UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the Quarterly Period Ended June 30, 2007
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 JUNE 30, 2007
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
|
Page
|
|
|
|
Item
1.
|
|
3
|
|
|
|
|
|
|
|
and
2006 (unaudited)
|
5
|
|
|
|
|
|
|
|
and
2006 (unaudited)
|
6
|
|
|
|
|
|
7
|
|
|
|
Item
2.
|
|
22
|
|
|
|
Item
3.
|
|
31
|
|
|
|
Item
4.
|
|
33
|
|
|
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
|
34
|
|
|
|
Item
1A.
|
|
34
|
|
|
|
Item
2.
|
|
34
|
|
|
|
Item
5.
|
|
34
|
|
|
|
Item
6.
|
|
34
|
All
references in this Quarterly Report on Form 10-Q to the terms ‘‘we,’’ ‘‘our,’’
‘‘us,’’ the ‘‘Company’’ and ‘‘Fairchild’’ refer to The Fairchild Corporation and
its subsidiaries. All references to ‘‘fiscal’’ in connection with a year shall
mean the 12 months ended September 30th.
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
THE
FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
(In
thousands)
ASSETS
|
|
June
30, 2007
|
|
|
September
30, 2006
|
|
CURRENT
ASSETS:
|
|
(Unaudited)
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
10,428
|
|
|
$ |
8,541
|
|
Short-term
investments - unrestricted
|
|
|
5,363
|
|
|
|
50,510
|
|
Short-term
investments - restricted
|
|
|
49,379
|
|
|
|
6,002
|
|
Accounts
receivable-trade, less allowances of $1,226 and $1,083
|
|
|
18,226
|
|
|
|
16,927
|
|
Finished
goods inventories, less reserves of $16,054 and $15,223
|
|
|
137,162
|
|
|
|
106,718
|
|
Prepaid
expenses and other current assets
|
|
|
14,195
|
|
|
|
10,795
|
|
Total
Current Assets
|
|
|
234,753
|
|
|
|
199,493
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net of accumulated
|
|
|
|
|
|
|
|
|
depreciation
of $31,143 and $24,989
|
|
|
61,846
|
|
|
|
58,698
|
|
Goodwill
|
|
|
12,346
|
|
|
|
14,128
|
|
Amortizable
intangible assets, net of accumulated amortization of $2,105
and
$1,673
|
|
|
867
|
|
|
|
1,279
|
|
Unamortizable
intangible assets
|
|
|
33,037
|
|
|
|
30,969
|
|
Prepaid
pension assets
|
|
|
34,648
|
|
|
|
33,373
|
|
Deferred
loan fees
|
|
|
1,710
|
|
|
|
3,170
|
|
Long-term
investments - unrestricted
|
|
|
3,499
|
|
|
|
4,370
|
|
Long-term
investments - restricted
|
|
|
22,051
|
|
|
|
60,949
|
|
Notes
receivable
|
|
|
3,255
|
|
|
|
5,396
|
|
Other
assets
|
|
|
4,391
|
|
|
|
3,304
|
|
TOTAL
ASSETS
|
|
$ |
412,403
|
|
|
$ |
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
|
|
June
30, 2007
|
|
|
September
30, 2006
|
|
|
|
(Unaudited)
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
Bank
notes payable and current maturities of long-term debt
|
|
$ |
47,699
|
|
|
$ |
25,492
|
|
Accounts
payable
|
|
|
51,634
|
|
|
|
26,325
|
|
Accrued
liabilities:
|
|
|
|
|
|
|
|
|
Salaries,
wages and commissions
|
|
|
10,501
|
|
|
|
10,044
|
|
Insurance
|
|
|
7,394
|
|
|
|
7,357
|
|
Interest
|
|
|
1,437
|
|
|
|
1,810
|
|
Other
accrued liabilities
|
|
|
27,776
|
|
|
|
28,304
|
|
Income
taxes
|
|
|
1,167
|
|
|
|
2,314
|
|
Current
liabilities of discontinued operations
|
|
|
-
|
|
|
|
62
|
|
Total
Current Liabilities
|
|
|
147,608
|
|
|
|
101,708
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES:
|
|
|
|
|
|
|
|
|
Long-term
debt, less current maturities
|
|
|
27,554
|
|
|
|
65,450
|
|
Other
long-term liabilities
|
|
|
31,511
|
|
|
|
31,750
|
|
Pension
liabilities
|
|
|
40,905
|
|
|
|
40,622
|
|
Retiree
health care liabilities
|
|
|
24,196
|
|
|
|
26,008
|
|
Deferred
tax liability
|
|
|
4,811
|
|
|
|
4,530
|
|
Noncurrent
income taxes
|
|
|
7,582
|
|
|
|
39,923
|
|
Noncurrent
liabilities of discontinued operations
|
|
|
16,120
|
|
|
|
16,120
|
|
TOTAL
LIABILITIES
|
|
|
300,287
|
|
|
|
326,111
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
Class
A common stock, $0.10 par value; 40,000 shares authorized,
|
|
|
|
|
|
|
|
|
30,480
shares issued and 22,605 shares outstanding;
|
|
|
|
|
|
|
|
|
entitled
to one vote per share
|
|
|
3,047
|
|
|
|
3,047
|
|
Class
B common stock, $0.10 par value; 20,000 shares authorized,
|
|
|
|
|
|
|
|
|
2,621
shares issued and outstanding; entitled
|
|
|
|
|
|
|
|
|
to
ten votes per share
|
|
|
262
|
|
|
|
262
|
|
Paid-in
capital
|
|
|
232,632
|
|
|
|
232,612
|
|
Treasury
stock, at cost, 7,875 shares of Class A common stock
|
|
|
(76,352 |
) |
|
|
(76,352 |
) |
Retained
earnings (accumulated deficit)
|
|
|
4,404
|
|
|
|
(15,680 |
) |
Notes
due from stockholders
|
|
|
(43 |
) |
|
|
(43 |
) |
Accumulated
other comprehensive loss
|
|
|
(51,834 |
) |
|
|
(54,828 |
) |
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
112,116
|
|
|
|
89,018
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
412,403
|
|
|
$ |
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
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
REVENUE:
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
Net
sales
|
|
$ |
117,928
|
|
|
$ |
105,578
|
|
|
$ |
259,088
|
|
|
$ |
219,615
|
|
Rental
revenue
|
|
|
237
|
|
|
|
237
|
|
|
|
712
|
|
|
|
713
|
|
|
|
|
118,165
|
|
|
|
105,815
|
|
|
|
259,800
|
|
|
|
220,328
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
65,893
|
|
|
|
61,376
|
|
|
|
153,171
|
|
|
|
132,440
|
|
Cost
of rental revenue
|
|
|
56
|
|
|
|
60
|
|
|
|
174
|
|
|
|
167
|
|
Selling,
general & administrative expense
|
|
|
49,629
|
|
|
|
44,367
|
|
|
|
126,387
|
|
|
|
108,848
|
|
Other
income, net
|
|
|
(595 |
) |
|
|
(2,527 |
) |
|
|
(4,460 |
) |
|
|
(3,811 |
) |
Amortization
of intangibles
|
|
|
145
|
|
|
|
135
|
|
|
|
423
|
|
|
|
391
|
|
|
|
|
115,128
|
|
|
|
103,411
|
|
|
|
275,695
|
|
|
|
238,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME (LOSS)
|
|
|
3,037
|
|
|
|
2,404
|
|
|
|
(15,895 |
) |
|
|
(17,707 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(2,780 |
) |
|
|
(2,788 |
) |
|
|
(11,927 |
) |
|
|
(7,546 |
) |
Interest
income
|
|
|
729
|
|
|
|
616
|
|
|
|
2,479
|
|
|
|
1,575
|
|
Net
interest expense
|
|
|
(2,051 |
) |
|
|
(2,172 |
) |
|
|
(9,448 |
) |
|
|
(5,971 |
) |
Investment
income
|
|
|
3,536
|
|
|
|
396
|
|
|
|
5,467
|
|
|
|
1,713
|
|
Increase
in fair market value of interest rate contract
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
836
|
|
Income
(loss) from continuing operations before taxes
|
|
|
4,522
|
|
|
|
628
|
|
|
|
(19,876 |
) |
|
|
(21,129 |
) |
Income
tax provision
|
|
|
(110 |
) |
|
|
(1,580 |
) |
|
|
(766 |
) |
|
|
(1,562 |
) |
Equity
in earnings (loss) of affiliates, net
|
|
|
-
|
|
|
|
