<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --------- SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1998
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 Commission File Number 1-10561
BANNER AEROSPACE, INC.
------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 95-2039311
- --------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
45025 AVIATION DRIVE, SUITE 300
DULLES, VA 20166-7556
- --------------------------------- --------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703) 478-5790
--------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Title of Class February 26, 1999
-------------- -----------------
Common Stock, $1.00 Par Value 21,541,532
AMENDMENT
The purpose of this Amendment is to amend Item 1 and 2 of Part I of the
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 1998, primarily to reclassify the loss it recorded from the
disposition of a subsidiary from a separate classification below operating
income to within cost of goods sold, as well as include the Company's current
Year 2000 disclosures in Management's Discussion and Analysis.
<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 December 31, 1998 and March 31, 1998.......................... 3-4
Consolidated Statements of Income and Comprehensive Income for the Nine Months Ended
December 31, 1998 and 1997...................................................................... 5
Consolidated Statements of Income and Comprehensive Income for the Three Months Ended
December 31, 1998 and 1997...................................................................... 6
Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 1998 and 1997...... 7
Notes to Summarized Financial Information....................................................... 8-11
Item 2: Management's Discussion and Analysis of Results of Operations and Financial Condition........ 12-21
Part II. Other Information
Item 6: Exhibits and Reports on Form 8-k............................................................. 22
</TABLE>
Page 2 of 24
<PAGE> 3
PART I
ITEM 1 -- FINANCIAL STATEMENTS
A. Summarized Financial Information
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND MARCH 31, 1998
<TABLE>
<CAPTION>
ASSETS
(In thousands) (unaudited)
December 31, March 31,
CURRENT ASSETS: 1998 1998
- -------------- -------------------- --------------------
<S> <C> <C>
Cash $ 1,633 $ ---
Marketable securities 214,596 ---
Receivables, less allowances of $470 at December 31, 1998 and
$2,881 at March 31, 1998 18,334 48,046
Inventories 80,853 122,236
Other current assets 26,374 29,741
-------------------- --------------------
341,790 200,023
-------------------- --------------------
PROPERTY, PLANT AND EQUIPMENT (AT COST):
- ---------------------------------------
Land 15 15
Buildings and improvements 2,020 2,430
Machinery and equipment 6,561 8,056
-------------------- --------------------
8,596 10,501
Accumulated depreciation (5,164) (6,008)
-------------------- --------------------
3,432 4,493
-------------------- --------------------
OTHER ASSETS:
- ------------
Investments 39,110 206,626
Cost in excess of net tangible assets of purchased
businesses, net 9,331 12,292
Other 1,483 1,776
-------------------- --------------------
49,924 220,694
-------------------- --------------------
TOTAL ASSETS $ 395,146 $ 425,210
==================== ====================
</TABLE>
The accompanying notes to summarized financial information are an integral
part of these consolidated balance sheets.
Page 3 of 24
<PAGE> 4
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND MARCH 31, 1998
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands) (unaudited)
December 31, March 31,
CURRENT LIABILITIES: 1998 1998
- ------------------- -------------------- --------------------
<S> <C> <C>
Accounts payable $ 7,288 $ 27,431
Accrued salaries 1,500 2,568
Income taxes 8,234 8,446
Other current liabilities 38,511 36,180
-------------------- --------------------
55,533 74,625
-------------------- --------------------
LONG-TERM LIABILITIES:
- ---------------------
Long-term debt 50,600 48,900
Deferred federal and state income taxes 38,784 41,194
Other long-term liabilities 2,830 2,381
-------------------- --------------------
92,214 92,475
-------------------- --------------------
TOTAL LIABILITIES 147,747 167,100
-------------------- --------------------
STOCKHOLDERS' EQUITY:
- ---------------------
Preferred stock, $0.01 par value per share, 10,000 shares
authorized, 4,100 shares issued, 3,493 shares outstanding at
December 31, 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, 23,732 shares issued, 21,485 shares outstanding at
December 31, 1998 and 23,642 shares issued, 21,395 shares
outstanding at March 31, 1998 23,732 23,642
Less: treasury stock at cost, 2,247 common shares and 607
preferred shares held at December 31, 1998 and 2,247 common
shares held at March 31, 1998 (28,042) (23,331)
Paid-in capital 152,906 150,460
Retained earnings 79,143 93,046
Cumulative other comprehensive income 19,619 14,255
-------------------- --------------------
TOTAL STOCKHOLDERS' EQUITY 247,399 258,110
-------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 395,146 $ 425,210
==================== ====================
</TABLE>
The accompanying notes to summarized financial information are an integral
part of these consolidated balance sheets.
Page 4 of 24
<PAGE> 5
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE NINE (9) MONTHS ENDED DECEMBER 31, 1998 AND 1997
The consolidated income statements for the nine (9) months ended December 31,
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 Nine Months Ended
(In thousands, except per share data) December 31,
--------------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Net sales $ 152,404 $ 359,458
Cost of goods sold 139,666 256,085
-------------- --------------
GROSS PROFIT 12,738 103,373
Selling, general and administrative expenses 26,366 77,601
---------------- -----------------
OPERATING INCOME (LOSS) (13,628) 25,772
Investment income 1,197 ---
Interest expense, net 5,255 12,178
---------------- -----------------
INCOME/(LOSS) BEFORE TAXES (17,686) 13,594
Provision/(benefit) for taxes (5,750) 5,300
---------------- -----------------
NET INCOME/(LOSS) $ (11,936) $ 8,294
================= =================
Preferred stock dividends 1,966 1,377
---------------- -----------------
NET INCOME/(LOSS) AVAILABLE FOR COMMON
SHAREHOLDERS $ (13,902) $ 6,917
================ =================
Basic earnings/(loss) per common share $ (0.65) $ 0.30
================ =================
Diluted earnings/(loss) per common share $ (0.65) $ 0.29
================ =================
Weighted average number of common shares - basic 21,458 23,424
================ =================
Weighted average number of common shares - diluted 21,458 23,830
================ =================
Net income/(loss) $ (11,936) $ 8,294
Other comprehensive income:
Unrealized holding gain on available-for-sale securities,
net of tax provision of $3,429 5,364 ---
---------------- -----------------
Comprehensive income/(loss) $ (6,572) $ 8,294
================ =================
</TABLE>
The accompanying notes to summarized financial information are an integral
part of these consolidated income statements.
