<PAGE>
As filed with the Securities and Exchange Commission on February 26, 1999
Registration No. 333-70673
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT No. 1
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
THE FAIRCHILD CORPORATION
(Exact name of registrant as specified in its charter)
---------------
Delaware 3452 34-0728587
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification Number)
incorporation or Code Number)
organization)
45025 Aviation Drive
Suite 400
Dulles, Virginia 20166
(703) 478-5800
(Address, including ZIP Code, and telephone number, including area code, of
registrant's principal executive offices)
DONALD E. MILLER, ESQ.
Executive Vice President,
General Counsel and Secretary
The Fairchild Corporation
45025 Aviation Drive
Suite 400
Dulles, Virginia 20166
(Name, address, including ZIP Code, and telephone number, including area code,
of agent for service)
Copies to:
JAMES J. CLARK, ESQ. STEVEN WOLOSKY, ESQ.
Cahill Gordon & Reindel Olshan Grundman Frome Rosenzweig &
80 Pine Street Wolosky LLP
New York, NY 10005 505 Park Avenue
Telephone: (212) 701-3000 New York, NY 10022
Facsimile: (212) 269-5420 Telephone: (212) 753-7200
---------------Facsimile: (212) 755-1467
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective and all other
conditions to the merger contemplated by the Agreement and Plan of Merger,
dated as of January 11, 1999, described in the Proxy Statement/Prospectus
included in this Registration Statement, have been satisfied or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box.
---------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Proposed
Title of each class of Amount maximum maximum
securities to be to be offering price aggregate Amount of
registered registered(1) per share offering price(2) registration fee(3)
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<S> <C> <C> <C> <C>
Class A Common Stock,
$0.10 par value per
share................. 3,854,952 N/A $53,778,648 $14,951
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</TABLE>
(1) Amount to be registered is estimated based upon the maximum ratio of
shares, of the Registrant's Class A Common Stock for which a share of Banner
Aerospace, Inc. common stock may be exchanged after the merger, and assumes
the conversion into Banner Aerospace, Inc. common stock of all outstanding
shares of Banner Aerospace, Inc. preferred stock and the exercise of all
options to purchase shares of Banner Aerospace, Inc. common stock that are
being assumed by the Registrant.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 promulgated under the Securities Act of 1933, as amended, on the
basis of the proposed merger consideration of $11.00 in market value of the
Registrant's Class A Common Stock for each share of Banner common stock,
multiplied by 4,888,968, the maximum number of shares of Banner common stock
to be converted in the merger.
(3) Previously paid.
---------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
this Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Commission, acting pursuant to
Section 8(a), may determine.
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<PAGE>
BANNER AEROSPACE, INC.
45025 Aviation Drive
Suite 300
Dulles, VA 20166-7556
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD , 1999
To the Stockholders:
Notice is hereby given that a special meeting of stockholders of Banner
Aerospace, Inc. will be held at , on , 1999, at a.m., local
time, for the following purposes:
1. To consider and act upon a proposal to adopt an Agreement and Plan of
Merger dated January 11, 1999 among Banner Aerospace, Inc., The Fairchild
Corporation and MTA, Inc. MTA is a wholly-owned subsidiary of Fairchild that
was formed to implement the merger. If the merger agreement is adopted by
Banner stockholders and the other conditions to the merger are satisfied or
waived, each outstanding share of Banner's common stock, other than shares
owned by Fairchild and its affiliates, will be converted into the right to
receive $11.00 in market value of shares of Fairchild Class A Common Stock,
subject to adjustments based on the price of Fairchild Class A Common Stock and
the value of certain shares of AlliedSignal common stock owned by Banner.
2. To approve the withdrawal of Banner's common stock from listing on the
New York Stock Exchange upon consummation of the proposed merger .
3. To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
Information relating to the above matters is set forth in the accompanying
Proxy Statement/Prospectus. A copy of the merger agreement is set forth as
Appendix A to the Proxy Statement/Prospectus and is incorporated herein by
reference.
The close of business on February 16, 1999 has been fixed as the record date
for determination of the stockholders entitled to notice of and to vote at the
meeting or any adjournment thereof. Any stockholder will be able to examine a
list of holders of record, for any purpose related to the special meeting,
during the 10-day period before the meeting. The list will be available at
Harris Trust and Savings Bank, 600 Superior Avenue East, Suite 600, Cleveland,
Ohio, 44114; telephone (216) 263-3638 or (800) 539-7216. Approval of the merger
agreement and the consummation of the transactions contemplated thereby
requires the affirmative vote of the holders of a majority of the shares of
Banner common stock entitled to vote at the special meeting. Fairchild has
agreed to vote its shares of Banner common stock for approval of the merger
agreement.
Stockholders may vote in person or by proxy. The proxy statement, which
explains the merger in detail, and the accompanying proxy card are attached to
this notice. Only holders of record of Banner common stock at the close of
business on February 16, 1999 will be entitled to vote at the meeting or any
adjournment thereof with respect to all matters described above. Please sign,
date and mail the enclosed proxy promptly using the enclosed postage-paid
envelope. This action will not limit your right to vote in person if you wish
to attend the special meeting.
The merger is an important decision for Banner and its stockholders. Whether
or not you plan to attend the special meeting, we urge you to complete, sign
and promptly return the enclosed proxy card to ensure that your shares will be
voted at the meeting.
By Order of the Board of
Directors,
Bradley T. Lough
Secretary
Dulles, Virginia
, 1999
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained herein is subject to completion or amendment. A +
+registration statement relating to these securities has been filed with the +
+Securities and Exchange Commission. These securities may not be sold nor may +
+offers to buy be accepted prior to the time the registration statement +
+becomes effective. This prospectus shall not constitute an offer to sell or +
+the solicitation of an offer to buy nor shall there be any sale of these +
+securities in any State in which such offer, solicitation or sale would be +
+unlawful prior to the registration or qualification under the securities laws +
+of any such State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 26, 1999
PROXY STATEMENT
OF
BANNER AEROSPACE, INC.
------------
PRELIMINARY PROSPECTUS
OF
THE FAIRCHILD CORPORATION
------------
This Proxy Statement/Prospectus is being furnished to holders of common stock
of Banner Aerospace, Inc. in connection with the solicitation of proxies by the
board of directors of Banner for use at a special meeting of holders of Banner
common stock to be held at , Eastern time, on , 1999, at ,
and at any adjournments of the special meeting. Banner is convening the
special meeting to consider and act upon a proposal to adopt the merger
agreement and approve the merger.
This Proxy Statement/Prospectus also constitutes a prospectus of The
Fairchild Corporation relating to shares of Fairchild Class A Common Stock to
be issued to stockholders of Banner pursuant to the terms of the Agreement and
Plan of Merger, dated as of January 11, 1999, among Banner, Fairchild and MTA,
Inc., a Delaware corporation and a wholly-owned subsidiary of Fairchild. At the
effective time of the merger, each outstanding share of Banner common stock not
owned by Fairchild or its affiliates shall cease to be outstanding and shall be
converted into the right to receive $11.00 in market value in shares of
Fairchild Class A Common Stock, subject to adjustments based on the price of
Fairchild Class A Common Stock and the value of certain shares of AlliedSignal
common stock held by Banner. The merger agreement provides, among other things,
that MTA will merge with and into Banner and, as a result, Banner will become a
wholly-owned subsidiary of Fairchild.
Immediately prior to the effective time of the merger, each share of Series A
Convertible Paid-In-Kind Preferred Stock, liquidation value $9.20 per share, of
Banner issued and outstanding shall, by virtue of the merger and without any
action on the part of the holder thereof, be mandatorily converted into one
share of Banner common stock. At the effective time of the merger, the shares
of Banner common stock deemed held as a result of such mandatory conversion
from Banner preferred stock shall be converted into the right to receive the
merger consideration as set forth above. As further described herein, prior to
the effective time of the merger, a number of conditions must be met. Banner
and Fairchild expect that the merger will become effective promptly after
approval by the common stockholders of Banner at the special meeting (probably
the same day or next day), provided that the other conditions to the merger
have been satisfied.
Fairchild Class A Common Stock is listed on the New York Stock Exchange, Inc.
under the symbol "FA." On December 2, 1998, the last trading day immediately
preceding the public announcement of the proposed merger, and on , 1999, the
most recent practicable date prior to the mailing of this Proxy
Statement/Prospectus, the closing sale prices for the Fairchild Class A Common
Stock as reported on the NYSE Composite Tape were $15 1/2 per share and $
per share, respectively.
See "Risk Factors" beginning on page 8 for a discussion of certain important
risks that should be considered by stockholders in connection with the merger
and the acquisition of Fairchild Class A Common Stock offered hereby.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the shares of Fairchild Class A
Common Stock to be issued in the merger, or determined if this Proxy
Statement/Prospectus is accurate or complete. Any representation to the
contrary is a criminal offense.
The date of this Proxy Statement/Prospectus is , 1999. It is first being
mailed or otherwise delivered to Banner stockholders on or about that date.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
WHERE YOU CAN FIND MORE INFORMATION....................................... iv
Incorporation of Certain Information by Reference....................... iv
QUESTIONS AND ANSWERS ABOUT THE MERGER.................................... v
WHO CAN ANSWER YOUR QUESTIONS............................................. vii
SUMMARY................................................................... 1
RISK FACTORS.............................................................. 8
Risks Relating to the Merger............................................ 8
A decrease in Fairchild's stock price could decrease the merger
consideration.......................................................... 8
Ongoing litigation could interfere with the merger...................... 8
Risks Relating to Fairchild............................................. 8
Fairchild's business is in a cyclical industry that depends on a limited
number of aircraft manufacturers....................................... 8
Fairchild has risks resulting from significant amounts of debt.......... 9
The acquisition of Kaynar and future acquisitions have various
associated risks; Fairchild's failure to successfully integrate Kaynar
or future acquisitions into Fairchild's operations could adversely
affect Fairchild....................................................... 10
Fairchild's business is very competitive and increased competition could
adversely affect Fairchild............................................. 10
Fairchild has incurred operating losses in its Technologies Business.... 10
Fairchild's relationship with Mr. Steiner may influence its future...... 10
A proposed Spin-Off is uncertain ....................................... 11
Changes in government regulations or customer qualifications could
adversely affect Fairchild............................................. 11
Additional shares of Fairchild Class A Common Stock may be sold in the
future, which could adversely impact the price of outstanding shares... 12
Fairchild could be adversely affected if Year 2000 problems are
significant............................................................ 12
INFORMATION CONCERNING THE SPECIAL MEETING................................ 13
Time, Place, Date....................................................... 13
Purpose of the Special Meeting.......................................... 13
Record Date; Quorum; Outstanding Banner Common Stock Entitled To Vote... 13
Vote Required; Certain Banner Common Stock Voting in Favor of the
Merger................................................................. 13
No Dissenter's Rights................................................... 14
Action To Be Taken Under the Proxy...................................... 14
Proxy Solicitation...................................................... 14
THE MERGER................................................................ 15
Purpose and Background of the Merger.................................... 15
Recommendation of the Special Committee and Board of Directors of
Banner; Fairness of the Merger......................................... 19
Opinion of Houlihan Lokey for the Special Committee..................... 20
Valuation of Banner..................................................... 22
Premium Analysis........................................................ 23
Valuation of Fairchild.................................................. 23
Fairness Conclusion..................................................... 24
Certain Consequences of the Merger...................................... 25
Listing of Fairchild Class A Common Stock............................... 25
Plans for Banner After the Merger....................................... 25
</TABLE>
i
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<TABLE>
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Page
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<S> <C>
Conduct of the Business of Fairchild and Banner if the Merger Is Not
Consummated........................................................... 25
Interest of Certain Persons in the Merger; Certain Relationships....... 26
Common Share Ownership................................................. 26
Directors and Officers................................................. 26
Indemnification and Insurance.......................................... 26
Accounting Treatment................................................... 27
Fees and Expenses and Source of Funds.................................. 27
Regulatory Requirements................................................ 27
Litigation Regarding the Merger........................................ 27
MATERIAL TAX CONSIDERATIONS.............................................. 28
CERTAIN PROVISIONS OF THE MERGER AGREEMENT............................... 29
Merger Consideration................................................... 29
Effective Time......................................................... 29
Exchange and Payment Procedures........................................ 29
Transfer of Banner Common Stock........................................ 30
Treatment of Stock Options............................................. 30
No Appraisal Rights.................................................... 30
Covenants.............................................................. 30
Representations and Warranties......................................... 31
Conditions............................................................. 32
Termination; Amendments; Withdrawal of Recommendations................. 33
COMPARATIVE MARKET PRICE AND DIVIDEND INFORMATION........................ 34
Banner Common Stock.................................................... 34
Price Range of Banner Common Stock..................................... 34
Banner Dividends....................................................... 34
Holders of Record...................................................... 35
Fairchild Class A Common Stock......................................... 35
Price Range of Fairchild Class A Common Stock.......................... 35
Fairchild Dividends.................................................... 35
CAPITALIZATION........................................................... 36
SELECTED CONSOLIDATED FINANCIAL DATA..................................... 37
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS.................... 38
DESCRIPTION OF FAIRCHILD................................................. 45
DESCRIPTION OF BANNER.................................................... 50
SELECTED CONSOLIDATED FINANCIAL INFORMATION FOR BANNER................... 53
BANNER MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 55
DESCRIPTION OF MTA....................................................... 63
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 63
DESCRIPTION OF FAIRCHILD CAPITAL STOCK................................... 66
General................................................................ 66
Preferred Stock........................................................ 66
Fairchild Common Stock................................................. 66
Transfer Agent and Registrar........................................... 67
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
COMPARISON OF STOCKHOLDER RIGHTS......................................... 67
Voting Rights.......................................................... 67
Stockholder Proposals.................................................. 67
SECURITIES OWNERSHIP..................................................... 68
Ownership of Banner Capital Stock...................................... 68
Ownership of Fairchild Class A Common Stock by Directors and Executive
Officers of Banner.................................................... 69
MANAGEMENT OF BANNER AS SURVIVING CORPORATION............................ 70
Directors of Banner.................................................... 70
Executive Officers of Banner........................................... 71
PROPOSALS BY STOCKHOLDERS OF BANNER...................................... 72
EXPERTS.................................................................. 72
LEGAL MATTERS............................................................ 72
OTHER MATTERS............................................................ 73
BANNER AEROSPACE, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS........ F-1
APPENDIX A--AGREEMENT AND PLAN OF MERGER................................. A-1
APPENDIX B--FAIRCHILD'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED JUNE 30, 1998..................................................... B-1
APPENDIX C--FAIRCHILD'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD
ENDED DECEMBER 27, 1998................................................. C-1
</TABLE>
<TABLE>
<S> <C>
APPENDIX D--OPINION OF HOULIHAN LOKEY HOWARD & ZUKIN CAPITAL ............... D-1
</TABLE>
Please Note
We have not authorized anyone to provide you with any information other than
the information included in this document and the documents to which we refer
you. If someone provides you with other information, please do not rely on it
as being authorized by us.
<TABLE>
<S> <C>
</TABLE>
This Proxy Statement/Prospectus has been prepared as of , 1999. There
may be changes in the affairs of Fairchild or Banner since that date that are
not reflected in this document.
iii
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
As required by law, Fairchild and Banner file reports, proxy statements and
other information with the Securities and Exchange Commission. You can inspect
and copy these materials at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549. For further information concerning the Commission's public
reference rooms, you may call the Commission at 1-800-SEC-0330. Some of this
information may also be accessed on the World Wide Web through the Commission's
Internet address at "http://www.sec.gov." Fairchild's Class A Common Stock and
Banner's common stock are listed on the New York Stock Exchange, and materials
may also be inspected at the New York Stock Exchange's offices, 20 Broad
Street, New York, New York 10005. Fairchild's Class A Common Stock is also
listed on the Pacific Stock Exchange and may be inspected at the Pacific Stock
Exchange's offices, 301 Pine Street, San Francisco, California, 94104.
Incorporation of Certain Information by Reference
The Commission allows Fairchild and Banner to "incorporate by reference"
information into this Proxy Statement/Prospectus, which means that Fairchild
and Banner can disclose important information by referring you to another
document filed separately with the Commission. Information incorporated by
reference is considered part of this Proxy Statement/Prospectus, except to the
extent that this Proxy Statement/Prospectus supersedes the information.
This Proxy Statement/Prospectus incorporates by reference the information
contained in the following documents previously filed by Fairchild with the
Commission (Commission file number 1-6560):
(a) Fairchild's Annual Report on Form 10-K for the fiscal year ended
June 30, 1998, a copy of which is attached as Appendix B to the Proxy
Statement/Prospectus;
(b) Fairchild's Quarterly Reports on Form 10-Q for the periods ended
September 27, 1998, and December 27, 1998, a copy of which is attached as
Appendix C to the Proxy Statement/Prospectus; and
(c) Fairchild's Current Report on Form 8-K dated December 29, 1998.
This Proxy Statement/Prospectus incorporates by reference the information
contained in the following documents previously filed by Banner with the
Commission (Commission file number 1-10561):
(a) Banner's Annual Report on Form 10-K for the fiscal year ended March
31, 1998, as amended by Form 10-K/A dated July 29, 1998 and further amended
by Form 10-K/A dated January 20, 1999;
(b) Banner's Quarterly Reports on Form 10-Q for the periods ended June
30, 1998, September 30, 1998, and December 31, 1998; and
(c) Banner's Current Reports on Form 8-K dated January 14, 1999 and
January 15, 1999.
Fairchild also incorporates by reference the information contained in all
other documents Fairchild files with the Commission after the date of this
Proxy Statement/Prospectus and before the special meeting. The information
contained in any such document will be considered part of this Proxy
Statement/Prospectus from the date the document is filed and will supplement or
amend the information contained in this Proxy Statement/Prospectus.
Fairchild has supplied all information contained or incorporated by
reference in this Proxy Statement/Prospectus relating to Fairchild, and Banner
has supplied all such information contained in this Proxy Statement/Prospectus
relating to Banner.
If you are a stockholder of Banner and would like to receive a copy of any
document incorporated by reference into this Proxy Statement/Prospectus,
without charge to stockholders (which will not include any of the exhibits to
the document other than those exhibits that are themselves specifically
incorporated by reference into this Proxy Statement/Prospectus), you should
call or write to Harris Trust and Savings Bank, 600 Superior Avenue East, Suite
600, Cleveland, Ohio, 44114. Telephone: (216) 263-3638 or (800) 539-7216. In
order to ensure timely delivery of the documents you request, you should make
your request by 5 days before the special meeting date.
iv
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
A copy of the merger agreement is attached as Appendix A to this Proxy
Statement/Prospectus. Summaries of the portions of the Merger Agreement set
forth in this Proxy Statement/Prospectus do not purport to be complete and are
qualified in their entirety by reference to the merger agreement. We encourage
you to read carefully the Proxy Statement/Prospectus and the merger agreement.
Q: What will I receive in the merger?
A: Fairchild will convert each of your shares of Banner common stock into the
right to receive $11.00 in market value in shares of Fairchild Class A
Common Stock, including any adjustments.
The merger consideration could change based on the price of Fairchild
Class A Common Stock and the value of certain shares of AlliedSignal Inc.
common stock owned by Banner as described below.
Fairchild and Banner will calculate the amount of Fairchild Class A Common
Stock for which you will be able to exchange a cancelled share of Banner
common stock based on the average per share closing price on the NYSE of
Fairchild Class A Common Stock for the 20 most recent trading days ending
on the third trading day prior to the date the merger is effected. For
example, the average closing price of Fairchild Class A Common Stock over
the 20 trading days preceding , 1999 was $ . per share. If we had
consummated the merger on , 1999, it would take of a share of
Fairchild Class A Common Stock to pay the $11.00 merger consideration for
each share of Banner common stock.
Q: How will the price be adjusted?
A: Fairchild will pay the number of shares of Fairchild Class A Common Stock
for each share of Banner common stock subject to a "collar," which has the
effect of "freezing" the value of the Fairchild Class A Common Stock at
$13.95 if the 20 trading day average per share closing price on the NYSE is
below $13.95, and at $17.05 if the average per share price over the same
period for the Fairchild Class A Common Stock is above $17.05. This means
that the merger consideration for each share of Banner common stock will
not be less than 0.6452 shares or more than 0.7885 shares of Fairchild
Class A Common Stock.
Banner currently owns approximately 3,000,000 shares of AlliedSignal
common stock and has entered into "hedging" arrangements with respect to
all but 1,642,789 of such shares. If the value of 1,642,789 shares of
AlliedSignal common stock owned by Banner is outside of a range of $65.3
million and $79.9 million at the close of the third trading day before the
merger is completed, Fairchild and Banner will adjust the merger
consideration to reflect the amount by which such shares are outside the
range. This adjustment will be on an after-tax basis per share for each
outstanding share of Banner common stock. Fairchild and Banner will
calculate the value of such shares using the average per share closing
price on the NYSE of AlliedSignal common stock over the 20 most recent
trading days ending on the third trading day prior to the merger. If any
of such shares are sold by Banner prior to such date, the value for such
sold shares will be equal to the net proceeds received by Banner.
The price of shares of AlliedSignal common stock would have to be above
$48.61 per share or below $39.77 per share before any adjustment would
take effect. The closing price of AlliedSignal's common stock was $44.19
per share on January 8, 1999 and was $42 1/2 per share on February 25,
1999. For every $1.00 that the average per share price of AlliedSignal
common stock is above or below the range of $48.61 and $39.77, the merger
consideration would be increased or decreased by $.037 per share, as the
case may be.
Q: What do I receive if I own Banner preferred stock?
A: Banner will automatically convert each of your shares of Banner preferred
stock into one share of Banner common stock immediately before the merger.
Then, at the time of the merger, you will have the right
v
<PAGE>
to receive $11.00 in market value of Fairchild Class A Common Stock
(subject to adjustment) for each share of Banner common stock that you own
as a result of the conversion of Banner preferred stock.
Q: Why is the board of Banner recommending that I vote for the merger
agreement?
A: In the opinion of Banner's board of directors, the merger is in the best
interests of Banner's stockholders and the price of $11.00 in Fairchild
Class A Common Stock per share of your Banner common stock is
fair from a financial point of view. To review the background and reasons
for the merger in greater detail, see page 15.
Q: What vote is required for the merger to occur?
A: A majority of Banner's common stockholders must approve the merger.
Currently Fairchild owns more than 83% of the outstanding Banner common
stock and has agreed to vote such stock in favor of the merger, so we
expect the merger to be approved.
Q: What will happen to Banner common stock as a result of the merger?
A: As a result of the merger, Banner will cancel and retire all shares of
Banner common stock, other than shares held by Fairchild and its
affiliates. Banner will also cancel and retire shares of Banner preferred
stock that converted to Banner common stock immediately before the merger.
Except for Fairchild and its affiliates, holders of Banner common and
Banner preferred stock certificates will have no rights as stockholders
after the merger.
Q: Will stockholders have appraisal rights?
A: No. Banner stockholders will not have any appraisal rights or other rights
to demand fair value in cash as a result of the merger.
Q: What do I need to do now?
A: Please mail your signed proxy card in the enclosed return envelope as soon
as possible, so that your shares may be represented at the special meeting.
Q: Should I send in my stock certificates now?
A: No. After the merger is completed, we will send you written instructions
for exchanging your share certificates.
Q: If my shares are held in "street name" by my broker, will my broker vote
my shares for me?
A: Your broker will vote your shares only if you provide instructions on how
to vote. You should follow the directions provided by your broker regarding
how to instruct your broker to vote your shares.
Q: May I change my vote after I have mailed my signed proxy card?
A: Yes. Just send in a later dated, signed proxy card at least seven days
before the special meeting or attend the special meeting and vote.
Q: When do you expect the merger to be completed?
A: We are working toward completing the merger as quickly as possible. We
expect that the merger will become effective promptly after approval by the
common stockholders of Banner at the special meeting (probably the same day
or next day), provided that the other conditions to the merger have been
satisfied.
Q: What are the tax consequences of the merger?
A: The merger generally will not be taxable to you for federal income tax
purposes. To review the tax consequences to stockholders in greater detail,
see page 28.
Q: What other matters will be voted on at the special meeting?
A: We do not expect to ask you to vote on any other matters at the special
meeting.
vi
<PAGE>
WHO CAN ANSWER YOUR QUESTIONS
If you have more questions about the merger or would like additional copies
of this Proxy Statement/Prospectus, you should contact: Banner Aerospace, Inc.,
45025 Aviation Drive, Suite 300, Dulles, VA 20166, Telephone: (703) 478-5790,
Attention: Eugene W. Juris, Vice President and Chief Financial Officer. In
addition, you may call Banner at (800) 283-2117 to receive the conversion ratio
based on the average closing price of Fairchild over the 20 most recent trading
days.
vii
<PAGE>
SUMMARY
This summary highlights selected information from this document. This
summary may not contain all of the information that is important to you. To
understand the merger fully and for a more complete description of the legal
terms of the merger, you should read carefully this entire document and the
other documents to which we have referred you. See "Where You Can Find More
Information" on page iv of this document. The actual terms of the merger are
contained in the merger agreement. The merger agreement is included in this
Proxy Statement/Prospectus as Appendix A.
The Companies
The Fairchild Corporation
45025 Aviation Drive, Suite 400
Dulles, VA 20166
Telephone: (703) 478-5800
Fairchild is a leading worldwide aerospace and industrial fastener
manufacturer and is also an independent aerospace parts distributor. Fairchild
has become one of the leading aircraft parts suppliers to aircraft
manufacturers such as Boeing, the Airbus consortium of companies, Lockheed
Martin, British Aerospace and Aerospatiale, as well as major aerospace hardware
distributors such as AlliedSignal, Tri-Star Aerospace and Wesco Aircraft
Hardware. Fairchild's primary focus is on the aerospace industry and its
business consists primarily of two segments--aerospace fasteners and aerospace
parts distribution.
Banner Aerospace, Inc.
45025 Aviation Drive, Suite 300
Dulles, VA 20166
Telephone: (703) 478-5790
Banner is an international supplier to the aerospace industry, distributing
a wide range of aircraft parts and related support services. A substantial
portion of Banner's assets consists of the common stock of AlliedSignal Inc.
Fairchild owns approximately 85% of Banner's outstanding capital stock.
MTA, Inc.
45025 Aviation Drive, Suite 400
Dulles, VA 20166
Telephone: (703) 478-5800
MTA, Inc. is a wholly-owned subsidiary of Fairchild that will merge with and
into Banner to effect the merger. MTA has not engaged in any operations to date
and will not engage in any operations prior to the merger.
The Special Meeting
Date, Time and Place; Purpose
Banner will hold a special meeting of Banner stockholders at , on
, 1999, at a.m., local time. Banner is holding the special meeting to
consider and act upon a proposal to adopt the Agreement and Plan of Merger that
is attached to this document as Appendix A.
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Voting
At the special meeting, the holders of Banner common stock will vote on a
proposal to adopt the merger agreement. Each share of Banner common stock
entitles such holder to one vote. Delaware law requires that a majority of all
outstanding Banner common stock vote to approve the merger. Fairchild owns 83%
of the outstanding Banner common stock and has agreed to vote in favor of the
merger.
Record Date
The record date for determining who is entitled to vote at the Special
Meeting has been set at February 16, 1999. On the record date, there were
21,541,532 shares of Banner common stock outstanding and entitled to vote, held
by approximately 63 stockholders of record.
The Merger
Purpose, Structure and Effects of the Merger (Page 15)
Fairchild's purpose for the merger is to acquire all of the remaining stock
in Banner it does not already own. Fairchild and Banner believe that combining
will more closely coordinate the activities of the two companies. In addition,
Fairchild and Banner expect that the merger will provide opportunities for
reducing expenses, including saving the costs of operating Banner as a separate
public company. Fairchild and Banner structured the transaction as a merger
because a merger is simpler than any alternative structure. After the merger,
Banner will be a wholly-owned subsidiary of Fairchild.
