<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, 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)
<TABLE>
<S> <C>
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)
</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>
<S> <C>
Outstanding at
Title of Class October 30, 1998
-------------- ----------------
Common Stock, $1.00 Par Value 21,483,128
</TABLE>
<PAGE> 2
BANNER AEROSPACE, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Part I. Financial Information:
Item 1: Financial Statements
Consolidated Balance Sheets as of September 30, 1998 and March 31, 1998 . . . . . . . . . . . 3-4
Consolidated Statements of Income and Comprehensive Income for the Six Months Ended
September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Income and Comprehensive Income for the Three Months Ended
September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Consolidated Statements of Cash Flows for the Six Months Ended September 30, 1998 and 1997 . 7
Notes to Summarized Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . 8-15
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations . . 16-23
Part II. Other Information:
Item 4: Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . 24
Item 5: Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 6: Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
<PAGE> 3
PART I
ITEM 1 -- FINANCIAL STATEMENTS
A. Summarized Financial Information
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND MARCH 31, 1998
ASSETS
<TABLE>
<CAPTION>
(In thousands) (unaudited)
September 30, March 31,
CURRENT ASSETS: 1998 1998
- -------------- ------------------ -------------------
<S> <C> <C>
Marketable securities $ 174,033 $ ---
Receivables, less allowances of $2,693 at September 30, 1998
and $2,881 at March 31, 1998 33,153 48,046
Inventories 149,577 122,236
Other current assets 19,574 29,741
------------------ -------------------
376,337 200,023
------------------ -------------------
PROPERTY, PLANT AND EQUIPMENT (AT COST):
- ---------------------------------------
Land 15 15
Buildings and improvements 2,560 2,430
Machinery and equipment 8,863 8,056
------------------ -------------------
11,438 10,501
Accumulated depreciation (6,671) (6,008)
------------------ -------------------
4,767 4,493
------------------ -------------------
OTHER ASSETS:
- ------------
Investments 21,858 206,626
Cost in excess of net tangible assets of purchased 12,075 12,292
businesses, net
Other 1,605 1,776
------------------ -------------------
35,538 220,694
------------------ -------------------
TOTAL ASSETS $ 416,642 $ 425,210
================== ===================
</TABLE>
The accompanying notes to summarized financial information are an integral part
of these consolidated balance sheets.
Page 3 of 22
<PAGE> 4
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND MARCH 31, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands) (unaudited)
September 30, March 31,
CURRENT LIABILITIES: 1998 1998
- ------------------- --------------------- -------------------
<S> <C> <C>
Accounts payable $ 22,271 $ 27,431
Accrued salaries 1,803 2,568
Other 31,454 44,626
--------------------- -------------------
55,528 74,625
--------------------- -------------------
LONG-TERM LIABILITIES:
- ---------------------
Long-term debt 97,500 48,900
Deferred federal and state income tax 25,174 41,194
Other 2,743 2,381
--------------------- -------------------
125,417 92,475
--------------------- -------------------
TOTAL LIABILITIES 180,945 167,100
--------------------- -------------------
STOCKHOLDERS' EQUITY:
- --------------------
Preferred stock, $0.01 par value per share, 10,000 shares
authorized, 4,100 shares issued and outstanding at
September 30, 1998 and 3,810 shares issued and outstanding
at March 31, 1998 41 38
Common stock, $1.00 par value per share, 50,000 shares
authorized, 23,730 shares issued, 21,483 outstanding at
September 30, 1998 and 23,642 shares issued, 21,395
shares outstanding at March 31, 1998 23,730 23,642
Less: treasury stock at cost, 2,247 shares held in treasury
at September 30, 1998 and March 31, 1998 (23,331) (23,331)
Paid-in capital 152,292 150,460
Retained earnings 93,746 93,046
Cumulative other comprehensive income (10,781) 14,255
--------------------- -------------------
TOTAL STOCKHOLDERS' EQUITY 235,697 258,110
--------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 416,642 $ 425,210
===================== ===================
</TABLE>
The accompanying notes to summarized financial information are an integral part
of these consolidated balance sheets.
Page 4 of 22
<PAGE> 5
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE SIX (6) MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The consolidated income statements for the six (6) months ended September 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)
(In thousands, except per share data) For the Six Months Ended
September 30,
---------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Net sales $ 105,566 $ 239,844
Cost of goods sold 83,138 172,340
---------------- ----------------
GROSS PROFIT 22,428 67,504
Selling, general and administrative expenses 19,013 49,446
---------------- ----------------
OPERATING INCOME 3,415 18,058
Investment income 2,570 ---
Interest expense, net 3,261 7,777
---------------- ----------------
INCOME BEFORE TAXES 2,724 10,281
Provision for taxes 660 4,010
---------------- ----------------
NET INCOME $ 2,064 $ 6,271
================ ================
Preferred stock dividends 1,364 689
---------------- ----------------
NET INCOME AVAILABLE FOR COMMON SHAREHOLDERS $ 700 $ 5,582
================ ================
Basic earnings per common share $ 0.03 $ 0.24
================ ================
Diluted earnings per common share $ 0.03 $ 0.23
================ ================
Weighted average number of common shares - basic 21,444 23,428
================ ================
Weighted average number of common shares - diluted 21,856 23,797
================ ================
Net income $ 2,064 $ 6,271
Other comprehensive income (loss):
Unrealized loss on available-for-sale securities, net of
tax benefit of $16,006 (25,036) ---
---------------- ----------------
Comprehensive income (loss) $ (22,972) $ 6,271
================ ================
</TABLE>
The accompanying notes to summarized financial information are an integral part
of these consolidated income statements.
Page 5 of 22
<PAGE> 6
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE (3) MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The consolidated income statements for the three (3) months ended September 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) September 30,
----------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Net sales $ 50,528 $ 122,914
Cost of goods sold 39,341 88,955
----------------- ----------------
GROSS PROFIT 11,187 33,959
Selling, general and administrative expenses 9,467 25,260
----------------- ----------------
OPERATING INCOME 1,720 8,699
Investment income 1,832 ---
Interest expense, net 1,932 3,745
----------------- ----------------
INCOME BEFORE TAXES 1,620 4,954
Provision for taxes 410 1,930
----------------- ----------------
NET INCOME $ 1,210 $ 3,024
================= ================
Preferred stock dividends 695 640
----------------- ----------------
NET INCOME AVAILABLE FOR COMMON SHAREHOLDERS $ 515 $ 2,384
================= ================
Basic earnings per common share $ 0.02 $ 0.10
================= ================
Diluted earnings per common share $ 0.02 $ 0.10
================= ================
Weighted average number of common shares - basic 21,458 23,428
================= ================
Weighted average number of common shares - diluted 21,842 23,923
================= ================
Net income $ 1,210 $ 3,024
Other comprehensive income (loss):
Unrealized loss on available-for-sale securities, net of
tax benefit of $20,606 (32,231) ---
----------------- ----------------
Comprehensive income (loss) $ (31,021) $ 3,024
================= ================
</TABLE>
The accompanying notes to summarized financial information are an integral part
of these consolidated income statements.