1
|
|
|
|
89
|
|
|
|
(42 |
) |
Income
(loss) from continuing operations
|
|
|
4,412
|
|
|
|
(951 |
) |
|
|
(20,553 |
) |
|
|
(22,733 |
) |
Loss
from discontinued operations, net
|
|
|
(1,934 |
) |
|
|
(1,192 |
) |
|
|
(4,678 |
) |
|
|
(982 |
) |
Gain
on disposal of discontinued operations, net
|
|
|
-
|
|
|
|
1,000
|
|
|
|
45,315
|
|
|
|
13,500
|
|
NET
EARNINGS (LOSS)
|
|
$ |
2,478
|
|
|
$ |
(1,143 |
) |
|
$ |
20,084
|
|
|
$ |
(10,215 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED EARNINGS (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
0.18
|
|
|
$ |
(0.04 |
) |
|
$ |
(0.81 |
) |
|
$ |
(0.90 |
) |
Loss
from discontinued operations, net
|
|
|
(0.08 |
) |
|
|
(0.05 |
) |
|
|
(0.19 |
) |
|
|
(0.04 |
) |
Gain
on disposal of discontinued operations, net
|
|
|
-
|
|
|
|
0.04
|
|
|
|
1.80
|
|
|
|
0.54
|
|
NET
EARNINGS (LOSS) PER SHARE
|
|
$ |
0.10
|
|
|
$ |
(0.05 |
) |
|
$ |
0.80
|
|
|
$ |
(0.40 |
) |
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
25,226
|
|
|
|
25,226
|
|
|
|
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)
|
|
Nine
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(Restated)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
earnings (loss)
|
|
$ |
20,084
|
|
|
$ |
(10,215 |
) |
Depreciation
and amortization
|
|
|
6,311
|
|
|
|
5,057
|
|
Non-cash
interest expense
|
|
|
3,217
|
|
|
|
815
|
|
Gain
on collection of note receivable
|
|
|
(2,110 |
) |
|
|
-
|
|
Stock
compensation expense
|
|
|
20
|
|
|
|
133
|
|
Increase
in fair market value of interest rate contract
|
|
|
-
|
|
|
|
(836 |
) |
Equity
in (earnings) loss of affiliates, net of distributions
|
|
|
(89 |
) |
|
|
42
|
|
Gain
on sale of investments
|
|
|
(4,491 |
) |
|
|
(902 |
) |
Net
proceeds from the sale of trading securities
|
|
|
42,797
|
|
|
|
11,147
|
|
Changes
in operating assets and liabilities
|
|
|
(11,210 |
) |
|
|
(8,462 |
) |
Non-cash
charges and working capital changes of discontinued
operations
|
|
|
(45,378 |
) |
|
|
(13,003 |
) |
Net
cash provided by (used for) operating activities
|
|
|
9,151
|
|
|
|
(16,224 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(7,760 |
) |
|
|
(5,924 |
) |
Change
in available-for-sale investment securities, net
|
|
|
1,802
|
|
|
|
(12,207 |
) |
Equity
investment in affiliates
|
|
|
-
|
|
|
|
(44 |
) |
Proceeds
from sale of equity investment in affiliates
|
|
|
95
|
|
|
|
-
|
|
Net
proceeds from the sale of discontinued operations
|
|
|
12,500
|
|
|
|
13,850
|
|
Collections
of notes receivable
|
|
|
4,048
|
|
|
|
548
|
|
Net
cash used for investing activities of discontinued
operations
|
|
|
-
|
|
|
|
(98 |
) |
Net
cash provided by (used for) investing activities
|
|
|
10,685
|
|
|
|
(3,875 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of debt
|
|
|
14,703
|
|
|
|
49,503
|
|
Debt
repayments
|
|
|
(32,935 |
) |
|
|
(25,613 |
) |
Payment
of interest rate contract
|
|
|
-
|
|
|
|
(4,310 |
) |
Payment
of financing fees
|
|
|
(25 |
) |
|
|
(2,400 |
) |
Loan
repayments from stockholders
|
|
|
-
|
|
|
|
66
|
|
Net
cash used for financing activities of discontinued
operations
|
|
|
-
|
|
|
|
(504 |
) |
Net
cash provided by (used for) financing activities
|
|
|
(18,257 |
) |
|
|
16,742
|
|
Net
change in cash and cash equivalents
|
|
|
1,579
|
|
|
|
(3,357 |
) |
Effect
of exchange rate changes on cash
|
|
|
308
|
|
|
|
370
|
|
Cash
and cash equivalents, beginning of the period
|
|
|
8,541
|
|
|
|
12,582
|
|
Cash
and cash equivalents, end of the period
|
|
$ |
10,428
|
|
|
$ |
9,595
|
|
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 June 30, 2007, and the condensed
consolidated statements of operations, and cash flows for the periods ended
June
30, 2007 and 2006 have been prepared by us, without audit. In the
opinion of management, all adjustments necessary to present fairly the
financial
position, results of operations, and cash flows at June 30, 2007, 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 nine months ended June 30, 2007
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 June 30, 2007 and 2006 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 and nine months ended June 30,
2007 and
2006. No tax benefit and deferred tax asset 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 June 30, 2007,
outstanding stock options on Class A common stock reflected only those
stock
options granted prior to the expiration of the plans. During the nine
months ended June 30, 2006, the Company granted 3,000 stock options at
a
weighted-average exercise price of $2.46 per share. On June 30, 2007,
we had outstanding stock option awards of 317,917, of which 227,917 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
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
earnings (loss) |
|
$ |
2,478 |
|
|
$ |
(1,143 |
) |
|
$ |
20,084 |
|
|
$ |
(10,215 |
) |
Unrealized
periodic holding gains (losses) on available-for-sale
securities
|
|
|
(3,378 |
) |
|
|
888
|
|
|
|
(1,431 |
) |
|
|
4,005
|
|
Foreign
currency translation adjustments
|
|
|
607
|
|
|
|
1,927
|
|
|
|
4,425
|
|
|
|
1,993
|
|
Unrealized
holding gains on derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
299
|
|
Other
comprehensive income (loss)
|
|
$ |
(293 |
) |
|
$ |
1,672
|
|
|
$ |
23,078
|
|
|
$ |
(3,918
|
) |
The
components of accumulated other comprehensive loss were:
(In
thousands)
|
|
June
30, 2007
|
|
|
September
30, 2006
|
|
Unrealized
holding gains on available-for-sale securities
|
|
$ |
4,128
|
|
|
$ |
5,559
|
|
Foreign
currency translation adjustments
|
|
|
6,061
|
|
|
|
1,636
|
|
Excess
of additional pension liability over unrecognized prior service
costs
|
|
|
(62,023 |
) |
|
|
(62,023 |
) |
Accumulated
other comprehensive loss
|
|
$ |
(51,834 |
) |
|
$ |
(54,828 |
) |
Recently
Issued Accounting Pronouncements
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities, permitting entities to elect fair value measurement for many
financial instruments and certain other items. Unrealized gains and losses
on
designated items will be recognized in earnings at each subsequent period.
SFAS
No. 159 also establishes presentation and disclosure requirements for similar
types of assets and liabilities measured at fair value. We are required
to adopt
this statement in October 2008 and we are currently evaluating the
potential impact to our future results of operations, financial position,
and
cash flows.