Page 5 of 24
<PAGE> 6
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE (3) MONTHS ENDED DECEMBER 31, 1998 AND 1997
The consolidated income statements for the three (3) months ended December 31,
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) December 31,
----------------------------------------
1998 1997
---------------- -----------------
<S> <C> <C>
Net sales $ 46,839 $ 119,614
Cost of goods sold 56,529 83,745
---------------- -----------------
GROSS PROFIT (9,690) 35,869
Selling, general and administrative expenses 7,353 28,155
---------------- -----------------
OPERATING INCOME (LOSS) (17,043) 7,714
Investment loss (1,372) ---
Interest expense, net 1,994 4,401
---------------- -----------------
INCOME/(LOSS) BEFORE TAXES (20,409) 3,313
Provision/(benefit) for taxes (6,410) 1,290
---------------- -----------------
NET INCOME/(LOSS) $ (13,999) $ 2,023
================ =================
Preferred stock dividends 603 689
---------------- -----------------
NET INCOME/(LOSS) AVAILABLE FOR COMMON SHAREHOLDERS $ (14,602) $ 1,334
================ =================
Basic earnings/(loss) per common share $ (0.68) $ 0.06
================ =================
Diluted earnings/(loss) per common share $ (0.68) $ 0.06
================ =================
Weighted average number of common shares - basic 21,484 23,424
================ =================
Weighted average number of common shares - diluted 21,484 23,909
================ =================
Net income/(loss) $ (13,999) $ 2,023
Other comprehensive income:
Unrealized holding gain on available-for-sale securities, net
of tax provision of $19,436 30,400 ---
---------------- -----------------
Comprehensive income $ 16,401 $ 2,023
================ =================
</TABLE>
The accompanying notes to summarized financial information are an integral
part of these consolidated income statements.
Page 6 of 24
<PAGE> 7
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE (9) MONTHS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
(unaudited)
For the Nine Months Ended
(In thousands) December 31,
-----------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- ------------------------------------
Net income/(loss) $ (11,936) $ 8,294
Adjustments to reconcile net income to net cash (used for)
operating activities--
Depreciation and amortization 1,766 4,280
Loss on disposition of subsidiary 13,500 ---
Loss on sale of investment securities 63 ---
Change in receivables 18,442 (26,182)
Change in inventories (20,641) (46,057)
Change in payables and accrued liabilities (26,115) 1,480
Change in other assets and liabilities 10,017 (5,143)
----------------- -----------------
Net cash (used for) operating activities (14,904) (63,328)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- ------------------------------------
Proceeds from disposition of subsidiary 60,397 ---
Acquisition of investment securities (42,481) ---
Proceeds from sale of investment securities 2,576 ---
Acquisition of property, plant and equipment (1,517) (3,964)
----------------- -----------------
Net cash provided by (used for) investing activities 18,975 (3,964)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- ------------------------------------
Net borrowings of revolver 1,700 65,300
Repayment of subordinated loan --- (28,000)
Repayment of term loan --- (3,850)
Repayments on other debt --- (233)
Issuance of preferred stock --- 33,877
Repurchase of preferred stock (4,711) ---
Proceeds from exercise of stock options 573 198
----------------- -----------------
Net cash provided by (used for) financing activities (2,438) 67,292
----------------- -----------------
NET CHANGE IN CASH 1,633 ---
CASH, BEGINNING OF PERIOD --- ---
----------------- -----------------
CASH, END OF PERIOD $ 1,633 $ ---
================= =================
</TABLE>
The accompanying notes to summarized financial information are an integral
part of these consolidated statements of cash flows.
Page 7 of 24
<PAGE> 8
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO SUMMARIZED FINANCIAL INFORMATION
DECEMBER 31, 1998 AND 1997 (In
thousands, except share data, unless otherwise noted)
The information furnished in this Quarterly Report on Form 10-Q for the
interim periods ended December 31, 1998 and 1997 reflect 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 periods.
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 Annual Report on Form 10-K for
the fiscal year ended March 31, 1998.
1) Earnings Per Common Share
The following is a reconciliation of the computations of basic earnings per
common share and diluted earnings per common share for the nine and three months
ended December 31, 1998 and 1997 in accordance with Statement of Financial
Accounting Standards No. 128 "Earnings per Share" (SFAS 128).
<TABLE>
<CAPTION>
For the Nine Months Ended
December 31,
-------------------------------------
BASIC EARNINGS (LOSS) PER COMMON SHARE: 1998 1997
---------------- ------------------
<S> <C> <C>
Net income (loss) available for common shareholders $ (13,902) $ 6,917
================ ==================
Weighted average common shares outstanding 21,458 23,424
================ ==================
Basic earnings (loss) per common share $ (0.65) $ 0.30
================ ==================
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Net income (loss) available for common shareholders $ (13,902) $ 6,917
================ ==================
Weighted average common shares outstanding 21,458 23,424
Incremental shares due to assumed exercise and repurchase of stock options --- 406
================ ==================
21,458 23,830
================ ==================
Diluted earnings (loss) per common share $ (0.65) $ 0.29
================ ==================
</TABLE>
For the nine months ended December 31, 1998, 3,895,042 weighted average
shares outstanding of preferred stock and stock options to purchase 368,205
shares of common stock were excluded from the diluted earnings per common share
computation due to the net loss for the period. For the nine months ended
December 31, 1997, 3,810,000 weighted average shares outstanding of preferred
stock were excluded from the calculation of diluted earnings per common share,
as the effects would be antidilutive. Likewise, for the nine months ended
December 31, 1997, outstanding stock options to purchase 45,000 shares of common
stock were not included in the computation of diluted earnings per common share
because the exercise price was greater than the average market price of common
shares for the period.