Recommendation of Banner's Board of Directors (Page 19)
Banner's board of directors, acting on the unanimous recommendation of its
independent special committee, has approved the merger agreement and recommends
that you vote to adopt the merger agreement. Banner's board of directors and
its special committee believe that the merger is in the best interests of
Banner's stockholders and that the $11.00 per share price to be paid in
Fairchild Class A Common Stock, subject to adjustments, is fair from a
financial point of view to the holders of Banner common stock, other than
Fairchild and its affiliates.
An independent special committee formed by Banner's board of directors
negotiated this price and the terms and conditions of the merger. The special
committee received the opinion of its financial advisor to the effect that the
consideration Fairchild will pay to the holders of Banner common stock is fair
to such holders from a financial point of view.
Factors Considered by Banner's Board of Directors and Its Special Committee
(Page 19)
In reaching their decision to recommend adoption of the merger agreement,
the special committee and the Banner board of directors considered a number of
factors. These include the following:
. The directors compared the historical and prospective market prices of
Banner common stock with the per share price offered by Fairchild. This
price represents a 25.7% premium over $8.75 per share. The $8.75 per
share price was the closing price of Banner common stock on December 2,
1998, the last full trading day before Fairchild announced its proposal
to acquire the shares owned by the public stockholders of Banner.
. The board of directors of Banner believed that $11.00 paid in Fairchild
Class A Common Stock per share was the highest price that Fairchild would
be willing to pay. The directors of Banner formed this belief after the
special committee's negotiations with Fairchild to obtain the highest
possible price.
. The special committee and the Banner board of directors considered the
opinion of Houlihan Lokey Howard & Zukin, discussed below.
. The special committee and the board of directors of Banner considered the
potential conflicts of interest of Banner management, discussed below.
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. The merger agreement specifically permits Banner, with the concurrence of
the special committee, to terminate the merger agreement if, prior to
consummation of the merger, Banner receives an offer from a third party
to acquire Banner on more favorable terms to Banner's stockholders than
the merger.
Fairness Opinion (Page 20)
Houlihan Lokey delivered to the board of directors of Banner and its special
committee a written opinion, dated January 11, 1999, that the per share price
Fairchild is to pay, including possible adjustments, is fair from a financial
point of view to the public holders of Banner common stock. Houlihan Lokey's
opinion is included as Appendix D to this document. Please read the opinion.
Interests of Banner Management in the Merger (Pages 19, 26)
All members of Banner's board of directors and Banner officers own Banner
common stock or hold Banner stock options and, to that extent, their interest
in the merger is the same as yours. However, some of the officers and directors
of Banner have relationships, or interests in the merger, that are different
from your interests as a stockholder or that present a conflict of interest.
Some of these interests are described below. The special committee and the
board of directors of Banner were aware of these interests and considered them
in recommending and approving the merger.
. Three of the members of the board of directors of Banner are also
directors of Fairchild. These directors were faced with a conflict of
interest because they had to consider the best interests of both Banner
and Fairchild.
. One Banner director is married to an officer of Fairchild and, as a
result, is related to two directors of Fairchild.
. Several Banner directors and executive officers own common stock of
Fairchild.
. Banner management will have their unvested Banner stock options become
vested and converted into Fairchild stock options at the time of the
merger.
In order to avoid these conflicts of interest, the board of directors of
Banner formed the special committee to evaluate the fairness of the merger to
the stockholders of Banner, excluding Fairchild and its affiliates. The special
committee is composed of three Banner board members who are not employees of
Banner or Fairchild and who do not have commercial relationships with Fairchild
or its subsidiaries.
The Merger Consideration
If the merger is completed, Fairchild will exchange $11.00 in market value
of Fairchild Class A Common Stock, subject to adjustments, for each share of
Banner common stock, other than shares held by Fairchild and its affiliates.
Prior to the merger, holders of Banner's Series A Convertible Paid-In-Kind
preferred stock will have each of their shares of Banner preferred stock
mandatorily converted into one share of Banner common stock, and will then
receive the applicable number of shares of Fairchild Class A Common Stock.
Fairchild will make an aggregate payment to all public stockholders of Banner
which will be approximately $41,000,000 in Fairchild Class A Common Stock.
The equivalent value of the Banner common stock is $11.00 if the average per
share closing price of the Fairchild Class A Common Stock is between $13.95 and
$17.05. Examples of the equivalent values of the Banner common stock for the
average per share closing price of the Fairchild Class A Common Stock below and
above those closing prices are as follows:
<TABLE>
<CAPTION>
Example of Price Below Example of Price Above
-------------------------------------------------------------------------------------
Fairchild Class A Equivalent value of Fairchild Class A Equivalent value of
Average closing price Banner common Average closing price Banner common
--------------------- ------------------- --------------------- -------------------
<S> <C> <C> <C>
$13.95 $11.00 $17.05 $11.00
$13.50 $10.65 $17.50 $11.29
$13.00 $10.25 $18.00 $11.61
$12.50 $9.86 $18.50 $11.94
$12.00 $9.46 $19.00 $12.26
</TABLE>
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Conditions to the Merger (Page 32)
There are a number of conditions that must be satisfied before both Banner
and Fairchild are obligated to complete the merger. The most important of these
mutual conditions are:
. the majority of the common stockholders of Banner must approve the
merger. However, Fairchild has agreed to vote all of the Banner common
stock it owns, approximately 83%, in favor of the merger;
. there can be no legal restraints or prohibitions that prevent completion
of the merger; and
. all governmental authorizations necessary for the merger's completion
must have been obtained.
There are additional conditions that Banner must meet before Fairchild is
obligated to complete the merger. The most important of these conditions are:
. Banner must comply in all material respects with the merger agreement;
and
. the representations and warranties Banner made in the merger agreement
must be true in all material respects.
There are additional conditions that Fairchild must meet before Banner is
obligated to complete the merger. The most important of these conditions are:
. Fairchild must comply with the merger agreement in all material respects;
and
. the representations and warranties Fairchild made in the merger agreement
must be true in all material respects.
The first three mutual conditions cannot be waived. The additional
conditions that Banner must meet can be waived by Fairchild, and the additional
conditions Fairchild must meet can be waived by Banner.
Termination of the Merger Agreement (Page 33)
Either Banner or Fairchild may terminate the merger agreement if:
. the merger has not been completed by May 31, 1999;
. the majority of the common stockholders of Banner entitled to vote at the
special meeting do not adopt the merger agreement;
. a law or final court order prohibits the merger; or
. the other party fails to perform in any material respect its obligations
under the merger agreement.
Banner may terminate the merger agreement if:
. Banner receives an offer from a third party to acquire Banner and Banner
(with the concurrence of the special committee) determines that the terms
of such offer are more favorable to Banner's stockholders than the
merger.
No Dissenters' Rights
Under Delaware law, holders of Banner common stock are not entitled to
exercise dissenters' rights in connection with the merger.
Regulatory Matters
No regulatory approval, including under the Hart-Scott-Rodino Antitrust
Improvements Act 1976, as amended, is required in connection with the merger.
Federal Income Tax Consequences (Page 28)
You will not be taxed on your receipt of the $11.00 per share paid in
Fairchild Class A Common Stock. Your tax basis and holding period in your
Banner common stock will become your tax basis and holding period for the
shares of Fairchild Class A Common Stock you receive in exchange for your
Banner common stock. Because determining the tax consequences of the merger can
be complicated, you should consult your tax advisor in order to understand
fully how the merger will affect you.
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COMPARATIVE MARKET PRICE DATA
The following table presents per share closing market prices as reported on
the NYSE Composite Tape for Fairchild Class A Common Stock and Banner common
stock as of December 2, 1998, the last trading day before the public
announcement of Fairchild's intention to acquire Banner, and as of , 1999,
the latest practicable date prior to the printing of this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
Fairchild Class A
Common Stock Price Banner Common Stock Price
------------------ -------------------------
<S> <C> <C>
December 2, 1998.............. $15.50 $8.75
, 1999...................
</TABLE>
Banner stockholders are urged to obtain current market quotations for
Fairchild Class A Common Stock before making a decision with respect to the
merger.
COMPARATIVE PER SHARE DATA
The following tables present unaudited historical and pro forma data to
reflect the completion of the merger and full year impact of significant
transactions on a per share basis for Banner and Fairchild. Pro forma data does
not show what the actual results would have been if the merger had been
completed at the beginning of the time periods shown. Pro forma data also does
not show or predict future results. You should read the data presented below in
conjunction with the historical consolidated financial statements, including
applicable notes, of Fairchild, which are incorporated by reference in this
Proxy Statement/Prospectus and included in Appendix B to this Proxy
Statement/Prospectus and Banner, which are included with this Proxy
Statement/Prospectus, as well as in conjunction with the Pro Forma Consolidated
Financial Information of Fairchild and Banner, including notes, that appears
elsewhere in this document.
The second column reflects the pro forma adjustments to the historical
results in column one for Banner's divestitures of the Hardware Group and
Solair.
The fourth column reflects the pro forma adjustments to historical results
of Fairchild in column three. These pro forma adjustments reflect the merger
and Banner's divestitures.
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<TABLE>
<CAPTION>
Banner Banner Fairchild Fairchild
Historical Pro Forma Historical Pro Forma
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Six months ended December 27, 1998:
Earnings (loss) from continuing
operations per common share
assuming a $13.95 average price:
Basic............................ $(0.59) $(0.02) $(0.35) $ 0.09
Diluted.......................... $(0.59) $(0.02) $(0.35) $ 0.09
Book value per common share...... $11.51 $ -- $20.13 $19.56
Earnings from continuing operations
per common share assuming a $17.05
average price:
Basic............................ $ 0.09
Diluted.......................... $ 0.09
Book value per common share...... $20.00
Six months ended December 28, 1997:
Earnings from continuing operations
per common share:
Basic............................ $ 0.10 $ 0.07
Diluted.......................... $ 0.10 $ 0.07
Book value per common share...... $ 7.02 $13.88
Twelve months ended June 30, 1998:
Earnings from continuing operations
per common share assuming a $13.95
average price:
Basic............................ $ 3.53 $ 0.28 $ 2.78 $ 0.30
Diluted.......................... $ 2.97 $ 0.23 $ 2.66 $ 0.28
Book value per common share...... $10.50 $20.54
Earnings from continuing operations
per common share assuming a $17.05
average price:
Basic............................ $ 0.30
Diluted.......................... $ 0.28
Twelve months ended June 30, 1997:
Earnings from continuing operations
per common share:
Basic............................ $ 0.40 $ 0.11
Diluted.......................... $ 0.39 $ 0.11
Book value per common share...... $ 6.90 $13.98
Twelve months ended June 30, 1996:
Earnings (loss) from continuing
operations per common share:
Basic............................ $ 0.11 $(1.98)
Diluted.......................... $ 0.11 $(1.98)
Book value per common share...... $ 6.15 $14.10
Twelve months ended June 30, 1995:
Earnings (loss) from continuing
operations per common share:
Basic............................ $ 0.02 $(3.49)
Diluted.......................... $ 0.02 $(3.49)
Book value per common share...... $ 6.01 $ 2.50
Twelve months ended June 30, 1994:
Earnings from continuing operations
per common share:
Basic............................ $ 0.28 $ 0.30
Diluted.......................... $ 0.28 $ 0.30
Book value per common share...... $ 6.00 $ 4.32
</TABLE>
Banner and Fairchild did not pay dividends to their common shareholders in
any of the periods represented in this schedule.
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RECENT DEVELOPMENTS
On December 28, 1998 Fairchild announced that it signed a definitive merger
agreement to acquire Kaynar Technologies Inc., an aerospace and industrial
fastener manufacturer and tool company, in a cash merger of Kaynar with a
wholly-owned subsidiary of Fairchild. The purchase price is $28.75 per share of
Kaynar common stock, or approximately $267 million, plus assumption of Kaynar's
debt of approximately $98 million. A majority of the holders of all classes of
Kaynar stock have agreed to vote in favor of that merger. The transaction is
subject to certain conditions, including financing and regulatory approval.
On December 31, 1998, Banner consummated the sale of Solair, Inc., Banner's
largest subsidiary in the rotables group, to Kellstrom Industries, Inc., in
exchange for approximately $57 million in cash and a warrant to purchase
300,000 shares of common stock of Kellstrom.
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RISK FACTORS
In addition to the other information in this Proxy Statement/Prospectus, the
following risk factors should be considered carefully in evaluating an
investment in the Fairchild Class A Common Stock offered by this Proxy
Statement/Prospectus.
Fairchild and Banner have each made forward-looking statements (as that term
is defined in Section 27A of the Securities Act and in Section 20A of the
Exchange Act) in this document (and in documents that are incorporated by
reference in this Proxy Statement/Prospectus) that are subject to risks and
uncertainties. These statements are based on the current beliefs of management
of Fairchild and Banner. Forward-looking statements include the information
concerning possible or assumed future results of operations of Fairchild and
Banner set forth under "Summary," "The Merger," "Fairchild Unaudited Pro Forma
Financial Statements," as well as statements elsewhere in this document that
are preceded by, followed by or that include the words "believes," "expects,"
"anticipates," "intends," "plans," "estimates" or similar expressions. By way
of example, forward looking statements include predictions of cost savings or
other benefits expected to be realized from the merger. Forward-looking
statements are not guaranties of performance. By their nature, they involve
risks, uncertainties and assumptions. The future results and shareholder values
of Fairchild and Banner may differ materially from those expressed in these
forward-looking statements. Many of the factors that will determine these
results and values are beyond Fairchild and Banner's ability to control or
predict. You are cautioned not to put undue reliance on any forward-looking
statement. Any such statement speaks only as of the date of this Proxy
Statement/Prospectus, and Fairchild and Banner do not have any intention or
obligation to update forward-looking statements after they distribute this
Proxy Statement/Prospectus, even if new information, future events or other
circumstances have made such statements incorrect or misleading. For those
statements, Fairchild and Banner claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995.
Risks Relating to the Merger
A decrease in Fairchild's stock price could decrease the merger consideration.
The market prices of Fairchild Class A Common Stock and Banner common stock
may fluctuate significantly before the merger. A decrease in Fairchild Class A
Common Stock price could decrease the merger consideration. After the merger,
the market price of Fairchild Class A Common Stock may fluctuate significantly.
At February 25, 1999, the average closing price of Fairchild Class A Common
Stock for the 20 most recent trading days was $12.644 per share. If the average
for the 20-trading day period ending on the third trading day prior to the date
the merger is effective is below $13.95, the equivalent value of Banner common
stock will be below the $11.00 market value.
Ongoing litigation could interfere with the merger.
The stockholder action, which is described at "The Merger--Litigation
Regarding the Merger," page , alleges that the initially proposed
consideration for the merger was insufficient and that Banner's board of
directors has breached its fiduciary duty. If the plaintiff were to prevail in
the lawsuit and/or obtain injunctive relief, the time for approval and
consummation of the merger would be postponed indefinitely. It is not currently
possible to determine how long such a postponement might be. In addition, if
the stockholder action causes a material adverse change in Banner's business,
financial condition or results of operations, Fairchild would not be obligated
to effect the merger.
Risks Relating to Fairchild
Fairchild's business is in a cyclical industry that depends on a limited number
of aircraft manufacturers.
Fairchild's aerospace fasteners and aerospace distribution segments operate
in historically cyclical industries. These segments are sensitive to general
economic conditions and have been adversely affected by past recessions.
Conditions generally affecting the aerospace industry also influence
performance of the
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aerospace fasteners and aerospace distribution segments. For example, from 1990
to 1994 aerospace-related industries experienced reduced demand for commercial
aircraft, a more rapid decline in military spending and the postponement of
overhaul and maintenance on existing aircraft. In past years, the aerospace
industry has been adversely affected by a number of factors, including
increased fuel and labor costs and intense price competition.
The loss of any of Fairchild's significant customers could result in a
decrease in Fairchild's net sales and have a material adverse effect upon
Fairchild's business. Although no one customer accounted for more than 10% of
Fairchild's net sales in the fiscal year ended June 30, 1998 or for the six
months ended December 27, 1998, the vast majority of Fairchild's revenues come
from customers providing parts or services to Boeing and Airbus. Accordingly,
Fairchild is dependent on the business of those manufacturers. Countries in the
Asia/Pacific region have experienced a weakening in their currency, banking and
equity markets. This financial crisis has adversely affected Asian commercial
airlines and has led to reduced demand for commercial aircraft by Asian
carriers and some carriers serving Asia. On December 1, 1998, Boeing announced
that it would reduce production rates for some of its commercial airline
programs based on updated assessments of the Asian economic crisis. Additional
cancellations or delays in aircraft orders from customers serving Asia of both
Boeing and Airbus would reduce demand for Fairchild's products, and ultimately
could adversely affect Fairchild's consolidated results from operations.
Fairchild has risks resulting from significant amounts of debt
At December 27, 1998, Fairchild had outstanding long-term debt of $278.2
million. If Fairchild consummates the acquisition of Kaynar, Fairchild will
incur significant additional indebtedness. Fairchild's ability to pay its debt
obligations will depend on Fairchild's future performance and assessments of
future performance by prospective financing sources. To a certain extent,
Fairchild's performance will be subject to general economic, financial,
competitive, legislative, regulatory and other factors beyond Fairchild's
control. If Fairchild has difficulty servicing its debt, Fairchild may be
forced to reduce or delay capital expenditures, sell assets, restructure or
refinance Fairchild's debt or seek equity capital. Fairchild might not be able
to implement any of these strategies on satisfactory terms or on a timely
basis, if at all. Fairchild's debt instruments will limit its ability to
undertake certain transactions.
In addition, Fairchild is party to certain bank credit facilities. Such bank
credit facilities contain financial and other restrictive covenants that limit
Fairchild's ability to, among other things, borrow additional money, pay
dividends, sell assets or engage in mergers. If Fairchild does not comply with
these covenants, or does not repay Fairchild's debt on time, Fairchild would be
in default under its debt agreements. Unless Fairchild's lenders waive any such
default, the debt could become immediately payable. This acceleration could
have a material adverse impact on Fairchild.
Fairchild's level of debt and the limitations imposed on Fairchild by
Fairchild's existing or future debt agreements could have important
consequences to you, including the following:
. Fairchild will have to use a portion of its cash flow from operations for
debt service, rather than for Fairchild's operations;
. Fairchild may not be able to obtain additional debt financing for future
working capital, capital expenditures, acquisitions or other corporate
purposes;
. Fairchild could be more vulnerable to economic downturns and less able to
take advantage of significant business opportunities and to react to
changes in market or industry conditions; and
. Fairchild's less leveraged competitors could have a competitive
advantage.
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<PAGE>
The acquisition of Kaynar and future acquisitions have various associated
risks; Fairchild's failure to successfully integrate Kaynar or future
acquisitions into Fairchild's operations could adversely affect Fairchild.
Fairchild believes that it will realize substantial benefits from the
successful integration of Kaynar. However, there can be no assurance that
Fairchild will be able to establish, maintain or increase the profitability of
Kaynar or that Kaynar will be successfully integrated into Fairchild's
operations. Fairchild continually evaluates potential acquisitions and intends
to actively pursue acquisition opportunities, some of which could be material.
Fairchild may finance future acquisitions with internally generated funds, bank
borrowings, issuances of equity or debt securities, or a combination of the
foregoing. There can be no assurance that Fairchild will be able to make
acquisitions on terms favorable to Fairchild. If Fairchild completes
acquisitions, Fairchild will encounter various associated risks. These risks
include the possible inability to integrate an acquired business into its
operations, increased goodwill amortization, diversion of management's
attention and unanticipated problems or liabilities, some or all of which could
have a material adverse effect on Fairchild's operations and financial
performance.
Fairchild's business is very competitive and increased competition could
adversely affect Fairchild.
The markets for Fairchild's products and services are extremely competitive
and Fairchild faces competition from a number of sources in most of its product
lines. Some of Fairchild's competitors have financial and other resources
greater than those of Fairchild and are also well established as suppliers to
the markets that Fairchild serves. Quality, performance, service and price are
generally the prime competitive factors. Fairchild's markets could attract
additional competitors in the future.
Fairchild has incurred operating losses in its Technologies Business
Fairchild owns a technology products unit which designs, manufactures and
markets high performance production equipment and systems required for the
manufacture of semiconductor chips and recordable compact discs
("Technologies"). For Fairchild's fiscal years 1996, 1997 and 1998 and the
first six months of fiscal 1999, Technologies had operating losses of
approximately $1.5 million, $3.6 million, $48.7 million and $16.1 million,
respectively. In addition, primarily as a result of the downturn in the Asian
markets, Technologies has experienced delivery deferrals, order cancellations,
reduction in new orders, lower margins, staff reductions and increased price
competition. Technologies also faces a continuing need for product development.
In response, in February 1998, Fairchild adopted a formal plan to enhance
the opportunities for disposition of Technologies, while improving the ability
of Technologies to operate more efficiently. The plan includes
. reduction in production capacity and headcount at Technologies, and
. the pursuit of potential vertical and horizontal integration with peers
and competitors of Technologies.
Fairchild believes that it may be required to contribute substantial
additional resources to provide Technologies with the liquidity necessary to
continue operating before such integration is completed.
Fairchild's relationship with Mr. Steiner may influence its future.
Jeffrey J. Steiner, Fairchild's Chairman of the Board and Chief Executive
Officer through his control of 2,563,996 shares of the Class B Common Stock and
3,379,488 shares of the Class A Common Stock, has approximately 64% of the
combined voting power of both classes of common stock. This voting power
enables him to elect a majority of the directors of Fairchild and to determine
the outcome of any other matter submitted to stockholders for approval except
for matters requiring approval of holders of both classes voting separately.
The ten-to-one voting rights of the Class B Common Stock may make Fairchild
less attractive as the potential target of a hostile tender offer or other
proposal to acquire or merge with Fairchild, even if such actions would be in
the best interests of the holders of Fairchild Class A Common Stock. The Class
B Common Stock is
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<PAGE>
convertible into Class A Common Stock on a share-for-share basis and is subject
to certain restrictions on transferability.
Articles have appeared in the French press reporting an inquiry by a French
magistrate into certain allegedly improper business transactions involving Elf
Acquitaine, a French petroleum company, its former chairman and various third
parties, including Maurice Bidermann. In connection with this inquiry, the
magistrate has made inquiry into allegedly improper transactions between Mr.
Steiner and that petroleum company. In response to the magistrate's request
that Mr. Steiner appear in France as a witness, Mr. Steiner submitted written
statements concerning the transactions and appeared in person before the
magistrate and others. Mr. Steiner, who has been put under examination (mis en
examen), by the magistrate, with respect to this matter, has not been charged.
Mr. Steiner appeared before the Tribunal de Grande Instance de Paris to
answer a charge of knowingly benefiting in 1990 from a misuse by Mr. Bidermann
of corporate assets of Societe Generale Mobiliere et Immobiliere, a French
corporation in which Mr. Bidermann is believed to have been the sole
shareholder. Mr. Steiner has been assessed a fine of two million French Francs
in connection therewith. Both Mr. Steiner and the prosecutor (parquet) have
appealed the decision.
A proposed Spin-Off is uncertain
In order to focus its operations on the aerospace industry, Fairchild has
been considering for some time distributing (the "Spin-Off") to its
stockholders certain of its assets via distribution of all of the stock of
Fairchild Industrial Holdings Corp. ("FIHC"), which may own all or a
substantial part of Fairchild's non-aerospace operations. Fairchild is still in
the process of deciding the exact composition of the assets and liabilities to
be included in FIHC, but such assets are likely to include certain real estate
interests and Fairchild's 31.9% interest in Nacanco Paketeleme (the largest
producer of aluminum cans in Turkey). The ability of Fairchild to consummate
the Spin-Off, if it should choose to do so, would be contingent, among other
things, on obtaining consents and waivers under Fairchild's credit facility and
all necessary governmental and third party approvals. There is no assurance
that Fairchild will be able to obtain the necessary consents and waivers from
its lenders. In addition, Fairchild may encounter unexpected delays in
effecting the Spin-Off, and Fairchild can make no assurance as to the timing
thereof. There can be no assurance that the Spin-Off will occur.
Depending on the ultimate structure and timing of the Spin-Off, it may be a
taxable transaction to stockholders of Fairchild and could result in a material
tax liability to Fairchild and its stockholders. The amount of the tax to
Fairchild and its stockholders is uncertain. If the tax is material to
Fairchild, Fairchild may elect not to consummate the Spin-Off. Because
circumstances may change and provisions of the Internal Revenue Code of 1986,
as amended, may be further amended from time to time, Fairchild may, depending
on various factors, restructure or delay the timing of the Spin-Off to minimize
the tax consequences thereof to Fairchild and its stockholders, or elect not to
consummate the Spin-Off.
Pursuant to the Spin-Off, FIHC expects to assume certain liabilities,
including contingent liabilities, of Fairchild and may indemnify Fairchild for
such liabilities. In the event that FIHC is unable to satisfy the liabilities
which it will assume in connection with the Spin-Off, Fairchild may have to
satisfy such liabilities.
Changes in government regulations or customer qualifications could adversely
affect Fairchild.
The Federal Aviation Administration prescribes standards and licensing
requirements for aircraft components and licenses component repair stations
worldwide. Comparable agencies also regulate these matters in other countries.
If Fairchild fails to obtain a required certification for one of its products
or services or loses a certification previously granted, the sale of the
subject product or service will be prohibited by law until such certification
is obtained or requalified. Fairchild believes it is currently in material
compliance with FAA requirements existing on the date of this Proxy
Statement/Prospectus. However, changes in FAA regulations
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<PAGE>
could be adopted that, if extensive, could adversely affect the results of
operations of Fairchild. In addition, customers also impose various
certification requirements on aerospace manufacturers such as Fairchild to have
their facilities and products meet certain standards and specifications. If
Fairchild were to fail to meet such certification requirements or lose their
certified status with one or more customers, and fail to have such status
reinstated, it could adversely affect the results of operations of Fairchild.
The Fastener Quality Act of 1991 regulates the manufacture and distribution
of certain high grade industrial fasteners in the United States and imposes
testing, certification and record keeping requirements on manufacturers and
distributors of these fasteners. As a result of the Fastener Quality Act,
Fairchild and other distributors of certain types of fasteners will be required
to maintain records and product tracking systems. Fairchild has implemented
tracking and traceability systems that comply with the regulations. Although
compliance with the Fastener Act has not materially increased expenses for
Fairchild, it is possible that future regulations could result in materially
increased costs for Fairchild. The Fastener Quality Act is currently scheduled
to become effective on June 30, 1999.
Additional shares of Fairchild Class A Common Stock may be sold in the future,
which could adversely impact the price of outstanding shares.
Fairchild has 21,843,468 shares of common stock outstanding, of which
12,463,060 shares are freely tradeable without restrictions or further
registration under the Securities Act. Holders of the remaining shares,
primarily Jeffrey J. Steiner, Chairman of the Board and Chief Executive Officer
of Fairchild, are eligible to sell such shares pursuant to Rule 144 under the
Securities Act at prescribed times and subject to the manner of sale, volume,
notice and information restrictions of Rule 144. Sales of substantial numbers
of shares of Class A Common Stock in the public market could adversely affect
the market price of the Fairchild Common Stock.
Fairchild could be adversely affected if Year 2000 problems are significant.
As the end of the century nears, there is a widespread concern that many
existing computer programs that use only the last two digits to refer to a year
will not properly recognize a year that begins with the digits "20" instead of
"19." If not corrected, many computer applications could fail, create erroneous
results, or cause unanticipated systems failures, among other problems.
Fairchild expects to complete testing of its most critical information
technology and related systems by June 30, 1999, and anticipates that it will
complete its Year 2000 preparations by October 31, 1999. Fairchild could be
subject to liability to customers and other third parties if its systems are
not Year 2000 compliant, resulting in possible legal actions for breach of
contract, breach of warranty, misrepresentation, unlawful trade practices and
other harm.