Page 6 of 22
<PAGE> 7
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX (6) MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
(unaudited)
(In thousands) For the Six Months Ended
September 30,
----------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
CASH FLOWS (USED FOR) OPERATING ACTIVITIES:
Net income $ 2,064 $ 6,271
Adjustments to reconcile net income to net cash (used for)
operating activities--
Depreciation and amortization 1,058 2,749
Change in receivables 14,893 (21,017)
Change in inventories (27,341) (21,378)
Change in payables and accrued liabilities (19,097) 3,444
Change in other accounts 10,488 (1,079)
----------------- -----------------
Net cash (used for) operating activities (17,935) (31,010)
----------------- -----------------
CASH FLOWS (USED FOR) INVESTING ACTIVITIES:
Acquisition of investment securities (30,306) ---
Acquisition of property, plant and equipment (919) (2,557)
----------------- -----------------
Net cash (used for) investing activities (31,225) (2,557)
----------------- -----------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net borrowings of revolver 48,600 31,600
Repayment of subordinated loan --- (28,000)
Repayment of term loan --- (3,850)
Repayments on other debt --- (154)
Issuance of preferred stock --- 33,877
Exercise of stock options 560 94
----------------- -----------------
Net cash provided by financing activities 49,160 33,567
----------------- -----------------
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 22
<PAGE> 8
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO SUMMARIZED FINANCIAL INFORMATION
SEPTEMBER 30, 1998 AND 1997
(In thousands, except share data, unless otherwise noted)
The information furnished in this Form 10-Q for the interim period ended
September 30, 1998 reflects all adjustments which are, in the opinion of
management, of a normal recurring nature and are necessary to present a fair
statement of the results for the interim period. 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. 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% as of March 31,
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 8.2% (refer to Note 6 in the notes to summarized financial
information). Fairchild's current beneficial ownership is approximately 85.4%
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 5 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-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.
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.
Page 8 of 22
<PAGE> 9
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 six and three months
ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
(In thousands, except per share data) For the Six Months Ended
September 30,
------------------------------------
BASIC EARNINGS PER COMMON SHARE: 1998 1997
---------------- ------------------
<S> <C> <C>
Net income available for common shareholders $ 700 $ 5,582
Weighted average shares outstanding 21,444 23,428
Basic earnings per common share $ 0.03 $ 0.24
================ ==================
DILUTED EARNINGS PER COMMON SHARE:
Net income available for common shareholders $ 700 $ 5,582
Weighted average shares outstanding 21,444 23,428
Incremental shares due to assumed exercise and repurchase of stock options 412 369
---------------- ------------------
21,856 23,797
---------------- ------------------
Diluted earnings per common share $ 0.03 $ 0.23
================ ==================
</TABLE>
Preferred Stock totaling 4,100,305 and 3,710,955 shares as of September 30,
1998 and 1997, respectively, that are convertible into Common Stock at a
one-to-one ratio have been excluded from the calculation of diluted earnings
per common share for the six months ended September 30, 1998 and 1997,
respectively, as the effects would be antidilutive. In addition, outstanding
stock options to purchase 135,000 and 40,000 shares of Common Stock as of
September 30, 1998 and 1997, respectively, were not included in the computation
of diluted earnings per common share for the six months ended September 30,
1998 and 1997, respectively, because the exercise price was greater than the
average market price of common shares for the period.
<TABLE>
<CAPTION>
(In thousands, except per share data) For the Three Months Ended
September 30,
-------------------------------------
BASIC EARNINGS PER COMMON SHARE: 1998 1997
----------------- ------------------
<S> <C> <C>
Net income available for common shareholders $ 515 $ 2,384
Weighted average shares outstanding 21,458 23,428
Basic earnings per common share $ 0.02 $ 0.10
================= ==================
DILUTED EARNINGS PER COMMON SHARE:
Net income available for common shareholders $ 515 $ 2,384
Weighted average shares outstanding 21,458 23,428
Incremental shares due to assumed exercise and repurchase of stock options 384 495
----------------- ------------------
21,842 23,923
----------------- ------------------
Diluted earnings per common share $ 0.02 $ 0.10
================= ==================
</TABLE>
Preferred Stock totaling 4,100,305 and 3,710,955 shares as of September 30,
1998 and 1997, respectively, that are convertible into Common Stock at a
one-to-one ratio have been excluded from the calculation of diluted earnings
per common share for the three months ended September 30, 1998 and 1997,
respectively, as the effects
Page 9 of 22
<PAGE> 10
would be antidilutive. In addition, outstanding stock options to purchase
140,000 shares of Common Stock as of September 30, 1998 were not included in
the computation of diluted earnings per common share for the three months ended
September 30, 1998, because the 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 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. Preferred Stock issued
and outstanding at September 30, 1998 includes 148,204 shares related to the
semi-annual stock dividend declared on September 18, 1998 and payable on
October 31, 1998. The additional shares of Preferred Stock are included as of
September 30, 1998 to provide the retroactive effect in the balance sheet and
diluted earnings per common share computation.
3) 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 Company 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 5 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 September 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 December 31, 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 that limit dividends and distributions on
the capital stock of the Company to an aggregate of $150 in any fiscal year.
At September 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.
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
Page 10 of 22
<PAGE> 11
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.
4) 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 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 149,750 $11.59
Exercised (89,033) $6.29
Terminated (29,750) $8.27
Expired --- ---
---------
Outstanding at September 30, 1998 1,138,717 $7.06
========= ==========
</TABLE>
At September 30, 1998, 1,087,717 of the 1,138,717 options outstanding were
issued under the 1990 Stock Option Plan and have exercise prices between $4.88
and $11.81 per share. The remaining 51,000 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 $8.13
and $10.63 per share.
Page 11 of 22
<PAGE> 12
5) 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. In fiscal 1999, the final closing date
balance sheet was completed with no change in purchase price proceeds. 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 a current available-for-sale security at
September 30, 1998 (previously classified as non-current) and the Company
recorded in stockholders' equity unrealized holding losses since inception of
$5.6 million or $1.14 per share, net of tax benefits, from the decline in the
market value of the AlliedSignal Inc. common stock since January 13, 1998. 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 net sales,
operating income, net income, net income available for common shareholders and
earnings per common share of the Company's operations, on a pro forma basis for
the six and three months ended September 30, 1997 to give effect of the
Hardware Business Disposition and the disposition of BAI. The unaudited pro
forma consolidated financial information is based on the historical financial
information of the Company for the six and three months ended September 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 Hardware Business
Disposition and the disposition of BAI occurred 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
<TABLE>
<CAPTION>
For the Six For the Three
Months Ended Months Ended
September 30, September 30,
(In thousands, except per share data) 1997 1997
-------------- --------------
<S> <C> <C>
Net sales $ 109,977 $ 56,435
============== ==============
Operating income $ 5,464 $ 2,701
============== ==============
Net income $ 3,283 $ 1,621
============== ==============
Net income available for common
shareholders $ 2,594 $ 981
============== ==============
Earnings per common share - basic $ 0.11 $ 0.04
============== ==============
</TABLE>
Page 12 of 22
<PAGE> 13
6) Related Party Transactions
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. During the three month period ended September 30, 1998,
the Company purchased 940,800 shares of Fairchild stock at an average purchase
price of $19.83. As of November 6, 1998, the Company had purchased 1,246,400
shares of Fairchild stock at an average purchase price of $17.79. At September
30, 1998, such shares were treated as non-current available-for-sale securities
and the Company recorded in stockholders' equity unrealized holding losses
since inception of $3.3 million or $3.48 per share, net of tax benefits, from
the decline in the market value of the Fairchild stock.
