<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------
EXCHANGE ACT OF 1934
Commission File Number 1-10561
BANNER AEROSPACE, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-2039311
- -------------------------------------------- --------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
300 WEST SERVICE ROAD, PO BOX 20260
WASHINGTON, DC 20041
- -------------------------------------------- -------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (703) 478-5790
--------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past ninety (90) days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Outstanding at
Title of Class October 31, 1997
-------------- ----------------
<S> <C>
Common Stock, $1.00 Par Value 23,442,778
</TABLE>
<PAGE> 2
BANNER AEROSPACE, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Summarized Financial Information:
Consolidated Balance Sheets as of September 30, 1997 and March 31, 1997 . . . . . . . . . . . . . . . 3-4
Consolidated Income Statements for the Six Months Ended September 30, 1997 and 1996 . . . . . . . . . 5
Consolidated Income Statements for the Three Months Ended September 30, 1997 and 1996 . . . . . . . . 6
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996 . . . . . . . . 7
Notes to Summarized Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-14
Management's Discussion and Analysis of the Financial Condition and Results of Operations . . . . . . 15-19
Part II. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-21
</TABLE>
Page 2 of 21
<PAGE> 3
Part I
A. Summarized Financial Information
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND MARCH 31, 1997
ASSETS
<TABLE>
<CAPTION>
(In thousands)
(unaudited)
September 30, March 31,
CURRENT ASSETS: 1997 1997
- -------------- ------------------ -------------------
<S> <C> <C>
Receivables, less allowances of $4,693 at September 30, 1997
and $4,420 at March 31, 1997 $ 85,399 $ 64,382
Inventories 275,159 253,781
Future tax benefits 12,007 11,307
Other current assets 10,786 11,375
------------------ -------------------
383,351 340,845
------------------ -------------------
PROPERTY, PLANT AND EQUIPMENT (AT COST):
- ---------------------------------------
Land 453 453
Buildings and improvements 7,811 9,519
Machinery and equipment 19,092 19,408
------------------ -------------------
27,356 29,380
Accumulated depreciation (11,156) (14,046)
------------------ -------------------
16,200 15,334
------------------ -------------------
OTHER ASSETS:
- ------------
Cost in excess of net tangible assets of purchased
businesses, net 32,627 33,003
Other 4,111 4,719
------------------ -------------------
36,738 37,722
------------------ -------------------
TOTAL ASSETS $ 436,289 $ 393,901
================== ===================
</TABLE>
The accompanying notes to summarized financial information are an integral part
of these consolidated balance sheets.
Page 3 of 21
<PAGE> 4
Part I
A. Summarized Financial Information
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND MARCH 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
(unaudited)
September 30, March 31,
CURRENT LIABILITIES: 1997 1997
- ------------------- ------------------ -------------------
<S> <C> <C>
Current maturities of long-term debt $ 299 $ 301
Accounts payable 51,287 38,864
Other 22,043 31,022
------------------ -------------------
73,629 70,187
------------------ -------------------
LONG-TERM LIABILITIES:
- ---------------------
Long-term debt, less current maturities 164,746 165,148
Other 7,477 8,371
------------------ -------------------
172,223 173,519
------------------ -------------------
TOTAL LIABILITIES 245,852 243,706
------------------ -------------------
STOCKHOLDERS' EQUITY:
- --------------------
Preferred stock, $.01 par value, 10,000 shares authorized,
3,711 shares issued and outstanding at September 30, 1997
and no shares authorized, issued and outstanding at March
31, 1997 37 ---
Common stock, $1.00 par value, 50,000 shares authorized,
23,435 shares issued and outstanding at September 30, 1997
and 30,000 shares authorized, 23,420 shares issued and
outstanding at March 31, 1997 23,435 23,420
Paid-in capital 147,155 113,236
Retained earnings 19,810 13,539
------------------ -------------------
TOTAL STOCKHOLDERS' EQUITY 190,437 150,195
------------------ -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 436,289 $ 393,901
================== ===================
</TABLE>
The accompanying notes to summarized financial information are an integral part
of these consolidated balance sheets.
Page 4 of 21
<PAGE> 5
Part I
A. Summarized Financial Information
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE SIX (6) MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
The consolidated income statements for the six (6) months ended September 30,
1997 and 1996 are not necessarily indicative of the results to be expected for
the full year and are subject to audit at year end.