In addition, Fairchild is continually attempting to assess the level of Year
2000 preparedness of its key suppliers, distributors, customers and service
providers. To this end, Fairchild has sent, and will continue to send, letters,
questionnaires and surveys to its significant business partners inquiring about
their Year 2000 efforts. If a significant business partner of Fairchild fails
to be Year 2000 compliant, Fairchild could suffer a material loss of business
or incur material expenses.
Fairchild is also developing and evaluating contingency plans to deal with
events affecting Fairchild or one of its business partners arising from
significant Year 2000 issues. These contingency plans include identifying
alternative suppliers, distribution networks and service providers. Although
Fairchild's Year 2000 assessment, implementation and contingency planning
phases are not yet complete, Fairchild does not believe that Year 2000 issues
will materially affect its business, results of operations or financial
condition. However, Fairchild's Year 2000 efforts may not be successful in
every respect. As of December 27, 1998, Fairchild has incurred approximately
$0.8 million in costs that are directly attributable to addressing Year 2000
issues. Fairchild management estimates that Fairchild will incur between $2.0
million and $3.0 million in additional costs during the next 12 months relating
to the Year 2000.
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INFORMATION CONCERNING THE SPECIAL MEETING
Time, Place, Date
This Proxy Statement/Prospectus is being furnished to the holders of the
outstanding Banner common stock in connection with the solicitation of proxies
by the board of directors of Banner for use at the special meeting of
stockholders of Banner to be held on , 1999 at a.m. local time, at
, including any adjournments or postponements thereof.
Purpose of the Special Meeting
At the special meeting, holders of Banner common stock will consider and
vote upon a proposal to approve and adopt the merger agreement and the merger
and to transact such other business as may properly come before the meeting.
Additional information concerning the special meeting and the merger agreement
is set forth below and a copy of the merger agreement is attached hereto as
Appendix A. A special committee of independent directors of the board of
directors of Banner has unanimously determined, based upon the opinion of their
financial advisor, that the terms of the merger are fair from a financial point
of view to the holders of the Banner common stock other than Banner common
stock owned by Fairchild or any of its affiliates (all Banner common stock not
so owned by Fairchild or any of its affiliates being referred to herein as the
"Nonaffiliated Shares"), and has recommended that such holders and the board of
directors of Banner vote for approval and adoption of the merger agreement and
the transactions contemplated thereby. Acting on the unanimous recommendation
of the special committee, the board of directors of Banner has approved and
adopted the merger agreement and the merger. The special committee and the
board of directors of Banner recommend that stockholders vote for approval and
adoption of the merger agreement and the merger. However, stockholders of
Banner should be aware that certain of the members of the board of directors of
Banner have conflicts of interest with respect to the merger and accordingly
abstained from voting. See "The Merger--Interest of Certain Persons in the
Merger; Certain Relationships."
Record Date; Quorum; Outstanding Banner
Common Stock Entitled To Vote
The record date for the special meeting has been fixed as the close of
business on February 16, 1999. Only holders of record of Banner common stock on
the record date are entitled to notice of and to vote at the special meeting.
Holders of Banner common stock on the Record Date are entitled to one vote for
each share of Banner common stock held on matters properly presented at the
special meeting. A stockholders' list will be available for examination by
holders of Banner common stock, for any purpose related to the special meeting,
during the 5-day period preceding such meeting, at the offices of Harris Trust
and Savings Bank, 600 Superior Avenue East, Suite 600, Cleveland, Ohio, 44114.
Telephone: (216) 263-3638 or (800) 539-7216.
At the close of business on the record date, there were 23,788,499 shares of
issued Banner common stock and 21,541,532 of outstanding Banner common stock
held of record by 63 registered holders. The holders of a majority of the
Banner common stock entitled to vote who are present in person or represented
by proxy will constitute a quorum for the transaction of business at the
special meeting. Fairchild's approximately 83% ownership of the outstanding
Banner common stock will be sufficient to create a quorum at the special
meeting.
Vote Required; Certain Banner Common
Stock Voting in Favor of the Merger
Pursuant to the Delaware General Corporation Law, the merger agreement must
be approved and adopted by the affirmative vote of the holders of a majority of
the outstanding Banner common stock (the "DGCL Vote Requirement"). Fairchild
will vote its Banner common stock for approval and adoption of the merger
agreement. As of the record date, Fairchild was the owner of 17,839,974 shares
of Banner common stock, approximately 83% of the outstanding shares of Banner
common stock. The merger is also subject to other conditions. See "Certain
Provisions of the Merger Agreement--Conditions."
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Failure to return an executed proxy card or to vote in person at the special
meeting or voting to abstain will constitute, in effect, a vote against
approval and adoption of the merger agreement for purposes of the DGCL Vote
Requirement.
No Dissenters' Rights
Under the DGCL, no holder of Banner common stock will have dissenters'
rights of appraisal as a result of the merger.
Action To Be Taken Under the Proxy
All proxies in the enclosed form that are properly executed and returned to
Banner's transfer agent, Harris Trust and Savings Bank, on or before the date
of the special meeting, and not revoked, will be voted at the special meeting
or any adjournments or postponements thereof in accordance with any
instructions thereon or, if no instructions are provided, will be voted FOR
adoption and approval of the merger agreement. Any stockholder who has given a
proxy pursuant to this solicitation may revoke it by attending the special
meeting and giving oral notice of his or her intention to vote in person,
without compliance with any other formalities. In addition, any proxy given
pursuant to this solicitation may be revoked prior to the special meeting by
delivering to the Secretary of Banner an instrument revoking it or a duly
executed proxy bearing a later date.
Management of Banner does not know of any matters other than those set forth
herein which may come before the special meeting. If any other matters are
properly presented to the special meeting for action, it is intended that the
persons named in the enclosed form of proxy and acting thereunder will vote in
accordance with their best judgment on such matters. Such matters could include
an adjournment or postponement of the special meeting from time to time in the
event the board of directors of Banner or the special committee determines that
holders of Banner common stock have not had sufficient time to consider the
merger agreement. If any such determination is made, additional proxies may be
solicited during such adjournment period.
Proxy Solicitation
The expense of mailing this Proxy Statement/Prospectus and the proxies
solicited hereby will be borne by Banner. The expense of preparing and printing
this Proxy Statement/Prospectus will be borne equally by Fairchild and Banner.
In addition to the use of the mail, proxies may be solicited by officers,
directors and employees of Banner, without additional remuneration, by personal
interviews, written communication, telephone or facsimile transmission. Banner
also will request brokerage firms, nominees, custodians and fiduciaries to
forward proxy materials to the beneficial owners of Banner common stock held of
record, and will provide reimbursement for the cost of forwarding the material
in accordance with customary charges.
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THE MERGER
Purpose and Background of the Merger
Prior to the initial public offering of Banner in 1990, Fairchild owned,
through a subsidiary, 100% of the shares of the Banner common stock. As a
result of the initial public offering, Fairchild's indirect beneficial
ownership of Banner common stock was reduced from 100% to 47.2%.
Effective February 25, 1996, Fairchild completed a transfer of its Harco
Business to Banner in exchange for 5,386,477 shares of Banner common stock. The
exchange increased Fairchild's ownership of Banner common stock from
approximately 47.2% to 59.3%. Accordingly, since February 25, 1996, Fairchild
has consolidated the financial results of Banner for accounting purposes.
In May 1997, Banner issued rights to its existing stockholders pursuant to
which each stockholder could acquire one share of a newly established 7.5%
convertible preferred stock for every 4.5 shares of Banner common stock owned.
Fairchild signed a commitment to subscribe for its pro rata share of such newly
established preferred stock. On June 18, 1997, Banner received subscriptions
for 3,710,955 shares of Banner Preferred Stock resulting in gross proceeds to
Banner of $34.1 million. Such proceeds were used to reduce outstanding debt of
Banner. By virtue of this transaction, Fairchild's beneficial ownership of
Banner increased from 59.3% to approximately 62.6%.
In January 1998, Banner repurchased 2,246,967 shares of Banner common stock
for a total cost of $23.3 million, increasing Fairchild's ownership to 66.3% at
the end of March 31, 1998.
On May 11, 1998, Fairchild commenced an offer to exchange, for each properly
tendered share of Banner common stock, a number of shares of Fairchild's Class
A Common Stock, equal to the quotient of $12.50 divided by $20.675, up to a
maximum of 4,000,000 shares of Banner common stock. The exchange offer expired
on June 9, 1998, and 3,659,364 shares of Banner common stock were validly
tendered for exchange and Fairchild issued 2,212,361 shares of its Class A
common stock to the tendering stockholders. As a result of the exchange offer,
Fairchild's ownership of Banner Common Stock increased to 83.3%. Fairchild
effected the exchange offer to increase its ownership of Banner to more than
80% in order for Fairchild to include Banner in its United States consolidated
corporate income tax return.
On several occasions in the period between September 1998 through November
1998, Jeffrey J. Steiner, the Chairman of the Board and Chief Executive Officer
of Fairchild, discussed with certain senior officers of Fairchild and Banner
the possibility that Fairchild might consider making an offer to acquire all of
the outstanding public shares of Banner common stock at a future time. During
this period, the senior management of Fairchild analyzed strategic options
available to Fairchild, including transactions involving the purchase of the
Nonaffiliated Shares, but no decision to proceed was made.
On December 1, 1998, a meeting of the board of directors of Banner was held.
Eight of nine directors were present in person or by teleconference. At the
meeting, Mr. Steiner advised the Banner board of directors that Fairchild was
considering the possibility of making an offer to acquire the outstanding
Nonaffiliated Shares. He outlined a possible time frame in which such an offer
might be made, if at all, and discussed the potential implications of such an
acquisition. A discussion followed, at the end of which the Banner board of
directors concluded that, in view of Fairchild's position as a controlling
stockholder of Banner and certain directors of Banner either serving as
directors or officers of Fairchild or having other relationships with Fairchild
and its management, it would be appropriate to constitute a special committee.
The Banner board of directors determined that the special committee would be
composed entirely of directors without such positions or relationships, which
would permit independent consideration of any proposal that Fairchild might
make. The Banner board of directors then appointed Steven Gerard, Charles Haar
and Leonard Toboroff to act in that capacity, should Fairchild determine to
offer to acquire the Nonaffiliated Shares. See "Management of Banner and
Surviving Corporation." The special committee was authorized to evaluate and
negotiate the terms of a proposed transaction, to make a recommendation to the
full Banner board of directors concerning any proposed
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transaction and to cause any proposed transaction determined to be acceptable
to be consummated. The Banner board of directors also authorized the special
committee to retain independent legal and financial advisors to assist it in
discharging these delegated duties.
During the period December 1-3, 1998, the special committee discussed the
retention of an independent financial advisor. Among the relevant
considerations in determining who to engage were the degree of expertise in the
areas of mergers and acquisitions and going private transactions, familiarity
with special committee procedures and prior knowledge of Banner's business and
prospects. After consideration of potential candidates, the special committee
selected Houlihan Lokey to serve as its financial advisor, which had been
engaged to assist Banner on two previous occasions in connection with merger
and acquisition transactions. The special committee's selection of Houlihan
Lokey was subject to confirmation of the existence of no conflict of interest
(which was subsequently confirmed to be the case). The special committee
informed Houlihan Lokey of its decision and discussed with the financial
advisor the terms of the proposed transaction, the scope of such firm's
engagement and the procedures that such firm would utilize in the course of
such engagement.
The special committee also determined that Mr. Gerard would act as its
Chairman and that he should meet with and supervise engagement of independent
legal counsel.
On December 2, 1998, a special telephonic meeting of the board of directors
of Fairchild was convened with each director of Fairchild in attendance in
person or by teleconference. Mr. Steiner reviewed with the Fairchild board of
directors the recommendation of senior management of Fairchild that Fairchild
offer to acquire the Nonaffiliated Shares at a price of $9.75 per share,
payable entirely in Fairchild Class A Common Stock. At such meeting, Mr.
Steiner outlined the potential advantages in operating benefits and
efficiencies that could be realized were Banner a wholly-owned subsidiary of
Fairchild. After a lengthy discussion, the Fairchild board of directors
approved an offer to acquire in a merger all of the Nonaffiliated Shares at
$9.75 per share, to be paid entirely in Fairchild Class A Common Stock. The
Fairchild board of directors delegated to senior management of Fairchild
authority to negotiate this proposed transaction, including the price to be
paid, on behalf of Fairchild, subject to final approval by the Fairchild board
of directors. The price proposed to be paid for the Nonaffiliated Shares was
based principally upon historic trading prices for the Banner common stock, on
premiums paid in selected minority share purchases and a determination by the
Fairchild board of directors as to what would be an appropriate price to offer
holders of the Nonaffiliated Shares.
Subsequent to the Fairchild board of directors meeting, Mr. Steiner
communicated to the members of the special committee the terms of this proposed
transaction. This included its structure, the price proposed to be paid for the
Nonaffiliated Shares and the proposed adjustment to the purchase price based
upon fluctuations in value of Fairchild Class A Common Stock and the common
stock of AlliedSignal held by Banner.
On December 3, 1998, Fairchild and Banner publicly announced this proposed
transaction, including the proposed purchase price of $9.75 per share of Banner
common stock. The release indicated that this proposed transaction was subject
to certain conditions such as:
. the approval of the Banner board of directors (which was expected to
refer the Proposed Transaction to the special committee),
. consents of lenders to Fairchild and Banner,
. the execution of a definitive merger agreement, and
. the approval of this proposed transaction by Banner stockholders.
On December 4, 1998, a purported class action lawsuit against Fairchild,
Banner and Banner's directors was initiated in Delaware. See "--Litigation
Regarding the Merger."
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Over the next several weeks, Houlihan Lokey conducted its financial due
diligence review of Banner and Fairchild. In connection with such due diligence
it reviewed, among other things, annual and quarterly reports, including:
. financial statements of Banner and Fairchild;
. historical business and financial information relating to Banner and
Fairchild;
. pro forma financial statements and projections for Fairchild (including
Banner) for the period ending June 30, 2004 prepared by management of
Fairchild;
. forecasts for Banner for the period ending March 31, 1999 prepared by
management of Banner;
. historical market price and trading volume for Banner's and Fairchild's
publicly traded securities;
. publicly available data for certain companies deemed comparable to Banner
and Fairchild;
. publicly available price and premiums paid in other transactions deemed
similar to this proposed transaction; and
. documentation relating to the merger.
Houlihan Lokey also met with members of senior management of Banner and
Fairchild to discuss the operations, financial condition, future prospects and
projected operations and performance of Banner and Fairchild, respectively.
On December 11, 1998, the chairman of the special committee met with
representatives of Olshan Grundman Frome Rosenzweig & Wolosky LLP to discuss
its retention as counsel. They reviewed this proposed transaction and the
course of discussions to date. They discussed potential transaction issues and
how these issues might be addressed. Thereafter, the special committee
determined to retain Olshan as counsel.
In connection with their legal due diligence, representatives of Olshan
reviewed, among other things, certain books and records of Banner and
Fairchild, including the minutes of meetings of the boards of directors and
committees of the boards of both companies; publicly filed documents of Banner
and Fairchild; the terms of the contractual arrangements between Banner on the
one hand and Fairchild and/or other of Fairchild's affiliates on the other; and
the principal contractual arrangements to which Banner is a party, including
agreements relating to its financing; and various litigation.
On December 18, 1998, the special committee met with Houlihan Lokey and its
counsel. A representative of Olshan discussed with the special committee its
duties and obligations to Banner stockholders. Olshan reviewed standards under
Delaware law applicable to evaluation and negotiation of a transaction such as
this proposed transaction and the role of a special committee. The special
committee requested that Olshan prepare a memorandum concerning the duties and
obligations of a special committee and provide it with copies of the principal
Delaware case law in this area. The special committee reviewed a time line for
this proposed transaction, which included discussion of transaction
documentation and the procedure for filing with and review by the Securities
and Exchange Commission of proxy materials that would be utilized for a meeting
of Banner stockholders. A representative of Houlihan Lokey reviewed the process
inherent in a fairness opinion and efforts undertaken by it to date. He
explained the valuation methodology to be used involving Banner, Fairchild and
their respective publicly traded securities. He also discussed a variety of
issues that might be expected to affect valuation, including certain aspects of
the operations of the two companies. The meeting concluded with a discussion of
some of the issues that could be expected to arise in a draft of the proposed
merger agreement.
During the weeks following this meeting, Houlihan Lokey and Olshan continued
their due diligence activities. These included visits by Houlihan Lokey and
Olshan to the principal offices of Banner, a visit by Houlihan Lokey to the
principal office of Fairchild and numerous telephone conversations between each
of the special committee's advisors and senior management of Banner.
During the week of January 4, 1999, Cahill Gordon & Reindel, counsel to
Fairchild, provided initial drafts of the merger agreement and this Proxy
Statement/Prospectus to Banner and its counsel and negotiations began with
respect to the terms of the merger agreement.
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<PAGE>
On January 7, 1999, the special committee again met with Houlihan Lokey and
Olshan. The principal purpose of the meeting was to hear the preliminary report
of Houlihan Lokey with regard to fairness of this proposed transaction.
Representatives of Houlihan Lokey reviewed due diligence completed by it. They
then reviewed a timeline of events from January 1997 to date that they regarded
as significant to the valuation of Banner and Fairchild. They presented a
comparative analysis of premiums paid in comparable transactions. Houlihan
Lokey then provided its preliminary range of valuation of Banner, utilized the
market multiple, discounted cash flow and comparable transaction approaches to
total invested capital, in the case of operational assets, and trading values,
transaction price and an option model, in the case of non-operational assets.
They reviewed Banner pro forma historical and projected representative earning
levels and risk rankings. They then reviewed Fairchild historical and projected
representative earnings levels and risk rankings and provided preliminary
conclusions as to Fairchild valuation. The special committee discussed the
material presented and determined a range of acceptable price for the
Nonaffiliated Shares.
The special committee agreed that Mr. Gerard would meet with senior
management of Fairchild on the same day to present the special committee's
viewpoint. Negotiations then continued at a meeting with Fairchild senior
management and the parties agreed in principle to increase the purchase price
to be paid for the Nonaffiliated Shares to $10.60. Concurrently, counsel to the
special committee furnished to Cahill, Banner's comments on the draft merger
agreement.
Cahill circulated a second draft of the merger agreement on January 9 and
negotiations on the document followed through the weekend. Houlihan Lokey
continued to refine its preliminary conclusion on valuations based in part upon
updated and further financial information regarding Banner provided to it by
senior management of Banner. On January 11, Mr. Gerard communicated with Mr.
Steiner outlining the special committee's belief that a further increase in the
price to be paid for the Nonaffiliated Shares was justified.
On January 11, 1999, the special committee met with Houlihan Lokey and
Olshan. Mr. Gerard updated the other members on the developments of the prior
five days. A representative of Houlihan Lokey outlined recent increases in the
valuation of Banner assets. The special committee reviewed with Olshan its
responsibilities regarding the transaction price to be obtained and
consideration of alternative transactions. The meeting of the special committee
was then adjourned to permit Mr. Gerard and Mr. Steiner to discuss the terms of
this proposed transaction. Following these negotiations, Mr. Gerard and Mr.
Steiner ultimately resolved all principal outstanding issues. These included an
increase to $11.00 in the price to be paid for the Nonaffiliated Shares and the
application of the "collar" on AlliedSignal shares held by Banner solely to
those 1,642,789 shares not subject to hedging arrangements.
The meeting of the special committee was then reconvened. Houlihan Lokey
rendered an oral opinion that, as of such date, the $11.00 per Nonaffiliated
Share in Fairchild Class A Common Stock to be received by holders of
Nonaffiliated Shares in the merger was fair from a financial point of view to
such holders. This opinion was confirmed in writing as of January 11, 1999. See
"--Opinion of Houlihan Lokey for the Special Committee." After full discussion,
the special committee determined that the terms of the merger, subject to
revised documentation, were fair to, and in the best financial interests of,
the holders of the Nonaffiliated Shares. The special committee then unanimously
adopted resolutions recommending to the board of directors of Banner that,
subject to revised documentation, it approve and adopt the merger agreement and
recommend to the holders of Nonaffiliated Shares that they vote to approve and
adopt the merger agreement.
The meeting of the board of directors of Banner then commenced. The Banner
board of directors reviewed the principal terms of the merger and heard the
oral opinion of Houlihan Lokey. After full discussion, the board of directors
of Banner determined that the merger was fair to, and in the best financial
interest of, the holders of the Nonaffiliated Shares, and adopted resolutions
to approve and adopt the merger agreement and to recommend that such holders
vote to approve and adopt the merger agreement. During the remainder of the day
and the evening of January 11, representatives of Cahill and Olshan finalized
the terms of the merger agreement. The merger agreement was then executed and
delivered by representatives of Banner, Fairchild and MTA.
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On January 12, 1999, Banner and Fairchild jointly announced that they had
reached agreement on the terms of the merger.
Recommendation of the Special Committee and Board of Directors
of Banner; Fairness of the Merger
At a meeting held on January 11, 1999, the special committee unanimously
determined:
. to recommend that the Board of Directors of Banner approve and adopt the
merger agreement and that the board of directors of Banner recommend to
the holders of the Nonaffiliated Shares that such stockholders vote to
approve and adopt the merger agreement;
. to recommend to the holders of the Nonaffiliated Shares that such
stockholders vote to approve and adopt the merger agreement; and
. that the terms of the merger were fair from a financial point of view to,
and in the best interests of, the holders of the Nonaffiliated Shares.
At a meeting of the board of directors of Banner held on January 11, 1999,
at which eight of the nine directors of Banner were present or participated by
telephone, the board of directors of Banner, based on the unanimous
recommendation of the special committee:
. approved and adopted the merger agreement;
. determined to recommend to the holders of the Nonaffiliated Shares that
they vote to approve and adopt the merger agreement; and
. determined that the terms of the merger were fair from a financial point
of view to, and in the best interests of, Banner and the holders of the
Nonaffiliated Shares. See "--Purpose and Background of the Merger."
The Special Committee. In determining to recommend to the board of directors
of Banner that it approve and adopt the merger agreement, and in determining
the fairness of the terms of the merger, the special committee considered
factors including the following, each of which, in the special committee's
view, supported the special committee's determination to recommend the merger:
. the financial condition, assets, results of operations, business and
prospects of Banner, and the risks inherent in achieving those prospects,
including the belief of management of Banner, as expressed to the special
committee and which the special committee generally found to be
reasonable;
. the terms and conditions of the merger agreement, including the amount
and form of consideration, the nature of the parties' representations,
warranties, covenants and agreements, the limited number of conditions to
the obligations of Fairchild (including the absence of a financing
condition) and the rights of the special committee and the board of
directors of Banner, are consistent with their fiduciary duties to the
holders of the Nonaffiliated Shares, including the right under certain
circumstances to withdraw their respective recommendations;
. the history of the negotiations with respect to the merger, and the
belief of the members of the special committee that $11.00 to be paid in
Fairchild Class A Common Stock per Nonaffiliated Share was the best price
that Banner could obtain from Fairchild;
. the fact that the $11.00 paid in Fairchild Class A Common Stock per
Nonaffiliated Share to be received by the holders of the Nonaffiliated
Shares in the merger represented a premium of 25.7% over the closing price
of the common stock on December 2, 1998, the last full trading day before
the public announcement of this proposed transaction;
. the stock price and trading volume history of the Banner common stock;
. the opinion of Houlihan Lokey as to the fairness from a financial point
of view of the $11.00 to be paid in Fairchild Class A Common Stock per
Nonaffiliated Share to be received by the holders of the
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Nonaffiliated Shares and the analysis presented to the special committee
by Houlihan Lokey (see "--Opinion of Houlihan Lokey for the Special
Committee"); and
. the absence of any expression of interest on the part of potential third
party acquirers of Banner.
In light of the number and variety of factors the special committee
considered in connection with its evaluation of this proposed transaction, the
special committee did not find it practicable to assign relative weights to the
foregoing factors, and accordingly, the special committee did not do so.
Although the special committee did consider historical trading prices of the
Banner common stock, the special committee did not consider trading prices of
the Banner common stock for the period following the announcement of the merger
because it believed that such prices reflected anticipation of the possibility
of the purchase of the Nonaffiliated Shares by Fairchild.
The special committee regularly consulted with Houlihan Lokey during the
course of its work in connection with its analysis of Banner and the evaluation
of the merger. The special committee believes that the analysis of Houlihan
Lokey is reasonable.
The special committee believes that the merger is procedurally fair because:
. the special committee consisted of disinterested directors appointed to
represent the interests of, and to negotiate on an arm's-length basis
with Fairchild on behalf of, the holders of the Nonaffiliated Shares;
. the special committee retained and was advised by independent legal
counsel; and
. the special committee retained Houlihan Lokey as an independent
financial advisor to assist it in evaluating the merger. In addition,
the special committee believes that the merger is procedurally fair
because the $11.00 to be paid in Fairchild Class A Common Stock per
share price and the other terms and conditions of the merger agreement
resulted from active arm's-length bargaining between the special
committee and Fairchild.
The members of the special committee have had ongoing contact with Banner's
management concerning developments with respect to Banner, including financial
results. However, such developments have not affected the special committee's
determination with respect to the fairness of the merger, nor have such
developments led the members of the special committee to conclude that such
developments warranted an additional meeting of the special committee.
The Board of Directors of Banner. The board of directors of Banner, at a
meeting held on January 11, 1999, considered the unanimous recommendation of
the special committee, as well as the factors (enumerated above) considered by
the special committee, and determined that the merger is fair from a financial
point of view to, and in the best interests of, Banner and the holders of the
Nonaffiliated Shares, approved and adopted the merger agreement, and
recommended that such stockholders vote to approve and adopt the merger
agreement. The members of the board of directors of Banner are not aware of
developments with respect to Banner, including its financial results, that
would affect its determination with respect to the fairness of the merger. Mr.
Steiner, Dr. Steiner, Mr. Alcox and Mr. Hercot, given their status as
interested directors, abstained from voting.
Opinion of Houlihan Lokey for the Special Committee
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The
following is a brief summary and general description of the valuation
methodologies followed by Houlihan Lokey. The summary does not purport to be a
complete statement of the analyses and procedures applied, the judgements made
or the conclusion reached by Houlihan Lokey or a complete description of its
presentation. Houlihan Lokey believes, and so advised the special committee,
that its analyses must be considered as a whole and that selecting portions of
its analyses and of the factors considered by it, without considering all
factors and analyses, could create an incomplete view of the process underlying
its analyses and opinions.
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<PAGE>
The special committee retained Houlihan Lokey to render an opinion as to the
fairness, from a financial point of view, of the $11.00 stock consideration to
be received by the public common stockholders of Banner in the merger. On
January 7, 1999, Houlihan Lokey updated the special committee with respect to
its analysis. On January 11, 1999, Houlihan Lokey delivered its oral opinion,
followed by a written opinion on January 11, 1999, to the special committee and
to the board of directors of Banner that, as of such date and based on the
matters described therein, the consideration to be received by the public
common stockholders of Banner is fair from a financial point of view.
The complete text of Houlihan Lokey's opinion is attached hereto as Appendix
D. The summary of the opinion set forth below is qualified in its entirety by
reference to the opinion. Banner stockholders are urged to read the opinion
carefully in its entirety for a description of the procedures followed, the
factors considered and the assumptions made by Houlihan Lokey.
The Houlihan Lokey opinion addresses only the fairness from a financial
point of view of the stock consideration to be received by the public common
stockholders of Banner pursuant to the merger agreement and does not constitute
a recommendation to the Banner stockholders. The opinion does not address
Banner's or Fairchild's underlying business decision to effect the merger.