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for
measuring fair value in GAAP, and expands disclosures about fair value
measurements. SFAS No. 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing
a
fair value hierarchy used to classify the source of the information. We
are
required to adopt this statement in October 2008 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 management’s review of
the Company’s historical financial statements, additional errors were
identified. The consolidated financial statements for the three and
nine months ended June 30, 2006 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 loss for the three
and nine
months ended June 30, 2006 decreased by $0.2 million ($0.00 per share)
and $1.3
million ($0.06 per share), respectively. 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.
The
following table summarizes the impact of the restatement adjustments on
net loss
and basic and diluted earnings (loss) per share for the three and nine
months
ended June 30, 2006.
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(In
thousands, except per share data)
|
|
June
30, 2006
|
|
|
June
30, 2006
|
|
Net
loss, as previously reported
|
|
$ |
(1,293 |
) |
|
$ |
(11,536 |
) |
Restatement
adjustments for:
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
1,390
|
|
|
|
1,477
|
|
Long-term
investments
|
|
|
191
|
|
|
|
1,169
|
|
Income
taxes
|
|
|
(1,431 |
) |
|
|
(1,325 |
) |
Net
loss, as restated
|
|
$ |
(1,143 |
) |
|
$ |
(10,215 |
) |
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
As
previously reported
|
|
$ |
(0.05 |
) |
|
$ |
(0.46 |
) |
Total
impact of restatement adjustments
|
|
|
0.00
|
|
|
|
0.06
|
|
As
restated
|
|
$ |
(0.05 |
) |
|
$ |
(0.40 |
) |
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
June
30, 2006.
|
|
|
|
|
Restatement
Adjustments for:
|
|
|
|
|
|
|
|
(In
thousands)
|
|
As
Previously Reported
|
|
|
Income
Taxes
|
|
|
Commitments
and Contingencies
|
|
|
Long-term
Investments
|
|
|
Total
Restatement Adjustments
|
|
|
As
Restated
|
|
Revenues
|
|
$ |
105,815
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
105,815
|
|
Cost
of revenues
|
|
|
61,436
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
61,436
|
|
Other
operating expenses
|
|
|
41,965
|
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
10
|
|
|
|
41,975
|
|
Operating
income
|
|
|
2,414
|
|
|
|
-
|
|
|
|
(10 |
) |
|
|
-
|
|
|
|
(10 |
) |
|
|
2,404
|
|
Net
interest expense
|
|
|
(2,230 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
58
|
|
|
|
58
|
|
|
|
(2,172 |
) |
Investment
income
|
|
|
396
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
396
|
|
Income
from continuing operations before taxes
|
|
|
580
|
|
|
|
-
|
|
|
|
(10 |
) |
|
|
58
|
|
|
|
48
|
|
|
|
628
|
|
Income
tax provision
|
|
|
(149 |
) |
|
|
(1,431 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(1,431 |
) |
|
|
(1,580 |
) |
Equity
in earnings (loss) of affiliates, net
|
|
|
(132 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
133
|
|
|
|
133
|
|
|
|
1
|
|
Income
(loss) from continuing operations
|
|
|
299
|
|
|
|
(1,431 |
) |
|
|
(10 |
) |
|
|
191
|
|
|
|
(1,250 |
) |
|
|
(951 |
) |
Loss
from discontinued operations, net
|
|
|
(2,592 |
) |
|
|
-
|
|
|
|
1,400
|
|
|
|
-
|
|
|
|
1,400
|
|
|
|
(1,192 |
) |
Gain
on disposal of discontinued operations, net
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
Net
loss
|
|
$ |
(1,293 |
) |
|
$ |
(1,431 |
) |
|
$ |
1,390
|
|
|
$ |
191
|
|
|
$ |
150
|
|
|
$ |
(1,143 |
) |
The
following table displays the cumulative impact of the restatement on the
condensed consolidated statements of operations for the nine months ended
June
30, 2006.
|
|
|
|
|
Restatement
Adjustments for:
|
|
|
|
|
|
|
|
(In
thousands)
|
|
As
Previously Reported (a)
|
|
|
Income
Taxes
|
|
|
Commitments
and Contingencies
|
|
|
Long-term
Investments
|
|
|
Total
Restatement Adjustments
|
|
|
As
Restated
|
|
Revenues
|
|
$ |
220,328
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
220,328
|
|
Cost
of revenues
|
|
|
132,607
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
132,607
|
|
Other
operating expenses
|
|
|
105,348
|
|
|
|
-
|
|
|
|
80
|
|
|
|
-
|
|
|
|
80
|
|
|
|
105,428
|
|
Operating
loss
|
|
|
(17,627 |
) |
|
|
-
|
|
|
|
(80 |
) |
|
|
-
|
|
|
|
(80 |
) |
|
|
(17,707 |
) |
Net
interest expense
|
|
|
(6,208 |
) |
|
|
-
|
|
|
|
157
|
|
|
|
80
|
|
|
|
237
|
|
|
|
(5,971 |
) |
Investment
income
|
|
|
1,713
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,713
|
|
Increase
in fair market value of interest rate contract
|
|
|
836
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
836
|
|
Loss
from continuing operations before taxes
|
|
|
(21,286 |
) |
|
|
-
|
|
|
|
77
|
|
|
|
80
|
|
|
|
157
|
|
|
|
(21,129 |
) |
Income
tax provision
|
|
|
(237 |
) |
|
|
(1,325 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(1,325 |
) |
|
|
(1,562 |
) |
Equity
in loss of affiliates, net
|
|
|
(1,131 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
1,089
|
|
|
|
1,089
|
|
|
|
(42 |
) |
Loss
from continuing operations
|
|
|
(22,654 |
) |
|
|
(1,325 |
) |
|
|
77
|
|
|
|
1,169
|
|
|
|
(79 |
) |
|
|
(22,733 |
) |
Loss
from discontinued operations, net
|
|
|
(2,382 |
) |
|
|
-
|
|
|
|
1,400
|
|
|
|
-
|
|
|
|
1,400
|
|
|
|
(982 |
) |
Gain
on disposal of discontinued operations, net
|
|
|
13,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,500
|
|
Net
loss
|
|
$ |
(11,536 |
) |
|
$ |
(1,325 |
) |
|
$ |
1,477
|
|
|
$ |
1,169
|
|
|
$ |
1,321
|
|
|
$ |
(10,215 |
) |
(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:
|
|
June
30, 2007
|
|
|
September
30, 2006
|
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
|
Fair
|
|
|
Cost
|
|
|
Fair
|
|
|
Cost
|
|
(In
thousands)
|
|
Value
|
|
|
Basis
|
|
|
Value
|
|
|
Basis
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market and other cash funds
|
|
$ |
10,428
|
|
|
$ |
10,428
|
|
|
$ |
8,541
|
|
|
$ |
8,541
|
|
Total
cash and cash equivalents
|
|
|
10,428
|
|
|
|
10,428
|
|
|
|
8,541
|
|
|
|
8,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds – available-for-sale – restricted
|
|
|
11,517
|
|
|
|
11,517
|
|
|
|
6,002
|
|
|
|
6,002
|
|
Corporate
bonds – available-for-sale – restricted
|
|
|
23,768
|
|
|
|
23,846
|
|
|
|
-
|
|
|
|
-
|
|
Corporate
bonds – trading securities
|
|
|
3,462
|
|
|
|
3,462
|
|
|
|
42,919
|
|
|
|
42,919
|
|
Equity
securities – trading securities
|
|
|
122
|
|
|
|
122
|
|
|
|
2,459
|
|
|
|
2,459
|
|
Equity
and equivalent securities – available-for-sale
|
|
|
1,779
|
|
|
|
825
|
|
|
|
5,132
|
|
|
|
825
|
|
Equity
and equivalent securities – available-for-sale –
restricted
|
|
|
14,094
|
|
|
|
12,202
|
|
|
|
-
|
|
|
|
-
|
|
Total
short-term investments
|
|
|
54,742
|
|
|
|
51,974
|
|
|
|
56,512
|
|
|
|
52,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government securities – available-for-sale – restricted
|
|
|
-
|
|
|
|
-
|
|
|
|
512
|
|
|
|
512
|
|
Money
market funds – available-for-sale – restricted
|
|
|
6,576
|
|
|
|
6,576
|
|
|
|
10,313
|
|
|
|
10,313
|
|
Corporate
bonds – available-for-sale – restricted
|
|
|
9,464
|
|
|
|
9,464
|
|
|
|
28,934
|
|
|
|
29,326
|
|
Equity
and equivalent securities – available-for-sale –
restricted
|
|
|
6,011
|
|
|
|
4,652
|
|
|
|
9,275
|
|
|
|
7,984
|
|
Other
securities – available-for-sale – restricted
|
|
|
-
|
|
|
|
-
|
|
|
|
11,915
|
|
|
|
11,565
|
|
Other
investments, at cost
|
|
|
3,499
|
|
|
|
3,499
|
|
|
|
4,370
|
|
|
|
4,370
|
|
Total
long-term investments
|
|
|
25,550
|
|
|
|
24,191
|
|
|
|
65,319
|
|
|
|
64,070
|
|
Total
cash equivalents and investments
|
|
$ |
90,720
|
|
|
$ |
86,593
|
|
|
$ |
130,372
|
|
|
$ |
124,816
|
|
On
June 30, 2007 and September 30, 2006, we had restricted investments of
$71.4
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 June 30, 2007 and September 30, 2006,
cash
of $5.3 million and $3.4 million, respectively, is held by our European
subsidiaries which have debt agreements that place restrictions on the
amount of
cash that may be transferred outside the borrowing companies. For additional
information on debt see Note 4.
