<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 June 30, 1998
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)
DELAWARE 95-2039311
- ----------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
45025 AVIATION DRIVE, SUITE 300
DULLES, VA 20166-7556
- ---------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
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.
Outstanding at
Title of Class July 31, 1998
-------------- --------------
Common Stock, $1.00 Par Value 21,446,502
<PAGE> 2
BANNER AEROSPACE, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Summarized Financial Information:
Consolidated Balance Sheets as of June 30, 1998 and March 31, 1998................ 3-4
Consolidated Statements of Income and Comprehensive Income for the Three Months Ended
June 30, 1998 and 1997............................................................ 5
Consolidated Statements of Cash Flows for the Three Months Ended June 30, 1998 and 1997 6
Notes to Summarized Financial Information......................................... 7-13
Management's Discussion and Analysis of the Financial Condition and Results of Operations 14-16
Part II. Other Information....................................................................... 17-18
</TABLE>
Page 2 of 18
<PAGE> 3
Part I
------
A. Summarized Financial Information
-----------------------------------
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND MARCH 31, 1998
ASSETS
<TABLE>
<CAPTION>
(In thousands) (unaudited)
June 30, March 31,
CURRENT ASSETS: 1998 1998
- -------------- ---------------- ----------------
<S> <C> <C>
Receivables, less allowances of $3,149 at June 30,
1998 and $2,881 at March 31, 1998 $ 40,160 $ 48,046
Inventories 135,884 122,236
Other current assets 29,295 29,741
---------------- ----------------
205,339 200,023
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT (AT COST):
- ----------------------------------------
Land 15 15
Buildings and improvements 2,493 2,430
Machinery and equipment 8,356 8,056
---------------- ----------------
10,864 10,501
Accumulated depreciation (6,353) (6,008)
---------------- ----------------
4,511 4,493
---------------- ----------------
OTHER ASSETS:
- -------------
Investments 228,710 206,626
Cost in excess of net tangible assets of purchased
businesses, net 12,184 12,292
Other 1,654 1,776
---------------- ----------------
242,548 220,694
---------------- ----------------
TOTAL ASSETS $ 452,398 $ 425,210
================ ================
</TABLE>
The accompanying notes to summarized financial information are an integral
part of these consolidated balance sheets.
Page 3 of 18
<PAGE> 4
Part I
------
A. Summarized Financial Information
-----------------------------------
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND MARCH 31, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands) (unaudited)
June 30, March 31,
CURRENT LIABILITIES: 1998 1998
- ------------------- ---------------- ----------------
<S> <C> <C>
Accounts payable $ 25,017 $ 27,431
Accrued salaries 2,057 2,568
Other 44,489 44,626
---------------- ----------------
71,563 74,625
---------------- ----------------
LONG-TERM LIABILITIES:
- ----------------------
Long-term debt 65,800 48,900
Deferred federal and state income tax 45,902 41,194
Other 2,594 2,381
---------------- ----------------
114,296 92,475
---------------- ----------------
TOTAL LIABILITIES 185,859 167,100
---------------- ----------------
STOCKHOLDERS' EQUITY:
- ---------------------
Preferred stock, $.01 par value, 10,000 shares
authorized, 3,951 shares issued and outstanding at
June 30, 1998 and 3,810 shares issued and outstanding
at March 31, 1998 40 38
Common stock, $1.00 par value, 50,000 shares
authorized, 23,692 shares issued, 21,445 outstanding
at June 30, 1998 and 23,642 shares issued, 21,395 shares
outstanding at March 31, 1998 23,692 23,642
Less: treasury stock at cost, 2,247 shares held in
treasury at June 30, 1998 and March 31, 1998 (23,331) (23,331)
Paid-in capital 151,457 150,460
Retained earnings 93,231 93,046
Accumulated other comprehensive income 21,450 14,255
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 266,539 258,110
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 452,398 $ 425,210
================ ================
</TABLE>
The accompanying notes to summarized financial information are an integral
part of these consolidated balance sheets.