In connection with the preparation of the opinion, Houlihan Lokey made such
reviews, analyses and inquiries as it deemed necessary and appropriate under
the circumstances. Among other things, Houlihan Lokey:
. reviewed the publicly available financial information in the Banner's
Form 10-K for the fiscal years ended March 31, 1995 through March 31,
1998, Form 10-Q of Banner as of September 30, 1998 and unaudited
results of Banner as of October 31, 1998, prepared by the management of
Banner;
. reviewed the publicly available financial information in Fairchild's
Form 10-K for the fiscal years ended June 30, 1995 through June 30,
1998, and Form 10-Q of Fairchild as of September 27, 1998;
. met with certain members of the senior management of Banner and
Fairchild to discuss the operations, financial condition, future
prospects and projected operations and performance of Banner and
Fairchild;
. visited the business offices of Banner and Fairchild located in Dulles,
Virginia;
. reviewed a pro forma forecast for Banner dated May 27, 1998 prepared by
the management of Banner, for the fiscal year ending March 31, 1999;
. reviewed pro forma forecasts dated December 30, 1998 for Fairchild
(including Banner) prepared by the management of Fairchild, for the
years ending June 30, 1999 through 2004;
. reviewed the charter and by-laws of Banner;
. reviewed the historical market prices and trading volume for the
publicly traded securities of Banner and Fairchild;
. reviewed publicly available financial data for certain companies that
Houlihan Lokey deemed comparable to Banner and Fairchild, and publicly
available prices and premiums paid in other transactions that Houlihan
Lokey considered similar to the merger; and
. conducted such other studies, analyses and inquiries as it deemed
appropriate.
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<PAGE>
Houlihan Lokey also reviewed pro forma projections, portions of which are
extracted below.
<TABLE>
<CAPTION>
Fairchild
-------------------------------------------------------
Projected Fiscal Year Ending
-------------------------------------------------------
June June June June June
1999 2000 2001 2002 2003 June 2004
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
(In Thousands)
Revenues............... $705,104 $754,577 $802,866 $883,010 $960,381 $1,038,461
EBIT................... $ 64,178 $ 74,890 $ 87,350 $108,633 $128,971 $ 149,155
<CAPTION>
Banner
-------------------------------------------------------
Projected Fiscal Year Ending
-------------------------------------------------------
March March March March March
1999 2000 2001 2002 2003 March 2004
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
(In Thousands)
Revenues............... $154,000 $161,700 $169,785 $178,274 $187,188 $ 196,547
EBIT................... $ 11,500 $ 12,613 $ 13,243 $ 13,905 $ 14,601 $ 15,331
</TABLE>
In assessing the financial fairness of the consideration to be received in
the merger Houlihan Lokey:
. analyzed the reasonableness of the trading value of Banner's and
Fairchild's publicly traded common stock;
. valued the common equity of Banner using widely accepted valuation
methodologies; and
. analyzed the reasonableness of the trading value of the Fairchild Class
A Common Stock being used as consideration in the merger.
Valuation of Banner Aerospace, Inc.
Independent Valuation Analysis of Banner. Houlihan Lokey separated its
valuation of Banner into two categories of assets: (1) a valuation of the
continuing operations of Banner, including all balance sheet assets that
contribute to the operations of Banner ("Operational Assets") and (2) a
valuation of all balance sheet assets that do not contribute to the continuing
operations of Banner, including investments in other publicly traded companies
("Non-operational Assets"). To determine the valuation of the Operational
Assets, Houlihan Lokey applied three widely used valuation approaches, namely,
the market multiple approach, the discounted cash flow approach and the
comparable transactions approach. To determine the value of the Non-operational
Assets, each Non-operational Asset was valued separately on an after-tax basis
to arrive at an aggregate value of the Non-operational assets at Banner. With
respect to investments in the stock of publicly traded companies, except for
Banner's $6.7 million investment in Kaynar stock, Houlihan Lokey used the 30-
day average trading price for the shares to determine an appropriate value of
the investment. With respect to determining the value of the investment in
Kaynar, Houlihan Lokey used a share price equal to the acquisition price being
offered in the Kaynar acquisition pursuant to an executed definitive merger
agreement. With respect to valuing investments in Non-operational Assets that
included an option position against a publicly traded company, Houlihan Lokey
used the Black-Scholes option model to value each of these investments.
Market Multiple Approach. The market multiple approach used by Houlihan
Lokey involved the multiplication of various earnings and cash flow measures by
appropriate risk-adjusted multiples. Multiples used by Houlihan Lokey were
determined through an analysis of certain publicly traded companies, selected
on the basis of operational and economic similarity with the principal business
operations of Banner. Houlihan Lokey calculated earnings and cash flow
multiples for the comparative companies based upon daily trading prices. A
comparative risk analysis between Banner and the public companies formed the
basis used by Houlihan Lokey for the selection of appropriate risk-adjusted
multiples for Banner. The risk analysis used by Houlihan Lokey incorporated
both quantitative and qualitative risk factors which relate to, among other
things, the nature of the industry in which Banner and other comparative
companies are engaged. For purposes of this analysis, Houlihan Lokey selected
the following publicly-traded companies: AAR Corp., Aviall Inc., AVTEAM, Inc.,
First Aviation Services Inc. and Kellstrom.
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<PAGE>
Discounted Cash Flow Approach. In the discounted cash flow approach,
projections for Banner, as prepared by the management of Banner and Fairchild,
for the fiscal years ending March 31, 1999 through March 31, 2004 were
utilized. The projected cash flows were analyzed on a "debt-free" basis, before
cash payments to equity and interest-bearing debt investors, in order to
develop a total invested capital ("TIC") value indication for Banner. A
provision for the TIC value of Banner at the end of the forecast period, or
terminal value, was also made by Houlihan Lokey. The present value of the
interim cash flows and the terminal value was determined by Houlihan Lokey
using a risk-adjusted rate of return or "discount rate." The discount rate used
by Houlihan Lokey, in turn, was developed through an analysis of rates of
return on alternative investment opportunities on investments in companies with
similar risk characteristics to Banner.
Comparable Transactions Approach. Houlihan Lokey analyzed the acquisition
multiples paid in publicly announced, majority acquisitions of select companies
in the aerospace distribution industry. Houlihan Lokey's study analyzed
transactions that were announced between October 1996 and December 1998.
Premium Analysis
Houlihan Lokey analyzed minority buyout transactions from January 1, 1994,
to the present, where the acquiror owned at least 75% of the target prior to
the announcement date of the proposed merger. Houlihan Lokey analyzed the
premium paid to the price of the stock of the target one day prior to, one week
prior to, and 30 days prior to the announcement date of the proposed merger.
The premium paid to the price of the common stock of Banner prior to the
announcement date for the same time periods used in the Houlihan Lokey study
yielded the following results:
<TABLE>
<CAPTION>
1-Day Prior to 1-Week Prior to 30-Days Prior to
Announcement Date Announcement Date Announcement Date
----------------- ----------------- -----------------
<S> <C> <C> <C>
Premium to Banner common
stock price............ 25.7% 41.9% 39.6%
</TABLE>
Houlihan Lokey believes that the premium paid for Banner's common stock was
within an acceptable range of fairness for transactions in which control was
not being acquired.
Valuation of Fairchild
To determine the reasonableness of the value of the Fairchild Class A Common
Stock to be received by the public common stockholders of Banner pursuant to
the merger, Houlihan Lokey used the market multiple approach and the comparable
transactions approach to assess the reasonableness of Fairchild's public
trading value. In addition, Houlihan Lokey used one of the aforementioned
widely used valuation approaches to arrive at an independent valuation of
Fairchild, namely, the discounted cash flow approach. The financial operations
and forecasts prepared by the management of Fairchild and used by Houlihan
Lokey for purposes of its analysis was pro forma for the acquisition of Kaynar
by Fairchild.
Market Multiple Analysis. Houlihan Lokey analyzed the multiples of certain
publicly traded companies as compared to Fairchild. Houlihan Lokey selected the
comparable companies on the basis of operational and economic similarity with
the principal business operations of Fairchild. Houlihan Lokey calculated
earnings and cash flow multiples for the comparative companies based upon daily
trading prices. For purposes of this analysis, Houlihan Lokey selected the
following publicly traded companies: Cordant Technologies Inc., SPS
Technologies, Inc., Textron, Inc., Triumph Group Inc., and Kaynar Technologies,
Inc.
Comparable Transaction Analysis. Houlihan Lokey also analyzed the
acquisition multiples paid in publicly announced, majority acquisitions of
selected companies in the aerospace manufacturing industry. Houlihan Lokey's
study analyzed transactions that were announced between November 1996 and
December 1998.
Discounted Cash Flow Approach. Houlihan Lokey separated its valuation using
the discounted cash flow approach into two asset categories:
23
<PAGE>
. a valuation of the continuing operations at Fairchild, including all
balance sheet assets that contribute to the operations of Fairchild
("Fairchild Operational Assets"); and
. a valuation of all balance sheet assets that do not contribute to the
continuing operations at Fairchild, including investments in other
publicly traded companies ("Fairchild Non-operational Assets"). In the
discounted cash flow approach, projections for Fairchild, as prepared by
Fairchild's management, for the fiscal years ending June 30, 1999 through
June 30, 2004 were utilized. The projected cash flows used by Houlihan
Lokey were analyzed on a "debt-free" basis (before cash payments to
equity and interest-bearing debt investors) in order to develop a TIC
value indication for Fairchild. A provision for the TIC value of the
Fairchild at the end of the forecast period, or terminal value, was also
made by Houlihan Lokey. Houlihan Lokey determined the present value of
the interim cash flows and the terminal value using a risk-adjusted rate
of return or "discount rate."
With respect to the valuation of the Fairchild Non-operational Assets, each
Fairchild Non-operational Asset was valued by Houlihan Lokey separately on an
after-tax basis to arrive at a cumulative value of the Fairchild Non-
Operational assets. With respect to investments in the stock of publicly traded
companies, Houlihan Lokey used the 30-day average trading price for the shares
to determine an appropriate value of the investment. With respect to valuing
investments in Fairchild Non-operational Assets that were not publicly traded,
Houlihan Lokey valued those investments at their book value or at a value
provided by a third-party interested in acquiring the Fairchild Non-operational
Asset.
Fairness Conclusion
Based on the analyses described above, Houlihan Lokey concluded that the
value of the consideration to the public common stockholders of Banner to be
received pursuant to the merger agreement is fair from a financial point of
view.
Houlihan Lokey was not requested to, and did not, solicit third party
indications of interest in acquiring all or any part of Banner.
Houlihan Lokey relied upon and assumed, without independent verification,
that the financial forecasts and projections provided to it were reasonably
prepared and reflected the best available estimates of the future financial
results and condition of Banner and Fairchild, and except as disclosed in such
financial forecasts and projections, that there had been no material change in
the assets, financial condition, business or prospects of Banner or Fairchild
since the date of the most recent financial statements made available to
Houlihan Lokey.
Houlihan Lokey did not independently verify the accuracy and completeness of
the information supplied to it with respect to Banner and does not assume any
responsibility with respect to Banner and Fairchild. Houlihan Lokey did not
make any independent appraisal of any of the properties or assets of Banner.
The opinion is necessarily based on business, economic, market and other
conditions as they existed and could be evaluated by Houlihan Lokey at the date
of the opinion.
Houlihan Lokey is a nationally recognized investment banking firm with
special expertise in, among other things, valuing businesses and securities and
rendering fairness opinions. Houlihan Lokey is continually engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, leveraged buyouts, private placements of debt and equity,
corporate reorganizations, employee stock ownership plans, corporate and other
purposes.
Fees and Expenses. Pursuant to a retainer agreement entered into on January
7, 1999, Houlihan Lokey was retained by the special committee to analyze the
fairness of the consideration to be received in the Proposed Transaction by
Banner's public common stockholders from a financial point of view. Houlihan
Lokey
24
<PAGE>
received $100,000 from Banner upon the signing of the retainer agreement, and
$125,000 when it provided the special committee with its oral advice as to the
merger and will be paid an additional $125,000 when the first proxy materials,
which include the opinion, are mailed to Banner stockholders. Houlihan Lokey
was also to be reimbursed by Banner for reasonable out-of-pocket expenses
incurred by Houlihan Lokey in connection with the rendering of the opinion.
Certain Consequences of the Merger
Pursuant to the merger agreement, following approval and adoption of the
merger agreement and subject to the fulfillment or waiver of certain
conditions, MTA will be merged with and into Banner, and Banner will continue
as the surviving corporation of the merger. The Nonaffiliated Shares of Banner
will be converted in the merger by Fairchild into the right to receive
Fairchild Class A Common Stock. Upon consummation of the merger, Banner will be
a wholly-owned subsidiary of Fairchild. Therefore, following the merger, the
holders of the Nonaffiliated Shares will no longer share in the future earnings
or growth of Banner or benefit from any increases in the value of Banner, and
will no longer bear directly the risk of any decreases in the value of Banner.
Because the holders of the Nonaffiliated Shares will have no continuing
interest in Banner following the merger, the Banner common stock will no longer
meet the requirements of the NYSE for continued listing and will therefore be
delisted from the NYSE.
Banner common stock is currently registered under the Exchange Act.
Registration of the Banner common stock under the Exchange Act will be
terminated and Banner will be relieved of the obligation to comply with the
public reporting requirements of the Exchange Act, including the obligation to
comply with the proxy rules of Regulation 14A under Section 14.
At the effective time of the merger, unexercised options to purchase Banner
common stock pursuant to certain stock option plans in which certain Banner
employees and directors participate will be converted into options to purchase
Fairchild shares pursuant to the terms of such plans and all unvested options
will vest as of the effective time of the merger. See "Certain Provisions of
the Merger Agreement--Treatment of Stock Options."
The directors and officers of Banner immediately prior to the merger will be
replaced immediately after the merger with designees of Fairchild. The
Certificate of Incorporation and Bylaws of Banner immediately prior to the
effective time of the merger will be the Certificate of Incorporation and
Bylaws of Banner as the surviving corporation immediately after the merger.
Listing of Fairchild Class A Common Stock
Fairchild intends to file an application to list on the NYSE the shares of
Fairchild Class A Common Stock to be issued in the merger and the shares
issuable upon the exercise of Banner stock options that are converting in the
merger to be exercisable for Fairchild Class A Common Stock. The listing of the
shares of Fairchild Class A Common Stock to be issued in the merger is a
condition to the consummation of the merger.
Plans for Banner After the Merger
Fairchild has not, as of the date of this Proxy Statement/Prospectus,
approved any specific plans or proposals involving Banner after the merger.
However, Fairchild does intend to use the assets of Banner in support of
Fairchild's operations and plans for growth, which could include substantial
sales of assets of Banner to finance acquisitions or for general corporate
purposes.
Conduct of the Business of Fairchild and Banner if the Merger Is Not
Consummated
If the merger is not consummated, Fairchild and Banner expect that Banner
will continue to be controlled by Fairchild. The businesses of Fairchild and
Banner would probably continue substantially as currently conducted. However,
Fairchild expects that it would use its control of Banner to cause Banner to
act in support of Fairchild's operations and plans for growth, which could
include Fairchild borrowing money from Banner. In addition, Banner could buy
Fairchild stock in accordance with its existing investment plans.
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<PAGE>
If the merger is not consummated, Fairchild may purchase additional Banner
common stock on terms more or less favorable to the holders of the
Nonaffiliated Shares than the terms of the merger or sell Banner common stock,
from time to time, at prices deemed acceptable to Fairchild, pursuant to a
merger transaction, tender offer, and open market or privately negotiated
transactions or otherwise. However, currently Fairchild has not made any
decision about any future transactions if the merger is not consummated.
Interest of Certain Persons in the Merger; Certain Relationships
In considering the recommendation of the special committee and of the board
of directors of Banner, the stockholders of Banner should be aware that certain
officers and directors of Banner have certain interests in the merger or
certain relationships, including those referred to below, that present actual,
potential or the appearance of potential conflicts of interest in connection
with the merger. The Special Committee and the board of directors of Banner
were aware of these potential or actual conflicts of interest and considered
them along with other matters described under "--Recommendation of the Special
Committee and the Board of Directors of Banner, Fairness of the Merger."
Common Stock Ownership
Directors and executive officers of Banner beneficially owned as of February
25, 1999 approximately 87% of the outstanding Banner common stock, mostly as a
result of owning a controlling interest in Fairchild. Directors and executive
officers of Fairchild owned as of February 25, 1999 approximately 87% of the
outstanding shares of Banner common stock and 99% and 25% of the outstanding
shares of Fairchild Class A Common Stock and Class B Common Stock,
respectively. All Banner common stock held by such directors and executive
officers at the effective time of the merger will be converted, upon
consummation of the merger, along with all other publicly held Banner common
stock, into the right to receive the merger consideration. Fairchild and Banner
believe that the present intention of their respective directors and executive
officers who own Banner common stock is to vote all Banner common stock as to
which they possess voting power for approval and adoption of the merger
agreement. See "Securities Ownership--Ownership of Banner Common Stock" and
"Securities Ownership--Ownership of Fairchild Class A Common Stock by Directors
and Executive Officers of Banner."
Directors and Officers
Jeffrey J. Steiner is the Chairman of the Board, Chief Executive Officer and
President of Banner and the Chairman of the Board and Chief Executive Officer
of Fairchild. Michael T. Alcox is a director of Banner and Fairchild. Dr. Eric
I. Steiner is a director and a Senior Vice President of Banner and director,
President and Chief Operating Officer of Fairchild and is the son of Jeffrey J.
Steiner. Philippe Hercot is a director of Banner and is the son-in-law of
Jeffrey J. Steiner and the brother-in-law of Dr. Eric Steiner. Philippe Hercot
is also the husband of Natalia Hercot, an officer of Fairchild. Donald E.
Miller serves as the General Counsel for Banner and serves as Executive Vice
President, General Counsel and Secretary of Fairchild . In addition, Eugene W.
Juris is a Vice President and Chief Financial Officer of Banner, and provided
in fiscal 1998 accounting services for a Fairchild subsidiary which reimbursed
Banner for Mr. Juris' salary and expenses for that period.
For services performed as members of the special committee, Steven Gerard,
the Chairman, will receive a fee of $40,000 and Charles Haar and Leonard
Toboroff will each receive a fee of $30,000.
Indemnification and Insurance
Fairchild agreed to cause Banner to maintain for not less than six years
Banner's current director and officer liability insurance to the extent
available or substantially equivalent policies; provided, that Fairchild will
not have to pay more than 150% of the current annual premiums paid by Banner.
Fairchild has also agreed that all rights to indemnification now existing in
favor of the directors or officers of Banner and its subsidiaries
26
<PAGE>
as in effect on the date of the merger agreement shall continue for a period of
six years beyond the merger. See "The Merger--Certain Provisions of the Merger
Agreement--Covenants."
Accounting Treatment
Fairchild will account for the merger using the purchase method of
accounting.
Fees and Expenses and Source of Funds
The cash costs and fees to be incurred in connection with the merger
agreement are estimated in the aggregate to be approximately $1.1 million. Such
expenses include registration fees, financial advisory fees, accounting fees,
legal fees and printing costs.
The merger agreement calls for costs and fees to be paid by the party which
incurred them. Such expenses include registration fees, financial advisory
fees, accounting and legal fees.
Fairchild currently expects it will issue shares of Fairchild Class A Common
Stock with an aggregate value of approximately $41.0 million to pay the merger
consideration to the holders of the Nonaffiliated Shares.
Regulatory Requirements
Except for the filing of the certificate of merger with the Secretary of
State of the State of Delaware after the approval and adoption of the merger
agreement pursuant to the DGCL, and compliance with federal and state
securities laws, neither Fairchild nor Banner is aware of any material United
States federal or state or foreign governmental regulatory requirement
necessary to be complied with, or any approval that must be obtained, in
connection with the merger.
Litigation Regarding the Merger
Immediately after the public announcement of this proposed transaction, on
or about December 4, 1998 a purported class action lawsuit against Fairchild,
Banner and Banner's directors was initiated by a Banner stockholder, in
Delaware State Court, styled Yassin v. Banner Aerospace, Inc., et al., Civ. A
168 22NC (Del. Ch. New Castle Co.). The complaint alleges that the price
offered by Fairchild for the Nonaffiliated Shares was inadequate and that
negotiations leading up to the proposal were not conducted at arm's length. The
stockholder action complaint purports to be brought by a holder of
Nonaffiliated Shares on behalf of all holders of Nonaffiliated Shares, and
seeks injunctive relief and unspecified money damages. The complaint alleges,
among other things, that the defendants breached their fiduciary duties to
Banner's minority stockholders because the initially proposed merger
consideration was inadequate and unfair. Fairchild and Banner believe that
their actions and those of Banner's board of directors (and its special
committee) in connection with the merger have been in accordance with Delaware
law. The time in which the defendants may answer or move against the complaint
has been extended to March 26, 1999.
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<PAGE>
MATERIAL TAX CONSIDERATIONS
The following is a summary of certain federal income tax consequences of the
Merger. This summary is based upon the Internal Revenue Code of 1986, as
amended, the ("Code"), Treasury Regulations, administrative rulings, and
judicial decisions as of the date hereof, all of which are subject to change
(possibly with retroactive effect). No ruling has been or will be requested
from the Internal Revenue Service (the "Service") on the tax consequences of
the merger. Accordingly, there can be no assurance that the Service will not
take a position contrary to one or more positions reflected herein or that the
positions reflected herein will be upheld if challenged by the Service.
This summary applies only to those holders of Banner common stock who hold
their shares as "capital assets" within the meaning of Section 1221 of the
Code. This summary does not address the federal income tax consequences that
may be relevant to a particular holder subject to special treatment under
applicable federal income tax laws, including, without limitation, holders who
are foreign persons, insurance companies, tax-exempt organizations, financial
institutions, dealers in securities, persons who acquired Banner common stock
pursuant to the exercise of employee stock options or rights or otherwise as
compensation, persons who hold their shares of Banner common stock through a
partnership or other pass-through entity or persons who hold Banner common
stock as part of a straddle or conversion transaction. Moreover, the summary
does not address state, local or foreign tax consequences of the merger.
Consequently, each holder should consult such holder's own tax advisor as to
the specific tax consequences of the merger to such holder.
In the opinion of John L. Flynn, Senior Vice President, Tax of Fairchild,
Banner's tax advisor, an exchange of Banner common stock for Fairchild Class A
Common Stock pursuant to the merger will be treated for federal income tax
purposes as an exchange pursuant to Section 368(a)(1)(B) of the Code and:
. no gain or loss will be recognized by Fairchild, any of its wholly owned
subsidiaries, Banner or MTA as a result of the merger;
. no gain or loss will be recognized by a holder of Banner common stock
upon the exchange of such Banner common stock solely for Fairchild Class
A Common Stock, except with respect to the receipt of cash in lieu of
fractional shares of Fairchild Class A Common Stock;
. the aggregate adjusted tax basis of shares of Fairchild Class A Common
Stock received in the merger by a holder of Banner common stock,
including fractional shares of Fairchild Class A Common Stock deemed
received and redeemed as described below, will be the same as the
aggregate adjusted tax basis of the Banner common stock exchanged
therefor;
. the holding period of shares of Fairchild Class A Common Stock received
in the merger by a holder of Banner common stock (including fractional
shares of Fairchild Class A Common Stock deemed received and redeemed as
described below) will include the holding period of the Banner common
stock exchanged therefor; and
. a holder of Banner common stock who receives cash in lieu of fractional
shares of Fairchild Class A Common Stock will be treated as having
received such fractional shares and then as having received such cash in
redemption of such fractional shares. Under Section 302 of the Code,
provided such deemed redemption is "substantially disproportionate" with
respect to such holder or is "not essentially equivalent to a dividend"
after giving effect to the constructive ownership rules of the Code, the
holder will generally recognize capital gain or loss equal to the
difference between the amount of cash received and the holder's adjusted
tax basis in such fractional shares. Such capital gain or loss will be
long-term capital gain or loss if the holder's holding period in the
fractional shares is more than one year.
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<PAGE>
CERTAIN PROVISIONS OF THE MERGER AGREEMENT
The following includes a description of certain provisions of the merger
agreement and is qualified in its entirety by reference to the merger
agreement, a copy of which is attached hereto as Appendix A and is incorporated
herein by reference.
Merger Consideration
In the merger, all Nonaffiliated Shares will be converted, by virtue of the
merger and without any action on the part of such stockholder, into the right
to receive for each share of Banner common stock $11.00 in market value (based
on the average closing price on the NYSE for the 20 most recent trading days
ending on the third trading day prior to the merger) in shares of Fairchild
Class A Common Stock. Immediately prior to the merger, each share of Banner
Preferred Stock will be mandatorily converted into one share of Banner common
stock, which will then receive the applicable merger consideration. Shares of
Banner common stock held by Fairchild and its subsidiaries will remain
outstanding.
The merger consideration may be adjusted based upon either or both of two
factors:
. The market value of the shares of Fairchild Class A Common Stock are
subject to a "collar" of no less than $13.95 or no more than $17.05. This
means that, regardless of the trading price of Fairchild Class A Common
Stock, 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 Banner
common stock.
. The merger consideration will be adjusted on a per-share, after-tax basis
to reflect any decrease in the value of 1,642,789 shares of AlliedSignal
common stock owned by Banner below $65.3 million or an increase above
$79.9 million. The price of shares of AlliedSignal common stock would
have to be above $48.61 per share or below $39.77 per share before any
adjustment would take effect. For every $1.00 that the average per share
AlliedSignal common stock price is above or below the range of $48.61 and
$39.77, the merger consideration would be increased or decreased by $.037
per share, as the case may be.
Effective Time
The effective time of the merger will occur upon the filing of the
certificate of merger with the Secretary of the State of Delaware. The
certificate of merger will be filed as soon as practicable after the approval
and adoption of the merger agreement and the merger by the stockholders of
Banner at the special meeting, and after the other conditions precedent to the
consummation of the merger have been satisfied or waived. See "--Certain
Provisions of the Merger Agreement--Conditions."
Exchange and Payment Procedures
As soon as practicable after the effective time of the merger, the paying
agent, ChaseMellon Shareholder Services L.L.C., will mail to each record holder
(other than Fairchild and its affiliates) of an outstanding certificate or
certificates representing Banner common stock as of the effective time of the
merger (including holders of Banner Preferred Stock, whose certificates will be
deemed converted to Banner common stock by that time), a letter of transmittal
and instructions. The letter of transmittal will be used to surrender such
certificates in exchange for the merger consideration. Upon surrender to the
paying agent of a certificate representing Banner common stock, together with
such letter of transmittal, duly executed, the holder of such certificate shall
be entitled to receive the merger consideration. Until surrendered in
accordance with the foregoing instructions, each certificate representing
Banner common stock will represent for all purposes only the right to receive
the merger consideration.
Stockholders of Banner should not send their Banner common stock
certificates now and should send them only pursuant to instructions set forth
in letters of transmittal to be mailed to Banner stockholders as soon as
practicable after the effective time of the merger. In all cases, the merger
consideration will be provided only in accordance with the procedures set forth
in this Proxy Statement/Prospectus and such letters of transmittal.
29
<PAGE>
Fairchild and Banner strongly recommend that certificates for Banner common
stock and letters of transmittal be transmitted only by registered United
States mail, return receipt requested, appropriately insured. Holders of Banner
common stock whose certificates are lost will be required, at the holder's
expense, to furnish a lost certificate affidavit and bond acceptable in form
and substance to the paying agent.
Any merger consideration not validly claimed by stockholders of Banner will
be subject to surrender to governmental entities pursuant to applicable
abandoned property, escheat or similar laws. Neither the paying agent nor any
party to the merger agreement will be liable to any holder of certificates
formerly representing Banner common stock for any amount paid to any such
governmental entity.
Banner will pay all charges and expenses of the paying agent in connection
with the merger and the payment and issuance of the merger consideration.