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. As such, 3,659,424 shares of the Company's Common Stock were
validly tendered for exchange and Fairchild issued 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 83.2%. Fairchild's current beneficial ownership is
approximately 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.
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 ("1FSBC") 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. For the six months ended September 30, 1998, the Company
recorded royalty income from FSBC of $202.
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 Aerospace, Inc. 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.
Page 13 of 22
<PAGE> 14
7) Subsequent Event
In November 1998, the Company committed to repurchase 606,822 shares of its
convertible Preferred Stock (refer to Note 2 in the Notes to Summarized
Financial Information) from an existing shareholder. The aggregate purchase
price to be paid by the Company is approximately $4.7 million, or $7.75 per
share. The Company's obligation under this commitment is conditioned upon the
Board of Director's consent and consent from the Company's senior lenders. The
closing date of such transaction is expected to be November 16, 1998.
Page 14 of 22
<PAGE> 15
PART I
ITEM 2 MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SIX (6) MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997 Increase/(Decrease)
------------------ ------------------- ---------------------
(In thousands) $ % $ % $ %
-------- -------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales 105,566 100.0 239,844 100.0 (134,278) (56.0)
Cost of goods sold 83,138 78.8 172,340 71.9 (89,202) (51.8)
-------- ----- -------- ----- ---------- ------
Gross profit 22,428 21.2 67,504 28.1 (45,076) (66.8)
Selling, general & administrative
expenses 19,013 18.0 49,446 20.6 (30,433) (61.5)
-------- ----- -------- ----- ---------- ------
Operating income 3,415 3.2 18,058 7.5 (14,643) (81.1)
Investment income 2,570 2.4 --- --- 2,570 100.0
Interest expense, net 3,261 3.0 7,777 3.2 (4,516) (58.1)
-------- ----- -------- ----- ---------- ------
Income before taxes 2,724 2.6 10,281 4.3 (7,557) (73.5)
Provision for taxes 660 0.6 4,010 1.7 (3,350) (83.5)
-------- ----- -------- ----- ---------- ------
Net income 2,064 2.0 6,271 2.6 (4,207) (67.1)
======== ===== ======== ===== ========== ======
</TABLE>
Operating Results
Net sales for the six months ended September 30, 1998 decreased $134.3
million, or 56.0%, from the comparable prior period. This decrease was the
result of the Hardware Business Disposition, which accounted for approximately
50% of sales (see Note 5 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 the Delta Contract. Sales from the Delta Contract
for the six months ended September 30, 1998 were approximately $8.3 million
compared to $2.4 million for the comparable period ended September 30, 1997.
Sales of the engine group decreased slightly compared to the prior period, due
primarily to decreased engine sales, partially offset by an increase in turbine
parts and engine management sales.
The gross profit percentage for the six months ended September 30, 1998
decreased to 21.2% compared to 28.1% 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 six
months ended September 30, 1997 would have been 21.5%.
Selling, general and administrative ("SG&A") expenses decreased $30.4
million, or 61.5%, in the six months compared to the prior year. Excluding the
disposition, SG&A expenses would have been $18.2 million, or 16.5% of sales,
compared to $19.0 million, or 18.0% of sales.
The following unaudited pro forma table illustrates consolidated sales and
operating income of the Company's operations, on a pro forma basis for the six
months ended September 30, 1997 to give effect of the Hardware Business
Disposition and the disposition of BAI. The unaudited pro forma consolidated
financial information is based on the historical financial information of the
Company for the six months ended September 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
Page 15 of 22
<PAGE> 16
the Hardware Business Disposition and the disposition of BAI occurred 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 SIX MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
(In thousands) Amount Percentage
------------ ------------
<S> <C> <C>
Net sales $ 109,977 100.0%
Cost of goods sold 86,321 78.5
------------ ------------
Gross profit 23,656 21.5
Selling, general
and administrative
expenses 18,192 16.5
------------ ------------
Operating income $ 5,464 5.0%
============ ============
</TABLE>
Investment Income
Investment income for the six months ended September 30, 1998 amounted to
$2.6 million. The Company recorded no investment income in fiscal 1998. For
the six months ended September 30, 1998, the Company recorded $1.5 million in
dividend income as a result of shares of AlliedSignal Inc. common stock
received from the Hardware Business Disposition, and $1.1 million related to
the sale and subsequent marking to market of calls sold on the investment in
AlliedSignal Inc. common stock. Through the end of October 1998, the Company
had sold calls on over 2 million shares of its investment in AlliedSignal Inc.
common stock for proceeds aggregating approximately $2.8 million.
Interest Expense
Interest expense for the six months ended September 30, 1998 decreased $4.5
million or 58.1% compared to the prior period. This decrease was the result of
a decrease from $165.2 million in the average outstanding debt balance during
the prior period, to $73.2 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 six months ended September 30, 1998 and
1997 amounted to $0.7 million and $4.0 million, respectively. The effective
tax rate for the six months ended September 30, 1998 and 1997 was 24.2% and
39.0%, respectively. The decrease in the effective tax rate for the six months
ended September 30, 1998 was due to the 70% exclusion permitted on dividend
income earned from the investment in AlliedSignal Inc. common stock.
Page 16 of 22
<PAGE> 17
THREE (3) MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997 Increase/(Decrease)
----------------- -------------------- ---------------------
(In thousands) $ % $ % $ %
------ ------- ------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales 50,528 100.0 122,914 100.0 (72,386) (58.9)
Cost of goods sold 39,341 77.9 88,955 72.4 (49,614) (55.8)
------ ------- ------- -------- ---------- -------
Gross profit 11,187 22.1 33,959 27.6 (22,772) (67.1)
Selling, general & administrative
Expenses 9,467 18.7 25,260 20.6 (15,793) (62.5)
------ ------- ------- -------- ---------- -------
Operating income 1,720 3.4 8,699 7.0 (6,979) (80.2)
Investment income 1,832 3.6 --- --- 1,832 100.0
Interest expense, net 1,932 3.8 3,745 3.0 (1,813) (48.4)
------ ------- ------- -------- ---------- -------
Income before taxes 1,620 3.2 4,954 4.0 (3,334) (67.3)
Provision for taxes 410 0.8 1,930 1.6 (1,520) (78.8)
------ ------- ------- -------- ---------- -------
Net income 1,210 2.4 3,024 2.4 (1,814) (60.0)
====== ======= ======= ======== ========== =======
</TABLE>
Operating Results
Net sales for the three months ended September 30, 1998 decreased $72.4
million, or 58.9%, from the comparable prior period. This decrease was the
result of the Hardware Business Disposition, which accounted for approximately
50% of sales (see Note 5 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"). Sales from the Delta Contract for the three months ended
September 30, 1998 were approximately $4.6 million compared to $2.4 million for
the comparable period ended September 30, 1997. 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 sales,
partially offset by an increase in turbine parts and engine management sales.
