10-Q

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, 2004
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 (    )            NO ( X )

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES ( X )             NO (   )

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

                                                                                                    Outstanding at
Title of Class                                                                             March 31, 2004
Class A Common Stock, $0.10 Par Value                                    22,572,204
Class B Common Stock, $0.10 Par Value                                     2,621,412

THE FAIRCHILD CORPORATION INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2004

		PAGE
		NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
	Condensed Consolidated Balance Sheets – (Unaudited) as of June 30, 2004 and June 30, 2003		3
	Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended June 30, 2004 and June 30, 2003		5
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended June 30, 2004 and June 30, 2003		6
	Notes to Condensed Consolidated Financial Statements (Unaudited)		7
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition			20
Item 3. Quantitative and Qualitative Disclosure about Market Risk			28
Item 4. Controls and Procedures			30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			31
Item 2. Changes in Securities and Use of Proceeds			31
Item 5. Other Information			31
Item 6. Exhibits and Reports on Form 8-K			32

        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. On December 24, 2003, we announced that we have elected to change our fiscal year end from June 30th to September 30th.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements  

THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, 2004 and September 30, 2003
(In thousands)

			June 30		September 30
			2004		2003
ASSETS
	Cash and cash equivalents		$	11,420	$	6,601
	Short Term Investments			7,215		45,763
	Accounts receivable-trade, less allowances of $8,061 and $1,433			24,271		11,569
	Finished Goods			111,167		23,649
	Work-in-Process			902		859
	Raw Materials			711		536
				112,780		25,044
	Net Current Assets of discontinued operations			- -		52
	Prepaid expenses and other current assets			18,554		4,057
		Total current assets		174,240		93,086
Property, plant and equipment, net of accumulated depreciation of $34,578 and $27,440				147,137		130,556
Net noncurrent assets of discontinued operations				- -		125
Goodwill				30,567		10,821
Investments and advances, affiliated companies				4,201		4,935
Prepaid pension assets				59,502		60,571
Deferred loan costs				5,533		1,070
Long Term Investments				78,723		58,550
Notes receivable				17,289		8,397
Other assets				10,752		9,296
TOTAL ASSETS			$	524,944	$	377,407

        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 (Unaudited)
June 30, 2004 and September 30, 2003
(In thousands)

LIABILITIES AND STOCKHOLDERS’ EQUITY

			June 30		September 30
			2004		2003
CURRENT LIABILITIES:
	Notes payable and current maturities of long-term debt		$	22,930	$	3,997
	Accounts payable			33,656		8,805
	Accrued liabilities
	Salaries, wages and commissions			13,160		9,798
	Employee benefit plan costs			2,799		2,604
	Insurance			8,475		11,990
	Interest			940		699
	Other accrued liabilities			14,054		10,849
	Current liabilities of discontinued operations			- -		730
		Total current liabilities		98,014		49,472
LONG-TERM LIABILITIES:
Long-term debt, less current maturities				103,732		4,277
Fair value of interest rate contract				10,229		16,012
Other long-term liabilities				25,003		11,576
Pension liabilities				63,702		63,793
Retiree health care liabilities				29,707		28,272
Noncurrent income taxes				66,203		68,492
		TOTAL LIABILITIES		396,590		241,894
STOCKHOLDERS’ EQUITY:
	Class A common stock, $0.10 par value; 40,000 shares authorized, 30,386 (30,377 in September) shares issued and 22,572 (22,563 in September); shares outstanding entitled to one vote per share			3,038		3,037
	Class B common stock, $0.10 par value; 20,000 shares authorized, 2,621 (2,622 in September) shares issued and outstanding, entitled to ten votes per share			262		262
	Paid-in capital			232,763		232,741
	Treasury stock, at cost, 7,814 shares of Class A common stock			(76,459)		(76,459)
	Retained earnings			30,335		38,127
	Notes due from stockholders			(1,303)		(1,508)
	Cumulative other comprehensive income			(60,282)		(60,687)
		TOTAL STOCKHOLDERS’ EQUITY		128,354		135,513
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY			$	524,944	$	377,407

        The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For The Three (3) and Nine (9) Months Ended June 30, 2004 and June 30, 2003
(In thousands,except per share data)

		Three Months Ended					Nine Months Ended
		6/30/04		6/30/03			6/30/04			6/30/03
REVENUE:
Net sales		$	114,655	$	18,257		$	234,100		$	51,414
Rental revenue			2,704		2,435			7,591			6,811
			117,359		20,692			241,691			58,225
COSTS AND EXPENSES:
	Cost of goods sold		69,508		15,028			146,900			41,376
	Cost of rental revenue		1,759		1,638			4,933			4,433
	Selling, general and administrative		37,159		7,534			95,378			52,863
	Other (income) expense, net		784		(1,410	)		(1,336	)		(2,484	)
	Impairment charges		1,206		6,726			1,206			6,726
	Restructuring		563		- -			563			- -
			110,979		29,516			247,644			102,914
OPERATING INCOME (LOSS)			6,380		(8,824)			(5,953)			(44,689)
Interest Expense			5,677		4,355			16,876			26,961
Interest income			(127)		(816)			(1,174)			(9,218)
Net interest Expense			5,550		3,539			15,702			17,743
Investment imcome (loss)			890		(618)			1,160			32
Increase (decrease) in fair market value of interest rate contract			4,920		(1,925)			5,783			(898)
Earnings (loss) from Continuing operations before taxes			6,640		(14,906)			(14,712)			(63,298)
Income tax benefit (provision)			3,968		(1,745)			3,895			(7,788)
Equity in loss of Affiliates, net			(734)		(807)			(734)			(1,066)
Minority Interest, net			- -		39			- -			39
Earnings (loss) from continuing operations			9,874		(17,419)			(11,551)			(72,113)
Loss from discontinued operations, net			(3,631)		(4,718)			(5,974)			(3,555)
Gain (loss)on disposal of discontinued operations, net			809		(10,298)			9,502			29,784
Cummulative effect of change in accounting for investment in affiliate, net			- -		- -			230			- -
NET EARNINGS (LOSS)		$	7,052	$	(32,435)		$	(7,793)		$	(45,884)
Other comprehensive income (loss), net of tax:
	Foreign currency translation adjustments		748		2,278			(972)			20,818
	Minimum pension liability		- -		(13,290)			- -			(60,806)
	Unrealized holding changes on derivatives		26		(174)			79			(141)
	Unrealized periodic holding changes on securities		(525)		1,345			1,299			2,006
Other comprehensive income (loss)			249		(9,841)			406			(38,123)
COMPREHENSIVE INCOME (LOSS)		$	7,301	$	(42,276)		$	(7,387)		$	(84,007)
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Earnings (loss) from continuing operations		$	0.39	$	(0.69)		$	(0.46)		$	(2.86)
Loss from discontinued operations, net			(0.14)		(0.19)			(0.24)			(0.14)
	Gain (loss) on disposal of discontinued operations, net		0.03		(0.41)			0.38			1.18
	Cumulative effect of change in accounting for investment in affiliate, net		- -		- -			0.01			- -
NET EARNINGS (LOSS)		$	0.28	$	(1.29)		$	(0.31)		$	(1.82)
	Basic weighted average shares outstanding		25,194		25,184			25,192			25,172
	Diluted weighted average shares outstanding		25,244		25,184			25,192			25,172

        The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For The Nine (9) Months Ended June 30, 2004 and June 30, 2003
(In thousands)

	6/30/04	6/30/03
Cash flows from operating activities:
Net loss	$ (7,793)	$ (45,884)
Depreciation and amortization	6,602	4,248
Amortization of deferred loan fees	555	10,460
Unrealized holding (gain) loss on interest rate contract	(5,783)	898
Net gain on the sale of discontinued operations	(9,502)	(29,784)
Loss from Impairments	1,206	6,726
Undistributed (earnings) loss of affiliates, net	734	1,066
Net (gain) loss on sale of property, plant, and equipment	-	(764)
Paid-in kind interest income	-	(7,198)
Cumulative effect of change in accounting for investment in affiliate	(230)	-
Change in trading securities	38,159	(46,193)
Change in operating assets and liabilities	(34,851)	6,357
Non-cash charges and working capital changes of discontinued operations	(553)	(35,799)
Net cash used for operating activities	(11,456)	(135,867)
Cash flows from investing activities:
Purchase of property, plant and equipment	(5,218)	(8,237)
Net proceeds received from (used for) investment securities, net	(17,786)	(54,652)
Acquisition of subsidiary, net of cash acquired	(72,981)	-
Net proceeds received from the sale of discontinued operations	5,736	657,050
Equity investment in affiliates	-	15
Changes in net assets held for sale	-	2,551
Changes in notes receivable	97	13,923
Investing activities of discontinued operations	-	(1,728)
Net cash provided by (used for) investing activities	(90,152)	608,922
Cash flows from financing activities:
Proceeds from issuance of debt	177,939	30,920
Debt repayments	(69,688)	(506,661)
Payment of financing fees	(2,061)	(1,027)
Issuance of Class A common stock	23	17
Loan repayments from stockholders'	205	323
Net cash provided by (used for) financing activities	106,418	(476,428)
Effect of exchange rate changes on cash	9	109
Net change in cash and cash equivalents	4,819	(3,264)
Cash and cash equivalents, beginning of the year	6,601	15,281
Cash and cash equivalents, end of the period	$ 11,420	$ 12,017

        The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except share data)

1.     FINANCIAL STATEMENTS

        The condensed consolidated balance sheet as of June 30, 2004, and the condensed consolidated statements of operations and cash flows for the periods ended June 30, 2004 and June 30, 2003 have been prepared by us, without audit. In the opinion of management, all adjustments necessary (consisting only of normal accruals) to present fairly the financial position, results of operations and cash flows at June 30, 2004, and for all periods presented, have been made.

        The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and the Securities and Exchange Commission’s instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in complete financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our 2003 Annual Report on Form 10-K. The results of operations for the period ended June 30, 2004 are not necessarily indicative of the operating results for the full year. Certain amounts in the prior year’s quarterly financial statements have been reclassified to conform to the current presentation. On December 24, 2003, we announced that we would change our fiscal year end from June 30th to September 30th. Additionally, we combined our aerospace distribution segment and our aerospace manufacturing segment into one segment now known as our aerospace segment. All prior periods have been restated to reflect this change in the composition of the aerospace segment.

        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 income statement accounts are translated at average exchange rates during the period. The resulting translation gains and losses are included as a separate component of stockholders’ equity. Foreign currency transaction gains and losses are included in our income statement in the period in which they occur.

2. ACQUISITIONS

        On November 1, 2003, we acquired for $45.5 million (39.0 million euros) substantially all of the worldwide business of Hein Gericke and the capital stock of Intersport Fashions West (IFW) from the Bankruptcy Administrator for Eurobike AG in Germany. Also on November 1, 2003, we acquired for $23.4 million (20.0 million euros) from the Administrator for Eurobike AG and from two subsidiaries of Eurobike AG all of their respective ownership interests in Polo Express and receivables owed to them by PoloExpress. We used available cash from investments that were sold to pay the Administrator $14.6 million (12.5 million euros) on November 1, 2003 and borrowed 46.5 million euros ($54.1 million) from the Administrator at a rate of 8%, per annum. On May 5, 2004 we received long-term financing and paid the note due to the Administrator. The aggregate purchase price for these acquisitions was approximately $68.9 million (59.0 million euros), including $15.0 million (12.9 million euros) of cash acquired.

        On January 2, 2004, we acquired for $18.8 million (15.0 million euros) all but 7.5% of the interest owned by Mr. Klaus Esser in PoloExpress. Mr. Esser will retain a 7.5% ownership interest in PoloExpress, but Fairchild has a right to call this interest at any time from March 2007 to October 2008, for a purchase price of 12.3 million euros ($14.9 million at June 30, 2004). Mr. Esser has the right to put such interest to us at any time during April of 2008 for 12.0 million euros ($14.5 million at June 30, 2004). On January 2, 2004, we used available cash to pay Mr. Esser $18.8 million (15.0 million euros) and provided collateral of $15.0 million (12.0 million euros) to a German bank to issue a guarantee to Mr. Esser to secure the price for the put Mr. Esser has a right to exercise in April of 2008. The purchase price includes an agreement with Mr. Esser under which he agrees with us not to compete with PoloExpress for five years. We also signed an employment agreement with Mr. Esser for two years. As of June 30, 2004, the 12.0 million euros ($14.5 million) collateralized obligation for the put option was recorded in other long-term liabilities and the restricted cash is invested in money market funds and included in long-term investments.

        The total purchase price exceeded the estimated fair value of the net assets acquired by approximately $19.7 million. The excess of the purchase price over tangible assets and identifiable intangible assets was preliminarily reflected as goodwill in the consolidated financial statements as of June 30, 2004. Estimates for fair value represent our best estimate as of June 30, 2004. We are currently finalizing fair values for these acquisitions. Changes in fair value from current estimated amounts, as well as changes in other assumptions, could significantly impact our operating results and the reported value of goodwill. For all periods since the acquisition date, we may have to recognize amortization expense associated with intangible assets determined to have a definite life. Since their acquisition on November 1, 2003, we have consolidated the results of Hein Gericke, PoloExpress and IFW into our financial statements.

        Hein Gericke, PoloExpress and IFW are now included in our segment known as sports & leisure. The retail sales of our sports & leisure products is a highly seasonal business with a historic trend for higher volumes of sales and profits during March through September when the weather in Europe is more favorable for individuals to use their motorcycles than October to February. We acquired these companies because we believe they have potential upside, and may provide a platform for other entrees into related leisure businesses. The acquired companies are one of the European leaders of this industry and opportunities for expansion are significant in Europe and the United States. Hein Gericke currently operates 147 retail shops in Austria, Belgium, England, France, Germany, Italy, Luxembourg and the Netherlands. PoloExpress currently operates 85 retail shops in Germany. IFW, located in Tustin, California, is a designer and distributor of motorcycle accessories, protective and other apparel, and helmets under several labels, including First Gear and Hein Gericke. In addition, IFW designs and produces apparel under private labels for third parties, including Harley-Davidson. IFW is also a distributor for other manufacturers in the United States. The acquisition has lessened our dependence on the aerospace industry.

3.     CASH EQUIVALENTS AND INVESTMENTS

        Cash equivalents and investments at June 30, 2004 consist primarily of investments in United States government securities and investment grade corporate bonds, which are recorded at market value. Restricted cash equivalent investments are classified as short-term or long-term investments depending upon the length of the restriction period. Investments in common stock of public corporations are recorded at fair market value and classified as trading securities or available-for-sale securities. Other short-term investments and 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. A summary of the cash equivalents and investments held by us follows:

		June 30, 2004				September 30,2003
		Aggregate				Aggregate
		Fair		Cost		Fair		Cost
		Value		Basis		Value		Basis
Cash and cash equivalents
U.S. government Securities		$	3,495	$	3,495	$	5,544	$	5,544
Money market and other cash funds			7,925		7,925		1,057		1,057
Total Cash and cash equivalents		$	11,420	$	11,420	$	6,601	$	6,601
Short-term investments:
	US government securities - restricted		3,283		3,283		7,549		7,549
	Money Market Funds - restricted		3,393		3,393		- -		- -
	Trading Securities - Corporate Bonds		- -		- -		37,669		37,186
	Trading Securities - equity securities		484		638		399		609
	Available-for-sale equity securities		- -		- -		91		199
	Other Investments		55		55		55		55
Total Short-term investments		$	7,215	$	7,369	$	45,763	$	45,598
Long-term investments:
	US government securities - restricted		23,360		2,373		21,007		21,007
	Money Market Funds - restricted		14,730		14,730		220		220
	Corporate Bonds - restricted		24,202		24,746		23,102		22,972
	Available-for-sale equity securities		10,391		7,695		8,435		7,715
	Other Investments		6,040		6,040		5,786		5,786
Total Long-term investments			78,723		76,584		58,550		57,700
Total cash equivalents and investments		$	97,358	$	95,373	$	110,914	$	109,899

On June 30, 2004 and September 30, 2003, we had restricted investments of $68,968 and $51,878, respectively, all of which are maintained as collateral for certain debt facilities, our interest rate contract, the Esser put option, environmental matters, and escrow arrangements. The restricted funds are invested in money market funds, U.S. government securities, or high investment grade corporate bonds.

4. DEBT

At June 30, 2004 and September 30, 2003, notes payable and long-term debt consisted of the following:

	June 30,	Sept 30,
	2004	2003
Revolving Credit Facility-Fairchild Sports	$ 7,814	$ -
Short-term margin loan	-	3,468
Current maturities of long-term debt	15,116	529
Total notes payable and current maturities of long-term debt	$ 22,930	$ 3,997
Term loan agreement - shopping center	$ 54,753	$ -
Term loan agreement - Fairchild Sports	35,590	-
GMAC credit facility - Fairchild Sports	4,157	-
CIT revolving credit facility - Aerospace	8,995	-
Capital lease obligations	2,929	88
Other notes payable, collateralized by fixed assets	12,424	4,718
Less: current maturities of long-term debt	(15,116)	(529)
Net long-term debt	$ 103,732	$ 4,277
Total debt	$ 126,662	$ 8,274

Credit Facilities at Fairchild Sports

On May 5, 2004, our German subsidiary, Hein Gericke Deutschland GmbH and its German partnership, PoloExpress, obtained financing of 41.0 million euros ($49.5 million at June 30, 2004) from Stadtsparkasse Dusseldorf and HSBC Trinkaus & Burkhardt KGaA. The proceeds received from the loan were used to payoff a short-term loan due to the bankruptcy Administrator of Eurobike. The components of the financing obtained are as follows:

(In thousands)	Credit	Credit
	Facilities	Facilities
	(In Euros)	(In Dollars)	Interest Rate	Maturity Date
Revolving credit facility (2)	10,000	$ 12,085	3-month Euribor + 3.5%	364 days
Term Loans:
Tranche A (1)(2)	11,000	13,294	3-month Euribor + 1%	March 31, 2009
Tranche B (1)(3)	14,000	16,919	3-month Euribor + 1%	March 31, 2009
Tranche C (3)	6,000	7,251	6% Fixed	March 31, 2009
Total Facility	41,000	$ 49,549

(1)     - 20 million euros of the Tranche A and Tranche B financing is guaranteed by the State of North Rhine-Westphalia. One half of the Tranche A and Tranche B term loans are protected by an interest rate cap in which our interest expense would not exceed 6%.
(2)     - Tranche A and the revolving credit facility are secured by the assets of Hein Gericke Deutschland GmbH.
(3)     - Tranche B and Tranche C are secured by the assets of PoloExpress, and secondarily by Hein Gericke Deutschland.

        The loan agreements require Hein Gericke and PoloExpress to maintain compliance with certain covenants. The most restrictive of the covenants requires Hein Gericke to maintain economic equity of 44.5 million euros ($53.8 million). No dividends may be paid by Hein Gericke unless such covenants are met and dividends may be paid only up to it’s consolidated after tax profits. The proceeds from the financing were used to pay the balance of the purchase price owed to the administrator for Eurobike AG, and complete our acquisition of Hein Gericke, PoloExpress, and Intersport Fashions West. Hein Gericke also borrowed 12.0 million euros ($14.5 million) from our subsidiary, Fairchild Holding Corp., which may be repaid if the covenants in the loan agreements are met.

        On April 30, 2004, our subsidiary, Hein Gericke UK Ltd obtained a credit facility of 5.0 million British Pounds ($9.0 million) from GMAC. At June 30, 2004, $4.2 million was borrowed against the facility. The loan bears interest at 2.25%, per annum, above the base rate of Lloyds TSB Bank Plc and matures on April 30, 2007. We must pay a 0.75% per annum non-utilization fee on the available facility. The financing is secured by the inventory of Hein Gericke UK Ltd and an investment with a fair market value of $4.6 million at June 30, 2004.

Short-term Loan from Administrator

        We received a short-term loan of 46.5 million euros ($54.1 million) from the bankruptcy Administrator of Eurobike to fund the remaining purchase price of the businesses that we acquired on November 1, 2003. The due date of the short term loan was originally April 30, 2004, but was extended until May 7, 2004, to allow completion of long term financing. On May 5, 2004, we obtained long-term financing of 41.0 million euros (approximately $49.6 million on that date) and repaid the short-term loan due to the Administrator, thus completing the acquisition.

Term Loan Agreement — Shopping Center

        On December 26, 2003, our subsidiary, Republic Thunderbolt, LLC, obtained a $55.0 million, non-recourse 10-year term loan financing of our Airport Plaza shopping center in Farmingdale, New York. The interest rate is fixed at 6.2% for the term of the loan. The lender is Column Financial, a subsidiary of Credit Suisse First Boston, LLC. The loan is secured by the assets of our shopping center. Approximately $8.1 million of the loan proceeds are being invested in a long-term escrow account as collateral to fund certain contingent environmental matters.

Credit Facility at Aerospace Segment

        In January 2004, we entered into 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. Interest on outstanding borrowings is 1.0% over prime and we will pay a non-usage fee of 0.5%. On June 30, 2004, $9.0 million was borrowed against the facility and $1.7 million was available for future borrowings.

Guaranties

        On June 30, 2004, we have included $2.1 million as debt for guarantees of retail shop partners indebtedness incurred for the purchase of leasehold improvements. These guarantees were assumed by our subsidiary in the sports & leisure segment. In addition, on June 30, 2004, approximately $2.2 million of bank loans received by retail shop partners in the sports & leisure segment were guaranteed by our subsidiary and are not reflected on our balance sheet because these loans have not been assumed by us.

5.     PENSIONS AND POSTRETIREMENT BENEFITS

        In January, 2004 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132 (revised 2003) “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, an amendment of FASB Statements No. 87, 88, and 106. The Statement revises employers’ disclosures about pension plans and other postretirement benefit plans. The statement retains the disclosure requirements contained in FASB Statement No. 132, which it replaces, and requires additional annual disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. Statement No. 132R requires us to provide disclosures in interim periods for pensions and other postretirement benefits. We adopted Statement No. 132R in the quarter ended March 31, 2004. A summary of the components of total pension expense is as follows:

	Three Months Ended		Nine Months Ended
	6/30/04	6/30/03	6/30/04	6/30/03
Service cost, benefits earned during the period	$ 183	$ 776	$ 548	$ 2,327
Interest cost on projected benefit obligation	2,788	3,614	8,363	10,842
Expected return on plan assets	(3,703)	(4,652)	(11,108)	(13,956)
Amortization of net loss	72	469	217	1,408
Amortization of prior service cost	758	77	2,273	230
Amortization of transition asset	-	(1)	-	(4)
Net periodic pension (income) expense	$ 98	$ 283	$ 293	$ 847
Curtailment charge	$ -	$ -	$ -	8,305
Settlement charge	-	-	-	17,478
Total net periodic pension cost	$ 98	$ 283	$ 293	$ 26,630

We do not expect cash contributions to the pension plan to be required until 2008.

The amount of expense recognized for other defined contribution postretirement plans were $1,137 and $888, for the three months ended June 30, 2004 and June 30, 2003, respectively and $3,514 and $2,525 for the nine months ended June 30, 2004 and June 30, 2003, respectively.

6. EARNINGS (LOSS) PER SHARE

The following table illustrates the computation of basic and diluted earnings (loss) per share:

	Three Months Ended		Nine Months Ended
Basic earnings (loss) per share:	6/30/04	6/30/03	6/30/04	6/30/03
Earnings (loss) from continuing operations	$ (9,874)	$ (17,419)	$ (11,551)	$ (72,113)
Weighted average common shares outstanding	25,194	25,184	25,192	25,172
Basic earnings (loss) from continuing operations per share	$ 0.39	$ (0.69)	$ (0.46)	$ (2.86)
Diluted earnings (loss) per share:
Earnings (loss) from continuing operations	$ 9,874	$ (17,419)	$ (11,551)	$ (72,113)
Weighted average common shares outstanding	25,194	25,184	25,192	25,172
Options	50	antidilutive	antidilutive	antidilutive
Total shares outstanding	25,244	25,184	25,192	25,172
Diluted earnings (loss) from continuing operations per share	$ 0.39	$ (0.69)	$ (0.46)	$ (2.86)

        Stock options entitled to purchase 308,280 and 1,311,307 shares of Class A common stock were antidilutive and not included in the earnings per share calculation for the three and nine months ended June 30, 2004, respectively. Stock options entitled to purchase 1,668,167 and 1,795,358 shares of Class A common stock were antidilutive and not included in the earnings per share calculation for the three and nine months ended June 30, 2003, respectively.

7.     EQUITY SECURITIES

        We had 22,572,204 shares of Class A common stock and 2,621,412 shares of Class B common stock outstanding at June 30, 2004. Class A common stock is traded on both the New York and Pacific Stock Exchanges. There is no public market for the Class B common stock. The shares of Class A common stock are entitled to one vote per share and cannot be exchanged for shares of Class B common stock. The shares of Class B common stock are entitled to ten votes per share and can be exchanged, at any time, for shares of Class A common stock on a share-for-share basis. During the nine months ended June 30, 2004, 90 shares of Class B common stock were exchanged for Class A common stock and we issued 9,500 shares of Class A common stock as a result of the exercise of stock options.

8.     STOCK-BASED COMPENSATION

        Stock-Based Compensation: As permitted by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, we use the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, for our stock-based employee compensation plans. Accordingly, no compensation cost has been recognized for the granting of stock options to our employees in the three months ended June 30, 2004 and June 30, 2003. If stock options granted were accounted for based on their fair value as determined under SFAS 123, our pro forma results would be as follows:

	Three Months Ended		Nine Months Ended
	6/30/04	6/30/03	6/30/04	6/30/03
Net earnings (loss), as reported	$ 7,052	$ (32,435)	$ (7,793)	$ (45,884)
Total stock-based employee compensation expense determined under the fair value based method for all awards, net of tax	(84)	(137)	(251)	(411)
Pro forma net earnings (loss)	$ 6,968	$ (32,572)	$ (8,044)	$ (46,295)
Basic and diluted loss per share:
As reported	$ 0.28	$ (1.29)	$ (0.31)	$ (1.82)
Pro forma	$ 0.28	$ (1.29)	$ (0.32)	$ (1.84)

        The pro forma effects of applying SFAS 123 are not representative of the effects on reported net results for future years. Additional grants are expected in future years.

        The weighted average grant date fair value of options granted during the nine months ended June 30, 2004 was $3.12. The weighted average grant date fair value of options granted during the nine months ended June 30, 2003 was $3.03. The fair value of each option granted is estimated on the grant date using the Black-Scholes option pricing model.

9.     PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)

        The following table sets forth our unaudited pro forma results of operations for the nine months ended June 30, 2004 and three and nine months ended June 30, 2003, reflecting our acquisition of Hein Gericke, PoloExpress and IFW (completed on November 1, 2003), and the disposition of our fastener business (December 3, 2002). The pro forma results are based on our historical financial statements and the historical financial statements of the operations and entities we acquired. The prior period historical results of the operations and entities we acquired are based upon the best information available to us and these financial statements were not audited. The unaudited pro forma statements of operations give effect to each of these transactions as if the transactions occurred on October 1, 2003 and October 1, 2002, respectively. The pro forma financial results are presented for informational purposes only and are not intended to be indicative of either future results of our operations or results that might have been achieved had the transactions actually occurred since the beginning of the fiscal periods. The summary unaudited consolidated pro forma financial results are qualified by and should be read in conjunction with the financial statements and notes thereto included in our June 30, 2003 Annual Report on Form 10-K.