On
June 30, 2007, we had gross unrealized holding gains from available-for-sale
securities of $4.2 million and gross unrealized losses from available-for-sale
securities of $0.1 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
June 30, 2007 and September 30, 2006, notes payable and long-term debt
consisted
of the following:
(In
thousands)
|
|
June
30, 2007
|
|
|
September
30, 2006
|
|
Revolving
credit facilities – Hein Gericke
|
|
$ |
12,489
|
|
|
$ |
11,425
|
|
Current
maturities of long-term debt
|
|
|
35,210
|
|
|
|
14,067
|
|
Total
notes payable and current maturities of long-term debt
|
|
|
47,699
|
|
|
|
25,492
|
|
GoldenTree
term loan – Corporate
|
|
|
20,938
|
|
|
|
30,000
|
|
Term
loan agreement – Hein Gericke
|
|
|
4,245
|
|
|
|
6,090
|
|
Term
loan agreement – PoloExpress
|
|
|
7,950
|
|
|
|
11,292
|
|
Promissory
note – Corporate
|
|
|
13,000
|
|
|
|
13,000
|
|
CIT
revolving credit facility – Aerospace
|
|
|
8,942
|
|
|
|
9,603
|
|
GMAC
credit facility – Hein Gericke
|
|
|
3,687
|
|
|
|
3,118
|
|
Other
notes payable, collateralized by assets
|
|
|
2,990
|
|
|
|
3,837
|
|
Capital
lease obligations
|
|
|
1,012
|
|
|
|
2,577
|
|
Less:
current maturities of long-term debt
|
|
|
(35,210 |
) |
|
|
(14,067 |
) |
Net
long-term debt
|
|
|
27,554
|
|
|
|
65,450
|
|
Total
debt
|
|
$ |
75,253
|
|
|
$ |
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 June 30, 2007, 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
$36.3
million at June 30, 2007.
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 June 30, 2007, 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 ($14.8
million at June 30, 2007) 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
(5.41% at June 30, 2007) when utilized as a short-term credit facility
and 2.75%
over the European Overnight Interest Average rate (6.89% at June 30, 2007)
when
utilized as an overdraft facility. In addition, we must pay a 1.25%
per annum non-utilization fee on the available facility during the seasonal
drawing period. The seasonal financing facility is 80% guaranteed by the
German
State of North Rhine-Westphalia. The seasonal facility will reduce by €1.0
million per year and expires on June 30, 2008. On November 30, 2006,
we amended the seasonal credit line with Stadtsparkasse Düsseldorf to include
HSBC Trinkaus & Burkhardt AG as a second lender. This amendment allows us to
borrow the entire €10.0 million ($13.5 million at June 30, 2007) facility for
the 2007 season.
At
June 30, 2007, our German subsidiary, Hein Gericke Deutschland GmbH, and
its
German subsidiary, PoloExpress, had outstanding borrowings of $24.7 million
(€18.3 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 ($12.5 million
outstanding and $1.0 million available at June 30, 2007), at interest rates
of
3.5% over the three-month Euribor (7.41% at June 30, 2007), which matures
annually. For this revolving credit line, we must pay a 1.25% per
annum non-utilization fee. Outstanding borrowings under the term loan
facilities have blended interest rates, with $10.8 million (€8.1 million)
bearing interest at 1% over the three-month Euribor rate (4.91% at June
30,
2007), with an interest rate cap protection in which our interest expense
would
not exceed 6% on 50% of debt, and the remaining $1.3 million (€1.0 million)
bearing interest at a fixed rate of 6%. The term loans mature on March
31, 2009,
and are secured by the assets of Hein Gericke Deutschland GmbH and PoloExpress
and specified guarantees provided by the German State of North
Rhine-Westphalia.
The
loan agreements require Hein Gericke Deutschland and PoloExpress to maintain
compliance with certain covenants. The most restrictive of the covenants
requires Hein Gericke Deutschland to maintain equity of €44.5 million
($60.0 million at June 30, 2007), as defined in the loan
contracts. At June 30, 2007, equity was €56.2 million ($75.7
million), which exceeded by €11.7 million ($15.7 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 June 30, 2007, Hein Gericke borrowed
approximately $29.5 million (€21.9 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 ($67.4 million). At June
30, 2007, inventory and accounts receivable at Hein Gericke Deutschland
and
PoloExpress were €84.6 million ($114.0 million), which exceeded by €34.6 million
($46.4 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 June 30, 2007, we were
in
compliance with the loan covenants.
At
June 30, 2007, our subsidiary, Hein Gericke UK Ltd had outstanding borrowings
of
$3.7 million (£1.8 million) on its £5.0 million ($10.0 million) credit facility
with GMAC. The loan bears interest at 2.25% above the base rate of Lloyds
TSB
Bank Plc (7.75% at June 30, 2007) and matures on April 30, 2008. We
must pay a 0.75% per annum non-utilization fee on the available facility.
The
financing is secured by the inventory of Hein Gericke UK Ltd and an investment
with a fair market value of $5.5 million at June 30, 2007. The most restrictive
covenant requires Hein Gericke UK to maintain a maximum level of inventory
turns
(“Inventory Turns”) as defined. At June 30, 2007, Hein Gericke UK was
in compliance with the Inventory Turns covenant.
Credit
Facility at Aerospace Segment
At
June 30, 2007, we had outstanding borrowings of $8.9 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 $2.8 million was available for future borrowings
at June
30, 2007. Borrowings under the facility are collateralized by a security
interest in the assets of our Aerospace segment. The loan bears interest
at 1.0%
over prime (9.25% at June 30, 2007) 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.
Promissory
Note – Corporate
At
June 30, 2007, we had an outstanding loan of $13.0 million with Beal Bank,
SSB.
The loan is evidenced by a Promissory Note dated as of August 26, 2004,
and is
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 June 30, 2007), 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 June 30, 2007, approximately $1.2 million of the
loan
proceeds were held in escrow to fund specific improvements to the mortgaged
property.