Page 4 of 18
<PAGE> 5
Part I
------
A. Summarized Financial Information
-----------------------------------
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE (3) MONTHS ENDED JUNE 30, 1998 AND 1997
The consolidated income statements for the three (3) months ended June 30, 1998
and 1997 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)
For the Three Months Ended
(In thousands, except per share data) June 30,
----------------------------------
<S> <C> <C>
1998 1997
-------------- --------------
Net sales $ 55,038 $ 116,930
Cost of goods sold 43,797 83,385
-------------- --------------
GROSS PROFIT 11,241 33,545
Selling, general and administrative expenses 9,546 24,186
-------------- --------------
OPERATING INCOME 1,695 9,359
Investment income 738 ---
Interest expense, net 1,329 4,032
-------------- --------------
INCOME BEFORE TAXES 1,104 5,327
Provision for taxes 250 2,080
-------------- --------------
NET INCOME $ 854 $ 3,247
============== ==============
Preferred stock dividends 669 49
-------------- --------------
NET INCOME AVAILABLE FOR COMMON SHAREHOLDERS $ 185 $ 3,198
============== ==============
Basic earnings per common share $ 0.01 $ 0.14
============== ==============
Diluted earnings per common share $ 0.01 $ 0.14
============== ==============
Weighted average number of common shares - basic 21,431 23,424
============== ==============
Weighted average number of common shares - diluted 21,918 23,970
============== ==============
Net income $ 854 $ 3,247
Other comprehensive income:
Unrealized gain on available-for-sale securities, net
of tax of $4,600 7,195 ---
-------------- --------------
Comprehensive income $ 8,049 $ 3,247
============== ==============
</TABLE>
The accompanying notes to summarized financial information are an integral
part of these consolidated income statements.
Page 5 of 18
<PAGE> 6
Part I
------
A. Summarized Financial Information
-----------------------------------
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE (3) MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
(unaudited)
For the Three Months Ended
(In thousands) June 30,
---------------------------------
1998 1997
-------------- -------------
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
- -------------------------------------------------------
<S> <C> <C>
Net income $ 854 $ 3,247
Adjustments to reconcile net income to net cash
provided by (used for) operating activities--
Depreciation and amortization 554 1,325
Change in receivables 7,886 (19,487)
Change in inventories (13,647) (17,752)
Change in payables and accrued liabilities (3,064) 13,747
Change in other accounts 791 2,403
-------------- -------------
Net cash provided by (used for) operating activities (6,626) (16,517)
-------------- -------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
- -----------------------------------------
Acquisition of property, plant and equipment (365) (1,404)
Acquisition of investment securities (10,289) ---
-------------- -------------
Net cash used for investing activities (10,654) (1,404)
-------------- -------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
- --------------------------------------------
Repayment of subordinated loan --- (28,000)
Net borrowings of revolver 16,900 12,100
Repayments on other debt --- (77)
Issuance of preferred stock --- 33,877
Exercise of stock options 380 21
-------------- -------------
Net cash provided by financing activities 17,280 17,921
-------------- -------------
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 6 of 18
<PAGE> 7
Part I
------
A. Notes to Summarized Financial Information
--------------------------------------------
BANNER AEROSPACE, INC. AND SUBSIDIARIES
JUNE 30, 1998 AND 1997
(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, 1998.