<TABLE>
<CAPTION>
(unaudited)
(In thousands, except per share data) For the Six Months
Ended September 30,
--------------------------------------
1997 1996
---------------- ---------------
<S> <C> <C>
Net sales $ 239,844 $ 178,383
Cost of goods sold 172,340 127,588
---------------- ---------------
GROSS PROFIT 67,504 50,795
Selling, general and administrative expenses 49,446 39,955
---------------- ---------------
OPERATING INCOME 18,058 10,840
Interest expense, net 7,777 5,869
---------------- ---------------
INCOME BEFORE TAXES 10,281 4,971
Provision for taxes 4,010 1,990
---------------- ---------------
NET INCOME $ 6,271 $ 2,981
================ ===============
Preferred stock dividends 689 ---
---------------- ---------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 5,582 $ 2,981
================ ===============
Earnings per common share $ 0.24 $ 0.13
================ ===============
Weighted average number of common shares 23,428 23,405
================ ===============
</TABLE>
The accompanying notes to summarized financial information are an integral part
of these consolidated income statements.
Page 5 of 21
<PAGE> 6
Part I
A. Summarized Financial Information
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE THREE (3) MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
The consolidated income statements for the three (3) months ended September 30,
1997 and 1996 are not necessarily indicative of the results to be expected for
the full year and are subject to audit at year end.
<TABLE>
<CAPTION>
(unaudited)
(In thousands, except per share data) For the Three Months
Ended September 30,
-------------------------------------
1997 1996
---------------- --------------
<S> <C> <C>
Net sales $ 122,914 $ 84,107
Cost of goods sold 88,955 58,514
---------------- --------------
GROSS PROFIT 33,959 25,593
Selling, general and administrative expenses 25,260 19,612
---------------- --------------
OPERATING INCOME 8,699 5,981
Interest expense, net 3,745 3,197
---------------- --------------
INCOME BEFORE TAXES 4,954 2,784
Provision for taxes 1,930 1,120
---------------- --------------
NET INCOME $ 3,024 $ 1,664
================ ==============
Preferred stock dividends 640 ---
---------------- --------------
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS $ 2,384 $ 1,664
================ ==============
Earnings per common share $ 0.10 $ 0.07
================ ==============
Weighted average number of common shares 23,428 23,405
================ ==============
</TABLE>
The accompanying notes to summarized financial information are an integral part
of these consolidated income statements.
Page 6 of 21
<PAGE> 7
Part I
A. Summarized Financial Information
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX (6) MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
(unaudited) (unaudited)
(In thousands) 1997 1996
----------------- ----------------
<S> <C> <C>
CASH FLOWS USED FOR OPERATING ACTIVITIES:
- ----------------------------------------
Net income $ 6,271 $ 2,981
Adjustments to reconcile net income to net cash used for
operating activities--
Depreciation and amortization 2,749 2,237
Change in receivables (21,017) 48
Change in inventories (21,378) (22,590)
Change in payables and accrued liabilities 3,444 (6,842)
Change in other accounts (1,079) (4,191)
----------------- ----------------
Net cash used for operating activities (31,011) (28,357)
----------------- ----------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
- ----------------------------------------
Acquisition of property, plant and equipment (2,557) (1,791)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
- -------------------------------------------
Repayment of subordinated loan (28,000) ---
Borrowings on term loans --- 30,000
Repayments of term loans (3,850) (3,500)
Net borrowings of revolver 31,600 400
(Repayments) Borrowings on other debt (154) 3,161
Issuance of preferred stock 33,877 ---
Exercise of stock options 94 87
----------------- ----------------
Net cash provided by financing activities 33,567 30,148
----------------- ----------------
NET CHANGE IN CASH --- ---
CASH, BEGINNING OF PERIOD --- ---
----------------- ----------------
CASH, END OF PERIOD $ --- $ ---
================= ================
</TABLE>
The accompanying notes to summarized financial information are an integral part
of these consolidated statements of cash flows.
Page 7 of 21
<PAGE> 8
Part I
A. Notes to Summarized Financial Information
BANNER AEROSPACE, INC. AND SUBSIDIARIES
SEPTEMBER 30, 1997 AND 1996
(In thousands of dollars except per share data)
The condensed financial information included herein has been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been condensed or omitted.