Page 8 of 24
<PAGE> 9
<TABLE>
<CAPTION>
For the Three Months Ended
December 31,
--------------------------------------
BASIC EARNINGS (LOSS) PER COMMON SHARE: 1998 1997
----------------- ------------------
<S> <C> <C>
Net income (loss) available for common shareholders $ (14,602) $ 1,334
================= ==================
Weighted average common shares outstanding 21,484 23,424
================= ==================
Basic earnings (loss) per common share $ (0.68) $ 0.06
================= ==================
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Net income (loss) available for common shareholders $ (14,602) $ 1,334
================= ==================
Weighted average common shares outstanding 21,484 23,424
Incremental shares due to assumed exercise and repurchase of stock options --- 485
================= ==================
21,484 23,909
================= ==================
Diluted earnings (loss) per common share $ (0.68) $ 0.06
================= ==================
</TABLE>
For the three months ended December 31, 1998, 3,803,610 weighted average
shares outstanding of preferred stock and stock options to purchase 238,398
shares of common stock were excluded from the computation of diluted earnings
per common share due to the net loss for the period. For the three months ended
December 31, 1997, 3,810,000 weighted average shares outstanding of preferred
stock were excluded from the calculation of diluted earnings per common share,
as the effects would be antidilutive. Likewise, for the three months ended
December 31, 1997, outstanding stock options to purchase 5,000 shares of common
stock were not included in the computation of diluted earnings per common share
because the exercise price was greater than the average market price of common
shares for the period.
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 at any time into one share of common stock;
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.
On November 16, 1998, the Company repurchased 606,822 shares of its preferred
stock from a shareholder. The aggregate purchase price paid by the Company was
approximately $4.7 million, or $7.75 per share.
2) Dispositions
On December 31, 1998 (the "Closing Date"), the Company consummated the sale
of all the issued and outstanding shares of common stock, par value $1.00 per
share (the "Solair Shares"), of Solair, Inc. ("Solair") to Kellstrom Industries,
Inc. ("Kellstrom") in exchange for approximately $57.0 million in cash and a
warrant (the "Kellstrom Warrant") to purchase 300,000 shares of Kellstrom common
stock, par value $0.001 per share (the "Kellstrom Shares"). The purchase price
for the Solair Shares is based on the consolidated net worth of Solair as of the
Closing Date, subject to certain adjustments. The Kellstrom Warrant is
exercisable for a term of four years at an exercise price of $27.50. Based on
the number of shares of common stock of Kellstrom issued and outstanding as of
December 31, 1998, the Kellstrom Shares would represent, upon issuance,
approximately 0.025% of the then issued and outstanding shares of Kellstrom.
In December 1998, the Company recorded a pre-tax loss of approximately
$19.3 million on the sale of Solair. This loss was included in cost of goods
sold as it was primarily attributable to the bulk sale of inventory at prices
below the carrying amount of the inventory. Gross proceeds from the sale totaled
approximately $60.4 million. Approximately $50.0 million of the gross proceeds
was used to pay down the Company's revolver balance. A $5.8 million tax benefit
was realized from the transaction, resulting in an after-tax loss of
approximately $13.5 million, which is included in the net loss available for
common shareholders for the three and nine months ended December 31, 1998.
Page 9 of 24
<PAGE> 10
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 group") 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 group
disposition"). In fiscal 1999, the final closing date balance sheet was
completed with no change in purchase price. The remaining investment in
AlliedSignal Inc. common stock has been accounted for as a current
available-for-sale security at December 31, 1998 (previously classified as
non-current) and the Company recorded in stockholders' equity unrealized holding
gains of $20.9 million or $44.31 per share, net of tax benefits, from the
appreciation since January 13, 1998 in the market value of the AlliedSignal Inc.
common stock.
On January 2, 1998, the Company disposed of BAI, Inc. ("BAI") through a
stock purchase agreement. The Company did not realize a material gain or loss on
the transaction.
The following unaudited pro forma table illustrates consolidated net sales,
operating income, net income, net income (loss) available for common
shareholders and earnings (loss) per common share of the Company's operations,
on a pro forma basis for the nine and three months ended December 31, 1998, to
give effect to the sale of Solair. Additionally, the 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 nine and three months ended December 31, 1997, to
give effect to the sale of Solair, the hardware group disposition and the
disposition of BAI. The unaudited pro forma consolidated financial information
is based on the historical financial information of the Company and is presented
for informational purposes only and is not necessarily indicative of what
earnings and results of operations would have been had the sale of Solair, the
hardware group disposition and the disposition of BAI occurred at the beginning
of the periods presented, nor is such information intended necessarily to be
indicative of the future results of operations.