1) Significant Accounting and Reporting Policies
---------------------------------------------
Organization
- ------------
Prior to an initial public offering on August 1, 1990, Banner Aerospace,
Inc. (the "Company") was a wholly-owned subsidiary of The Fairchild Corporation
("Fairchild"). As a result of the initial public offering, Fairchild's indirect
beneficial ownership of the Company's Common Stock was reduced from 100.0% to
47.2%. However, as a result of the additional shares of the Company's Common
Stock issued in connection with the acquisition of Harco, Inc. in fiscal 1996,
Fairchild became the majority owner of the Company and owned 59.3% of the
Company's Common Stock as of March 31, 1997 (refer to Note 3 in the notes to
consolidated financial statements). In January 1998, the Company repurchased
2,246,967 shares of its own Common Stock for a total cost of $23,331 which
increased Fairchild's ownership to 66.3% at the end of fiscal 1998. On June 9,
1998, Fairchild completed an Exchange Offer pursuant to which it acquired
3,659,424 shares of the Company's Common Stock in exchange for shares of
Fairchild Class A common stock (the "Exchange Offer"). As a result of the
Exchange Offer, Fairchild's beneficial ownership of the Company's Common Stock
increased to 85.4% (refer to Note 7 in the notes to summarized financial
information).
Description of the Business
- ---------------------------
The Company is an international supplier to the aerospace industry,
distributing a wide range of aircraft parts and related support services. The
Company's products are divided into two product groups: rotables and engines.
The Company's hardware product group, which included bearings, nuts, bolts,
screws, rivets and other types of fasteners, was disposed of as part of a
business combination completed on January 13, 1998 (refer to Note 6 in the notes
to summarized financial information). 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 ("AOG") situations and
customer tailored inventory management programs. The Company also provides both
long-
Page 7 of 18
<PAGE> 8
term and short-term engine leasing services to commercial airlines and air cargo
carriers. Through its subsidiaries, the Company sells its products in the United
States and abroad to most of the world's commercial airlines and air cargo
carriers, as well as other distributors, fixed-base operations, corporate
aircraft operators and other aerospace and non-aerospace companies.
2) Earnings Per Common Share
-------------------------
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings per Share" (SFAS 128). This statement
replaces the previously reported primary and fully diluted earnings per common
share with basic earnings per common share and diluted earnings per common
share. Unlike primary earnings per common share, basic earnings per common share
excludes any dilutive effects of stock options. All earnings per common share
have been restated to conform to the requirements of SFAS 128.
The following is a reconciliation of the computations of basic earnings per
common share and diluted earnings per common share for the three months ended
June 30, 1998 and 1997.
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the three months ended
June 30,
-------------------------------
BASIC EARNINGS PER COMMON SHARE: 1998 1997
-------------- ---------------
<S> <C> <C>
Net income available to common shareholders $ 185 $ 3,198
Weighted average shares outstanding 21,431 23,424
-------------- ---------------
Basic earnings per common share $ 0.01 $ 0.14
============== ===============
DILUTED EARNINGS PER COMMON SHARE:
Net income available to common shareholders/Net income $ 185 $ 3,247
Weighted average shares outstanding 21,431 23,424
Incremental shares due to assumed conversion of preferred stock --- 289
Incremental shares due to assumed exercise and repurchase of
stock options 487 257
-------------- ---------------
21,918 23,970
-------------- ---------------
Diluted earnings per common share $ 0.01 $ 0.14
============== ===============
</TABLE>
Preferred Stock totaling 3,951,000 shares that is convertible into Common
Stock at a one-to-one ratio has been excluded from the calculation of diluted
earnings per common share for the three months ended June 30, 1998 as the effect
would be antidilutive. In addition, options to purchase 100,000 shares of Common
Stock were outstanding, but were not included in the computation of diluted
earnings per common share for the three months ended June 30, 1997, because the
options' exercise price was greater than the average market price of common
shares for the period.
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 129 "Disclosure of Information about Capital Structure"
(SFAS 129). This statement establishes standards for disclosing information
about an entity's capital structure. The Company's Preferred Stock pays annual
dividends of additional Preferred Stock at 7.5% per annum of the liquidation
value of $9.20 per share. Each share of Preferred Stock is convertible into one
share of Common Stock at any time; however, all shares not previously converted
will
Page 8 of 18
<PAGE> 9
automatically be converted into Common Stock on the fifth anniversary of
the date of initial issuance of the Preferred Stock (June 19, 2002). The
Preferred Stock has no voting rights.
