 2005. The loss from continuing
operations for the quarter ended December 31, 2005 benefited
from the settlement
of the shareholder derivative litigation, which improved results
by
approximately $3.2 million. Excluding this item, the loss from
continuing
operations before taxes for the quarter ended December 31, 2006
increased by
$0.2 million compared to the quarter ended December 31, 2005.
The seasonal
inventory demands of our Hein Gericke and PoloExpress businesses
has contributed
primarily to our $7.7 million use of cash in our operating activities
in the
three months ended December 31, 2006. As of December 31, 2006,
we have
unrestricted cash, cash equivalents and short-term investments
of $40.7 million
and available borrowing under lines of credit of $3.7 million.
In addition, we
received the final earn-out payment of $12.5 million from Alcoa
in February 2007
under the terms of our 2002 sale agreement, of which approximately
$9.1 million
was used to repay debt. On October 31, 2007, the Company and Alcoa
resolved all disputes related to the 2002 sale of the fastener
business. Accordingly, $25.3 million of the escrow account was
released to us and Alcoa paid us an additional $0.6 million,
of which $20.9
million was used to fully repay the GoldenTree loan. Also on October
31, 2007, we sold our property in Fullerton, California to Alcoa
for $19.0
million, of which $13.0 million was used to fully repay the Beal
Bank loan. We expect
to recognize a
pre-tax gain of approximately $26.0 million from these transactions
with Alcoa
in the quarter ending December 31, 2007.
We
have undertaken a number of actions, which we believe will ultimately
improve
the results of Hein Gericke in future periods, including:
·
|
Consolidating
and centralizing our warehouse facilities to one location
to service all
of Europe.
|
·
|
Improving
timeliness of product deliveries from suppliers to
our warehouse and
delivery to the stores.
|
·
|
Reintroducing
our Hein Gericke product catalog to expand brand awareness
and attract
customer traffic.
|
·
|
Optimizing
store location and appearance.
|
In
addition, we plan to continue cost structure improvements at
Hein Gericke by
taking aggressive actions to reduce expenses, including:
·
|
Consolidating
and restructuring back office functions, achieving
a significant reduction
in staff levels.
|
·
|
Closing
stores which do not provide a positive
contribution.
|
·
|
Reducing
advertising expense.
|
·
|
Researching
opportunities to further reduce warehousing
expenses.
|
We
also have taken action to reduce the cash needs of Fairchild
Sports USA by
significantly downsizing the operations and focusing efforts
primarily on its
design and licensing businesses.
On
July 6, 2006, Republic Thunderbolt, LLC (our indirect, wholly-owned
subsidiary)
completed the sale of Airport Plaza, a shopping center located
in Farmingdale,
New York, to an affiliate of Kimco Realty Corporation. The sale
does not include
several other undeveloped parcels of real estate that we own
in Farmingdale, New
York, the largest of which is under contract of sale to the market
chain, Stew
Leonards. We decided to sell the shopping center to enhance our
financial flexibility, allowing us to pursue other opportunities. We
received net proceeds of approximately $40.7 million from the
sale. As a
condition to closing, the buyer assumed our existing mortgage
loan on Airport
Plaza that had an outstanding principal balance of approximately
$53.5 million
on the closing date. Also as a condition to closing, we provided the
buyer with an environmental indemnification and agreed to remediate
an
environmental matter that was identified, the costs of which
are estimated to be
between $1.0 million and $2.7 million. We expect to recognize
a gain of
approximately $15.1 million from this transaction. However, because
of the
uncertain nature of the environmental liabilities that we retained,
the gain
recognition is required to be delayed until the remediation efforts
are
complete.
On
May 3, 2006, we borrowed $30.0 million from GoldenTree Capital
Opportunities,
L.P. and GoldenTree Capital Solutions Fund Financing to further
improve our
liquidity and provide us with flexible opportunities to:
·
|
Invest
in our existing operations;
|
·
|
Pursue
acquisition opportunities;
|
·
|
Provide
a source for any additional cash needs of our Hein
Gericke operations
during the 2007 season; or
|
·
|
Consider
the repurchase of our outstanding
stock.
|
Subsequent
to December 31, 2006, and directly resulting from the financial
statement
restatement process, we were unable to provide to the lenders
timely financial
statements for the quarters ended December 31, 2006, March 31,
2007, and June
30, 2007, as required by the credit agreement. Our lenders have
waived certain
provisions in the credit agreement and granted us an extension
in time to
provide these financial statements.