Although the Company believes that the following disclosures are adequate to
make the information presented not misleading, it is suggested that this
condensed financial information be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's Form 10-K
for the fiscal year ended March 31, 1997.
1) Significant Accounting and Reporting Policies
Description of the Business
The Company is a leading international supplier to the aerospace industry.
The Company's products are divided into three product groups: hardware,
rotables and engines. Hardware includes bearings, nuts, bolts, screws, rivets
and other types of fasteners. Rotables include flight data recorders, radar
and navigation systems, instruments, landing gear and hydraulic and electrical
components. Engines include jet engines, engine parts and engine leasing for
use on both narrow and wide body aircraft and smaller engines for corporate and
commuter aircraft. The Company provides a number of services such as immediate
shipment of parts in aircraft on ground situations. The Company also provides
products to original equipment manufacturers and subcontractors ("OEMs") in the
aerospace industry under just-in-time and inventory management programs. The
Company, through its subsidiaries, distributes its products in the United
States and abroad to most of the world's commercial airlines, and to air cargo
carriers, as well as many OEMs, other distributors, fixed-base operations,
corporate aircraft operators and other aerospace and non-aerospace companies.
Year 2000
As the Year 2000 approaches, the Company is preparing all of its computer
systems to be Year 2000 compliant. A review of all of the computer systems
currently used throughout the Company has been performed. A number of the
Company's computer systems are currently Year 2000 compliant. The remaining
computer systems will either be
Page 8 of 21
<PAGE> 9
replaced or upgraded. The Company expects all of its computer systems will be
Year 2000 compliant on a timely basis. However, there can be no assurance that
the systems of other companies on which the Company's systems rely will also be
timely converted, or that any such failure to convert by another company would
not have an adverse effect on the Company's systems. The cost of ensuring that
all systems are Year 2000 compliant is being assessed.
Safe Harbor Statement
This document contains statements which, to the extent they are not
historical fact, constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities and
Exchange Act of 1934 (the "Safe Harbor Acts"). All forward-looking statements
involve risks and uncertainties. When used in this document, the words
"expect," "believe," "anticipate," "plan" and similar expressions are intended
to identify forward-looking statements. The forward-looking statements in this
document are intended to be subject to the safe harbor protection provided by
the Safe Harbor Acts.
2) Earnings Per Common Share
Earnings per common share is calculated based on net income available to
common shareholders divided by the weighted average number of shares
outstanding. Stock options are excluded from the calculation of earnings per
common share as they would be non-dilutive (see Note 5 in the notes to
summarized financial information for detail on stock options).
3) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
4) Credit Agreement
On August 2, 1995, the Company entered into a credit agreement ("Credit
Agreement") that provides for working capital and potential acquisitions. On
July 1, 1996, the Company amended the Credit Agreement ("Amended and
Page 9 of 21
<PAGE> 10
Restated Credit Agreement") to provide additional financing as well as require
that loans made to the Company will not exceed a defined borrowing base which
is based upon a percentage of inventories and eligible accounts receivables. On
December 12, 1996, the Company amended the Amended and Restated Credit
Agreement ("Second Amended and Restated Credit Agreement") to provide
additional financing and approve the incurrence of subordinated debt and
certain acquisitions. The facility under the Second Amended and Restated Credit
Agreement includes i) a $55,000 six-year term loan ("Term Loan"); ii) a $30,000
seven-year term loan ("Tranche B Loan"); iii) a $40,000 six-year term loan
("Tranche C Loan"); and iv) a $71,500 six-year revolving credit facility
("Revolver"). On March 31, 1997, the Company borrowed $40,000 under the Tranche
C Loan. The Term Loan, Tranche B Loan and Tranche C Loan require certain
semi-annual payments on February 1 and August 1 of each year.