UNAUDITED SUPPLEMENTAL PRO FORMA INFORMATION
<TABLE>
<CAPTION>
For the Nine Months Ended For the Three Months Ended
December 31, December 31,
--------------------------------- ----------------------------------
1998 1997 1998 1997
--------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 105,910 $ 112,118 $ 34,955 $ 34,788
=============== =============== ================ ================
Operating income $ 5,974 $ 7,620 $ 1,759 $ 1,714
=============== =============== ================ ================
Net income $ 4,578 $ 4,648 $ 41 $ 1,046
=============== =============== ================ ================
Net income (loss) available for common
shareholders $ 2,612 $ 3,072 $ (562) $ 357
=============== =============== ================ ================
Earnings (loss) per common share - $
basic 0.12 $ 0.13 $ (0.03) $ 0.02
=============== =============== ================ ================
Earnings (loss) per common share -
diluted $ 0.12 $ 0.13 $ (0.03) $ 0.01
=============== =============== ================ ================
</TABLE>
Page 10 of 24
<PAGE> 11
3) Related Party Transactions
On January 12, 1999, the Company announced that it had reached agreement
for a stock-for-stock merger with a subsidiary of The Fairchild Corporation
("Fairchild"), at an exchange ratio determined by dividing $11.00 for each of
the Company's par value $1.00 common stock, by the average closing price of
Fairchild's Class A Common Stock, over a 20-day trading period, ending on the
third trading day before the merger. The ratio is subject to a "collar" such
that no more than 0.7885, and no less than 0.6452, of a share of Fairchild Class
A Common Stock, may be exchanged for a share of the Company's common stock. The
price is also subject to adjustment on a per share, after-tax basis, to reflect
an increase or decrease in the value of certain shares of AlliedSignal Inc.
common stock owned by the Company, within a determined range. On January 15,
1999, Fairchild filed a combined Registration Statement, including the Company's
shareholder proxy statement. Immediately prior to the merger, each share of
Series A 7.5% convertible preferred stock of the Company will convert into one
share of the Company's common stock.
On July 7, 1998, the Company's Board of Directors announced the Company's
intention to purchase up to 2.5 million shares of Fairchild Class A Common Stock
through open market purchases, to be made from time to time depending on the
market price of Fairchild stock, and where required 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. As of December 31, 1998, the
Company held 1,239,750 shares of Fairchild stock at an average purchase price of
$17.83. At December 31, 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 $1.6 million or $15.75 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. Prior to the expiration of the Exchange Offer, 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%.
4) Credit Agreement
On December 31, 1998, the Company amended the Second Amended and Restated
Credit Agreement dated as of December 12, 1996. The amendment allows the Company
(i) to make certain additional investments in marketable securities, (ii) to
incur additional indebtedness, (iii) and to make subordinated loans to Fairchild
for up to $30,000. Also, the amendment modified the prepayment and commitment
reduction requirements. At December 31, 1998, the Company was in compliance with
all covenants under the Second Amended and Restated Credit Agreement, as
amended. Substantially all of the Company's assets are pledged as collateral
under the amended Second Amended and Restated Credit Agreement. In February
1999, the Company agreed to enter into a subordinated loan agreement with
Fairchild whereby the Company agreed to loan up to $30,000 to Fairchild, on an
unsecured basis.
5) Contingency
On January 12, 1999, the Company received a letter from AlliedSignal Inc.
making indemnification claims against the Company for $18.9 million in
connection with the hardware group disposition. Although the Company believes
that the amount of the claim is far in excess of any amount that AlliedSignal
Inc. is entitled to recover from the Company, the Company is in the process of
reviewing such claims and is unable to predict the ultimate outcome of such
matter.
Page 11 of 24
<PAGE> 12
PART I
ITEM 2 - MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
NINE (9) MONTHS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997 Increase/(Decrease)
---------------------- ----------------------- ----------------------
(In thousands) $ % $ % $ %
---------- --------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales 152,404 100.0 359,458 100.0 (207,054) (57.6)
Cost of goods sold 139,666 91.6 256,085 71.2 (116,419) (45.5)
---------- --------- ---------- ---------- --------- ---------
Gross profit 12,738 8.4 103,373 28.8 (90,635) (87.7)
Selling, general & administrative
expenses 26,366 17.3 77,601 21.6 (51,235) (66.0)
---------- --------- ---------- ---------- --------- ---------
Operating income (loss) (13,628) (8.9) 25,772 7.2 (39,400) N/A
Investment income 1,197 0.8 --- --- 1,197 100.0
Interest expense, net 5,255 3.5 12,178 3.4 (6,923) (56.8)
---------- --------- ---------- ---------- --------- ---------
Income (loss) before taxes (17,686) (11.6) 13,594 3.8 (31,280) N/A
Provision (benefit) for taxes (5,750) (3.8) 5,300 1.5 (11,050) N/A
---------- --------- ---------- ---------- --------- ---------
Net income (loss) (11,936) (7.8) 8,294 2.3 (20,230) N/A
========== ========= ========== ========== ========= =========
</TABLE>
Operating Results
Net sales for the nine months ended December 31, 1998 decreased $207.1
million, or 57.6%, from the comparable prior period. This decrease was the
result of the hardware group disposition, which accounted for approximately 50%
of sales (see Note 2 in the notes to summarized financial information), the
effect of which is presented below. Sales of the rotables group decreased
compared to the prior period; however, the decrease was offset partially by
incremental sales from the exclusive three-year agreement between Solair and
Delta Air Lines ("Delta"), which commenced in August 1997 ("Delta Contract").
Sales of the engine group also decreased compared to the prior period, due
primarily to lower engine sales, partially offset by an increase in turbine
parts and engine management sales. The lower engine sales are attributable
partly to a shift in the marketplace from customers purchasing engines to
customers leasing engines, due to upcoming regulatory changes. Excluding the
results of Solair, net sales for the nine months ended December 31, 1998 would
have been $105.9 million.
Gross profit for the nine months ended December 31, 1998 was $12.7 million
or 8.4%. Included in cost of goods sold was a charge of $19.3 million recognized
on the sale of Solair. This charge was attributable primarily to the bulk sale
of inventory at prices below the carrying amount of the inventory. Excluding
this charge, gross profit for the nine months ended December 31, 1998 would have
been $32.1 million or 21.0%. Gross profit for the nine months ended December 31,
1997 was $103.4 million or 28.8%. The decrease in gross profit percentage from
21.0% in the current period compared to 28.8% for the prior period was
attributable primarily to the hardware group disposition, which typically earned
higher margins than the engine and rotables groups. Excluding the results of the
hardware group, gross profit for the nine months ended December 31, 1997 would
have been $36.9 million or 22.4%.