Our
cash needs are generally the highest during our second and third
quarters of our
fiscal year, when our Hein Gericke and PoloExpress segments purchase
inventory
in advance of the spring and summer selling seasons. Accordingly,
€10.0 million
was available and utilized to finance the fiscal 2007 seasonal
trough to support
our PoloExpress operations, and €9.0 million will be available to finance the
fiscal 2008 season. We expect that cash on hand, which includes
cash proceeds
received from the sale of our shopping center, the Alcoa earn-out
and escrow,
the proceeds available from additional seasonal borrowings, cash
available from
lines of credit, and proceeds received from dispositions of short-term
investments and other non-core assets, will be adequate to satisfy
our cash
requirements through December 2007.
In
the event our cash needs are substantially higher than projected,
particularly
during the fiscal 2008 seasonal trough, we will take additional
actions to
generate the required cash. These actions may include one or any
combination of the following:
·
|
Liquidating
investments and other non-core
assets.
|
·
|
Refinancing
existing debt and borrowing additional funds which
may be available to us
from improved performances at our Aerospace and PoloExpress
operations or
increased values of certain real estate we
own.
|
·
|
Eliminating,
reducing, or delaying all non-essential services provided
by outside
parties, including consultants.
|
·
|
Significantly
reducing our corporate overhead
expenses.
|
·
|
Delaying
inventory purchases.
|
However,
if we need to implement one or more of these actions, there remains
some
uncertainty that we will actually receive a sufficient amount
of cash in time to
meet all of our needs during the fiscal 2008 seasonal trough. Even if
sufficient cash is realized, any or all of these actions may
have adverse
effects on our operating results or business.
We
may also consider raising cash to meet the subsequent needs of
our operations by
issuing additional stock or debt, entering into partnership arrangements,
liquidating one or more of our core businesses, or other means.
Should these
actions be insufficient, we may be forced to liquidate other
non essential
assets and significantly reduce overhead expenses.
CRITICAL
ACCOUNTING POLICIES
Our
financial statements and accompanying notes are prepared in accordance
with U.S.
generally accepted accounting principles. Preparing financial
statements
requires management to make estimates and assumptions that affect
the reported
amounts of assets, liabilities, revenue, and expenses. These
estimates and
assumptions are affected by management’s application of accounting policies.
Critical accounting policies for us are more fully described
in our Annual
Report on Form 10-K and include: valuation of long-lived assets;
impairment of
goodwill and intangible assets with indefinite lives; pension
and postretirement
benefits; deferred and noncurrent income taxes; environmental
and litigation
accruals; and revenue recognition. Estimates in each of these
areas are based on
historical experience and a variety of assumptions that we believe
are
appropriate. Actual results may differ from these estimates.
RESULTS
OF OPERATIONS
Business
Transactions
On
October 18, 2006, we collected $2.75 million in cash in full
payment of our note
receivable from Voyager Kibris. We recognized a gain of approximately
$2.1 million in the three months ended December 31, 2006.
On
July 6, 2006, Republic Thunderbolt, LLC (an indirect, wholly-owned
subsidiary of
the Company) completed the sale of Airport Plaza, a shopping
center located in
Farmingdale, New York, to an affiliate of Kimco Realty Corporation.
The sale
does not include several other undeveloped parcels of real estate
that we own in
Farmingdale, New York, the largest of which is under contract
of sale to the
market chain, Stew Leonards. We decided to sell the shopping center
to enhance our financial flexibility, allowing us to pursue other
opportunities. We received net proceeds of approximately $40.7
million from the sale. As a condition to closing, the buyer assumed
our existing
mortgage loan on Airport Plaza that had an outstanding principal
balance of
approximately $53.5 million on the closing date. Also as a condition
to closing, we provided the buyer with an environmental indemnification
and
agreed to remediate an environmental matter that was identified,
the costs of
which are estimated to be between $1.0 million and $2.7 million.
We expect to
recognize a gain of approximately $15.1 million from this transaction.
However,
because of the uncertain nature of the environmental liabilities
that we
retained, the gain recognition is required to be delayed until
the remediation
efforts are complete.
Consolidated
Results
We
currently report in three principal business segments: PoloExpress;
Hein
Gericke; and Aerospace. Because PoloExpress and Hein Gericke are
highly seasonal businesses, 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:
|
|
Three
Months Ended
December
31,
|
|
(In
thousands)
|
|
2006
|
|
|
2005
|
|
Revenues
|
|
|
|
|
|
|
PoloExpress
Segment
|
|
$ |
18,210
|
|
|
$ |
13,845
|
|
Hein
Gericke Segment
|
|
|
20,535
|
|
|
|
20,585
|
|
Aerospace
Segment
|
|
|
21,641
|
|
|
|
16,880
|
|
Corporate
and Other
|
|
|
258
|
|
|
|
258
|
|
Intercompany
Eliminations
|
|
|
(21 |
) |
|
|
(21 |
) |
Total
|
|
$ |
60,623
|
|
|
$ |
51,547
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
|
|
|
|
|
|
|
PoloExpress
Segment
|
|
$ |
(1,157 |
) |
|
$ |
(1,016 |
) |
Hein
Gericke Segment
|
|
|
(7,542 |
) |
|
|
(6,084 |
) |
Aerospace
Segment
|
|
|
1,363
|
|
|
|
567
|
|
Corporate
and Other
|
|
|
(3,440 |
) |
|
|
(2,661 |
) |
Total
|
|
$ |
(10,776 |
) |
|
$ |
(9,194 |
) |
Revenues
increased by $9.1 million, or 17.6%, in the first quarter of
fiscal 2007
compared to the first quarter of fiscal 2006. This revenue improvement
was
driven by increased revenue in our PoloExpress and Aerospace
operating segments
as revenue increased $4.4 million and $4.8 million, respectively. See
segment discussion below for further details.