	Three Months
	Ended	Nine Months Ended
	6/30/03	6/30/04	6/30/03
Net revenues	$ 106,595	$ 252,777	$ 238,258
Operating loss	(838)	(6,610)	(43,719)
Loss from continuing operations	12,736)	(12,533)	(76,561)
Loss from continuing operations, per share	$ (0.51)	$ (0.50)	$ (3.04)

10.     CONTINGENCIES

         Environmental Matters

        Our operations are subject to stringent government imposed environmental laws and regulations concerning, among other things, the discharge of materials into the environment and the generation, handling, storage, transportation and disposal of waste and hazardous materials. To date, such laws and regulations have not had a material effect on our financial condition, results of operations, or net cash flows, although 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 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. Recent 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 quarter ended June 30, 2004, we recorded a $4.0 million expense in discontinued operations.

        As of June 30, 2004, the consolidated total of our recorded liabilities for environmental matters was approximately $9.8 million, which represented the estimated probable exposure for these matters. On June 30, 2004, $3.8 million of these liabilities were classified as other accrued liabilities and $6.0 million were classified as other long-term liabilities. It is reasonably possible that our exposure for these matters could be approximately $17.9 million.

        The sales agreement with Alcoa includes an indemnification for legal and environmental claims in excess of $8.4 million, for our fastener business. To date, Alcoa has contacted us concerning potential environmental and legal claims which, while disputed, could consume up to $6.0 million of the $8.4 million accrual for the indemnification liability. Accordingly, there is no additional accrual for these environmental claims at June 30, 2004.

         Other Matters

        We have an unsettled demand from Alcoa to pay $8.2 million as a post-closing adjustment based upon the net working capital of the fastener business on December 3, 2002, compared with its net working capital at March 31, 2002. In addition, Alcoa has asserted other claims which, if proven, would, according to Alcoa, aggregate in excess of $5.0 million. If Alcoa is correct and these other claims exceed $5.0 million, we may be required to reimburse Alcoa for the full amount, without benefit of a threshold set forth in the acquisition agreement under which we sold our fastener business to Alcoa. On March 5, 2004, Alcoa paid us approximately $4.8 million of $8.8 million due to us based upon $12.5 million earned for commercial aircraft deliveries in 2003, less amounts we settled for accounts receivable, taxes, and liabilities to former employees. Alcoa, without our authorization, held back “in escrow” $4.0 million, which Alcoa agreed was due to the Company, pending resolution of the closing balance sheet matter. There is no provision in the agreements between the Company and Alcoa permitting Alcoa to create an escrow for the disputed post-closing balance sheet adjustment. We have notified Alcoa of our dispute of these matters and claims, and expect that resolution will require litigation, arbitration, or alternative dispute resolution methods. At June 30, 2004, we had not recorded an accrual for these disputes with Alcoa.

        On January 21, 2003, we and one of our subsidiaries were served with a third-party complaint in an action brought in New York by a non-employee worker and his spouse alleging personal injury as a result of exposure to asbestos-containing products. The defendant, which is one of many defendants in the action, had purchased a pump business from us, and asserts the right to be indemnified by us under its purchase agreement. While the purchaser has notified us of, and claimed a right to indemnity from us against other asbestos-related claims against it, this is the only instance in which a suit has been instituted against us. We have not received enough information to assess the impact, if any, of the other claims.

        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.

11.     RESTRUCTURING CHARGES

        Restructuring charges of $563 in the three and nine months ended June 30, 2004 included the costs to close all fifteen of the GoTo Helmstudio retail locations in Germany. All of the charges were the direct result of activities that occurred as of June 30, 2004. The restructuring charges included an accrual of $428 for excess facilities of the closed stores, $124 for the write-off of store fittings and $11 for severance. These costs were classified as restructuring and were the direct result of a formal plan to close the GoTo Helmstudio locations and terminate its employees. Such costs are nonrecurring in nature. Other than a reduction in our existing cost structure, none of the restructuring costs will result in future increases in earnings or represent an accrual of future costs of our ongoing business.

12.     BUSINESS SEGMENT INFORMATION

        We currently report in three principal business segments: sports & leisure, aerospace, and real estate operations. The following table provides the historical results of our operations for the three and nine months ended June 30, 2004 and June 30, 2003, respectively.

	Three Months Ended		Nine Months Ended
	6/30/04	6/30/03		6/30/04	6/30/03
Revenues
Sports & Leisure Segment (a)	$ 91,920	$ -		$ 171,405	$ -
Aerospace Segment	22,735	18,232		62,694	51,389
Real Estate Operations Segment	2,704	2,435		7,591	6,811
Corporate and Other	-	25		1	25
Total	$ 117,359	$ 20,692		$ 241,691	$ 58,225
Operating Income (Loss)
Sports & Leisure Segment (a)	$ 10,385	$ -		$ 5,772	$ -
Aerospace Segment	1,389	(6,593)		2,632	(6,982)
Real Estate Operations Segment	849	696		2,396	2,139
Corporate and Other	(6,243)	(2,927)		(16,753)	(39,846)
Total	$ 6,380	$ (8,824)		$ (5,953)	$ (44,689)
Earnings (Loss) From Continuing Operations Before Taxes
Sports & Leisure Segment (a)	$ 9,217	$ -		$ 2,497	$ -
Aerospace Segment	1,150	(4,840)		2,116	(7,352)
Real Estate Operations Segment	82	694		356	908
Corporate and Other	(3,809)	(10,760)		(19,681)	(56,854)
Total	$ 6,640	$ (14,906)		$ (14,712)	$ (63,298)
Assets	6/30/04	9/30/03
Sports & Leisure Segment	$ 182,574	$ -
Aerospace Segment	53,139	52,506
Real Estate Operations Segment	133,429	122,241
Corporate and Other	155,802	202,660
Total	$ 524,944	$ 377,407

(a)     – Includes the results from our sports & leisure segment since its acquisition on November 1, 2003.

13.     DISCONTINUED OPERATIONS

         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. The cash received from Alcoa is subject to a post-closing adjustment based upon the net working capital of the fastener business on December 3, 2002, compared with its net working capital as of March 31, 2002. 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 threshold levels up to a maximum of $12.5 million per year. The threshold aircraft delivery levels are 505 in 2003; 515 in 2004; 570 in 2005; and 650 in 2006.

        Based upon the Greenslet report included in the Airline Monitor issued on February 10, 2004, 579 commercial aircraft were delivered by Boeing and Airbus in 2003. These deliveries exceeded the target threshold for aircraft deliveries of 505 commercial aircraft in 2003. Accordingly, we earned $12.5 million of additional proceeds from Alcoa and we have recognized this amount as pre-tax income from gain on disposal of discontinued operations in the nine months ended June 30, 2004. From this amount, in January 2004, we reimbursed Alcoa approximately $1.2 million for taxes Alcoa had paid that were attributable to periods prior to December 3, 2002 (the date of the sale), and agreed to split equally a $0.7 million claim Alcoa had made with respect to bonus payments of certain foreign employees of the business Alcoa acquired from the Company. The taxes were primarily property taxes and non-income taxes paid after December 3, 2002 in foreign countries for periods prior to the date of sale. In addition, there were accounts receivable on the closing date balance sheet at the date of the sale to Alcoa. Alcoa had the right to require us to repurchase any of these accounts receivable which were uncollected by Alcoa as of June 3, 2003 (six months after the date of sale). In March 2004, we paid Alcoa $2.2 million to settle its claims arising from these uncollected receivables. Since that time, several of the account debtors have made payments to Alcoa; and in July 2004, Alcoa reimbursed us $1.0 million for these accounts receivable it collected through March 31, 2004.

        As a result of the aircraft delivery earn-out, offset partially by the settlement for taxes, accounts receivable, and former employee bonus payments, we recorded an $9.5 million gain on disposal of discontinued operations for the nine months ended June 30, 2004. Alcoa, without our authorization, held back “in escrow” $4.0 million, which Alcoa agreed was due to the Company, pending resolution of the closing balance sheet matter. There is no provision in the agreements between the Company and Alcoa permitting Alcoa to create an escrow for the disputed post-closing balance sheet adjustment. We have notified Alcoa of our dispute of these matters and claims, and expect that resolution will require litigation, arbitration, or alternative dispute resolution methods. At June 30, 2004, we had not recorded an accrual for the $4.0 million held back by Alcoa.

        On December 3, 2002, we deposited with an escrow agent $25 million to secure indemnification obligations we may have to Alcoa. The escrow period remains in effect to December 2, 2007, but funds may be held longer if claims are timely asserted and remain unresolved. The escrow is classified in long-term investments on our balance sheet. In addition, for a period ending on December 2, 2007, we are required to maintain our corporate existence, take no action to cause our own liquidation or dissolution, and take no action to declare or pay any dividends on our common stock. (Please see Note 10 for further discussion).

         APS

        In February 2003, our Board of Directors adopted a formal plan for the sale of APS, a small operation in our aerospace manufacturing segment, which has been unprofitable. On January 23, 2004, we consummated a sale of substantially all of the physical assets of APS, for a nominal amount. Accordingly, the results of APS were reported as a discontinued operation.

        The results of the fastener business and APS are recorded as earnings from discontinued operations, the components of which are as follows:

                                                                                            Three Months Ended           Six Months Ended

	6/30/04	6/30/03	6/30/04	6/30/03 (a)
Net sales	$ -	$ 8	$ 39	$ 86,844
Cost of goods sold	-	92	350	64,001
Gross margin	-	(84)	(311)	22,843
Selling, general & administrative expense (b)	3,631	1,228	5,663	21,434
Other (income) expense, net	-	-	-	1,429
Operating loss	(3,631)	(1,312)	(5,974)	(20)
Net interest expense	-	-	-	123
Loss from discontinued operations before taxes	(3,631)	(1,312)	(5,974)	(20)
Income tax provision (benefit)	-	(3,406)	-	(3,412)
Net earnings (loss) from discontinued operations	$ (3,631)	$ (4,718)	$ (5,974)	$ (3,555)

(a) – The results presented for the nine months ended June 30, 2003, include the operating activity of the fastener business, which was sold on December 3, 2002.

(b) – Included in selling, general and administrative expense for the nine months ended June 30, 2004 was a $0.8 million accrual established to fund a legal matter of a former subsidiary, $4.1 million for environmental liabilities of operations previously sold, and a $1.0 million cost of severance for a former fastener employee.

        The assets and liabilities of APS were reported as assets and liabilities of discontinued operations at September 30, 2003, and were as follows:

	September 30,
	2003
Current assets of discontinued operations:
Accounts receivable	$ 18
Inventories	32
Prepaid expenses and other current assets	2
	52
Noncurrent assets of discontinued operations:
Property, plant and equipment	71
Accumulated depreciation	(71)
Other assets	125
	125
Current liabilities of discontinued operations:
Accounts payable	(5)
Accrued liabilities	(725)
	(730)
Total net assets (liabilities) of discontinued operations	$ (553)

14.     CHANGES IN ACCOUNTING

        For the three and nine months ended June 30, 2004, we recorded a $0.2 million gain from the cumulative effect of change in accounting for an investment in affiliate. In January 2004, our position in a small start-up business was diluted, and the business could no longer be consolidated by us. We previously were required to consolidate the start-up business, and through December 2003, we recognized losses of $0.2 million in excess of our investment. The negative book value was reversed in the nine months ended June 30, 2004.

15.     CONSOLIDATION OF VARIABLE INTEREST ENTITIES

        On March 31, 2004, we adopted FASB Interpretation 46 “Consolidation of Variable Interest Entities”. FASB Interpretation 46, as revised, requires variable interest entities created before December 31, 2003 to be consolidated during the first interim period beginning after December 15, 2003. Accordingly, on June 30, 2004, we consolidated our interest in a landfill development partnership, of which we are a limited partner. The consolidation of the landfill development partnership had an effect of increasing fixed assets by $2.8 million and reducing notes receivable by approximately $3.9 million on June 30, 2004 as compared to September 30, 2003. The partnership has signed a letter of intent to sell its remaining landfill at a price below its carrying value. Accordingly, we recognized an impairment expense of $1.2 million in the quarter ended June 30, 2004.

16.     SUBSEQUENT EVENTS

        On July 1, 2004, we acquired for one euro, all the outstanding shares of Allspeedex SA, which owns all of the outstanding shares of Hein Gericke France, SARL. Hein Gericke France operates in six retail shops in France.

        In July 2004 our tenant closed on an option to purchase a building it was leasing from us in Chatsworth, California for $4.5 million. We will recognize a nominal gain from this transaction. As a result of the sale of this property, annual revenue and operating income will decrease by approximately $0.5 million in our real estate segment.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFRESULTS
OF OPERATIONS AND FINANCIAL CONDITION

        The Fairchild Corporation was incorporated in October 1969, under the laws of the State of Delaware. We have 100% ownership interests (directly and indirectly) in Fairchild Holding Corp. and Banner Aerospace Holding Company I, Inc. Fairchild Holding Corp. is the owner (directly and indirectly) of Republic Thunderbolt, LLC and effective November 1, 2003 and January 2, 2004, acquired ownership interests in Hein Gericke, PoloExpress, and Intersport Fashions West. Our principal operations are conducted through these entities. Our consolidated financial statements present the results of our former fastener business, and APS, a small business recently sold, as discontinued operations.

        The following discussion and analysis provide information which management believes is relevant to the assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto.

CAUTIONARY STATEMENT

        Certain statements in this filing contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operation and business. These statements relate to analyses and other information, which are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies. These forward-looking statements are identified by their use of terms and phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” and similar terms and phrases, including references to assumptions. These forward-looking statements involve risks and uncertainties, including current trend information, projections for deliveries, backlog and other trend estimates that may cause our actual future activities and results of operations to be materially different from those suggested or described in this financial discussion and analysis by management. These risks include: our ability to find, finance, acquire and successfully operate one or more new businesses; product demand; weather conditions in Europe during peak business periods; timely deliveries from vendors; our dependence on the aerospace industry; customer satisfaction and quality issues; labor disputes; competition; our ability to achieve and execute internal business plans; worldwide political instability and economic growth; military conflicts; reduced airline revenues as a result of the September 11, 2001 terrorist attacks on the United States, and their aftermath; reduced airline travel due to infectious diseases; and the impact of any economic downturns and inflation.

        If one or more of these and other risks or uncertainties materializes, or if underlying assumptions prove incorrect, our actual results may vary materially from those expected, estimated or projected. Given these uncertainties, users of the information included in this financial discussion and analysis by management, including investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. We do not intend to update the forward-looking statements included in this filing, even if new information, future events or other circumstances have made them incorrect or misleading.

EXECUTIVE OVERVIEW

        Our business consists of three segments: sports & leisure, aerospace, and real estate operations. Our sports & leisure segment is engaged in the design and retail sale of protective clothing, helmets and technical accessories for motorcyclists in Europe and the 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 and also manufactures airframe components. Our real estate operations segment owns and leases a shopping center located in Farmingdale, New York, and owns and rents two improved parcels located in Southern California.

        During the past nine months, we have located and acquired substantially all of the worldwide operations of Hein Gericke, PoloExpress, and Intersport Fashions West (IFW), collectively now known as Fairchild Sports. Hein Gericke currently operates 147 retail shops in Austria, Belgium, England, France, Germany, Italy, Luxembourg, and the Netherlands. PoloExpress currently operates 85 retail shops in Germany. IFW, located in Tustin, California, is a designer and distributor of motorcycle apparel, boots and helmets under several labels, including First Gear and Hein Gericke. In addition IFW designs and produces apparel under private labels for third parties, including Harley-Davidson. IFW is also a distributor for other manufacturers in the United States. Fairchild Sports is a seasonal business, with a historic trend of a higher volume of sales and profits during the months of March through September.

        On December 26, 2003, we obtained a $55 million, ten-year term loan financing of our shopping center on a non-recourse basis. On January 2, 2004, we acquired all but 7.5% of the remaining interest in PoloExpress.

        In January 2004, we obtained a $20.0 million asset based revolving credit facility with CIT. The amount that we can borrow under the facility is based upon the inventory and accounts receivable on-hand at our aerospace segment. Interest on outstanding borrowings is 1.0% over prime and we will pay a non-usage fee of 0.5%.

        On May 5, 2004, we obtained long-term financing of 41.0 million euros at the sports & leisure segment and satisfied a 46.5 million euro note payable due.

During the next several months, we will endeavor to:

- Develop Hein Gericke brand recognition through presently targeted customers and market expansion.

- Integrate and restructure the components of Fairchild Sports to enhance operational efficiencies, centralizing worldwide procurement and improving information systems.

-Complete Sarbanes-Oxley Section 404 internal control compliance efforts on a worldwide basis.

-Generate cash from operations, borrowings, and sale of non-core assets.

RESULTS OF OPERATIONS

      Business Transactions

        On November 1, 2003, we acquired for $45.5 million (39.0 million euros) substantially all of the worldwide business of Hein Gericke and the capital stock of Intersport Fashions West (IFW) from the Bankruptcy Administrator for Eurobike AG in Germany. Also on November 1, 2003, we acquired for $23.4 million (20.0 million euros) from the Administrator for Eurobike AG and from two subsidiaries of Eurobike AG all of their respective ownership interests in Polo Express and receivables owed to them by PoloExpress. We used available cash from investments that were sold to pay the Administrator $14.6 million (12.5 million euros) on November 1, 2003 and borrowed 46.5 million euros ($54.1 million) from the Administrator at a rate of 8%, per annum. On May 5, 2004 we received long-term financing and paid the note due to the Administrator. The aggregate purchase price for these acquisitions was approximately $68.9 million (59.0 million euros), including $15.0 million (12.9 million euros) of cash acquired.

        On January 2, 2004, we acquired for $18.8 million (15.0 million euros) all but 7.5% of the interest owned by Mr. Klaus Esser in PoloExpress. Mr. Esser will retain a 7.5% ownership interest in PoloExpress, but Fairchild has a right to call this interest at any time from March 2007 to October 2008, for a purchase price of 12.3 million euros ($14.9 million at June 30, 2004). Mr. Esser has the right to put such interest to us at any time during April of 2008 for 12.0 million euros ($14.5 million at June 30, 2004). On January 2, 2004, we used available cash to pay Mr. Esser $18.8 million (15.0 million euros) and provided collateral of $15.0 million (12.0 million euros) to a German bank to issue a guarantee to Mr. Esser to secure the price for the put Mr. Esser has a right to exercise in April of 2008. The purchase price includes an agreement with Mr. Esser under which he agrees with us not to compete with PoloExpress for five years. We also signed an employment agreement with Mr. Esser for two years. As of June 30, 2004, the 12.0 million euros ($14.5 million) collateralized obligation for the put option was recorded in other long-term liabilities and the restricted cash is invested in money market funds and included in long-term investments.

        The total purchase price exceeded the estimated fair value of the net assets acquired by approximately $19.7 million. The excess of the purchase price over tangible assets and identifiable intangible assets was preliminarily reflected as goodwill in the consolidated financial statements as of June 30, 2004. Estimates for fair value represent our best estimate as of June 30, 2004. We are currently finalizing fair values for these acquisitions. Changes in fair value from current estimated amounts, as well as changes in other assumptions, could significantly impact our operating results and the reported value of goodwill. For all periods since the acquisition date, we may have to recognize amortization expense associated with intangible assets determined to have a definite life. Since their acquisition on November 1, 2003, we have consolidated the results of Hein Gericke, PoloExpress and IFW into our financial statements.

        On May 5, 2004, our German subsidiary, Hein Gericke Deutschland GmbH and its German partnership PoloExpress, obtained financing of 41.0 million euro($49.5 million) from Stadtsparkasse Düsseldorf and HSBC Trinkaus & Burkhardt KGaA. The loan agreements require Hein Gericke and PoloExpress to maintain compliance with certain covenants. The most restrictive of the covenants requires Hein Gericke to maintain economic equity of  44.5 million euros ($53.8 million). No dividends may be paid by Hein Gericke unless such covenants are met and dividends may be paid only up to it’s consolidated after tax profits. The proceeds from the financing were used to pay the balance of the purchase price owed to the Administrator for Eurobike AG, and complete our acquisition of Hein Gericke, PoloExpress, and Intersport Fashions West. In addition, Hein Gericke also borrowed, 12.0 million euros ($14.5 million) from our subsidiary, Fairchild Holding Corp., which may be repaid if the covenants in the loan agreements are met.

        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. The cash received from Alcoa is subject to a post-closing adjustment based upon the net working capital of the fastener business on December 3, 2002, compared with its net working capital as of March 31, 2002. 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 threshold levels up to a maximum of $12.5 million per year. The threshold aircraft delivery levels are 505 in 2003; 515 in 2004; 570 in 2005; and 650 in 2006.

        Based upon the Greenslet report included in the Airline Monitor issued on February 10, 2004, 579 commercial aircraft were delivered by Boeing and Airbus in 2003. These deliveries exceeded the target threshold for aircraft deliveries of 505 commercial aircraft in 2003. Accordingly, we earned $12.5 million of additional proceeds from Alcoa and we have recognized this amount as pre-tax income from gain on disposal of discontinued operations in the nine months ended June 30, 2004. From this amount, in January 2004, we reimbursed Alcoa approximately $1.2 million for taxes Alcoa had paid that were attributable to periods prior to December 3, 2002 (the date of the sale), $2.2 million to settle Alcoa’s claims with respect to uncollected accounts receivable, and agreed to split equally a $0.7 million claim Alcoa had made with respect to bonus payments of certain foreign employees of the business Alcoa acquired from the Company. The taxes were primarily property taxes and non-income taxes paid after December 3, 2002 in foreign countries for periods prior to the date of sale.

        There were accounts receivable on the closing date balance sheet at the date of the sale to Alcoa. Alcoa had the right to require us to repurchase any of these accounts receivable which were uncollected by Alcoa as of June 3, 2003 (six months after the date of sale). In March 2004, we paid Alcoa $2.2 million to settle its claims arising from these uncollected receivables. Since that time, several of the account debtors have made payments to Alcoa; and in July 2004, Alcoa reimbursed us $1.0 million for these accounts receivable it collected through March 31, 2004.

        As a result of the aircraft delivery earn-out, offset partially by the settlement for taxes, accounts receivable, and former employee bonus payments, we recorded an $9.5 million gain on disposal of discontinued operations for the nine months ended June 30, 2004. Alcoa, without our authorization, held back “in escrow” $4.0 million, which Alcoa agreed was due to the Company, pending resolution of the closing balance sheet matter. There is no provision in the agreements between the Company and Alcoa permitting Alcoa to create an escrow for the disputed post-closing balance sheet adjustment. We have notified Alcoa of our dispute of these matters and claims, and expect that resolution will require litigation, arbitration, or alternative dispute resolution methods. At June 30, 2004, we had not recorded an accrual for these disputes with Alcoa.

        The sale of the fastener business has reduced our dependence upon the aerospace industry. In fiscal 2003, we used a portion of the proceeds from the sale to repay our bank debt and to acquire by tender all of our outstanding $225 million 10.75% senior subordinated notes due in April 2009. We used a portion of the remaining proceeds to fund the acquisition of Hein Gericke, PoloExpress, and IFW.

        In February 2003, our Board of Directors adopted a formal plan for the sale of APS, a small operation in our aerospace manufacturing segment, which has been unprofitable. On January 23, 2004, we consummated a sale of substantially all of the physical assets of APS for a nominal amount. Accordingly, the results of APS were reported as a discontinued operation.

      Consolidated Results

        Because of the November 1, 2003, acquisition of Hein Gericke, PoloExpress, and IFW, collectively now known as Fairchild Sports, and the sale of the fasteners business on December 3, 2002, the discussion below can not be relied upon as a trend of our future results. Additionally, Fairchild Sports is a highly seasonal business, with a historic trend of a higher volume of sales and profits during the months of March through September.

        We currently report in three principal business segments: sports & leisure, aerospace, and real estate operations. The following table provides the sales and operating income of our segments on a historical and pro forma basis for the three and nine months ended June 30, 2004 and June 30, 2003, respectively. The pro forma results represent the impact of our acquisition of Hein Gericke, PoloExpress, and IFW, as if this transaction had occurred at the beginning of each of our fiscal periods. The pro forma information is based on the historical financial statements of these companies, giving effect to the aforementioned transactions. The prior period historical results of the operations and entities we acquired are based upon the best information available to us and these financial statements were not audited. The pro forma information is not necessarily indicative of the results of operations, that would actually have occurred if the transactions had been in effect since the beginning of each fiscal period, nor are they necessarily indicative of our future results.

                                                                  Three Months Ended                          Six Months Ended
                                                                  Actual           Pro Forma             Actual                  Pro Forma

	6/30/04	6/30/03	6/30/03	6/30/04	6/30/03	6/30/04	6/30/03
Revenues
Sports & Leisure Segment (a)	$ 91,920	$ -	$ 85,903	$ 171,405	$ -	$ 182,491	$ 180,033
Aerospace Segment	22,735	18,232	18,232	62,694	51,389	62,694	51,389
Real Estate Operations Segment	2,704	2,435	2,435	7,591	6,811	7,591	6,811
Corporate and Other	-	25	25	1	25	1	25
Total	$ 117,359	$ 20,692	$ 106,595	$ 241,691	$ 58,225	$ 252,777	$ 238,258
Operating Income (Loss)
Sports & Leisure Segment (a)	$ 10,385	$ -	$ 7,986	$ 5,772	$ -	$ 5115	$ 970
Aerospace Segment	1,389	(6,593)	(6,593)	2,632	(6,982)	2,632	(6,982)
Real Estate Operations Segment	849	696	696	2,396	2,139	2,396	2,139
Corporate and Other	(6,243)	(2,927)	(2,927)	(16,753)	(39,846)	(16,753)	(39,846)
Total	$ 6,380	$ (8,824)	$ (838)	$ (5,953)	$ (44,689)	$ (6,610)	$ (43,719)

(a)     – Actual results for the nine months ended June 30, 2004, include only eight months of results from our sports & leisure segment since its acquisition on November 1, 2003.

        Revenues increased by $96.7 million, or 467%, in the third quarter of fiscal 2004, as compared to the third quarter of fiscal 2003. Revenues increased by $183.5 million, or 315%, in the first nine months of fiscal 2004, as compared to the first nine months of fiscal 2003. The increase was due primarily to the acquisition of Hein Gericke, PoloExpress and IFW on November 1, 2003. Revenues in the third quarter and first nine months of fiscal 2004 also benefited from increased revenues at our aerospace segment and real estate operations segment.

        Gross margin as a percentage of sales was 37.2% and 19.5% in the first nine months of fiscal 2004 and fiscal 2003, respectively. The improvement in margins reflects the higher gross margins earned from retail sales at the sports & leisure segment, which was acquired on November 1, 2003. Gross margin as a cost of rental revenue increased slightly to 35.0% in the first nine months of fiscal 2004 as compared to 34.9% in fiscal 2003.

