<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998 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
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 478-5790
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF CLASS ON WHICH REGISTERED
-------------- -------------------
Common Stock, $1.00 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant based on the closing price at which stock was sold on the New York
Stock Exchange on January 14, 1999 was approximately $37.4 million.
<TABLE>
<CAPTION>
SHARES OUTSTANDING
TITLE OF CLASS AS OF JANUARY 14, 1999
-------------- ----------------------
<S> <C>
Common Stock ........................21,535,295
</TABLE>
AMENDMENT
The primary purpose of this Amendment is to amend Part II, Item 8 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1998
to include subsequent event disclosures in the Notes To Consolidated Financial
Statements regarding: (i) the sale of a significant wholly owned subsidiary and,
(ii) a claim against the Company in connection with the disposition of the
Hardware Business on January 13, 1998.
<PAGE> 2
PART II
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
------------- --------------
ASSETS
Current Assets:
<S> <C> <C>
Receivables, less allowances of $2,881 in 1998 and $4,420 in 1997 $ 48,046 $ 64,382
Inventories 122,236 253,781
Future tax benefits --- 11,307
Other 29,741 11,375
------------- --------------
200,023 340,845
------------- --------------
Property, Plant and Equipment, at cost:
Land 15 453
Buildings and improvements 2,430 9,519
Machinery and equipment 8,056 19,408
------------- --------------
10,501 29,380
Accumulated depreciation (6,008) (14,046)
------------- --------------
4,493 15,334
------------- --------------
Other Assets:
Investments 206,626 ---
Cost in excess of net tangible assets of purchased businesses, net 12,292 33,003
Other 1,776 4,719
------------- --------------
220,694 37,722
------------- --------------
Total assets $ 425,210 $ 393,901
============= ==============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
2
<PAGE> 3
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
<S> <C> <C>
Current maturities of long-term debt $ --- $ 301
Accounts payable 27,431 38,864
Accrued salaries 2,568 5,968
Other 44,626 25,054
---------------- -----------------
74,625 70,187
---------------- -----------------
Long-Term Liabilities:
Long-term debt, less current maturities 48,900 165,148
Deferred federal and state income tax 41,194 ---
Other 2,381 8,371
---------------- -----------------
92,475 173,519
---------------- -----------------
Total liabilities 167,100 243,706
---------------- -----------------
Stockholders' Equity:
Preferred stock; $.01 par value, 10,000 shares authorized, 3,810 issued and
outstanding at March 31, 1998 and no shares authorized, issued and
outstanding at March 31, 1997 38 ---
Common stock; $1.00 par value, 50,000 shares authorized, 23,642
shares issued, 21,395 shares outstanding at March 31, 1998 and 30,000
shares authorized, 23,420 shares issued and outstanding at March 31, 1997 23,642 23,420
Less: Treasury stock at cost, 2,247 shares held in treasury at March
31, 1998 (23,331) ---
Paid-in capital 150,460 113,236
Retained earnings 93,046 13,539
Accumulated other comprehensive income 14,255 ---
---------------- -----------------
258,110 150,195
---------------- -----------------
Total liabilities and stockholders' equity $ 425,210 $ 393,901
================ =================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
3
<PAGE> 4
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE FISCAL YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
--------------- ---------------- ---------------
<S> <C> <C> <C>
Net sales $ 420,323 $ 389,111 $ 287,880
--------------- ---------------- ---------------
Cost of goods sold 305,385 279,041 209,609
Selling, general and administrative 87,296 84,557 64,704
--------------- ---------------- ---------------
Operating income 27,642 25,513 13,567
Non-recurring income 124,041 --- ---
Interest expense, net (13,960) (13,090) (10,972)
--------------- ---------------- ---------------
Income from operations before taxes on income 137,723 12,423 2,595
Provision for taxes 56,182 4,970 1,040
--------------- ---------------- ---------------
Net income $ 81,541 $ 7,453 $ 1,555
--------------- ---------------- ---------------
Preferred stock dividends (2,034) --- ---
--------------- ---------------- ---------------
Net income available to common shareholders $ 79,507 $ 7,453 $ 1,555
=============== ================ ===============
Basic earnings per common share $ 3.46 $ 0.32 $ 0.09
=============== ================ ===============
Diluted earnings per common share $ 3.10 $ 0.31 $ 0.08
=============== ================ ===============
Weighted average number of shares outstanding - basic 22,995 23,408 18,283
Weighted average number of shares outstanding - diluted 26,333 23,673 18,296
Net income $ 81,541 $ 7,453 $ 1,555
Other comprehensive income:
Unrealized gain on available-for-sale securities (net of tax
of $9,113) 14,255 --- ---
--------------- ---------------- ---------------
Comprehensive income $ 95,796 $ 7,453 $ 1,555
=============== ================ ===============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
4
<PAGE> 5
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED COMMON TREASURY PAID-IN
STOCK STOCK STOCK CAPITAL
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
BALANCE, MARCH 31, 1995 $ --- $ 18,002 $ --- $ 84,971
Exercise of stock options --- 4 --- 17
Acquisition of Harco --- 5,387 --- 28,136
Net income --- --- --- ---
------------ ------------ ------------- ------------
BALANCE, MARCH 31, 1996 --- 23,393 --- 113,124
Exercise of stock options --- 27 --- 112
Net income --- --- --- ---
------------ ------------ ------------- ------------
BALANCE, MARCH 31, 1997 --- 23,420 --- 113,236
Issuance of preferred stock 37 --- --- 33,839
Exercise of stock options --- 218 --- 1,135
