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Fairchild 10-Q 2007 Documents found in this filing: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
(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:
THE
FAIRCHILD CORPORATION INDEX TO QUARTERLY REPORT ON FORM
10-Q
FOR
THE PERIOD ENDED JUNE 30, 2007
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
The
accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
THE
FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except per share data)
LIABILITIES
AND STOCKHOLDERS’ EQUITY
The
accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements. 4
THE
FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
(In
thousands, except per share data)
The
accompanying Notes to Condensed
Consolidated Financial Statements are an integral part of these
statements. 5
THE
FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
(In
thousands)
The
accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements. 6
THE
FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
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.
7
Comprehensive
Income (Loss)
The
activity in other comprehensive income (loss), net of tax, was:
The
components of accumulated other comprehensive loss were:
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.
8
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.
9
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.
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.
10
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:
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.
11
At
June 30, 2007 and September 30, 2006, notes payable and long-term debt
consisted
of the following:
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.
12
During
the term of 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.
13
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.
14
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:
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.
15
The
following table illustrates the computation of basic and diluted earnings
(loss)
per share:
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.
16
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.
17
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.
18
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.
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.
19
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:
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:
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.
20
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.
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