Any questions concerning exchange and payment procedures and requests for
letters of transmittal may be addressed to the paying agent at ChaseMellon
Shareholder Services, L.L.C., Attn: Reorganization Department, by mail: Post
Office Box 3301, South Hackensack, NJ 07606; by hand: 120 Broadway, 13th Floor,
New York, NY 10271; or by overnight courier: 85 Challenger Road, Mail Drop-
Reorg, Ridgefield Park, NJ 07660. For additional information call 1-800-777-
3674.
Transfer of Banner Common Stock
No transfer of Banner common stock will be made on the stock transfer books
of Banner after the close of business on the day immediately prior to the
effective date of the merger. If, on or after the effective date, certificates
for Banner common stock are presented, they will be canceled and exchanged for
the merger consideration as provided in the preceding section of this Proxy
Statement/Prospectus.
Treatment of Stock Options
The merger agreement provides that each outstanding option to acquire Banner
common stock under the 1990 Non-Qualified and Incentive Stock Option Plan,
Banner's 1996 Non-Employee Director Stock Option Plan and the Stock Award
Agreement for Philippe Hercot, in each case as such plan may have been amended,
will, upon consummation of the merger, be converted by virtue of the merger and
without any action on the part of the holder thereof into the right to purchase
on exercise thereof the number of shares of Fairchild Class A Common Stock that
they would have received as merger consideration had such options been
exercised immediately prior to the merger, except that each option, to the
extent not then exercisable, shall become exercisable in full on the date the
merger becomes effective. See the merger agreement, attached as Appendix A.
No Appraisal Rights
Holders of Banner common stock will not have any dissenters' rights of
appraisal under the merger agreement or Delaware law.
Covenants
Banner has agreed to submit the merger agreement for consideration by the
stockholders of Banner at the special meeting and to recommend to the
stockholders of Banner the approval of the transactions contemplated by the
merger agreement.
Fairchild has agreed to vote its Banner common stock in favor of the merger.
MTA has agreed not to engage in any activities prior to the effective time of
the merger except as provided in the merger agreement.
30
<PAGE>
Fairchild also has agreed to cause Banner to maintain for not less than six
years Banner's current director and officer liability insurance to the extent
available or substantially equivalent policies; provided, that Fairchild will
not be required to pay more than 150% of the annual premiums paid by Banner
during the 12 month period ending September 30, 1998. In addition, all rights
to indemnification now existing in favor of the present directors or officers
of Banner and its subsidiaries as in effect on the date of the merger agreement
shall continue for a period of six years beyond the merger.
Fairchild and Banner have agreed in the merger agreement:
. to prepare and file with the Commission this Proxy Statement/Prospectus
and otherwise to make all necessary filings and take all necessary
actions in order to comply with federal and state securities laws
applicable to all the transactions contemplated by the merger agreement;
. to consult with each other in advance of making public announcements
concerning the merger; and
. to use their reasonable efforts to take or cause to be taken all action
and to do or cause to be done all things necessary or advisable to
consummate the transactions contemplated by the merger agreement.
Banner has agreed to afford to Fairchild and its representatives reasonable
access to information needed for the purpose of evaluating the transactions
contemplated by the merger agreement.
Representations and Warranties
The merger agreement contains various representations and warranties of
Banner to Fairchild and MTA, including with respect to the following matters:
. the due organization and valid existence of Banner and its subsidiaries
and similar corporate matters;
. the capitalization of Banner;
. the due authorization, execution and delivery of the merger agreement and
its binding effect on Banner;
. regulatory filings and approvals, and the lack of conflicts between the
merger agreement and the transactions contemplated thereby with Banner's
Certificate of Incorporation or By Laws, contracts to which it or its
subsidiaries are parties, or any law, rule, regulation, order, writ,
injunction or decree binding upon Banner or its subsidiaries;
. the accuracy of Banner's SEC filings and financial statements;
. the absence of certain changes or undisclosed liabilities;
.certain litigation matters;
. the opinion of the special committee's financial advisor;
. compliance with applicable laws; and
. the accuracy of the information provided by Banner for inclusion in this
Proxy Statement/Prospectus.
Such representations and warranties are subject to some specified exceptions
and qualifications.
The merger agreement also contains representations and warranties of
Fairchild and MTA to Banner, including with respect to the following matters:
. the due organization and valid existence of each of Fairchild and MTA and
similar corporate matters;
. the capitalization of Fairchild;
. the due authorization, execution and delivery of the merger agreement by
Fairchild and MTA, and its binding effect on them;
. regulatory filings and approvals, and the absence of conflicts of the
merger agreement and the transactions contemplated thereby with the
Fairchild Certificate of Incorporation or by laws of each of Fairchild
and MTA, or with any contract binding upon Fairchild and MTA, or with any
law, rule, regulation, order, writ, injunction or decree binding upon any
of such parties;
. the accuracy of the information provided by Fairchild and MTA for
inclusion in this Proxy Statement/Prospectus;
31
<PAGE>
. the formation and absence of prior activities of MTA;
. the absence of undisclosed liabilities;
. compliance with applicable laws;
. Fairchild's ownership of Banner's capital stock;
. independent investigation of Banner by Fairchild and MTA; and
. the absence of any brokerage, finder's or similar fee in connection with
the merger.
Such representations and warranties are subject to some specified exceptions
and qualifications.
Conditions
The obligations of Banner, MTA and Fairchild to consummate the merger are
subject to the fulfillment or waiver (if permissible) at or prior to the
effective time of the merger of certain conditions, including:
. the satisfaction of the DGCL Vote Requirement;
. there not being in effect any statute, rule, regulation, executive order,
decree, ruling or injunction or other order of a court or agency
directing that the transactions contemplated by the merger agreement not
be consummated;
. all required governmental and third party consents and approvals having
been obtained and continuing to be in effect at the effective time of the
merger, except for failures which would not, individually or in the
aggregate, have a material adverse effect (as defined below) on Fairchild
(assuming the merger had taken place); and
. the Form S-4 registration statement (of which this Proxy
Statement/Prospectus is a part) shall have become effective under the
Securities Act, and no stop order shall have been issued.
The obligations of Fairchild and MTA to effect the merger are further
subject to the fulfillment or waiver (if permissible) at or prior to the
effective time of the merger of the following conditions:
. Banner taking all necessary corporate actions to approve and comply with
the merger agreement;
. the representations and warranties of Banner in the merger agreement
being true in all material respects when made and as of the date the
merger is effected;
. Banner having performed in all material respects its obligations
contained in the merger agreement;
. Banner not having suffered a material adverse change; and
. Banner having obtained all consents required from its bank lenders to
effect the merger.
The obligation of Banner to effect the merger is further subject to the
fulfillment or waiver (if permissible) at or prior to the date the merger is
effected of the following conditions:
. Fairchild and MTA taking all necessary corporate actions to approve and
comply with the merger agreement;
. the representations and warranties of Fairchild and MTA in the merger
agreement being true in all material respects when made and as of the
date the merger is effected;
. Fairchild and MTA having performed in all material respects their
obligations contained in the merger agreement;
. Fairchild not having suffered a material adverse change;
. Fairchild and MTA having obtained all consents required by their bank
lenders to effect the merger;
32
<PAGE>
. the receipt of the opinion of Houlihan Lokey; and
. the listing on the NYSE of the Fairchild Class A Common Stock to be
issued in the merger and to be issued upon exercise of options into which
options to purchase Banner common stock are to be converted.
As used in the merger agreement, the term "Material Adverse Effect" means
with respect to Banner any adverse change in the financial condition, business
or properties of Banner which is material to Banner and its subsidiaries, taken
as a whole, and, with respect to Fairchild, any adverse change in the financial
condition, business or properties of Fairchild which would materially impact
the ability of Fairchild and MTA to fulfill their obligations under the merger
agreement.
The merger agreement provides that the parties may waive compliance in whole
or in part with any of the conditions contained in it to the extent permitted
by law, provided that any such waiver by Banner must be approved by the special
committee. As of the date of this Proxy Statement/Prospectus, Banner, Fairchild
and MTA do not intend to waive any material conditions under the merger
agreement.
Termination; Amendments; Withdrawal of Recommendations
The merger agreement provides that it may be terminated and the merger
abandoned at any time prior to the date the merger is effected, whether before
or after approval by the stockholders of Banner:
1. by mutual written consent of Fairchild, MTA and Banner (with the
concurrence of the special committee);
2. by any of Fairchild, MTA or Banner (with the concurrence of the
special committee in the case of termination by Banner) if:
. any court of competent jurisdiction in the United States or some
other governmental body or regulatory authority shall have issued an
order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the merger and such
order, decree, ruling or other action shall have become final and
nonappealable;
. the merger shall not have been consummated by May 31, 1999, provided
that the right to terminate the merger agreement in such event is not
available to any party whose failure to fulfill any of its
obligations under the merger agreement results in the failure of the
merger to occur on or before such date; or
. the merger agreement and the merger shall have been voted on by
stockholders of Banner at the special meeting and the vote shall not
have been sufficient to satisfy the DGCL Vote Requirement;
3. by Fairchild or MTA if Banner shall have failed to perform in any
material respect any of its material obligations under the merger agreement
to be performed by Banner, which failure to perform has not been cured
within 30 days following receipt by Banner of notice from Fairchild of such
failure to perform;
4. by Banner with the concurrence of the special committee if MTA or
Fairchild shall have failed to perform in any material respect any of their
material obligations under the merger agreement to be performed by
Fairchild or MTA, which failure to perform has not been cured within 30
days following receipt by Fairchild of notice from Banner of such failure
to perform; and
5. by Banner, if prior to consummation of the merger, Banner shall have
received a bona fide written offer from a third party to acquire for
consideration consisting of cash and/or securities more than 50% of the
combined voting power of Banner securities then outstanding or all or
substantially all of the assets of Banner, and the special committee shall
have determined in its good faith judgment (based on the advice of a
financial advisor of nationally recognized reputation) that the terms of
such offer are more favorable to Banner's stockholders than the merger.
33
<PAGE>
COMPARATIVE MARKET PRICE AND DIVIDEND INFORMATION
Banner Common Stock
Price Range of Banner Common Stock
Since August 1990, Banner common stock has traded on the NYSE under the
symbol "BAR". The following table sets forth the quarterly high and low prices
as reported by the NYSE for fiscal 1997, 1998, the first three quarters of
fiscal 1999, December 2, 1998 (the last full trading day prior to the day on
which the initial proposal to effect the merger was publicly announced),
January 11, 1999 (the last full trading day prior to the day on which the
approval of the merger agreement was publicly announced), and February 16, 1999
(the record date).
<TABLE>
<CAPTION>
High Low
Fiscal 1997 ----- -----
<S> <C> <C>
Quarter Ended:
June 30, 1996..................................... $ 9 $ 5 3/8
September 30, 1996................................ 8 3/8 7 3/8
December 31, 1996................................. 8 5/8 7 3/4
March 31, 1997.................................... 9 3/4 7 1/4
Fiscal 1998
Quarter Ended:
June 30, 1997..................................... $ 8 7/8 $ 6 7/8
8
September 30, 1997................................ 11 1/4 3/8
December 31, 1997................................. 11 11/16 8 3/4
March 31, 1998.................................... 12 9 5/8
Fiscal 1999
Quarter Ended:
June 30, 1998..................................... $ 12 7/8 $ 10 7/8
September 30, 1998................................ 13 7 11/16
December 31, 1998................................. 9 9/16 7 3/8
March 31, 1999 (through , 1999)...........
Other Dates:
December 2, 1998.................................. $ 9 1/16 $ 8 3/4
January 11, 1999.................................. 9 7/8 9 9/16
February 16, 1999................................. 9 5/8 9 1/2
</TABLE>
As of December 31, 1998, Banner had a total of 3,493,457 shares of 7.5%
convertible Preferred Stock outstanding. Banner Preferred Stock is convertible
into Banner common stock on a share for share basis.
As a result of the exchange offer, the number of record holders of Banner
common stock has fallen below the continued listing criteria for NYSE listed
companies. The NYSE has not taken any action to delist the Banner common stock.
Banner Dividends
It is Banner's policy to retain earnings to support the growth of its
present operations and to reduce its outstanding debt. Any future determination
as to the payment of cash dividends on Banner's common stock will be at the
discretion of Banner's board of directors and will depend on Banner's financial
condition, results of operations and capital requirements, restrictive
covenants in the credit agreement that limit the payment of dividends in any
fiscal year and such other factors as the board of directors of Banner deems
relevant. No dividends were declared in fiscal 1998 or 1997 on Banner's common
stock. Banner issued 102,144 and 291,015 shares of Banner preferred stock as a
result of dividends on Banner preferred stock in fiscal 1998 and 1999,
34
<PAGE>
respectively. The next scheduled dividend payment date on the Banner preferred
stock is April 30, 1999. If the merger is consummated prior to that date, no
additional dividends will be paid on the Banner preferred stock.
If the proposed merger is not consummated, the declaration of future
dividends, if any, will necessarily be dependent upon business conditions, the
earnings and financial position of Banner and Banner's plans with respect to
operating and capital expenditures and such other matters as Banner's board of
directors deems relevant.
Holders of Record
Banner had 63 holders of record at February 16, 1999.
Fairchild Class A Common Stock
Price Range of Fairchild Class A Common Stock
The Fairchild Class A Common Stock is quoted on the NYSE under the symbol
"FA." The following table sets forth the quarterly high and low prices as
reported by the NYSE for fiscal 1997, 1998, the first two quarters of fiscal
1999, December 2, 1998 (the last full trading day prior to the day on which the
initial proposal to effect the merger was publicly announced), January 11, 1999
(the last full trading day prior to the day on which the approval of the merger
agreement was publicly announced).
<TABLE>
<CAPTION>
High Low
Fiscal 1997 ---- ----
<S> <C> <C>
Quarter ended:
September 29, 1996................................... $ 17 $12 1/4
December 29, 1996.................................... 17 3/4 14 3/8
March 30, 1997....................................... 15 3/8 12 7/8
June 30, 1997........................................ 18 15 5/8
Fiscal 1998
Quarter ended:
September 28, 1997................................... $28 11/16 $ 17
December 28, 1997.................................... 28 11/16 19 5/16
March 31, 1998....................................... 21 9/16 21 1/8
June 30, 1998........................................ 23 18 3/16
Fiscal 1999
Quarter ended:
September 27, 1998................................... $23 7/8 $12 3/8
December 27, 1998.................................... 17 5/8 10 3/8
March 28, 1999 (through , 1999).................
Other Dates:
December 2, 1998..................................... $16 1/8 $15 5/8
January 11, 1999..................................... 16 15 9/16
</TABLE>
On February 25, 1999, the last reported sale price of Fairchild Class A
Common Stock as quoted on the NYSE was $12 1/16. As of December 31, 1998 there
were approximately 1,300 holders of record of Fairchild Class A Common Stock
and approximately 39 holders of record of Fairchild Class B Common Stock.
Fairchild Dividends
Fairchild has not paid a dividend since fiscal 1992 on its common stock. The
payment of cash dividends in the future will depend on Fairchild's earnings,
financial condition and capital needs and on other factors deemed relevant by
the board of directors of Fairchild at that time. It is the current policy of
Fairchild's board of directors to retain earnings to finance the operations and
expansion of Fairchild's business.
35
<PAGE>
CAPITALIZATION
The following table sets forth the cash position and the capitalization of
Fairchild as of September 27, 1998, and on a pro forma basis to give effect to
the issuance of shares of Fairchild Class A Common Stock by Fairchild pursuant
to the merger. This table should be read in conjunction with Fairchild's
Consolidated Financial Statements incorporated by reference to this Proxy
Statement/Prospectus and attached as Appendix B hereto and, the Fairchild Pro
Forma Consolidated Financial Statements and their related notes and the other
information included in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
December 27, Pro
1998 Forma(1)
(In thousands, except share data) ------------ --------
<S> <C> <C>
Cash and short-term investments......................... $232,323 $231,222
======== ========
Short-Term Debt......................................... $ 22,434 $ 22,434
Existing Credit Facilities.............................. 273,350 273,350
Other Debt.............................................. 7,732 7,732
-------- --------
Total Debt.............................................. $303,516 $303,516
-------- --------
Stockholders' Equity
Class A common stock, $0.10 par value; 40,000,000
shares authorized; 26,708,726 (actual) and 29,690,292
(pro forma) shares issued; and 19,219,006 (actual)
and 22,200,572 (pro forma) shares outstanding........ 2,671 2,969
Class B common stock, $0.10 par value; 20,000,000
shares authorized; 2,624,662 shares issued and
outstanding.......................................... 262 262
Paid-in capital....................................... 195,291 241,019
Retained earnings..................................... 294,222 294,222
Cumulative other comprehensive loss................... 21,183 21,183
Treasury Stock, 7,489,720 shares of Class A common
stock................................................ (74,009) (74,009)
-------- --------
Total Stockholders' Equity.............................. $439,620 $485,646
-------- --------
Total Capitalization.................................... $743,136 $789,162
======== ========
</TABLE>
- --------
(1) Gives effect to the merger.
36
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data for Fairchild and
should be read in conjunction with the financial statements and related notes
appearing elsewhere in this Proxy Statement/Prospectus. The selected financial
data as of and for the five years ended June 30, 1998 have been derived from
Fairchild's Consolidated Financial Statements, which were audited by Arthur
Andersen LLP, Fairchild's independent accountants. The selected financial data
as of and for the six months ended December 27, 1998 and December 28, 1997 have
been derived from Fairchild's Consolidated Financial Statements and are
unaudited. The unaudited pro forma statement of operations data for the fiscal
year ended June 30, 1998 and for the six months ended September 27, 1998 give
effect to the merger as if it occurred on July 1, 1997 and July 1, 1998,
respectively. The data presented below should be read in conjunction with the
financial statements and related notes appearing elsewhere in this Proxy
Statement/Prospectus. The unaudited pro forma balance sheet data as of December
27, 1998 give effect to the merger as if it had occurred on such date. The pro
forma financial data is not intended to be indicative of either future results
of operations or results that might have been achieved had the merger actually
occurred on the dates specified.
<TABLE>
<CAPTION>
Fiscal Six Months Ended
--------------------------------------------------- ----------------------
1994 1995 1996 1997 1998 12/28/97 12/27/98
-------- -------- -------- ---------- ---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations:
Net sales.............. $203,456 $220,351 $349,236 $ 680,763 $ 741,176 $ 402,978 $ 299,720
Gross profit........... 28,415 26,491 74,101 181,344 186,506 103,151 72,054
Operating income
(loss)................ (46,845) (30,333) (11,286) 33,499 45,443 27,881 14,739
Net interest expense... 66,670 64,113 56,459 47,681 42,715 27,744 14,147
Earnings (loss) from
continuing
operations............ 4,834 (56,280) (32,186) 1,816 52,399 (3,376) (7,637)
Earnings (loss) per
share from continuing
operations:
Basic................ $ 0.30 $ (3.49) $ (1.98) $ 0.11 $ 2.78 $ (0.20) $ (0.35)
Diluted.............. 0.30 (3.49) (1.98) 0.11 2.66 (0.20) (0.35)
Pro Forma Data (1):
Net sales.............. $ 546,401 $ 271,401
Gross profit........... 135,874 66,081
Operating income
(loss)................ 37,724 14,323
Net interest expense... 32,394 14,147
Earnings from
continuing
operations............ 6,792 2,285
Earnings per share
from continuing
operations, assuming
a $13.95 average
price:
Basic................ $ 0.30 $ 0.09
Diluted.............. 0.28 0.09
Earnings per share
from continuing
operations, assuming
a $17.05 average
price:
Basic................ $ 0.30 $ 0.09
Diluted.............. 0.28 0.09
<CAPTION>
At December 27, 1998
----------------------
Pro
Actual Forma(1)
Balance Sheet Data: ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets........... $860,943 $828,680 $993,398 $1,052,666 $1,157,259 $1,083,641 $1,101,601
Long-term debt, less
current maturities.... 518,718 508,225 368,589 416,922 295,402 278,229 278,229
Stockholders' equity... 69,494 39,378 230,861 232,424 473,559 439,620 485,646
Book value per share... $ 4.32 $ 2.50 $ 14.10 $ 13.98 $ 20.54 $ 20.13 $ 19.56
Equivalent book value
per share assuming a
$13.95 average
price................. $ 19.56
Equivalent book value
per share assuming a
$17.05 average
price................. $ 20.00
</TABLE>
- --------
(1) See "Unaudited Pro Forma Consolidated Financial Statements."
37
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
OF THE FAIRCHILD CORPORATION AND BANNER AEROSPACE
The Fairchild unaudited pro forma consolidated statements of earnings for
the year ended June 30, 1998 and for the six months ended December 27, 1998
were prepared to give effect to (1) the merger, and (2) the impact of the
Banner divestitures (Solair and the Hardware Group) and the acquisition of
Special-T as if the merger and these transactions had occurred on July 1, 1997
and July 1, 1998, respectively. The Fairchild unaudited pro forma consolidated
balance sheet as of December 27, 1998 was prepared to give effect to the merger
as if it had occurred on such date. The impact of the Banner divestitures and
Special-T acquisition is already reflected in the historical balance sheet.
The Banner unaudited pro forma consolidated statements of earnings for the
year ended June 30, 1998 and for the six months ended December 27, 1998 were
prepared to give effect to the divestitures of Solair and the Hardware Group as
if these transactions had occurred on July 1, 1997 and July 1, 1998,
respectively. No Banner unaudited pro forma consolidated balance sheet was
reported as the impact of these transactions is already reflected in the
historical balance sheet.
The unaudited pro forma consolidated financial data are not necessarily
indicative of the results that would have been obtained had the merger or the
other transactions been completed as of the dates presented or for any future
period. The unaudited pro forma consolidated financial data should be read in
conjunction with Fairchild's and Banner's consolidated financial statements and
notes thereto included elsewhere in this Proxy Statement/Prospectus.
38
<PAGE>
BANNER AEROSPACE, INC.
CONSOLIDATED STATEMENT OF EARNINGS--PRO FORMA
For the six months ended December 31, 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
Banner Solair Banner
Historical Divestiture(2) Pro Forma
---------- -------------- ---------
<S> <C> <C> <C>
Sales..................................... $ 97,366 $(28,319) $69,047
Costs and expenses:
Cost of sales........................... 76,549 (22,346) 54,203
Selling, general & administrative....... 16,894 (5,745) 11,149
Amortization of goodwill................ 170 (50) 120
-------- -------- -------
93,613 (28,141) 65,472
Operating income (loss)................. 3,753 (178) 3,575
Net interest expense...................... (3,925) -- (3,925)
Investment income, net.................... 805 -- 805
Nonrecurring loss on disposition of
subsidiary............................... (19,320) 19,320 --
-------- -------- -------
Earnings (loss) before taxes.............. (18,687) 19,142 455
Income tax (provision) benefit............ 5,964 (6,847) (883)
Equity in earnings of affiliates.......... -- -- --
Minority interest......................... -- -- --
-------- -------- -------
Earnings (loss) from continuing
operations............................... $(12,723) $ 12,295 $ (428)
======== ======== =======
Earnings (loss) per share from continuing
operations:
Basic................................... $ (0.59) $ (0.02)
Diluted................................. (0.59) (0.02)
Weighted average shares outstanding:
Basic................................... 21,471 21,471
Diluted................................. 21,471 21,471
</TABLE>
39
<PAGE>
THE FAIRCHILD CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS--PRO FORMA
For the six months ended December 27, 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
Fairchild Solair Adjustment Fairchild
Historical Divestiture(2) Subtotal For Merger(1) Pro Forma
---------- -------------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Sales................... $299,720 $(28,319) $271,401 $ -- $271,401
Costs and expenses:
Cost of sales......... 227,666 (22,346) 205,320 -- 205,320
Selling, general &
administrative....... 54,677 (5,745) 48,932 -- 48,932
Amortization of
goodwill............. 2,638 (50) 2,588 238 2,826
-------- -------- -------- ------ --------
284,981 (28,141) 256,840 238 257,078
Operating income...... 14,739 (178) 14,561 (238) 14,323
Net interest expense.... (14,147) -- (14,147) -- (14,147)
Investment income, net.. 834 -- 834 -- 834
Nonrecurring loss on
disposition of
subsidiary............. (19,320) 19,320 -- -- --
-------- -------- -------- ------ --------
Earnings (loss) before
taxes.................. (17,894) 19,142 1,248 (238) 1,010
Income tax (provision)
benefit................ 6,433 (6,847) (414) -- (414)
Equity in earnings of
affiliates............. 1,689 -- 1,689 -- 1,689
Minority interest....... 2,135 (2,580) (445) 445 --
-------- -------- -------- ------ --------
Earnings (loss) from
continuing operations.. $ (7,637) $ 9,715 $ 2,078 $ 207 $ 2,285
======== ======== ======== ====== ========
Earnings (loss) per
share from continuing
operations:
Basic................. $ (0.35) $ 0.09 $ 0.09
Diluted............... (0.35) 0.09 0.09
Weighted average shares
outstanding:
Basic................. 22,129 22,129 2,982 25,111
Diluted............... 22,129 22,635 3,855 26,490
Equivalent earnings per
share from continuing
operations based upon a
$13.95 average price:
Basic................. $ (0.35) $ 0.09 $ 0.09
Diluted............... (0.35) 0.09 0.09
Weighted average shares
outstanding:
Basic................. 22,129 22,129 2,982 25,111
Diluted............... 22,129 22,635 3,855 26,490
Equivalent earnings per
share from continuing
operations based upon a
$17.05 average price:
Basic................. $ (0.35) $ 0.09 $ 0.09
Diluted............... (0.35) 0.09 0.09
Weighted average shares
outstanding:
Basic................. 22,129 22,129 2,439 24,568
Diluted............... 22,129 22,635 3,154 25,789
</TABLE>
40
<PAGE>
BANNER AEROSPACE, INC.