Purchase of common stock --- --- (23,331) ---
Conversion of stock --- 4 --- (4)
Acceleration of stock option
vesting --- --- --- 221
Unrealized holding gain from
available-for-sale securities --- --- --- ---
Dividends 1 --- --- 2,033
Net income --- --- --- ---
------------ ------------ ------------- ------------
BALANCE, MARCH 31, 1998 $ 38 $ 23,642 $ (23,331) $ 150,460
============ ============ ============= ============
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE
EARNINGS INCOME TOTAL
------------ ------------------- -------------
<S> <C> <C> <C>
BALANCE, MARCH 31, 1995 $ 4,531 $ --- $ 107,504
Exercise of stock options --- --- 21
Acquisition of Harco --- --- 33,523
Net income 1,555 --- 1,555
------------ ------------------- -------------
BALANCE, MARCH 31, 1996 6,086 --- 142,603
Exercise of stock options --- --- 139
Net income 7,453 --- 7,453
------------ ------------------- -------------
BALANCE, MARCH 31, 1997 13,539 --- 150,195
Issuance of preferred stock --- --- 33,876
Exercise of stock options --- --- 1,353
Purchase of common stock --- --- (23,331)
Conversion of stock --- --- ---
Acceleration of stock option
vesting --- --- 221
Unrealized holding gain from
available-for-sale securities --- 14,255 14,255
Dividends (2,034) --- ---
Net income 81,541 --- 81,541
------------ ------------------- -------------
BALANCE, MARCH 31, 1998 $ 93,046 $ 14,255 $ 258,110
============ =================== =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
5
<PAGE> 6
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
---------------- ---------------- ----------------
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 81,541 $ 7,453 $ 1,555
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization 4,951 4,795 3,435
Gain on disposition of businesses (124,041) --- ---
Change in receivables (37,880) (5,599) (16,270)
Change in inventories (56,206) (37,519) (17,513)
Change in payables and accrued liabilities 18,717 3,492 33,294
Change in other accounts 27,881 (5,314) (1,817)
---------------- ---------------- ----------------
Net cash provided by (used for) operating activities (85,037) (32,692) 2,684
---------------- ---------------- ----------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (4,587) (4,600) (8,505)
Business acquisitions, net of cash acquired --- (15,789) ---
---------------- ---------------- ----------------
Net cash used for investing activities (4,587) (20,389) (8,505)
---------------- ---------------- ----------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from borrowings 112,775 103,000 78,600
Repayments of debt (35,049) (50,058) (74,750)
Proceeds from issuance of preferred stock 33,876 --- ---
Purchase of treasury stock (23,331) --- ---
Exercise of stock options 1,353 139 21
---------------- ---------------- ----------------
Net cash provided by financing activities: 89,624 53,081 3,871
---------------- ---------------- ----------------
NET INCREASE (DECREASE) IN CASH --- --- (1,950)
CASH, BEGINNING OF PERIOD --- --- 1,950
---------------- ---------------- ----------------
CASH, END OF PERIOD $ --- $ --- $ ---
================ ================ ================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 13,543 $ 11,326 $ 8,504
Income taxes paid (net of refunds) 5,649 6,854 2,188
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
6
<PAGE> 7
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:.
Organization and Operations
Prior to an initial public offering on August 1, 1990, Banner Aerospace,
Inc. (the "Company") was a wholly-owned subsidiary of The Fairchild Corporation
("Fairchild"). As a result of the initial public offering, Fairchild's indirect
beneficial ownership of the Company's Common Stock was reduced from 100.0% to
47.2%. However, as a result of the additional shares of the Company's Common
Stock issued in connection with the acquisition of Harco, Inc. in fiscal 1996,
Fairchild became the majority owner of the Company and owned 59.3% of the
Company's Common Stock as of March 31, 1997 (refer to Note 3 in the notes to
consolidated financial statements). In January 1998, the Company repurchased
2,246,967 shares of its own Common Stock for a total cost of $23,331 which
increased Fairchild's ownership to 66.3% at the end of fiscal 1998. On June 9,
1998, Fairchild completed an Exchange Offer pursuant to which it acquired
3,659,424 shares of the Company's Common Stock in exchange for shares of
Fairchild common stock (the "Exchange Offer"). As a result of the Exchange
Offer, Fairchild's beneficial ownership of the Company's Common Stock increased
to 85.4% (refer to Note 16 in the notes to consolidated financial statements).
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 2 in the notes
to consolidated financial statements). 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.
Fiscal Year
The fiscal year ("fiscal") of the Company ends March 31. All references
herein to "1998," "1997" and "1996" means the fiscal years ended March 31, 1998,
1997 and 1996.
Principles of Consolidation
The accompanying consolidated balance sheet includes the accounts of all
the Company's subsidiaries as of March 31, 1998:
Banner Aerospace-Singapore, Inc.
DAC International, Inc.
Dallas Aerospace, Inc.
Georgetown Jet Center, Inc.
Matrix Aviation, Inc.
NASAM Incorporated
Professional Aviation Associates, Inc.
Solair, Inc.
As a result of the disposition of certain subsidiaries (refer to Note 2 in
the notes to consolidated financial statements), the operating results of the
following operating subsidiaries were included in the accompanying consolidated
financial statements until January 1998:
Adams Industries, Inc.
7
<PAGE> 8
Aerospace Bearing Support, Inc.
Aircraft Bearing Corporation
BAI, Inc.
Banner Distribution, Inc.
Burbank Aircraft Supply, Inc.
Harco, Inc.
PacAero
PB Herndon Aerospace, Inc.
All significant intercompany accounts and transactions between the
consolidated subsidiaries have been eliminated.