The gross profit percentage for the three months ended September 30, 1998
decreased to 22.1% compared to 27.6% 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 September 30, 1997 would have been 21.0%.
Selling, general and administrative ("SG&A") expenses decreased $15.8
million or 62.5% in the three months compared to the prior year. Excluding the
dispositions, SG&A expenses would have been $9.2 million, or 16.2% of sales,
compared to $9.5 million, or 18.7% of sales.
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 September 30, 1997, to give effect to the Hardware Business
Disposition and the disposition of BAI. The unaudited pro forma consolidated
financial information is based on the historical financial information of the
Company for the three months ended September 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 Hardware Business Disposition and the disposition of BAI occurred
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.
Page 17 of 22
<PAGE> 18
UNAUDITED SUPPLEMENTAL PRO FORMA INFORMATION
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
(In thousands) Amount Percentage
------------ ------------
<S> <C> <C>
Net sales $ 56,435 100.0%
Cost of goods sold 44,573 79.0
------------ ------------
Gross profit 11,862 21.0
Selling, general
and administrative
expenses 9,161 16.2
------------ ------------
Operating income $ 2,701 4.8%
============ ============
</TABLE>
Investment Income
Investment income for the three months ended September 30, 1998 amounted to
$1.8 million. The Company recorded no investment income in fiscal 1998. For
the three months ended September 30, 1998, the Company recorded $0.7 million in
dividend income as a result of shares of AlliedSignal Inc. common stock
received from the Hardware Business Disposition, and $1.1 million related to
the sale and subsequent marking to market of calls sold on the investment in
AlliedSignal Inc. common stock.
Interest Expense
Interest expense for the three months ended September 30, 1998 decreased
$1.8 million or 48.4% compared to the prior period. This decrease was the
result of a decrease from $157.2 million in the average outstanding debt
balance during the prior period, to $85.2 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 September 30, 1998 and
1997 amounted to $0.4 million and $1.9 million, respectively. The effective
tax rate for the three months ended September 30, 1998 and 1997 was 25.3% and
39.0%, respectively. The decrease in the effective tax rate for the three
months ended September 30, 1998 was due to the 70% exclusion permitted on
dividend income earned from the investment in AlliedSignal Inc. common stock.
FINANCIAL CONDITION
Liquidity
The following table presents certain liquidity ratios of the Company at
September 30, 1998 and March 31, 1998.
<TABLE>
<CAPTION>
September 30, 1998 March 31, 1998
------------------- ---------------
<S> <C> <C>
Current ratio 6.77:1 2.68:1
Debt to equity 0.41:1 0.19:1
</TABLE>
The increased ratio of current assets to current liabilities from March 31,
1998 to September 30, 1998 is primarily the result of the reclassification of
the investment in AlliedSignal Inc. common stock from non-current investments
to current marketable securities. Based on the Company's review of its
investment in AlliedSignal Inc. common stock, management believes that a
current classification more appropriately reflects the increased probability
that it will be liquidated within the next twelve months, subject to market
conditions.
Page 18 of 22
<PAGE> 19
At September 30, 1998, the Company had total debt outstanding of $97.5
million, all of which was borrowed under the Credit Agreement. As of September
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 and proceeds from the liquidation of securities,
should be adequate to finance the Company's operations in fiscal 1999 (refer to
Note 3 in the notes to summarized financial information). The Company had no
other material capital commitments or planned expenditures as of September 30,
1998.
Net cash used for operating activities for the six months ended September
30, 1998 and 1997 amounted to $17.9 million and $31.0 million, respectively.
The primary use of cash for operating activities for the six months ended
September 30, 1998 was an increase in inventories, and a decrease in payables
and accrued liabilities in the amount of $27.3 million and $19.1 million,
respectively. The primary source of cash from operating activities for the six
months ended September 30, 1998 was a decrease in receivables in the amount of
$14.9 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 six months ended September 30, 1997 was an increase in
payables and accrued liabilities in the amount of $3.4 million, along with
scheduled depreciation and amortization expense of $2.7 million. 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.
Net cash used for investing activities for the six months ended September
30, 1998 and 1997 was $31.2 million and $2.6 million, respectively. The
primary use of cash for investing activities for the six months ended September
30, 1998 was the acquisition of investment securities. The primary use of cash
for investing activities for the six months ended September 30, 1997 was
capital expenditures, net of proceeds from the sale of fixed assets.
Net cash provided by financing activities for the six months ended
September 30, 1998 and 1997 was $49.2 million and $33.6 million, respectively.
Net cash provided by financing activities for the six months ended September
30, 1998 was the result of net borrowings on the revolver to fund current
working capital requirements. Net cash provided by financing activities for
the six months ended September 30, 1997 was comprised of $33.9 million received
from the preferred stock rights offering, and net borrowings of $31.6 million
on the revolver, partially offset by repayment of $28.0 million of the
subordinated loan with RHI (refer to Note 6 in the notes to summarized
financial information).
Factors That May Affect Future Results
Certain information included above relating to expectations of cash flows
and earnings constitute "forward-looking" statements, as that term is defined
by the Securities and Exchange Commission in its rules, regulations and
releases. The Company intends that such forward-looking statements be subject
to the safe harbors created thereby. All forward-looking statements are based
on current expectations regarding important risk factors. Accordingly, actual
results may differ materially from those expressed in the forward-looking
statements, and the making of such statements should not be regarded as a
representation by the Company or any other person that the results expressed
therein will be achieved.
Year 2000
As the end of the century nears, there is a widespread concern that many
existing computer programs that use only the last two digits to refer to a year
will not properly recognize a year that begins with the digits "20" instead of
"19." If not corrected, many computer applications could fail, create
erroneous results, or cause unanticipated systems failures, among other
problems. The Company has begun to take appropriate measures to ensure that
its information processing systems, embedded technology and other
infrastructure will be ready for the Year 2000.
The Company has retained both technical review and modification consultants
to help it assess its Year 2000 readiness. Working with these consultants and
other advisors, the Company has formulated a plan to address Year 2000 issues.
Under this plan, the Company's systems are being modified or replaced, or will
be modified or replaced, as necessary, to render them, as far as possible, Year
2000 ready. The Company expects to complete its
Page 19 of 22
<PAGE> 20
preparations for Year 2000 by early 1999. The Company could be subject to
liability to customers and other third parties if its systems are not Year 2000
compliant, resulting in possible legal actions for breach of contract, breach
of warranty, misrepresentation, unlawful trade practices and other harm.
In addition, the Company is continually attempting to assess the level of
Year 2000 preparedness of its key suppliers, distributors, customers and
service providers. To this end, the Company has sent, and will continue to
send, letters, questionnaires and surveys to its significant business partners
inquiring about their Year 2000 efforts. If a significant business partner of
the Company fails to be Year 2000 compliant, the Company could suffer a
material loss of business or incur material expenses.