Unaudited Pro Forma Consolidated Statement of Earnings
For the year ended June 30, 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
Banner
Banner Solair Hardware Group Subtotal of Pro
Historical Divestiture(2) Divestiture(3) Divestitures Forma
---------- -------------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Sales................... $358,431 $(78,939) $(131,153) $(210,092) $148,339
Cost and expenses:
Cost of sales......... 265,797 (63,645) (86,441) (150,086) 115,711
Selling, general &
administrative....... 71,436 (14,973) (33,610) (48,583) 22,853
Amortization of
goodwill............. 868 (100) (375) (475) 393
-------- -------- --------- --------- --------
338,101 (78,718) (120,426) (199,144) 138,957
-------- -------- --------- --------- --------
Operating income...... 20,330 (221) (10,727) (10,948) 9,382
Net interest expense.... (11,258) -- 11,258 11,258 --
Investment income, net.. 386 -- -- -- 386
Nonrecurring income..... 124,041 -- (124,041) (124,041) --
-------- -------- --------- --------- --------
Earnings before taxes... 133,499 (221) (123,510) (123,731) 9,768
Income tax (provision)
benefit................ (54,353) 163 50,654 50,817 (3,536)
Equity in earnings of
affiliates............. -- -- -- -- --
Minority interest....... -- -- -- -- --
-------- -------- --------- --------- --------
Earnings (loss) from
continuing operations.. $ 79,146 $ (58) $ (72,856) $ (72,914) $ 6,232
======== ======== ========= ========= ========
Earnings per share from
continuing operations:
Basic................. $ 3.53 $ 0.28
Diluted............... 2.97 0.23
Weighted average shares
outstanding:
Basic................. 22,412 22,412
Diluted............... 26,632 26,632
</TABLE>
41
<PAGE>
THE FAIRCHILD CORPORATION
Unaudited Pro Forma Consolidated Statement of Earnings
For the year ended June 30, 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
Fairchild
Fairchild Special-T Banner Banner Pro
Historical Acquisition(4) Divestitures(2)(3) Subtotal Merger(1) Forma
---------- -------------- ------------------ -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales....................... $741,176 $15,317 $(210,092) $546,401 $ -- $546,401
Cost and expenses:
Cost of sales............. 554,670 5,943 (150,086) 410,527 -- 410,527
Selling, general &
administrative........... 135,594 5,399 (48,583) 92,410 -- 92,410
Amortization of goodwill.. 5,469 269 (475) 5,263 477 5,740
-------- ------- --------- -------- ------ --------
695,733 11,611 (199,144) 508,200 477 508,677
-------- ------- --------- -------- ------ --------
Operating income.......... 45,443 3,706 (10,948) 38,201 (477) 37,724
Net interest expense........ (42,715) (937) 11,258 (32,394) -- (32,394)
Investment income, net...... (3,362) -- -- (3,362) -- (3,362)
Nonrecurring income......... 124,028 -- (124,028) -- -- --
-------- ------- --------- -------- ------ --------
Earnings before taxes....... 123,394 2,769 (123,718) 2,445 (477) 1,968
Income tax (provision)
benefit.................... (48,659) (1,290) 50,817 868 -- 868
Equity in earnings of
affiliates................. 3,956 -- -- 3,956 -- 3,956
Minority interest........... (26,292) -- 24,052 (2,240) 2,240 --
-------- ------- --------- -------- ------ --------
Earnings (loss) from
continuing operations...... $ 52,399 $ 1,479 $ (48,849) $ 5,029 $1,763 $ 6,792
======== ======= ========= ======== ====== ========
Earnings per share from
continuing operations:
Basic..................... $ 2.78 $ 0.25 $ 0.30
Diluted................... 2.66 0.24 0.28
Weighted average shares
outstanding:
Basic..................... 18,834 1,073 19,907 2,982 22,889
Diluted................... 19,669 1,073 20,742 3,855 24,597
Equivalent earnings per
share from continuing
operations based upon a
$13.95 average price:
Basic..................... $ 2.78 $ 0.25 $ 0.30
Diluted................... 2.66 0.24 0.28
Weighted average shares
outstanding:
Basic..................... 18,834 1,073 19,907 2,982 22,889
Diluted................... 19,669 1,073 20,742 3,855 24,597
Equivalent earnings per
share from continuing
operations based
upon a $17.05 average price:
Basic..................... $ 2.78 $ 0.25 $ 0.30
Diluted................... 2.66 0.24 0.28
Weighted average shares
outstanding:
Basic..................... 18,834 1,073 19,907 2,439 22,346
Diluted................... 19,669 1,073 20,742 3,154 23,896
</TABLE>
42
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS
December 27, 1998
(in thousands)
<TABLE>
<CAPTION>
Banner Fairchild Adjustment Fairchild
Historical Historical for Merger Pro Forma
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash............................ $ 1,633 $ 16,063 $(1,101) $ 14,962
Short-term investments.......... 214,596 216,260 216,260
Accounts receivable, less
allowances..................... 18,334 95,435 95,435
Inventory....................... 80,853 174,682 -- 174,682
Net current assets of
discontinued operations........ -- 1,670 -- 1,670
Prepaid and other current
assets......................... 26,374 52,870 -- 52,870
-------- ---------- ------- ----------
Total current assets........ 341,790 556,980 (1,101) 555,879
Net fixed assets................ 3,432 124,446 -- 124,446
Net assets held for sale........ -- 20,794 -- 20,794
Net noncurrent assets of
discontinued operations........ -- 10,945 -- 10,945
Goodwill........................ 9,331 167,262 19,061 186,323
Investment in affiliates........ -- 28,416 -- 28,416
Prepaid pension assets.......... -- 62,246 -- 62,246
Deferred loan costs............. 1,014 5,879 -- 5,879
Long-term investments........... 39,110 36,398 -- 36,398
Other assets.................... 469 70,275 -- 70,275
-------- ---------- ------- ----------
Total Assets................ $395,146 $1,083,641 $17,960 $1,101,601
======== ========== ======= ==========
Bank notes payable & current
maturities of debt............. $ -- $ 25,287 $ -- $ 25,287
Accounts payable................ 7,288 36,511 -- 36,511
Other accrued expenses.......... 48,177 100,214 -- 100,214
-------- ---------- ------- ----------
Total current liabilities... 55,465 162,012 -- 162,012
-------- ---------- ------- ----------
Long-term debt, less current
maturities..................... 50,600 278,229 -- 278,229
Other long-term liabilities..... 2,830 24,707 -- 24,707
Retiree health care
liabilities.................... -- 43,127 -- 43,127
Noncurrent income taxes......... 38,784 107,871 -- 107,871
Minority interest in
subsidiaries................... -- 28,075 (28,066) 9
-------- ---------- ------- ----------
Total liabilities........... 147,679 644,021 (28,066) 615,955
-------- ---------- ------- ----------
Class A common stock............ 41 2,671 298 2,969
Class B common stock............ -- 262 -- 262
Preferred Stock................. 23,732 -- -- --
Paid-in capital................. 152,906 195,291 45,728 241,019
Retained earnings............... 79,211 294,222 -- 294,222
Cumulative other comprehensive
loss........................... 19,619 21,183 -- 21,183
Treasury stock, at cost......... (28,042) (74,009) -- (74,009)
-------- ---------- ------- ----------
Total stockholders' equity.. 247,467 439,620 46,026 485,646
-------- ---------- ------- ----------
Total liabilities &
stockholders' equity........... $395,146 $1,083,641 $17,960 $1,101,601
======== ========== ======= ==========
</TABLE>
43
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(1) For purposes of these unaudited pro forma statements, the purchase price
of the merger was calculated based on the low end of the price range of
$13.95 per share divided into $11.00 (the offer price), as the closing
market price of Fairchild Class A Common Stock on February 25, 1999 was
$12.0625. Based on this assumption, the unaudited pro forma financial
statements reflect Fairchild issuing 2,981,566 shares of Fairchild Class A
Common Stock as a result of the merger, resulting in an increase in
Fairchild's equity of $45,728. The $1,101 reduction in cash represents the
estimated costs of the merger. An increase of $19,061 in goodwill
represents the estimated excess of cost paid over fair value. The decrease
in minority interest liability results from Fairchild acquiring all of the
Banner common stock that Fairchild does not presently own. Pro forma
adjustment also reflect amortization of goodwill which will result from
the merger and the reduction of minority interest expense of $2,599 and
$445 for the year ended June 30, 1998 and the six months ended December
27, 1998, respectively.
(2) Represents the deletion of the operating results of Solair as if the
disposition had occurred at the beginning of the fiscal year ended June
30, 1998 and the six months ended December 27, 1998.
(3) Represents the deletion of the operating results of the Hardware Group as
if the disposition had occurred at the beginning of the fiscal year ended
June 30, 1998.
(4) Reflects the operating results of Special-T as if the acquisition occurred
at the beginning of the fiscal year ended June 30, 1998.
44
<PAGE>
DESCRIPTION OF FAIRCHILD
General
Fairchild was incorporated in October 1969, under the laws of the state of
Delaware. Fairchild is a leading worldwide aerospace and industrial fastener
manufacturer and distributor and, through Banner, an international supplier to
the aerospace industry, distributing a wide range of aircraft parts and related
support services. Through internal growth and strategic acquisitions, Fairchild
is one of the leading aircraft parts suppliers to aircraft manufacturers and
aerospace hardware distributors.
Fairchild's aerospace business consists of two segments: aerospace fasteners
and aerospace parts distribution. The aerospace fasteners segment manufactures
and markets high performance fastening systems used in the manufacture and
maintenance of commercial and military aircraft. Banner's aerospace
distribution segment stocks and distributes a wide variety of aircraft parts to
commercial airlines and air cargo carriers, fixed-base operators, corporate
aircraft operators and other aerospace companies.
Fairchild also owns a technology products unit which designs, manufactures
and markets high performance production equipment and systems required for the
manufacture of semiconductor chips and recordable compact discs, and a
significant equity interest in Nacanco Paketleme, which manufactures customized
cans for the beverage industry in Turkey. Fairchild also owns several parcels
of developed and undeveloped land, almost entirely representing residuals of
operations previously divested or closed. Included among these is an 88 acre
site in Farmingdale, New York, of which 69 acres are currently being developed
as a shopping center.
For more information concerning Fairchild, we encourage shareholders to
consult and review information previously filed by Fairchild with the
Commission and listed at "Where You Can Find More Information", "Incorporation
of Certain Information by Reference" and Appendix B to this Proxy Statement
Prospectus.
Aerospace Fasteners
Fairchild, through its aerospace fasteners segment, is a leading worldwide
manufacturer and distributor of fastening systems used primarily in the
construction and maintenance of commercial and military aircraft.
In general, aerospace fasteners produced by Fairchild are highly engineered,
close tolerance, high strength fastening devices. Products range from standard
aerospace screws, to more complex systems that fasten airframe structures, and
sophisticated latching or quick disconnect mechanisms that allow efficient
access to internal parts which require regular servicing or monitoring. The
aerospace fasteners segment also manufactures and supplies fastening systems
used in non-aerospace industrial, electronic and marine applications.
Sales and Markets
The products of the aerospace fasteners segment are sold primarily to
domestic and foreign OEMs of airframes, subcontractors to OEMs, engine
manufacturers, and to the maintenance and repair market through distributors.
Approximately 66% of its sales for fiscal 1998 are believed destined for
domestic use. Major customers include OEMs such as Boeing, Airbus, General
Electric, Lockheed Martin, British Aerospace and Aerospatiale and their
subcontractors, as well as major aerospace hardware distributors such as
AlliedSignal, Tri-Star Aerospace and Wesco Aircraft Hardware. Over the past two
years, OEMs have significantly increased their production levels. In addition,
OEMs are increasingly interested in programs to reduce inventories. In
response, Fairchild is expanding efforts to provide parts and services through
its subsidiaries, such as Special-T Fasteners in the United States and
Fairchild AS+C Ohg in Europe. No single customer accounts for more than 10% of
Fairchild's consolidated sales.
Revenues in the aerospace fasteners segment are closely related to aircraft
production. As OEMs searched for cost cutting opportunities during the
commercial aerospace industry recession of 1993-1995, parts
45
<PAGE>
manufacturers, including Fairchild, accepted lower profit margins and/or
smaller lot sizes to maintain market share, at lower profit margins. However,
during recent years, this situation has changed as build rates in the aerospace
industry have increased and resulted in capacity constraints. Although lead
times have increased, Fairchild has been able to provide its major customers
with favorable pricing, while maintaining or increasing margins by negotiating
for larger minimum lot sizes that are more economic to manufacture. In
addition, Fairchild has eliminated "make and hold" contracts under which large
volume buyers would require current production of parts for long-term
unspecified dates of delivery. Overall, existing backlog is anticipated to
result in higher margins due to larger and more efficient lot sizes, combined
with the utilization of recently acquired customized production capacity,
improved profitability arising from training programs for all employees and
additional logistic services.
Fasteners also have applications in the automotive/industrial markets, where
numerous special fasteners are required (such as engine nuts and bolts, wheel
bolts and turbocharger tension bolts). Fairchild is actively targeting the
growing high technology automotive, high speed rail, heavy truck and other
industrial markets.
The aerospace fasteners segment has eight primary manufacturing facilities,
of which three are located in the United States and five are located in Europe.
Each facility has virtually complete production capability, and subcontracts
only those production steps for which outside processors provide a more cost
effective solution. Each plant is designed to produce a specified product or
group of products, determined by the production process involved and
certification requirements. Fairchild's largest customers have recognized its
quality and operational controls by granting it advanced quality system status,
such as Boeing's D1-9000A. Fairchild believes it is the first and only
aerospace fastener manufacturing company with all of its facilities holding
ISO-9000 approval.
Fairchild has a fully operational modern information system at all of its
U.S. facilities, which was expanded to most of its European operations in
fiscal 1998. Fairchild will expand this information system to the remaining
European operations in fiscal 1999. The new system performs detailed and timely
cost analysis of production by product and facility. Updated MIS systems also
help Fairchild to better service its customers. OEMs require each product to be
produced in an OEM-qualified/OEM-approved facility.
Aerospace Distribution
Fairchild, through Banner, its aerospace distribution segment, distributes a
wide variety of aircraft parts, which it has purchased on the open market or
acquired from OEMs as an authorized distributor. No single distributor
arrangement is material to Fairchild's financial condition.
An extensive inventory of products and a quick response time are essential in
providing service to its customers. Another key factor in selling to its
customers is Banner's ability to maintain a system that traces a part back to
the manufacturer.
Products of the aerospace distribution segment are divided into two groups:
rotables and engines. Rotables include flight data recorders, radar and
navigation systems, instruments and hydraulic and electrical components.
Engines include jet engines and engine parts for use on both narrow and wide
body aircraft and smaller engines for corporate and commuter aircraft. Banner
provides a number of services such as immediate shipment of parts in aircraft-
on-ground situations. Banner also buys and sells commercial aircraft from time
to time.
Rotable parts are sometimes purchased as new parts, but are generally
purchased in the aftermarket which are then overhauled for Banner by outside
contractors, including OEMs and FAA-licensed facilities. Rotables are sold in a
variety of conditions such as new, overhauled, serviceable and "as is."
Rotables may also be exchanged instead of sold. An exchange occurs when an
aircraft part in inventory is exchanged for a part from the customer and the
customer is charged an exchange fee plus the actual cost to overhaul the part.
Engines and engine components are sold "as is," overhauled or disassembled for
resale as parts.
46
<PAGE>
Backlog of Orders
Backlog is important for all Fairchild's operations, due to the long-term
production requirements of its customers. Fairchild's backlog of orders as of
December 27, 1998 in the aerospace fasteners segment and aerospace distribution
segment amounted to $158 million, and $7 million, respectively. Fairchild
anticipates that in excess of 90% of the aggregate backlog at December 27, 1998
will be delivered by December 31, 1999.
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, Fairchild has developed a worldwide Year 2000
readiness plan that is divided into a number of interrelated and overlapping
phases. These phases include corporate awareness and planning, readiness
assessment, evaluation and prioritization of solutions, implementation of
remediation, validation testing, and contingency planning. Each are discussed
below.
Awareness. In the corporate awareness and planning phase, Fairchild formed a
Year 2000 project group under the direction of Fairchild's Chief Financial
Officer, identified and designated key personnel within Fairchild 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 Fairchild's Year 2000 plan. Fairchild has completed this
phase of its Year 2000 plan. Fairchild evaluates its information technology
applications regularly, and based on such evaluation revises the schedule and
budget to reflect the progress of Fairchild's Year 2000 readiness efforts. The
Chief Financial Officer regularly reports to Fairchild's management and the
audit committee of the board of directors on the status of the Year 2000
project.
Assessment. In the readiness assessment phase, Fairchild, in coordination
with its technical review consultants, has been evaluating Fairchild's Year
2000 preparedness in a number of areas, including its information technology
infrastructure, external resources, physical plant and production facilities,
equipment and machinery, products and inventory. Fairchild has substantially
completed this phase of its Year 2000 Plan. However, Fairchild is continuing to
assess the extent and implications relating to product inventories maintained
by Fairchild Technologies that include embedded data processing technology. In
addition, pending the completion of all validation testing, Fairchild continues
to review all aspects of its year 2000 preparedness on a regular basis. In this
respect, we have designated officers at each business segment 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
Fairchild's Chief Financial Officer.
Evaluation. In the evaluation and prioritization of solutions phase,
Fairchild seeks to develop potential solutions to the Year 2000 issues
identified in Fairchild's readiness assessment phase, consider those solutions
in light of Fairchild'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, Fairchild has not identified any major information technology system
or non-information technology system that it must replace in its entirety for
Year 2000 reasons. Fairchild has also determined 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,
Fairchild does not presently anticipate incurring any material systems
replacement costs relating to the Year 2000 issues.
Implementation. In the implementation of remediation phase, Fairchild, 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,
47
<PAGE>
reprogramming and resetting machines, and other modifications. Substantially
all of the material systems within the aerospace fasteners and aerospace
distribution segments of Fairchild's business are currently Year 2000 ready.
However, Fairchild is continuing to evaluate and implement Year 2000
modifications to embedded data processing technology in certain manufacturing
equipment used in its aerospace fasteners segment. At Fairchild Technologies,
Fairchild intends, but has no specific plan, to replace and upgrade a number of
its systems that are not Year 2000 compliant.
Testing. In the validation testing phase, Fairchild seeks to evaluate and
confirm the results of its Year 2000 remediation efforts. In conducting its
validation testing, Fairchild is using, among other things, proprietary testing
protocols developed internally and by Fairchild's technical review and
modification consultants, as well as testing tools such as Greenwich Mean
Time's Check 2000 and SEMATECH's Year 2000 Readiness Testing Scenarios Version
2.0. The Greenwich tools identify potential Year 2000-related software and data
problems, and the SEMATECH protocols validate the ability of data processing
systems to rollover and hold transition dates. Testing for the aerospace
fasteners segment is approximately 20 percent complete, and testing for the
aerospace distribution segment is approximately 30 to 40 percent complete. To
date, the results of Fairchild's validation testing have not revealed any new
and significant Year 2000 issues or any ineffective remediation. Fairchild
expects to complete testing of its most critical information technology and
related systems by June 30, 1999.
Contingency Planning. In the contingency planning phase, Fairchild, together
with its technical review consultants, is assessing the Year 2000 readiness of
its key suppliers, distributors, customers and service providers. Toward that
objective, Fairchild 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,
Fairchild also began to evaluate the risks to Fairchild 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, Fairchild's financial condition, business or
operations. So far, we have identified only our aerospace fasteners MRP system
as being both mission critical and potentially at risk. In mitigation of this
concern, we have engaged a consultant to test and evaluate the manufacturer-
designed Year 2000 patches for the system. This testing has only recently
commenced, but no significant problems have been identified. Fairchild also is
developing and evaluating contingency plans to deal with events arising from
significant Year 2000 issues outside of our infrastructure. In this regard,
Fairchild is considering the advisability of augmenting its inventories of
certain raw materials and finished products, securing additional sources for
certain supplies and services, arranging for back-up utilities, and exploring
alternate distribution and sales channels, among other things.
48
<PAGE>
The following chart summarizes Fairchild's progress, by phase and business
segment, in completing its Year 2000 plan:
Percentage of Year 2000 Plan Completed
(By Phase and Business Segment)
<TABLE>
<CAPTION>
1997 Quarter Ended 1998 Quarter Ended
------------------ ------------------------------
September December March June- September December Work
30 27 31 30 30 27 Remaining
--------- -------- ----- ----- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Awareness:
Aerospace Fasteners... 50% 100% 100% 100% 100% 100% 0%
Aerospace
Distribution......... 100 100 100 100 100 100 0
Assessment:
Aerospace Fasteners... 25 50 75 100 100 0
Aerospace
Distribution......... 0 0 0 50 100 0
Evaluation:
Aerospace Fasteners... 0 70 30
Aerospace
Distribution......... 20 100 0
Implementation:
Aerospace Fasteners... 50 50
Aerospace
Distribution......... 40 60
Testing:
Aerospace Fasteners... 20 80
Aerospace
Distribution......... 30-40 60-70
Contingency Planning:
Aerospace Fasteners... 0 20 80
Aerospace
Distribution......... 25 50 50
</TABLE>
The following chart summarizes the total costs incurred by Fairchild as of
December 27, 1998, by business segment, to address Year 2000 issues, and the
total costs Fairchild reasonably anticipates incurring during the next twelve
months relating to the Year 2000 issue.
<TABLE>
<CAPTION>
Year 2000 Costs as Anticipated Year 2000 Costs
of December 27, 1998: During the Next Twelve Months:
--------------------- ------------------------------
<S> <C> <C>
Aerospace Fasteners
Segment................. $250,000 $2,000,000
Aerospace Distribution
Segment................. $550,000 $100,000
</TABLE>
Fairchild 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 Fairchild's Year 2000 efforts have not had a material effect
on, and have caused no delays with respect to, our other information technology
programs or projects.
Fairchild anticipates that it will complete its Year 2000 preparations by
October 31, 1999. Although Fairchild's Year 2000 assessment, evaluation,
implementation, testing and contingency planning phases are not yet complete,
Fairchild does not currently believe that Year 2000 issues will materially
affect its business, results of operations or financial condition. However, in
some international markets in which Fairchild conducts business, the level of
awareness and remediation efforts by third parties, utilities and
infrastructure managers relating to the Year 2000 issue may be less advanced
than in the United States, which could, despite our efforts, have an adverse
effect on us. If Fairchild's Year 2000 programs are not completed on time, or
its mission critical systems are not Year 2000 ready, Fairchild 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.
49
<PAGE>
DESCRIPTION OF BANNER
The information provided in this section is provided pursuant to the
provisions of the registration requirements under the Securities Act and should
be considered with the information provided concerning Fairchild, including the
information incorporated by reference as described at "Where You Can Find More
Information" and "Incorporation of Certain Information by Reference."
General
Banner is an international supplier to the aerospace industry, distributing a
wide range of aircraft parts and related support services. Banner's products
are divided into two product groups: rotables and engines. Rotables include
flight data recorders, radar and navigation systems, instruments and hydraulic
and electrical components. Engines include jet engines and engine parts for use
on both narrow and wide body aircraft and smaller engines for corporate and
commuter aircraft. Banner provides special services, such as immediate shipment
of parts for aircraft on ground situations. Banner also provides both long-term
and short-term engine leasing services to commercial airlines and air cargo
carriers. Through its subsidiaries, Banner sells its products in the United
States and abroad to commercial airlines and air cargo carriers, fixed-base
operations, corporate aircraft operators and other aerospace.
Banner distributes a wide variety of aircraft parts, which it has purchased
on the open market, or acquired from the original equipment manufacturer as an
authorized distributor. No single distributor arrangement is material to
Banner's financial condition taken as a whole.
At December 31, 1998, approximately 50% of Banner's assets consisted of
shares of AlliedSignal common stock received in connection with the January 13,
1998 Banner Hardware Group disposition. Currently, approximately 40% of
Banner's assets consist of shares of AlliedSignal common stock.
On January 12, 1999, Banner received a letter from AlliedSignal making
indemnification claims against Banner for $18.9 million in connection with the
Banner Hardware Group disposition. Although Banner believes that the amount of
the claim is far in excess of any amount that AlliedSignal is entitled to
recover from Banner, Fairchild and Banner are in the process of reviewing such
claims and are unable to predict the ultimate outcome of such matter.
Dallas Aerospace, Inc., Banner's largest subsidiary in the engine group,
sells jet engines and engine parts for use on both narrow and wide body
aircraft and smaller engines for corporate and commuter aircraft. In addition,
Dallas Aerospace buys and sells large commercial aircraft from time to time and
provides engine repair management services and engine leasing to a variety of
airline and air cargo customers. Banner has recently retained an investment
banker to facilitate the sale of Dallas Aerospace.
On December 31, 1998, Banner consummated the sale of Solair, Banner's largest
subsidiary in the rotable group, to Kellstrom in exchange for approximately
$57.0 million in cash and a warrant to purchase 300,000 shares of common stock
of Kellstrom. Pursuant to performance goals approved by the Banner board of
directors and Banner's stockholders, Jeffrey J. Steiner, Chief Executive
Officer of Banner, was awarded by Banner incentive compensation of $1.6 million
in connection with the sale of Solair. Certain other officers of Banner may
also receive incentive compensation awards from Banner in connection with such
sale.
Sales
Banner's subsidiaries conduct marketing efforts, through its direct sales
force, outside representatives and, for some product lines, overseas sales
offices. Sales in the aviation aftermarket depend on price, service, quality
and reputation. Banner's business does not experience significant seasonal
fluctuations nor does Banner's business depend on a single customer. No single
customer of Banner accounts for more than 10% of revenue in fiscal 1998. The
sales order backlog amounted to $23.2 million and $82.8 million at March 31,
1998 and 1997,
50
<PAGE>
respectively. It is anticipated that in excess of 90% of the backlog at March
31, 1998 will be shipped by March 31, 1999. The change in the sales backlog
resulted from the Banner Hardware Group disposition which had accounted for
$65.7 million or 79.3% of the March 31, 1997 backlog.
The table below shows the percentage of sales by each product group for the
fiscal years ended March 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Product Group 1998 1997 1996
------------- ----- ----- -----
<S> <C> <C> <C>
Hardware(a)................................................ 44.1% 51.3% 47.6%
Rotables................................................... 36.8 31.4 34.1
Engines.................................................... 19.1 17.3 18.3
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
- --------
(a) Sales for the Banner Hardware Group for fiscal 1998 include the period from
April 1, 1997 to December 31, 1997.
Foreign sales accounted for 28.7%, 29.3% and 32.0% of Banner's total sales
for the fiscal years ended March 31, 1998, 1997 and 1996, respectively. Export
sales by geographic area for the fiscal years ended March 31, 1998, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
(In Thousands) 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>
The increase in the export sales in fiscal 1998 compared to fiscal 1997 was
attributable primarily to sales in Europe by DAC International, Inc. and engine
leasing in South America by Dallas Aerospace.
The increase in the export sales in fiscal 1997 compared to fiscal 1996 was
attributable primarily to the increases in sales to Europe, Asia (excluding
Japan) and Canada. The increased export sales to Europe and Canada of
approximately 17.2% and 48.6%, respectively, were due primarily to the
inclusion of sales recorded by Harco for the entire fiscal year for 1997,
compared to one month of sales included in fiscal 1996. The increased sales to
Asia (excluding Japan) of approximately 39.0% were due primarily to several
large contracts obtained by the rotables group in late fiscal 1996 and fiscal
1997.
Competition
Banner's rotables group competes with Air Ground Equipment Services ("AGES"),
Duncan Aviation, Stevens Aviation, Inc., OEMs such as Honeywell, Trimble
Navigation and Litton, and other fixed based operations and maintenance and
repair organizations. The major competitors for Banner's engine group are OEMs
such as General Electric Company and Pratt & Whitney, as well as the engine and
engine parts divisions of AAR Corp., Kellstrom Industries, Inc. and AGES, and
other engine leasing and repair companies.
51
<PAGE>
Employees
As of December 31, 1998, Banner had approximately 200 employees. None of
Banner's employees are covered by collective bargaining agreements. Banner
believes that relations with its employees are satisfactory.
Environmental Matters
There are no material expenditures anticipated for environmental control for
fiscal 1999 and thereafter.
Properties
Banner's corporate office consists of approximately 10,000 square feet and is
located in Dulles, Virginia. Banner currently leases the space from Fairchild
under a lease which commenced on April 1, 1996. The lease is for a term of ten
years, but may be terminated at Banner's option, after five years, and requires
annual lease payments of approximately $175,000. Banner owns and leases other
facilities throughout the United States, primarily for warehousing inventory
and for office space. In addition, Banner leases sales offices and warehouses
in other countries, including Switzerland and Singapore. All of Banner's
properties are maintained on a regular basis and are adequate for Banner's
present requirements. The following table identifies the principal properties
owned or leased by Banner:
<TABLE>
<CAPTION>
Owned Approx.
or Square
Subsidiary Location Leased Footage
---------- -------- ------ -------
<S> <C> <C> <C>
DAC International,
Inc.................... Austin, TX Leased 7,000
Cortaillod, Switzerland Leased 1,500
Dallas Aerospace, Inc... Carrollton, TX Leased 126,000
Medley, FL Leased 6,200
Miami Springs, FL Leased 1,400
Georgetown Jet Center,
Inc.................... Georgetown, TX Leased 19,000
Matrix Aviation, Inc.... Wichita, KS Owned 6,300
NASAM Incorporated...... S. San Francisco, CA Leased 4,800
Professional Aviation
Associates, Inc........ Atlanta, GA Leased 29,000
Titusville, FL Leased 15,000
</TABLE>
Legal Proceedings
Banner 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 Banner. See "Litigation Regarding the Merger"
included elsewhere in this document.