        Selling, general and administrative expense increased $42.5 million for the nine months ended June 30, 2004, as compared to the first nine months of fiscal 2003. Selling, general and administrative expense for the nine months ended June 30, 2004, included $67.1 million of expenses related to the sports & leisure segment acquired on November 1, 2003. Selling, general and administrative expense for the nine months ended June 30, 2003, included $13.7 million of one-time change of control payments required under contracts with our top four executives as a result of the sale of the fastener business, and $10.4 million of bonuses awarded to our top four executives as a result of the sale of the fasteners business. The top four executives have relinquished their right to any other future change of control payments. Selling, general and administrative expense for the three and nine months ended June 30, 2004, included $0.7 million of severance expense for a former executive of Fairchild Sports.

        Other income decreased $1.1 million for the nine months ended June 30, 2004. The results for the nine months ended June 30, 2003 included $0.8 million earned on the sale of real estate.

        Impairment charges of $1.2 million and $6.7 million were recognized in the nine months ended June 30, 2004 and June 30, 2003, respectively. The impairment charges for the nine months ended June 30, 2004 included $1.2 million to write down the long-lived assets of a limited partnership interest which we are required to consolidate in accordance with FASB Interpretation 46. The impairment charges for the nine months ended June 30, 2003 included $6.6 million to write down goodwill at our aerospace distribution segment, and $0.1 million to write down intangible assets of a start-up company in our corporate and other segment.

        Restructuring charges of $0.6 million in the three and nine months ended June 30, 2004 included the costs to close all fifteen of the GoTo Helmstudio retail locations in Germany. All of the charges were the direct result of activities that occurred as of June 30, 2004. The restructuring charges included an accrual of $0.4 million for excess facilities of the closed stores, $0.1 million for the write-off of store fittings and a nominal amount for severance. These costs were classified as restructuring and were the direct result of a formal plan to close the GoTo Helmstudio locations and terminate employees. Such costs are nonrecurring in nature. Other than a reduction in our existing cost structure, none of the restructuring costs will result in future increases in earnings or represent an accrual of future costs of our ongoing business.

        Net interest expense was $15.7 million and $17.7 million for the nine months ended June 30, 2004 and June 30, 2003, respectively. The results for the first nine months of fiscal 2003 included interest expense, prior to the repayment of all of our outstanding senior subordinated notes, term loan and revolving credit facilities. These repayments were made from proceeds of the sale of the fastener business on December 3, 2002. We anticipate that interest expense will increase in future quarters, as a result of a $118.4 million net increase in debt incurred during the nine months ended June 30, 2004.

        The fair market value adjustment of our position in a ten-year $100 million interest rate contract improved by $5.8 million in the first nine months of fiscal 2004. The fair market value adjustment of this agreement will generally fluctuate, based on the implied forward interest rate curve for 3-month LIBOR. If the implied forward interest rate curve decreases, the fair market value of the interest rate contract will increase and we will record an additional charge. If the implied forward interest rate curve increases, the fair market value of the interest rate contract will decrease, and we will record income. Increasing interest rates have caused the favorable change in fair market value of the contract in the current period.

        The income tax benefit was $4.0 million for the nine months ended June 30, 2004. The tax benefit is due to the carryback of the current U.S. domestic loss and decrease in the valuation allowance, which reduces, by $6.0 million, the $68.5 million of noncurrent income tax liabilities at September 30, 2003, offset partially by income taxes of $1.8 million on foreign earnings and $0.2 million of state taxes. We recorded an income tax provision of $7.8 million in the first nine months of fiscal 2003, which reflected the adjustments due from the gain on disposal of discontinued operations in 2003.

        Earnings (loss) from discontinued operations includes the results of the fasteners business prior to its sale, APS, and certain legal and environmental expenses associated with our former businesses. The loss from discontinued operations for the first nine months of fiscal 2004 consists primarily of an accrual of $4.1 million of environmental liabilities at locations of operations previously sold, $0.8 million to cover legal expenses associated with an unfavorable verdict relating to a business we sold several years ago, and $1.0 million of severance costs for a former fastener employee. The increase in our environmental accrual is the result of a recent sampling of groundwater from the extraction wells to be used in the remediation system at a site in Farmingdale, New York, indicating contaminant levels at the extraction point that are significantly higher than previous sampling results indicated. As a result, the cost to treat this matter is now estimated to be significantly higher. The prior period earnings from discontinued operations reflect our ownership of the fastener business during the first three months of fiscal 2003, prior to its sale on December 3, 2002.

        For the nine months ended June 30, 2004, we recorded a $0.2 million gain from cumulative effect of change in accounting for an investment in affiliate. In January 2004, our position in a small start-up business was diluted and could no longer be consolidated by us. We were previously required to consolidate the start-up business, and through December 2003, we recognized losses $0.2 million in excess of our investment. The negative book value was reversed in the current quarter.

Segment Results

Sports & Leisure Segment

        Our sports & leisure segment, which we purchased from the Administrator of Eurobike AG and Mr. Klaus Esser, designs and sells protective clothing, helmets, and technical accessories for motorcyclists. Primary brand names of our products include Polo, Hein Gericke, and First Gear. Hein Gericke currently operates 147 retail shops in Austria, Belgium, England, France, Germany, Italy, Luxembourg and the Netherlands. Polo currently operates 85 retail shops in Germany. For the most part, the Hein Gericke retail stores sell Hein Gericke brand items, and the Polo retail stores sell Polo brand products. Both the Hein Gericke and Polo retail stores sell products of other manufacturers, the inventory of which is owned by the Company. IFW, located in Tustin, California, is a designer and distributor of motorcycle apparel, boots and helmets under several labels, including First Gear and Hein Gericke. In addition IFW designs and produces apparel under private labels for third parties, including Harley-Davidson. IFW is also a distributor for other manufacturers in the United States. The Fairchild Sports group is a seasonal business, with a historic trend of a higher volume of sales and profits during the months of March through September. On a pro forma basis, sales in our sports & leisure segment increased by $6.0 million during the three months ended June 30, 2004, as compared to the three months ended June 30, 2003. On a pro forma basis, operating income in our sports & leisure segment increased by $2.4 million during the three months ended June 30, 2004, as compared to the three months ended June 30, 2003. Operating income in the current quarter was adversely effected by $0.7 million of severance and $0.6 million of restructuring charges.

        Since the November 1, 2003 acquisition, Hein Gericke has initiated steps to advance its retail business in Germany. A new standard contract has been negotiated with each shop partner that operates a German retail shop to ensure each shop partner is sufficiently motivated to increase sales. Hein Gericke is focusing on increased advertising and greater marketing to restore brand recognition previously enjoyed by Hein Gericke in Germany. The number of Hein Gericke’s German employees has been reduced by one-third at no cost to the Company. During 2004 and early 2005, a new ERP computer system, now operational at Polo, will be expanded to encompass the operations of Hein Gericke.

        Hein Gericke and Polo increased the procurement of goods for delivery in Germany to meet the seasonal increase in sales. We believe relations with the suppliers of Fairchild Sports have improved since our acquisition.

        We have initiated a program to focus on optimal store location. This includes closing or relocating low performing stores, and opening new stores in the United Kingdom and elsewhere in Western Europe. Since the acquisition, we have opened five stores in Germany, five stores in the United Kingdom, one store in Italy and we have closed nineteen low performing stores in Germany. We have also redesigned several stores to better present our products to customers.

Aerospace Segment

        Our aerospace segment has six locations in the United States, and is an international supplier to the aerospace industry. Five locations specialize in the distribution of avionics, airframe accessories, and other components, and one location manufactures airframe components. The products distributed include: navigation and radar systems, instruments, and communication systems, flat panel technologies and rotables. Our location in Titusville, Florida, also overhauls and repairs landing gear, pressurization components, instruments, and avionics. Customers include original equipment manufacturers, commuter and regional airlines, corporate aircraft and fixed-base operators, air cargo carriers, general aviation suppliers and the military. Sales in our aerospace segment increased by $4.5 million, or 24.7%, and $11.3 million, or 22.0% in the third quarter and first nine months of fiscal 2004, respectively, as compared to the third quarter and first nine months of fiscal 2003. The improvement in sales reflects a large order which was delivered during the three and nine months ended June 30, 2004. Sales in our aerospace segment are not anticipated to remain at these levels in the coming quarters, as demand in the aerospace industry is still adversely affected by the events of September 11, 2001, and the continued financial difficulties of major commercial airlines.

        Operating income increased by $8.0 million in the third quarter and $9.6 million in the first nine months of fiscal 2004, as compared to the same periods in fiscal 2003. The results for the three and nine months ended June 30, 2003 were adversely affected by a $6.6 million impairment charge to write down goodwill. Excluding the goodwill impairment, operating income increased by $1.4 million and $3.0 million for the three months and nine months ended June 30, 2004, respectively, reflecting the increase in volume of sales and a small increase in gross margin as a percentage of sales.

Real Estate Operations Segment

            Our real estate operations segment owns and operates a 451,000 square foot shopping center located in Farmingdale, New York, and also owns and leases to others a 102,000 square foot building in Chatsworth, California and a 208,000 square foot manufacturing facility located in Fullerton, California. We have one tenant that occupies more than 10% of the rentable space of the shopping center. Rental revenue increased by 11.0% in the third quarter and 11.5% in the first nine months of fiscal 2004, as compared to the same periods of fiscal 2003, reflecting tenants occupying an additional 30,000 square feet of the shopping center. The weighted average occupancy was 96.7% during the first nine months of fiscal 2004, as compared to 90.0% in the first nine months of fiscal 2003. The average effective annual rental rate per square foot was $21.00 and $20.29 during the first nine months of fiscal 2004 and fiscal 2003, respectively. As of June 30, 2004, approximately 98% of the shopping center was leased. We anticipate that rental income will remain stable during fiscal 2004, as a result of a new lease for approximately 27,000 square feet, entered into during the last quarter of fiscal 2003, being offset from the July 2004 sale of the Chatsworth property which previously generated revenue and operating income of approximately $0.5 million per year. The Fullerton property is leased to Alcoa through October 2007, and generates revenue and operating income in excess of $0.5 million per year.

             Operating income increased by 22.0% in the third quarter and 12.0% in the first nine months of fiscal 2004, as compared to the same periods of fiscal 2003. The improvement in the first nine months of fiscal 2004 reflects an increase in the weighted-average occupancy of our shopping center during the first nine months of fiscal 2004.

Corporate

        The operating results at corporate improved by $23.1 million in the first nine months of fiscal 2004 as compared to the first nine months of fiscal 2003. The first nine months of fiscal 2003 included $13.7 million of expense for one-time change of control payments required under contracts with our top four executives, as a result of the sale of the fastener business, and $10.4 million of bonuses awarded to our top four executives, as a result of the sale of the fastener business. The top four executives relinquished their right to any other future change of control payments. Excluding these payments, operating results decreased by $0.6 million in the first nine months of fiscal 2004, due to $1.2 million impairment recognized by a variable interest partnership that we are now consolidating. In January 2004, we completed a move of our corporate headquarters to a newly leased facility that is less than half the size of our former location, creating approximately a $0.2 million annual savings of expense.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

        Total capitalization as of June 30, 2004 and September 30, 2003 amounted to $255.0 million and $143.8 million, respectively. The nine-month change in capitalization included a $118.4 million net increase in debt as a result of our acquisition of Hein Gericke, PoloExpress, and IFW; obtaining financing on our shopping center; and receiving a revolving credit line based on the assets of our aerospace segment. Equity decreased by $7.2 million, due primarily to our reported net loss. Our combined cash and investment balances totaled $97.4 million on June 30, 2004, as compared to $110.9 million on September 30, 2003, and included restricted investments of $69.0 million and $51.9 million at June 30, 2004 and September 30, 2003, respectively.

        Net cash used for operating activities for the nine months ended June 30, 2004, was $11.5 million and included a $38.2 million liquidation of trading securities used to fund the acquisition of Hein Gericke, PoloExpress, and IFW on November 1, 2003, offset partially by a $28.2 million increase in inventory. Net cash used for operating activities for the nine months ended June 30, 2003, was $135.9 million. The working capital uses of cash in the first nine months of fiscal 2003 included $46.2 million invested in trading securities, $7.4 million that was contributed to fund our pension plan, $13.7 million of expense for one-time change of control payments required under contracts with our top four executives as a result of the sale of the fastener business, and $10.4 million of bonuses awarded to our top four executives as a result of the sale of the fasteners business.

        Net cash used for investing activities for the nine months ended June 30, 2004 was $90.2 million, and included our acquisition funding of $73.0 million, net of $15.0 million cash acquired. Net cash provided by investing activities was $608.9 million for the nine months ended June 30, 2003. In the first nine months of fiscal 2003, the primary source of cash was $657.1 million of cash proceeds received from the sale of our fastener business, partially offset by $54.7 million of new investments and $8.2 million investments in property, plant and equipment, including the purchase of a manufacturing facility located in Fullerton, California.

        Net cash provided by financing activities was $106.4 million for the nine months ended June 30, 2004, which reflected $55.0 million borrowed to finance our shopping center, the long-term financing of $43.4 million for our acquisition of Hein Gericke, PoloExpress, and IFW, and $9.0 million borrowed from a revolving credit facility at our aerospace segment. Net cash used by financing activities was $476.4 million for the nine months ended June 30, 2003, which reflected the repayment of essentially all of our debt with the proceeds we received from the sale of our fastener business, except for a $3.4 margin loan and $3.2 million of debt at Fairchild Aerostructures.

        Our principal cash requirements include acquisitions, capital expenditures, payment of long-term debt obligations including our interest rate contract agreement, and the payment of other liabilities including postretirement benefits, environmental investigation and remediation obligations, and litigation settlements and related costs. We anticipate that cash on hand, cash generated from operations, cash available from borrowings, and proceeds received from asset dispositions of non-core assets and investments will be adequate to satisfy our short-term cash requirements during the next twelve months. If our operations generate less cash than anticipated and/or we are unable to dispose of assets or liquidate investments, we may have less cash than is necessary to support our operations and corporate expense, which could materially and adversely effect the financial condition of our company.

Off Balance Sheet Items 

        On June 30, 2004, approximately $2.2 million of bank loans received by retail store partners were guaranteed by our subsidiary in the sports & leisure segment. These loans have not been assumed by us.

Contractual Obligations

        At June 30, 2004, we had contractual commitments to repay long term debt, including capital lease obligations. Payments due under these long-term obligations for the fiscal years ending September 30 are as follows: $7.3 million for 2004; $10.6 million for 2005; $13.5 million for 2006; $18.3 million for 2007; $9.4 million for 2008; and $59.7 million thereafter.

        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, 2004, we had contingent liabilities of $2.7 million on commitments related to outstanding letters of credit.

        On June 30, 2004, we have reflected a $10.2 million obligation due under a ten-year $100 million interest rate swap agreement which expires on February 19, 2008. Interest on the swap agreement is settled quarterly.

        In addition, we have $25.0 million classified as other long-term liabilities at June 30, 2004, including environmental and other liabilities, which do not have specific payment terms or other similar contractual arrangements.

        Currently, we are not being audited by the IRS for any years. The audit period for the year ended June 30, 1999 and the income tax return of an acquired business for year ended April 20, 1999 expired on April 30, 2004 and March 31, 2004, respectively. Except for $400,000 of proposed additional tax, which we are disputing, the IRS has not proposed any other adjustments. We have a $66.2 million tax liability at June 30, 2004. However, based on tax planning strategies we do not anticipate having to satisfy the tax liability over the short-term.

        Should any of these liabilities become immediately due, we would be obligated to obtain financing, raise capital, and/or liquidate assets to satisfy our obligations.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

        On March 31, 2004, we adopted FASB Interpretation 46 “Consolidation of Variable Interest Entities”. FASB Interpretation 46, as revised, requires that variable interest entities created before December 31, 2003 be consolidated during the first interim period beginning after December 15, 2003. Accordingly, on June 30, 2004, we consolidated our interest in a landfill development partnership, of which we are a limited partner. The consolidation of the landfill development partnership had an effect of increasing fixed assets by $2.8 million and reducing notes receivable by approximately $3.9 million on June 30, 2004 as compared to September 30, 2003. The partnership has signed a letter of intent to sell its remaining landfill at a price below its carrying value. Accordingly, we recognized an impairment expense of $1.2 million in the quarter ended June 30, 2004.

        In January, 2004 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132 (revised 2003) “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, an amendment of FASB Statements No. 87, 88, and 106. The Statement revises employers’ disclosures about pension plans and other postretirement benefit plans. The statement retains the disclosure requirements contained in FASB Statement No. 132, which it replaces, and requires additional annual disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. Statement No. 132R requires us to provide disclosures in interim periods for pensions and other postretirement benefits. We adopted Statement No. 132R in the quarter ended March 31, 2004.

        In May 2004, the Financial Accounting Standards Board issued a staff position, FSP 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003". FSP 106-2 provides guidance on accounting for the effects of the Medicare Prescription Drug Improvement Act of 2003 for employers that sponsor postretirement healthcare plans that provide prescription drug benefits. The staff position generally applies beginning in the first interim or annual period after June 15, 2004. Accordingly, we will adopt FSP 106-2 in our fourth quarter beginning on July 1, 2004. The Medicare Prescription Drug Improvement Act of 2003 should result in improved financial results for employers that provide prescription drug benefits for their Medicare-eligible retirees. We are currently assessing the effect the Prescription Drug bill will have on our postretirement liabilities.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

        In fiscal 1998, we entered into a ten-year interest rate swap agreement to reduce our cash flow exposure to increases in interest rates on variable rate debt. The ten-year interest rate swap agreement provides us with interest rate protection on $100 million of variable rate debt, with interest being calculated based on a fixed LIBOR rate of 6.24% to February 17, 2003. On February 17, 2003, the bank, with which we entered into the interest rate swap agreement, did not exercise a one-time option to cancel the agreement, and accordingly the transaction will proceed, based on a fixed LIBOR rate of 6.745% from February 17, 2003 to February 19, 2008.

        We have recognized a $5.8 million non-cash increase in the fair market value of the interest rate contract in the first nine months of fiscal 2004 as a result of the fair market value adjustment for our interest rate swap agreement.

        The fair market value adjustment of these agreements will generally fluctuate based on the implied forward interest rate curve for 3-month LIBOR. If the implied forward interest rate curve decreases, the fair market value of the interest hedge contract will increase and we will record an additional charge. If the implied forward interest rate curve increases, the fair market value of the interest hedge contract will decrease, and we will record income.

        In May 2004, we issued a floating rate note with a principal amount of 25.0 million euros. Embedded within the promissory note agreement is an interest rate cap protecting one half of the 25.0 million borrowed. The embedded interest rate cap limits to 6%, the 3-month EURIBOR interest rate that we must pay on the promissory note. We paid approximately $0.1 million to purchase the interest rate cap. In accordance with SFAS 133, the embedded interest rate cap is considered to be clearly and closely related to the debt of the host contract and is not required to be separated and accounted for separately from the host contract. We are accounting for the hybrid contract, comprised of the variable rate note and the embedded interest rate cap, as a single debt instrument.

        The table below provides information about our financial instruments that is sensitive to changes in interest rates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date.

(In thousands)
Expected maturity date	February 19, 2008	March 31, 2009
Type of interest rate contract	Variable to Fixed	Interest Rate Cap
Variable to fixed contract amount	$100,000	$15,106
Fixed LIBOR rate	6.745%	N/A
EURIBOR cap rate	N/A	6.0%
Average floor rate	N/A	N/A
Weighted average forward LIBOR rate	3.70%	3.70%
Market value of contract at June 30, 2004	$(10,229)	$28
Market value of contract if interest rates increase by 1/8 %	$(9,781)	$34
Market value of contract if interest rates decrease by 1/8%	$(10,677)	$24

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

        The term “disclosure controls and procedures” is defined in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934. These rules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of a date within 90 days before the filing of this quarterly report, which we refer to as the Evaluation Date. They have concluded that, as of the Evaluation Date, such controls and procedures were effective at ensuring that the required information was disclosed on a timely basis in our reports filed under the Exchange Act.

Changes in Internal Controls

        Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report, which we refer to as the evaluation date. We 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. During the nine months ended June 30, 2004, we acquired Hein Gericke, PoloExpress, and IFW, and we are currently integrating the internal controls of the combined group. There were no other significant changes to our internal controls or in other factors that could significantly affect our internal controls during the quarter ended June 30, 2004.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

        The information required to be disclosed under this Item is set forth in Footnote 10 (Contingencies) of the Consolidated Financial Statements (Unaudited) included in this Report.

Item 2. Changes in Securities and Use of Proceeds

        Pursuant to the sale of our fastener business to Alcoa, we have agreed that the Company may not declare dividends on its common stock for a period of five years (ending on December 3, 2007).

Item 5. Other Information

1.     We have disclosed in this report that the Company has not filed all reports required under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.  The reasons for such non-compliance are as follows:  On November 1, 2003 we acquired Hein Gericke, IFW and PoloExpress.  On November 14, 2003, we filed a Form 8-K with the SEC announcing the acquisition and, on December 30, 2003, we filed an amendment to the Form 8-K, providing pro forma financial information. In the Form 8-K, we were unable to file audited financial statements of the acquired businesses because the outside auditors had audited less than 50% of the former parent of the acquired business, Eurobike AG, for the year ended September 30, 2002, and no audit was performed for the year ended September 30, 2003 because Eurobike AG and three of its operating subsidiaries went into bankruptcy. As the audit could not have been completed in time for us to meet the Form 8-K extended filing deadline, the Company decided not to incur audit fees, which would be substantial, to have an audit completed for either of these periods.  On March 24, 2004, we formally requested the SEC to grant us a waiver from the 8-K requirements.  On March 30, 2004, we received a letter from the SEC, which did not require us to complete a preacquisition audit for the acquired businesses, but denied our request for a waiver of the 8-K requirements. Until we file audited financial statements of the acquired businesses, we may not use a short form registration statements (Form S-2 and Form S-3), or grant stock options, nor may we make offerings under effective registration statements to any purchasers that are not accredited investors. We expect to file the audited financial statements of the acquired business in our next Form 10-K Annual Report filing for the year ending September 30, 2004.

2.     The Board of Directors has established a Governance and Nominating Committee consisting of non-employee independent directors, which, among other functions, identifies individuals qualified to become board members, and selects, or recommends that the Board select, the director nominees for the next annual meeting of shareholders.  As part of its director selection process, the Committee considers recommendations from many sources, including:  management, other board members and the Chairman.  The Committee will also consider nominees suggested by stockholders of the Company. Stockholders wishing to nominate a candidate for director may do so by sending the candidate’s name, biographical information and qualifications to the Chairman of the Governance and Nominating Committee c/o the Corporate Secretary, The Fairchild Corporation, 1750 Tysons Blvd., Suite 1400, McLean VA  22102.

        In identifying candidates for membership on the Board of Directors, the Committee will take into account all factors it considers appropriate, which may include (a) ensuring that the Board of Directors, as a whole, is diverse and consists of individuals with various and relevant career experience, relevant technical skills, industry knowledge and experience, financial expertise, including expertise that could qualify a director as a “financial expert,” as that term is defined by the rules of the SEC, local or community ties, and (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. The Committee also may consider the extent to which the candidate would fill a present need on the Board of Directors.

3.     The Company has been informed by Mr. Jeffrey Steiner, the Chairman and Chief Executive Officer of the Company, that a French court has ordered that Euro 259,000 of the Euro 500,000 fine assessed against him by that court in a proceeding in France that has been disclosed by the Company in prior SEC filings over the past several years, be withdrawn from a part of the surety (caution) previously deposited by the Company in the court. A special committee consisting of all of the Company’s independent directors has been formed to review issues arising from these proceedings, including, among other things, reimbursement for legal fees and other amounts advanced by the Company on behalf of Mr. Steiner in connection with the proceedings.

Item 6. Exhibits and Reports on Form 8-K

(a)	Exhibits:
*2.1	Loan agreement between Hein Gericke Deutschland and Polo KG, as borrowers, and Stadtsparkasse and HSBC Trinkaus & Burkhardt KGaA, as lenders.
*2.2	Working Capital Loan agreement between Hein Gericke Deutschland, as borrower, and Stadtsparkasse, as lender.
*2.3	Working Capital Loan agreement between Hein Gericke Deutschland, as borrower, and HSBC Trinkaus & Burkhardt KGaA, as lender.
*2.4	Loan agreement between Hein Gericke UK, as borrower, and GMAC, as lender.
*31	Certifications required by Section 302 of the Sarbanes-Oxley Act.
*32	Certifications required by Section 906 of the Sarbanes-Oxley Act.
*	Filed herewith.
(b)	Reports on Form 8-K:
	On May 6, 2004, we filed a report on Form 8-K, as a result of issuing a press release to announce the financing of its German subsidiaries, Hein Gericke Deutschland GmbH and PoloExpressversand.
	On May 14, 2004, we issued a press release announcing our operating results for the quarter ended March 31, 2004.