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 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 eligible accounts receivables and inventories. 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. On
November 25, 1997, the Company amended the Second Amended and Restated Credit
Agreement to provide additional financing. Immediately following this amendment,
the facility under the Second Amended and Restated Credit Agreement included (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 $121,500 six-year revolving credit facility ("Revolver"). On January 13,
1998, the Hardware Business repaid the outstanding balances of the Term Loan,
Tranche B Loan and Tranche C Loan in conjunction with the Hardware Business
Disposition (refer to Note 6 in the notes to summarized financial information).
Based on the Company's financial performance, the Revolver bears interest
at prime plus 1/4% to 1 1/4% or London Interbank Offered Rate ("LIBOR") plus 1
1/2% to 2 3/4% and is subject to a nonuse fee of 30 to 50 basis points of the
unused availability. On June 30, 1998, the Company's performance level resulted
in borrowings under the Revolver bearing interest at prime plus 1/4% and LIBOR
plus 1 1/2% and a nonuse fee of 30 basis points for the quarter ending September
30, 1998. 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 minimum net worth and minimum
earnings levels, 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 which limit dividends and distributions on the capital stock of the
Company to an aggregate of $150 in any fiscal year. At June 30, 1998, the
Company was in compliance 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.
Page 9 of 18
<PAGE> 10
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 a
LIBOR cap of 7.0% if the 90 day LIBOR exceeds 7.0%. If the 90 day LIBOR drops
below the LIBOR floor of 5.0%, the Company will be required to pay interest at a
floor rate of approximately 6.0%. 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 cap of 7 1/4% if the
90 day LIBOR exceeds 7 1/4%. If the 90 day LIBOR drops below 5.0%, the Company
will be required to pay interest at a floor rate of approximately 6.0%. 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 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 Plan terminates in the year 2000; however, all stock options
outstanding as of August 2, 2000 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 are 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 which 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
Page 10 of 18
<PAGE> 11
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.
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 1999 is as follows:
<TABLE>
<CAPTION>
Weighted
average
exercise
Shares price
----------- ----------
<S> <C> <C>
Outstanding at March 31, 1998 1,107,750 $6.42
Granted 138,750 $11.81
Exercised (50,333) $7.55
Terminated (13,000) $7.70
Expired --- ---
----------- ----------
Outstanding at June 30, 1998 1,183,167 $6.99
=========== ==========
</TABLE>
At June 30, 1998, 1,101,167 of the 1,183,167 options outstanding were
issued under the 1990 Stock Option Plan and have exercise prices between $4.88
and $11.81 per share. The remaining 82,000 options were issued under the NED
Stock Option Plan, or are 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) Dispositions
------------
On January 13, 1998, the Company completed the disposition of substantially
all of the assets and certain liabilities of its hardware companies and PacAero
unit (the "Hardware Business") to two wholly-owned subsidiaries of AlliedSignal
Inc. (the "Buyers") in exchange for unregistered shares of AlliedSignal Inc.
common stock with an aggregate value equal to $369,000 (the "Hardware Business
Disposition"). The determination of the number of AlliedSignal Inc. shares
received by the Company was based on the average closing price of such stock on
the New York Stock Exchange for a period of twenty days preceding the closing.
The Hardware Business consisted of the following companies: Adams Industries,
Inc., Aerospace Bearing Support, Inc., Aircraft Bearing Corporation, Banner
Distribution, Inc., Burbank Aircraft Supply, Inc., Harco, Inc., PB Herndon
Aerospace, Inc. (which collectively comprise the Company's hardware business),
Banner Aerospace Services, Inc. (which transferred only those assets related to
the Hardware Business) and PacAero. The purchase price received for the Hardware
Business was based on the consolidated net worth as reflected on an estimated
closing date balance sheet for the assets (and liabilities) conveyed by the
Hardware Business to the Buyers. Such estimated closing date balance sheet is
subject to review by the parties, and the purchase price adjusted (up or down)
based on the net worth as reflected on the final closing date balance sheet. The
assets transferred to the Buyers consisted primarily of the Company's hardware
business, which included the distribution of bearings, nuts, bolts, screws,
rivets and other types of fasteners, and its PacAero unit. Approximately
$194,000 of the common stock received from the Buyers was used to repay
outstanding term loans and a portion of the revolver balance of the Company's
subsidiaries, and related fees. The remaining investment in AlliedSignal Inc.
common stock has been accounted for as an available-for-sale security.