Selling, general and administrative ("SG&A") expenses decreased $51.2
million, or 66.0%, for the nine months compared to the prior year. Excluding the
results of the hardware group and BAI as described below, SG&A expenses would
have been $28.4 million, or 17.3% of sales, compared to $26.4 million, or 17.3%
of sales.
Page 12 of 24
<PAGE> 13
Operating income for the nine months ended December 31, 1998 decreased
$39.4 million from the comparable prior period, of which $19.3 million was a
charge attributable primarily to the bulk sale of inventory at prices below the
carrying amount of the inventory, and $17.3 million to the divestiture of the
hardware group. Excluding the charge related to the sale of Solair in the
current period, and the results of the hardware group in the prior period,
operating income would have decreased $2.8 million, or 32.7%, from the
comparable period. This decrease was attributable primarily to lower sales and
an overall decrease in gross margins. Excluding the results of Solair, operating
income for the nine months ended December 31, 1998 would have been $6.0 million.
The following unaudited pro forma table illustrates consolidated sales and
operating income of the Company's operations, on a pro forma basis, for the nine
months ended December 31, 1997, to give effect to the hardware group 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 nine months ended December 31, 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 group 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.
UNAUDITED SUPPLEMENTAL PRO FORMA INFORMATION
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
(In thousands) Amount Percentage
--------------- -------------
<S> <C> <C>
Net sales $ 164,916 100.0 %
Cost of goods sold 128,007 77.6
--------------- -------------
Gross profit 36,909 22.4
Selling, general and
administrative
expenses 28,449 17.3
--------------- -------------
Operating income $ 8,460 5.1 %
=============== =============
</TABLE>
Investment Income
Investment income for the nine months ended December 31, 1998 amounted to
$1.2 million. The Company recorded no investment income in the comparable prior
period. For the nine months ended December 31, 1998, the Company recorded $2.3
million in dividend income mainly as a result of shares of AlliedSignal common
stock received from the hardware group disposition, and a $1.0 million loss
related to the sale and subsequent marking to market of calls sold on the
investment in AlliedSignal common stock. Through the end of December 1998, the
Company had sold calls on over 2.75 million shares of its investment in
AlliedSignal common stock for proceeds aggregating approximately $34.7 million.
Interest Expense
Interest expense for the nine months ended December 31, 1998 decreased $6.9
million or 56.8% compared to the prior period. This decrease was the result of a
decrease from $171.0 million in the average outstanding debt balance during the
prior period, to $84.0 million in the current period, as well as an overall
decrease in the effective interest rate between the periods. The Company
utilized approximately $194 million of the proceeds received from the hardware
group 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.
Page 13 of 24
<PAGE> 14
Provision/(Benefit) for Taxes
The benefit for taxes for the nine months ended December 31, 1998 amounted
to $5.8 million due primarily to the $5.8 million tax benefit on the $19.3
million pre-tax loss from the sale of Solair. The provision for taxes for the
nine months ended December 31, 1997 amounted to $5.3 million. The effective tax
rate for the nine months ended December 31, 1998 and 1997 was a benefit of 32.5%
and a provision of 39.0%, respectively. The decrease in the effective tax rate
for the nine months ended December 31, 1998 was due to the 70% exclusion
permitted on dividend income.
Net Income (Loss)
For the nine months ended December 31, 1998 and 1997, the Company recorded
a net loss available to common shareholders of $13.9 million, or $0.65 basic
earnings per common share, and net income available to common shareholders of
$6.9 million, or $0.30 basic earnings per common share, respectively.
Inflation has had minimal effect on the Company's current operations and
the Company believes that this trend will continue in the immediate future.
Comprehensive Income (Loss)
Comprehensive income (loss) for the nine months ended December 31, 1998
included unrealized holding gains in the fair market value of the AlliedSignal
common stock, which was received from the hardware group disposition, and net
unrealized holding losses from other available-for-sale securities. The fair
market value of available-for-sale securities increased by $5.4 million, net of
taxes, for the nine months ended December 31, 1998.
Page 14 of 24
<PAGE> 15
THREE (3) MONTHS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997 Increase/(Decrease)
---------------------- ----------------------- ----------------------
(In thousands) $ % $ % $ %
---------- --------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales 46,839 100.0 119,614 100.0 (72,775) (60.8)
Cost of goods sold 56,529 120.7 83,745 70.0 (27,216) (32.5)
---------- --------- ---------- ---------- --------- ---------
Gross profit (9,690) (20.7) 35,869 30.0 (45,559) N/A
Selling, general & administrative
expenses 7,353 15.7 28,155 23.5 (20,802) (73.9)
---------- --------- ---------- ---------- --------- ---------
Operating income (loss) (17,043) (36.4) 7,714 6.5 (24,757) N/A
Investment (loss) (1,372) (2.9) --- --- (1,372) (100.0)
Interest expense, net 1,994 4.3 4,401 3.7 (2,407) (54.7)
---------- --------- ---------- ---------- --------- ---------
Income (loss) before taxes (20,409) (43.6) 3,313 2.8 (23,722) N/A
Provision (benefit) for taxes (6,410) (13.7) 1,290 1.1 (7,700) N/A
---------- --------- ---------- ---------- --------- ---------
Net income (loss) (13,999) (29.9) 2,023 1.7 (16,022) N/A
========== ========= ========== ========== ========= =========
</TABLE>
Operating Results
Net sales for the three months ended December 31, 1998 decreased $72.8
million, or 60.8%, from the comparable prior period. This decrease was the
result of the hardware group disposition, which accounted for approximately 50%
of sales (see Note 2 in the notes to summarized financial information), the
effect of which is presented below. Sales of the rotables group decreased as a
result of a decrease in sales from the Delta Contract compared to the prior
period. Sales of the engine group, however, increased compared to the prior
period primarily due to several engine sales and engine sale-leaseback
transactions, coupled with an overall increase in turbine parts sales. Excluding
the results of Solair, net sales for the three months ended December 31, 1998
would have been $35.0 million.