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:
Date:	August 4, 2004	By: /s/ JOHN L. FLYNN
		John L. Flynn
		Chief Financial Officer and Senior Vice President, Tax

EX-31

Exhibit 31

CERTIFICATION ACCOMPANYING PERIODIC REPORT

PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, Jeffrey J. Steiner, Chief Executive Officer of The Fairchild Corporation (“Company”), hereby certifies that:

1. I have reviewed this quarterly report on Form 10-Q of the Company;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;

4. The Company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this repot based on such evaluation; and

c) disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date:	August 4, 2004	By: /s/ JEFFREY J. STEINER
		Jeffrey J. Steiner
		Chairman of the Board and Chief Executive Officer

Exhibit 31

CERTIFICATION ACCOMPANYING PERIODIC REPORT

PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, John L. Flynn, Chief Financial Officer of The Fairchild Corporation (“Company”), hereby certifies that:

1. I have reviewed this quarterly report on Form 10-Q of the Company;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;

4. The Company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this repot based on such evaluation; and

c) disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date:	August 4, 2004	By: /s/ JOHN L. FLYNN
		John L. Flynn
		Chief Financial Officer, Treasurer and Senior Vice President, Tax

EX-2

Translation from German into English:

Loan Agreement

for Euro 31,000,000.00

entered into by between

Hein Gericke Deutschland GmbH

Düsseldorf

hereinafter “HGD”

and

POLO EXPRESSVERSAND

Gesellschaft für Motorradbekleidung und Sportswear mbH & Co. KG

Düsseldorf

hereinafter “Polo”

and

Stadtsparkasse Düsseldorf

Düsseldorf

hereinafter “SSK”

and

HSBC Trinkaus & Burkhardt KGaA

Düsseldorf

hereinafter “HSBC”

dated April 21, 2004

Table of contents

§ 1                Definitions
§ 2                Loan
§ 3                Purpose of Loan
§ 4                Disbursement Conditions
§ 5                Drawdown and Disbursement
§ 6                Interest
§ 7                Maturity and Amortization
§ 8                Default
§ 9                Cost Increase
§ 10               Crediting of Payments
§11               Security Interests
§12               Compensation for Deductions
§ 13               Representations and Warranties
§ 14               Requirements
§ 15               Key Financial Data
§ 16               Termination
§ 17               The Agent and the Lenders
§ 18               Payments through the Agent
§ 19               Administration of Security Interests
§ 20               Commissions and Fees
§ 21               Assignment and Assumption of Contract
§ 22               Notices
§23               Confirmation According to § 8 Money Laundering Act
§24               Final Provisions

Section 1

Definitions

Unless provided otherwise in this Agreement, the terms shown in the left column of the following table shall have the meaning set forth in the right column of the table:

"Agent"	means SSK in its capacity as agent of the Lenders.
"Bank Business Day"	means (i) TARGET days for purposes of determining the EURIBOR and for payments denominated in Euro, and otherwise (ii) each day on which financial institutions in Dusseldorf, Germany, are generally open for business.
"Working Capital Loans"	means all loans of any kind disbursed under the Working Capital Credit Lines.
"Working Capital Credit Lines"	means the working capital credit lines provided by SSK and HSBC to HGD in accordance with section 2 (5) hereof.
"Guarantee Decision"	means the draft guarantee commitment of the State of North Rhine-Westphalia, which is attached hereto as Schedule 2.
"NRW Guarantee Guidelines"	means the guarantee guidelines of the State of North Rhine-Westphalia, which are attached hereto as Schedule 3.
"EURIBOR"	means the interest rate per annum for deposits denominated in Euro and with a term corresponding to the applicable interest period as determined by the Agent at or around 11 a.m. Brussels time two Bank Business Days prior to the first day of the applicable interest period, which is reported on page EURIBOR 01 of the Reuters Information Service (or the page replacing the same) for "spot value" (D + 2) based upon the "actual/360 days" calculation method and based upon the quotation determined in accordance with the Euribor-FBE Agreement. If no suitable EURIBOR rate can be calculated in this manner, the applicable EURIBOR shall be determined by the Agent as the arithmetic mean of the interest rates offered by three first-rate banks.
"Fairchild Group"	means The Fairchild Corporation and all of its direct and indirect subsidiaries.
"Group"	means HGD and all consolidated subsidiaries of HGD.
"IFW"	means Intersport Fashions West, Inc., California, U.S.A..
"Purchase Agreements"	means the agreements entered into by HGD and Dr. Biner Bahr, the insolvency administrator, for the purchase of assets of EUROBIKE AG and its subsidiaries in connection with the insolvency proceedings with respect to the assets of EUROBIKE AG and its subsidiaries of October 11, 2003 and October 31 / November 1st, 2003.
"Lenders"	means SSK and HSBC, as well as each financial services provider to which any rights and obligations arising from this Agreement are assigned in accordance with the provisions of section 21 hereof.
"Borrowers"	means HGD and Polo.
"Loan Tranche"	means tranches A, B, and C of this Loan as defined in section 2 (1) hereof.
"Loan Commitment"	means in relation to each Lender and each Loan Tranche the Euro amount shown in Schedule 1 next to the name of the applicable Lender under the applicable Loan Tranche.
"State Guarantee"	means the guarantee(s) provided by the State of North Rhine-Westphalia in accordance with the Guarantee Decision for the payment obligations of the Borrowers under tranches A and B up to a maximum limit of 80% of any default under these tranches.
"Majority Banks"	means Lenders that collectively account for at least 66 2/3 % of the Loan Commitment or, if at least one drawdown is outstanding, that collectively account for at least 66 2/3 % of all outstanding drawdowns.
"Security Agreements"	means the agreements for the creation of security interests as defined in section 11 hereof.
"Security Administrator"	means SSK in its capacity as security administrator of the Lenders.
"TARGET Day"	means any day on which payments denominated in Euro are processed by the Trans-European Automated Real-time Gross Settlement Express Transfer System.
"Drawdown"	means any disbursement of loan funds to a Borrower under this Agreement
"Drawdown Period"	means the period which commences at execution of this Agreement and expires on May 28, 2004.
"Drawdown Notice"	means a notice which shall be substantially in conformity with the sample notice attached hereto as Schedule 4.

Section 2

Loan

(1) The Lenders shall make a loan available to the Borrowers subject to the terms and conditions stipulated in this Agreement up to the total maximum amount of EUR 31,000,000 (Thirty-one million euros) and in three tranches:

(a) “Tranche A” in the form of an amortized loan in the amount of EUR 11,000,000 (amount in words: eleven million euros);

(b) “Tranche B” in the form of an amortized loan in the amount of EUR 14,000,000 (amount in words: fourteen million euros); and

(c) “Tranche C” in the form of an amortized loan in the amount of EUR 6,000,000 (amount in words: six million euros).

        The total amount of Tranches A, B and C shall hereinafter the referred to as the “Loan Amount.”

(2) Each time a loan tranche is drawn, each Lender shall make available to the Agent for disbursement to the Borrowers an amount corresponding to his share in the respective loan commitment of such Lender.

(3) The Lenders are neither joint and several debtors nor joint and several creditors. Unless expressly provided otherwise in this Agreement, each Lender may independently enforce the rights accruing to it under this Agreement without any requirement for cooperation by the other Lenders or the Agent. If a Lender fails to perform its obligations under this Agreement, the Borrowers may exercise their rights only against said Lender without any recourse against any other Lender.

(4) HGD shall be jointly and severally liable for the performance of all of Polo’s obligations under this Loan Agreement. Polo shall only be liable for the obligations undertaken by itself (in particular payment of capital, interest and fees) and not for costs or damages caused by or exclusively attributable to HGD.

(5) Pursuant to separate agreements, SSK and HSBC shall each make available to HGD a working capital credit line in the amount of up to EUR 5,000,000 per Lender, the specific terms and conditions of which shall be determined on the basis of bilateral agreements between HGD and SSK, and between HGD and HSBC. The parties agree, however, that the provisions of this Agreement shall have priority in the event of any conflict with provisions of one or both of the aforementioned Working Capital Credit Lines. In particular, SSK and HSBC shall have the right to terminate their respective Working Capital Credit Line for good cause only if there are also grounds for termination of this Agreement.

Section 3

Purpose of Loan

(1) Tranche A may be utilized only by HGD (in its capacity as Borrower under Tranche A) and shall be used exclusively to satisfy part of HGD’s obligations to pay the purchase price under the Purchase Agreements.

(2) Tranche B and Tranche C may be utilized only by Polo (in its capacity as Borrower under Tranche B and Tranche C) and shall be used exclusively to repay amounts owed by Polo to HGD. HGD in turn shall apply the amount thus received from Polo to the same purpose as stipulated in subsection (1) above.

(3) The utilization of Tranches A, B and C is part of the total financing of the acquisition of assets under the Purchase Agreements, which is described in the table attached hereto as Schedule 5.

Section 4

Disbursement Conditions

Amounts may be drawn under this Loan Agreement only if the Agent has confirmed to the Borrowers that the conditions of disbursement stipulated below have been satisfied to the satisfaction of the Agent or if the Lenders have waived said conditions:

(a) Valid execution of all Security Agreements and satisfaction of all other requirements for the valid creation of the security interests defined in Section 11 (for clarification: including submission of the duly signed undertakings by The Fairchild Corporation, Fairchild Holding Corp., and EURO MLS, Inc., as provided in Section 11 (3) and submission of the State Guarantee as provided in Section 11 (4)).

(b) Submission of waivers by the insolvency administrator Dr. Biner Bähr and of the banks of the insolvent Eurobike AG with regard to the accessory security interests held by them and a retransfer agreement with regard to the non-accessory security interests held by them, in each case subject to the receipt of an amount of EUR 46.5m on accounts of Dr. Bähr kept with SSK.

(c) Submission of a copy of the Purchase Agreements.

(d) Documentation of payment in a total amount of at least EUR 47,000,000 to HGD in the form of equity capital, allocations to reserves, or subordinated shareholder loans by Fairchild Holding Corp.

(e) Documentation that with respect to all claims arising from loans made to HGD and/or Polo by companies of the Fairchild Group, there are agreements stipulating that such claims are subordinated to the Lenders’ claims under this Agreement and under the Working Capital Loans.

(f) Documentation that the sale of Hein Gericke (UK) Ltd. from HGD to Banner Investments (UK) Ltd. has been reversed or that Hein Gericke (UK) Ltd. has been reacquired from Banner Investments (UK) in a manner economically equivalent to a reversal of the sale.

(g) Submission of an overview of the current and future applicable terms and conditions of supply and payment of HGD and Polo’s major suppliers.

(h) Submission of the current employment and/or service agreements with Dr. Mrosik for a minimum term until April 15, 2006 and with Mr. Klaus Esser for a minimum term until December 31, 2005.

(i) Since September 30, 2003 there has been no material deterioration of the economic condition of the assets assumed by HGD under the Purchase Agreements, nor has there been any other material event that might make the realization of the project to be financed with funds from this Agreement economically disadvantageous.

(j) Submission of the single-entity annual financial statements of IFW as of September 30, 2003, and an interim statement of earnings as of March 31, 2004, including a comparison between the budgeted and realized operating results for HGD on a consolidated basis as well as for all companies of the Group.

(k) Submission of a legal opinion from the Borrowers’ legal counsel (Lovells) addressed to the Lenders that confirms that de facto the Borrowers have no contingent liabilities under the Purchase Agreements resulting from Section 613a of the German Civil Code (BGB).

(l) Submission of customary legal opinions from the Borrower’s legal counsel (Lovells) addressed to the Lenders that confirm that the security interests to be created according to the laws of foreign jurisdictions as stipulated in Section 11 have been effectively created, and that such security interests are valid [and enforceable under the laws of the applicable foreign jurisdictions].

(m) Certification by an auditor that on a date no earlier than 10 days before the date of the first drawdown, Polo’s debts to HGD referenced in Section 3 (2) hereof exist with legal effect in the amount of at least EUR 20,000,000 and do not qualify as equity capital-replacing loans within the meaning of Section 32a of the German Limited Liability Corporation Act (GmbHG).

(n) An amount of at least EUR 5,500,000 is available without limitation in an account maintained by HGD with the Agent, and HGD has given irrevocable instructions to the Agent to transfer a total amount of EUR 46,500,000 to the seller under the Purchase Agreements in full satisfaction of HGD’s obligation to pay the purchase price under the Purchase Agreements.

(o) Submission of written agreements with suppliers of HGD and Polo and credit insurers concerning the granting and insurance of supplier credits for HGD and Polo amounting at least to EUR 1,200,000.

Section 5

Drawdown and Disbursement

(1) Tranche A, Tranche B and Tranche C of the Loan must be utilized in a single amount and in a single drawdown, and the disbursement date must be a Bank Business Day within the Drawdown Period.

(2) The Borrowers shall draw on the Loan Tranches by sending an irrevocable drawdown notice to the Agent. There must be a period of at least three Bank Business Days between receipt of the Drawdown Notice and the disbursement date.

(3) Drawdowns under Tranche B and Tranche C shall be made available exclusively in the form of transfers to a new account maintained by Polo with the Agent to be directly transferred to a new account maintained by HGD with the Agent for the purpose of partial repayment of Polo’s debts to HGD as defined in Section 3 (2) hereof.

(4) The drawdown under Tranche A shall be made available by bank transfer (together with the amounts received by HGD in accordance with subsection 3 and an amount of EUR 10,000,000 coming from the Working Capital Loans and an amount of EUR 5,500,000 made available by HGD from its own funds) to accounts maintained with the Agent in the name of the sellers under the Purchase Agreements. HGD shall make the appropriate account information available to the Agent in due time.

(5) The Lenders shall not be required to disburse loan funds, if on the intended date of disbursement:

(a) one of the representations or warranties stipulated in Section 13 is or has been determined to be incorrect, or

(b) one of the special requirements stipulated in Section 14 has been breached; or

(c) there are grounds for termination as provided in Section 16.

(6) If after the drawdown notice has been issued, Loan Amounts are not disbursed to the Borrowers or to one of them in whole or in part on the intended disbursement date for reasons other than a culpable violation of the Lenders’ obligations under this Agreement, the Borrowers shall immediately reimburse and indemnify the Lenders for any and all costs and damages incurred as a result thereof. In such case the Lenders are obligated to make every effort reasonably to be expected from them in order to hold the damage low.

Section 6

Interest

(1) During the term of the Loan, the Borrowers shall pay interest on amounts drawndown and not repaid as follows:

(a) For drawdowns under Tranche A and Tranche B: at the EURIBOR applicable to the corresponding interest period, plus a margin of 1.0% p.a.; and

(b) For drawdowns under Tranche C: 6% p.a.

(2) The first interest period for each loan tranche starts on the date of the corresponding drawdown and ends on June 30, 2004. Each subsequent interest period starts with expiration of the immediately preceding interest period and continues for three months. Notwithstanding the above provisions, each interest period of a drawdown that would otherwise extend beyond the term of the Loan ends on the last day of the term of the Loan.

(3) If the last day of an interest period is not a Bank Business Day, the interest period is deemed to have expired at the end of the immediately preceding Bank Business Day. If an interest period starts on the last Bank Business Day of a month, or if during the month in which the interest period ends there is no date that numerically corresponds to the date when the interest period started, then the interest period ends on the last Bank Business Day of the month in which the interest period ends.

(4) Interest shall be calculated based on the actual days elapsed divided by 360 days (actual/360), including the first day but excluding the last day of each interest period.

(5) Interest for each interest period shall be due and payable in arrears on the last day of the interest period.

Section 7

Maturity and Amortization

(1) The Loan matures on March 31, 2009.

(2) Each Borrower shall repay the amounts drawn under this Loan in equal quarterly installments on the last day of each interest period (starting on June 30, 2004). The amount of each repayment installment is:

(a) for Tranche A: EUR 550,000.00

(b) for Tranche B: EUR 700,000.00

(c) for Tranche C: EUR 300,000.00

(3) Any Loan Amount still outstanding on the last day of the term of the Loan shall be repaid on that day.

Section 8

Default

(1) In the event and for the duration of any default with payments other than interest payments, the Borrowers shall pay default interest on the Loan Amount past due at the statutory rate from the due date until receipt by the Agent of the amounts past due.

(2) If a Borrower is in default with interest payments, it shall pay a contractual penalty to the Lenders. The contractual penalty is 2% p.a. above the interest rate applicable to the interest period immediately preceding the default for the period from the due date until receipt by the Agent of the amounts past due.

(3) The right of the Lenders to claim additional damages, as well as the provisions of § 289 sentence 2 of the German Civil Code (BGB) shall remain unaffected thereby.

Section 9

Cost Increase

(1) If a Lender announces that a result of the introduction or amendment of any statutory or administrative regulation applicable to it, or any change in the interpretation or application thereof, or compliance with the order of any government agency (i) such Lender is required to pay a tax (with the exception, however, of taxes on the income of such Lender in the country of the Lender’s corporate domicile or at the Lender’s place of business) or is required make any other payment with respect to the Loan Amount it has disbursed to the Borrowers, or on the payments to be made to the Lender by the Borrowers, or (ii) such Lender is subject to any other sovereign act resulting in an increase in the costs of the Lender for the Loan Amount it has disbursed to the Borrowers, or a decrease in the amount of any payment that the Lender effectively receives under this Agreement, then the Lender shall promptly inform the Borrowers of such cost increase. In this case, unless compensation has already been made in accordance with Section 12 of this Agreement, the Borrowers, upon request of the Agent, shall pay to the Lender the amount required to compensate the Lender for the respective increase in costs or the reduced amounts received under the Loan with respect to the interest periods after the Agent’s request. Upon request of the Borrowers, the respective Lender shall explain in writing how and based upon what criteria the cost increase or the reduced amounts related to this Loan were determined.

(2) As long as the circumstances set forth in paragraph (1) continue, the Borrowers have the right to prepay disbursed loan funds in full and to cancel the Loan in its entirety effective as of the end of any given interest period by providing 30 Bank Business Days’ written notice to the Agent. In this case no prepayment compensation shall become payable for Tranches A and B.

Section 10

Crediting of Payments

(1) If a Borrower’s payment is not sufficient to satisfy all of the Lenders’ claims against such Borrower due at the time of payment, the Agent shall credit the amount received in the following order, unless otherwise provided for in this Agreement:

(a) first, the amount shall be credited against any claims for fees, commissions, costs, and other expenses due under this Agreement,

(b) second, the amount shall be credited against any outstanding claims for interest,

(c) third, the amount shall be credited against any outstanding claims for repayment of the Loan Amount, and

(d) fourth, the amount shall be credited against any other claims of the Agent, the Security Administrator, or the Lender which are due under this Agreement.

If several claims rank pari passu, the amount received by the Agent shall be credited proportionately to the amounts of the outstanding claims.

(2) The Borrowers shall only have a right to offset counterclaims or to refuse performance based upon counterclaims with respect to any claims for payment held by the Agent or the Lenders under this Agreement, to the extent that the counterclaims are undisputed or final under an unappealable court decision.

Section 11

Security Interests

(1) HGD shall create or cause to be created the following security interests for all of Lenders’ claims under this Agreement and under the Working Capital Loans:

(a) creation of security interest in all current assets owned by HGD located within Germany, including the current assets being transferred to Germany [goods in transit, including claims for damages],

(b) global assignment of all receivables of HGD,

(c) creation of security interests in all trademark and other industrial property rights of HGD,

(d) pledge of all shares in

• POLO EXPRESSVERSAND Gesellschaft fur
  Motorradbekleidung und Sportswear mbH, Germany,
• POLO EXPRESSVERSAND Gesellschaft fur
  Motorradbekleidung und Sportswear mbH & Co. KG, Germany,
• Hein Gericke Austria GmbH, Austria,
• Hein Gericke (UK) Limited, Great Britain
• Damen Holding B.V., Netherlands,
• Hein Gericke Nederland B.V., Netherlands,
• Hein Gericke Belgium BVBA, Belgium,
• EURO MLS, Inc., Delaware, USA,
• IFW,

(e) personal guarantee of The Fairchild Corporation in the amount of EUR 2,500,000 (plus 20% interest and costs of the guaranteed EUR 2,500,000),

      provided that

(i) the security interests provided for in subsections (a) through (d) above shall primarily secure the Lenders’ claims for payment under Tranche C and under the Working Capital Loans, and shall secure only secondarily the payment obligations under Tranches A and B.

(ii) the guarantee provided for in subsection (e) shall primarily secure the Borrowers’ payment obligations under Tranches A and B, and shall secure only secondarily the payment obligations under Tranche C and the Working Capital Loans.

(2) To secure all of the Lenders’ claims under Tranches B and C of this Agreement, Polo shall create the following security interests:

(a) creation of security interests in all the current assets of Polo located within Germany, including the current assets that are being transferred to Germany (goods in transit, including claims for damages),

(b) global assignment of all receivables of Polo,

(c) creation of security interests in all trademark and other industrial property rights of Polo.

The security interests provided for in subsections (a) to (c) shall primarily secure the Lenders’ claims for payment under Tranche C, and shall secure only secondarily the claims for payment under Tranche B. For clarification: The security provided by Polo shall exclusively serve to secure the Lenders’ claims under Tranches B and C where Polo is the Borrower.

(3)     HGD shall ensure that

(a) The Fairchild Corporation, Delaware, U.S.A., enters into an undertaking with the Lenders, in which it agrees that, if the maximum working capital set forth in section H.3.b) of the Guarantee Decision is required, it will provide the Lenders with cash cover in a form and in an amount specified by the Lenders in due time prior to the disbursement of any maximum financing (as set forth in section H.3.b of Guarantee Decision) to secure all of the Lenders’ claims under such maximum financing;

(b) Fairchild Holding Corp., Delaware, U.S.A., provides a negative covenant in which it agrees vis-à-vis the Lenders that, until all of the Lenders’ claims under this Loan Agreement and under the Working Capital Loans are satisfied in full,

• it will continue to hold 100% of the shares in HGD and will not transfer such shares to any third party or dispose of them in any other manner;
• it will continue to hold 100% of the shares in EURO MLS, Inc., Delaware, USA, and will not transfer such shares to any third party or dispose of them in any other manner;
• it will ensure that EURO MLS, Inc., Delaware, U.S.A., does not pay any dividends or decide to pay such dividends, unless The Fairchild Corporation or another company of the Fairchild Group undertakes in a legally binding manner that it will at the same time contribute an equal amount to the reserves of the Borrowers or pay such an amount to the Borrowers in the form of a subordinated loan; and that
• it will retain its status as a holding company without its own business operations;

(c) EURO MLS, Inc., Delaware, U.S.A., provides a negative covenant in which it agrees vis-à-vis the Lenders that, until all of the Lenders’ claims under this Loan Agreement and under the Working Capital Loans are fully satisfied,

• it will continue to hold 100% of the shares in IFW and will not transfer such shares to any third party or dispose of them in any other manner;
• it will ensure that IFW does not pay any dividends or decide to pay such dividends, unless The Fairchild Corporation or another company of the Fairchild Group affirms in a legally binding manner that it will at the same time contribute an equal amount to the reserves of the Borrowers or pay such an amount to the Borrowers in the form of a subordinated loan;
• it will ensure that IFW shall not to any substantial extent transfer, discontinue or modify its business fields (e.g. motorbike helmets, garments and accessories) or business as such, and that
• it will retain its status as a holding company without its own operational business and will acquire no additional assets;

(4) The State of North Rhine-Westphalia has agreed to furnish a State Guarantee.

(5) The Borrowers agree vis-à-vis the Lenders that in the event that shares in other companies are acquired in a shareholding of at least 25% of the capital, such shares shall, upon request of the Lenders, likewise be pledged to the Lenders as security. All costs incurred thereby shall be borne by the Borrowers.

Section 12

Compensation for Deductions

(1) The Borrowers shall make all payments under this Agreement without withholding any taxes, fees or making any other deductions. If a Borrower withholds or transfers to third parties, including, without limitation, any competent tax authorities, any amounts, it shall make up for the shortfall by increasing the payment to be made to the Lenders by such an amount that the Lenders, after the withholding or transfer, have available the amount to which they would have been entitled without such withholding or transfer. Any amount later paid to the Lenders as final tax reimbursement, if any, with respect to the amounts withheld or deducted by the concerned Borrower, shall be reimbursed to the concerned Borrower (after deduction of costs).

(2) As long as there is an obligation for a deduction to be compensated pursuant to para. (1), which does not result in a claim for reimbursement of taxes, the Borrowers are entitled to prepay all loan amounts disbursed under this Agreement in full and to cancel the loan in its entirety prematurely effective as of the end of any given interest period by providing 30 Bank Business Days’ written notice to the Agent. In this case no prepayment compensation shall become payable for Tranches A and B.

Section 13

Representations and Warranties

The Borrowers (Polo, however, limited to its own business enterprise and to the circumstances therein) hereby make the following representations and warranties:

(a) After the Loan Amount has been disbursed in accordance with Section 5, the Borrowers’ assets, except for the security interests set forth in Section 11, will not be encumbered with liens, security interests, security assignments or other third-party security rights, except for reservations of title customary in the industry, liens and security interests based on the general terms and conditions of banks, and statutory liens as well as security for rent payments in the ordinary course of business. The Borrowers have made no payment guarantees, suretyship agreements or any similar security agreements except for (i) guarantees of Polo in favour of Bayerische Hypo- und Vereinsbank (“HVB”) to secure loans in a volume not exceeding roundabout EUR 4m given by HVB to Polo shop partners for the financing of equipment and fixtures of shops, (ii) guarantees of HGD in favour of commercial banks in a volume not exceeding EUR 2.2m securing loans given by these commercial banks to HGD shop-partners in order to finance the equipment and fixtures of these shops and (iii) security for rent payments in the ordinary course of business.

(b) There are no circumstances which

• constitute a violation of this Agreement or grounds for termination; or
• constitute a violation of an agreement to which a Borrower is a party where such violation entitles a third party to take measures that could have a material adverse effect on the financial position of the Borrowers or the Group as a whole.

(c) No legal actions, court proceedings, administrative proceedings, tax court proceedings or any other proceedings are pending or announced or threatened, the outcome of which could directly or indirectly have a material adverse effect on the financial position of the Borrowers or the Group as a whole.

§ 14

Requirements

(1) The Borrowers (Polo, however, only with regard to its own business enterprise) shall provide the Agent with the following information for the Lenders:

(a) (i) HGD’s consolidated certified auditor’s reports as well as the certified single-entity financial statements for all companies in the Group within five months of the close of the fiscal year in question (provided that the audit report must address whether the transactions between the Borrowers and the other members of the Fairchild Group have been carried out based upon fair market terms and conditions and have not resulted in any disadvantage to the Borrowers, and the amounts of the guarantees referred to in § 14 para. (3) (iv)); and (ii) HGD’s consolidated quarterly financial statements and single-entity financial statements for all companies in the Group within 60 days of the closing date for the quarter in question;

(b) The Fairchild Corporation’s consolidated financial statement within five months of the close of the fiscal year in question;

(c) the single-entity financial statements for Fairchild Holding Corp., EURO MLS, Inc. and IFW within five months of the close of the fiscal year in question;

(d) a schedule of the Borrowers’ assets that are the subject of a security agreement as of March 31 and September 30 of each year, certified by the auditor of the company in question as well as corresponding uncertified schedules as of June 30 and December 31 of each year, together with written confirmation by HGD’s auditor of the observation of the key financial data pursuant to § 15 as of each closing date for the quarter, in each case within 60 days of the closing date for the quarter in question;

(e) a quarterly evaluation of the data of HGD’s management information system, which shall include at least a monthly liquidity plan for the following 12 months, an analysis comparing the actual numbers with the projected numbers, a target profit and loss statement, as well as target balance sheet, quarterly accounts with target-performance comparison, implementation report on the progress of the restructuring (related to both HGD individually and to the Group);

(f) all information regarding the acquisition of interests in other companies and the establishment of new companies by a member of the Group, to be provided immediately upon receipt of such information;

(g) information regarding the termination or premature repayment request concerning any loan granted to IFW or Hein Gericke (UK) Ltd. to be provided immediately upon receipt of such information ;

(h) information regarding any material legal proceedings or arbitration proceedings that have been initiated, announced or threatened by or against the Borrowers or another company in the Group, to be provided immediately upon receipt of such information;

(i) an organizational chart for the Borrowers setting forth the names and a description of the professional life for the top management and the structure for the second level of management of each Borrower, to be provided immediately after execution of this Agreement and together with the submission of each consolidated accounts of HGD pursuant to para. 1 (a) (i);

(j) submission of other information and documents relevant for this Loan at any time upon request of the Lenders.

(2) The Borrowers shall not make any statements or commitments and shall not undertake any legally relevant actions (including the exercise of their shareholder rights) and HGD shall make sure that no other companies that have granted security interests under Section 11 hereof shall make such statements or commitments or undertake legally relevant actions as a result of which the Lenders’ security interests may be adversely affected.