Gross
margin as a percentage of sales decreased to 37.1% in the first
quarter of
fiscal 2007 compared to 37.5% in the first quarter of fiscal
2006. This margin decline was primarily driven by a decrease in gross
margin at our Hein Gericke business to 40.5% for the quarter
ended December 31,
2006 from 41.3% for the quarter ended December 31, 2005.
Selling,
general, and administrative expense includes pension and postretirement
expense
of $0.8 million and $0.9 million for the quarter ended December
31, 2006 and the
quarter ended December 31, 2005, respectively, primarily relating
to inactive
and retired employees of businesses that we sold and for which
we retained the
pension or postretirement liability. Selling, general, and
administrative expense, excluding pension and postretirement
expense, as a
percentage of sales increased to 58.5% for the three months ended
December 31,
2006 compared to 54.5% for the first quarter of fiscal 2005. Selling,
general, and administrative expense for the three months ended
December 31,
2005, benefited from $3.8 million received by us from the settlement
of the
shareholder derivative litigation, offset partially by $0.6 million
of related
legal fees. Without this benefit, selling, general, and administrative
expense,
excluding pension and postretirement expense, as a percentage
of sales would
have been approximately 62.8% in the quarter ended December 31,
2005. This effective improvement in selling, general, and
administrative expense as a percentage of sales primarily resulted
from
increased sales in our Aerospace segment without a commensurate
increase in
operating expenses. See segment discussion below for further
details.
Other
income, net increased by $2.5 million for the quarter ended December
31, 2006
compared to the quarter ended December 31, 2005. This increase
resulted primarily from the $2.1 million gain recognized from
the collection in
full of a note receivable in October 2006.
Interest
expense increased $2.1 million for the three months ended December
31, 2006
compared to the three months ended December 31, 2005. This increase
principally resulted from $1.4 million of interest expense from
the correction
of the carrying value of the liability associated with our arrangement
to
acquire the remaining 7.5% of PoloExpress.
The
fair market value adjustment of our position in a ten-year $100.0
million
interest rate contract improved by $0.8 million in the three
months ended
December 31, 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. 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 three months ended December 31, 2006 represents
$0.6
million of state taxes. No federal tax provision was accrued,
due to our foreign
operations reporting a loss for the quarter and our annual projected
loss for
domestic operations.
Loss
from discontinued operations includes the results of the Airport
Plaza shopping
center prior to its sale and certain legal and environmental
expenses associated
with our former businesses. The loss from discontinued operations
for the three
months ended December 31, 2006 consists primarily of $3.7 million
to cover legal
expenses and workers compensation obligations associated with
businesses we sold
several years ago and a $1.5 million increase in our environmental
accrual,
offset partially by $3.3 million insurance reimbursement. The
loss from
discontinued operations for the three months ended December 31,
2005 resulted
from a $0.2 million increase in our environmental accrual and
a $0.2 million
loss at our shopping center.
We
recognized a $12.5 million gain on the disposal of discontinued
operations in
each of the three months ended December 31, 2006 and December
31, 2005, due to
$12.5 million of additional proceeds earned from the sale of
the fastener
business. No related income tax expense was recorded due to our
overall domestic
tax loss.
Segment
Results
PoloExpress
Segment
Our
PoloExpress segment designs and sells motorcycle apparel, protective
clothing,
helmets, and technical accessories for motorcyclists. As of December
31, 2006, PoloExpress operated 93 retail shops in Germany and
2 shops in
Switzerland. While the PoloExpress retail stores primarily sell
PoloExpress
brand products, these retail stores also sell products of other
manufacturers,
the inventory of which is owned by the Company. The PoloExpress
segment is a seasonal business, with an historic trend of a higher
volume of
sales and profits during March through September.