The Company is also developing and evaluating contingency plans to deal
with events affecting the Company or one of its business partners arising from
significant Year 2000 problems. These contingency plans include identifying
alternative suppliers, distribution networks and service providers.
Although the Company's Year 2000 assessment, implementation and contingency
planning is not yet complete, the Company does not believe that Year 2000
issues will materially affect its business, results of operations or financial
condition. However, the Company's Year 2000 efforts may not be successful in
every respect. To date, the Company has incurred approximately $0.2 million in
costs that are directly attributable to addressing Year 2000 issues. Management
currently estimates that the Company will incur between $0.3 million and $0.4
million in additional costs during the next twelve months relating to the Year
2000 problem.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131 ("SFAS 131") "Disclosures
about Segments of an Enterprise and Related Information." SFAS 131 supersedes
Statement of Financial Accounting Standards No. 14 "Financial Reporting for
Segments of a Business Enterprise" and requires that a public company report
certain information about its reportable operating segments in annual and
interim financial reports. Generally, financial information is required to be
reported on the basis that is used internally for evaluating segment
performance and deciding how to allocate resources to segments. The Company
currently operates in only one reportable segment and will adopt SFAS 131 in
fiscal 1999. SFAS 131 need not be applied to interim financial statements in
the initial year of application.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132 ("SFAS 132") "Employers' Disclosures about Pensions and Other
Postretirement Benefits." SFAS 132 revises and improves the effectiveness of
current note disclosure requirements for employers' pensions and other retiree
benefits by requiring additional information to facilitate financial analysis
and eliminating certain disclosures which are no longer useful. SFAS 132 does
not address recognition or measurement issues. The Company will adopt SFAS 132
in fiscal 1999.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes a new model for accounting for derivatives
and hedging activities and supersedes and amends a number of existing
accounting standards. It requires that all derivatives be recognized as assets
and liabilities on the balance sheet and measured at fair value. The
corresponding derivative gains or losses are reported based on the hedge
relationship that exists, if any. Changes in the fair value of hedges that are
not designated as hedges or that do not meet the hedge accounting criteria in
SFAS 133 are required to be reported in earnings. Most of the general
qualifying criteria for hedge accounting under SFAS 133 were derived from, and
are similar to, the existing qualifying criteria in SFAS 80 "Accounting for
Futures Contracts." SFAS 133 describes three primary types of hedge
relationships: fair value hedge, cash flow hedge, and foreign currency hedge.
SFAS 133 is required to be adopted by the Company in fiscal 2000, although,
earlier application is permitted.
Page 20 of 22
<PAGE> 21
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 18, 1998. Three proposals were put to vote: Proposal 1 -
the election of nine directors for the ensuing year; Proposal 2 - the
approval of the material terms of the performance goals for the fiscal
1999 incentive compensation award for the Company's Chief Executive
Officer; and Proposal 3 - the approval of the Board of Director's
selection of Arthur Anderson LLP as independent auditors. All of the
above proposals were approved, as follows:
<TABLE>
<CAPTION>
BROKER TOTAL
FOR AGAINST WITHHELD ABSTAINED NON-VOTES VOTES
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PROPOSAL 1:
Michael T. Alcox 19,427,418 0 137,252 0 0 19,564,670
Steven L. Gerard 19,427,418 0 137,252 0 0 19,564,670
Charles M. Haar 19,427,018 0 137,652 0 0 19,564,670
Philippe Hercot 19,427,418 0 137,252 0 0 19,564,670
Michael D. Herdman 19,427,418 0 137,252 0 0 19,564,670
Warren D. Persavich 19,427,418 0 137,252 0 0 19,564,670
Dr. Eric I. Steiner 19,427,418 0 137,252 0 0 19,564,670
Jeffrey J. Steiner 19,427,418 0 137,252 0 0 19,564,670
Leonard Toboroff 19,427,418 0 137,252 0 0 19,564,670
PROPOSAL 2 18,450,070 405,165 2,204 0 707,231 19,564,670
PROPOSAL 3 19,457,674 106,001 995 0 0 19,564,670
</TABLE>
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 23, 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
*10 (i) Registration Rights Agreement by and between The
Fairchild Corporation and Banner Aerospace, Inc.,
dated as of July 7, 1998
*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 21 of 22
<PAGE> 22
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.
<TABLE>
<S> <C>
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: November 12, 1998
</TABLE>
Page 22 of 22
<PAGE> 1
EXHIBIT 10
REGISTRATION RIGHTS AGREEMENT
By and Between
THE FAIRCHILD CORPORATION
And
BANNER AEROSPACE, INC.
Dated as of July 7, 1998
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into as of July 7, 1998, by and between The Fairchild Corporation, a Delaware
corporation (the "Company") and Banner Aerospace, Inc., a Delaware corporation
("Banner").
R E C I T A L S:
On July 7, 1998, Banner announced its intention to purchase up to 2.5
million shares of Class A Common Stock of the Company through open market
purchases (the "Subject Shares").
In connection therewith, the Company has agreed to grant demand
registration rights agreement in favor of Banner for the registration and sale
of such shares.
NOW, THEREFORE, the parties to this Agreement agree as follows:
ARTICLE I
DEFINITIONS
1.1 Certain Definitions.
"Affiliate" shall have the meaning given to such term in Rule 12b-2
promulgated under the Exchange Act.
"Commission" shall mean the Securities and Exchange Commission.
"Common Stock" shall mean the shares of Class A Common Stock, $.10 par
value, of the Company.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
and all rules and regulations promulgated thereunder.
"Holder" shall mean Banner or any Permitted Transferee of Registrable
Common Stock. There may be more than one Holder at any time.
"NASDAQ" shall mean the National Association of Securities Dealers
Automated Quotation System.
"Person" shall mean any individual, group, partnership, corporation,
trust, joint stock company, unincorporated organization, joint venture or other
entity of whatever nature.
"Registration Statement" shall mean a registration statement relating to
the Common Stock on such form as counsel to the Company deems appropriate to be
filed with the Commission, as such registration statement may be amended from
time to time.
1
<PAGE> 3
"Securities Act" shall mean the Securities Act of 1933, as amended, and
all rules and regulations promulgated thereunder.
"Subject Shares" shall have the meaning ascribed in the Recitals hereof.
1.2 Permitted Transferees. "Permitted Transferees" shall mean any
subsidiary of Banner to whom Banner has (a) transferred five percent (5%) or
more of the aggregate Subject Shares and (b) assigned its registrations rights
under this Agreement. In the event that Banner transfers the requisite
percentage of Subject Shares and assigns its registration rights under this
Agreement, it shall be a condition precedent to such transfer and assignment
that Banner give prior written notice thereof to the Company.
1.3 Registrable Common Stock. "Registrable Common Stock" means the Subject
Shares held by Banner or its Permitted Transferees (as the case may be), until
such time as the Common Stock ceases to be registrable as provided in Section
2.2 of this Agreement.