(3) The Borrowers shall make no loans, guarantees or suretyship agreements of any kind (and HGD shall ensure that other companies in the Group likewise refrain from doing so). Excepted from the foregoing are (i) security for rental payments in the ordinary course of business, (ii) customary credits granted to debtors in the ordinary course of business (including for supplies and services to other members of the group); (iii) loans to HGD; and (iv) guarantees by HGD or Polo in favour of commercial banks securing loans given to HGD or Polo Shop Partners in order to finance the equipment and fixtures of their shops, in total volume which, per financial year, shows a net increase of not more than EUR 800,000 as compared to the initial amounts mentioned in § 13 (a), but in any event must not exceed EUR 10m during the life of the loan; as well as (v) cash loans of HGD or Polo to other Group members to finance the acquisition of current assets or fixed assets in the ordinary course of business up to the limit of EUR 500,000.00 per quarter and a total of EUR 5,000,000.00 over the term of this Loan. Contributions by HGD or Polo to the registered capital stock or to the reserves of another Group member are applied against the above-referenced maximum limit (excepted from such application is the contribution of receivables of HGD against (i) Damen Holding B.V., Hein Gericke Nederland B.V. and Hein Gericke Belgium BVBA in an amount of up to EUR 9,300,000 and (ii) Allspeedex France Holding S.a.r.l. and Hein Gericke France S.a.r.l. up to EUR 1,200,000 into the reserves of the concerned debtor company provided that the contribution shall have occurred by June 30, 2004).

(4) HGD shall ensure that shares in Group companies shall not be sold, otherwise transferred, or encumbered by any third party rights.

(5) HGD shall ensure that none of members of the Group to any substantial extent transfers, discontinues or modifies its business fields (e.g. motorbike helmets, garments or accessories) or its business as such.

(6) HGD shall ensure that upon request the Lenders are given an advisory board mandate (without the right to vote) at HGD.

(7) HGD shall only undertake or promise the distribution of dividends or the payment of remuneration for management services (other than to members of its management board within the framework of their employment contracts) to the extent that this can be made from the Group’s consolidated earnings after taxes and under the condition that (i) all payments due under this Agreement were duly made, (ii) under the business plan currently in effect, which must be plausible for the Agent, all current and future payments under this Agreement will be able to be made as agreed even after such distribution or payment, and (iii) such distribution or payment will not jeopardize compliance with the key financial data as defined in Section 15 hereof. Withdrawals prior to the end of the year based on anticipated claims for earnings are generally excluded, the only exceptions being payments due under the service agreement between HGD and Mr. Klaus Esser, a copy of which is in possession of the Agent.

(8) The Borrowers (Polo, however, only for its own business enterprise) shall ensure that three months after the execution hereof all banking transactions of Group members in Germany shall be executed by the Lenders; the only exception are local bank accounts of the individual HGD or Polo shops for conducting their local daily business which, until further notice (i.e. any request by the Agent), may be kept with local banks, if it is assured that at least after the lapse of the three months the daily balances shall be transferred to accounts kept with the Lenders.

(9) Transactions between the Borrowers and other members of the Fairchild Group shall be undertaken exclusively based upon fair market terms and conditions and shall result in no detriment to the Borrowers.

(10) The Borrowers shall make replacement of capital assets and/or supplementary investments in excess of EUR 2,000,000.00 per quarter for the entire Group only if the costs and financing associated therewith and the reasonableness of the debt service has been demonstrated to and approved by the Lenders.

(11) Within two weeks of the execution hereof, the Borrowers shall enter into one or more interest rate hedging agreement(s) with SSK and/or HSBC to limit the interest rate risk with respect to at least 50% of the amounts outstanding under Tranches A and B at such time.

§ 15

Key Financial Data

(1) HGD shall ensure that at all times during the term of the Loan HGD shall show, based both on the single-entity and consolidated financial statements, the following:

    (a)        economic equity capital of at least EUR 44,500,000.00 and

    (b)        an economic equity capital ratio of at least 25%.

The aforementioned key financial data shall be calculated in accordance with the German Commercial Code (HGB) and according to the definitions and method of calculation set forth in Schedule 6.

(2) The Borrowers shall ensure that on every closing date for the quarter during the term of the Loan, the value of the goods and receivables transferred or assigned as security shall not be less than the following amounts:

    (a)        on the closing date for the quarter ending on September 30, 2004: EUR 40,000,000.00;

    (b)        on the closing date for the quarter ending on September 30, 2005: EUR 45,000,000.00;

    (c)        on all remaining closing dates: EUR 50,000,000.00,

provided that goods and receivables transferred or assigned as security by HGD shall account for at least 50% of the agreed amounts.

(3) Compliance with the Key Financial Data as defined in subsections (1) and (2) shall be monitored regularly on the closing date for each quarter.

§ 16

Termination

(1) The Agent shall have the right or, if instructed by the Majority Banks, the obligation to terminate the Loan for good cause in whole or part. The parties are in agreement that good cause for termination shall include, without limitation, the following:

(a) a Borrower has not paid one of the Lenders an amount owed under this Agreement on the date due and has not made payment within three months from the due date;

(b) any of the Key Financial Data defined in Section 15 hereof is not in compliance with this Agreement on the closing date for the quarter;

(c) any of the representations and warranties set forth in Section 13 hereof was materially inaccurate at the time it was made;

(d) any of the requirements set forth in Section 14 hereof is not observed, and to the extent that observance of the requirement in question can be achieved after the fact, is not satisfied within an additional five Bank Business Days after a corresponding written request by the Agent; this shall apply regardless of whether failure to observe the requirement has or may have an effect on the performance of the Borrowers’ payment obligations under this Agreement;

(e) the Borrowers have breached other obligations under this Agreement, and, if this breach can be cured, have not cured the breach within ten Bank Business Days upon written demand by the Agent;

(f) the Borrowers or a party providing security has breached its duties under the Security Agreements, and, if this breach can be cured, have not cured it within ten Bank Business Days upon written demand by the Agent;

(g) any of the Security Agreements has been revoked or contested by any party providing security, or in some other way has been adversely impacted or jeopardized without the consent of the Lenders, or the validity of any security interest created under the Security Agreements is impaired to a not only immaterial extent;

(h) a Borrower or another Group members is unable to meet its financial obligations, a third party files a petition for insolvency pursuant to §§ 17 through 19 of the German Insolvency Act (InsO) (unless the petition shall be withdrawn or dismissed within ten Bank Business Days), the managing directors, or other corporate directors are obligated by operation of law to file such a petition; or a court of competent jurisdiction orders a measure pursuant to § 21 of the German Insolvency Act with respect to one of the Group members or initiate insolvency proceedings against one of the Group members, or, in the case of a Group members with registered offices outside the Federal Republic of Germany, an analogous factual situation occurs (this applies to Allspeedex France Holding S.a.r.l., Hein Gericke France S.a.r.l., Hein Gericke Nederland B.V., Damen Holding B.V. and Hein Gericke Belgium BVBA only after December 31, 2004), in particular, a petition for insolvency, debt relief, debtor protection, or similar proceeding, or for appointment of a receiver, trustee, custodian or comparable administrator is filed for the affiliate in question or for (a portion of) its assets, or such an administrator is appointed by a competent court or government agency.

(i) assets of a Group member are attached by third party for a monetary claim, the third party begins with the realization of the value of the attached asset and the attachment is not terminated within 10 Bank Business Days after the beginning of such realisation;

(j) the net worth, earnings position, or liquidity of HGD, Polo or the Group deteriorates substantially, seriously jeopardizing the payment of interest on the Loan or the repayment of the Loan Amount;

(k) Fairchild Holding Corp. or EURO MLS Inc. is in breach of its negative covenant pursuant to § 11 para (3) (b) or (c).

(2) The Borrowers shall immediately advise that Agent in writing of the existence of one of the circumstances referenced in Paragraph (1).

(3) In the event that this Agreement is terminated early, the Borrowers shall be obligated to repay the disbursed Loan Amount and all other amounts owed to the Lenders under the provisions of this Agreement, in each case within five Bank Business Days after receipt of notice of termination, and shall indemnify the Lenders for all damages incurred as a result of early termination. The Lenders shall have the right to realize the values of the security furnished pursuant to this Agreement according to the provisions of the Security Agreements. Upon written request of a Borrower to be received by the Agent no later than on the 2^nd day after the day of termination notice the Lenders shall benevolently consider an extension of the payment period mentioned in sentence 1 with respect to such Borrower’s payment obligations in case of - according to the reasonable discretion of the Lenders - such Borrower’s sufficient creditworthiness. If the Lenders do not consent to the extension, the delay of payment mentioned in sentence 1 commences for the concerned Borrower vis-à-vis the respective Lender on the day of the receipt of notice of the extension refusal.

Section 17

The Agent and the Lenders

(1) The Lenders hereby authorize the Agent to perform all legal acts provided for in this Agreement or the Security Agreements (hereinafter collectively the “Financing Agreements”). The Agent shall have no obligations to the Lenders other than those expressly assumed under the Financing Agreements. The Agent shall not be subject to the limitations provided for in § 181 of the German Civil Code (BGB).

(2) The Agent assumes no liability to the Lenders for the legal effect, validity, or enforceability of the Financing Agreements, for the correctness of any confirmations and representations made by the Borrowers in connection with this Agreement, for the correctness, completeness, or suitability of any documents or other notices provided by HGD to the Agent or the Lenders in accordance with this Agreement, or for the creditworthiness of the Borrowers.

The Agent furthermore shall not be liable to the Lenders for any actions or omissions of its employees, officers or directors, except in cases of gross negligence or willful misconduct.

Each Lender represents to the Agent and the other Lenders that it has independently reviewed the Financing Agreements, has independently made the decision to extend credit to the Borrowers, and shall remain responsible for the review of its credit decision. Except as expressly provided otherwise herein, the Agent shall have no obligation to provide the Lenders with credit information about the Borrowers during the term of this Agreement or during the performance of the Loan, unless the Agent has received information in accordance with this Agreement. The Agent is authorized, without limitation, to accept deposits from the Borrowers, to grant loans to the Borrowers, and to execute any other banking transactions with the Borrowers.

(3) The Lenders shall, in proportion to their respective shares in outstanding loan amounts or, if no loan amount is outstanding, in the Loan Commitment, indemnify the Agent for all costs, expenses (with the exception of customary administrative costs), and damages incurred by the Agent in the exercise of its rights or in the performance of its obligations under the Financing Agreements (to the extent that such expenses or damages are not reimbursed by the Borrowers), unless the Agent has failed to exercise the same care in the exercise of such rights or in the performance of such obligations as the Agent ordinarily exercises in its own affairs. Any claims of the Lenders against the Borrowers shall remain unaffected thereby.

(4) The Agent shall have the right, in relation to the Lenders, not to exercise rights or not to perform tasks assigned to the Agent under this Agreement or necessarily associated with such rights or tasks, if the Agent receives no instructions from the Lenders or the Majority Banks as to whether and how to exercise or perform such rights or tasks. Unless otherwise provided herein, the Agent shall comply with all instructions issued by the Majority Banks, which shall be binding upon all Lenders. If instructed by the Majority Banks, the Agent shall refrain from exercising rights or performing tasks assigned to the Agent under this Agreement.

The Agent shall have no obligation to comply with instructions of the Lenders or the Majority Banks to commence legal actions, unless and until the Agent has been provided to its satisfaction with indemnity for all costs and expenses (including court costs and attorneys’ fees) which may be incurred by the Agent in connection with such legal actions. The Agent shall file no legal actions in the name of any Lender without the consent of such Lender.

(5) In the exercise and performance of its rights and obligations under this Agreement, the Agent shall exercise the same care vis-à-vis the Lenders as the Agent ordinarily exercises its own affairs. The Agent shall, in relation to the Lenders, have the right to rely upon any notice believed to be authentic by the Agent and believed by the Agent to originate from the person designated as the signatory of such notice. The Agent may obtain any opinions and information from attorneys, accountants, and other professional advisers deemed necessary or appropriate by the Agent, and the Agent may rely upon such opinions and information.

(6) The Agent shall promptly confirm to the Lenders the receipt of all documents and provide Lenders with copies of all documents received in its capacity as agent of the Lenders from the Borrowers under this Agreement, and, in addition, shall promptly notify the Lenders of the contents of any other notices addressed to Agent in its capacity as agent of the Lenders (with the exception of purely administrative notices which do not affect any rights or obligations of the Lenders).

Moreover, the Agent shall promptly forward to the Borrowers any notices or inquiries made by the Lenders under this Agreement.

(7) The Agent shall notify the Lenders of any grounds for termination of this Agreement, if and as soon as the Lenders or the Borrowers inform the Agent of such grounds in its capacity as agent, or the Agent gains actual knowledge of such grounds.

Section 18

Payments through the Agent

(1) Each Lender shall, on the disbursement date, transfer its share of any Drawdown to the account designated by the Agent. The Agent shall then disburse the appropriate amounts to the Borrowers in accordance with Section 5 (3) and (4) hereof as agent of the Lenders. Each Lender shall transfer its share of any Drawdown in a timely manner to the account designated by the Agent (or shall arrange for the transmission of unconditional transfer instructions), so as to allow the Agent to dispose of the funds as contemplated herein and to notify the Lenders of disbursement of the funds no later than 11 a.m. on the disbursement date. The Agent is authorized to disburse the full drawdown amount on the drawdown date. If the drawdown share of any Lender is not made available to the Agent in a timely manner, the Agent may cover such share at the cost of such Lender by procuring interim financing based upon fair market terms and conditions. If the Agent determines on the next Bank Business Day following the date of disbursement that the relevant amount still has not been received from the Lender, the Agent may demand repayment of such amount from the Borrowers, including all interim financing costs incurred by the Agent. The rights of the Borrowers against the relevant Lender shall remain unaffected thereby.

(2) The Borrowers shall make all payments under this Agreement to the Agent. Unless special provisions in this Agreement provide for payment to a particular Lender or the Agent, the Agent shall forward to the Lenders promptly upon receipt, and in proportion to their respective shares, all payments of interest or principal made by the Borrowers, as well as any other amounts due and payable by the Borrowers to the Lenders under this Agreement. The Agent shall transfer the appropriate amounts, at the risk and costs of each Lender, to an account to be designated to the Agent in a timely manner by each Lender. Each Lender hereby agrees that if such amounts are transferred before they have been received by the Agent from the Borrowers, it shall repay such amounts, including any costs incurred by the Agent in connection therewith (refinancing costs, overdraft charges, etc.), to the Agent promptly upon request, if and to the extent that a Borrower fails to make payment or a payment credit is subsequently revoked. The Agent shall have no obligation to transfer any amounts to the Lenders until the Agent has been able to verify that such amounts have actually been paid to the Agent by the Borrowers. The rights of the Lenders against the Borrowers shall remain unaffected thereby.

(3) If any Lender receives, by way of offset, court judgment, or in any other manner, a payment which, relative to its share in the Drawdowns, is greater than the payments received by the other Lenders and if such payment was not specifically intended for such Lender under the terms of this Agreement, such Lender shall promptly notify the Agent thereof and make compensation payments to the Agent, so as to ensure that all Lenders receive the same amounts in proportion to their respective shares in the applicable Drawdowns. If it is subsequently determined that an amount shared by a Lender with the other Lenders to compensate the other Lenders must be repaid to the Borrowers in whole or part, each Lender that has received a share of compensation payments shall be liable to the Lender required to repay the Borrowers for its share of such compensation payment (including any accrued interest).

Compensation payments as defined in sentence 1 of subsection 3 above shall also be made in the event that a Lender receives a greater payment as a result of any court proceedings, provided however that no compensation payments shall be due to Lenders that had an opportunity to become parties to such proceedings or to initiate equivalent proceedings, but failed to do so.

Section 19

Administration of Security Interests

(1)     Holding and administration of security interests

(a) The Security Administrator shall administrate the security interests to be created in accordance with section 11 hereof as trustee for the other Lenders. The Security Administrator shall administrate and enforce accessory rights (pledges, guarantees) in the name and on behalf of the other Lenders.

(b) The Security Administrator shall transmit to the other Lenders upon demand for independent review copies of all agreements pertaining to the security interests held by the Security Administrator. The other Lenders shall promptly notify the Security Administrator of any objections thereto, whereupon the matter shall be settled by mutual agreement of the Lenders.

(c) The Lenders hereby authorize the Security Administrator to make and receive in their names all statements and acts necessary for the creation, administration, and enforcement of security interests, and to take all other necessary or appropriate actions. The Security Administrator shall not be subject to the limitations provided for in § 181 of the German Civil Code (BGB) with respect to any actions taken by the Security Administrator based upon this Agreement.

(d) The release of security interests, in whole or part, shall be subject to the consent of all Lenders.

(e) The Security Administrator shall not transfer the administration of security interests to any other administrator except with the consent of the other Lenders. Any other administrator likewise shall not be subject of limitations provided for in § 181 of the German Civil Code (BGB).

(f) In the event that security interests are held by a Lender other than the Security Administrator, the foregoing provisions shall apply mutatis mutandis. Moreover, the Security Administrator shall have the right, without any obligation, to exercise in its own name all control and administration rights provided for in the Security Agreements.

(2)     Enforcement of security interests

(a) The security interests to be created in accordance with section 11 hereof shall be enforced exclusively by the Security Administrator in accordance with the provisions of the Security Agreements; accessory security interests shall be enforced in the name and for the account of the Lenders, whereas non-accessory security interests shall be enforced in the name of the Security Administrator, but for the account of all Lenders.

(b) Prior to enforcement of any security interests to be created in accordance with section 11 (1) and (2) hereof, SSK and HSBC shall effect the balance settlement provided for in section H.3.c. of the Guarantee Decision by debiting to HGD’s loan accounts for Working Capital Loans maintained with SSK and HBSC, respectively, the difference between the amount of EUR 5,000,000.00 and the amount of Working Capital Loans disbursed to HGD and outstanding at the relevant time, and by crediting such amount through the Agent to HGD’s loan account maintained in accordance with this Agreement, for the purpose of repaying Tranche A and, following full repayment of Tranche A, by crediting such amount to Polo’s loan account maintained in accordance with this Agreement, for the purpose of repaying Tranche B. HGD hereby consents to the availment of the Working Capital Credit Lines in accordance with the foregoing sentence; such availment shall require no additional acts by HGD.

(c) The Lenders shall decide by mutual agreement whether and when to enforce security interests. The Security Administrator shall initiate steps for the enforcement of security interests if expressly instructed to do so by the Majority Banks. In urgent cases, the Security Administrator shall decide upon the enforcement of security interests at its reasonable discretion; in such cases, the Security Administrator shall promptly notify the other Lenders of all enforcement measures taken by the Security Administrator.

(d) The Security Administrator and the Lenders shall comply with the enforcement conditions set forth in each of the Security Agreements.

(3)     Distribution of enforcement proceeds

(a) All proceeds from the enforcement of security interests shall, subject to the order of priority provided for in section 11 hereof, be distributed in the following order:

(i)         proceeds shall first be used to pay the costs and any taxes and other expenses incurred in connection with the administration and enforcement of the concerned security interests by the Security Administrator, as well as to satisfy the Security Administrator’s claims for compensation;

(ii)         any remaining proceeds shall be used in the order or priority provided for in section 10 (1) of this Agreement.

(b) If the amount of a claim to be covered with proceeds from the enforcement of security interests has not been determined at the time the proceeds are distributed, such claim shall initially be disregarded for purposes of determining the distribution ratio. Only when the final amount of such claim has been determined, shall a final determination be made with respect to the distribution ratio. In the event that such final determination results in any changes of the enforcement proceeds due and payable to each of the parties to this Agreement, the resulting differences shall, even if proceeds have already been paid, be settled among the parties.

(c) The Lenders may change the aforementioned distribution allocation at any time by mutual agreement.

(d) Any remaining proceeds that are no longer needed shall be disbursed to the concerned Borrower or the relevant third party furnishing security, unless the Lenders are required to transfer such proceeds to a third party that has satisfied claims of one or several of the Lenders (e.g., a guarantor).

(4) Reporting

(a) The Security Administrator shall report to the other Lenders on the status of the Loan at its reasonable discretion. The Lenders shall make available to the Security Administrator all information necessary for such purpose.

(b) Each Lender shall notify the other Lenders if such Lender gains knowledge of any circumstances that may seriously jeopardize repayment of the Loan.

Section 20

Commissions and Fees

(1) The Borrowers agree to pay to SSK, the Agent, and the Security Administrator on the agreed dates the commissions and lump sum costs mentioned in the letters signed by the aforementioned parties on the date of this Agreement.

(2) The Borrowers further agree to pay to the Lenders during the Drawdown Period an availability commission in the amount of 0.75% per annum for any portion of tranche A, B and C that is not drawn or canceled. The availability commission shall be due in arrears on the last day of the Drawdown Period.

Section 21

Assignment and Assumption of Contract

(1) The Borrowers shall have no right to assign their rights and obligations arising from this Agreement to any third parties in whole or in part.

(2) The Lenders shall have the right to assign or transfer their rights and obligations arising from this Agreement to another financial services provider in whole or in part after May 28, 2004, unless such assignment/transfer would result in costs or expenses for the Borrowers or would require the Borrowers to pay any other additional amounts in accordance with the provisions of this Agreement which would not be due, or would not be due in the same amount, absent such assignment/transfer.

(3) Any assignment of rights and obligations arising from this Agreement by a Lender to another financial services provider shall require a duly signed agreement for assumption of contract as shown in Schedule 7 hereto. The assignment shall become effective upon acceptance by the Agent, which shall act in the name of all the remaining parties. The Agent shall inform the other Lenders and the Borrower of each transfer pursuant to this para. 3.

(4) Each Lender shall have the right to disclose information about the Lenders, the Group, and/or the Financing Agreements

(a) to any third party to whom such Lender intends to assign or transfer any rights or obligations arising from this Agreement;

(b) to any third party to whom such Lender intends to grant any right to participate in this Agreement, whatever the form of such right;

    (c)        to any advisers that are subject to a duty of confidentiality,

and insofar, the Borrowers hereby release the Lenders from the duty of banking secrecy and all other duties of confidentiality, in cases (a) and (b) above, however, only subject to the requirement that the concerned third party shall have entered into a confidentiality undertaking.

Section 22

Notices

All notices related to this Agreement shall be made in writing, and shall be hand-delivered or transmitted by mail or telecopier to the addresses designated below or to such other addresses as may from time to time be designated by the parties in writing after the execution hereof:

HGD:

Hein Gericke Deutschland GmbH
attn. Mr. John Flynn
Reisholzer Werftstraße 19
40589 Düsseldorf

Tel.: 0211-9898 755
Fax: 0211-9898 603

with a copy to:

The Fairchild Corporation
Attn.: Mr. Donald Miller

1750 Tysons Boulevard, Suite 1400
McLean, Virginia 22102
USA
Tel.: 001-703-478 5800
Fax: 001-703-478 5767

for Polo:

POLO EXPRESSVERSAND

Gesellschaft für Motorradbekleidung und Sportswear m.b.H. & Co. KG
attn. Mr. John Flynn
Reisholzer Werftstraße 76
40589 Düsseldorf
Tel.: 0211-9796 860
Fax: 0211-9796 869

with a copy to:

The Fairchild Corporation
Attn.: Mr. Donald Miller
1750 Tysons Boulevard, Suite 1400
McLean, Virginia 22102
USA
Tel.: 001-703-478 5800
Fax: 001-703-478 5767

for SSK:

Stadtsparkasse Düsseldorf
attn. Mr. Thorsten Zahlmann
Berliner Allee 33
40212 Düsseldorf
Tel.: 0211-878 5863
Fax: 0211-878 5890

for HSBC:

HSBC Trinkaus & Burkhardt KGaA
attn. Mr. Martin Vetter-Diez
Königsallee 21-23
40212 Düsseldorf
Tel.: 0211-910 62
Fax: 0211-910 25 35.

Section 23

Confirmation in accordance with § 8 of the German Money Laundering Act

Each of the Borrowers hereby confirms to the Lenders that it shall avail itself of loans under this Agreement exclusively for its own account, and that each Borrower shall be the economic beneficiary within the meaning of § 8 of the German Money Laundering Act (Geldwäschegesetz) for all loan amounts drawn by such Borrower under this Agreement.

Section 24

Final Provisions

(1) This Agreement shall be governed by and construed in accordance with the laws of the Federal Republic of Germany. The non-exclusive place of jurisdiction for any disputes arising from or in connection with this Agreement shall be Düsseldorf, Germany.

(2) The provisions set forth in sections 3.1 through 3.13 of the “General Terms and Conditions for Loan Agreements” (Appendix 1 to the NRW Guarantee Guidelines) as last revised on February 14, 1990 shall apply directly between the Borrowers and the Lenders, and shall prevail in cases of doubt or any conflicts with other contract provisions.

(3) The provisions of this Agreement shall be supplemented as between and among all parties to this Agreement by the general terms and conditions of SSK, which are attached hereto as Schedule 8.

(4) Subject to the provisions of the following sentences, the Agent shall, with the prior consent of the Majority Banks, have the right to waive any rights of the Lenders or the Agent under this Agreement, or to agree upon modifications to this Agreement with the Borrowers. Waivers or modifications shall be subject to the consent of all Lenders, if (i) they result in any increase of the Loan Amount or a reduction of the payments of principal, interest, or commissions due from the Borrowers, (ii) they involve the deferment or postponement of payment due dates for any amounts payable by the Borrowers, or any extension of the Drawdown Period, (iii) they relate to any provision which expressly requires the consent of all Lenders or expressly provides for rights of any individual Lender, and they effectively cancel such consent requirement or individual rights, (iv) they result in any substantial modification of the Security Agreements or in the release of any security interests, or (v) they relate to the definition of “Majority Banks” or the provisions in sections 2, 3, 4 (d) and (n), 5 (1), or 24 (4) of this Agreement.

Any waivers of rights of the Agent or modifications affecting the rights and obligations of the Agent shall be subject to the consent of the Agent.

Any modifications or amendments of this Agreement, including any modification of this provision, shall be invalid unless executed in writing.

(5) If any provision of this Agreement is invalid or impracticable in whole or part, the validity of the remaining provisions of this Agreement shall remain unaffected thereby. The same applies, if in this Agreement there appears a gap requiring to be dealt with. Any invalid or impracticable provision shall be replaced and any gap shall be filled by such lawful and reasonable provision as most closely reflects the parties’ intent and purpose, if they had considered the issue.

(6) Any (even if only temporary or partial) failure of the Agent or the Lenders to exercise any rights under this Agreement, including, without limitation, termination rights, shall not be deemed a waiver of such rights and shall not prevent the Agent or the Lenders to exercise such rights in the future.

(7) The schedules referenced herein are hereby incorporated as parts into this Agreement.

Düsseldorf, April 21, 2004

Hein Gericke Deutschland GmbH

_________________

POLO EXPRESSVERSAND

Gesellschaft für Motorradbekleidung
und Sportswear m.b.H. & Co. KG

_________________

Stadtsparkasse Düsseldorf

_________________

HSBC Trinkaus & Burkhardt KGaA

_________________

Schedule 1

The Lenders and Their Respective Loan Commitments

Lender	Tranche A	Tranche B	Tranche C
Stadtsparkasse Dusseldorf	(euro)5,500,000.00	(euro)7,000,000.00	(euro)6,000,000.00
HSBC Trinkaus & Burkhardt KGaA	(euro)5,500,000.00	(euro)7,000,000.00	0.00

Schedule 2

        Draft of the Guarantee Commitment of the State of North Rhine-Westphalia

Schedule 3

Guarantee Guidelines of the State of North Rhine-Westphalia

Schedule 4

Drawdown Notice

Stadtsparkasse Düsseldorf
Attention [*]

Berliner Allee 33
40212 Düsseldorf

[Date]

Dear Ladies and Gentlemen:

In accordance with Section 5 (2) of the Loan Agreement dated April 19, 2004 between Hein Gericke Deutschland GmbH and POLO EXPRESSVERSAND Gesellschaft für Motorradbekleidung und Sportswear mbH & Co. KG as Borrowers and Stadtsparkasse Düsseldorf and HSBC Trinkhaus & Burkhardt KGaA as Lenders regarding a loan for a total maximum amount of EUR 31,000,000.00 (“Loan Agreement”), we hereby wish to avail ourselves of the following loan amount:

Disbursement date:

Tranche:

Amount of drawdown:

Disbursement instructions¹:

Account No.:

Bank: Stadtsparkasse Düsseldorf

⁽¹⁾For drawdowns under Tranches B and C, Polo is to be designated as the recipient for immediate transfer to HGD, and for drawdowns under Tranche A, the Sellers under the Purchase Agreements are to be designated as the recipient.