The Term Loan and Revolver bear interest at prime plus 1/4 % to 1 1/2% or
London Interbank Offered Rate ("LIBOR") plus 1 1/2% to 2 3/4% based upon
certain performance criteria. As a result of the Company's performance level
through June 30, 1997, borrowings under the Term Loan and Revolver bore
interest at prime plus 3/4% and LIBOR plus 2.0% for the quarter ended
September 30, 1997. The Tranche B Loan bears interest at prime plus 1 3/4% or
LIBOR plus 3.0%. The interest rate for the Tranche C Loan is initially prime
plus 1 1/2% or LIBOR plus 2 3/4%. The interest rate under the Tranche C Loan
may decrease, after September 30, 1997, by 1/4% if the Company meets certain
performance criteria. As a result of the Company's performance level through
September 30, 1997, borrowings under the Term Loan and Revolver will bear
interest at prime plus 3/4% or LIBOR plus 2.0%, and borrowings under the
Tranche C Loan will bear interest at prime plus 1 1/2% or LIBOR plus 2 1/2% for
the quarter ending December 31, 1997. The Revolver was subject to a nonuse fee
of 40 basis points of the unused availability for the quarter ended September
30, 1997 and is subject to a nonuse fee of 40 basis points of the unused
availability for the quarter ending December 31, 1997.
The Second Amended and Restated Credit Agreement contains certain financial
and nonfinancial covenants which the Company is required to meet on a quarterly
basis. The financial covenants include a minimum net worth, and minimum ratios
of interest coverage, fixed charges and debt to earnings before interest,
taxes, depreciation and amortization. The Company also has certain limitations
on the incurrence of additional debt and has restrictions on cash dividends and
distributions on the capital stock of the Company in that the aggregate amount
of such cash dividends and distributions may not exceed $150 in any fiscal
year. At September 30, 1997, the Company was in compliance
Page 10 of 21
<PAGE> 11
with all covenants under the Second Amended and Restated Credit Agreement.
Substantially all of the Company's assets are pledged as collateral under the
Second Amended and Restated Credit Agreement.
In September 1995, the Company entered into several interest rate hedge
agreements ("Hedge Agreements") to manage its exposure to increases in interest
rates on its floating rate debt. The Company entered into the Hedge Agreements
with two of its major lenders to provide interest rate protection on $60,000 of
debt for a period of five years. Effectively, the Hedge Agreements provide for
90 day LIBOR caps of 6.6% to 7.0%. If the 90 day LIBOR drops below the LIBOR
floors of 4.9% to 5.3%, the Company will be required to pay interest at floor
rates of 5.9% to 6.1%. The above rates exclude any spread above LIBOR. No cash
outlay was required as the cost of the cap was offset by the sale of the floor.
In November 1996, the Company entered into an additional hedge agreement
("Additional Hedge Agreement") with one of its major lenders to provide
interest rate protection on an additional $20,000 of debt for a period of three
years. Effectively, the Additional Hedge Agreement provides for a 90 day LIBOR
cap of 7.3%. If the 90 day LIBOR drops below 5.0%, the Company will be required
to pay interest at a floor rate of 5.8%. No cash outlay was required to obtain
the Additional Hedge Agreement as the cost of the cap was offset by the sale of
the floor.
The Company recognizes interest expense under the provisions of the Hedge
Agreements and Additional Hedge Agreement based on the fixed rate. The Company
is exposed to credit loss in the event of non-performance by the lenders;
however, such non-performance is not anticipated.
5) Stock Options
The Company's Non-Qualified and Incentive Stock Option Plan (the "1990
Stock Option Plan"), adopted in August 1990, authorizes the granting of common
stock options at not less than the fair market value of the stock at the time
of the granting of the options. On September 13, 1996, the stockholders
approved an amendment to the 1990 Stock Option Plan to increase the number of
shares of its common stock ("Common Stock") authorized to be issued under the
1990 Stock Option Plan and to extend the period under which options may be
exercised. The Company has reserved for issuance two million shares of Common
Stock under the 1990 Stock Option Plan. The option price is payable in cash or,
with the approval of the compensation and stock option committee of the Board
of Directors, in shares of Common Stock, valued at fair market value at the
time of exercise. The 1990 Stock Option
Page 11 of 21
<PAGE> 12
Plan terminates in the year 2000; however, all stock options outstanding as of
August 2, 2000 shall continue to be exercisable pursuant to their terms. Under
the 1990 Stock Option Plan, all options granted are for a term of seven years.
Options granted on or before August 1, 1993 may be immediately exercisable and
options granted subsequent to August 1, 1993 vest over a period of three to
four years.