Gross profit for the three months ended December 31, 1998 was a loss of
$9.7 million or 20.7%. Included in cost of goods sold was a charge of $19.3
million recognized on the sale of Solair. This charge was attributable primarily
to the bulk sale of inventory at prices below the carrying amount of the
inventory. Excluding this charge, gross profit for the three months ended
December 31, 1998 would have been $9.6 million or 20.6%. Gross profit for the
three months ended December 31, 1997 was $35.9 million or 30.0%. The decrease in
gross profit percentage from 20.6% in the current period compared to 30.0% for
the prior period was attributable primarily to the hardware group disposition,
which typically earned higher margins than the engine and rotables groups.
Excluding the results of the hardware group, gross profit for the three months
ended December 31, 1997 would have been $13.3 million or 24.1%. The decrease in
the current period is due primarily to the deferred profit accounting from
engine sale-leaseback transactions whereby the gross profit is deferred over the
life of the lease.
SG&A expenses decreased $20.8 million or 73.9% for the three months
compared to the prior year. Excluding the results of the hardware group and BAI
as described below, SG&A expenses would have been $10.3 million, or 18.7% of
sales, compared to $7.4 million, or 15.7% of sales. The decrease in SG&A
expenses represents reduced employment costs in the rotables group compared to
the prior year.
Operating income for the three months ended December 31, 1998 decreased
$24.8 million from the comparable prior period, of which $19.3 million was a
charge attributable primarily to the bulk sale of inventory at prices below the
carrying amount of the inventory, and $4.7 million to the divestiture of the
hardware group. Excluding the charge related to the sale of Solair in the
current period, and the results of the hardware group in the prior period,
operating income would have decreased $0.7 million, or 24.0%, from the
comparable period. This decrease was attributable primarily to lower sales and
an overall decrease in gross margins. Excluding the actual operating results
Page 15 of 24
<PAGE> 16
of Solair for the period prior to its disposition, operating income for the
three months ended December 31, 1998 would have been $1.8 million.
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 December 31, 1997, to give effect to the hardware group 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 December 31, 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 group 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.
UNAUDITED SUPPLEMENTAL PRO FORMA INFORMATION
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
(In thousands) Amount Percentage
--------------- -------------
<S> <C> <C>
Net sales $ 54,940 100.0%
Cost of goods sold 41,686 75.9
--------------- -------------
Gross profit 13,254 24.1
Selling, general and
administrative
expenses 10,257 18.7
--------------- -------------
Operating income $ 2,997 5.4%
=============== =============
</TABLE>
Investment Loss
Investment loss for the three months ended December 31, 1998 amounted to
$1.4 million. The Company recorded no investment income or loss in the
comparable prior period. For the three months ended December 31, 1998, the
Company recorded $0.8 million in dividend income mainly as a result of shares of
AlliedSignal common stock received from the hardware group disposition, and a
$2.1 million loss related to the sale and subsequent marking to market of calls
sold on the investment in AlliedSignal common stock.
Interest Expense
Interest expense for the three months ended December 31, 1998 decreased
$2.4 million or 54.7% compared to the prior period. This decrease was the result
of a decrease from $184.0 million in the average outstanding debt balance during
the prior period, to $105.0 million in the current period, as well as an overall
decrease in the effective interest rate between the periods. The Company
utilized approximately $194 million of the proceeds received from the hardware
group 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/(Benefit) for Taxes
The benefit for taxes for the three months ended December 31, 1998 amounted
to $6.4 million due primarily to the $5.8 million tax benefit on the $19.3
million pre-tax loss from the sale of Solair. The provision for taxes for the
three months ended December 31, 1997 amounted to $1.3 million. The effective tax
rate for the three months ended December 31, 1998 and 1997 was a benefit of
31.4% and a provision of 39.0%, respectively. The decrease in the effective tax
rate for the three months ended December 31, 1998 was due to the 70% exclusion
permitted on dividend income.
Page 16 of 24
<PAGE> 17
Net Income (Loss)
For the three months ended December 31, 1998 and 1997, the Company recorded
a net loss available to common shareholders of $14.6 million, or $0.68 basic
earnings per common share, and net income available to common shareholders of
$1.3 million, or $0.06 basic earnings per common share, respectively.
Comprehensive Income
Comprehensive income for the three months ended December 31, 1998 included
unrealized holding gains in the fair market value of the AlliedSignal common
stock, which was received from the hardware group disposition, and unrealized
holding gains from other available-for-sale securities. The fair market value of
available-for-sale securities increased by $30.4 million, net of taxes, for the
three months ended December 31, 1998.
Page 17 of 24
<PAGE> 18
FINANCIAL CONDITION
Liquidity
The following table presents certain liquidity ratios of the Company at
December 31, 1998 and March 31, 1998.
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1998
-------------------- -------------------
<S> <C> <C>
Current ratio 6.15:1 2.68:1
Debt to equity 0.20:1 0.19:1
</TABLE>
Total capitalization as of December 31, 1998 and March 31, 1998 amounted to
$298.0 million and $307.0 million, respectively. The changes in the components
of capitalization for the nine months ended December 31, 1998 included an
increase in debt of $1.7 million and a decrease in equity of $10.7 million. The
net increase in debt was the result of incremental borrowings under the credit
agreement to fund current working capital requirements, purchase marketable
securities, primarily Fairchild Class A common stock, and repurchase shares of
the Company's preferred stock from a third party. The gross increase in
borrowings was partially offset, however, by the proceeds from the sale of
Solair on December 31, 1998 that were used to pay down debt by approximately
$50.0 million. The decrease in equity was the result primarily of the repurchase
of the Company's preferred stock offset by the market appreciation on the shares
of AlliedSignal common stock from March 31, 1998. The current year net loss was
due primarily to the after-tax loss recorded on the sale of Solair.