Sales
in our PoloExpress segment increased by $4.4 million, or 31.5%,
for the quarter
ended December 31, 2006 compared to the year-ago period. Retail sales
per square meter was $393 in the three months ended December
31, 2006 compared
to $339 in the three months ended December 31, 2005. This increase
resulted from an improvement in same store sales of 15.6% and
the effect of 5
stores, which were newly opened or relocated during fiscal
2006. Foreign currency exchange rates on the translation of European
sales into U.S. dollars changed favorably and increased our revenues
by
approximately $1.4 million in 2007. Operating income in our
PoloExpress segment decreased $0.1 million in the December 2006
quarter compared
to the year-ago period. This slight decrease in operating income
resulted from the impact of a newly opened shop in Switzerland.
Hein
Gericke Segment
Our
Hein Gericke segment designs and sells motorcycle apparel, protective
clothing,
helmets, and technical accessories for motorcyclists. As of December
31, 2006,
Hein Gericke operated 146 retail shops in Austria, Belgium, France,
Germany,
Italy, Luxembourg, the Netherlands, Turkey, and the United
Kingdom. Although the Hein Gericke retail stores primarily sell Hein
Gericke brand items, these retail stores also sell products of
other
manufacturers, the inventory of which is owned by the Company.
Fairchild Sports
USA, located in Tustin, California, designs and sells apparel
and accessories
under private labels for third parties and sells licensed product
to
Harley-Davidson dealers. The Hein Gericke segment is a seasonal
business, with
an historic trend of a higher volume of sales during March through
September.
Sales
in our Hein Gericke segment decreased $0.1 million, or 0.2%,
for the quarter
ended December 31, 2006 compared to the year-ago period. Sales at
Hein Gericke retail locations increased $2.6 million, or 15.5%,
for the quarter
ended December 31, 2006 compared to the quarter ended December
31,
2005. Retail sales per square meter increased to $378 for the
December 2006 quarter compared to $319 for the year-ago period. The
increase in Hein Gericke retail sales reflected a same store
sales increase of
5.8% in the December 2006 quarter. The improvement in retail sales
was offset by a $2.7 million decrease in sales at Fairchild Sports
USA, whose
operations were substantially downsized in fiscal 2006. Foreign
currency exchange rates on the translation of European sales
into U.S. dollars
changed favorably and increased our revenues by approximately
$1.5 million in
the December 2006 quarter compared to the December 2005 quarter. The
operating results in our Hein Gericke segment decreased by $1.5
million in the
quarter ended December 31, 2006, compared to the year-ago period,
due primarily
to a $1.4 million decline in operating results at Hein Gericke
Germany.
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
other components. Customers include original equipment manufacturers,
commercial airlines, corporate aircraft operators, fixed-base
operators, air
cargo carriers, general aviation suppliers, and the military. Sales
in our Aerospace segment increased by $4.8 million, 28.2%, for
the quarter ended
December 31, 2006 compared to the quarter ended December 31,
2005. This increase reflected an overall improvement in the areas of
the aerospace industry for which we provide products.
Operating
income increased $0.8 million to $1.4 million for the quarter
ended December 31,
2006 from $0.6 million for the year-ago period. The improved
operating income
resulted from increased sales accompanied by stable gross margin
and reduced
selling, general, and administrative expenses as a percentage
of sales in the
quarter ended December 31, 2006 compared to the quarter ended
December 31,
2005.
Corporate
and Other
Our
other operations consist of a 208,000 square foot manufacturing
facility located
in Fullerton, California that we own and lease to Alcoa, and
a 58,000 square
foot manufacturing facility located in Huntington Beach, California
that we own
and lease to PCA Aerospace. The Fullerton property is leased
to Alcoa through
October 2007. On October 31, 2007, we sold the Fullerton property to
Alcoa for $19.0 million.
The
Huntington Beach property is leased to PCA Aerospace through
October 2011 and is
expected to generate revenues and operating income of $0.4 million
per
year. In October 2007, we amended our arrangement with PCA Aerospace
whereby we can cause PCA Aerospace to purchase the Huntington
Beach property at
the greater of fair market value or $5.0 million under a put
option we hold
which can be exercised at any time through January 12, 2012. PCA
Aerospace also holds a similar purchase option. In November 2007,
we exercised
our put option. Accordingly, PCA Aerospace will have up to six months
to purchase the property from us at the fair market value, which
we believe is
$8.0 million. At December 31, 2006, the book value of the Huntington
Beach property was $2.9 million.
The
operating loss at corporate increased by $0.8 million for the
three months ended
December 31, 2006 compared to the three months ended December
31, 2005, due
primarily to the settlement of shareholder derivative litigation
during the
December 2005 quarter. We recognized a net reduction in general
and
administrative expenses of $3.2 million in the December 2005
quarter from net
proceeds we received as a result of settlement of shareholder
derivative
litigation. After adjusting for the one-time benefit in the December
2005 quarter from the shareholder litigation settlement, the
Company actually
experienced a $2.4 million decrease in operating loss. This
improvement primarily resulted from the $2.1 million gain recognized
on the full
collection of a note receivable in October 2006.