Guarantees
At
June 30, 2007, we included $0.9 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
June 30, 2007, approximately $0.9 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 June 30, 2007, we had contingent liabilities of $3.5 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
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
|
Three
Months Ended
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Service
cost
|
|
$ |
79
|
|
|
$ |
96
|
|
|
$ |
237
|
|
|
$ |
290
|
|
|
$ |
3
|
|
|
$ |
7
|
|
|
$ |
8
|
|
|
$ |
20
|
|
Interest
cost
|
|
|
2,533
|
|
|
|
2,626
|
|
|
|
7,292
|
|
|
|
7,877
|
|
|
|
380
|
|
|
|
518
|
|
|
|
1,141
|
|
|
|
1,555
|
|
Expected
return on plan assets
|
|
|
(3,047 |
) |
|
|
(3,405 |
) |
|
|
(9,141 |
) |
|
|
(10,214 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amortization
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service cost
|
|
|
65
|
|
|
|
91
|
|
|
|
195
|
|
|
|
272
|
|
|
|
(392 |
) |
|
|
(278 |
) |
|
|
(1,175 |
) |
|
|
(833 |
) |
Actuarial
loss
|
|
|
793
|
|
|
|
894
|
|
|
|
2,403
|
|
|
|
2,681
|
|
|
|
264
|
|
|
|
379
|
|
|
|
791
|
|
|
|
1,136
|
|
Net
periodic benefit cost
|
|
|
423
|
|
|
|
302
|
|
|
|
986
|
|
|
|
906
|
|
|
$ |
255
|
|
|
$ |
626
|
|
|
$ |
765
|
|
|
$ |
1,878
|
|
Settlement
charge (a)
|
|
|
-
|
|
|
|
-
|
|
|
|
557
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net pension cost
|
|
$ |
423
|
|
|
$ |
302
|
|
|
$ |
1,543
|
|
|
$ |
906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Represents
the settlement charge from $2.3 million distributions 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 and nine months ended June 30,
2007.
|
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 also 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 earnings
(loss)
per share:
|
|
Three
Months Ended
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
(In
thousands, except per share data)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Basic
earnings (loss) per share:
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
Income
(loss) from continuing operations
|
|
$ |
4,412
|
|
|
$ |
(951 |
) |
|
$ |
(20,553 |
) |
|
$ |
(22,733 |
) |
Weighted
average common shares outstanding
|
|
|
25,226
|
|
|
|
25,226
|
|
|
|
25,226
|
|
|
|
25,226
|
|
Basic
earnings (loss) from continuing operations per share
|
|
$ |
0.18
|
|
|
$ |
(0.04 |
) |
|
$ |
(0.81 |
) |
|
$ |
(0.90 |
) |
Diluted
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
4,412
|
|
|
$ |
(951 |
) |
|
$ |
(20,553 |
) |
|
$ |
(22,733 |
) |
Weighted
average common shares outstanding
|
|
|
25,226
|
|
|
|
25,226
|
|
|
|
25,226
|
|
|
|
25,226
|
|
Options
|
|
antidilutive
|
|
|
antidilutive
|
|
|
antidilutive
|
|
|
antidilutive
|
|
Total
shares outstanding
|
|
|
25,226
|
|
|
|
25,226
|
|
|
|
25,226
|
|
|
|
25,226
|
|
Diluted
earnings (loss) from continuing operations per share
|
|
$ |
0.18
|
|
|
$ |
(0.04 |
) |
|
$ |
(0.81 |
) |
|
$ |
(0.90 |
) |
The
computation of diluted earnings (loss) from continuing operations per share
for
the three and nine months ended June 30, 2007 excluded the effect of 317,917
incremental common shares attributable to the potential exercise of common
stock
options outstanding because the effect was antidilutive. The
computation of diluted loss from continuing operations per share for the
three
and nine months ended June 30, 2006 excluded the effect of 768,530 incremental
common shares 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 June 30, 2007. 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 nine months ended June 30, 2007, we contributed approximately $0.5
million
toward this remediation, but may be required to pay additional amounts
of up to
$7.3 million over the next 20 years.
We
incurred $1.7 million of expense in discontinued operations for environmental
matters in the nine months ended June 30, 2007. As of June 30, 2007 and
September 30, 2006, the consolidated total of our recorded liabilities
for
environmental matters was approximately $13.6 million and $13.5 million,
respectively, which represented the estimated probable exposure for these
matters. At June 30, 2007, $1.2 million of these liabilities were
classified as other accrued liabilities and $12.4 million were classified
as
other long-term liabilities. It is reasonably possible that our
exposure for these matters could be approximately $20.1 million.
The
sales agreement with Alcoa includes an indemnification for legal and
environmental claims in excess of $8.45 million, for our fastener
business. As of June 30, 2007, Alcoa has contacted us concerning
additional potential health and safety claims of approximately $22.6
million. On June 25, 2007, the Company received an arbitration ruling
awarding Alcoa approximately $4.0 million from the Company’s $25.0 million
escrow account. On October 31, 2007, the Company and Alcoa resolved
all disputes related to the 2002 sale of the fastener business to
Alcoa. Accordingly, $25.3 million of the escrow account was released
to us and Alcoa paid us an additional $0.6 million.
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. The aforementioned case was
discontinued as to all defendants, thereby extinguishing the indemnity
claim
against us in the instant case. However, in September 2003, the purchaser
has
notified us of, and claimed a right to indemnity from us in relation to
thousands of other asbestos-related claims filed against it. We have
not received enough information to assess the impact, if any, of the other
claims. During the last forty five months, the Company has been served
directly
by plaintiffs’ counsel in fifty nine cases related to the same pump business.
Two of the fifty nine cases were dismissed as to all defendants based upon
forum
objections. The Company was voluntarily dismissed from eighteen additional
pump
business cases during the same period, without the payment of any consideration
to plaintiffs. The Company, in coordination with its insurance carriers,
intends
to aggressively defend against the remaining thirty nine claims.
During
the last forty five months, the Company, or its subsidiaries, has been
served
with a total of 330 separate complaints in actions filed in various venues
by
non-employee workers, alleging personal injury or wrongful death as a result
of
exposure to asbestos-containing products other than those related to the
pump
business. The plaintiffs’ complaints do not specify which, if any, of the
Company’s former products are at issue, making it difficult to assess the merit
and value, if any, of the asserted claims. The Company, in coordination
with its insurance carriers, intends to aggressively defend against these
claims.
During
the same time period, the Company has resolved 206 similar, non-pump,
asbestos-related lawsuits that were previously served upon the Company.
In 201
cases, the Company was voluntarily dismissed, without the payment of any
consideration to plaintiffs. The remaining five cases were settled
for a nominal amount.
The
Company’s insurance carriers have participated in the defense of all of the
aforementioned asbestos claims, both pump and non-pump related. Although
insurance coverage amounts vary, depending upon the policy period(s) and
product
line involved in each case, management believes that the Company’s insurance
coverage levels are adequate, and that asbestos claims will not have a
material
adverse effect on our financial condition, future results of operation,
or net
cash flow.