1.4 Registration Expenses. "Registration Expenses" shall mean any and all
expenses reasonably attributable to the registration of the Registrable Common
Stock, including, without limitation, the following expenses: (a) all filing
fees; (b) all fees and expenses of complying with securities or blue sky laws
(including reasonable fees and disbursements of counsel for the underwriters in
connection with blue sky qualification of the Registrable Common Stock); (c) all
fees and expenses incurred in connection with the listing of the Registrable
Common Stock on any securities exchange or other market (including, but not
limited to, NASDAQ) pursuant to Section 3.4(j) of this Agreement and all fees of
the National Association of Securities Dealers; (d) the fees and disbursements
of counsel retained by the Company in connection with each such registration or
listing on a stock exchange and of its independent public accountants; (e) the
fees and disbursements of counsel retained by Holder and any underwriter; (f)
all commissions, fees and disbursements of underwriters; (g) all underwriting
discounts and commissions applicable to the Registrable Common Stock; (h) all
printing expenses; and (i) all other out-of-pocket expenses of the Company
incurred in connection with the registration of the Registrable Common Stock.
ARTICLE II
SECURITIES SUBJECT TO THIS AGREEMENT
2.1 Securities Subject to this Agreement. The securities entitled to the
benefits of this Agreement are shares of the Registrable Common Stock.
2.2 Termination of Entitlement. For purposes of this Agreement, the
Subject Shares will cease to be Registrable Common Stock when: (a) a
Registration Statement with respect to the sale of the Subject Shares shall have
become effective under the Securities Act and the Subject Shares shall have been
transferred pursuant to such Registration Statement; (b) the Subject Shares
shall have been transferred pursuant to Rule 144 (or any successor provisions)
2
<PAGE> 4
under the Securities Act; (c) certificates for the Subject Shares not bearing a
legend restricting transfer thereof under the Securities Act shall have been
delivered by the Company and, in the opinion of counsel for the Company,
transfer of such shares may be made without registration or qualification under
the Securities Act; or (d) the Subject Shares shall have ceased to be
outstanding.
ARTICLE III
REGISTRATION RIGHTS
3.1 Demand Registration.
(a) Request for Registration. At any time, a Holder of Registrable
Common Stock may make a written request for registration under the
Securities Act of all or part of its Registrable Common Stock (a "Demand
Registration"). Except as set forth below, there shall be no limit on the
number of Demand Registrations that may be requested by Banner or its
Permitted Transferees, as the case may be.
Such requests for a Demand Registration will specify the aggregate
number of shares proposed to be sold and will also specify the intended
method of disposition thereof. The Company will use its best efforts to
effect such registration; provided, however, that the Company shall not be
obligated to take any action to effect any such registration,
qualification or compliance pursuant to this Agreement: (i) within sixty
(60) days immediately following the effective date of a Registration
Statement pertaining to a public offering of securities of the Company
(other than a registration relating solely to employee benefit plans);
(ii) if at the time of the request to register the Holder's Registrable
Common Stock, the Company gives notice within thirty (30) days of such
request that it intends to initiate within sixty (60) days thereafter a
registered public offering (other than a registration relating solely to
employee benefit plans); or (iii) if at the time of the request, the
Holder could sell all of the Registrable Common Stock requested to be
registered under Rule 144 during the three-month period following such
request, or if, in the opinion of counsel for the Company reasonably
satisfactory to the Holder, the proposed sale of its Registrable Common
Stock is otherwise exempt from registration under the Securities Act.
(b) Effective Registration and Expenses. A Registration Statement
will not count as a Demand Registration until it has become effective.
Except as set forth below in Section 3.1(d), in any registration initiated
as a Demand Registration, Banner or its Permitted Transferee, as the case
may be, will pay or cause to be paid all Registration Expenses in
connection therewith, whether or not the Registration Statement becomes
effective.
(c) Underwriting. If the Holder intends to distribute the
Registrable Common Stock covered by its request by means of an
underwritten offering, it shall so advise the
3
<PAGE> 5
Company as a part of its request made pursuant to Section 3.1(a). The
Holder of the Registrable Common Stock to be registered thereunder may
select and obtain the investment banker or investment bankers and manager
or managers that will administer the offering; provided, however, that
such investment bankers and managers must be reasonably satisfactory to
the Company.
(d) Priority on Demand Registration. If the Underwriter does not
limit the number of Registrable Common Stock to be underwritten in a
Demand Registration, the Company may include securities for its own
account or the account of others in such registration if the underwriters
so agree and if the number of Registrable Common Stock which would
otherwise have been included in such registration and underwriting will
not thereby be limited. In the event that the Company elects to include
securities for its own account or the account of others pursuant to this
Section 3.1(d), then notwithstanding anything to the contrary, the Company
will pay or cause to be paid, the pro rata portion of: (i) any filing fees
for such securities to be registered by the Company; (ii) underwriting
discounts and commissions applicable to the Company's securities; and
(iii) any additional incremental costs, including without limitation,
printing expenses attributable to the offer, sale and registration of the
Company's securities in such Demand Registration.
3.2 Piggy-Back Registration.
(a) If at any time or from time to time during the five-year period
commencing from the date of this Agreement, the Company proposes to file a
Registration Statement under the Securities Act with respect to an
offering for its own account or for the account of others of any class of
equity security (other than a registration relating solely to employee
benefit plans or a registration on any registration form which dos not
include substantially the same information as would be required to be
included in a Registration Statement covering the sale of Registrable
Common Stock), then the Company shall in each case give written notice of
such proposed filing to the Holder of Registrable Common Stock at least
sixty (60) days before the anticipated filing date (the "Piggy-Back
Registration Notice"), and such notice shall offer the Holder the
opportunity to register such Registrable Common Stock as such Holder may
request in writing to the Company within twenty (20) days after the date
of the Piggy-Back Registration Notice (a "Piggy-Back Registration").
(b) Underwriting. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holder as part of the Piggy-Back Registration
Notice. The Company shall have the right to select and obtain the services
of the investment banker or investment bankers and manager or managers
that will administer the offering. The right of a Holder to registration
shall be conditioned upon such Holder's participating in such underwriting
and the inclusion of such Holder's Registrable Common Stock in the
underwriting to the extent provided herein.
4
<PAGE> 6
(c) Subject to the provisions of Section 3.2(d), the Company shall
use its best efforts to cause the managing underwriter or underwriters of
a proposed underwritten offering to commit to the Holder of Registrable
Common Stock who has requested within twenty (20) days of receipt of the
Company's notice to be included in the registration for such offering (the
"Requesting Holder") to include such Registrable Common Stock in such
offering on the same terms and conditions as any similar securities of the
Company included therein; provided, however, that the Company shall not be
required to effect any such registration for any Holder if at the time of
the request such Holder could sell all of the Registrable Common Stock
specified in its request under Rule 144, or in any other transaction that
is exempt from registration under the Securities Act, during the
three-month period following such request.
(d) Priority on Piggy-Back Registration. Notwithstanding any other
division of this Section 3.2, if the underwriter for the Company
determines that market factors require a limitation of the number of
shares to be underwritten, the underwriter may exclude some or all
Registrable Common Stock from such registration and underwriting. The
Company shall so advise the Holder and the number of shares of Registrable
Common Stock to be offered by the Holder pursuant to the Piggy-Back
Registration will be reduced to the extent necessary to reduce the total
number of shares of Common Stock to be included in such offering to the
number recommended by the underwriter(s).