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total
capitalization as of December 31, 2006 and September 30, 2006
was $184.6 million
and $180.0 million, respectively. The three-month change in capitalization
included a net increase of $2.8 million in debt resulting from
$7.3 million of
additional borrowings from our credit facilities, offset partially
by
approximately $5.4 million of debt repayments and a $0.9 million
increase due to
the change in foreign currency on debt denominated in euros.
Equity increased by
$1.8 million, reflecting $5.3 million from other comprehensive
income offset
partially by our $3.5 million net loss. Our combined cash and
investment
balances totaled $115.1 million on December 31, 2006, as compared
to $130.4
million on September 30, 2006, and included restricted investments
of $70.9
million and $67.0 million at December 31, 2006 and September
30, 2006,
respectively.
Net
cash used for operating activities for the three months ended
December 31, 2006,
was $7.7 million and included a $20.5 million increase in net
operating assets,
principally related to the $12.5 million due from Alcoa and an
$8.9 million
increase in inventory, offset partially by $15.8 million of trading
securities
liquidated to fund our operating requirements. Net cash used for
operating activities for the three months ended December 31,
2005, was $8.0
million and included a $21.6 million increase in net operating
assets,
principally related to the $12.5 million due from Alcoa and a
$6.8 million
increase in inventory, offset partially by $9.5 million of trading
securities
liquidated to fund our operating requirements.
Net
cash provided by investing activities for the three months ended
December 31,
2006 was $3.0 million, and included $0.3 million of proceeds
received from
investment securities and $3.9 million from the collection of
notes receivable,
offset partially by $1.2 million of capital expenditures. Net cash
provided by investing activities for the three months ended December
31, 2005
was $7.7 million, and included $9.4 million of proceeds received
from investment
securities, offset partially by $2.3 million of capital
expenditures.
Net
cash provided by financing activities was $1.9 million for the
three months
ended December 31, 2006, which reflected $7.3 million received
on additional
borrowings, offset partially by $5.4 million of debt repayments. Net
cash provided by financing activities was $0.8 million for the
three months
ended December 31, 2005, which reflected $11.8 million of debt
repayments,
including the liquidation of the $100 million interest rate contract,
offset by
$12.8 million received on additional borrowings.
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.
Our
cash needs are generally the highest during our second and third
quarters of our
fiscal year, when our Hein Gericke and PoloExpress segments purchase
inventory
in advance of the spring and summer selling seasons. Accordingly,
€10.0 million
was available and utilized to finance the fiscal 2007 seasonal
trough to support
our PoloExpress operations, and €9.0 million will be available to finance the
fiscal 2008 season. We expect that cash on hand, including the
Alcoa earn-out
and escrow, the proceeds available from additional seasonal borrowings,
cash
available from lines of credit, and proceeds received from dispositions
of
short-term investments and other non-core assets, will be adequate
to satisfy
our cash requirements through December 2007.
Although
we believe that our relationship with the principal lenders to
our PoloExpress
and Hein Gericke segments is strong, a significant portion of
our debt
facilities are subject to annual renewal. We expect that the
facilities will be renewed annually in the normal course of
business. Should the lenders decide not to renew the facilities, we
believe that we could secure alternative funding sources on commercially
reasonable terms.
The
costs of being a small to mid-sized public company have increased
substantially
with the introduction and implementation of controls and procedures
mandated by
the Sarbanes-Oxley Act of 2002. Audit and corporate governance
related fees have
significantly increased over the past two years. Our increased
costs also
include the effects of acquisitions and additional costs related
to compliance
with various financing agreements. The costs to comply with Section
404 of the
Sarbanes-Oxley Act of 2002 alone substantially increased our
audit and related
costs to approximately $3.1 million in fiscal 2005, as compared
to only $1.6
million in fiscal 2004. This increase is significant for a company
of our
size. However, on March 31, 2006, our market capitalization was below
the $50.0 million threshold and remained below $75.0 million
as of March 31,
2007. Accordingly, on September 30, 2007, we will continue to be
deemed a non-accelerated filer in accordance with the United
States Securities
and Exchange Commission regulations and will not be required
to have an external
audit of our internal controls under Section 404 of the Sarbanes-Oxley
Act of
2002 in fiscal 2007. We did not have an external audit of our
internal controls resulting in a reduction in our audit fees
in fiscal
2006. However, audit expenses associated with the restatement
increased our 2006 audit fees to $3.5 million. As a result of
the escalating
costs, we decided to change our independent registered public
accountants in an
effort to bring audit expenses back in line with what is commercially
reasonable
for a company of our size.