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 June 30, 2007, 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 nine months ended June 30, 2007 and June 30,
2006. In February 2007, we received from Alcoa the final $12.5
million payment related to the sale of this business. Of this amount
received, we repaid 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
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
revenues
|
|
$ |
-
|
|
|
$ |
2,431
|
|
|
$ |
-
|
|
|
$ |
7,320
|
|
Cost
of revenues
|
|
|
-
|
|
|
|
915
|
|
|
|
-
|
|
|
|
3,463
|
|
Gross
margin
|
|
|
-
|
|
|
|
1,516
|
|
|
|
-
|
|
|
|
3,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general & administrative expense
|
|
|
1,866
|
|
|
|
1,955
|
|
|
|
4,754
|
|
|
|
2,729
|
|
Other
income, net
|
|
|
(1 |
) |
|
|
(34 |
) |
|
|
(145 |
) |
|
|
(314 |
) |
Operating
income (loss)
|
|
|
(1,865 |
) |
|
|
(405 |
) |
|
|
(4,609 |
) |
|
|
1,442
|
|
Investment
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23
|
|
Net
interest expense
|
|
|
-
|
|
|
|
(787 |
) |
|
|
-
|
|
|
|
(2,431 |
) |
Loss
from discontinued operations before taxes
|
|
|
(1,865 |
) |
|
|
(1,192 |
) |
|
|
(4,609 |
) |
|
|
(966 |
) |
Income
tax provision
|
|
|
(69 |
) |
|
|
-
|
|
|
|
(69 |
) |
|
|
(16 |
) |
Loss
from discontinued operations, net
|
|
$ |
(1,934 |
) |
|
$ |
(1,192 |
) |
|
$ |
(4,678 |
) |
|
$ |
(982 |
) |
Certain
liabilities remaining from the sale of our shopping center that occurred
in July
2006 are being reported as liabilities of discontinued operations at June
30,
2007 and September 30, 2006, and were as follows:
(In
thousands)
|
|
June
30, 2007
|
|
|
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 June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
51,755
|
|
|
$ |
44,889
|
|
|
$ |
21,284
|
|
|
$ |
237
|
|
|
$ |
118,165
|
|
Operating
income (loss)
|
|
|
8,511
|
|
|
|
(1,427 |
) |
|
|
1,646
|
|
|
|
(5,693 |
) |
|
|
3,037
|
|
Total
assets at June 30
|
|
|
99,536
|
|
|
|
107,547
|
|
|
|
46,199
|
|
|
|
159,121
|
|
|
|
412,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
101,700
|
|
|
$ |
90,968
|
|
|
$ |
66,420
|
|
|
$ |
712
|
|
|
$ |
259,800
|
|
Operating
income (loss)
|
|
|
8,645
|
|
|
|
(15,108 |
) |
|
|
4,999
|
|
|
|
(14,431 |
) |
|
|
(15,895 |
) |
Total
assets at June 30
|
|
|
99,536
|
|
|
|
107,547
|
|
|
|
46,199
|
|
|
|
159,121
|
|
|
|
412,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
43,465
|
|
|
$ |
41,627
|
|
|
$ |
20,486
|
|
|
$ |
237
|
|
|
$ |
105,815
|
|
Operating
income (loss) (restated)
|
|
|
8,545
|
|
|
|
(2,011 |
) |
|
|
1,437
|
|
|
|
(5,567 |
) |
|
|
2,404
|
|
Total
assets at June 30 (restated)
|
|
|
84,573
|
|
|
|
98,104
|
|
|
|
47,318
|
|
|
|
257,317
|
|
|
|
487,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
79,814
|
|
|
$ |
83,023
|
|
|
$ |
56,778
|
|
|
$ |
713
|
|
|
$ |
220,328
|
|
Operating
income (loss) (restated)
|
|
|
8,032
|
|
|
|
(15,147 |
) |
|
|
3,235
|
|
|
|
(13,827 |
) |
|
|
(17,707 |
) |
Total
assets at June 30 (restated)
|
|
|
84,573
|
|
|
|
98,104
|
|
|
|
47,318
|
|
|
|
257,317
|
|
|
|
487,312
|
|
11. SUBSEQUENT
EVENTS
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 the escrow account was released to us and Alcoa made an additional
payment to us of $0.6 million and assumed specified liabilities for foreign
taxes, environmental matters, and worker compensation claims. We used
$20.9 million of these proceeds to fully repay the GoldenTree
loan. On October 31, 2007, we sold our property in Fullerton,
California to Alcoa for $19.0 million. We used $13.0 million of these
proceeds to fully repay the Beal Bank loan. We expect to
recognize a pre-tax gain of approximately $26.0 million from these transactions
with Alcoa in the quarter ending December 31, 2007.
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 and nine months ended, June 30, 2007 as
well as a
restatement of our previously issued condensed consolidated financial statements
for the three and nine months ended June 30, 2006.
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 and nine months
ended
June 30, 2006 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 and nine months ended June
30,
2006.
As
a result of the restatement, originally reported net loss for the three
and nine
months ended June 30, 2006 decreased by $0.2 million ($0.00 per share)
and $1.3
million ($0.06 per share), respectively. 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 the
final $12.5 million earn-out payment in February 2007.
Financial
Results and Trends
For
the nine months ended June 30, 2007, we reported loss from continuing operations
before taxes of $19.9 million compared to a loss of $21.1 million for the
nine
months ended June 30, 2006. The loss from continuing operations for
the nine months ended June 30, 2006 benefited from the settlement of the
shareholder derivative litigation, which improved results by approximately
$5.7
million. Excluding this item, the loss from continuing operations for the
nine
months ended June 30, 2007 improved by $6.9 million compared to the nine
months
ended June 30, 2006. Our $9.2 million cash provided by operating
activities primarily resulted from the $42.8 million proceeds from the
sale of
trading securities partially offset by the seasonal inventory demands of
our
PoloExpress and Hein Gericke businesses. As of June 30, 2007, we have
unrestricted cash, cash equivalents and short-term investments of $15.8
million
and available borrowing under lines of credit of $5.0 million. In
February 2007, we received the final payment of $12.5 million from Alcoa
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 ended December
31,
2007.
We
have undertaken a number of actions, which we believe will improve the
results
of Hein Gericke in 2007 and beyond including:
·
|
Consolidating
and centralizing our warehouse facilities to one location to
service all
of Europe.
|
·
|
Improving
timeliness of product deliveries from suppliers to our warehouse
and
delivery to the stores.
|
·
|
Reintroducing
our Hein Gericke product catalog to expand brand awareness and
attract
customer traffic.
|
·
|
Optimizing
store location and appearance.
|
In
addition, we plan to continue cost structure improvements at Hein Gericke
by
taking aggressive actions to reduce expenses, including:
·
|
Consolidating
and restructuring back office functions, achieving 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 June 2008.
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 nine months ended June 30, 2007.
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
June
30,
|
|
|
Nine
Months Ended
June
30,
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
PoloExpress
Segment
|
|
$ |
51,755
|
|
|
$ |
43,465
|
|
|
$ |
101,700
|
|
|
$ |
79,814
|
|
Hein
Gericke Segment
|
|
|
44,889
|
|
|
|
41,627
|
|
|
|
90,968
|
|
|
|
83,023
|
|
Aerospace
Segment
|
|
|
21,284
|
|
|
|
20,486
|
|
|
|
66,420
|
|
|
|
56,778
|
|
Corporate
and Other
|
|
|
259
|
|
|
|
259
|
|
|
|
777
|
|
|
|
778
|
|
Intercompany
Eliminations
|
|
|
(22 |
) |
|
|
(22 |
) |
|
|
(65 |
) |
|
|
(65 |
) |
Total
|
|
$ |
118,165
|
|
|
$ |
105,815
|
|
|
$ |
259,800
|
|
|
$ |
220,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PoloExpress
Segment
|
|
|
8,511
|
|
|
|
8,545
|
|
|
|
8,645
|
|
|
|
8,032
|
|
Hein
Gericke Segment
|
|
|
(1,427 |
) |
|
|
(2,011 |
) |
|
|
(15,108 |
) |
|
|
(15,147 |
) |
Aerospace
Segment
|
|
|
1,646
|
|
|
|
1,437
|
|
|
|
4,999
|
|
|
|
3,235
|
|
Corporate
and Other
|
|
|
(5,693 |
) |
|
|
(5,567 |
) |
|
|
(14,431 |
) |
|
|
(13,827 |
) |
Total
|
|
$ |
3,037
|
|
|
$ |
2,404
|
|
|
$ |
(15,895 |
) |
|
$ |
(17,707 |
) |
Revenues
increased $12.4 million, or 11.7%, for the three months ended June 30,
2007
compared to the three months ended June 30, 2006. This revenue
improvement was driven by increased revenue in each of our three operating
segments as revenue increased $8.3 million at our PoloExpress segment,
$3.3
million at our Hein Gericke segment, and $0.8 million at our Aerospace
segment. Revenues increased by $39.5 million, or 17.9%, for the nine
months ended June 30, 2007 compared to the nine months ended June 30,
2006. This revenue improvement was driven by increased revenue in
each of our three operating segments as revenue increased $21.9 million
at our
PoloExpress segment, $9.6 million at our Aerospace segment, and $7.9 million
at
our Hein Gericke segment. See segment discussion below for further
details.