In connection with the hardware group disposition, the Company recorded its
investment in AlliedSignal common stock as an available-for-sale investment, the
value of which was $214.6 million and $206.6 million at December 31, 1998 and
March 31, 1998, respectively. The Company has reclassified its investment in
AlliedSignal common stock from noncurrent investments at March 31, 1998 to
current marketable securities at December 31, 1998. This reclassification was
based on management's belief that a current classification more appropriately
reflects the increased probability that the AlliedSignal common stock will be
liquidated within the next twelve months, subject to market conditions. There is
risk associated with market fluctuation in the AlliedSignal common stock, which
is inherent in stock investments.
At December 31, 1998, the Company had total debt outstanding of $50.6
million, all of which was borrowed under its credit agreement. As of December
31, 1998, the credit agreement (as amended) provided for up to $62.9 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 credit agreement (as amended) and proceeds
from the liquidation of securities should be adequate to finance the Company's
operations in fiscal 1999. The Company had no other material capital commitments
or planned expenditures as of December 31, 1998.
Net cash used for operating activities for the nine months ended December
31, 1998 and 1997, amounted to $14.9 million and $63.3 million, respectively.
The primary use of cash for operating activities for the nine months ended
December 31, 1998 was an increase of $20.6 million in inventories, and a
decrease of $26.1 million in payables and accrued liabilities. The primary
source of cash from operating activities for the nine months ended December 31,
1998 was a decrease in receivables of $18.4 million, and a decrease of $10.0
million in other assets and liabilities. 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 nine months ended December 31, 1997 was
an increase in payables and accrued liabilities in the amount of $1.5 million,
along with scheduled depreciation and amortization expense of $4.3 million. The
primary use of cash for operating activities for the nine months ended December
31, 1997 was an increase of $46.1 million in inventories and an increase of
$26.2 million in receivables.
Net cash provided by and used for investing activities for the nine months
ended December 31, 1998 and 1997 was $19.0 million and $4.0 million,
respectively. The primary sources of cash for investing activities for the nine
months ended December 31, 1998 were the proceeds of $60.4 million from the sale
of Solair, and $2.6 million from the sale of investment securities. The primary
use of cash for investing activities for the nine months ended December 31,
1998
Page 18 of 24
<PAGE> 19
was the acquisition of $42.5 million of investment securities. The primary use
of cash for investing activities for the nine months ended December 31, 1997 was
capital expenditures, net of proceeds from the sale of fixed assets.
Net cash used for and provided by financing activities for the nine months
ended December 31, 1998 and 1997 was $2.4 million and $67.3 million,
respectively. Net cash used for financing activities for the nine months ended
December 31, 1998 was primarily the result of the repurchase of preferred stock,
net of borrowings on the revolver, to fund current working capital requirements.
Net cash provided by financing activities for the nine months ended December 31,
1997 was comprised of $33.9 million received from the preferred stock rights
offering, and net borrowings of $65.3 million on the revolver, offset partially
by repayment of $28.0 million of the subordinated loan with RHI Holdings, Inc.,
a wholly-owned subsidiary of Fairchild.
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 and are subject to 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 data processing devices 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 properly modified, these data processing devices could fail,
create erroneous results, or cause unanticipated systems failures, among other
problems. In response, the Company has developed a Year 2000 readiness plan that
is divided into a number of interrelated and overlapping phases, including
corporate awareness and planning, readiness assessment, evaluation and
prioritization of solutions, implementation of remediation, validation testing,
and contingency planning. These phases are discussed below.
Awareness. In the corporate awareness and planning phase, the Company
formed a Year 2000 project group under the direction of the Company's Chief
Operating Officer, identified and designated key personnel within the Company to
coordinate its Year 2000 efforts, and retained the services of outside technical
review and modification consultants. The project group prepared an overall
schedule and working budget for the Company's Year 2000 plan. The Company has
completed this phase of its Year 2000 plan. The Company evaluates regularly, and
based on such evaluation revises the schedule and budget to reflect the progress
of the Company's Year 2000 readiness efforts. The Chief Operating Officer
regularly reports to the Company's management and the board of directors on the
status of the Year 2000 project.
Assessment. In the readiness assessment phase, the Company, in coordination
with its technical review consultants, has been evaluating the Company's Year
2000 preparedness in a number of areas, including its information technology
infrastructure, external resources, facilities, equipment, products and
inventory. The Company has substantially completed this phase of its Year 2000
plan. In addition, pending the completion of all validation testing, the Company
continues to review all aspects of its Year 2000 preparedness on a regular
basis. In this respect, we have designated officers at each operating unit to
provide regular assessment updates to our outside consultants. These consultants
are assimilating a range of alternative methods to complete each phase of our
Year 2000 plan and are reporting regularly their findings and conclusions to the
Company's Chief Operating Officer.
Evaluation. In the evaluation and prioritization phase, the Company seeks
to develop potential solutions to the Year 2000 issues identified in the
Company's readiness assessment phase, consider those solutions in light of the
Company's other information technology and business priorities, prioritize the
various remediation tasks, and develop an implementation schedule. This phase is
ongoing and will not be completed until after October 31, 1999, when all
validation testing is anticipated to be completed. However, identified problems
are corrected as soon as practicable after identification. To date, the Company
has not identified any major information technology system or non-information
technology system that it must replace in its entirety for Year 2000 reasons,
and has determined
Page 19 of 24
<PAGE> 20
that most of the Year 2000 issues identified in the assessment phase can be
addressed satisfactorily through system modifications, component upgrades and
software patches. Thus, the Company does not presently anticipate incurring any
material systems replacement costs relating to the Year 2000 issue.
Implementation. In the implementation phase, the Company, with the
assistance of its technical review and modification consultants, began to
implement the proposed solutions to any identified Year 2000 issues. The
solutions include equipment and component upgrades, systems and software
patches, reprogramming and resetting machines, and other modifications.