Inventories
Inventories consist of finished goods and are stated at the lower of cost
or market. The Company's subsidiaries use various cost methods for inventory
including specific identification and first-in, first-out ("FIFO").
Deferred Loan Costs
Deferred loan costs associated with various debt issues are being amortized
over the terms of the related debt, based on the amount of outstanding debt,
using the effective interest method. Amortization expense for these loan costs
for fiscal 1998, 1997 and 1996 was $923, $948 and $589, respectively.
Property, Plant and Equipment
For financial reporting purposes, the policy of the Company is to provide
for depreciation of property, plant and equipment, principally by the
straight-line method, at annual rates sufficient to amortize the cost of the
assets during their estimated useful lives. For tax purposes, the Company
generally uses accelerated depreciation methods.
Major classes of assets and their depreciable lives are as follows:
Buildings and improvements....................10-33 1/3 Years
Machinery and equipment.......................3-10 Years
Maintenance and repair expenditures are charged to expense as incurred, and
expenditures for significant improvements and major renewals are capitalized.
The carrying amounts of assets which are sold or retired and the related
accumulated depreciation are removed from the accounts in the year of disposal,
and any resulting gains or losses are reflected in income. Such gains and losses
were not significant in fiscal 1998, 1997 or 1996.
Long-Lived Assets
In fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". SFAS 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used, and for long-lived assets and certain identifiable intangibles to be
disposed of. The Company reviews its long-lived assets, including property,
plant and equipment, identifiable intangibles and goodwill, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be fully recoverable. To determine recoverability of its
long-lived assets the Company evaluates the probability that future undiscounted
net cash flows will be less than the carrying amount of the assets. Impairment
is measured based on the difference between the carrying amount of the assets
and fair value. The implementation of SFAS 121 did not have a material effect on
the Company's consolidated results of operations.
Fair Value of Financial Instruments
Financial instruments are defined as cash, evidence of an ownership
interest in an entity, or a contract that imposes an obligation to deliver cash
or other financial instruments to a second party. The carrying amounts of
current assets and current liabilities in the accompanying financial statements
approximate fair value due to the short
8
<PAGE> 9
maturity of these instruments. The carrying amount of investments are marked to
market value. Long-term debt approximates fair value at March 31, 1998, as the
debt bears a variable interest rate.
Revenue Recognition
Sales and related cost of sales are recognized primarily upon shipment of
products and performance of services. Sales and related cost of sales on
long-term contracts are recognized as products are delivered and services are
performed, determined by the percentage of completion method based on the
relationship of costs incurred to date to estimated total costs under the
respective contracts. Lease revenue is recognized as earned.
Amortization
The amounts included in the accompanying consolidated balance sheets as
"Cost in excess of net tangible assets of purchased businesses, net" are
primarily amortized over 40 years. Amortization expense was $1,018, $912 and
$575 in fiscal 1998, 1997 and 1996, respectively. Accumulated amortization at
March 31, 1998 and 1997 was $4,290 and $7,637, respectively.
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.
Following is a reconciliation of the computations of basic earnings per
common share and diluted earnings per common share for the years ended March 31,
1998 and 1997.
(In thousands, except per share data)
For the year ended March 31,
<TABLE>
<CAPTION>
Basic earnings per common share: 1998 1997
----------------- ------------------
<S> <C> <C>
Net income available to common shareholders $ 79,507 $ 7,453
Weighted average shares outstanding 22,995 23,408
----------------- ------------------
Basic earnings per common share $ 3.46 $ 0.32
================= ==================
Diluted earnings per common share:
Net income $ 81,541 $ 7,453
Weighted average shares outstanding 22,995 23,408
Incremental shares due to assumed conversion of preferred stock 2,975 ---
Incremental shares due to assumed exercise and repurchase of stock options 363 265
----------------- ------------------
26,333 23,673
----------------- ------------------
Diluted earnings per common share $ 3.10 $ 0.31
================= ==================
</TABLE>
Options to purchase 60,000 and 100,000 shares of common stock were
outstanding, but were not included in the computation of diluted earnings per
common share because the options' exercise price was greater than the average
market price of common shares for the twelve months ended March 31, 1998 and
1997, respectively.
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.
9
<PAGE> 10
Comprehensive Income
Effective March 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive Income". SFAS
130 establishes standards for reporting and display of comprehensive income and
its components in the financial statements.
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.
Reclassifications
Certain amounts in fiscal 1997 and 1996 have been reclassified to conform
to the fiscal 1998 presentation.
Recently Issued Accounting Pronouncements
In June 1997, 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 operating segments in annual and interim financial
reports. The Company currently operates in only one reportable segment.
In February 1998, 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' pension 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.
2. DISPOSITIONS:
On January 13, 1998, the Company completed the disposition of substantially
all of the assets and certain liabilities of its hardware companies and PacAero
unit (the "Hardware Business") to two wholly-owned subsidiaries of AlliedSignal
Inc. (the "Buyers") in exchange for unregistered shares of AlliedSignal Inc.
common stock with an aggregate value equal to $369,000 (the "Hardware Business
Disposition"). The determination of the number of AlliedSignal Inc. shares
received by the Company was based on the average closing price of such stock on
the New York Stock Exchange for a period of twenty days preceding the closing.