Gross
margin as a percentage of sales increased to 44.1% for the three months
ended
June 30, 2007 compared to 41.9% for the three months ended June 30,
2006. Gross margin as a percentage of sales increased to 40.9% for
the nine months ended June 30, 2007 compared to 39.7% for the nine months
ended
June 30, 2006. This margin improvement was primarily driven by the
increased gross margin at our Hein Gericke business to 43.6% for the nine
months
ended June 30, 2007 from 40.8% for the nine months ended June 30, 2006,
respectively, primarily driven by improved inventory management and product
pricing.
Selling,
general, and administrative expense includes pension and postretirement
expense
of $0.7 million and $2.3 million for the three and nine months ended June
30,
2007, respectively, and $0.9 million and $2.8 million for the three and
nine
months ended June 30, 2006, 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 41.4% for the three months ended June
30, 2007
compared to 41.1% for the three months ended June 30, 2006. Selling,
general, and administrative expense for the three months ended June 30,
2006
benefited from $1.1 million received by us from the settlement of the
shareholder derivative litigation. Without this benefit, selling,
general, and administrative expense, excluding pension and postretirement
expense, as a percentage of sales would have been approximately 42.1% for
the
three months ended June 30, 2006. Selling, general, and
administrative expense, excluding pension and postretirement expense, as
a
percentage of sales decreased to 47.8% for the nine months ended June 30,
2007
compared to 48.1% for the nine months ended June 30, 2006. Selling,
general, and administrative expense for the nine months ended June 30,
2006
benefited from $5.7 million received by us from the settlement of the
shareholder derivative litigation, offset partially by $0.6 million of
related
legal fees. Without this benefit, selling, general, and administrative
expense,
excluding pension and postretirement expense, as a percentage of sales
would
have been approximately 50.5% for the nine months ended June 30,
2006. 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.
Interest
expense for the nine months ended June 30, 2007 increased $4.4 million
compared
to the nine months ended June 30, 2006. This increase principally
resulted from $3.7 million of interest and loan fee amortization related
to the
GoldenTree loan, which was entered into in May 2006, as well as $1.7 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 nine months ended
June
30, 2006. 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 nine months ended June 30, 2007 represents $0.8 million
of
state taxes. No federal tax provision was accrued, due to our foreign
operations reporting a loss for the nine month period 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 June 30, 2007 consists primarily of $1.7 million to cover
legal
expenses and workers compensation obligations associated with businesses
we sold
several years ago. The loss from discontinued operations for the nine
months ended June 30, 2007 consists primarily of $6.0 million to cover
legal
expenses and workers compensation obligations associated with businesses
we sold
several years ago and a $1.6 million increase in our environmental accrual,
offset partially by $3.3 million insurance reimbursement. The
earnings from discontinued operations for the three months ended June 30,
2006
primarily resulted from a $0.7 million increase in our environmental accrual
and
a $0.6 million accrual for the claim by Ohio Bureau of Workers’ Compensation
offset partially by income of $0.6 million from our shopping
center. The loss from discontinued operations for the nine months
ended June 30, 2006 primarily resulted from a $0.9 million increase in
our
environmental accrual and a $0.6 million accrual for the claim by Ohio
Bureau of
Workers’ Compensation offset partially by income of $1.2 million from our
shopping center.
We
recognized a $45.3 million gain on the disposal of discontinued operations
for
the nine months ended June 30, 2007, an increase of $31.8 million compared
to
the nine months ended June 30, 2006. The gain for the nine months
ended June 30, 2007 resulted from $32.8 million tax reserve releases resulting
from the expiration of the related statutes of limitations and closure
of the
related tax period as well as $12.5 million of additional proceeds earned
from
the sale of the fastener business. The gain for the three months ended
June 30,
2006 reflected the $1.0 million gain on the sale of a landfill
partnership. The gain for the nine months ended June 30, 2006
reflected the $12.5 million of additional proceeds earned from the sale
of the
fastener business and the $1.0 million gain on the sale of a landfill
partnership. 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 June 30,
2007, PoloExpress operated 88 retail shops in Germany and 4 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 $8.3 million, or 19.1%, for the
three
months ended June 30, 2007 compared to the three months ended June 30,
2006. Sales in our PoloExpress segment increased by $21.9 million, or
27.4%, for the nine months ended June 30, 2007 compared to the year-ago
period. Retail sales per square meter was approximately $1,047 and
$2,086 for the three and nine months ended June 30, 2007, respectively,
compared
to $1,025 and $1,873 for the three and nine months ended June 30, 2006,
respectively. The sales increase for the three months ended June 30,
2007 resulted from an improvement in same store sales of 0.8%. The
sales increase for the nine months ended June 30, 2007 resulted from an
improvement in same store sales of 9.2% and the effect of 5 stores, which
were
newly opened or relocated during fiscal 2006. Foreign currency
exchange rates on the translation of European sales into U.S. dollars changed
favorably and increased our revenues by approximately $3.4 million and
$7.6
million for the three and nine months ended June 30, 2007,
respectively. Operating income in our PoloExpress segment increased
$0.6 million for the nine months ended June 30, 2007 compared to the year-ago
period. This improvement reflected the increase in sales during this
period and their related economies of scale and the favorable increase
in the
Euro compared to the U.S. Dollar in the current period.
Hein
Gericke Segment
Our
Hein Gericke segment designs and sells motorcycle apparel, protective clothing,
helmets, and technical accessories for motorcyclists. As of June 30, 2007,
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 increased $3.3 million, or 7.8%, for the three
months ended June 30, 2007 compared to the three months ended June 30,
2006. Sales at Hein Gericke retail locations increased $4.8 million,
or 12.1%, for the three months ended June 30, 2007 compared to the three
months
ended June 30, 2006. Sales in our Hein Gericke segment increased $7.9
million, or 9.6%, for the nine months ended June 30, 2007 compared to the
year-ago period. Sales at Hein Gericke retail locations increased
$12.4 million, or 16.6%, for the nine months ended June 30, 2007 compared
to the
nine months ended June 30, 2006. Retail sales per square meter
increased to $835 and $1,663 for the three and nine months ended June 30,
2007,
respectively, compared to $744 and $1,417 for the three and nine months
ended
June 30, 2006, respectively. The increase in Hein Gericke retail
sales reflected a same store sales increase of 2.8% and 6.7% for the three
nine
months ended June 30, 2007, respectively. The improvement in retail
sales was offset by a $4.5 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 $3.0 million
and
$6.5 million for the three and nine months ended June 30, 2007, respectively,
compared to the three and nine months ended June 30, 2006. The
operating results in our Hein Gericke segment improved by $0.6 million
for the
three months ended June 30, 2007, compared to the three months ended June
30,
2006, due primarily to improved gross margins at our Hein Gericke retail
locations and reduced losses generated by the downsized Fairchild Sports
USA
business. The operating results in our Hein Gericke segment for the
nine months ended June 30, 2007 remained consistent with the year-ago period
as
the segment’s operating expenses increased at a greater rate than
sales.
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 $0.8 million and $9.6 million for
the
three and nine months ended June 30, 2007, respectively, compared to the
three
and nine months ended June 30, 2006. This increase reflected an
overall improvement in the areas of the aerospace industry for which we
provide
products.
Operating
income increased $0.2 million to $1.6 million for the three months ended
June
30, 2007 from $1.4 million for the three months ended June 30,
2006. Operating income increased $1.8 million to $5.0 million for the
nine months ended June 30, 2007 from $3.2 million for the year-ago period.
The
improved operating income resulted from increased sales accompanied by
stable
gross margin and decreased selling, general, and administrative expenses
as a
percentage of sales for the three and nine months ended June 30, 2007 compared
to the three and nine months ended June 30, 2006.