Page 11 of 18
<PAGE> 12
The Company effected the Hardware Business Disposition to concentrate its
efforts on the rotables and jet engine businesses and because the Hardware
Business Disposition presented a unique opportunity to realize a significant
return. As a result of the Hardware Business Disposition and the repayment of
outstanding term loans and a portion of the revolver balance, the Company
recorded non-recurring income of $124,041 for the twelve months ended March 31,
1998.
On January 2, 1998, the Company disposed of BAI, Inc. ("BAI") through a
stock purchase agreement. The Company did not realize a material gain on the
transaction.
The following unaudited pro forma table illustrates consolidated sales and
operating income of the Company's operations, on a pro forma basis for the three
months ended June 30, 1997 to give effect to the disposition of substantially
all of the assets and certain liabilities of the Hardware Business and BAI. The
unaudited pro forma consolidated financial information is based on the
historical financial information of the Company for the three months ended June
30, 1997. The unaudited pro forma consolidated financial information is
presented for informational purposes only and is not necessarily indicative of
what earnings and results of operations would have been had the Company disposed
of the Hardware Business and BAI at the beginning of the period presented, nor
is such information intended necessarily to be indicative of the future results
of operations that may occur.
UNAUDITED SUPPLEMENTAL PRO FORMA INFORMATION
FOR THE THREE MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
<S> <C>
(In thousands)
Net sales $ 52,102
Cost of goods sold 40,309
-------------
Gross profit 11,793
Selling, general and
administrative 9,156
-------------
Operating income $ 2,637
=============
</TABLE>
7) Related Party Transactions
--------------------------
On May 11, 1998, Fairchild commenced an offer to exchange (the "Exchange
Offer"), for each properly tendered share of Common Stock of the Company, a
number of shares of Fairchild's class A common stock, par value $0.10 per share,
equal to the quotient of $12.50 divided by $20.675 up to a maximum of 4,000,000
shares of the Company's Common Stock. The Exchange Offer expired on June 9,
1998. Approximately 3,659,424 shares of the Company's Common Stock were validly
tendered for exchange and Fairchild issued approximately 2,212,469 shares of
Fairchild class A common stock to the tendering shareholders. As a result of the
Exchange Offer, Fairchild's beneficial ownership of the Company's Common Stock
increased to 85.4%.
On May 23, 1997, the Company granted all of its stockholders certain rights
to purchase Series A Convertible Paid-in-Kind Preferred Stock, $.01 par value.
On June 19, 1997, the Company issued Fairchild 3,085,885 shares of Preferred
Stock for $28,390.
Page 12 of 18
<PAGE> 13
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 ("FSBC") 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 FSBC 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 exercised its option to terminate the Stock
Exchange Agreement. As a result, Fairchild paid the Company a termination fee of
$300 and out of pocket expenses of $447, and also agreed to allow the Company to
participate equally in future royalties from FSBC, if any.
On December 20, 1996, the Company entered into an unsecured subordinated
loan agreement ("Subordinated Loan") with RHI Holdings, Inc. ("RHI"), which is a
wholly-owned subsidiary of Fairchild. The purpose of the Subordinated Loan was
to provide funds for acquisitions and working capital requirements of the
acquired companies. The Subordinated Loan bore interest at 10.0% per annum for
the period commencing on the date of the initial draw and continuing for a
period of six months from the initial draw date. Thereafter, the Subordinated
Loan bore interest at 11.2% per annum. The principal and accrued interest were
deferred until the maturity date of November 15, 2003, subject to acceleration
in certain events specified in the Subordinated Loan. A commitment fee of 1.5%
per annum for six months from the initial draw date, and 3.0% per annum
thereafter, was accrued and payable on the last day of each month, based on the
balance outstanding. As of March 31, 1997, the Company borrowed $28,000 under
the Subordinated Loan, to fund the purchase of PB Herndon and other working
capital requirements. The Subordinated Loan was repaid in June 1997 as a result
of the Preferred Stock issuance. Interest paid to RHI from December 1996 to June
1997 totaled $1,047.