The Hardware Business consisted of the following companies: Adams Industries,
Inc., Aerospace Bearing Support, Inc., Aircraft Bearing Corporation, Banner
Distribution, Inc., Burbank Aircraft Supply, Inc., Harco, Inc., PB Herndon
Aerospace, Inc. (which collectively comprise the Company's hardware business),
Banner Aerospace Services, Inc. (which transferred only those assets related to
the Hardware Business) and PacAero. The purchase price received for the Hardware
Business was based on the consolidated net worth as reflected on an estimated
closing date balance sheet for the assets (and liabilities) conveyed by the
Hardware Business to the Buyers. Such estimated closing date balance sheet is
subject to review by the parties, and the purchase price will be adjusted (up or
down) based on the net worth as reflected on the final closing date balance
sheet. The assets transferred to the Buyers consist primarily of the Company's
hardware business, which includes 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 common
stock has been accounted for as an available-for-sale security. 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.
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<PAGE> 11
On January 2, 1998, the Company disposed of BAI, Inc. ("BAI") through a
stock purchase agreement. The Company did not realize a material gain on the
transaction.
The following unaudited pro forma table illustrates consolidated sales and
operating income of the Company's operations, on a pro forma basis for the
twelve months ended March 31, 1998, 1997 and 1996 to give effect to the
disposition of substantially all of the assets and certain liabilities of the
Hardware Business and BAI for the past three years. The unaudited pro forma
consolidated financial information is based on the historical financial
information of the Company for the twelve months ended March 31, 1998, 1997 and
1996. The unaudited pro forma consolidated financial information is presented
for informational purposes only and is not necessarily indicative of what
earnings and results of operations would have been had the Company disposed of
the Hardware Business and BAI at the beginning of the periods 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 FISCAL YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------------- ---------------- ------------------
(In thousands)
<S> <C> <C> <C>
Net sales $ 212,757 $ 162,737 $ 125,737
Cost of goods sold 164,283 125,728 98,879
---------------- --------------- -----------------
Gross profit 48,474 37,009 26,858
Selling, general and
administrative 37,420 31,623 26,778
---------------- --------------- -----------------
Operating income $ 11,054 $ 5,386 $ 80
================ =============== =================
</TABLE>
3. ACQUISITIONS:
On January 16, 1997, the Company, through its subsidiary, Dallas Aerospace,
Inc., consummated the acquisition of PB Herndon Aerospace ("PB Herndon") by
acquiring 100.0% of the outstanding stock of PB Herndon from the shareholders of
PB Herndon ("Sellers"), effective October 1996. PB Herndon, located near St.
Louis, Missouri, is a distributor of specialty fasteners and other aerospace
related components. At closing, the cash purchase price of $14,700 was paid to
the Sellers. The purchase price was based upon PB Herndon's net assets as of
September 30, 1996 plus capital contributions made by the Sellers after August
31, 1996. In addition, the Company loaned $1,300 to PB Herndon to repay loans
made from the Sellers to PB Herndon. To finance the acquisition of PB Herndon,
the Company borrowed $16,000 under a subordinated loan agreement (refer to Note
7 in the notes to the consolidated financial statements) from RHI Holdings, Inc.
("RHI"), which is a wholly-owned subsidiary of Fairchild. This acquisition was
accounted for using the purchase method of accounting. The excess of the
purchase price over the net tangible assets acquired was being amortized over 40
years. PB Herndon was one of the Company's subsidiaries divested as part of the
Hardware Business Disposition (refer to Note 2 in the notes to the consolidated
financial statements). The results of operations of PB Herndon have been
included in the consolidated results from April 1, 1997 up to the closing of the
Hardware Business Disposition.
In March 1996, the Company acquired Harco, Inc. ("Harco") from Fairchild.
Harco is an authorized stocking distributor of precision fasteners to the
aerospace industry and is located in El Segundo, California. The acquisition of
Harco was effected through the issuance of 5,386,477 shares of the Company's
Common Stock in exchange for 100.0% of the outstanding shares of Harco. The
issuance of the Company's Common Stock was based on an average price per share
of $6.075 resulting in a total value of $32,723. This acquisition was accounted
for using the purchase method of accounting as applied to simultaneous common
control mergers. The excess of the purchase price over the net tangible assets
acquired was being amortized over 40 years. Harco was one of the Company's
subsidiaries divested as part of the Hardware Business Disposition (refer to
Note 2 in the notes to consolidated financial statements). The results of
operations of Harco have been included in the consolidated results as of March
1, 1996 up to the closing of the Hardware Business Disposition.
11
<PAGE> 12
4. NOTES PAYABLE AND LONG-TERM DEBT:
At March 31, 1998 and 1997, notes payable and long-term debt consisted of
the following:
<TABLE>
<CAPTION>
Weighted Average
Interest Rates
--------------------------
1998 1997 1998 1997
---------------- ---------------- ------------ -----------
Senior Bank Loans:
<S> <C> <C> <C> <C>
Term $ --- $ 114,350 9.3% 9.2%
Revolver 48,900 19,900 9.3% 9.2%
Subordinated debt --- 28,000 8.4% 8.4%
Other debt --- 2,419 7.5% 7.0%
Capital leases --- 780 8.2% 8.4%
---------------- ---------------- ----------- ----------
48,900 165,449 9.3% 9.1%
============ ===========
Less: Current maturities --- 301
---------------- ----------------
Net long-term debt $ $48,900 $ $165,148
================ ================
</TABLE>
On August 2, 1995, the Company entered into a credit agreement ("Credit
Agreement") that provides for working capital and potential acquisitions. On
July 1, 1996, the Company amended the Credit Agreement ("Amended and Restated
Credit Agreement") to provide additional financing, as well as require that
loans made to the Company will not exceed a defined borrowing base which is
based upon a percentage of eligible accounts receivables and inventories. On
December 12, 1996, the Company amended the Amended and Restated Credit Agreement
("Second Amended and Restated Credit Agreement") to provide additional financing
and approve the incurrence of subordinated debt and certain acquisitions. On
November 25, 1997, the Company amended the Second Amended and Restated Credit
Agreement to provide additional financing. Immediately following this amendment,
the facility under the Second Amended and Restated Credit Agreement included (i)
a $55,000 six-year term loan ("Term Loan"); (ii) a $30,000 seven-year term loan
("Tranche B Loan"); (iii) a $40,000 six-year term loan ("Tranche C Loan"); and
(iv) a $121,500 six-year revolving credit facility ("Revolver"). On January 13,
1998, the Hardware Business repaid the outstanding balances of the Term Loan,
Tranche B Loan and Tranche C Loan in conjunction with the Hardware Business
Disposition.