We
considered additional options for reducing our public company
costs, including
opportunities to take our company private, or “going dark”. An offer to take our
company private at $2.73 per share, led by Jeffrey Steiner, our
Chairman and
Chief Executive Officer, and Philip Sassower, was terminated. As of
this date, no further discussions are on-going. However, our
senior management
will continue to pursue opportunities to reduce our public company
costs and our
corporate expenses and consider any other opportunities to restructure
our
existing debt and pursue additional merger, acquisition, and
divestiture
opportunities.
In
the event our cash needs are substantially higher than projected,
particularly
during the fiscal 2008 seasonal trough, we will take additional
actions to
generate the required cash. These actions may include one or any
combination of the following:
·
|
Liquidating
investments and other non-core
assets.
|
·
|
Refinancing
existing debt and borrowing additional funds which
may be available to us
from improved performance at our Aerospace and PoloExpress
operations or
increased values of certain real estate we
own.
|
·
|
Eliminating,
reducing, or delaying all non-essential services provided
by outside
parties, including consultants.
|
·
|
Significantly
reducing our corporate overhead
expenses.
|
·
|
Delaying
inventory purchases.
|
However,
if we need to implement one or more of these actions, there remains
some
uncertainty that we will actually receive a sufficient amount
of cash in time to
meet all of our needs during the fiscal 2008 seasonal trough. Even if
sufficient cash is realized, any or all of these actions may
have adverse
effects on our operating results or business.
We
may also consider raising cash to meet the subsequent needs of
our operations by
issuing additional stock or debt, entering into partnership arrangements,
liquidating one or more of our core businesses, or other means.
Should these
actions be insufficient, we may be forced to liquidate other
non essential
assets and significantly reduce overhead expenses.
Off
Balance Sheet Items
On
December 31, 2006, approximately $1.2 million of bank loans received
by retail
shop partners in the PoloExpress and Hein Gericke segments were
guaranteed by
our subsidiaries and are not reflected on our balance sheet because
these loans
have not been assumed by us. These guarantees were assumed by
us when we
acquired the PoloExpress and Hein Gericke businesses. We have
guaranteed loans
to shop partners for the purchase of store fittings in certain
locations where
we sell our products. The loans are secured by the store fittings
purchased to
outfit these retail stores.
Contractual
and Other Obligations
At
December 31, 2006, we had contractual commitments to repay debt,
to make
payments under operating and capital lease obligations, to make
pension
contribution payments, and to purchase the remaining 7.5% interest
in
PoloExpress. Our operations enter into purchase commitments in the
normal course of business.
Payments
due under our debt obligations, including capital lease obligations,
are
expected to be $24.0 million for the remainder of fiscal 2007,
$35.8 million in
fiscal 2008, $3.0 million in fiscal 2009, $30.4 million in fiscal
2010, $0.6
million in 2011, and none thereafter. Payments due under our
operating lease obligations will be $16.6 million for the remainder
of fiscal
2007, $17.5 million in fiscal 2008, $13.2 million in fiscal 2009,
$9.7 million
in fiscal 2010, $7.2 million in fiscal 2011, and $23.7 million
thereafter.
At
December 31, 2006, we had outstanding borrowings of $13.0 million
on a $20.0
million asset based revolving credit facility with CIT. The amount
that we can
borrow under the facility is based upon inventory and accounts receivable
at our
Aerospace segment, and $2.1 million was available for future
borrowings at
December 31, 2006. Borrowings under the facility are collateralized
by a
security interest in the assets of our Aerospace segment. The
loan bears
interest at 1.0% over prime (9.25% at December 31, 2006) and
we pay a non-usage
fee of 0.5%. The credit facility matures in January 2008. The
credit facility
requires that our Aerospace segment maintain compliance with
certain covenants.
The most restrictive of the covenants requires the borrowing
company, a
subsidiary of our Aerospace segment, to maintain a minimum net
worth on a
quarterly basis, of $14.0 million, plus 25% of cumulative net
earnings through
the end of the fiscal period. At December 31, 2006, the net worth of the
borrowing company was short of the covenant requirement by approximately
$0.3
million, which, at CIT’s option could result in an acceleration of the maturity
of the loan. However, we were in compliance with all covenants
under this credit
agreement, including the minimum net worth covenant, on March
31, 2007 and June
30, 2007. We are currently involved in discussions with CIT to
extend the
maturity of the loan and to receive a waiver from the minimum
net worth covenant
compliance for December 31, 2006. Management expects to continue
under the current terms and conditions of the arrangement until
renegotiation of
the credit facility is completed.
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 2008.