On September 13, 1996, the stockholders approved the 1996 Non-Employee
Director Stock Option Plan (the "NED Stock Option Plan"). The Company has
reserved for issuance 150,000 shares of Common Stock under the NED Stock Option
Plan. The NED Stock Option Plan terminates in the year 2006; however, all
stock options outstanding as of May 29, 2006 shall continue to be exercisable
pursuant to their terms. The option price is payable in cash or, with the
approval of the compensation and stock option committee of the Board of
Directors, in shares of Common Stock, valued at fair market value at the time
of exercise. All options are for a term of five years and vest immediately upon
issuance of the grant. Each newly elected non-employee director shall be
granted an option for 5,000 shares of Common Stock and on the date of each
succeeding annual meeting, each non-employee director elected at such meeting
shall be granted an option for 1,000 shares of Common Stock. On September 13,
1996, options for 40,000 shares of Common Stock were granted to non-employee
directors. In addition, non-employee directors were granted options for 67,000
shares of Common Stock prior to the approval of the NED Stock Option Plan.
Stock option activity under the 1990 Stock Option Plan, the NED Stock
Option Plan and non-employee director options granted prior to the approval of
the NED Stock Option Plan for fiscal year 1998 is as follows:
<TABLE>
<CAPTION>
Weighted
average
exercise
Shares price
---------- ----------
<S> <C> <C>
Outstanding at March 31, 1997 1,055,700 $5.82
Granted 303,000 $7.67
Exercised (15,834) $6.02
Terminated (13,166) $6.77
Expired --- ---
---------- ----------
Outstanding at September 30, 1997 1,329,700 $6.51
========== ==========
</TABLE>
At September 30, 1997, 1,222,700 of the 1,329,700 options outstanding
relate to the 1990 Stock Option Plan and have exercise prices between $4.75 and
$9.38 per share. The remaining 107,000 options relate to the NED
Page 12 of 21
<PAGE> 13
Stock Option Plan and non-employee director options granted prior to the
approval of the NED Stock Option Plan and have exercise prices between $4.63
and $10.63 per share.
6) Acquisitions
On January 16, 1997, the Company, through its subsidiary, Dallas Aerospace,
Inc., acquired 100.0% of the outstanding stock of PB Herndon Company ("PB
Herndon") from the shareholders of PB Herndon ("Sellers"). PB Herndon, located
near St. Louis, Missouri, is a distributor of specialty fastener lines and
other aerospace related components. The purchase price of $14.7 million was
based upon PB Herndon's net assets as of September 30, 1996, plus capital
contributions made by the Sellers after August 31, 1996. In addition, the
Company paid $1.3 million to the Sellers to repay loans made from the Sellers
to PB Herndon. To finance the acquisition of PB Herndon, the Company borrowed
$16.0 million under a subordinated loan agreement with RHI Holdings, Inc.
("RHI"), a wholly-owned subsidiary of The Fairchild Corporation ("Fairchild"),
which was repaid in June 1997. This acquisition was accounted for using the
purchase method of accounting. The excess of the purchase price over the net
tangible assets acquired is being amortized over 40 years.
The supplemental pro forma information for the six months ended September
30, 1996 would have been net sales, $185.9 million; gross profit, $53.2
million; income from operations before interest and taxes, $11.6 million; net
income, $3.0 million; earnings per common share, $0.13; and 23,405 weighted
average shares outstanding.
7) Related Party Transactions
The Company entered into a Stock Exchange Agreement with Fairchild,
effective May 12, 1997, pursuant to which the Company could acquire Fairchild
Scandinavian Bellyloading Company AB from Fairchild in exchange for 230,000
shares of Common Stock initially. This transaction was approved by a special
committee of the Board of Directors, and was approved by the Company's
stockholders at a meeting on June 18, 1997. Under the terms of the Stock
Exchange Agreement, Fairchild could terminate the agreement if it sold
Fairchild Scandinavian Bellyloading Company AB to a third party by reason of an
unsolicited offer, but Fairchild would be obligated to pay the Company a
reasonable termination fee and the Company's out-of-pocket expenses. On July 1,
1997, Fairchild
Page 13 of 21
<PAGE> 14
exercised its option to terminate the Stock Exchange Agreement. As of
September 30, 1997, an estimate of the termination fee has been recorded in the
accompanying financial statements.