8) Subsequent Events
-----------------
On July 7, 1998, the Company's Board of Directors announced its approval of
the purchase by the Company of up to 2.5 million shares of class A common stock
of Fairchild through open market purchases. The purchases by the Company will be
made from time to time depending on the market price of Fairchild stock, and may
be subject to the requirement of obtaining the consent of the Company's senior
lenders. Shares of Fairchild stock purchased by the Company may not be sold
unless they are registered on a registration statement (or are sold pursuant to
any applicable exemption under securities laws). The Company has the right to
demand that Fairchild register such shares in order for the Company to sell
them.
In July and August 1998, the Company sold calls on 600,000 shares of its
investment in AlliedSignal Inc. common stock for approximately $1.4 million.
The calls mature in April 1999. The Company is amortizing the gain on the sale
of the calls over the call period. The calls will be marked to market value
through net income on a monthly basis.
As of August 7, 1998, the Company's investment in AlliedSignal Inc. common
stock was valued at approximately $182.6 million, based on a closing price of
$37.13 per share.
Page 13 of 18
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE (3) MONTHS ENDED JUNE 30, 1998 AND 1997
- ---------------------------------------------
<TABLE>
<CAPTION>
1998 1997 Increase/(Decrease)
------------------ ------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands) $ % $ % $ %
-------- ------- -------- --------- -------- -------
Net sales 55,038 100.0 116,930 100.0 (61,892) (52.9)
Cost of goods sold 43,797 79.6 83,385 71.3 (39,588) (47.5)
-------- ------- -------- --------- -------- -------
Gross profit 11,241 20.4 33,545 28.7 (22,304) (66.5)
Selling, general &
administrative
expenses 9,546 17.3 24,186 20.7 (14,640) (60.5)
-------- ------- -------- --------- -------- -------
Operating income 1,695 3.1 9,359 8.0 (7,664) (81.9)
Investment income 738 1.3 --- --- 738 100.0
Interest expense, net 1,329 2.4 4,032 3.4 (2,703) (67.0)
-------- ------- -------- --------- -------- -------
Income before taxes 1,104 2.0 5,327 4.6 (4,223) (79.3)
Provision for taxes 250 0.4 2,080 1.8 (1,830) (88.0)
-------- ------- -------- --------- -------- -------
Net income 854 1.6 3,247 2.8 (2,393) (73.7)
======== ======= ======== ========= ======== =======
</TABLE>
Operating Results
-----------------
Net sales for the three months ended June 30, 1998 decreased $61.9 million
or 52.9% from the comparable prior period. This decrease was the result of the
Hardware Business Disposition, which accounted for approximately 50% of sales
(see Note 6 in the notes to summarized financial information). Sales of rotables
increased as a result of an increase in sales to commercial airlines and as a
result of an exclusive three-year agreement between Solair, Inc. ("Solair") and
Delta Air Lines ("Delta") which commenced in August 1997 ("Delta Contract"). The
Delta Contract designates Solair as Delta's sole source supplier of airframe
material, including rotables, repairables and expendables, from the surplus
market. In addition, the Delta Agreement contemplates a consignment arrangement
between Delta and Solair whereby Solair will remarket Delta's excess inventory.
This consignment arrangement has yet to be completed. Sales of the engine group
decreased slightly compared to the prior period, due primarily to decreased
engine and engine leasing sales, partially offset by an increase in turbine
parts and engine management sales.