(e) Expenses. In connection with a Piggy-Back Registration, the
Company will pay all of the Registration Expenses, except for the pro rata
portion of: (i) any filing fees attributable to the Holder's Registrable
Common Stock; (ii) underwriting discounts and commissions applicable to
the Holder's Registrable Common Stock; and (iii) any additional
incremental costs, including, without limitation, printing expenses
attributable to the offer, sale and registration of the Holder's
Registrable Common Stock in such Piggy-Back Registration.
3.3 Holdback Agreements.
(a) Registrations on Public Sale or Distribution. To the extent not
inconsistent with applicable law, the Holder agrees not to effect any
public sale or distribution of Registrable Common Stock, including a sale
pursuant to Rule 144 under the Securities Act during the sixty (60) day
period prior to, and during the ninety (90) day period beginning on, the
effective date of a Registration Statement in which shares of its
Registrable Common Stock are registered (except as part of such
registration), if and to the extent requested by the Company or by the
underwriter(s) in the case of an underwritten public offering.
(b) Stop Orders; Suspension of Effectiveness. If, in the case of
either a Demand Registration or a Piggy-Back Registration, a stop order is
imposed or if for any other reason the effectiveness of either a Demand
Registration or Piggy-Back Registration is suspended, then the Holder
agrees to stop distribution of its Common Stock thereunder immediately
upon written notice thereof from the Company.
5
<PAGE> 7
3.4 Registration Procedures. Whenever the Holder has requested that any
Registrable Common Stock be registered pursuant to this Agreement, the Company
will use its best efforts to effect the registration of such Registrable Common
Stock in accordance with the intended method of distribution therefore as
quickly as is reasonably practicable, and in connection with any such request,
the Company will:
(a) in connection with a request pursuant to Section 3.1, prepare
and file with the Commission, not later than ninety (90) days after
receipt of a request to file a Registration Statement with respect to
Registrable Common Stock, a Registration Statement on any form for which
the Company then qualifies and which counsel for the Company shall deem
appropriate and which form shall be available for the registration of such
Registrable Common Stock in accordance with the intended method of
distribution thereof, and use its best efforts to cause such Registration
Statement to become effective; provided that if the Company shall furnish
to the Holder certified resolutions signed by the Chief Executive Officer
of the Company stating that in the good faith judgement of the Board of
Directors it would be significantly disadvantageous to the Company and its
stockholders for such a Registration Statement to be filed on or before
the date filing would be required, the Company shall have an additional
period of not more than sixty (60) days within which to file such
Registration Statement;
(b) in connection with a registration pursuant to Section 3.1,
prepare and file with the Commission such amendments and supplements to
such Registration Statement and the prospectus used in connection
therewith as may be necessary to keep such Registration Statement
effective for a period of not less than one hundred eighty (180) days or
such shorter period which will terminate when all Registrable Common Stock
covered by such Registration Statement have been sold (but not before the
expiration of the ninety (90) day period referred to in Section 4(3) of
the Act and Rule 174 thereunder, if applicable), and comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Common Stock covered by such Registration Statement during
such period in accordance with the intended methods of disposition by the
Holders set forth in such Registration Statement;
(c) furnish to each seller of Registrable Common Stock, prior to
filing a Registration Statement, copies of such Registration Statement as
proposed to be filed, and thereafter such number of copies of such
Registration Statement, each amendment and supplement thereto (in each
case including all exhibits thereto), the prospectus included in such
Registration Statement (including each preliminary prospectus) and such
other documents as such seller may reasonably request in order to
facilitate the disposition of the Registrable Common Stock owned by such
seller;
(d) use its best efforts to register or qualify such Registrable
Common Stock under such other securities or blue sky laws of such
jurisdiction as any seller reasonably requests and do any and all other
acts and things which may be reasonably necessary or advisable to enable
such seller to consummate the disposition in such jurisdiction of the
Registrable Common Stock owned by such seller; provided, that the Company
will not be required to (i) qualify generally to do business in any
jurisdiction where it would not
<PAGE> 8
otherwise be required to qualify but for this paragraph (d), (ii) subject
itself to taxation in any such jurisdiction or (iii) consent to general
service of process in any such jurisdiction;
(e) notify each seller of the Registrable Common Stock, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such Registration Statement contains an untrue
statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein
misleading. The Company will prepare a supplement or amendment to such
prospectus as may be appropriate and use its best efforts to cause such
supplement or amendment to become effective so that, as thereafter
delivered to the purchasers of such Registrable Common Stock, such
prospectus will not contain an untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading;
(f) enter into customary agreements (including an underwriting
agreement in customary form) and take such other actions as are reasonably
required in order to expedite or facilitate the disposition of such
Registrable Common Stock;
(g) make available for inspection by any seller of Registrable
Common Stock, any underwriter participating in any disposition pursuant to
such Registration Statement, and any attorney, accountant or other agent
retained by any such seller or underwriter (collectively, the
"Inspectors"), all financial and other records, pertinent corporate
documents and properties of the Company (collectively, the "Records") as
shall be reasonably necessary to enable them to exercise their due
diligence responsibility, and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such
Inspectors in connection with such Registration Statement. Records which
the Company determines, in good faith, to be confidential and which it
notifies the Inspectors are confidential shall not be disclosed by the
Inspectors unless (i) the disclosure of such records is necessary to avoid
or correct a misstatement or omission in the Registration Statement or
(ii) the release of such Records is ordered pursuant to a subpoena or
other order from a court of competent jurisdiction. Each seller of
Registrable Common Stock agrees that it will, upon learning that
disclosure of such Records is sought in a court of competent jurisdiction,
give notice to the Company and allow the Company, at the Company's
expense, to undertake appropriate action to prevent disclosure of the
Records deemed confidential.
(h) in the event such sale is pursuant to an underwritten offering,
use its best efforts to obtain (i) a "cold comfort" letter from the
Company's independent public accountants in customary form and covering
such matters of the type customarily covered by "cold comfort" letters as
the Holder or the managing underwriter reasonably request and (ii) an
opinion or opinions of counsel for the Company in customary form;
(i) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering a period of twelve (12) months,
7
<PAGE> 9
beginning within three months after the effective date of the Registrable
Statement, which earning statement shall satisfy the provisions of Section
11(a) of the Securities Act; and
(j) cause all such Registrable Common Stock to be listed on each
securities exchange or market on which similar securities issued by the
Company are then listed, provided that the applicable listing requirements
are satisfied.
The Company may require each seller of Registrable Common Stock as to
which any registration is being effected to furnish to the Company such
information regarding the distribution of such securities as the Company may
from time to time reasonably request in writing.
The Holder agrees that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 3.4(e) hereof, such
Holder will forthwith discontinue disposition of Registrable Common Stock
pursuant to the Registration Statement covering such Registrable Common Stock
until such Holder's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 3.4(e) hereof, and, if so directed by the
Company such Holder will deliver to the Company (at the Company's expense) all
copies, other than permanent file copies then in such Holder's possession, of
the prospectus covering such Registrable Common Stock at the time of receipt of
such notice.