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 March 31, 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 June 30,
1998. The Second Amended and Restated Credit Agreement contains certain
financial and nonfinancial covenants which the Company is required to meet on a
quarterly basis. The financial covenants include minimum net worth and minimum
earnings levels, and minimum ratios of interest coverage, fixed charges and debt
to earnings before interest, taxes, depreciation and amortization. The Company
also has certain limitations on the incurrence of additional debt and has
restrictions on dividends and distributions on the capital stock of the Company
in that the aggregate amount of such dividends and distributions may not exceed
$150 in any fiscal year. At March 31, 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 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
12
<PAGE> 13
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.
At March 31, 1998 and 1997, the Company had unused bank lines of credit
aggregating $72,600 and $51,600, respectively. No cash balances were subject to
withdrawal restrictions. At March 31, 1998 and 1997, the Company had outstanding
letters of credit of $1,309 and $472, respectively.
Other fiscal 1998 debt included an unsecured demand promissory note
("Promissory Note") from RHI which was repaid in June 1997 (refer to Note 7 in
the notes to the consolidated financial statements) and a mortgage on the
distribution center building located in Salt Lake City, Utah, which was repaid
as part of the Hardware Business Disposition.
Scheduled reductions in the availability under the Second Amended and
Restated Credit Agreement is $48,900 in fiscal 2002.
The debt that would otherwise be classified as a current liability in
fiscal 1997 was subsequently repaid through an increase in the Revolver, which
is not due until 2002. As such, the majority of the current payments are
reflected as long-term debt in the accompanying consolidated balance sheets due
to this refinancing strategy.
5. INCOME TAXES:
The components of income tax expense (benefit) for the fiscal years ended
March 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- --------------
Current:
<S> <C> <C> <C>
Federal $ 2,842 $ 6,896 $ 3,261
State 499 1,130 150
Foreign 340 240 100
-------------- -------------- --------------
3,681 8,266 3,511
-------------- -------------- --------------
Deferred:
Federal 49,548 (3,296) (2,471)
State 2,953 --- ---
-------------- -------------- --------------
52,501 (3,296) (2,471)
-------------- -------------- --------------
Total income tax expense $ 56,182 $ 4,970 $ 1,040
============== ============== ==============
</TABLE>
The following is a reconciliation of the Federal income tax at the
statutory rate to income tax expense (benefit) from operations for the fiscal
years ended March 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- --------------
<S> <C> <C> <C>
Federal income tax at the statutory rate $ 48,202 $ 4,348 $ 880
Goodwill amortization 345 318 200
Foreign Sales Corporation (372) (456) (200)
State taxes (175) (353) (51)
Difference between book and tax basis of
disposed subsidiaries 4,634 --- ---
Other, net (244) (257) (39)
-------------- -------------- --------------
Provision for income taxes $ 52,390 $ 3,600 $ 790
============== ============== ==============
</TABLE>
13
<PAGE> 14
The net deferred tax assets (liabilities) consisted of the following components
at March 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
Deferred tax assets:
<S> <C> <C>
Inventories $ --- $ 5,432
Capital loss 354 2,787
Accounts receivable 1,737 2,206
Compensation 603 1,036
Other deferred tax assets, net 3,042 2,888
--------------- ---------------
Total deferred tax assets 5,736 14,349
Valuation reserve --- (2,787)
Deferred tax liabilities:
Difference between book and tax basis
of investments (45,619) ---
Inventories (1,241) ---
Other (70) (255)
--------------- ---------------
Total deferred tax liabilities (46,930) (255)
--------------- ---------------
Net deferred tax assets (liabilities) $ (41,194) $ 11,307
=============== ===============
</TABLE>
Domestic income taxes, less available credits, are provided on the
unremitted income of foreign subsidiaries and affiliated companies, to the
extent that such earnings are intended to be repatriated. No domestic income
taxes or foreign withholding taxes are provided on the undistributed earnings of
foreign subsidiaries and affiliates, which are considered permanently invested,
or which would be offset by allowable foreign tax credits. At March 31, 1998,
the amount of domestic taxes payable upon distribution of such earnings was not
significant.
6. PENSIONS:
The Company and its subsidiaries have a defined contribution plan covering
eligible employees. The majority of the benefits and current contributions are
derived from an amount equal to a defined percentage of annual compensation or a
defined percentage of operating profit. Pension expense for fiscal 1998, 1997
and 1996 was $656, $625 and $445, respectively.
During fiscal 1995, the Company adopted a Supplemental Executive Retirement
Plan (the "Plan") for the benefit of the executive officers which provides a
retirement benefit based on final average earnings and years of service. The
Plan provides a maximum retirement benefit equal to the difference between sixty
percent of the participant's average base salary for the last five years of
employment and the participant's primary Social Security benefit. The expense
for the Plan was $210, $140 and $165 for fiscal 1998, 1997 and 1996,
respectively.
7. RELATED PARTY TRANSACTIONS:
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 (refer to Note 14 in the notes to consolidated financial
statements).