The gross profit percentage for the three months ended June 30, 1998
decreased to 20.4% compared to 28.7% for the prior period. This decrease was
attributable primarily to the Hardware Business Disposition, which typically
earned higher margins than the engine and rotables groups. Excluding the results
of the Hardware Business, the gross profit percentage for the three months ended
June 30, 1997 would have been 22.6%. In addition, the gross profit percentage
declined slightly due to a change in product mix in both the engine and rotables
groups.
Page 14 of 18
<PAGE> 15
Selling, general and administrative ("SG&A") expenses as a percentage of
sales declined from 20.7% for the three months ended June 30, 1997 to 17.3% for
the current period. This decrease was due to the Hardware Business Disposition.
Excluding the results of the Hardware Group for the three months ended June 30,
1997, SG&A expenses as a percentage of sales would have been 17.6%.
The following unaudited pro forma table illustrates consolidated sales and
operating income of the Company's operations, on a pro forma basis for the three
months ended June 30, 1997 to give effect to the disposition of substantially
all of the assets and certain liabilities of the Hardware Business and BAI. The
unaudited pro forma consolidated financial information is based on the
historical financial information of the Company for the three months ended June
30, 1997. The unaudited pro forma consolidated financial information is
presented for informational purposes only and is not necessarily indicative of
what the results of operations would have been had the Company disposed of the
Hardware Business and BAI at the beginning of the period presented, nor is such
information intended necessarily to be indicative of the future results of
operations that may occur.
UNAUDITED SUPPLEMENTAL PRO FORMA INFORMATION
FOR THE THREE MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
(In thousands) Amount Percentage
------------- -----------
<S> <C> <C>
Net sales $ 52,102 100.0%
Cost of goods sold 40,309 77.4
------------- -----------
Gross profit 11,793 22.6
Selling, general
and administrative 9,156 17.6
------------- -----------
Operating income $ 2,637 5.0%
============= ===========
</TABLE>
Interest Expense
----------------
Interest expense for the three months ended June 30, 1998 decreased $2.7
million or 67.0% compared to the prior period. This decrease was the result of a
decrease from $172 million in the average outstanding debt balance during the
prior period, to $55.7 million in the current period. The Company utilized
approximately $194 million of the proceeds received from the Hardware Business
Disposition to reduce its debt. Interest expense also included 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 June 30, 1998 and 1997
amounted to $0.2 million and $2.1 million, respectively. The effective tax rate
for the three months ended June 30, 1998 and 1997 was 22.6% and 39.0%,
respectively. The decrease in the effective tax rate for the three months ended
June 30, 1998 was due to the 70% exclusion permitted on dividend income. The
Company recorded $738,000 in dividend income as a result of shares received from
AlliedSignal Inc. from the Hardware Business Disposition, and is classified as
investment income in the accompanying consolidated statements of income and
comprehensive income for the three months ended June 30, 1998.
Page 15 of 18
<PAGE> 16
Liquidity
---------
The following table presents certain liquidity ratios of the Company at
June 30, 1998 and March 31, 1998.
<TABLE>
<CAPTION>
June 30, 1998 March 31, 1998
----------------- ------------------
<S> <C> <C>
Current ratio 2.87:1 2.68:1
Debt to equity 0.25:1 0.19:1
</TABLE>
At June 30, 1998, the Company had total debt outstanding of $65.8 million,
all of which was under the Credit Agreement. As of June 30, 1998, the Second
Amended and Restated Credit Agreement provided for up to $121.5 million of
borrowings for working capital, capital expenditures and potential acquisitions,
subject to certain conditions and a borrowing base. Cash flow from operations,
along with funds available under the Second Amended and Restated Credit
Agreement, should be adequate to finance the Company's operations in fiscal 1999
(refer to Note 4 in the notes to summarized financial information). The Company
had no other material capital commitments or planned expenditures as of June 30,
1998.