We hereby confirm that to our best knowledge and belief

(a) all representations and warranties in accordance with Section 13 of the Loan Agreement are still correct,

(b) there is no violation of the requirements set forth in Section 14 of the Loan Agreement, and

(c) there is no cause for termination in accordance with Section 16 of the Loan Agreement.

This drawdown notice is irrevocable.

Sincerely,

_________________

[Borrowers]

Schedule 5

Overview of Total Financing

for Acquisition of Assets under the Purchase Agreements

Financing Requirements	in million(euro)
Purchase price of Eurobike assets and Polo shares
- to Insolvency Administrator	59.0
- to Mr. Esser (12.5% of Polo shares, 01/02/2004)	15.0
	74.0
Required working capital/increase in inventories	21.0
Fees and costs	1.5
Total	96.5

Financing	in million(euro)
Internal funds, capital stock and equity	32.5
Internal funds, shareholder loans	14.5
Hein Gericke loan (with state guarantee to the banks)	11.0
Polo and Hein Gericke loan (with state guarantee to the banks)	14.0
Loan (without state guarantee to the banks)	6.0
Credit line (without state guarantee to the banks)	10.0
Other/bridge financing	8.5
Total	96.5

Schedule 6

Definition of economic equity capital:

        Registered share capital (GmbH, AG)/Limited partnership capital (KG)
+ Capital reserves
+ Earnings reserves
+ Profit carried forward — Loss carried forward
+ Net income for
the year
— Net loss for the year
— Amounts scheduled for distribution
+ 50% of special account with reserve characteristics
— Pension obligations not reported as liabilities
+ Silent partnership Interests with loan continuation declaration and subordination
+ Shareholder loans with loan continuation declaration and subordination
— Outstanding contributions (*)
— Claims against and/or loans to shareholders / affiliated companies / associated companies (*), except loans for goods
— Treasury stock (*)
— Expenses for startup and expansion of business operations (*)
— Deferred taxation (*)
— Discount (*)
— Special lease payments (*)
— Capitalized goodwill (*), see also (**)
= Business equity

(*)= Adjustment item

(**)     Note on capitalized goodwill
Exception: the goodwill arising from the transactions cited in the preamble is not deducted as an adjustment item for purposes of determining the economic equity ratio and economic equity capital.

Determination of the economic equity ratio:

        Economic equity capital x 100

         ____________________________ = economic equity ratio

        Total assets — adjustment items (*)

Schedule 7

Agreement for Assumption of Contract

Stadtsparkasse Düsseldorf
Attn: [*]

Berliner Allee 33
40212 Düsseldorf

RE: Loan Agreement dated April 21, 2004 between Hein Gericke Deutschland GmbH and POLO EXPRESSVERSAND Gesellschaft für Motorradbekleidung und Sportswear mbH & Co. KG as Borrowers and Stadtsparkasse Düsseldorf and HSBC Trinkhaus & Burkhardt KGaA as Lenders regarding a loan for a total maximum amount of EUR 31,000,000.00 (“Loan Agreement).

1. The terms defined in the Loan Agreement shall have the same meaning in this Agreement. The terms “Transferor Bank” and “Transferee Bank” are defined in the Appendix to this Agreement.

2. The Transferor Bank (i) confirms that the Transferor Bank’s participation as set forth below completely and accurately describes the current participation under the Loan Agreement and (ii) hereby sells and transfers to the Transferee Bank by way of this Agreement for Assumption of Contract the share in the loan receivable defined in the Appendix, including all rights and obligations associated therewith. The Transferee Bank shall accept the transfer by countersigning this Agreement for Assumption of Contract and forwarding it to the Agent at the address designated in the Agreement.

3. The transfer shall become effective on the date set forth in the Appendix in accordance with the provisions of the Loan Agreement and the Account Pledge Agreement.

4. The Transferee Bank hereby confirms that it has received a copy of this Loan Agreement, as well as copies of all Security Agreements and all other information requested by it in connection with this transaction. The Transferee Bank affirms that it has reviewed or will review independently the creditworthiness of the Borrowers, the Loan Agreement, the Security Agreements as well as all other documents provided now or in the future, particularly for completeness, enforceability and accuracy. The Transferor Bank shall be liable only with respect to the confirmation made in Section 2 (i) of this Agreement.

5. On the effective date of the transfer, the Transferee Bank shall succeed to all rights and obligations of a Lender within the meaning of the Loan Agreement and the Security Agreements.

6. This Agreement for Assumption of Contract and the rights and obligations of the parties shall be governed by the laws of the Federal Republic of Germany.

Appendix to Schedule 7

— Transferor Bank:

— Transferee Bank:

— Effective date:

— Outstanding drawdowns:

— Share of Transferor Bank:

— Transferred portion:

[Transferor Bank]	[Transferee Bank]
Date:	Date:

Mailing address of Transferee Bank

Address:

Attn:

Account information:

Telephone:

Fax:

Schedule 8

General Terms and Conditions of Stadtsparkasse Düsseldorf

EX-2

Letterhead of Stadtsparkasse Düsseldorf

To the Management
Hein Gericke Deutschland GmbH
Reisholzer Werftstr. 19

40589 Dusseldorf

21 April 2004

Dear Sirs,

Supplemental to the syndicated loan agreement for EUR 31,000,000 between you, Polo EXPRESSVERSAND Gesellschaft für Motorradbekleidung und Sportswear mbH & Co. KG, Stadtsparkasse Düsseldorf and HSBC Trinkaus & Burkhardt KGaA of the date hereunder (hereinafter the “Syndicated Loan Agreement”), we gladly provide you with a working capital facility in the amount of

EUR 5,000,000.00 (in words: five million euros)

until further notice, but for a maximum period of 364 days. Stadtsparkasse Düsseldorf shall favourably consider an extension of the term of the Working Capital Facility if in its assessment the Borrower’s financial circumstances are unchanged upon expiry of the 364-day period.

This Working Capital Facility may be utilized only after tranches A, B and C under the Syndicated Loan Agreement have been fully drawn.

The Working Capital Facility may be utilised optionally by way of current account credits, money market credits, guarantee lines and letters of credit. Moreover, forex forward transactions — net – up to an amount of EUR 2,000,000.00 max. may also be effected against the Working Capital Facility.

Interest shall be paid on the basis of the EONIA¹ on amounts utilised on a regular basis as current account credit, and on the basis of the 3-month EURIBOR on money market credits, plus a margin of 3.5% p.a. in each of the two cases.

For utilisations by way of forex forward transactions, the following is hereby agreed:

Individual drawings may be effected for a maximum term of 12 months and may not exceed the respective term of the Working Capital Facility.

For details on the respective forex forward transactions performed, please refer to the separate contractual documentation sent to you separately in each individual case. The rate applicable for risks under these transactions is 10% of the respective €-countervalue for

        ¹European Overnight Interest Average. For the calculation the respective average EONIA of the previous month shall apply. Interest shall be due monthly in arrears. Interest shall be calculated pursuant to euro usages on the basis of the exact number of days with reference to a year of 360 days.

contractual terms of up to three months; for terms exceeding three months we will take into consideration 20% of the respective €-countervalue as a risk premium. Stadtsparkasse may refuse to grant forex forward transactions if it deems the currency risk to be too high. If the risk premium is exceeded due to the price trend, we may demand the provision of further suitable collateral within such period as to be set by us. Stadtsparkasse is entitled, upon a near 100% utilisation of the credit, to close open forex forward transactions in part or in whole whilst safeguarding the interests of the client as far as possible, and to call for payment any claim remaining after such closing and to debit the account accordingly.

Guarantee lines already taken out, as well as letters of credit assumed and other existing utilized lines (totalling € 1,949,057.97 as of April 21, 2004) shall be applied as per agreement against the aforementioned credit volume.

For further types of credit we will agree with you the terms and conditions in the individual case.

On that portion of this general line of credit not utilised and not called, an availability commission of 1.25% shall be paid which shall fall due in arrears on the last day of a quarter.

This Credit Line is secured by the collateral specified in § 11 para. (1) of the Syndicated Loan Agreement pursuant to ranking further defined in such provision, and by the declarations of undertaking and negative pledge [Verpflichtungs- und Negativerklärungen] as specified in § 11 para. (3) of the Syndicated Loan Agreement. Details on the provision of collateral are contained in separate agreements.

You hereby agree that, prior to commencing a realisation of the collateral created pursuant to § 11 para. (1) and para. (2) of the Syndicated Loan Agreement, we shall debit the account maintained with us for this Working Capital Facility by an amount equal to the difference between EUR 5,000,000 and the amount of outstanding working capital loans granted to you hereunder at the respective time, and that we shall credit this amount via the agent of the Syndicated Loan Agreement to your credit account maintained pursuant to the Syndicated Loan Agreement for repayment of tranche A and, after complete repayment of tranche A, to the credit account of Polo EXPRESSVERSAND Gesellschaft für Motorradbekleidung und Sportswear mbH & Co. KG maintained pursuant to the Syndicated Loan Agreement for repayment of tranche B.

We are required by statutory regulations to effect a timely inspection of the financial circumstances of our credit clients. In this connection we refer to your information undertakings pursuant to § 14 of the Syndicated Loan Agreement.

We draw attention to the fact that the general terms and conditions of Stadtsparkasse form an integral part of this Agreement. You may inspect these at our banking premises.

Based on the German Money Laundering Act [Geldwäschegesetz], the economic beneficiary under this Credit Line must be ascertained by us. We therefore ask you to tick the appropriate box at the end of this letter.

As security for the credit risk resulting from the business relationship, hedging transactions may be concluded. To enable the contractual partners of Stadtsparkasse to perform a creditworthiness review in this regard, Stadtsparkasse is entitled to disclose to third parties the information required for such creditworthiness review (notably regarding financial circumstances). To this extent, Stadtsparkasse is released from its banking secrecy obligation. In this connection neither you nor your shareholders/partners or subsidiaries are obligated to furnish further information and/or documentation beyond the scope owed under § 14 of the Syndicated Loan Agreement.

Supplemental hereto, § 13 (Representations and Warranties), § 14 (Requirements), § 15 (Key Financial Ratios), § 16 (Termination) of the Syndicated Loan Agreement shall apply. In particular, Stadtsparkasse is entitled to extraordinary termination of this Working Capital Facility only if at the same time a cause for termination exists under the Syndicated Loan Agreement. Should provisions of this Agreement contradict a provision of the Syndicated Loan Agreement, the provisions of the Syndicated Loan Agreement shall prevail.

This Agreement is governed by German law. The courts of Düsseldorf shall have non-exclusive jurisdiction for all disputes arising from or in connection with this Agreement.

Please confirm your agreement with the content of this letter on the enclosed copy.

With kind regards,

Enclosure

Stadtsparkasse Düsseldorf

sgd. Zahlmann

The Credit Line is utilised for your own account:

|X| Yes |_| No

Consenting cognizance is hereby taken of the content of this letter.
The specified terms and conditions are hereby acknowledged.

April 21, 2004	sgd. Flynn
...............................	...............................
Date	Hein Gericke Deutschland GmbH

EX-2

Letterhead of HSBC Trinkaus & Burkhardt KGaA

To the Management
Hein Gericke Deutschland GmbH
Reisholzer Werftstr. 76

40589 Dusseldorf

19 April 2004

Dear Sirs,

Supplemental to the syndicated loan agreement for EUR 31,000,000 between you, Polo EXPRESSVERSAND Gesellschaft für Motorradbekleidung und Sportswear mbH & Co. KG, Stadtsparkasse Düsseldorf and HSBC Trinkaus & Burkhardt KGaA of the date hereunder (hereinafter the “Syndicated Loan Agreement”), we gladly provide you with a working capital facility in the amount of

EUR 5,000,000.00

(in words: five million euros)

until further notice, but for a maximum period of 364 days. HSBC Trinkaus & Burkhardt KGaA shall favourably consider an extension of the term of the Working Capital Facility if in its assessment the Borrower’s financial circumstances are unchanged upon expiry of the 364-day period.

This Working Capital Facility may be utilized only after tranches A, B and C under the Syndicated Loan Agreement have been fully drawn.

The Working Capital Facility may be utilised optionally by way of current account credits, money market credits, guarantee lines and letters of credit. Moreover, forex forward transactions — net – up to an amount of EUR 2,000,000.00 max. may also be effected against the Working Capital Facility.

Interest shall be paid on the basis of the EONIA¹ on amounts utilised on a regular basis as current account credit, and on the basis of the 3-month EURIBOR on money market credits, plus a margin of 3.5% p.a. in each of the two cases.

For utilisations by way of forex forward transactions, the following is hereby agreed:

Individual drawings may be effected for a maximum term of 12 months and may not exceed the respective term of the Working Capital Facility.

For details on the respective forex forward transactions performed, please refer to the separate contractual documentation sent to you separately in each individual case. The rate

        ¹European Overnight Interest Average. For the calculation the respective average EONIA of the previous month shall apply. Interest shall be due monthly in arrears. Interest shall be calculated pursuant to euro usages on the basis of the exact number of days with reference to a year of 360 days.

applicable for risks under these transactions is 10% of the respective €-countervalue for contractual terms of up to three months; for terms exceeding three months we will take into consideration 20% of the respective €-countervalue as a risk premium.

HSBC Trinkaus & Burkhardt KGaA may refuse to grant forex forward transactions if it deems the currency risk to be too high. If the risk premium is exceeded due to the price trend, we may demand the provision of further suitable collateral within such period as to be set by us. HSBC Trinkaus & Burkhardt KGaA is entitled, upon a near 100% utilisation of the credit, to close open forex forward transactions in part or in whole whilst safeguarding the interests of the client as far as possible, and to call for payment any claim remaining after such closing and to debit the account accordingly.

For further types of credit we will agree with you the terms and conditions in the individual case.

On that portion of this general line of credit not utilised and not called, an availability commission of 1.25% shall be paid which shall fall due in arrears on the last day of a quarter.

This Credit Line is secured by the collateral specified in § 11 para. (1) of the Syndicated Loan Agreement pursuant to ranking further defined in such provision, and by the declarations of undertaking and negative pledge [Verpflichtungs- und Negativerklärungen] as specified in § 11 para. (3) of the Syndicated Loan Agreement. Details on the provision of collateral are contained in separate agreements.

You hereby agree that, prior to commencing a realisation of the collateral created pursuant to § 11 para. (1) and para. (2) of the Syndicated Loan Agreement, we shall debit the account maintained with us for this Working Capital Facility by an amount equal to the difference between EUR 5,000,000 and the amount of outstanding working capital loans granted to you hereunder at the respective time, and that we shall credit this amount via the agent of the Syndicated Loan Agreement to your credit account maintained pursuant to the Syndicated Loan Agreement for repayment of tranche A and, after complete repayment of tranche A, to the credit account of Polo EXPRESSVERSAND Gesellschaft für Motorradbekleidung und Sportswear mbH & Co. KG maintained pursuant to the Syndicated Loan Agreement for repayment of tranche B.

We are required by statutory regulations to effect a timely inspection of the financial circumstances of our credit clients. In this connection we refer to your information undertakings pursuant to § 14 of the Syndicated Loan Agreement.

We draw attention to the fact that the general terms and conditions of HSBC Trinkaus & Burkhardt KGaA form an integral part of this Agreement. You may inspect these at our banking premises.

Based on the German Money Laundering Act [Geldwäschegesetz], the economic beneficiary under this Credit Line must be ascertained by us. We therefore ask you to tick the appropriate box at the end of this letter.

As security for the credit risk resulting from the business relationship, hedging transactions may be concluded. To enable the contractual partners of HSBC Trinkaus & Burkhardt KGaA to perform a creditworthiness review in this regard, HSBC Trinkaus & Burkhardt KGaA is entitled to disclose to third parties the information required for such creditworthiness review (notably regarding financial circumstances). To this extent, HSBC Trinkaus & Burkhardt KGaA is released from its banking secrecy obligation. In this connection neither you nor your shareholders/partners or subsidiaries are obligated to furnish further information and/or documentation beyond the scope owed under § 14 of the Syndicated Loan Agreement.

Supplemental hereto, § 13 (Representations and Warranties), § 14 (Requirements), § 15 (Key Financial Ratios), § 16 (Termination) of the Syndicated Loan Agreement shall apply. In particular, HSBC Trinkaus & Burkhardt KGaA is entitled to extraordinary termination of this Working Capital Facility only if at the same time a cause for termination exists under the Syndicated Loan Agreement. Should provisions of this Agreement contradict a provision of the Syndicated Loan Agreement, the provisions of the Syndicated Loan Agreement shall prevail.

This Agreement is governed by German law. The courts of Düsseldorf shall have non-exclusive jurisdiction for all disputes arising from or in connection with this Agreement.

Please confirm your agreement with the content of this letter on the enclosed copy.

With kind regards, Enclosure

HSBC Trinkaus & Burkhardt KGaA

sgd.     Müller                                               sgd. Vetter-Diez

The Credit Line is utilised for your own account:

|_| Yes |_| No

Consenting cognizance is hereby taken of the content of this letter. The specified terms and conditions are hereby acknowledged.

April 21, 2004	sgd. Flynn
...............................	...............................
Date	Hein Gericke Deutschland GmbH

EX-2

         THIS FACILITY AGREEMENT is made on April 30, 2004

BETWEEN:

(1) HEIN GERICKE (U.K.) LIMITED whose company number is 02553316 and whose registered office is at Hanover House, Hornbeam Square East, Harrogate, North Yorkshire, HG2 8PD (the Borrower); and

(2) GMAC COMMERCIAL FINANCE PLC whose company number is 661920 and whose registered office is at Sovereign House, Church Street, Brighton, BN1 1SS (GMAC).

WHEREAS

(A) GMAC has agreed to make available to the Borrower financing facilities upon the terms and subject to the conditions set out in this Agreement.

         IT IS AGREED as follows:

1. CONSTRUCTION

1.1 Definitions

In this Agreement, unless the context otherwise requires, the following words and expressions will have the meaning set out opposite them:

Account Balance: the debit balance on the Loan Account from time to time; Advance: a cash advance made or to be made under the Facility or (as the context may admit or require) the principal amount of that cash advance; Agreement: this Agreement as the same may be amended or supplemented in writing by the parties from time to time and shall include the schedules hereto;

Annual Renewal Period: the period of twelve months commencing on the expiry of the Initial Term and thereafter each successive period of twelve calendar months commencing on the expiry of the previous such period;

Approved Locations: those warehouses or shops of the Borrower that have for the time being been approved in writing by GMAC, that are located in the United Kingdom and in respect of which irrevocable distraint waivers in favour of GMAC have been provided by the relevant landlords or in respect of which GMAC holds a Reserve on account of rent as referred to in paragraph (iii) of the definition of Reserves (as being as at the date of this Agreement, those set out in Schedule 6);

Arrangement Fee: an amount of £100,000 payable pursuant to clause 7.2 (of which GMAC acknowledges that £25,000 has been paid by the Borrower prior to the date of this Agreement);

Availability Period: the period commencing on the date of this Agreement and ending five Business

      Days prior to the Maturity Date;

Available Inventory Facility: at any time, the Facility Limit less the Account Balance, provided that in relation to a proposed Advance, there will be added back any amount of the Account Balance that is due to be paid or repaid (as the case may be) on the proposed Drawdown Date;

Banner: Banner Investments (U.K.) Limited whose company number is 02192316 and whose registered address is Mitre House, 160 Aldersgate Street, London EC1A 4DD;

      Borrowings: the following:

(i) money borrowed or raised and includes capitalised interest;

(ii) any liability under any bond, note, debenture, loan stock, instrument or security;

(iii) any liability for acceptance or documentary credits or discounted instruments;

(iv) any liability for the acquisition cost of assets or services payable on deferred payment terms where the period of deferment is more than 90 days;

(v) any liability under debt purchase, factoring and similar agreements and capital amounts owing under finance leases, hire purchase or conditional sale agreements or arrangements; and

(vi) any liability under any guarantee or indemnity (except product warranties);

Business Day: a day (other than a Saturday or Sunday) on which banks are open in London for business of the nature required for the purposes of this Agreement; Cash Account: an account in the name of GMAC maintained with such bank as GMAC may select from time to time, to which sums will be credited in accordance with clause 12 (Cash Account);

Cash Account Memorandum: means the proceeds memorandum agreed between GMAC and the Borrower (and reproduced in schedule 5) with regard to the payment of sums into, and the application of the credit balance for the time being on, the Cash Account;

Collateral Management Fee: the fee referred to in schedule 3;

Default: an Event of Default or any event or circumstance which could (with the expiry of a grace period, the giving of notice, the making of any determination or any confirmation of any of the foregoing) be an Event of Default;

        Default Rate: the rate which is two per cent per annum above the Interest Rate;

Drawdown Date: the date on which an Advance is made; Early Termination Fee: means the fee payable by the Borrower on the expiry of a notice of cancellation given in accordance with clause 9.2.2 (Cancellation), being computed as:

(i) if the relevant notice of cancellation expires on or before the first anniversary of the date of this Agreement, 3% (three per cent.) of the Total Line Size; or

(ii) if the relevant notice of cancellation expires after the first anniversary but on or before the second anniversary of the date of this Agreement, 2% (two per cent.) of the Total Line Size; or

(iii) if the relevant notice of cancellation expires at any time after the second anniversary of the date of this Agreement but prior to any subsequent anniversary of the date of this Agreement, 1% (one per cent.) of the Total Line Size;

Eligible Inventory: Finished Goods Inventory that is unencumbered and is not Ineligible Inventory; Environmental Approval: any permit, licence, approval, ruling, exemption or other authorisation

      required under applicable Environmental Laws;

Environmental Laws: any and all laws, rules, orders, regulations, statutes, ordinances or codes of any Governmental Authority regulating, relating to or imposing liability or standards of conduct concerning environmental protection matters, including without limitation, in relation to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environmental Concern, as now or may at any time hereafter be in effect;

        Event of Default: any of the events specified in clause 20 (Events of Default);

Existing Charges: the charges over credit balances, dated 5 September 2003 and 15 October 2003 respectively, granted by the Borrower in favour of Barclays Bank PLC;

Facility: the inventory-based revolving credit facility, in a maximum principal amount not exceeding the Facility Limit from time to time, made available by GMAC to the Borrower upon and subject to the terms of this Agreement;

Facility Limit: at any time the lesser of:

(i) £5,000,000; and

(ii) an amount equal to 50% of the cost price of Eligible Inventory (as evidenced by the most recently delivered Inventory Designation Form or, at GMAC’s option, the most recently delivered Inventory Valuation),

        and in either case minus the amount of any Reserves;

Fairchild: The Fairchild Corporation of 1750 Tysons Boulevard, Suite 1400, McLean, VA 22102-4225;

Finance Documents: this Agreement, the Put Option and the Security Documents and all other deeds and documents entered into pursuant to or ancillary to such documents;

Finished Goods Inventory: unsold finished goods of the Borrower that are stored or located at

      Approved Locations;

Governmental Authority: any nation or government, any state or political sub-division thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of

      any of the foregoing;

Group: the Borrower and all of its Subsidiaries and any Subsidiaries of such Subsidiaries from time to time and includes Banner for the purposes of this Agreement and member of the Group or Group Company means any of them;

Guarantor: Banner and any other person for the time being who guarantees the due performance and discharge of the Borrower's obligations and liabilities to GMAC in relation to the Facility; HG Deutschland GmbH: Hein Gericke Deutschland GmbH whose registered office is at Reisholzer, Werftstrasse, 190-40589, Dusseldorf, Germany; HG Deutschland Group: HG Deutschland GmbH and each of its Subsidiaries from time to time;

HG Intellectual Property: is the right to use the name “Hein Gericke”, the Hein Gericke logo and such other intellectual property as GMAC (acting reasonably) stipulates as being required to enable the Borrower to trade in the ordinary course of its business;

Hilco UK: means Hilco UK Limited (company number 03944915) whose registered office is at Unit 7, River Court, Riverside Park, Middlesbrough, Cleveland, TS2 1RT;

Ineligible Inventory: any item of Finished Goods Inventory at any time:

(i) that is not fit for its purpose or is not usable or readily saleable at a price not less than the lower of cost or market value;

(ii) that constitutes returned, damaged, defective or obsolete goods or goods that were purchased by the Borrower more than two years before that time;

(iii) that is subject to retention of title provisions in favour of a third party;

(iv) that would, when aggregated with all other items of Finished Goods Inventory, cause the cost value of Finished Goods Inventory to exceed the Insurance Limit, or that is uninsured;

(v) that is held by the Borrower as consignee or bailee for a third party, or that has been conditionally delivered to the Borrower; and/or

(vi) that has been sold or constructively delivered to customers of the Borrower,

        or such criteria as may be revised by GMAC from time to time in its sole discretion;

Inventory Designation Form: a certificate signed by a director of the Borrower as to the value of the Finished Goods Inventory and Preferential Creditors in the form shown in schedule 4 (or in such other form as GMAC shall from time to time reasonably require);

        Initial Term: shall be three (3) years from the date of this Agreement;

Insurance Limit: is, at the date of this Agreement, €165,000,000 and thereafter shall be such amount as notified in writing to GMAC by the Borrower’s insurers as representing the amount of insurance cover provided to the Borrower in respect of the Unfinished Goods Inventory;

Intellectual Property Rights: know-how, patents, trademarks, service marks, designs, business names, topographical or similar rights, copyrights or other intellectual property monopoly rights, and any licence or other interest in any such rights (including, without limitation, any licence granted to the Borrower in relation to the HG Intellectual Property whether in accordance with clause 18.3 (Positive Covenants) or otherwise);

        Interest Payment Date: the last day of each calendar month after the date of this Agreement;

Interest Rate: the rate which is 2.25 per cent. per annum above the base rate of Lloyds TSB Bank Plc as fluctuating from time to time;

Inventory Valuation: a valuation of the Finished Goods Inventory, addressed by a Valuer to GMAC and carried out on the basis of market value and on the assumption of a disposal within 90 days;

Loan Account: an account or accounts in the name of the Borrower with GMAC opened in connection with, and for the purpose of recording all amounts outstanding from time to time under, the Facility;

Letters of Credit: the following letters of credit, each issued by Barclays Bank PLC on the Borrower’s behalf and unmatured as at the date of this Agreement, or (as the context may admit or require) the maximum amount for which the Borrower is actually or contingently liable to Barclays Bank PLC in respect of such letters of credit:

(i) the letter of credit (reference MRDC4746718) dated 19 February 2004 addressed to Alpinestars SpA and expiring on 6 May 2004 with a maximum liability of £567,815.15; and

(ii) the letter of credit (reference MRDC4752247) dated 1 April 2004 addressed to Alpinestars SpA and expiring on 22 July 2004 with a maximum liability of £117,502.09;

        Material Adverse Effect: any effect which could reasonably be expected to be materially adverse to:

(i) the ability of any member of the Group to perform its payment obligations under any of the Finance Documents;

(ii) the business, assets, financial condition or prospects of the Group taken as a whole;

Materials of Environmental Concern: chemicals, pollutants, contaminants, wastes, toxic substances, petroleum and petroleum products and distillates, and all hazardous substances defined or regulated as such in or under any Environmental Law;

        Maturity Date: in relation to the Facility, the date on which:

(i) the Facility is terminated pursuant to clause 3.2 (Availability and term); or

(ii) GMAC notifies the Borrower at any time in writing of termination of the Facility pursuant to clause 20 (Events of Default);

Non-Utilisation Fee: a fee, payable by the Borrower in accordance with clause 7.3 (Fees) in respect of each calendar month or part thereof, computed at a rate of 0.75% per annum on the average daily amount during the calendar month (and calculated on the last Business Day of that calendar month) of the Available Inventory Facility;

Obligors: the Guarantor, the Borrower and each other member of the Group which has undertaken (or in the future undertakes) obligations to GMAC pursuant to one or more of the Finance Documents, and Obligor means any of them;

Permitted Borrowings: Borrowings under any of the following:

(i) this Agreement;

(ii) the master lease purchase agreement dated 17 February 2003 between the Borrower and Barclays Mercantile Business Finance Limited;

(iii) the PDQ hire agreement dated 19 September 1998 between the Borrower and Barclays Bank PLC in relation to the hiring of PDQ terminals by the Borrower;

(iv) the Letters of Credit (but not, for the avoidance of doubt, any extension, renewal or replacement of any of them); or

(v)     outstanding invoices relating to the supply of goods to the Borrower by HG Deutschland GmbH;

      Permitted Security Interest: means

(i) a lien or right of set off arising in the ordinary course of trading solely by operation of law (or by contractual provisions having a substantially similar effect) except for any lien the rights to which have been asserted;

(ii) Security Interests arising under the Security Documents;

(iii) the Existing Charges, provided that the Borrower will that procure that each of the Existing Charges will be released by Barclays Bank PLC reasonably promptly upon the expiry of the Letters of Credit; and

(iv) Security Interests which GMAC has at any time in writing agreed shall be a Permitted Security Interest;

Preferential Creditors: those creditors of an Obligor who, upon the insolvency of such Obligor, would have preference or priority to payment over the holder of a floating charge;

Prior Chargeholders: the holder or beneficiary of any mortgage, charge, trust, lien, reservation of ownership, security interest or any other interest affecting the absolute and unfettered ownership of the charged property;

Proceeds: the gross proceeds (including any value added tax included therein) of the sale by the Borrower of each and every item of Finished Goods Inventory, including but not limited to:

    (i)        cash;

    (ii)        the cleared proceeds of cheques;

    (iii)        all amounts received under credit card/charge/debit card merchant agreements or arrangements;

    (iv)        all amounts received under H-G branded charge card agreements;

Put Option: means the option deed made or to be made between GMAC (1) and Hilco UK (2) and the

      Borrower (3);

      Reservations: means

(i) the principle that equitable remedies and awards of enforcement costs are remedies which may be granted or refused at the discretion of the court;

(ii) the limitation on enforcement as a result of laws relating to bankruptcy, insolvency, liquidation, reorganisation, court schemes, moratoria, administration, and other laws generally affecting the rights of creditors;

(iii) the principle that certain types of security expressed to take effect as fixed security may, as a result of the ability of an Obligor to deal with the assets subject to that security on terms permitted under the Finance Documents, take effect as floating security;

(iv) the requirement that an assignment must be notified to the relevant counterparty if it is to take effect as a legal assignment;

(v) the principle that, if security is purported to be created (or an assignment is purported to be made) by an Obligor in breach of any prohibition imposed on that Obligor creating security over (or assigning) that asset, this may affect the validity of the security purported to be created;

(vi) the time barring of claims under the Limitation Acts; and

(vii) rules against penalties;

      Reserves: means:

(i) such sums as GMAC decides (acting reasonably) may be payable to Preferential Creditors;

(ii) such sums of the Finished Goods Inventory where the discrepancy from book value as determined by the test count or cost counts performed by or on behalf of GMAC is greater than five (5) per cent.;

(iii) such sums representing the aggregate amount of the rent payable by the Borrower in any quarter in respect of all shops and/or warehouses of the Borrower that in relation to which irrevocable distraint waivers in favour of (and in a form approved by) GMAC have not been received from the relevant landlords; and

(iv) such other sums as GMAC shall decide (acting reasonably) and notify in writing to the Borrower from time to time;

Security Documents: those documents listed in part 2 of schedule 1 and any other documents for the time being securing (directly or indirectly) all or any of the Borrower’s obligations under this Agreement and/or all or any other obligation (present or future, actual or contingent) of an Obligor to GMAC and references to any such documents shall include the same as varied or amended in writing by the parties thereto from time to time;

Security Interest: any mortgage, pledge, lien of any kind and howsoever arising, charge, assignment by way of security, hypothecation, security interest, standard security, assignation in security or any other security agreement or arrangement relating to existing or future assets (including, without limitation, the deposit of monies or property with a person with the primary intention of affording such person a right of set-off or lien);

Shares: shares of any class or description in the Borrower; Sterling: the lawful currency for the time being of the United Kingdom;

      Subsidiary:

(i)     a subsidiary as defined in section 736 of the Companies Act 1985; and

(ii)     a subsidiary undertaking as defined in section 53(1) of the Companies Act 1989;

Tacana Note: the Series 1 Managed Credit Portfolio Note due 2008 of Tacana Company Limited, having a redemption amount of US$3,500,000, of which the registered holder as at the date of this Agreement is Banner;

Taxes: all present and future taxes, levies, duties, withholdings or similar charges of whatever nature and wherever levied or assessed, together with interest thereon and any penalties in respect thereof;

      Total Line Size: £5,000,000;

Unencumbered: not subject to any Security Interest or any other interest (including, but not limited to, reservation of ownership or any retention of title) affecting a Group Company’s absolute and unfettered ownership; and

        Valuer: any suitably qualified valuer appointed by GMAC from time to time.

1.2 In this Agreement:

1.2.1 a clause or schedule shall (except where the context otherwise requires) be construed as a reference to the relevant clause in or schedule to (and forming a part of) this Agreement;

1.2.2 a person shall include a body corporate, individual, firm or an unincorporated body of persons (as the case may be);

1.2.3 the singular shall include the plural and vice-versa and the masculine, the feminine and the neuter;

1.2.4 any statutory provision shall be deemed to mean and to include a reference to any modification, consolidation or re-enactment thereof for the time being in force and any analogous provision or rule under any applicable law;

1.2.5 the expressions Borrower, Guarantor, Obligor or GMAC shall, where the context admits, include their respective personal representatives, successors in title or permitted assigns (whether immediate or derivative);

1.2.6 any reference herein to any document, including to this Agreement includes such document as amended, novated, supplemented, substituted, extended, assigned or replaced from time to time and includes any document which is supplemental hereto or thereto;

1.2.7 the meaning of general words introduced by the word other and the word otherwise shall not be limited by reference to any preceding words or enumeration including a particular class of acts, matters or things;

1.2.8 where a word or phrase has to be considered in relation to a jurisdiction outside England and there is no exact equivalent of such word or phrase then it shall have the meaning of the closest equivalent in such jurisdiction; and

1.2.9 indebtedness includes any obligation (whether incurred as principal, guarantor or surety) for the payment or repayment of money, whether present or future, actual or contingent.

1.2.10 The headings in this Agreement are inserted for convenience only and shall not affect its construction or interpretation.

2. THE INVENTORY FACILITY

2.1 On the terms and subject to the conditions of this Agreement, GMAC agrees to make available to the Borrower the Facility in an amount equal to the Facility Limit.

2.2 At no time may the Account Balance exceed the Facility Limit. 2.3 The Facility will be used by the Borrower: 2.3.1 to fund the working capital requirements of the Group; and 2.3.2 for such other purposes as GMAC may agree,

but GMAC shall not be bound to enquire as to, nor shall it be responsible for, the use or application by the Borrower of all or any part of the Facility.

3. AVAILABILITY AND TERM

3.1 Subject to the other provisions of this Agreement, the Facility shall be available for drawing by the Borrower once per week during the Availability Period.

3.2 Subject to the other provisions of this Agreement the Facility may be cancelled: 3.2.1 by the Borrower in accordance with clause 9.2 (Cancellation); or

3.2.2 (without prejudice to GMAC’s right to terminate at any time upon the occurrence of an Event of Default) by GMAC serving on the Borrower not less than 90 days’ prior written notice of such cancellation, such notice to take effect at any time on or after the expiry of the Initial Term.

3.3 The Facilities will be renewed for the first Annual Renewal Period and will continue to be renewed annually thereafter if::

3.3.1 no notice of cancellation has been served pursuant to clause 3.2; and 3.3.2 no Default has occurred and is continuing on the relevant renewal date.

4. CONDITIONS PRECEDENT

4.1 The Facility will only become effective if GMAC has received (or waived its entitlement to receive), in form and substance satisfactory to it, all of the documents and evidence listed in part 1 of schedule 1. GMAC acknowledges and agrees that it has waived its entitlement to receive the following documents, in each case subject to the following conditions:

4.1.1 the director’s fraud warranty of Mr Guy Richard Mainwaring (Mr Mainwaring), being one of the Security Documents, on condition that:

(a) the facility will not become effective unless and until GMAC has received a fax copy of Mr Mainwaring’s fraud warranty, duly executed by him; and

(b) the original such fraud warranty must be received by GMAC before 1 June 2004;

4.1.2 the original certificate for the Tacana Note (together with a transfer certificate thereto, undated and with the identity of the transferee left blank, but duly executed by Banner) on condition that the same must be received by GMAC within seven days of the date of this Agreement; and

4.1.3 the Put Option, on condition that the same is delivered, duly executed by all the parties thereto (other than GMAC) to GMAC within 30 days of the date of this Agreement.

4.2 The Facility will only be available for utilisation if and for so long as: 4.2.1 there is no Default; and

4.2.2 the representations and warranties set out in clause 14 (Representations and Warranties) are true and accurate as of the date of the proposed first Drawdown Date and would remain true following such drawdown and thereafter the representation and warranties set out in clause 14 (Representations and Warranties) which are deemed to be repeated are true and accurate as of the date of the proposed subsequent Drawdown Dates and would remain true following such drawdown.

5. DRAWDOWN OF ADVANCES

5.1 The Borrower may draw down an Advance by delivering to GMAC at least two Business Days’ prior written notice of its intention to borrow the relevant Advance, identifying the bank account of the Borrower (being a bank account in the United Kingdom) to which the amount of such Advance is to be credited.

5.2 The Borrower may not borrow an Advance unless:

5.2.1 the Drawdown Date (other than the first Drawdown Date) is a Business Day during the Availability Period and is not less than 2 Business Days after the preceding Drawdown Date;

5.2.2 the Borrower has delivered to GMAC, in relation to the Advance, an Inventory Designation Form in compliance with paragraphs 1 and 2 of schedule 2; and

5.2.3 the amount of the relevant Advance is not greater than the Available Inventory Facility.

6. INTEREST

6.1 Interest on the Facility will be charged on the Account Balance at the Interest Rate and will be due and payable on each Interest Payment Date.

6.2 All interest shall accrue from day to day and shall be computed on the basis of a 365 day year and the number of days elapsed.

6.3 Interest payable under this clause 6 (Interest) shall be paid in accordance with clause 11

      (Payments).

7. FEES

7.1 The Collateral Management Fee shall be payable to GMAC in accordance with schedule 3. 7.2 The Arrangement Fee shall be paid by the Borrower to GMAC on the date of this Agreement. 7.3 The Non-Utilisation Fee shall be payable monthly in arrears to GMAC;

7.4 Fees payable under this clause 7 (Fees) shall be fully earned upon becoming due, will not be refundable and will be paid in accordance with clause 11 (Payments).

8. REPAYMENT

8.1 The Facility shall terminate on the Maturity Date and save as otherwise provided in this Agreement, all amounts outstanding under or in respect of the Facility shall be paid or repaid on that date.

9. PREPAYMENT AND CANCELLATION

9.1 Compulsory Prepayment

9.1.1 If at any time the Account Balance exceeds the Facility Limit, the Borrower will prepay to GMAC on demand such amount as GMAC certifies is necessary to ensure that the Account Balance is, after such prepayment, equal to or less than the Facility Limit and until such prepayment is made no further Advances shall be made under the Facility.

9.1.2 If at any time:

(a) the Put Option is exercised by GMAC; or

(b) Hilco UK notifies GMAC that the Put Option will not be renewed in accordance with its terms in any circumstances in which the Put Option is due to expire (unless so renewed) before the Maturity Date,

the Borrower will prepay to GMAC on demand the Account Balance and any other amounts due hereunder, together with all outstanding interest and any other amounts due and payable under the Finance Documents.

9.2 Cancellation

9.2.1 The Borrower may cancel without penalty the whole (but not part only) of the Facility on giving GMAC not less than 90 days’ prior written notice, such notice to take effect on the expiry of the Initial Period or any subsequent Annual Renewal Period.

9.2.2 In addition to its right to cancel the Facilities under Clause 9.2.1, the Borrower may cancel the whole (but not part only) of the Facilities on giving GMAC not less than 90 days’ prior written notice at any time, subject to payment by the Borrower of the applicable Early Termination Fee to GMAC forthwith on the expiry of any such notice. Any Early Termination Fee payable under this Clause 9.2.2 will be paid in accordance with Clause 11 (Payments).

9.2.3 Forthwith on the expiry of a notice of cancellation under Clause 9.2.1 or 9.2.2, the Borrower must prepay to GMAC the Account Balance (together with accrued interest and/or commission, and all other amounts accrued or outstanding under the Finance Documents).

9.2.4 No amount of the Facility cancelled under this Agreement may be subsequently reinstated.

10. DEFAULT INTEREST

10.1 If the Borrower fails to pay any amount due under this Agreement on its due date, the Borrower shall be liable (if GMAC so requires) for interest on such amount from the date of such default until the date of actual payment (as well after as before judgement or demand) at the Default Rate. The Borrower’s liability under this clause shall be in substitution for the liability for interest on such defaulted amount at the otherwise applicable rate of interest under this Agreement. Such interest shall be payable on demand and, to the extent not actually paid, shall be compounded monthly in arrears and will be paid in accordance with Clause 10 (Payments).

10.2 For so long as any Event of Default has occurred and is continuing, (if GMAC so requires) the rate specified for the purpose of the definition of “Interest Rate” shall be increased so that such rate is equal to the Default Rate. The other provisions of this Agreement relating to the calculation and payment of interest shall continue to apply. This clause 10.2 shall not apply to any amount on which the Borrower is liable to pay interest under clause 10.1.

10.3 GMAC and the Borrower agree that the Default Rate and any increase to the Interest Rate which takes effect pursuant to clause 10.2 represents a genuine pre-estimate of GMAC’s administrative, funding and other costs, loss and increased risk and is not a penalty.

11. PAYMENTS

11.1 The Borrower will make all payments due under this Agreement:

11.1.1 in cleared funds for value on the relevant date (which, unless otherwise provided, shall be the last Business Day of each month); and

11.1.2 without set-off or counterclaim and, except when required by law, without any deduction for Taxes or for any other reason.

11.2 If the Borrower is required to make any deduction or withholding on account of Taxes, it will: 11.2.1 promptly notify GMAC of the amount which it is required to deduct or withhold; and

11.2.2 pay such additional amounts as are necessary to ensure that GMAC receives and retains a net amount equal to the full amount that it would have received, had the payment not been made subject to such deduction or withholding.

11.3 Without prejudice to the provisions of clause 11.2, if GMAC is required to make any payment on account of Tax on or in relation to any sum received or receivable by it under the Finance Documents, the Borrower will, upon demand by GMAC, indemnify GMAC against such payment, together with any interest, penalties and expenses payable or incurred in connection with it.

11.4 For the purposes of this clause, GMAC confirms that it is the person beneficially entitled to interest under this Agreement and is a company resident, for United Kingdom tax purposes, in the United Kingdom.

11.5 GMAC shall be entitled (and is hereby authorised by the Borrower) to debit all payments (including, without limitation, principal, interest and fees) due under this Agreement or any of the Security Documents to the Loan Account and to apply any balances for the time being standing to the credit of the Cash Account in or towards the immediate reduction or discharge of the same.

12. CASH ACCOUNT

12.1 The Borrower will forthwith upon receipt of the same pay all Proceeds to GMAC for credit to the Cash Account in accordance with the Cash Account Memorandum.

12.2 Subject always to its other rights under the Finance Documents, GMAC will apply the balance for the time being standing to the credit of the Cash Account on a weekly basis in accordance with the Cash Account Memorandum, as follows:

12.2.1 first, in or towards the reduction of the Account Balance to zero; and

12.2.2 secondly, if any surplus then remains, in payment to the Borrower by remitting the same to such bank account (located in the United Kingdom) as the Borrower may direct GMAC in writing for this purpose, provided that GMAC at its sole discretion may retain all or any part of such surplus in the Cash Account only in order to meet any interest or fees that are due to become payable in respect of the Facility during the period of five Business Days following the date of the relevant application.

13. CHANGES IN CIRCUMSTANCES AND INCREASED COSTS

13.1 If at any time it becomes unlawful or impossible for GMAC to advance, maintain or fund the whole or any part of the Facility or the Account Balance, GMAC may at any time by written notice to the Borrower require the Borrower to repay the whole or any part of the Facility or the Account Balance immediately, together with any outstanding interest and all other sums due under this Agreement and the Security Documents.

13.2 The Borrower shall pay to GMAC on demand such amount as GMAC may from time to time certify as being necessary to compensate it for any increase in the cost of funding the facility or the Account Balance or for any reduction in the rate of return under this Agreement, incurred by GMAC as a result of compliance with any official directives, requirements or requests of any regulatory authority (whether or not having the force of law) or any law or regulation (including, without limitation, those relating to reserve assets, special deposits, taxes (other than tax on its overall net income), capital adequacy and/or asset ratios) which come into force on or after the date of this Agreement.

14. REPRESENTATIONS AND WARRANTIES

14.1 The Borrower hereby represents and warrants that:

14.1.1 each Obligor is a limited liability company incorporated under the laws of its jurisdiction and has the power to own its property and assets and carry on its business as it is now being and will be conducted;

14.1.2 each Obligor has the power to enter into and perform its obligations under each of the Finance Documents to which it is a party and all necessary action (corporate or otherwise) has been taken to authorise the relevant Obligor’s unconditional entry into and performance of its obligations under each of the Finance Documents to which it is a party and (in the case of the Borrower) the borrowing or utilising of the Facility upon the terms and conditions contained herein;

14.1.3 all authorisations, approvals, consents, licences, exemptions, filings, registrations, notarisations and other matters required in connection with the entry into, performance and validity of the Finance Documents, the borrowing or utilisation of the Facility and the granting of the Security Documents have been obtained and are in full force and effect, and any requirements thereof have been or will be at the appropriate time complied with or fulfilled;

14.1.4 the Finance Documents to which each Obligor is a party constitute or will, following appropriate registration, constitute legal valid and (subject to the Reservations) enforceable obligations of that Obligor;

14.1.5 a relation to each Obligor, the entry into and performance of the Finance Documents to which it is party and the transactions contemplated hereby and thereby do not and will not conflict with (a) any law or regulation or any official or judicial order, or (b) its memorandum or articles of association; or (c) any agreement or document to which it is a party or which is binding upon it or its assets;

14.1.6 no member of the Group is in default under any agreement to which it is a party which would have a Material Adverse Effect and no litigation, arbitration or administrative proceedings are current or pending or (to the knowledge of the Borrower) threatened which would have a Material Adverse Effect;

14.1.7 it is not aware of any material fact or circumstances that has not been disclosed to GMAC which, if disclosed, would be likely at the date of this Agreement to be relevant in relation to (a) any material liability of GMAC in its capacity as lender under this Agreement or (b) in respect of Environmental Laws;

14.1.8 each member of the Group is in all material respects in full compliance with all Environmental Laws as presently applied and enforced which are currently applicable to its operations and all Environmental Approvals required in respect thereof have been obtained from the appropriate authorities and are in full force and effect;

14.1.9 the latest consolidated audited accounts delivered to GMAC under clause 15.1 (Financial Information) have been prepared in accordance with generally accepted accounting principles which have been consistently applied (or if not consistently applied, such inconsistency has been notified to GMAC) and such audited accounts represent (in conjunction with any notes to such accounts) a true and fair view of the financial position of the companies in the Group for the relevant period for which such accounts were prepared;

14.1.10 the management accounts delivered to GMAC under clause 15.2 (Financial Information):

(a) fairly represent the financial condition and operations of the Group as at the date up to which they have been prepared and for the period for which such management accounts relate; and

(b) were or will when the same are produced be prepared on a basis substantially in accordance with the accounting principles used in the latest audited accounts (other than in the event of any change notified to GMAC),

in each case within the reasonable parameters which may be expected of management accounts not the subject of audit procedures;

14.1.11 there are no members of the Group other than the Borrower, the Borrower and any other person that has become a member of the Group with the consent of GMAC in accordance with clause 17.1.4 (Negative Covenants);

14.1.12 none of the assets, property and undertaking of any member of the Group are subject to any Security Interest (other than as constituted by Permitted Security Interests) and no member of the Group is a party to, nor are its assets bound by any order, agreement or instrument under which it is, or in certain events may be, required to create, assume or permit to arise any Security Interest;

14.1.13 no Default has occurred and is continuing unremedied;

14.1.14 each Obligor has good valid and marketable freehold or leasehold title to each or valid leases or licences of the properties over which it purports to create security under the Security Documents;

14.1.15 the Intellectual Property Rights owned by, or licensed to, an Obligor:

(a) are all of the Intellectual Property Rights required by it in order for it to carry on its business as currently conducted, and the relevant Obligor, in carrying on its business, does not infringe any Intellectual Property Rights of any third party;

(b) are (in the case of Intellectual Property Rights which are owned) free of any Security Interests (save for those created by Permitted Security Interests) and any right or interest in favour of a third party and there is no actual or, to the best of the relevant Obligor’s knowledge and belief, threatened infringement of the Intellectual Property Rights owned by such Obligor; and

14.1.16 any Intellectual Property Rights licensed to the relevant Obligor are free from any Security Interests created by or through the Borrower, and any rights or interests in favour of a third party created by or through the Borrower, save for those created by this Deed and for those in favour of the owner(s) of such Intellectual Property Rights.

14.2 The representations and warranties set out in this clause 14 shall be deemed to be repeated on each Drawdown Date and on each Interest Payment Date with reference to the facts and circumstances then subsisting as if made at each such time.

15. FINANCIAL INFORMATION

15.1 As soon as available and in any event within 150 days after the end of each of its financial years the Borrower will deliver to GMAC the audited consolidated accounts of the Group as at the end of such financial year which shall have been audited or certified by an accountant acceptable to GMAC.

15.2 No later than 30 days after the end of each calendar month the Borrower will deliver to GMAC monthly management accounts of the Group for the most recent calendar month in a form acceptable to GMAC.

15.3 Notwithstanding the specific provisions set out in clauses 15.1 and 15.2, GMAC reserves the right so long as the Facility remain in place to require the Borrower to provide GMAC (at the Borrower’s cost) with such financial information or other information about the Borrower and/or the Group as GMAC may from time to time reasonably require.

15.4 The Borrower will provide:

15.4.1 twelve month forecast profit and loss, cash flow statement and balance sheet of the Borrower in the form accepted by GMAC prior to the date of this Agreement and thereafter, within 45 days of the year end of a Financial Year prior to the year of forecast, and when otherwise reasonably requested by GMAC (in the format accepted by GMAC prior to the date of this Agreement and therefore, or as otherwise advised);

15.4.2 weekly Inventory Designation Forms, one of which must be as at month end, each to be supported by an open item stock listing by location at that date;

15.4.3 monthly aged debtors and creditors analysis with such reconciliation as GMAC shall reasonably require within 15 days of month end;

15.4.4 confirmation of the inter-company trading for the month, within 30 days of month end;

15.4.5 any contract or purchase order with any customer or supplier, resulting in an outstanding balance of £1,000 or more:

(a)     to which the Borrower wishes to become party; or

(b)     which is amended, varied or substituted,

        in each case, after the date of this Agreement;

15.4.6 such other documents as GMAC shall reasonably request in respect of the trading of the Borrower and its assets.

16. FINANCIAL COVENANTS

16.1 The Borrower undertakes that it shall procure, for so long as this Agreement is in force and effect, that:

16.1.1 Tangible Net Worth will not be less than £5,000,000 at any time, tested as at 31 December, 31 March, 30 June and 30 September in each year;

16.1.2 EBITDA shall not in respect of the period ending on each of the dates specified in Column A and, tested as at the last day of each such period, be less than the amount specified in Column B opposite that date:

Column A Column B for the six month period (pound)300,000 ending 31 March 2004 for the nine month period (pound)1,200,000 ending 30 June 2004 for the twelve month period (pound)1,900,000 ending 30 September 2004

and thereafter GMAC will stipulate a required minimum EBITDA in respect of each Financial Year being not less than 85% of forecast EBITDA as directed by the forecast for that year delivered by the Borrower in accordance with Clause 15.4.1 and tested on such dates as GMAC may specify.

16.2 With regard to the financial covenants specified in clause 16.1: 16.2.1 each of the financial covenants will be tested on the dates specified therein for the relevant periods;

16.2.2 each of the covenants will be tested by reference to the most recent monthly management accounts delivered under clause 15.2 unless in any such case the consolidated audited accounts required to be delivered to GMAC pursuant to clause 15.1 for the relevant period are available on the relevant testing date, in which case such audited accounts shall be used instead;

16.2.3 if the audited accounts are not available when any covenant is tested but when such audited accounts become available they demonstrate that the figures in any monthly management accounts by reference to which the relevant financial covenant was tested were not substantially accurate, then GMAC shall require such adjustment to the calculations made as it, in its sole discretion, considers appropriate to rectify such inaccuracy, and compliance with the financial covenants in clause 16.1 will be determined by reference to such adjusted figures; and

16.2.4 the components of each definition contained in clause 16.3 will be calculated in accordance with accounting principles, standards and practices generally accepted from time to time in the United Kingdom and approved by the Accounting Standards Board (UK GAAP). In the case of any component calculated by reference to management accounts or unaudited financial statements, UK GAAP will be applied within the reasonable parameters which may be expected of such accounts or financial statements not the subject of audit procedures.