Page 14 of 21
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SIX (6) MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996 Increase
------------------- ---------------------- -------------------
(In thousands) $ % $ % $ %
-------- ------- --------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Net sales 239,844 100.0 178,383 100.0 61,461 34.5
Cost of goods sold 172,340 71.9 127,588 71.5 44,752 35.1
-------- ------- --------- ------- -------- ------
Gross profit 67,504 28.1 50,795 28.5 16,709 32.9
Selling, general & administrative
expenses 49,446 20.6 39,955 22.4 9,491 23.8
-------- ------- --------- ------- -------- ------
Operating income 18,058 7.5 10,840 6.1 7,218 66.6
Interest expense, net 7,777 3.2 5,869 3.3 1,908 32.5
-------- ------- --------- ------- -------- ------
Income before taxes 10,281 4.3 4,971 2.8 5,310 106.8
Provision for taxes 4,010 1.7 1,990 1.1 2,020 101.5
-------- ------- --------- ------- -------- ------
Net income 6,271 2.6 2,981 1.7 3,290 110.4
======== ======= ========= ======= ======== ======
</TABLE>
Operating Results
Net sales for the six months ended September 30, 1997 increased $61.5
million or 34.5% over the comparable prior period. This increase was primarily
due to increased sales recorded by the hardware group, attributable in part to
incremental sales of $10.7 million recorded by PB Herndon which was acquired in
January 1997 (see Note 6 in the notes to summarized financial information).
The sales of the hardware group also increased due to incremental sales to
commercial airlines and OEMs. The sales of the engine group increased compared
to the prior period, primarily due to increased sales of turbine parts and
engine management services, partially offset by no aircraft sales which had
accounted for $6.0 million in sales the prior period. In addition, the sales of
the rotables group increased compared to the prior period, primarily due to
increased sales to other distributors and incremental sales from a new product
line. Sales for the rotables group are expected to increase over the remainder
of fiscal 1998, due in part to a three-year agreement between Solair, Inc.
("Solair") and Delta Air Lines ("Delta") executed in September 1997. The
agreement designates Solair as Delta's sole source supplier of airframe
material, including rotables, repairables and expendables,
Page 15 of 21
<PAGE> 16
from the surplus market. Solair expects that the agreement could generate $150
million in revenue over the next three years.
The gross profit percentage for the six months ended September 30, 1997
decreased to 28.1% compared to 28.5% for the prior period. This decrease was
primarily attributable to lower gross margins earned in the rotables and engine
product groups, due to a change in product mix coupled with increased price
competition.
Selling, general and administrative ("SG&A") expenses as a percentage of
sales declined to 20.6% for the six months ended September 30, 1997 from 22.4%
for the comparable prior period. For the six months ended September 30, 1997,
SG&A expenses increased by $9.5 million or 23.8% over the comparable prior
period, due primarily to incremental SG&A expenses as a result of the
acquisition of PB Herndon and costs associated with the overall increase in
sales.
Interest Expense
Interest expense for the six months ended September 30, 1997 increased $1.9
million or 32.5% compared to the prior period, as a result of an increase from
$124 million in the average outstanding debt balance during the prior period,
to $165 million in the current period. In addition, interest expense was
affected by a slight increase in the weighted average interest rate to 9.2% in
the current period, compared to 9.1% in the prior period. Interest expense
also includes the amortization of deferred loan costs and charges for nonuse
fees, agency fees and compensating balances.
Provision for Taxes
The provision for taxes for the six months ended September 30, 1997 and
1996 amounted to $4.0 million and $2.0 million, respectively. The effective tax
rate for the six months ended September 30, 1997 and 1996 was 39.0% and 40.0%,
respectively.
Page 16 of 21
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE (3) MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996 Increase
-------------------- -------------------- -------------------
(In thousands) $ % $ % $ %
--------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales 122,914 100.0 84,107 100.0 38,807 46.1
Cost of goods sold 88,955 72.4 58,514 69.6 30,441 52.0
--------- ------- ------- ------- -------- -------
Gross profit 33,959 27.6 25,593 30.4 8,366 32.7
Selling, general & administrative
expenses 25,260 20.6 19,612 23.3 5,648 28.8
--------- ------- ------- ------- -------- -------
Operating income 8,699 7.0 5,981 7.1 2,718 45.4
Interest expense, net 3,745 3.0 3,197 3.8 548 17.1
--------- ------- ------- ------- -------- -------
Income before taxes 4,954 4.0 2,784 3.3 2,170 77.9
Provision for taxes 1,930 1.6 1,120 1.3 810 72.3
--------- ------- ------- ------- -------- -------
Net income 3,024 2.4 1,664 2.0 1,360 81.7
========= ======= ======= ======= ======== =======
</TABLE>
Operating Results
Net sales for the three months ended September 30, 1997 increased $38.8
million or 46.1% over the comparable prior period. This increase was primarily
due to increased sales recorded by the hardware group, attributable in part to
incremental sales of $5.2 million recorded by PB Herndon. The sales of the
hardware group also increased due to incremental sales to commercial airlines
and OEMs. The sales of the engine group increased compared to the prior period,
primarily due to increased sales of turbine parts and engine management
services. In addition, the sales of the rotables group increased compared to
the prior period, primarily due to increased sales to other distributors and
incremental sales from a new product line.