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
currently
project that the amount of our future contribution requirements
under the
Pension Protection Act of 2006 will be $5.1 million in 2008,
$7.2 million in
2009, $7.4 million in 2010, $7.4 million in 2011, and $18.9 million
thereafter.
In lieu of these changes, we are currently evaluating the pension
asset
portfolio mix to determine the appropriate level of maximizing
investment
returns while maintaining a reasonable and tolerable level of
risk.
In
addition, we are required to make annual cash contributions of
approximately
$0.3 million to fund a small pension plan.
We
have entered into standby letter of credit arrangements with
insurance companies
and others, issued primarily to guarantee our future performance
of contracts.
At December 31, 2006, we had contingent liabilities of $3.0 million
on
commitments related to outstanding letters of credit.
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 $46.3
million at December 31, 2006. However, based on tax planning
strategies, we do
not anticipate having to satisfy the tax liability over the
short-term. In March 2007, our tax liability was reduced by
approximately $32.8 million due to the expiration of the related
statute of
limitations and closure of the related tax period.
We
have $32.2 million classified as other long-term liabilities
at December 31,
2006, including $13.9 million due to purchase the remaining 7.5%
interest in
PoloExpress in April 2008. The remaining $18.3 million of other
long-term
liabilities includes environmental and other liabilities, which
do not have
specific payment terms or other similar contractual arrangements.
Should
any of these liabilities become immediately due, we may be obligated
to obtain
financing, raise capital, and/or liquidate assets to satisfy
our
obligations.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities, permitting entities
to elect fair value measurement for many financial instruments
and certain other
items. Unrealized gains and losses on designated items will be
recognized in
earnings at each subsequent period. SFAS No. 159 also establishes
presentation
and disclosure requirements for similar types of assets and liabilities
measured
at fair value. We are required to adopt this statement in October 2008 and
we are currently evaluating the potential impact to our future
results of
operations, financial position, and cash flows.
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for
measuring fair value in GAAP, and expands disclosures about fair
value
measurements. SFAS No. 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value
by providing a
fair value hierarchy used to classify the source of the information.
We are
required to adopt this statement in October 2008 and we are currently
evaluating the potential impact to our future results of operations,
financial
position, and cash flows.
In
September 2006, the FASB published SFAS No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Pension Plans
– an amendment of
FASB Statements No. 87, 88, 106, and 132(R). SFAS No. 158
requires an employer to recognize in its statement of financial
position the
overfunded or underfunded status of a defined benefit postretirement
plan
measured as the difference between the fair value of plan assets
and the benefit
obligation. Employers must also recognize as a component of other
comprehensive
income, net of tax, the actuarial gains and losses and the prior
service costs
and credits that arise during the period. SFAS No. 158 is effective
for fiscal
years ending after December 15, 2006 and will be adopted by the
Company as of
September 30, 2007. If SFAS No. 158 was adopted as of September 30,
2006, the Company would have recorded a reduction in prepaid
assets and other
assets of $18.1 million and $1.5 million, respectively, a decrease
in pension
liabilities of $2.6 million, and a charge to other comprehensive
income (loss)
of $17.0 million.
In
July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in
Income Taxes – an interpretation of FASB Statement No. 109. FIN
No. 48 requires the use of a two-step approach for recognizing
and measuring tax
benefits taken or expected to be taken in a tax return and disclosures
regarding
uncertainties in income tax positions. We are required to adopt
FIN No. 48
effective October 1, 2007. The cumulative effect of initially adopting FIN
No. 48 will be recorded as an adjustment to opening retained
earnings in the
year of adoption and will be presented separately. Only tax positions
that meet
the more likely than not recognition threshold at the effective
date may be
recognized upon adoption of FIN No. 48. We are currently evaluating
the impact
this new standard will have on our future results of operations,
financial
position, and cash flows.
We
are exposed to certain market risks as part of our ongoing business
operations,
including risks from changes in interest rates and foreign currency
exchange
rates that could impact our financial condition, results of operations
and cash
flows. We manage our exposure to these and other market risks
through regular
operating and financing activities. We may use derivative financial
instruments
on a limited basis as additional risk management tools and not
for speculative
investment purposes.
Interest
Rate Risk: In May 2004, we issued a floating rate note with a principal
amount of €25.0 million. Embedded within the promissory note agreement is
an
interest rate cap protecting one half of the €25.0 million borrowed. The
embedded interest rate cap limits to 6% the 3-month EURIBOR interest
rate that
we must pay on the promissory note. We paid approximately $0.1
million to
purchase the interest rate cap. In accordance with SFAS No. 133,
Accounting
for Derivative Instruments and Hedging Activities, the embedded interest
rate cap is considered to be clearly and closely related to the
debt of the host
contract and is not required to be separated and accounted for
separately from
the host contract. We are accounting for the hybrid contract,
comprised of the
variable rate note and the embedded interest rate cap, as a single
debt
instrument. At December 31, 2006, the fair value of this instrument
is
nominal.