52
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION FOR BANNER
The following table presents selected historical financial data and is
qualified in its entirety by the more detailed consolidated financial
statements contained elsewhere in this Proxy Statement/Prospectus. The selected
financial data for the years ended March 31, 1998, 1997, 1996, 1995 and 1994
are extracted from Banner's audited consolidated financial statements.
<TABLE>
<CAPTION>
For the Fiscal Years Ended March 31,
-------------------------------------------------
(In Thousands Except Per 1998(/1/) 1997 1996 1995 1994
Share Data) --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales.................. $420,323 $389,111 $287,880 $222,384 $212,391
-------- -------- -------- -------- --------
Cost of goods sold......... 305,385 279,041 209,609 153,261 144,245
Selling, general and
administrative............ 87,296 84,557 64,704 52,389 50,815
Restructuring charges...... -- -- -- 11,650 6,000
-------- -------- -------- -------- --------
Operating income........... 27,642 25,513 13,567 5,084 11,331
Unusual item............... -- -- -- 5,750 --
Non-recurring income....... 124,041 -- -- -- --
Interest expense, net...... (13,960) (13,090) (10,972) (9,809) (9,089)
-------- -------- -------- -------- --------
Income from continuing
operations before taxes on
income.................... 137,723 12,423 2,595 1,025 2,242
Provision for taxes........ 56,182 4,970 1,040 550 940
-------- -------- -------- -------- --------
Income from continuing
operations................ 81,541 7,453 1,555 475 1,302
-------- -------- -------- -------- --------
Discontinued operations,
net of tax
Loss from discontinued
operations, net......... -- -- -- -- (1,905)
Loss on disposal of
discontinued operations,
net..................... -- -- -- -- (11,093)
-------- -------- -------- -------- --------
-- -- -- -- (12,998)
-------- -------- -------- -------- --------
Net income (loss).......... $ 81,541 $ 7,453 $ 1,555 $ 475 $(11,696)
-------- -------- -------- -------- --------
Preferred stock dividends.. 2,034 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) available
to common shareholders.... $ 79,507 $ 7,453 $ 1,555 $ 475 $(11,696)
======== ======== ======== ======== ========
Basic earnings (loss) per
common share:
Continuing operations...... $ 3.46 $ 0.32 $ 0.09 $ 0.03 $ 0.07
Discontinued operations.... -- -- -- -- (0.72)
-------- -------- -------- -------- --------
Net income (loss) per
share..................... $ 3.46 $ 0.32 $ 0.09 $ 0.03 $ (0.65)
======== ======== ======== ======== ========
Diluted earnings (loss) per
common share:
Continuing operations...... $ 3.10 $ 0.31 $ 0.08 $ 0.03 $ 0.07
Discontinued operations.... -- -- -- -- (0.72)
-------- -------- -------- -------- --------
Net income (loss) per
share..................... $ 3.10 $ 0.31 $ 0.08 $ 0.03 $ (0.65)
======== ======== ======== ======== ========
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
For the Fiscal Years Ended March 31,
---------------------------------------------
(In Thousands Except Per Share 1998(/1/) 1997 1996 1995 1994
Data) --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Weighted average number of common
shares:
basic........................... 22,995 23,408 18,283 18,002 18,002
diluted......................... 26,333 23,673 18,296 18,002 18,002
Balance Sheet Data:
Working capital.................. $125,398 $270,658 $209,022 $184,087 $214,806
Total assets..................... 425,210 393,901 318,209 241,315 272,357
Long-term debt, less current
maturities...................... 48,900 165,148 111,900 102,800 134,017
Stockholders' equity............. 258,110 150,195 142,603 107,504 107,029
</TABLE>
- --------
(/1/The)results of the Banner Hardware Group are included in the periods until
their disposition in January 1998. Fiscal 1998 includes the non-recurring
income on the disposition of the Banner Hardware Group. Fiscal 1994
includes the results of the Discontinued Subsidiaries which were sold in
January 1995. The reserves recorded in fiscal 1994 were adequate to cover
all losses incurred in fiscal 1995 as a result of the divestitures. These
transactions materially affect the comparability of the information stated
in the selected consolidated financial information.
No cash dividends have been paid for the past five years.
The consolidated income statements for the nine 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>
For the Nine
Months Ended
December 31,
------------------
(unaudited)
1998 1997
(In Thousands Except Per Share Data) -------- --------
<S> <C> <C>
Net sales................................................... $152,404 $359,458
Cost of goods sold.......................................... 120,346 256,085
-------- --------
Gross profit.............................................. 32,058 103,373
Selling, general and administrative expenses................ 26,366 77,601
-------- --------
Operating income.......................................... 5,692 25,772
Non-recurring loss.......................................... 19,320 --
Investment income........................................... 1,197 --
Interest expense, net....................................... 5,255 12,178
-------- --------
Income before taxes....................................... (17,686) 13,594
Provision (benefit) for taxes............................... (5,750) 5,300
-------- --------
Net income.................................................. $(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
diluted.................................................... 21,458 23,830
<CAPTION>
As of December
31,
------------------
(unaudited)
1998 1997
-------- --------
<S> <C> <C>
Balance Sheet Data:
Working capital............................................. $286,257 $345,064
Total assets................................................ 395,146 425,211
Long-term debt, less current maturities..................... 50,600 196,666
Stockholders' equity........................................ 247,399 192,564
</TABLE>
54
<PAGE>
BANNER MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On December 31, 1998, Banner completed the sale of Solair to Kellstrom in
exchange for approximately $57.0 million in cash and a warrant to purchase
300,000 shares of common stock of Kellstrom. Banner's results of operations
include Solair, which accounted for approximately 37% of Banner's net sales for
the nine months ended December 31, 1998. As a result of the sale of Solair, net
sales will decrease by approximately 35-40% and operating income will improve.
On January 13, 1998, Banner completed the disposition of substantially all of
the assets and certain liabilities of the Banner Hardware Group to two wholly-
owned subsidiaries of AlliedSignal (the "Buyers") in exchange for unregistered
shares of AlliedSignal common stock with an aggregate value equal to $369
million. The purchase price received for the Banner Hardware Group was based on
the consolidated net worth as reflected on an estimated closing date balance
sheet for the assets (and liabilities) conveyed by the Banner Hardware Group to
the Buyers. The assets transferred to the Buyers consisted primarily of the
Banner Hardware Group, which includes the distribution of bearings, nuts,
bolts, screws, rivets and other types of fasteners, and its PacAero unit.
Approximately $194 million of the AlliedSignal common stock received from the
Buyers was used to repay outstanding term loans and a portion of the revolver
balance of Banner's subsidiaries and related fees. The remaining investment in
AlliedSignal common stock has been accounted for as an available-for-sale
security. As a result of the Hardware Group disposition and the repayment of
outstanding term loans and a portion of the revolver balance, Banner recorded
nonrecurring income of $124 million for the twelve months ended March 31, 1998.
For fiscal 1998, the Banner Hardware Group represented approximately 44% of
Banner's revenues.
Analysis of Results of Operations
<TABLE>
<CAPTION>
For the Fiscal Years Ended March 31,
-----------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
Amount Percentage Amount Percentage Amount Percentage
(In Thousands) -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $420,323 100.0% $389,111 100.0% $287,880 100.0%
Cost of goods sold...... 305,385 72.7 279,041 71.7 209,609 72.8
-------- ----- -------- ----- -------- -----
Gross profit............ 114,938 27.3 110,070 28.3 78,271 27.2
Selling, general and
administrative......... 87,296 20.7 84,557 21.7 64,704 22.5
-------- ----- -------- ----- -------- -----
Operating income........ $ 27,642 6.6% $ 25,513 6.6% $ 13,567 4.7%
======== ===== ======== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended December 31,
---------------------------------------
1998 1997
------------------- -------------------
Amount Percentage Amount Percentage
(In Thousands) -------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Net sales.............................. $152,404 100.0% $359,458 100.0%
Cost of goods sold..................... 120,346 79.0 256,085 71.2
-------- ----- -------- -----
Gross profit........................... 32,058 21.0 103,373 28.8
Selling, general and administrative.... 26,366 17.3 77,601 21.6
-------- ----- -------- -----
Operating income....................... $ 5,692 3.7% $ 25,772 7.2%
======== ===== ======== =====
</TABLE>
Operating Results
Nine Months Ended December 31, 1998 and 1997
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
55
<PAGE>
approximately 50% of sales (see Note 2 in the notes to summarized financial
information). 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, which
commenced in August 1997. 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.
The gross profit percentage for the nine months ended December 31, 1998
decreased to 21.0% compared to 28.8% for the prior period. This decrease 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, the gross profit percentage for the nine months
ended December 31, 1997 would have been 22.4%.
Selling, general and administrative expenses decreased $51.2 million, or
66.0%, for the nine months compared to the prior year. Excluding the results of
the Hardware Group, SG&A expenses would have been $28.4 million, or 17.3% of
sales, compared to $26.4 million, or 17.3% of sales.
Operating income for the nine months ended December 31, 1998 decreased $20.1
million, or 77.9%, from the comparable prior period. Excluding the results of
the Hardware Group, operating income would have decreased $2.8 million, or
32.7%, from the comparable prior period. This decrease was primarily
attributable 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.
Non-recurring Loss
As a result of the sale of Solair on December 31, 1998, Banner recorded a
pre-tax non-recurring charge of $19.3 million in December 1998 (see Note 2 in
the notes to summarized financial information).
Investment Income
Investment income for the nine months ended December 31, 1998 amounted to
$1.2 million. Banner recorded no investment income in the comparable prior
period. For the nine months ended December 31, 1998, Banner recorded $2.3
million in dividend income from the 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 against the
investment in AlliedSignal common stock. Through the end of December 1998,
Banner sold calls against approximately 2.75 million shares of 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 the average outstanding debt balance from $171 million to $84
million in the current period, as well as an overall decrease in the effective
interest rate between the periods. Banner utilized approximately $194 million
of the proceeds received from the Hardware Group disposition to reduce the debt
of its subsidiaries. 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 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 non-recurring pre-tax loss from the sale of Solair.
56
<PAGE>
For the nine months ended December 31, 1997, the provision for taxes was $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, Banner 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 Banner's current operations and Banner
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
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.
Fiscal 1998, 1997 and 1996
Net sales of $420.3 million in fiscal 1998 increased by $31.2 million, or
8.0%, compared to sales of $389.1 million in fiscal 1997. The increase in sales
was attributable to an increase of $32.5 million, or 26.6%, in sales of
rotables and an increase of $13.0 million, or 19.0%, in sales of engines
partially offset by a decrease of $14.3 million or 7.2% in hardware sales.
Sales of rotables increased as a result of the introduction of a new product
line by DAC International, Inc. and the Delta Contract. The decrease in
hardware sales was due to nine months of sales in fiscal 1998, compared to a
full year of sales in fiscal 1997, as a result of the Hardware Group
disposition. Net sales in fiscal 1997 increased $101.2 million, compared to
fiscal 1996, which reflected (i) an increase of $62.1 million in hardware sales
resulting primarily from the acquisition of PB Herndon Aerospace, Inc. in
January 1997, and including twelve months of sales from Harco in fiscal 1997
compared to one month in fiscal 1996; (ii) an increase of $24.0 million in
rotable sales; and (iii) an increase of $15.1 million in engine sales. On a pro
forma basis excluding the sales recorded by the Banner Hardware Group, net
sales increased 30.7% in fiscal 1998 and 29.4% in fiscal 1997, as compared to
fiscal 1997 and 1996, respectively.
Gross profit as a percentage of sales was 27.3%, 28.3% and 27.2%, in fiscal
1998, 1997 and 1996, respectively. The decrease in the current year was
primarily due to lower margins realized on sales of rotables, which were nearly
offset by higher margins contributed by the engine group. The decreased margins
for the rotable group were primarily the result of a change in product mix. The
increased margins for the engine group was due to the overall improvement in
the aviation market. The increase in fiscal 1997 compared to fiscal 1996 was
due primarily to higher margins realized on the sale of hardware and rotables.
Fiscal 1996 margins were adversely effected by an increase in the supply of
Stage 2 rotables in the marketplace, which in turn had a negative impact on
pricing in that year. The supply and demand of Stage 2 rotables somewhat
stabilized in fiscal 1997, allowing pricing to improve slightly. On a pro forma
basis, excluding the gross profit recorded by the Banner Hardware Group, gross
profit would have been 22.8%, 22.7% and 21.4%, in fiscal 1998, 1997 and 1996,
respectively.
SG&A expenses as a percentage of sales was 20.8%, 21.7% and 22.5%, in fiscal
1998, 1997 and 1996, respectively. The decreasing trend was attributable
primarily to substantial sales growth outpacing the growth of SG&A expenses
incurred to realize such sales growth. On a pro forma basis, excluding the SG&A
expenses recorded by the Hardware Group, SG&A expense as a percentage of sales
would have been 17.6%, 19.4% and 21.3%, in fiscal 1998, 1997 and 1996,
respectively.
57
<PAGE>
Operating income of $27.6 million in fiscal 1998 increased $2.1 million
compared to operating income of $25.5 million in fiscal 1997. The increase in
operating income was due primarily to the current year's growth in sales and
increased operational efficiencies. In addition, operating income for fiscal
1998 includes the results of the Banner Hardware Group for only nine months as
compared to the full year for fiscal 1997. Operating income in fiscal 1997
improved by $11.9 million over fiscal 1996, due primarily to increased sales
and improved margins resulting from a turnaround in the aerospace industry. On
a pro forma basis to exclude the results of the Banner Hardware Group,
operating income increased $5.7 million in fiscal 1998, as compared to fiscal
1997, and $5.3 million in fiscal 1997, as compared to fiscal 1996.
Foreign sales accounted for 28.7%, 29.3% and 32.0% of Banner's total sales
for the fiscal years ended March 31, 1998, 1997 and 1996, respectively. Foreign
sales to Asia (excluding Japan) accounted for 5.2%, 6.6%, and 6.4% of Banner's
total sales for the fiscal years ended March 31, 1998, 1997, and 1996,
respectively. Banner expects that the current Asian economic crisis will not
have a material impact on its future operating results.
Interest Expense
Interest expense for fiscal 1998, 1997 and 1996 amounted to $14.0 million,
$13.1 million and $11.0 million, respectively. The increase in interest expense
in fiscal 1998 compared to fiscal 1997 was due primarily to higher average debt
outstanding coupled with a slight increase in the effective interest rate. The
increase in interest expense in fiscal 1997 compared to fiscal 1996 was due
primarily to higher average debt outstanding, offset by a slight decrease in
the effective interest rate. The effective interest rate for fiscal 1998, 1997
and 1996 was 9.3%, 9.1% and 9.3%, respectively. The average debt outstanding
for fiscal 1998, 1997 and 1996 amounted to $147.5 million, $141.2 million and
$108.1 million, respectively. Banner utilized approximately $194 million of the
proceeds received from the Hardware Group Disposition to reduce its debt.
Income Taxes
The tax provisions on income from operations for the fiscal years ended
March 31, 1998, 1997 and 1996 were $56.2 million, $5.0 million and $1.0
million, respectively. The effective tax rates for fiscal years 1998, 1997 and
1996 were 40.8%, 40.0% and 40.1%, respectively, which approximate the combined
Federal and State effective tax rates.
Net Income
For the fiscal years ended March 31, 1998, 1997 and 1996, Banner recorded
net income available to common shareholders of $79.5 million, or $3.46 basic
earnings per common share, $7.5 million, or $0.32 basic earnings per common
share and $1.6 million, or $0.09 basic earnings per common share, respectively.
Inflation has had minimal effect on Banner's current operations and Banner
believes that this trend will continue in the immediate future.
Comprehensive Income
Comprehensive income includes unrealized holding gains in the fair market
value of the AlliedSignal common stock which was received from the Hardware
Group Disposition and is classified as available-for-sale securities. The fair
market value of unrealized holding securities increased by $14.3 million, net
of taxes, for the twelve months ended March 31, 1998.
Market Risk of AlliedSignal Hedge Agreements
From July 1998 to October 1998, Banner sold calls against 2.1 million shares
of AlliedSignal common stock for aggregate proceeds of $3.9 million. The
exercise price of these calls ranges from $40.00 to $48.92
58
<PAGE>
with maturity dates in April 1999. Banner is required to mark to market the
calls based on their fair market value at the end of each period in accordance
with GAAP. As of December 31, 1998 the market value of these calls was
approximately $5.0 million. Banner has recorded approximately $1.0 million of
losses related to these calls, for the nine months ended December 31, 1998,
which was classified in investment income. In January 1999, Banner repurchased
these calls for an aggregate purchase price of $4.4 million. The net result of
the sale and repurchase of these calls was a loss of approximately $0.3
million.
Liquidity
Total capitalization as of December 31, 1998, March 31, 1998 and 1997,
amounted to $298.0 million, $307.0 million and $315.6 million. 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 Banner'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 Banner 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. The changes in the components of capitalization for the twelve months
ended March 31, 1998 included a decrease of $116.5 million in debt and an
increase of $107.9 million in equity. The decrease in debt was primarily the
result of the repayment of outstanding term loans with approximately $194
million of AlliedSignal common stock received in the Hardware Group
Disposition, partially offset by additional borrowings. The increase in equity
was due primarily to the net income for the fiscal year ended March 31, 1998,
which included non-recurring income of $124.0 million recorded as a result of
the Hardware Group Disposition and the $14.3 million net unrealized gain
recorded on the appreciation of the AlliedSignal common stock. In January 1998,
Banner repurchased 2,246,967 shares of Banner common stock for a total cost of
$23.3 million (refer to Note 14 in the notes to the consolidated financial
statements).
In connection with the Hardware Group Disposition, Banner 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. Banner 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 Allied Signal common stock,
which is inherent in stock investments.
At December 31, 1998, Banner 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 Banner's operations in fiscal 1999. Banner had no other material
capital commitments or planned expenditures as of December 31, 1998.
For the nine months ended December 31, 1998 and 1997, net cash used for
operating activities was $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. For the nine months ended
December 3, 1998 the primary source of cash from operating activities 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
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from operating activities for the nine months ended December 31, 1997 was an
increase of $1.5 million, in payables and accrued liabilities 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 borrowings on the revolver, subsequently
reduced by 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 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.
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, Banner 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, Banner formed a
Year 2000 project group under the direction of Banner's Chief Operating
Officer, identified and designated key personnel within Banner 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 Banner's Year 2000 plan. Banner has completed this phase
of its Year 2000 plan. Banner evaluates regularly, and based on such evaluation
revises the schedule and budget to reflect the progress of Banner's Year 2000
readiness efforts. The Chief Operating Officer regularly reports to Banner's
management and the board of directors on the status of the Year 2000 project.
Assessment. In the readiness assessment phase, Banner, in coordination with
its technical review consultants, has been evaluating Banner's Year 2000
preparedness in a number of areas, including its information technology
infrastructure, external resources, facilities, equipment, products and
inventory. Banner has substantially completed this phase of its Year 2000 plan.
In addition, pending the completion of all validation testing, Banner 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
assesment 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
Banner's Chief Operating Officer.
Evaluation. In the evaluation and prioritization phase, Banner seeks to
develop potential solutions to the Year 2000 issues identified in Banner's
readiness assessment phase, consider those solutions in light of Banner's other
information technology and business priorities, prioritize the various
remediation tasks, and
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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, Banner 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 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, Banner does not presently anticipate incurring any
material systems replacement costs relating to the Year 2000 issue.
Implementation. In the implementation phase, Banner, 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 the
Banner's material systems are currently Year 2000 ready.
Testing. In the validation testing phase, Banner seeks to evaluate and
confirm the results of its Year 2000 remediation efforts. In conducting its
validation testing, Banner is using, among other things, proprietary testing
protocols developed internally and by Banner'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. Banner
expects to complete testing of its most critical information technology and
related systems by June 30, 1999.
Contingency Planning. In the contingency planning phase, Banner, together
with its technical review consultants, is assessing the Year 2000 readiness of
its key suppliers, distributors, customers and service providers. Toward that
objective, Banner 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,
Banner also began to evaluate the risks to Banner 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, Banner's financial condition, business or
operations. So far, we have not identified any systems as being both mission
critical and potentially at risk. Banner also is developing and evaluating
contingency plans to deal with events arising from significant Year 2000 issues
outside of our infrastructure. In this regard, Banner 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 Banner's progress, by phase, in completing
its Year 2000 plan:
Percentage of Year 2000 Plan Completed
(By Phase)
<TABLE>
<CAPTION>
1997 1998
Quarter Ended 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>
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The following chart summarizes the total costs incurred by Banner as of
December 31, 1998, by business segment, to address Year 2000 issues, and the
total costs Banner 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>
Banner 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, Banner's other information technology
programs or projects.
Banner anticipates that it will complete its Year 2000 preparations by
October 31, 1999. Although Banner's Year 2000 assessment, evaluation,
implementation, testing and contingency planning phases are not yet complete,
from what we know, Banner does not believe that Year 2000 issues will
materially affect its business, results of operations or financial condition.
If Banner's Year 2000 programs are not completed on time, and its mission
critical systems are not Year 2000 ready, Banner 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 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. Banner 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, 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. Banner 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 Banner in fiscal 2000, although, earlier
application is permitted.
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DESCRIPTION OF MTA
MTA is a wholly-owned subsidiary of Fairchild formed to effect the merger.
MTA has not engaged in any operations to date. MTA will merge with and into
Banner.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In certain instances, Banner and Fairchild may have competing or conflicting
interests, such as in the purchase and sale of products in the ordinary course
of business, the transfer of a business by one company to the other or the
pursuit of business opportunities of interest to both companies. The resolution
of such competing or conflicting interest has been accomplished on a case by
case basis; and Fairchild's management recognizes its obligation to deal fairly
and in good faith with Banner, and accordingly will exercise reasonable
judgment and take such steps as they may then, under all the circumstances,
deem necessary in resolving specific instances where the interests of the
companies may compete or conflict. To this end, Banner has from time to time
retained independent advisors, independent counsel or established special
committees composed solely of outside directors, where it has determined that
such action is necessary or appropriate under the circumstances. Fairchild is
currently the beneficial owner of approximately 83% of the outstanding Banner
Common Stock. Messrs. Jeffrey Steiner (CEO and director of Banner), Michael
Alcox (director of Banner) and Eric Steiner (Senior Vice President and director
of Banner) are officers, directors and shareholders of Fairchild.
Fairchild Fasteners has historically been a supplier of fasteners to Banner,
and Banner has also competed with them, in the sale to some end users. All
transactions between Banner and Fairchild have been on terms that are no less
favorable to Banner than those that might be obtained in arms-length
transactions with unaffiliated third parties. Sales to Fairchild amounted to
approximately $220,000 and purchases from Fairchild amounted to approximately
$13,200,000 for the fiscal year ended March 31, 1998. Due to the disposition of
Banner's hardware business in January 1998 to AlliedSignal, future sales to and
purchases from Fairchild are expected to decrease significantly.
Banner entered into a lease with Fairchild on April 1, 1996 to rent
approximately 10,000 square feet of office space in the Fairchild building for
a term of ten years with the option to terminate the lease after five years.
The annual lease rate is approximately $170,000 subject to escalation. Banner
has a letter agreement with Fairchild in which Fairchild provides tax
preparation and consulting services to Banner. The current annual fee for such
services is approximately $103,000. Banner has a letter agreement with
Fairchild pursuant to which Fairchild's in-house attorneys provide legal
services to Banner. This agreement is on a month-to-month basis and Banner
currently pays Fairchild $12,500 per month. As a result, Fairchild's General
Counsel (Donald E. Miller) also serves as General Counsel for Banner. Banner
has a letter agreement with Fairchild in which Banner provides accounting and
financial reporting services to Fairchild. This agreement is on a month-to-
month basis and Fairchild currently pays Banner $15,500 per month. As part of
the accounting services, Mr. Juris provided on-site accounting services for a
Fairchild subsidiary for approximately three months. Fairchild reimbursed
Banner for Mr. Juris' salary and expenses during that period. All services are
provided in the normal course of business and are on terms that are no less
favorable to Banner or Fairchild, as the case may be, than those that might be
obtained in arm's-length transactions with unaffiliated third parties.
Banner is a party to several agreements with Fairchild which provide for
various methods of expense sharing related to combined sales and marketing
efforts to obtain customers in foreign countries. As of December 31, 1998,
Banner had contributed less than $125,000 under these agreements. Fairchild and
Banner have agreed to share commission income to the extent commissions exceed
expenses. No such commissions have been received to date.
Under a tax indemnity agreement, Fairchild has agreed to indemnify Banner
from and against any federal, state, local and foreign income, franchise,
withholding and alternative minimum taxes (including interest, additions to tax
and penalties with respect thereto) for periods ending on or before August 2,
1990 when 52.8%
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of the Banner common stock was sold in the initial public offering. Banner has
agreed to pay Fairchild for any tax savings it realizes after the initial
public offering as a result of adjustments to, or utilization of net operating
loss or tax credit carryforwards attributable to, income tax returns for prior
periods. Although Fairchild has agreed to indemnify Banner for taxes for
periods ending on or before the initial public offering, the tax indemnity is
not binding upon either the Internal Revenue Service or upon state, local or
foreign taxing authorities, any of which are permitted to collect from Banner
all relevant taxes owed by Banner and, in certain instances, by Fairchild and
its subsidiaries for periods covered by the tax indemnity. The effectiveness of
the tax indemnity is therefore dependent on the ability of Fairchild to pay
amounts owed, if any, under the tax indemnity.
As long as Fairchild owns 15% or more of the issued and outstanding Banner
common stock, it has the unlimited right pursuant to a registration rights
agreement to require Banner to use its best efforts to register, all the Banner
common stock beneficially owned by Fairchild at any time and from time to time,
at Fairchild's expense. In addition, Fairchild has piggyback registration
rights that are subject to certain limitations.
Banner and Fairchild have purchased a joint insurance policy which provides,
among other coverages, for a combined annual aggregate limit for Banner and
Fairchild of $150 million related to certain earthquake exposures. Banner and
Fairchild have entered into an agreement addressing the resolution process to
be applied if both companies suffer damages from earthquakes aggregating in
excess of the $150 million limit. In addition, Banner and Fairchild have
purchased joint aircraft product liability insurance with limits of $400
million.
Banner prepaid hours for a chartered helicopter used from time to time for
business related travel. The owner of the chartered helicopter is a company
controlled by Mr. Jeffrey Steiner. Cost for such flights charged to Banner are
comparable to those charged in arm's length transactions between unaffiliated
third parties. Prepaid hours by Banner in fiscal 1998 were $225,000.
On July 7, 1998, Banner's board of directors announced its approval of the
purchase by Banner of up to 2.5 million shares of Fairchild Class A Common
Stock through open market purchases. The purchases by Banner will be made from
time to time depending on the market price of Fairchild, and may be subject to
the requirement of obtaining the consent of Banner's senior lenders. Shares of
Fairchild stock purchased by Banner may not be sold unless they are registered
on a registration statement (or are sold pursuant to any applicable exemption
under securities laws). Banner has the right to demand that Fairchild register
such shares in order for Banner to sell them. As of December 31, 1998, Banner
had purchased 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 Banner recorded in stockholders' equity
unrealized holding losses since inception of $1.6 million, net of tax benefits,
from the decline in the market value of Fairchild stock.
On May 11, 1998, Fairchild commenced an offer to exchange, for each properly
tendered share of Banner common stock, a number of shares of Fairchild Class A
Common Stock, equal to the quotient of $12.50 divided by $20.675, up to a
maximum of 4,000,000 shares of Banner common stock. The exchange offer expired
on June 9, 1998. As such, a total of 3,659,424 shares of Banner common stock
were validly tendered to Fairchild in exchange for 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 Banner common stock
increased to 83.2%. Fairchild's current beneficial ownership is approximately
85.2%.
On May 23, 1997, Banner granted all of its stockholders certain rights to
purchase Banner Preferred Stock. On June 19, 1997, Banner issued Fairchild
3,085,885 shares of Preferred Stock for $28.4 million.