The Company entered into a Stock Exchange Agreement with Fairchild,
effective May 12, 1997, pursuant to which the Company could acquire Fairchild
Scandinavian Bellyloading Company AB ("FSBC") from Fairchild in exchange for
230,000 shares of Common Stock initially. This transaction was approved by a
special committee of the Board of Directors, and was approved by the Company's
stockholders at a meeting on June 18, 1997. Under the terms of the Stock
Exchange Agreement, Fairchild could terminate the agreement if it sold FSBC to a
third party by reason of an unsolicited offer, but Fairchild would be obligated
to pay the Company a reasonable termination fee and the Company's out-of-pocket
expenses. On July 1, 1997, Fairchild exercised its option to terminate the Stock
Exchange Agreement. As a result, Fairchild paid the Company a termination fee of
$300 and out of pocket expenses of $447, and also agreed to allow the Company to
participate equally in future royalties from FSBC, if any.
On October 17, 1996, the Company borrowed $5,000 from RHI, under an
unsecured demand promissory note ("Promissory Note"). Under the terms of the
Promissory Note, the Company could select interest periods up to six months with
an interest rate during each such interest period determined at LIBOR plus the
Applicable LIBOR
14
<PAGE> 15
Margin as defined in the Second Amended and Restated Credit Agreement, less 80
basis points. The Company had the ability to borrow and repay the Promissory
Note at any time subject to restrictions under the Second Amended and Restated
Credit Agreement. The Promissory Note was repaid in March 1997. Interest paid in
fiscal 1997 to RHI totaled $156.
On December 20, 1996, the Company entered into an unsecured subordinated
loan agreement ("Subordinated Loan") with RHI. The purpose of the Subordinated
Loan was to provide funds for acquisitions and any necessary future 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 certain acceleration in certain events specified in the
Subordinated Loan. A commitment fee of 1.5% per annum for six months from the
initial draw date, and 3.0% per annum thereafter, was accrued and payable on the
last day of each month, based on the balance outstanding. As of March 31, 1997,
the Company borrowed $28,000 under the Subordinated Loan, to fund the purchase
of PB Herndon and other working capital requirements. The Subordinated Loan was
repaid in June 1997 as a result of the Preferred Stock issuance. Interest paid
to RHI from December 1996 to June 1997 totaled $1,047.
The Company is a party to several agreements with Fairchild which provide
for various methods of expense sharing related to combined sales and marketing
efforts in foreign countries. For the fiscal year ended March 31, 1998, the
Company had contributed less than $125 under these agreements. In addition,
Fairchild and the Company would share commission income to the extent
commissions exceed expenses. No such commissions have been received to date.
The Company paid to Fairchild and its affiliates $1,530, $1,246 and $456 in
fiscal 1998, 1997 and 1996, respectively, for various expenses such as rent,
tax, legal and communication services. All services are and have been in the
ordinary course of business and were included in selling, general and
administrative expenses. The Company received $186 from Fairchild in fiscal 1998
for accounting support the Company provided Fairchild.
The Company had sales of products to Fairchild of $220, $122 and $48 and
purchases of products from Fairchild of $13,200, $9,384 and $5,522 in fiscal
1998, 1997 and 1996, respectively, all in the ordinary course of business.
8. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following quarterly financial data has been prepared from the financial
records of the Company without audit, and reflects all adjustments which, in the
opinion of management, were of a normal recurring nature and necessary for a
fair presentation of the results of operations for the interim periods
presented.
<TABLE>
<CAPTION>
For the fiscal year ended March 31, 1998 Quarters Ended
June 30, September 30, December 31, March 31,
1997 1997 1997 1998
------------------ ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Net sales $ 116,930 $ 122,914 $ 119,614 $ 60,865
Gross profit 33,545 33,959 35,869 11,565
Operating income 9,359 8,699 7,714 1,870
Net income 3,249 3,024 2,023 73,245
Basic earnings per common share $ 0.14 $ 0.10 $ 0.06 $ 3.35
Diluted earnings per common share $ 0.14 $ 0.11 $ 0.06 $ 2.82
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
For the fiscal year ended March 31, 1997 Quarters Ended
June 30, September 30, December 31, March 31,
1996 1996 1996 1997
------------------ ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Net sales $ 94,276 $ 84,107 $ 96,986 $ 113,742
Gross profit 25,202 25,593 26,312 32,963
Operating income 4,859 5,981 6,073 8,600
Net income 1,317 1,664 1,613 2,859
Basic earnings per common share $ 0.06 $ 0.07 $ 0.07 $ 0.12
Diluted earnings per common share $ 0.06 $ 0.07 $ 0.07 $ 0.12
</TABLE>
Included in net income for the quarter ended March 31, 1998 is $124,041 of
pre-tax non-recurring income from the Hardware Business Disposition.
9. BUSINESS SEGMENTS:
The Company operates in only one reportable business segment in accordance
with SFAS 14.
Export sales by geographic area for the fiscal years ended March 31, 1998,
1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- --------------
<S> <C> <C> <C>
Europe $ 52,817 $ 34,922 $ 29,797
Asia (excluding Japan) 21,734 25,790 18,557
Canada 14,746 20,516 13,803
Japan 10,473 15,672 13,006
South America 10,211 4,013 3,950
Australia 2,632 7,044 5,585
--------------- --------------- --------------
Other 8,208 6,008 7,490
--------------- --------------- --------------
$ 120,821 $ 113,965 $ 92,188
=============== =============== ==============
</TABLE>
Operating margins attributable to foreign sales were not materially
different from operating margins attributable to domestic sales.
10. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES:
Changes in the allowance for doubtful accounts for the fiscal years ended
March 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Beginning balance $ 4,420 $ 3,257 $ 2,432
Charged to expense 1,328 2,009 1,990
Write offs, net of recoveries (109) (1,046) (1,438)
Other (a) (2,758) 200 273
------------------ ------------------ -----------------
Ending balance $ 2,881 $ 4,420 $ 3,257
================== ================== =================
</TABLE>
(a) Represents primarily the disposition of the allowance for doubtful accounts
for subsidiaries disposed of as part of the Hardware Business Disposition in
fiscal 1998, an accrual transferred to the allowance for doubtful accounts in
fiscal 1997, and the allowance for doubtful accounts balance of Harco on the
date of acquisition in fiscal 1996.
16
<PAGE> 17
11. LEASES:
The Company leases certain of its facilities, equipment and engines under
operating leases. The following represents future minimum operating lease
commitments at March 31, 1998:
<TABLE>
<C> <C>
1999 $ 3,999
2000 3,691
2001 3,422
2002 2,702
2003 and thereafter 1,871
------------------
$ 15,685
==================
</TABLE>
Total rental expense for the fiscal years ended March 31, 1998, 1997 and
1996 was $2,764, $4,455 and $2,993, respectively.
12. CONTINGENCIES:
The Company is involved in various claims and lawsuits incidental to its
operations. In the opinion of management, the ultimate resolution of these
claims and lawsuits will not have a material adverse effect on the operating
results or financial position of the Company. In addition, the Company is
subject to certain guarantee provisions under the Delta Air Lines Procurement
Program. The Company does not expect to incur any penalties, but this is
uncertain.
13. 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 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
shall continue to be exercisable pursuant to their terms under the 1990 Stock
Option Plan, all options granted are for a term of seven years. Options granted
on or before August 1, 1993 may be immediately exercisable and options granted
subsequent to August 1, 1993 vest over a period of three to four years.
On September 13, 1996, the stockholders approved the 1996 Non-Employee
Director Stock Option Plan (the "NED Stock Option Plan"). The Company has
reserved for issuance 150,000 shares of Common Stock under the NED Stock Option
Plan 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 stock option
committee of the Board of Directors, in shares of Common Stock, valued at fair
market value at the time of exercise. All options are for a term of five years
and vest immediately upon issuance of the grant. Each newly elected non-employee
director shall be granted an option for 5,000 shares of Common Stock and on the
date of each succeeding annual meeting, each non-employee director elected at
such meeting shall be granted an option for 1,000 shares of Common Stock. On
September 13, 1996, all eight non-employee directors were each granted an option
for 5,000 shares of Common Stock. Stock options granted to non-employee
directors prior to the approval of the NED Stock Option Plan were not granted
under a formal stock option plan.
17
<PAGE> 18
Stock option activity under the 1990 Stock Option Plan, the NED Stock
Option Plan and non-employee director options granted outside a formal stock
option plan is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------------------- --------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,055,700 $5.82 696,700 $5.01 907,300 $5.20
Granted 363,000 $8.18 407,250 $7.19 275,000 $4.88
Exercised (217,617) $6.22 (26,833) $5.16 (4,200) $5.13
Terminated (93,333) $6.99 (21,417) $6.17 (45,800) $5.01
Expired --- --- --- --- (435,600) $5.33
-------------------------- --------------------------- ---------------------------
Outstanding at end of year 1,107,750 $6.42 1,055,700 $5.82 696,700 $5.01
========================== =========================== ===========================
Exercisable at end of year 606,854 $5.96 458,355 $5.44 221,819 $5.05
========================== =========================== ===========================
Weighted average fair value of
options granted $3.47 $ 3.15 $ 2.07
============= ============== ==============
</TABLE>
At March 31, 1998, 1,000,750 of the 1,107,750 options outstanding relate to
the 1990 Stock Option Plan and have exercise prices between $4.88 and $9.88 per
share, with a weighted average exercise price of $6.39 and a weighted average
remaining contractual life of 5.4 years. Of these, 499,854 options were
exercisable at March 31, 1998. The remaining 107,000 options relate to the NED
Stock Option Plan and non-employee director options granted outside a formal
stock option plan and have exercise prices between $4.63 and $10.63 per share,
with a weighted average exercise price of $6.70 and a weighted average remaining
contractual life of 3.5 years. All of these options were exercisable at March
31, 1998.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123") was issued. SFAS No.
123 is effective for fiscal years beginning after December 15, 1995. SFAS No.
123 encourages companies to adopt the fair value method for compensation
expenses recognition related to employee stock options. Existing accounting
requirements of Accounting Principles Board Opinion No. 25 ("APB No. 25") use
the intrinsic value method in determining compensation expense which represents
the excess of the market price of the stock over the exercise price on the
measurement date. The Company elected to remain under APB No. 25 rules for stock
options, under which no compensation cost has been recognized, and is required
to provide pro forma disclosures of what net income and earnings per share would
have been had the Company adopted the new fair value method for recognition
purposes. The following information is presented as if the Company had adopted
SFAS No. 123 and restated its results for the fiscal years ended March 31, 1998,
1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Net income:
As reported $ 81,541 $ 7,453 $ 1,555
Pro forma $ 81,046 $ 7,119 $ 1,555
Basic earnings per common share:
As reported $ 3.46 $ 0.32 $ 0.09
Pro forma $ 3.44 $ 0.31 $ 0.09
Diluted earnings per common share:
As reported $ 3.10 $ 0.31 $ 0.09
Pro forma $ 3.08 $ 0.30 $ 0.09
</TABLE>
For the above information, the fair value of each option grant was
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions used for grants in fiscal 1998, 1997 and 1996:
expected volatility of 37%, expected lives of 5 years, a risk free interest rate
ranging from 5.8% to 7.2% and a zero expected dividend rate.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to April 1, 1995, the above pro forma amounts may not be
representative of the compensation costs to be expected in future years.