Net cash used by operating activities for the three months ended June 30,
1998 and 1997 amounted to $6.6 million and $16.5 million, respectively. The
primary use of cash for operating activities for the three months ended June 30,
1998 was an increase in inventories, and a decrease in payables and accrued
liabilities in the amount of $13.6 million and $3.1 million, respectively. The
primary source of cash from operating activities for the three months ended June
30, 1998 was a decrease in receivables in the amount of $7.9 million. The
increase in inventories was the result of an increase in anticipated sales
volume. The decrease in receivables is due to several large collections since
March 31, 1998. The primary source of cash from operating activities for the
three months ended June 30, 1997 was an increase in payables and accrued
liabilities in the amount of $13.7 million, along with scheduled depreciation
and amortization expense of $1.3 million. The primary use of cash for operating
activities for the three months ended June 30, 1997 was an increase in
receivables and inventories in the amount of $19.5 million and $17.8 million,
respectively.
Net cash used for investing activities for the three months ended June 30,
1998 and 1997 was $10.7 million and $1.4 million, respectively. The primary use
of cash for investing activities for the three months ended June 30, 1998 was
the acquisition of investment securities. The primary use of cash for investing
activities for the three months ended June 30, 1997 was capital expenditures,
net of proceeds from the sale of fixed assets.
Net cash provided by financing activities for the three months ended June
30, 1998 and 1997 was $17.3 million and $17.9 million, respectively. Net cash
provided by financing activities for the three months ended June 30, 1998 was
the result of net borrowings on the revolver. Net cash provided by financing
activities for the three months ended June 30, 1997 was comprised of $33.9
million received from the preferred stock rights offering, and net borrowings of
$12.1 million on the revolver, partially offset by repayment of $28.0 million of
the subordinated loan with RHI (refer to Note 7 in the notes to summarized
financial information).
Page 16 of 18
<PAGE> 17
MANAGEMENT REPRESENTATION
The information furnished in this Form 10-Q for the interim period ended
June 30, 1998 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 5. Other Information
-----------------
Articles have appeared in the French press reporting an inquiry by a
French magistrate into certain allegedly improper business
transactions involving Elf Acquitaine, a French petroleum company, its
former chairman and various third parties, including Maurice
Bidermann. In connection with this inquiry, the magistrate has made
inquiry into allegedly improper transactions between Mr. Steiner and
that petroleum company. In response to the magistrate's request that
Mr. Steiner appear in France as a witness, Mr. Steiner submitted
written statements concerning the transactions and appeared in person
before the magistrate and others. Mr. Steiner, who has been put under
examination (mis en examen), by the magistrate, with respect to this
matter, has not been charged.
Mr. Steiner has been cited by a French prosecutor to appear on
November 22, 1998, before the Tribunal de Grande Instance de Paris, to
answer a charge of knowingly benefiting in 1990, from a misuse by Mr.
Bidermann of corporate assets of Societe Generale Mobiliere et
Immobiliere, a French corporation in which Mr. Bidermann is believed
to have been the sole shareholder.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
*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 17 of 18
<PAGE> 18
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 Operating Officer
By /S/ EUGENE W. JURIS
--------------------------
Eugene W. Juris
Vice President
Chief Financial Officer
Dated: August 14, 1998
Page 18 of 18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 228,710
<RECEIVABLES> 43,309
<ALLOWANCES> 3,149
<INVENTORY> 135,884
<CURRENT-ASSETS> 29,295
<PP&E> 10,864
<DEPRECIATION> 6,353
<TOTAL-ASSETS> 452,398
<CURRENT-LIABILITIES> 71,563
<BONDS> 65,800
0
40
<COMMON> 23,692
<OTHER-SE> 242,807
<TOTAL-LIABILITY-AND-EQUITY> 452,398
<SALES> 55,038
<TOTAL-REVENUES> 55,038
<CGS> 43,797
<TOTAL-COSTS> 43,797
<OTHER-EXPENSES> 9,546
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,329
<INCOME-PRETAX> 1,104
<INCOME-TAX> 250
<INCOME-CONTINUING> 854
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 854
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