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 in excess of $0.4 million
per
year. In October 2007, we amended our lease with PCA Aerospace
whereby we can cause PCA Aerospace to purchase the Huntington Beach property
at
the greater of fair market value or $5.0 million under a put option we
hold
which can be exercised at any time through January 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 at fair market value, which we believe
is
$8.0 million. At June 30, 2007, the book value of the Huntington
Beach property was $2.9 million.
The
operating loss at corporate increased by $0.1 million for the three months
ended
June 30, 2007 compared to the three months ended June 30, 2006. The
corporate results for the three months ended June 30, 2006 benefited by
$1.1
million from the net proceeds we received due to the settlement of the
shareholder derivative litigation. Excluding this one-time benefit,
our corporate results improved by $1.0 million, which resulted from reduced
insurance premiums and lower personnel and related costs.
The
operating loss at corporate increased by $0.6 million for the nine months
ended
June 30, 2007 compared to the nine months ended June 30, 2006, 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
$5.7 million in the nine months ended June 30, 2006 from net proceeds we
received as a result of settlement of shareholder derivative
litigation. After adjusting for the one-time benefit in the nine
months ended June 30, 2006 from the shareholder litigation settlement,
the
Company actually experienced a $5.1 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
as well
as reduced insurance premiums and lower personnel and related
costs.
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total
capitalization as of June 30, 2007 and September 30, 2006 was $187.4 million
and
$180.0 million, respectively. The nine-month change in capitalization included
a
net decrease of $15.7 million in debt resulting from $14.7 million of additional
borrowings from our credit facilities, offset partially by approximately
$32.9
million of debt repayments and a $2.5 million increase due to the change
in
foreign currency on debt denominated in Euros. Equity increased by
$23.1 million, reflecting our $20.1 million net income and $3.0 million
from
other comprehensive income. Our combined cash and investment balances
totaled $90.7 million on June 30, 2007 compared to $130.4 million on September
30, 2006, and included restricted investments of $71.4 million and $67.0
million
at June 30, 2007 and September 30, 2006, respectively.
Net
cash provided by operating activities for the nine months ended June 30,
2007
was $9.2 million principally resulting from $42.8 million of proceeds from
the
sale of trading securities liquidated to fund our operating expenses offset
partially by a $11.2 million increase in net operating assets, principally
related to the $30.4 million increase in inventory offset partially by
$23.7
million increase in accounts payable and accrued expenses as well as the
$32.8
million tax reserve release. Net cash used for operating activities
for the nine months ended June 30, 2006 was $16.2 million and included
a $8.5
million increase in net operating assets, principally related to the $30.6
million increase in inventory offset partially by $22.0 million increase
in
accounts payable and accrued expenses.
Net
cash provided by investing activities for the nine months ended June 30,
2007
was $10.7 million, including $12.5 million received from the calendar 2006
earn-out associated with our 2002 sale of our fastener business to Alcoa
and
$4.0 million from the collections of notes receivable, offset partially
by $7.8
million of capital expenditures. Net cash used in investing
activities for the nine months ended June 30, 2006 was $3.9 million, including
$12.2 million to purchase investment securities and $5.9 million of capital
expenditures, offset partially by $13.9 million of cash received from the
sale
of discontinued operations, including $12.5 million received from the calendar
2005 earn-out associated with our 2002 sale of our fastener business to
Alcoa.
Net
cash used in financing activities was $18.3 million for the nine months
ended
June 30, 2007, reflecting $32.9 million of debt repayments offset partially
by
$14.7 million received on additional borrowings. Net cash provided by
financing activities was $16.7 million for the nine months ended June 30,
2006,
reflecting a $49.5 million received from additional borrowings, offset
partially
by $25.6 million of debt repayments, $4.3 million payment to settle the
interest
rate contract, and payments of $2.4 million for financing fees.
Our
principal cash requirements include supporting our current operations,
general
and administrative expenses, capital expenditures, and the payment of other
liabilities including pension and postretirement benefits, environmental
investigation and remediation costs, and litigation related costs.
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 June 2008.
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 costs, including
opportunities to take our company private, or “going dark”. An offer to take our
company private at $2.73 per share, led by Jeffrey Steiner, our Chairman
and
Chief Executive Officer, and Philip Sassower, was terminated. As of
this date, no further discussions are on-going. However, our senior management
will continue to pursue opportunities to reduce our public costs and our
corporate expenses and consider any other opportunities to restructure
our
existing debt and pursue additional merger, acquisition, and divestiture
opportunities.
In
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
June 30, 2007, approximately $0.9 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
June 30, 2007, we had contractual commitments to repay debt, to make payments
under operating and capital lease obligations, to make pension contribution
payments, and to purchase the remaining 7.5% interest in
PoloExpress. 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 $18.9 million for the remainder of fiscal 2007, $31.6 million
in
fiscal 2008, $2.9 million in fiscal 2009, $21.3 million in fiscal 2010,
$0.6
million in 2011, and none thereafter. Payments due under our
operating lease obligations will be $5.5 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
June 30, 2007, we had outstanding borrowings of $8.9 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 $2.8 million was available for future borrowings
at June
30, 2007. Borrowings under the facility are collateralized by a security
interest in the assets of our Aerospace segment. The loan bears interest
at 1.0%
over prime (9.25% at June 30, 2007) 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 fiscal 2008, $7.2
million
in fiscal 2009, $7.4 million in fiscal 2010, $7.4 million in fiscal 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 June 30, 2007, we had contingent liabilities of $3.5 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. 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. Thus, our tax liability was $13.6 million at June 30, 2007.
However, based on tax planning strategies, we do not anticipate having
to
satisfy the tax liability over the short-term.
We
have $31.5 million classified as other long-term liabilities at June 30,
2007,
including $14.4 million due to purchase the remaining 7.5% interest in
PoloExpress in April 2008. The remaining $17.1 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 and financial
position.
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 June 30, 2007, the fair value of this instrument is
nominal.
Essentially
all of our other outstanding debt is variable rate debt. We are
exposed to risks of rising interest rates, which could result in rising
interest
costs.
Foreign
Currency Risk: We are exposed to foreign currency risks that arise from
normal business operations. These risks include the translation of local
currency balances of our foreign subsidiaries, intercompany loans with
foreign
subsidiaries and transactions denominated in foreign currencies. Our
objective
is to minimize our exposure to these risks through our normal operating
activities and, if we deem it appropriate, we may consider utilizing
foreign
currency forward contracts in the future. For the nine months ended June
30,
2007, we estimate that approximately 73% of our total revenues were derived
from
customers outside of the United States, with approximately 73% of our
total
revenues denominated in currencies other than the U.S. dollar. We estimate
that
revenue and operating expenses for the nine months ended June 30, 2007
were
higher by $14.2 million and $6.9 million, respectively, as a result of
changes
in exchange rates compared to the nine months ended June 30, 2006. At
June 30, 2007, we had $55.2 million of working capital denominated in
foreign currencies. At June 30, 2007, we had no outstanding foreign currency
forward contracts. The following table shows the approximate split of
these
foreign currency exposures by principal currency at June 30,
2007:
|
|
|
|
|
Total
|
|
Euro
|
British
Pound
|
Swiss
Franc
|
Other
|
Exposure
|
Revenues
|
78%
|
18%
|
4%
|
-
|
100%
|
Operating
Expenses
|
80%
|
17%
|
3%
|
-
|
100%
|
Working
Capital
|
84%
|
13%
|
2%
|
1%
|
100%
|
A
hypothetical 10% strengthening of the U.S. dollar during the nine months
ended
June 30, 2007 versus the foreign currencies in which we have exposure
would have
reduced revenue by approximately $17.2 million and reduced operating
expenses by approximately $8.4 million, resulting in a $0.4 million
improvement in our operating loss as compared to what was actually reported.
Working capital at June 30, 2007, would have been approximately
$5.0 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 nine months ended June 30, 2007. 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