18
<PAGE> 19
14. EQUITY SECURITIES
The Company had 21,393,809 shares of Common Stock outstanding at March 31,
1998. During fiscal 1998, 217,617 shares of Common Stock were issued as a result
of stock option exercises. In January 1998, the Company repurchased 2,246,967
shares of Common Stock for a total cost of $23,331. This amount has been
recorded as Treasury Stock in the accompanying consolidated financial
statements.
In June 1997, the Company's shareholders approved the following changes to
the Company's capital structure: (i) the total number of shares of capital
shares of capital stock which the Company has the authority to issue were
increased from 30,000,000 to 60,000,000; (ii) the number of authorized shares of
the Company's Common Stock were increased from 30,000,000 to 50,000,000; (iii) a
new class of Preferred Stock, par value $.01 per share was created, and the
Company was given the authority to issue 10,000,000 shares of such Preferred
Stock (collectively, the "Charter Amendments"). In May 1997, and in conjunction
with the Charter amendments, the Company issued rights to its existing
shareholders pursuant to which each shareholder had the right to acquire one
share of the newly established 7.5% convertible Preferred Stock for every 4.5
shares owned. On June 18, 1997, the Company received subscriptions for 3,710,955
shares of Preferred Stock of $34,100. The Preferred Stock is convertible into
Common Stock on a one-to-one basis. In fiscal 1998, 3,549 shares of Preferred
Stock had been converted to shares of Common Stock and 102,144 shares of
Preferred Stock had been issued as Preferred Stock dividends. At March 31, 1998,
3,809,550 shares of Preferred Stock were outstanding.
15. INVESTMENTS
Long-term investments at March 31, 1998 consist of 4,919,664 shares of
AlliedSignal common stock classified as available-for-sale securities, received
as a result of the Hardware Business Disposition. The twenty-day average closing
price used to determine the number of shares of AlliedSignal Inc. common stock
which the Company received at closing was $37.25. At March 31, 1998, the market
value of the AlliedSignal stock had appreciated to $42.00 per share. The
increase in the market value resulted in total appreciation of $23,400 which was
recorded net of a tax provision of $9,100 in retained earnings as accumulated
other comprehensive income. Short-term investments consisting of 184,000 shares
of other common stock with a market value of $1.03 at March 31, 1998 and
classified as trading securities were deemed impaired as of March 31, 1998 and
resulted in a loss from impairment of $190. Net investment loss has been
included in selling, general and administrative expenses in the consolidated
income statement. There were neither investments nor investment income in 1996.
A summary of investments held by the Company follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------- ---------------------------------
Aggregate Aggregate
NAME OF ISSUER OR Fair Cost Fair Cost
TYPE OF EACH ISSUE Value Basis Value Basis
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Short-term investments:
Common stock $ 0 $ 1,966 $ 1,113 $ 1,992
Long-term investments:
Common stock $ 206,626 $ 183,257 $ 0 $ 0
</TABLE>
Investment loss is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Gross realized gain (loss) from sales $ (3) $ 0
Change in unrealized holding gain (loss) from trading securities (901) (879)
Gross realized loss from impairments (190) 0
Dividend income 738 0
--------------- ---------------
$ (356) $ (879)
=============== ===============
</TABLE>
19
<PAGE> 20
16. SUBSEQUENT EVENTS
On May 11, 1998, Fairchild commenced an offer to exchange (the "Exchange
Offer"), for each properly tendered share of Common Stock of the Company, a
number of shares of Fairchild's class A common stock, par value $0.10 per share,
equal to the quotient of $12.50 divided by $20.675 up to a maximum of 4,000,000
shares of the Company's Common Stock. The Exchange Offer expired on June 9,
1998. Approximately 3,659,424 shares of the Company's Common Stock were validly
tendered for exchange and Fairchild issued approximately 2,212,469 shares of
Fairchild class A common stock to the tendering shareholders. As a result of the
Exchange Offer, Fairchild's beneficial ownership of the Company's Common Stock
increased to 85.4%.
On December 31, 1998, the Company consummated the sale of its wholly owned
subsidiary, Solair, Inc. ("Solair") to Kellstrom Industries, Inc. ("Kellstrom")
for approximately $57,000 in cash and a warrant to purchase 300,000 shares of
common stock of Kellstrom. The purchase price for Solair is based on the
consolidated net worth of Solair as of the closing date, subject to certain
adjustments. The Company estimates it will record an after tax loss of
approximately $12,500 at December 31, 1998.
On January 12, 1999, the Company received a letter from AlliedSignal making
indemnification claims against the Company for $18.9 million in connection with
the disposition of the Hardware Business to AlliedSignal on January 13, 1998.
Although the Company believes that the amount of such asserted claim is far in
excess of any amount that AlliedSignal 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.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors,
Banner Aerospace, Inc.:
We have audited the accompanying consolidated balance sheets of Banner
Aerospace, Inc. (a Delaware corporation) and Subsidiaries as of March 31, 1998
and 1997, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Banner Aerospace,
Inc. and Subsidiaries as of March 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
May 20, 1998 (Except with respect to the matters discussed in Note 16, as to
which the date is January 14, 1999).
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, "hereunto duly authorized".
BANNER AEROSPACE, INC.
Date: January 20, 1999 By: /s/ EUGENE W. JURIS
-------------------
Eugene W. Juris
Vice President and
Chief Financial Officer
(Principal Financial Officer)
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