Substantially all of he Company's material systems are currently Year 2000
ready.
Testing. In the validation testing phase, the Company seeks to evaluate and
confirm the results of its Year 2000 remediation efforts. In conducting its
validation testing, the Company is using, among other things, proprietary
testing protocols developed internally and by the Company's technical review and
modification consultants, as well as commercially available testing tools such
as Greenwich Mean Time's Check 2000, which identifies potential Year
2000-related software and data problems or any ineffective remediation. The
Company expects to complete testing of its most critical information technology
and related systems by June 30, 1999.
Contingency Planning. In the contingency planning phase, the Company,
together with its technical review consultants, is assessing the Year 2000
readiness of its key suppliers, distributors, customers and service providers.
Toward that objective, the Company has sent letters, questionnaires and surveys
to its business partners, inquiring about their Year 2000 readiness
arrangements. The average response rate to date has been approximately 40%, but
all of our most significant business partners have responded to our inquiries.
In this phase, the Company also began to evaluate the risks to the Company that
its failure or the failure of others to be Year 2000 ready would cause a
material disruption to, or have a material effect on, the Company's financial
condition, business or operations. So far, we have not identified any systems as
being both mission critical and potentially at risk. The Company also is
developing and evaluating contingency plans to deal with events arising from
significant Year 2000 issues outside of our infrastructure. In this regard, the
Company is considering the advisability of augmenting its inventories, securing
additional sources for certain supplies and services, arranging for back-up
utilities, and exploring alternate distribution and sales channels, among other
things.
The following chart summarizes the Company's progress, by phase, in
completing its Year 2000 plan:
PERCENTAGE OF YEAR 2000 PLAN COMPLETED
(BY PHASE)
<TABLE>
<CAPTION>
1997 Quarter Ended 1998 Quarter Ended
----------------------- -------------------------------------------------
Work
Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Remaining
---------- ---------- ---------- ---------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Awareness 100 % 100 % 100 % 100 % 100 % 100 % 0 %
Assessment 50 100 0
Evaluation 20 100 0
Implementation 40 60
Testing 30-40 60-70
Contingency Planning 25 50 50
</TABLE>
The following chart summarizes the total costs incurred by the Company as
of December 31, 1998 to address Year 2000 issues, and the total costs the
Company reasonably anticipates incurring during the next twelve months relating
to the Year 2000 issues.
<TABLE>
<CAPTION>
YEAR 2000 COSTS AS ANTICIPATED YEAR 2000 COSTS
OF DECEMBER 31, 1998: DURING THE NEXT TWELVE MONTHS:
--------------------- ------------------------------
<S> <C>
$550,000 $100,000
</TABLE>
Page 20 of 24
<PAGE> 21
The Company has funded the costs of its Year 2000 plan from general
operating funds, and all such costs have been deducted from income. To date, the
costs associated with our Year 2000 efforts have not had a material effect on
and have caused no delays with respect to, the Company's other information
technology programs or projects.
The Company anticipates that it will complete its Year 2000 preparations by
October 31, 1999. Although the Company's Year 2000 assessment, evaluation,
implementation, testing and contingency planning phases are not yet complete,
from what we know, the Company does not believe that Year 2000 issues will
materially affect its business, results of operations or financial condition. If
the Company's Year 2000 programs are not completed on time, and its mission
critical systems are not Year 2000 ready, the Company could be subject to
significant business interruptions, and could be liable to customers and other
third parties for breach of contract, breach of warranty, misrepresentation,
unlawful trade practices and other claims.
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, if any,
that exists. 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 21 of 24
<PAGE> 22
Part II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 (i) Amendment No. 6 and Consent Dated as of December
31, 1998 to Second Amended and Restated Credit
Agreement Dated as of December 12, 1996 (incorporated
by reference to the Registrant's Form 10-Q for the
quarterly period ended December 31, 1998, filed on
February 12, 1999).
10 (ii) Stock Purchase Agreement dated as of December 5,
1998, among Kellstrom Industries, Inc., Solair, Inc.
and Banner Aerospace, Inc. (incorporated by reference
to the Registrant's Current Report on Form 8-K, filed
on January 15, 1999).
10 (iii) Agreement and Plan of Merger by and between The
Fairchild Corporation, MTA, Inc. and Banner
Aerospace, Inc., dated as of January 11, 1999
(incorporated by reference to the Fairchild
Registration Statement on Form S-4, filed on January
15, 1999).
* 27 Financial Data Schedule (For SEC Use Only)
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter
ended December 31, 1998 for which this report is filed.
- ------------------
* Filed herewith
Page 22 of 24
<PAGE> 23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANNER AEROSPACE, INC.
By /S/ EUGENE W. JURIS
-----------------------------------
Eugene W. Juris
Vice President and
Chief Financial Officer
Dated: March 25, 1999
Page 23 of 24
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,633
<SECURITIES> 214,596
<RECEIVABLES> 18,804
<ALLOWANCES> 470
<INVENTORY> 80,853
<CURRENT-ASSETS> 341,790
<PP&E> 8,596
<DEPRECIATION> 5,164
<TOTAL-ASSETS> 395,146
<CURRENT-LIABILITIES> 55,533
<BONDS> 50,600
0
41
<COMMON> 23,732
<OTHER-SE> 223,626
<TOTAL-LIABILITY-AND-EQUITY> 395,146
<SALES> 152,404
<TOTAL-REVENUES> 152,404
<CGS> 139,666
<TOTAL-COSTS> 139,666
<OTHER-EXPENSES> 26,366
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,255
<INCOME-PRETAX> (17,686)
<INCOME-TAX> (5,750)
<INCOME-CONTINUING> (11,936)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,936)
<EPS-PRIMARY> (.65)
<EPS-DILUTED> (.65)
</TABLE>