The gross profit percentage for the three months ended September 30, 1997
decreased to 27.6% compared to 30.4% for the prior period. This decrease was
primarily attributable to lower gross margins earned in the rotables and engine
product groups, due to a change in product mix coupled with increased price
competition.
Selling, general and administrative ("SG&A") expenses as a percentage of
sales declined to 20.6% for the three months ended September 30, 1997 from
23.3% for the comparable prior period. For the three months ended September
Page 17 of 21
<PAGE> 18
30, 1997, SG&A expenses increased by $5.6 million or 28.8% over the comparable
prior period, due primarily to incremental SG&A expenses as a result of the
acquisition of PB Herndon and costs associated with the overall increase in
sales.
Interest Expense
Interest expense for the three months ended September 30, 1997 increased
$0.5 million or 17.1% compared to the prior period, as a result of an increase
from $131 million in the average outstanding debt balance during the prior
period, to $158 million in the current period, partially offset by a slight
decrease in the weighted average interest rate to 9.1% in the current period
compared to 9.3% in the prior period. Interest expense also includes the
amortization of deferred loan costs and charges for nonuse fees, agency fees
and compensating balances.
Provision for Taxes
The provision for taxes for the three months ended September 30, 1997 and
1996 amounted to $1.9 million and $1.1 million, respectively. The effective tax
rate for the three months ended June 30, 1997 and 1996 was 39.0% and 40.2%,
respectively.
Liquidity
The following table presents certain liquidity ratios of the Company at
September 30, 1997 and March 31, 1997.
<TABLE>
<CAPTION>
September 30, 1997 March 31, 1997
------------------ --------------
<S> <C> <C>
Current ratio 5.21:1 4.86:1
Debt to equity 0.87:1 1.10:1
</TABLE>
At September 30, 1997, the Company had total debt outstanding of $165.0
million, the majority of which was under the Second Amended and Restated Credit
Agreement. As of September 30, 1997, the Second Amended and Restated Credit
Agreement provided for up to $182.0 million of borrowings for working capital,
capital expenditures and potential acquisitions, subject to certain conditions
and a borrowing base. The Company is currently structuring an increase of up to
$50.0 million under the Revolver to support additional growth. Cash flows from
operations and funds available under the Second Amended and Restated Credit
Agreement, including the increase in the Revolver, should be
Page 18 of 21
<PAGE> 19
adequate to finance the Company's operations in fiscal 1998 (refer to Note 4 in
the notes to summarized financial information). The Company had no other
material capital commitments or planned expenditures as of September 30, 1997.
Net cash used for operating activities for the six months ended September
30, 1997 and 1996 amounted to $31.0 million and $28.4 million, respectively.
The primary use of cash for operating activities for the six months ended
September 30, 1997 was an increase in receivables and inventories in the amount
of $21.0 million and $21.4 million, respectively. The primary source of cash
from operating activities for the six months ended September 30, 1997 was net
income and an increase in the amount of $3.4 million in payables and accrued
liabilities, along with scheduled depreciation and amortization expense of $2.7
million. The increase in receivables is due to increased sales through
September 30, 1997. The increases in inventories and payables and accrued
liabilities are the result of an increase in anticipated sales volume. The
primary use of cash from operating activities for the six months ended
September 30, 1996 was an increase in the amount of $22.6 million in
inventories and a decrease in the amount of $6.8 million in payables and
accrued liabilities.
Net cash used for investing activities for the six months ended September
30, 1997 and 1996 amounted to $2.6 million and $1.8 million, respectively.
These amounts represent capital expenditures, net of proceeds from the sale of
fixed assets.