16.3 In this Agreement, unless the context otherwise requires, the following expressions shall have the following meanings:

EBITDA: in respect of the relevant testing period, the consolidated profit (or loss) of the Group for such period:

(a) before any deduction for or on account of corporation tax or other taxes, income or gains;

(b) before any deduction for Interest Payable;

(c) after deducting (to the extent included) Interest Receivable;

(d) after deducting (to the extent otherwise included) the amount of profit (or adding back the loss) of any member of the Group (other than the Borrower) which is attributable to any third party (not being a member of the Group) which is a shareholder in such member of the Group;

(e) after deducting (to the extent otherwise included) any gain over book value arising in favour of a member of the Group on the disposal of any assets (not being stock disposed of in the normal course of trading) during such period and any gain arising on any revaluation of any asset during such period;

(f) after adding back (to the extent otherwise deducted) any loss against book value incurred by a member of the Group on the disposal of any asset (not being stock disposed of in the ordinary course of trading) during such period;

(g) before deducting amortisation of any goodwill or any intangible assets;

(h) before deducting any depreciation on fixed assets; and

(i) before any deduction for or on account of corporation tax or other taxes, income or gains.

Financial Indebtedness: any indebtedness in respect of or arising under or in connection

         with:

(a) monies borrowed or monies raised by way of borrowing (including overdrafts) and debit balances at banks; or

(b) monies raised including any debenture, bond (other than a performance bond issued in the ordinary course of trading by one member of the Group in respect of the obligations of another member of the Group), note or loan stock or other similar instrument; or

(c) any acceptance or documentary credit; or

(d) receivables sold or discounted (otherwise than on a non-recourse basis); or

(e) the acquisition cost of any asset to the extent payable after the time of acquisition or possession by the person liable as principal obligor for the payment thereof whether deferred payment is arranged primarily as a method of raising finance or financing or refinancing the acquisition of the asset acquired; or

(f) the sale price of any asset to the extent paid before the time of sale or delivery by the person liable to effect such sale or delivery where the advance payment is arranged primarily as a method of raising finance or financing or refinancing the manufacture, assembly, acquisition or holding of the asset to be sold; or

(g) finance leases, credit sale or conditional sale agreements (whether in respect of land, buildings, plant, machinery, equipment or otherwise) entered into primarily as a method of raising finance or financing or refinancing the acquisition of the relevant asset (but not including liabilities under operating leases); or

(h) any agreement for managing or hedging currency and/or interest rate and/or commodity risk whether by way of forward exchange, cap, collar, swap, forward rate agreement or otherwise to the extent that the relevant contract does not provide for such indebtedness to be netted-off against any payment due thereunder, provided that where such agreement so provides for netting to occur this paragraph (h) shall include the net amount of the payment obligation outstanding thereunder after such netting-off has occurred; or

(i) the amount payable under any put option or other arrangement whereby any member of the Group is liable to purchase share capital or other securities issued by it or any other member of the Group; or

(j) the amount payable by any member of the Group in respect of the redemption of any share capital or other securities issued by it or any other member of the Group; or

(k) amounts raised under any other transactions having the commercial effects of a borrowing; or

(l) any guarantee, indemnity or similar assurance against financial loss of any person in respect of any indebtedness falling within paragraphs (a) to (k) inclusive of this definition,

and so that where the amount of Financial Indebtedness falls to be calculated, no amount shall be taken into account more than once in the same calculation;

Interest: interest and amounts in the nature of interest paid or payable in respect of any Financial Indebtedness of any member of the Group excluding any interest paid or payable on Financial Indebtedness between any member of the Group and any other member of the Group but including, without limitation:

(a) the interest element of finance leases;

(b) discount and acceptance fees payable (or deducted) in respect of any Financial Indebtedness;

(c) fees payable in connection with the issue or maintenance of any bond, letter of credit, guarantee or other assurance against financial loss which constitutes Financial Indebtedness and is issued by a third party on behalf of a member of the Group;

(d) repayment and prepayment premiums payable or incurred in repaying or prepaying any Financial Indebtedness; and

(e) commitment, utilisation and non-utilisation fees payable or incurred in respect of Financial Indebtedness;

Interest Payable: in respect of the relevant testing period, Interest payable (whether or not paid) during that testing period (but excluding for this purpose financing and hedging fees treated as interest under UK GAAP), as an obligation of any member of the Group during that period and calculated on the basis that all interest payable by the Group under or in connection with the Facility will be excluded;

Interest Receivable: in respect of the relevant testing period, the amount of Interest paid in cash or credited as paid to members of the Group (other than by other members of the Group) during such period;

Projections: the forecasts and projections produced by the Borrower and for any Financial Year that have been agreed by GMAC;

        Tangible Net Worth: at any time, the aggregate amount of:

(a) the issued and paid up share capital of the Borrower;

(b) plus the aggregate amount standing to the credit of the capital and revenue reserves of the Group (including, without limitation, any share premium account and capital redemption reserve);

(c) plus any balance standing to the credit, or minus any amount standing to the debit, of the consolidated profit and loss account of the Group;

(d) plus the amount of any accrued and unpaid dividends to the extent deducted and arriving at retained profit and loss;

as derived from the then latest audited consolidated accounts of the Group or management accounts or financial statements of the Group delivered under clause 15 (Financial Information) but after deducting, or excluding, as the case may be:

(e) minority interests in Subsidiaries of the Borrower

(f) any amount shown in respect of goodwill or other intangible assets of the Group;

(g) any amount equal to any distribution by any member of the Group to persons outside the Group out of the profits earned prior to the date of such consolidated balance sheet and which have been declared, recommended or made since that date except in so far as provided for in such balance sheet;

(h) any capital accounts or reserves derived from any writing-up of the book value of any assets of any member of the Group above historic cost less accumulated depreciation at any time after the date of Completion;

(i) any sum set aside for future taxation;

        and after:

(j) making such adjustments as appropriate in respect of any variation in the issued and paid up share capital, the share premium account and the capital redemption reserve of the Group since the date of its latest consolidated balance sheet;

(k) making such adjustments as appropriate in respect of any variation in the interests of the Borrower in its Subsidiaries and the acquisition or disposal of any assets since the date of such balance sheet;

(l) making such further adjustments as the auditors consider appropriate.

17. NEGATIVE COVENANTS

17.1 So long as the Facility remains in place no member of the Group shall without GMAC’s prior written consent:

17.1.1 create or permit to subsist any Security Interest over any of its assets, property or undertaking except for Permitted Security Interests;

17.1.2 make any loans or otherwise make credit (other than normal trade credit) available to any person;

17.1.3 by one or a series of transactions, whether related or not, sell or otherwise dispose of all or any material part of its property, assets or undertaking (other than in the normal course of trading) including without limitation by any form of sale and leaseback or factoring;

17.1.4 acquire from or incorporate any person to be a member of the Group without the prior consent of GMAC (such consent not to be unreasonably withheld or delayed provided that:

(a) the relevant new member of the Group executes and delivers to GMAC such Security Documents, in a form similar to those entered into by the Obligors, as GMAC may require; and

(b) GMAC shall be entitled to make such adjustments to the financial covenants and definitions confirmed in clause 16 as it reasonably considers necessary to take account the addition of the new member of the Group;

17.1.5 carry on any trade or business with a company which is not an Obligor other than in the normal course of trading;

17.1.6 subscribe for any shares, loan notes, debentures, commercial paper or other financial instrument issued or proposed to be issued by a company which is not an Obligor or make any other type of investment in such a company;

17.1.7 issue or redeem any Shares or repay any subordinated loans/ loan notes; 17.1.8 lend to or guarantee the obligations of any company (or person) which is not an Obligor; and 17.1.9 enter into any Borrowings other than Permitted Borrowings.

18. POSITIVE COVENANTS

18.1 The Borrower will:

18.1.1 promptly notify GMAC if any Event of Default arises and of anything which might result in an Event of Default;

18.1.2 procure that each Group Company will pay all material Taxes due and payable by it or that Group Company within a reasonable time of the relevant due date; and

18.1.3 procure that each Group Company shall effect and maintain adequate insurances in relation to its business and assets with reputable underwriters or insurers against such risks as are usual for companies carrying on a business such as that carried out by such Group Company.

18.2 The Borrower shall at its own expense procure that an Inventory Valuation is delivered to GMAC at the end of February and September in every year during the term of the Facility.

18.3 The Borrower will at its own expense procure that, within seven days of the date of this Agreement, HG Deutschland GmbH (or such other member of the HG Deutschland Group as owns the HG Intellectual Property) grants to the Borrower a licence to use the HG Intellectual Property, on such terms as may be approved by GMAC but in any event to contain provisions having the following effect:

18.3.1 such licence is to be an exclusive licence within the territory of the United Kingdom and non-exclusive in relation to sales made via the HG Deutschland Group’s web-site);

18.3.2 such licence is to be irrevocable by HG Deutschland GmbH for the period from the date on which it is granted until the last day of the Initial Term; and

18.3.3 if:

(a) an encumbrancer takes possession of or a receiver, liquidator, administrative receiver, administrator or similar officer is appointed in respect of the Borrower or all or any part of its undertaking, property or assets; or

(b) anything analogous to the events set out in paragraph (a) above occurs in relation to the Borrower or any of its undertaking, property or assets under the laws of any jurisdiction other than England & Wales,

such licence is to continue in full force and effect for the benefit of any such encumbrancer or appointee and will not expire, notwithstanding that the Initial Term may have expired, until the date upon which such possession or appointment is terminated by reason of the discharge of the order or other process by which such possession was taken or, as the case may be, such appointment was made (and for the purposes of this clause 18.3.3, a reference to an appointee is to be construed as a reference to any joint or joint and several appointees and to any succeeding or substituted such appointee(s) taking office at any time prior to the discharge of such order or other process).

19. SPECIAL CONDITIONS

19.1 The Borrower agrees to perform, observe and comply with the special conditions set out in schedule 2.

20. EVENTS OF DEFAULT

20.1 In the event that:

20.1.1 any Obligor fails to pay on the due date any amount payable by it under any Finance Document to which it is a party unless GMAC is satisfied that non-payment is due solely to administrative or technical delays in the transmission of funds and payment is made within 3 Business Days of its due date; or

20.1.2 any Obligor:

(a) fails to comply with any of its obligations in clause 15 (Financial Information) or clause 16 (Financial Covenants) or with any of the conditions attaching to the waiver of certain conditions precedent under clause 4.1 (Conditions Precedent); or

(b) fails to perform any of its respective obligations under any Finance Document (other than those specified in clause 20.1.1 or 20.1.2) and where such failure is capable of remedy fails to remedy the same within 10 Business Days of a notice from GMAC requiring such remedy; or

(c) any representation, warranty or statement made under or in connection with any Finance Document is or proves to be untrue on the date as of which it was made or deemed to be made or repeated; or

20.1.3 any other present or future indebtedness of an Obligor or a member of the HG Deutschland Group is declared or becomes capable of being declared due and payable prior to the stated maturity thereof or is not paid on the due date therefor or the relevant Obligor or a member of the HG Deutschland Group fails to pay when due any amount payable by it under any present or future guarantee or indemnity or the security therefor becomes enforceable; or

20.1.4 a distress or other execution is levied against any part of an Obligor’s property or assets or undertaking in respect of the present or future indebtedness of an Obligor; or

20.1.5 a Group Company (or a member of the HG Deutschland Group):

(a) is deemed to be unable to pay its debts within the meaning of section 123 of the Insolvency Act 1986; or

(b) convenes a meeting of or proposes or enters into any arrangement or composition for the benefit of its creditors generally; or

(c) ceases or threatens to cease to carry on all or a substantial part of its business or disposes of or threatens to transfer or dispose of the whole or a substantial part of its undertaking or assets (other than in the normal course of trading); or

(d) an encumbrancer takes possession of or a receiver, liquidator, administrative receiver, administrator or similar officer is appointed in respect of all or any part of a Group company’s undertaking, property or assets; or

20.1.6 any order is made, petition presented (unless the Borrower demonstrates to the satisfaction of GMAC that the petition is vexatious and frivolous and is discharged within 5 Business Days) or effective resolution passed for the winding-up (except for the purposes of amalgamation or reorganisation (not involving or arising out of insolvency) the terms of which shall have received GMAC’s prior written approval) of a Group Company, or any order is made or petition presented for the appointment of an administrator in relation to a Group Company; or

20.1.7 it becomes impossible or unlawful:

(a) for an Obligor or any member of the Group to perform any of its respective material obligations contained in the Finance Documents or any of them; or

(b) for GMAC to exercise any of its rights under this Agreement and/or the Security Documents or any of them; or

20.1.8 any Finance Document does not come into or ceases to be in full force and effect or is not for any reason valid and binding upon and enforceable in all respects against an Obligor; or

20.1.9 GMAC is of the opinion that a material adverse change has occurred in relation to the trading or financial position or condition of either the Borrower or the Group (taken as a whole);

20.1.10 anything is done or permitted or omitted to be done by an Obligor which GMAC reasonably believes may materially impair the security created by the Security Documents and/or prejudice or detract from an Obligor’s ability to perform the obligations contained in any Finance Document; or

20.1.11 there is any change of control of the Borrower and/or the Guarantor which for these purposes shall mean a change in the beneficial ownership of 50 per cent. or more of the issued share capital of the Borrower or the Guarantor (as the case may be),

then, in any such event GMAC may by notice in writing (a) terminate the Facility and/or (b) declare the Account Balance and any other amounts due hereunder immediately due and payable whereupon the Borrower will immediately comply with such demand by repaying the Account Balance together with all outstanding interest and any other amounts due under the Finance Documents.

21. ASSIGNMENT AND TRANSFER

21.1 The Borrower may not transfer or assign any of its rights under the Finance Documents.

21.2 GMAC may, without notice, transfer or assign all or any part of and/or grant one or more participations in the Facility and/or the Finance Documents to any company, person or body and the Borrower hereby irrevocably consents to any such transfer, assignment or participations (and the disclosure by GMAC to a transferee, assignee or participant of any information about the Borrower or the Group and the Facility as GMAC may consider appropriate) and undertakes to execute any documentation GMAC may require to effect any such transfer or assignment or participation.

22. NOTICES

22.1 Any notice by either party to another shall be sent to the address or telefax number and marked for the attention set out on the signature page to this Agreement or such other address or telefax number as may from time to time be notified by that party to the other in accordance with this clause. Any notice shall be deemed duly given, if delivered personally or sent by facsimile, when so delivered or sent and, if sent by first class, registered or recorded delivery post, two days after the notice is posted. Any notice which by virtue of the provisions of this clause 22 would be deemed served on a day which is not a Business Day or after 5.30pm on a Business Day shall be deemed to have been served at 9.00am on the next succeeding Business Day.

22.2 GMAC will send a copy of any notice addressed to an Obligor to Fairchild (marked “For the attention of General Counsel”; tel: +703 478 5800; fax +703 478 5767) at the same time as such notice is despatched to the relevant Obligor, provided always that failure by GMAC to comply with this clause 22.2 will not render any such notice invalid as against the Obligor to which it is addressed.

23. WAIVERS

No failure or delay by GMAC in exercising any right, power or privilege under any Finance Document shall operate as a waiver thereof nor will any single or partial exercise of any right, power or privilege preclude any further exercise thereof or prejudice any other or further exercise by GMAC of any of its rights or remedies under any Finance Document. Such rights and remedies are cumulative and not exclusive of any right or remedy provided by law.

24. EXPENSES

24.1 The Borrower shall pay to GMAC on demand on a full indemnity basis whether or not there is a drawing under the Facility:

24.1.1 all costs properly incurred in relation to arrangements incurred by GMAC in connection with the funding of the Account Balance and/or the Facility; and

24.1.2 all costs and expenses properly incurred in connection with the negotiation, execution, amendment or enforcement of any of the Finance Documents (including legal fees, charges, disbursements, survey and valuation fees, and value added tax) and GMAC’s costs and fees in administering the Facility and/or the Loan Account.

24.2 On non-payment to GMAC of any of the above amounts GMAC shall be entitled to debit such amounts to the Loan Account.

24.3 The Borrower shall also indemnify GMAC against any loss or expense incurred by it as a consequence of any non-payment by an Obligor of any of the above amounts.

25. ILLEGALITY

25.1 If any of the provisions of this Agreement become invalid, illegal or unenforceable in any respect under any law, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired.

26. SET-OFF

In addition to any right of set-off or other similar right to which GMAC may be entitled in law, GMAC (through any of its branches) may at any time and without notice to the Borrower combine and consolidate all or any of the accounts between the Borrower and GMAC and/or set-off any monies and in any currency whatsoever, which GMAC may at any time hold for the account of the Borrower, against any liabilities whatsoever which may be due and payable to GMAC from the Borrower.

27. GOVERNING LAW

This Agreement shall be governed by and construed in accordance with English law and the Borrower hereby submits to the jurisdiction of the English Courts.

28. DEMANDS AND NOTIFICATION BINDING

Any demand notification or certificate given by GMAC in writing and signed by a duly authorised officer of GMAC specifying any rate of interest or any amounts due and payable under or in connection with any provision of the Finance Documents shall be conclusive and binding upon the Borrower (in the absence of manifest error).

29. EURO

If the United Kingdom adopts the euro as its lawful currency, GMAC shall be entitled to make such changes to this Agreement as it reasonably considers are necessary to reflect the changeover to the euro (including, without limitation, the rounding (up or down) of fixed monetary amounts to convenient fixed amounts in the euro and amending any provisions to reflect the market conventions for a euro facility of the kind contemplated in this Agreement).

30. COUNTERPARTS

This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered to GMAC shall be an original, but all counterparts shall together constitute one and the same instrument. Upon receipt by GMAC of counterparts executed by all parties hereto, GMAC shall forthwith date each such counterpart and give notice in writing of such delivery and dating to all other parties.

31. JOINT AND SEVERAL LIABILITY

If there are two or more persons comprised in the expressions Borrower, Guarantor, Obligor or Obligors such persons shall be bound as joint and several obligors and such expressions shall be deemed to include all or any or each of such persons. None of such persons shall be released from liability hereunder by reason of this Agreement never being or ceasing to be binding as a continuing security on any other or others of them.

IN WITNESS whereof the parties have executed this Agreement as a deed on the date set out above.

SCHEDULE 1

Pre-Conditions Documents

Part 1

1. Certified copy board resolutions of each Obligor approving and authorising the execution of the Finance Documents to which it is a party (and containing specimen signatures of the person(s) authorised to execute the Finance Documents).

2. A certified true copy of the Certificate of Incorporation of each Obligor.

3. A certified true and up-to-date copy of the Memorandum and Articles of Association of each Obligor.

4. Such other documents, licences, waivers (including, but not limited to any landlord’s distraint waivers), approvals, resolutions and evidence as GMAC and its advisers shall deem necessary or advisable and notified to the Borrower prior to the first Drawdown Date.

5. An Inventory Valuation addressed to GMAC by Hilco Appraisal Limited.

6. Originals of the Security Documents, duly executed by each party thereto other than GMAC.

7. A list of Approved Locations, together with letters of distraint waiver from the landlord(s) in respect of any such Approved Locations.

8. Evidence (including, without limitation, Forms DS1) of the discharge of all security interests over the assets and the properties of the Obligors including, in particular, and property and, in respect of any floating charges, certificates of non-crystallisation from the relevant chargee (including without limitation the termination of the Borrower’s existing financing arrangements with HSBC Trinkaus & Burkhardt and confirmation that all amounts due, charged or incurred by the Borrower to HSBC Trinkaus & Burkhardt have been fully and finally repaid).

9. All original title deeds and land certificates in respect of the relevant Obligor’s interest in any property and a letter of undertaking providing that the Borrower’s solicitors shall carry out all necessary stamping and registration of the property transfers and relevant Security Documents.

10. A search of the register of mortgages and charges for each Obligor at the Companies Registry or Register showing, inter alia, no appointment of a receiver, liquidator or administrator or the presentation of any petition in respect of any of the same.

11. Evidence that the insurances required to be taken out pursuant to the Security Documents have been (or will prior to the first Drawdown Date be) taken out and are in full force and effect.

12. Management Accounts of both the Borrower up to the date of this Agreement.

13. Annual audited accounts for both the Borrower and the Guarantor for the financial year ending 30 September 2003 or confirmation from the auditors (of both the Borrower and the Guarantor) that they envisage no material change to the draft accounts already provided.

14. The terms and conditions of any financial accommodation extend to or investments made the Borrower or the Guarantor (including but not limited to any hire purchase or leasing consents, bonds, preference shares or loans).

15. Copies of all contracts or purchase orders with customers and suppliers of the Borrower, together with a report addressed to GMAC by GMAC’s solicitors advising on the terms of all such contracts and purchase orders, in each case in form and content satisfactory to GMAC.

16. A detailed analysis of all sources and uses of cash of the Borrower as at the first Drawdown Date.

17. A pro-forma balance sheet for the Borrower reflecting any closing adjustments.

18. Compliance with GMAC’s anti-money laundering policy requests in respect of all directors and beneficial owners of the Borrower.

19. An interface agreement duly executed by the Borrower in GMAC’s standard form.

20. The original certificate for the Tacana Note, together with a transfer certificate thereto, undated and with the identity of the transferee left blank, but duly executed by Banner.

21. Such evidence as is satisfactory to GMAC that:

21.1 each shop and/or warehouse of the Borrower; and

21.2 each credit and/or debit card provider with which the Borrower has a merchant services agreement, has been irrevocably instructed and directed to make pay all Proceeds into the Cash Account.

22. Such other documents as GMAC may reasonably request in respect of the trading of the Borrower and its assets.

Part 2

1. A composite guarantee and debenture in form and substance satisfactory to GMAC from the Borrower and the Guarantor.

2. Fraud warranties in form and substance satisfactory to GMAC from each of the directors of the Borrower.

3. Such other security or security documents, as GMAC’s advisers advise to be necessary or advisable in connection with the foregoing and notified to the Borrower prior to first Drawdown Date.

SCHEDULE 2

SPECIAL CONDITIONS RELATING TO THE FACILITY

1. The Borrower shall deliver to GMAC an Inventory Designation Form not less than once each week. Each such Inventory Designation Form must be supported by an average cost item report.

2. Any Inventory Valuation Form delivered by the Borrower in accordance with paragraph 1 above shall take into account the results of the most recent Inventory Valuation.

3. The Borrower will at all times keep the Finished Goods Inventory in a good state of repair and insured with some insurance office approved by GMAC (such approval not to be unreasonably withheld or delayed) against loss or damage by accident, fire and theft and such other risks as GMAC may from time to time reasonably require to the full insurance value of such Finished Goods Inventory and with GMAC noted upon such policy as loss payee. The Borrower will duly pay all premiums and other sums for this purpose and produce the receipts therefor to GMAC upon reasonable request. In default of such payment GMAC shall be at liberty to pay the said premiums and sums and the same shall thereupon be recoverable by GMAC from the Borrower. Any sums received by the Borrower under such policy shall be held in trust for and payable on demand to GMAC and may be applied by GMAC in reduction of any amount owing by the Borrower to GMAC on any account whatsoever.

4. The Borrower will at all times ensure that all of its Preferential Creditors are duly and punctually paid on the due dates for payment to them and, in particular, shall within five Business Days of the last Business Day of each month produce a letter in a form acceptable to GMAC confirming that any payments in respect of VAT and PAYE are up to date.

5. The Borrower will upon request advise GMAC of the whereabouts of all Finished Goods Inventory and shall keep proper books of account and make true and proper entries of all dealings and transactions relating to Finished Goods Inventory and shall permit GMAC and any person authorised by GMAC at all reasonable times to inspect the same. GMAC and any person so authorised shall have the right to enter upon any premises in which the Inventory or any part of it is for the time being kept or stored and may inspect the books and accounts and documents and shall at the expense of the Borrower supply to GMAC or to such persons all information accounts and copies of documents as GMAC or such person shall reasonably require.

6. The Borrower will adhere to all the relevant provisions of the Companies Act 1985 (as amended from time to time) and especially in respect of filings and authorisations.

7. The Borrower will adhere to (and observe) all relevant Environmental Laws.

8. All assets of the Company charged as security are to be insured for their full replacement value and GMAC CF named as first loss payee except for those fixed assets funded by another financier.

9. The Borrower will observe and comply with all material obligations arising in respect of all other security and liens other than permitted liens arising in the ordinary course of trading and acceptable to GMAC CF in its sole discretion.

10. The Borrower shall not make any payment of any dividend, distribution or redemption of shares without GMAC’s prior written consent.

SCHEDULE 3

COLLATERAL MANAGEMENT FEE

1. The Borrower shall pay Collateral Management Fee of £1,000 per annum in respect of each shop at which Finished Goods Inventory is located and £10,000 per annum in respect of each warehouse at which Finished Goods Inventory is located (subject to a minimum amount payable of £46,000 per annum) monthly in arrears on each Interest Payment Date.

2. The Borrower shall pay to Hilco UK a fee of £1,000 (plus VAT) per month in arrears in consideration for the provision of the Put Option. Any amount to be paid by the Borrower will be deducted from the Collateral Management Fee, provided that if GMAC makes such payment on behalf of the Borrower, such deduction will not apply. The Borrower hereby authorises GMAC to make all such payments to Hilco UK on its behalf.

3. In the event that GMAC determines that security monitoring and/or analysis of the Finished Goods Inventory is required additional to that originally contemplated by GMAC (such determination being made by GMAC at its sole discretion acting reasonably) the Borrower shall additionally pay to GMAC on the first Business Day of each calendar month following any month in which GMAC performs such additional security monitoring, namely any audit visit to any premises of the Borrower where the Borrower’s financial records are maintained or where any Finished Goods Inventory or other collateral is kept or other business analysis the need for which is determined by GMAC, an additional collateral monitoring fee in an amount equal to GMAC’s standard rate (currently £750 per day) for each GMAC person performing such monitoring plus all costs and disbursements incurred by GMAC in the performance of such additional examination or analysis and the fees and expenses of outside auditors as billed.

4. GMAC hereby gives notice to the Borrower that without prejudice to the generality of paragraph 3, GMAC will require an audit visit each quarter for the first 12 months during which the Facility is operated.

EX-32

Exhibit 32

CERTIFICATION ACCOMPANYING PERIODIC REPORT PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF CHIEF EXECUTIVE OFFICER

The undersigned, Jeffrey J. Steiner, Chief Executive Officer of The Fairchild Corporation (“Company”), hereby certifies that (1) the Quarterly Report of the Company on Form 10-Q for the Quarterly Period Ended June 30, 2004 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and the results of operations of the Company.

Date:	August 4, 2004	By: /s/ JEFFREY J. STEINER
		Jeffrey J. Steiner
		Chairman of the Board and Chief Executive Officer

Exhibit 32

CERTIFICATION ACCOMPANYING PERIODIC REPORT PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF CHIEF FINANCIAL OFFICER

The undersigned, John L. Flynn, Chief Financial Officer of The Fairchild Corporation (“Company”), hereby certifies that (1) the Quarterly Report of the Company on Form 10-Q for the Quarterly Period Ended June 30, 2004 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and the results of operations of the Company.

Date:	August 4, 2004	By: /s/ JOHN L. FLYNN
		John L. Flynn
		Chief Financial Officer, Treasurer and Senior Vice President, Tax