3.5 Indemnification and Contribution.
(a) Indemnification by the Company. The Company agrees to indemnify,
to the extent permitted by law, the Holder, its officers, directors and
agents and each Person who controls such Holder (within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act) from
and against any losses, claims, damages, liabilities and expenses
resulting from any untrue statement of material fact contained in any
Registration Statement, prospectus or preliminary prospectus or any
omission of a material fact required to be stated therein or necessary to
make the statements therein (in the case of a prospectus, in the light of
the circumstances under which they were made) not misleading, except
insofar as the same are caused by or contained in any information or
affidavit with respect to such Holder furnished in writing to the Company
by, or on behalf of, such Holder, expressly for inclusion in any
Registration Statement or prospectus.
(b) Indemnification by Holder. In connection with any Registration
Statement in which the Holder is participating, such Holder will furnish
to the Company in writing such information and affidavits with respect to
such Holder as the Company reasonably requests for use in connection with
any such Registration Statement or prospectus and agrees to indemnify, to
the extent permitted by law, the Company, its directors and officers and
each Person who controls the Company (within the meaning of Section 14 of
the Securities Act or Section 20 of the Exchange Act) from and against any
losses, claims, damages, liabilities and expenses resulting from any
untrue statement of a material fact or any omission or a material fact
required to be stated in the Registration
8
<PAGE> 10
Statement or preliminary, final or summary prospectus or any amendment
thereof or supplement thereto, or necessary to make the statements therein
(in the case of a preliminary, final or summary prospectus, in the light
of the circumstances under which they were made) not misleading to the
extent, but only to the extent, that such untrue statement or omission is
contained in any information or affidavit with respect to such Holder so
furnished in writing by, or on behalf of, such Holder expressly for
inclusion in any Registration Statement or prospectus.
(c) Conduct of Indemnification Proceedings. Any person entitled to
indemnification hereunder agrees promptly to give written notice to the
indemnifying party after the receipt of such person of any written notice
of the commencement of any action, suit, proceeding or investigation or
threat thereof made in writing for which such person will claim
indemnification or contribution pursuant to this Agreement and, unless in
the reasonable judgment of such indemnified party a conflict of interest
may exist between such indemnified party and the indemnifying party with
respect to such claim, permit the indemnifying party to participate in and
assume the defense of such claim with counsel reasonably satisfactory to
such indemnified party. If the indemnifying party is not entitled to, or
elects not to, assume the defense of a claim, it will not be obligated to
pay the fees and expenses of more than one counsel with respect to such
claim, unless in the reasonable judgment of such indemnified party a
conflict of interest may exist between such indemnified party and any
other of such indemnified parties with respect to such claim, in which
event the indemnifying party shall be obligated to pay the reasonable fees
and expenses of such additional counsel or counsels. The indemnifying
party will not be subject to any liability for any settlement made without
its consent, which consent shall not be unreasonably withheld.
(d) Contribution. If the indemnification provided for in this
Section 3.5 from the indemnifying party is unavailable to an indemnified
party hereunder in respect to any losses, claims, damages, liabilities or
expenses referred to herein, then the indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid
or payable to such indemnified party as a result of such losses, claims,
damages, liabilities or expenses in such proportion as is appropriate to
reflect the relative fault of the indemnifying party and indemnified
parties in connection with the actions which resulted in such losses
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative fault of such indemnifying party
and indemnified parties shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged
untrue statement of a material fact or omission or alleged omission to
state a material fact, has been made by, or related to information
supplied by, such indemnifying party and indemnified parties, and the
parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such action. The amount paid or payable by a party
as a result of the losses, claims, damages, liabilities and expenses
referred to above shall be deemed to include, subject to the limitations
set forth in Section 3.5(c), any legal or other fees or expenses
reasonably incurred by such party in connection with any investigation or
proceeding.
9
<PAGE> 11
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 3.5(d) were determined by pro rata
allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately
preceding paragraph. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be
entitled to contribution from any person.
3.6 Participation in Underwritten Registrations. The Holder may not
participate in any underwritten registration hereunder unless such Holder (a)
agrees to sell its Registrable Common Stock on the basis provided in any
underwriting arrangements approved by the persons entitled hereunder to approve
such arrangements and (b) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements.
3.7 Rule 144. The Company covenants that it will file the reports required
to be filed by it under the Exchange Act and the rules and regulations adopted
by the Commission thereunder; and it will take such further action as any Holder
may reasonably request, all to the extent required from time to time to enable
such Holder to sell Registrable Common Stock without registration under the
Securities Act within the limitation of the exemptions provided by (a) Rule 144,
or (b) any similar rule or regulation hereafter adopted by the Commission. Upon
the request of any Holder, the Company will deliver to such Holder a written
statement as to whether it has complied with such requirements.
ARTICLE IV
MISCELLANEOUS
4.1 Inconsistent Agreements. The Company will not hereafter enter into any
agreement with respect to its securities which is inconsistent with this
Agreement. The Company has not previously entered into any agreement with
respect to any of its securities granting any registration rights to any person.
4.2 Amendments and Waivers. Except as otherwise provided herein, the
provisions of this Agreement may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given
unless the Company has obtained the written consent of Holders of at least a
majority of the Registrable Common Stock which are then outstanding affected by
such amendment, modification, supplement, waiver or departure.
4.3 Notices. All notices, requests, demands and other communications under
this Agreement must be in writing and will be deemed duly given, unless
otherwise expressly indicated to the contrary, (i) when personally delivered,
(ii) upon receipt of a telephonic facsimile transmission with confirmed
telephonic transmission answer back, (iii) three (3) days after having been
deposited in the United States Mail, certified or registered, return receipt
required, postage prepaid, or (iv) business day after having been dispatched by
a nationally recognized overnight courier service, addressed to the parties or
their permitted assigns at the
10
<PAGE> 12
following addresses (or at such other address or number as is given in writing
by any of the parties to the others) as follows:
If to the Company: The Fairchild Corporation
45025 Aviation Drive
Suite 400
Dulles, VA 20166-7516
Attn: Senior Vice President
If to Banner: Banner Aerospace, Inc.
45025 Aviation Drive
Suite 300
Dulles, VA 20166-7556
Attn: Senior Vice President
4.4 Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their successors
and permitted assigns.
4.5 Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
4.6 Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
4.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
4.8 Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions contained herein shall not be in any way impaired
thereby, it being intended that all of the rights and privileges of the parties
to this Agreement shall be enforceable to the fullest extent permitted by law.
4.9 Entire Agreement. This Agreement constitutes the entire agreement with
respect to the subject matter hereof and supersedes all prior written and oral
agreements with respect thereto.
11
<PAGE> 13
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
THE FAIRCHILD CORPORATION
By:
------------------------------------------------
Donald E. Miller, Sr. Vice President
BANNER AEROSPACE, INC.
By:
------------------------------------------------
Eugene W. Juris, Vice President and CFO
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
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