Net cash provided by financing activities for the six months ended
September 30, 1997 and 1996 amounted to $33.6 million and $30.1 million,
respectively. Net cash provided by financing activities for the six months
ended September 30, 1997 were the result of proceeds received in the amount of
$33.9 million from the preferred stock rights offering, and net borrowings in
the amount of $31.6 million on the revolver, partially offset by repayment of
the subordinated loan with RHI in the amount of $28.0 million. Net cash
provided by financing activities for the six months ended September 30, 1996
was primarily the result of borrowings from the Tranche C term loan (refer to
Note 4 in the notes to summarized financial information).
Page 19 of 21
<PAGE> 20
MANAGEMENT REPRESENTATION
The information furnished in this Form 10-Q for the interim period ended
September 30, 1997 reflects all adjustments which are, in the opinion of
management, all of a normal recurring nature and are necessary to present a
fair statement of the results for the interim period.
Part II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on
September 12, 1997. Four proposals were held to vote: Proposal 1 -
the election of nine directors for the ensuing year; Proposal 2 - the
amendment of the 1990 Non-Qualified and Incentive Stock Option Plan;
Proposal 3 - the approval to grant stock options to certain employees
under the 1990 Non-Qualified and Incentive Stock Option Plan; and
Proposal 4 - the approval of the Board of Director's selection of
Arthur Andersen LLP as independent auditors. All of the above
proposals were approved, as follows:
<TABLE>
<CAPTION>
Broker Total
Matter For Against Withheld Abstained Non-Votes Votes
------------------------ ----------- --------- ----------- ----------- ------------ ------------
Proposal 1:
<S> <C> <C> <C> <C> <C> <C>
Michael T. Alcox 22,070,179 392,365 --- --- --- 22,462,544
Steven L. Gerard 22,070,679 391,865 --- --- --- 22,462,544
Charles M. Haar 22,070,679 391,865 --- --- --- 22,462,544
Philippe Hercot 22,068,379 394,165 --- --- --- 22,462,544
Warren D. Persavich 22,070,179 392,365 --- --- --- 22,462,544
Eric I. Steiner 22,067,879 394,665 --- --- --- 22,462,544
Jeffrey J. Steiner 22,061,769 400,775 --- --- --- 22,462,544
Leonard Toboroff 22,070,679 391,865 --- --- --- 22,462,544
John C. Wertz 22,069,909 392,635 --- --- --- 22,462,544
Proposal 2 22,176,746 119,409 --- 20,977 145,412 22,462,544
Proposal 3 20,971,853 1,329,851 --- 21,666 139,174 22,462,544
Proposal 4 22,420,933 32,486 --- 9,125 --- 22,462,544
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 (iii) Amendment dated as of January 1, 1997, to 1990
Non-Qualified and Incentive Stock Option Plan is
incorporated herein by reference to the Definitive
Proxy Statement dated and filed on August 8, 1997
with respect to the Annual Meeting of Stockholders
held on September 12, 1997.
*27 Financial Data Schedule (For SEC Use Only)
(b) Reports on Form 8-K
There have been no reports on Form 8-K filed during the
quarter.
- ------------------
* Filed herewith
Page 20 of 21
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANNER AEROSPACE, INC.
By /s/ WARREN D. PERSAVICH
---------------------------------------------------
Warren D. Persavich
Senior Vice President
Chief Financial Officer
By /s/ EUGENE W. JURIS
---------------------------------------------------
Eugene W. Juris
Vice President
Finance & Secretary
Dated: November 12, 1997
Page 21 of 21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> MAR-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 90,092
<ALLOWANCES> 4,693
<INVENTORY> 275,159
<CURRENT-ASSETS> 383,351
<PP&E> 27,356
<DEPRECIATION> 11,156
<TOTAL-ASSETS> 436,289
<CURRENT-LIABILITIES> 73,629
<BONDS> 164,746
0
37
<COMMON> 23,435
<OTHER-SE> 166,965
<TOTAL-LIABILITY-AND-EQUITY> 436,289
<SALES> 239,844
<TOTAL-REVENUES> 239,844
<CGS> 172,340
<TOTAL-COSTS> 172,340
<OTHER-EXPENSES> 49,446
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,777
<INCOME-PRETAX> 10,281
<INCOME-TAX> 4,010
<INCOME-CONTINUING> 6,271
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,271
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