Essentially
all of our other outstanding debt is variable rate debt. We are
exposed to risks of rising interest rates, which could result
in rising interest
costs.
Foreign
Currency Risk: We are exposed to foreign currency risks that arise from
normal business operations. These risks include the translation
of local
currency balances of our foreign subsidiaries, intercompany
loans with foreign
subsidiaries and transactions denominated in foreign currencies.
Our objective
is to minimize our exposure to these risks through our normal
operating
activities and, if we deem it appropriate, we may consider
utilizing foreign
currency forward contracts in the future. For the three months
ended December
31, 2006, we estimate that approximately 62% of our total revenues
were derived
from customers outside of the United States, with approximately
62% of our total
revenues denominated in currencies other than the U.S. dollar.
We estimate that
revenue and operating expenses for the three months ended December
31, 2006 were
higher by $2.9 million and $1.9 million, respectively, as a
result of changes in
exchange rates compared to the three months ended December
31, 2005. At December
31, 2006, we had $45.5 million of working capital denominated in foreign
currencies. At December 31, 2006, we had no outstanding foreign
currency forward
contracts. The following table shows the approximate split
of these foreign
currency exposures by principal currency at December 31,
2006:
|
|
|
|
Total
|
|
Euro
|
British
Pound
|
Swiss
Franc
|
Exposure
|
Revenues
|
74%
|
24%
|
2%
|
100%
|
Operating
Expenses
|
79%
|
19%
|
2%
|
100%
|
Working
Capital
|
86%
|
12%
|
2%
|
100%
|
A
hypothetical 10% strengthening of the U.S. dollar during the
quarter ended
December 31, 2006 versus the foreign currencies in which we
have exposure would
have reduced revenue by approximately $3.4 million and reduced operating
expenses by approximately $2.3 million, resulting in a $1.1 million
improvement in our operating loss as compared to what was actually
reported.
Working capital at December 31, 2006, would have been approximately
$4.1 million lower than actually reported, if we had used this hypothetical
stronger U.S. dollar.
Inflation:
We believe that inflation has not had a material impact
on our results of
operations for the three months ended December 31, 2006. However,
we cannot
assure you that future inflation would not have an adverse
impact on our
operating results and financial condition.
Material
Weaknesses in Disclosure Controls and Procedures
As
described in Item 9A of our Annual Report on Form 10-K for the
fiscal year ended
September 30, 2006, our management evaluated the effectiveness
of our disclosure
controls and procedures as of September 30, 2006, and based on
this evaluation,
noted the continued existence of a material weaknesses in our
disclosure
controls and procedures related to accounting for income taxes
and accounting
for complex and non-routine transactions in accordance with U.S.
generally
accepted accounting principles. A material weakness is a significant
deficiency,
as defined in Public Company Accounting Oversight Board Auditing
Standard No. 2,
or a combination of significant deficiencies, that results in
more than a remote
likelihood that a material misstatement of a company’s annual or interim
financial statements would not be prevented or detected by company
personnel in
the normal course of performing their assigned functions.
Changes
in Disclosure Controls and Procedures
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.
Notwithstanding
the foregoing efforts, we are continuing to undertake steps to
resolve the
material weaknesses described above. During the quarter ended
December 31, 2006, we hired an additional person with significant
technical
accounting experience. Additionally, we accelerated the timing of
internal communication to discuss the accounting for non-routine
or complex
transactions. Subsequent to December 31, 2006, we hired an additional
person with significant tax experience. However, a determination that
these material weaknesses have been corrected can only be substantiated
by the
passage of time and displayed by staff performance.
Evaluation
of Disclosure Controls and Procedures
Our
Chief Executive Officer and our Chief Financial Officer have
concluded, based on
an evaluation of the effectiveness of our disclosure controls
and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange
Act of 1934)
by our management, with the participation of our Chief Executive
Officer and our
Chief Financial Officer, that, as a result of the material weaknesses
described
above, such disclosure controls were not effective as of the
end of the period
covered by this report.
PART
II. OTHER INFORMATION
The
information required to be disclosed under this Item is set forth
in Footnote 8
(Contingencies) of the condensed consolidated financial statements
(unaudited)
included in this Form 10-Q.
A
description of the risks associated with our business, financial
condition, and
results of operations is set forth in Part I, Item 1A, of our
Annual Report on
Form 10-K for the fiscal year ended September 30, 2006. There
have been no
material changes in our risks from such description.
There
were no unregistered sales of equity securities.
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, Virginia 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.
* 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 |
|
|
Chief
Financial Officer |
Date: November
30, 2007