Banner entered into a stock exchange agreement with Fairchild, effective May
12, 1997, pursuant to which Banner could acquire Fairchild Scandinavian
Bellyloading Company AB from Fairchild in exchange for 230,000 shares of Banner
common stock initially. This transaction was approved by a special committee of
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Banner's board of directors, and was approved by Banner'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 Banner
a reasonable termination fee and Banner's out-of-pocket expenses. On July 1,
1997, Fairchild exercised its option to terminate the Stock Exchange Agreement.
As a result, Fairchild paid Banner a termination fee of $300,000 and out-of-
pocket expenses of $447,000, and also agreed to allow Banner to participate
equally in future royalties from FSBC, if any. For the nine months ended
December 31, 1998, Banner recorded royalty income from FSBC of $302,000.
On December 20, 1996, Banner entered into an unsecured subordinated loan
agreement with a wholly-owned subsidiary of Fairchild. The purpose of the
subordinated loan was to provide Banner with funds for acquisitions and working
capital requirements. The subordinated loan bore interest at 10.0% per annum
for the period commencing on the date of the initial draw and continuing for a
period of six months from the initial draw date. Thereafter, the subordinated
loan bore interest at 11.2% per annum. The principal and accrued interest were
deferred until the maturity date of November 15, 2003, subject to acceleration
in certain events specified in the subordinated loan. A commitment fee of 1.5%
per annum for six months from the initial draw date, and 3.0% per annum
thereafter, was accrued and payable on the last day of each month, based on the
balance outstanding. As of March 31, 1997, Banner borrowed $28.0 million under
the subordinated loan, to fund the purchase by Dallas Aerospace of PB Herndon
Aerospace, Inc. and other working capital requirements. The subordinated loan
was repaid in June 1997 as a result of the Banner Preferred Stock issuance.
Interest paid to Fairchild's subsidiary from December 1996 to June 1997 totaled
$1.0 million.
In February 1999, Banner acquired for cash certain marketable securities
from Fairchild for an aggregate purchase price of approximately $8.5 million.
The purchase price represents the market value of the marketable securities on
the date of the purchase by Banner.
On February 12, 1999, Banner and Fairchild entered into a subordinated loan
agreement with Fairchild whereby Banner would loan on an unsecured basis up to
$30.0 million to Fairchild. The loan bears interest at ten percent per annum
payable on a maturity date of July 1, 2004. This loan agreement is subordinated
to Fairchild's senior credit facility.
Fairchild has implemented an officer loan program in an aggregate amount of
$750,000 which will allow its officers, including certain Banner officers to
borrow to purchase Fairchild Class A Common stock.
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DESCRIPTION OF FAIRCHILD CAPITAL STOCK
General
The authorized capital stock of Fairchild consists of 40,000,000 shares of
Class A Common Stock, par value $0.10 per share, 19,218,806 of which were
outstanding as of December 31, 1998, 20,000,000 shares of Class B Common Stock,
par value $0.10 per share, 2,624,662 of which were outstanding as of December
31, 1998, and 10,000,000 shares of preferred stock, par value $0.10 per share,
none of which are issued and outstanding. The Class A Common Stock and the
Class B Common Stock are sometimes collectively referred to herein as the
"Fairchild Common Stock."
Preferred Stock
The board of directors of Fairchild is authorized, subject to the
limitations prescribed by law, to provide by resolutions for the issuance of
the preferred stock in one or more series, to establish the number of shares to
be included in each such series and to fix and state the voting powers, the
designations, preferences and relative, participating, optional or other
special rights, or qualifications, limitations or restrictions thereof,
applicable to the shares of each series. Satisfaction of any dividend
preferences of outstanding shares of preferred stock would reduce the amount of
funds available for the payment of dividends on shares of Fairchild Common
Stock. Holders of shares of preferred stock may be entitled to receive a
preference payment in the event of any liquidation, dissolution or winding-up
of Fairchild before any payment is made to the holders of shares of Fairchild
Common Stock. Under certain circumstances, the issuance of shares of preferred
stock may render more difficult or tend to discourage a merger, tender offer or
proxy contest, the assumption of control by a holder of a large block of
Fairchild's securities or the removal of incumbent management. The board of
directors of Fairchild, without stockholder approval, may issue shares of
preferred stock with voting and conversion rights which could adversely affect
the holders of shares of Fairchild Common Stock.
Fairchild Common Stock
The issued and outstanding shares of Fairchild Common Stock are, and the
shares of Fairchild Class A Common Stock being offered in the merger will be,
validly issued, fully paid and nonassessable. The powers, preferences and
rights of holders of Fairchild Class A Common Stock and Class B Common Stock,
and the qualifications, limitations or restrictions thereof, are substantially
identical, except as otherwise required by law or expressly provided in this
section. Each holder of Fairchild Class A Common Stock is entitled to one (1)
vote per share and each holder of Class B Common Stock is entitled to ten (10)
votes per share. Except as set forth below, all actions submitted to a vote of
stockholders shall be voted on by the holders of Fairchild Class A Common Stock
and Class B Common Stock voting together as a single class. The holders of
Fairchild Class A Common Stock and Class B Common Stock shall vote separately
as classes with respect to amendments to the Restated Certificate of
Incorporation that alter or change the powers, preferences or special rights of
their respective classes of stock so as to affect them adversely and with
respect to such other matters as may require class votes under Delaware Law.
Notwithstanding anything in the Restated Certificate of Incorporation to the
contrary, the affirmative vote of the holders of a majority of all outstanding
shares of capital stock of Fairchild entitled to vote, voting together as a
single class, shall be required to authorize additional shares of Fairchild
Class A Common Stock or Class B Common Stock, or upon certain proposals to
issue authorized but unissued shares of Class B Common Stock. Class B Common
Stock is convertible into Fairchild Class A Common Stock at any time at the
option of the holder or automatically if at any time the number of outstanding
shares of Class B Common Stock as reflected on the stock transfer books of
Fairchild is less than 300,000. If Fairchild at any time (a) declares a stock
dividend upon either class of its Fairchild Common Stock payable in shares of
that same class of Fairchild Common Stock, (b) makes any distribution upon
either class of its Common Stock payable in shares of that same class of
Fairchild Common Stock, (c) subdivides its outstanding shares of either class
of its Fairchild Common Stock into a greater number of shares, or (d)
subdivides its outstanding shares of either class of its Fairchild Common Stock
into a smaller number of shares, then and in any of such events
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Fairchild shall make, declare or effect a similar but ratable stock dividend,
distribution or subdivision on the shares of the other class of its Fairchild
Common Stock, but payable in shares of such other class of Fairchild Common
Stock and only on a share for share basis. Cash dividends are payable in such
relative amounts as the board of directors of Fairchild may determine;
provided, however, that in no event will cash dividends payable with respect to
the Class B Common Stock exceed fifty percent (50%) of the cash dividends
payable with respect to the Fairchild Class A Common Stock.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock of Fairchild is
ChaseMellon Shareholder Services L.L.C.
COMPARISON OF STOCKHOLDER RIGHTS
Fairchild and Banner are both organized under the laws of the State of
Delaware. Therefore, any differences between the rights of Fairchild
stockholders and the rights of Banner stockholders arise solely from
differences between each corporation's certificate of incorporation and bylaws.
The following summary sets forth certain material differences between the
rights of Fairchild stockholders and the rights of Banner stockholders and is
qualified in its entirety by reference to Fairchild Charter, Fairchild Bylaws
and Banner's Restated Certificate of Incorporation (the "Banner Charter") and
Banner Bylaws.
Voting Rights
The holders of Fairchild Class A Common Stock have one vote per share and
the holders of Fairchild Class B Common Stock have ten votes per share. Each
share of Fairchild Class B Common Stock is convertible at any time into one
share of Fairchild Class A Common Stock. Through control of substantially all
outstanding shares of Fairchild Class B Common Stock, Jeffrey J. Steiner, the
Chairman of the Board, Chief Executive Officer and President of Fairchild,
controls a majority of the combined voting power of both classes of Fairchild
Common Stock, which enables him to elect a majority of the directors of
Fairchild and to determine the outcome of any other matter submitted to
stockholders for approval (except for matters requiring approval of holders of
both classes voting separately). The holders of Fairchild Class A Common Stock
and Class B Common Stock vote separately as classes with respect to amendments
to the Restated Certificate of Incorporation that alter or change the powers,
preferences or special rights of their respective classes of stock so as to
affect them adversely and with respect to such other matters as may require
class votes under Delaware law. The holders of Banner common stock have one
vote per share with respect to all matters submitted to a vote of the Banner
stockholders.
Stockholder Proposals
The Fairchild Bylaws contain no advance notice requirements relating to
stockholder proposals for business to be conducted at a stockholders' meeting,
except that stockholder nominations for directors must be submitted to the
Fairchild board of directors not less than 10 nor more than 60 days prior to
any such meeting called for the election of directors. The Banner Bylaws
provide that any business that expressly requires the vote of Banner
stockholders must be stated in the notice of the stockholders' meeting at which
the business is proposed to be conducted.
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SECURITIES OWNERSHIP
Ownership of Banner Capital Stock
The table below sets forth as of January 31, 1999 the number and percentage
of Banner common stock and Banner preferred stock beneficially owned by (a)
each person known by Banner to own beneficially more than 5% of any class of
Banner common stock and Banner preferred stock; (b) each director of Banner;
(c) the five most highly compensated executive officers of Banner; and (d) the
directors and officers of Banner as a group. The persons and entities named
possess sole voting power and investment power with respect to all shares shown
as beneficially owned by them. As of January 31, 1999, there were 21,485,295
and 3,493,457 shares of Banner common stock and Banner preferred stock
outstanding, respectively.
<TABLE>
<CAPTION>
Banner Common
Stock Banner Preferred Stock
Beneficially Owned Beneficially Owned
Before Merger Before Merger
------------------------ ----------------------------
Percent
of Percent of
Shares Class Shares Class
---------- ------- ------------- -----------
<S> <C> <C> <C> <C>
Michael T. Alcox......... 14,000(1) * -- *
Steven L. Gerard......... 17,000(1) * -- *
Charles M. Haar.......... 17,000(1) * -- *
Dimensional Funds........ 1,471,000 5.9% -- *
The Fairchild
Corporation............. 21,253,084(2) 85.1% 3,413,110(2) 97.7%
Philippe Hercot.......... 17,000(1) * -- *
Michael D. Herdman....... 6,000(1) * -- *
Eugene W. Juris.......... 103,569(1)(3) * 3,069(3) *
Bradley T. Lough......... 19,250(1) * -- *
Warren D. Persavich...... 154,104(1) * 1,104 *
Dr. Eric I. Steiner...... 57,500(1) * -- *
Jeffrey J. Steiner....... 21,703,073(1)(4) 86.9% 3,432,821(4) 98.3%
Leonard Toberoff......... 17,000(1) * -- *
All directors and
officers of Banner as a
group (11 persons)...... 22,125,496 88.6% 3,436,994 98.4%
</TABLE>
- --------
* Represents less than one percent (1%).
(1) Includes exercisable stock options for Banner common stock, as follows: M.
Alcox, 7,000 shares; S. Gerard, 7,000 shares; C. Haar, 7,000 shares; P.
Hercot, 17,000 shares; M. Herdman, 6,000 shares; E. Juris, 86,500 shares;
B. Lough, 19,250 shares; W. Persavich, 131,000 shares; E. Steiner, 42,500
shares; J. Steiner, 321,667 shares; L. Toboroff, 7,000 shares; all
directors and officers as a group, 651,917 shares.
(2) Includes shares held by Fairchild and its wholly owned subsidiaries.
17,406,574 of such shares of Banner common stock and 3,413,110 of such
shares of Banner preferred stock have been pledged by Fairchild or its
subsidiaries as collateral for a loan facility, and 433,400 shares have
been pledged by Fairchild or its subsidiaries as collateral under an escrow
agreement with BTR Dunlop Holdings, Inc., a wholly-owned subsidiary of BTR
plc.
(3) Includes (a) 1,500 shares of Banner common stock held in a Self Directed
IRA Account; (b) 12,500 shares of Banner common stock held by the spouse of
E. Juris; and (c) 3,069 shares of Banner Preferred Stock held by the spouse
of E. Juris.
(4) Includes (a) 3,611 shares of Banner common stock owned by J. Steiner
through Banner's Profit Sharing/401(k) plan; (b) 105,000 shares of Banner
common stock held by J. Steiner; (c) 19,711 shares of Banner Preferred
Stock immediately convertible to Banner common stock held by J. Steiner;
and (d) 321,667 shares of Banner common stock issuable upon the exercise of
options held by J. Steiner. Also includes 17,839,974 shares of Banner
common stock and 3,413,110 shares of Banner Preferred Stock owned directly
or indirectly by Fairchild; Mr. Steiner disclaims beneficial ownership of
such shares except to the extent of his pecuniary interest therein.
68
<PAGE>
Ownership of Fairchild Class A Common Stock by Directors and Executive Officers
of Banner
The table below sets forth as of January 31, 1999 the number and percentage
of Fairchild Class A Common Stock and Class B Common Stock beneficially owned
by (a) each person known by Banner to own beneficially more than 5% of any
class of Banner common stock and Banner Preferred Stock; (b) each director of
Banner; (c) the five most highly compensated executive officers of Banner; and
(d) the directors and officers of Banner as a group. The persons and entities
named possess or control sole voting power and investment power with respect to
all shares shown below. As of January 31, 1999, there were 19,222,606 and
2,624,062 shares of Fairchild Class A Common Stock and Class B Common Stock
outstanding, respectively.
<TABLE>
<CAPTION>
Before the Merger After the Merger
---------------------------------------------- ----------------------------------------------
Class A Common Stock Class B Common Stock Class A Common Stock Class B Common Stock
---------------------- ---------------------- ---------------------- ----------------------
Percent Percent Percent Percent
Shares(1) of Class Shares(1) of Class Shares(1) of Class Shares(1) of Class
------------ --------- ------------ --------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael T. Alcox........ 47,876 * 600 * 57,811 * 600 *
Steven L. Gerard........ 1,100 * -- * 13,165 * -- *
Charles M. Haar......... -- * -- * 12,065 * -- *
Dimensional Funds....... -- * -- * 1,043,935 4.8% -- *
Philippe Hercot......... 10,000 * -- * 22,065 * -- *
Michael D. Herdman...... -- * -- * 4,258 * -- *
Eugene W. Juris......... -- * -- * 98,645 * -- *
Bradley T. Lough........ -- * -- * 26,968 * -- *
Warren D. Persavich..... -- * -- * 151,944 * -- *
Dr. Eric I. Steiner..... 171,915 * 15,000 * 212,721 1.0% 15,000 *
Jeffrey J. Steiner...... 6,585,499 29.4% 2,938,996 98.0% 7,021,950 31.2% 2,938,996 98.0%
Leonard Toboroff........ -- * -- * 12,065 * -- *
All directors and
officers of Banner as a
Group.................. 6,816,390 34.8% 2,954,596 98.5% 8,678,100 37.8% 2,954,596 98.5%
</TABLE>
- --------
*Represents less than one percent.
(1) The Fairchild Class A Common Stock column includes shares of Class B Common
Stock, which are immediately convertible into Fairchild Class A Common
Stock on a share-for-share basis. Options which are exercisable immediately
or within sixty days after January 15, 1998 appear in the Fairchild Class A
Common Stock column. Certain warrants that may be deemed to be owned by
Jeffrey J. Steiner are exercisable into either Fairchild Class A Common
Stock or Class B Common Stock and appear in both Fairchild Class A Common
Stock and Class B Common Stock columns.
69
<PAGE>
MANAGEMENT OF BANNER AND SURVIVING CORPORATION
The directors and officers of Banner are expected to be replaced immediately
after the effective time of the merger with designees of Fairchild.
Directors of Banner
Set forth below are the names of each person who is a director of Banner and
(a) the present principal occupation or employment of each such person and the
name and principal business of the corporation or other organization in which
such occupation or employment of each such person is conducted, and (b) the
material occupations, positions, offices and employment and the name and
principal business of any corporation or other organization in which any
material occupation, position, office or employment of each such person was
held during the last five years.
Name and Age Principal Occupations
Michael T. Alcox, 51......... Michael T. Alcox has served as a Director of
Banner since 1990. From 1987 through September
1996 he served as Senior Vice President and
Chief Financial Officer of Fairchild. He
presently serves as a Vice President of
Fairchild, not employed on a full time basis.
Mr. Alcox also owns and operates travel and
real estate businesses. Mr. Alcox is a director
of Fairchild.
Steven L. Gerard, 53......... Steven L. Gerard has served as a Director of
Banner since 1992. From September 1992 to
August 1997, Mr. Gerard served as the Chairman
and the Chief Executive Officer of Triangle
Wire and Cable, Inc., a manufacturer of
insulated wire and cable, and its successor,
Ocean View Capital, Inc. Mr. Gerard is also a
director of Deeptech International, Inc. and
U.S. Home Corp.
Charles M. Haar, 78.......... Charles M. Haar has served as a Director of
Banner since 1992. He has been a professor of
law at Harvard University since 1956. He has
served as a consultant to Skadden, Arps, Slate,
Meagher & Flom for more than the past five
years. Professor Haar is a director of American
Health Properties.
Philippe Hercot, 32.......... Philippe Hercot has served as a Director of
Banner since 1995. He has served as a managing
partner for Capital Industrie & Associes (a
Paris, France based investment and consulting
firm) since May 1997. Prior thereto, he was
employed by Apax Partners (an investment
company) as an associate from September 1996 to
April 1997 and by Donaldson, Lufkin & Jenrette
(an investment banking firm) as an associate
from August 1993 to August 1996. He is a
director of Medicis S.A., Decibel France S.A.
and Sofilma S.A. Mr. Hercot is the son-in-law
of Mr. Jeffrey J. Steiner.
Michael D. Herdman, 48....... Michael D. Herdman has served as a Director of
Banner since October 1997. He has served as
Senior Vice President of American National Can
for Beverage Cans Europe/Asia Pacific ("ANC")
since January 1997. Prior thereto, he was
responsible for the European beverage can
activities since its formation in 1991.
70
<PAGE>
Name and Age Principal Occupations
Warren D. Persavich, 46...... Warren D. Persavich has served as Senior Vice
President and Chief Operating Officer of Banner
since May 1998 and as a Director of Banner
since 1990. Prior thereto, he served as Senior
Vice President and Chief Financial Officer of
Banner from June 1990 to May 1998.
Dr. Eric I. Steiner, 36...... Dr. Eric I. Steiner has served as Senior Vice
President of Banner since May 1997 and as a
Director of Banner since 1992. He has served as
President of Fairchild since November, 1998 and
Chief Operating Officer of Fairchild since
November 1996. Prior thereto he served as
Executive Vice President of Fairchild between
November 1996 and November 1998 and Senior Vice
President--Operations of Fairchild between May
1992 and November 1996. He has also served as
President of Fairchild Fasteners (a division of
a Fairchild subsidiary), since February 1995.
Dr. Steiner is a director of Fairchild. Dr.
Eric I. Steiner is the son of Mr. Jeffrey J.
Steiner.
Jeffrey J. Steiner, 61.......
Jeffrey J. Steiner has served as Chairman of
the Board, Chief Executive Officer and
President of Banner since September 1993. He
has served as Chairman of the Board and Chief
Executive Officer of Fairchild for more than
the past five years. He is a director of The
Franklin Corporation, and The Copley Fund. Mr.
Jeffrey J. Steiner is the father of Dr. Eric I.
Steiner and the father-in-law of Mr. Philippe
Hercot.
Leonard Toboroff, 66......... Leonard Toboroff has served as a Director of
Banner since 1992. He has served as Executive
Vice President and a director of Riddell
Sports, Inc., a manufacturer and licenser of
sports equipment, since April 1988. He has also
served as a Vice President and the Vice
Chairman of the Board of Allis-Chalmers
Corporation, a holding company, since May 1988.
For more than the past five years, Mr. Toboroff
has been a private investor. Mr. Toboroff is a
director of Engex Corp. and Saratoga Beverages,
Inc.
Executive Officers of Banner
Set forth below is certain information about each executive officer of
Banner who is not a director of Banner, based on information supplied by him,
including his name, age and principal occupations during the past five years.
All of the executive officers of Banner are elected by the board of directors
to serve until the next annual meeting of the Banner board of directors and
until their successors are elected and qualified.
Name and Age Principal Occupations
Eugene W. Juris, 40.......... Eugene W. Juris has served as Vice President
and Chief Financial Officer since May 1998.
Prior thereto, he served as Vice President--
Finance and Secretary of Banner from September
1993 to May 1998.
Bradley T. Lough, 33......... Bradley T. Lough has served as Secretary of
Banner since May 1998 and as Treasurer of
Banner since August 1993.
71
<PAGE>
PROPOSALS BY STOCKHOLDERS OF BANNER
If the merger is consummated, there will be no public stockholders of Banner
and no public participation in any future meetings of stockholders of Banner.
However, if the merger is not consummated, Banner's public stockholders will
continue to be entitled to attend and participate in Banner's stockholder
meetings. If the merger is not consummated, any proposals by stockholders
intended to be presented at the 1999 annual meeting must be received by Banner
no later than April 16, 1999 in order to be considered by the board of
directors of Banner for inclusion in Banner's 1999 proxy statement. In order
for a stockholder to nominate a candidate for director, under Banner's Bylaws,
timely notice of the nomination must be received by Banner in advance of the
meeting. Ordinarily, such notice must be received not less than 30 nor more
than 60 days before the meeting (but if Banner gives less than 40 days' notice
of the meeting, then such notice must be received prior to the meeting and
within 10 days after notice of the meeting is mailed or other public disclosure
of the meeting is made). The stockholder filing the notice of nomination must
describe various matters regarding the nominee, including such information as
name, address, occupation and shares held.
In order for a stockholder to bring other business before a stockholder
meeting, timely notice must be received by Banner. Such notice must include a
description of the proposed business, the reasons therefor, and other specific
matters. These requirements are separate from and in addition to the
requirements a stockholder must meet to have a proposal considered for
inclusion in Banner's 1999 proxy statement. In each case, the notice must be
given to the Secretary of Banner, whose address is 45025 Aviation Drive, Suite
300, Dulles, VA 20166. Any stockholder desiring a copy of Banner's Bylaws will
be furnished one without charge upon written request of the Secretary.
EXPERTS
The consolidated financial statements of Fairchild as of June 30, 1997 and
1998 and for the three years in the period ended June 30, 1998 incorporated by
reference in this Proxy Statement/Prospectus and Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are incorporated by
reference herein in reliance upon the authority of said firm as experts in
giving said report. The consolidated financial statements of Banner as of March
31, 1997 and 1998, and for each of the three years in the period ended March
31, 1998 included in this Proxy Statement/Prospectus, and Registration
Statement, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
included in reliance upon the authority of said firm as experts in giving said
report. The consolidated financial statements of Edwards and Lock Management
Corporation, doing business as Special-T Fasteners, as of March 31, 1997 and
1996 and for the three years in the period ended March 31, 1997 incorporated by
reference in this Proxy Statement/Prospectus and Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports thereto, and are incorporated by reference upon the
authority of said firm as experts in giving said reports. The financial
statements of Nacanco Paketleme Sanayi ve Ticaret A.S. for the three years
ended December 31, 1997 have been audited by Basaran Serbest Muhasebeci Mali
Musavirlika A.S., independent public accountants, as indicated in their report
with respect thereto and are incorporated by reference in reliance upon the
authority of the firm as experts in giving the report.
LEGAL MATTERS
Certain legal matters with respect to the Fairchild Class A Common Stock
offered hereby will be passed upon for Fairchild by Cahill Gordon & Reindel (a
partnership including a professional corporation), New York, New York.
72
<PAGE>
OTHER MATTERS
As of the date of this Proxy Statement/Prospectus, the board of directors of
Banner knows of no matters that will be presented for consideration at the
special meeting other than as described in this Proxy Statement/Prospectus.
However, if any other matter shall come before the special meeting or any
adjournments or postponements thereof and shall be voted upon, the proxy will
be deemed to confer authority to the individuals named as authorized therein to
vote the shares represented by such proxy as to any such matters that fall
within the purposes set forth in the Notice of Special Meeting. It is expected
that representatives of Arthur Andersen LLP will be present at the special
meeting to respond to questions of stockholders of Banner.
73
<PAGE>
BANNER AEROSPACE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Annual Financial Statements:
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets............................................... F-3
Consolidated Income Statements............................................ F-4
Consolidated Statements of Stockholders' Equity........................... F-5
Consolidated Statements of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements................................ F-7
Consolidated Interim Financial Statements:
Consolidated Balance Sheets at December 31, 1998 and March 31, 1998....... F-23
Consolidated Statements of Income and Comprehensive Income for the nine
months ended
December 31, 1998 and 1997............................................. F-24
Consolidated Statements of Income and Comprehensive Income for the three
months ended
December 31, 1998 and 1997............................................. F-25
Consolidated Statements of Cash Flows for the nine months ended
December 31, 1998 and 1997............................................. F-26
Notes to Summarized Financial Information................................. F-27
</TABLE>
F-1
<PAGE>
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)
F-2
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
(In Thousands) 1998 1997
-------------- --------- ---------
<S> <C> <C>
ASSETS
Current Assets:
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
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
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 statementsare an integral part
of these consolidated balance sheets.
F-3
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE FISCAL YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
(In Thousands Except Per Share Data) 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.
F-4
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Accumulated
Other
Preferred Common Treasury Paid-In Retained Comprehensive
(In Thousands) Stock Stock Stock Capital Earnings Income Total
- -------------- --------- ------- -------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31,
1995................... $ -- $18,002 $ -- $ 84,971 $ 4,531 $ -- $107,504
Exercise of stock
options............... -- 4 -- 17 -- -- 21
Acquisition of Harco... -- 5,387 -- 28,136 -- -- 33,523
Net income............. -- -- -- -- 1,555 -- 1,555
---- ------- -------- -------- ------- ------- --------
Balance, March 31,
1996................... -- 23,393 -- 113,124 6,086 -- 142,603
Exercise of stock
options............... -- 27 -- 112 -- -- 139
Net income............. -- -- -- -- 7,453 -- 7,453
---- ------- -------- -------- ------- ------- --------
Balance, March 31,
1997................... -- 23,420 -- 113,236 13,539 -- 150,195
Issuance of preferred
stock................. 37 -- -- 33,839 -- -- 33,876
Exercise of stock
options............... -- 218 -- 1,135 -- -- 1,353
Purchase of common
stock................. -- -- (23,331) -- -- (23,331)
Conversion of stock.... -- 4 -- (4) -- -- --
Acceleration of stock
option vesting........ -- -- -- 221 -- -- 221
Unrealized holding gain
from available-for-
sale securities....... -- -- -- -- -- 14,255 14,255
Dividends.............. 1 -- -- 2,033 (2,034) -- --
Net income............. -- -- -- -- 81,541 -- 81,541
---- ------- -------- -------- ------- ------- --------
Balance, March 31,
1998................... $ 38 $23,642 $(23,331) $150,460 $93,046 $14,255 $258,110
==== ======= ======== ======== ======= ======= ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-5
<PAGE>
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
- -------------- --------- -------- --------
<S> <C> <C> <C>
Cash Flows Provided By (Used For) Operating
Activities
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.
F-6
<PAGE>
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. ("Banner") was a wholly-owned subsidiary of The Fairchild Corporation
("Fairchild"). As a result of the initial public offering, Fairchild's indirect
beneficial ownership of Banner's Common Stock was reduced from 100.0% to 47.2%.
However, as a result of the additional shares of Banner's Common Stock issued
in connection with the acquisition of Harco, Inc. in fiscal 1996, Fairchild
became the majority owner of Banner and owned 59.3% of Banner's Common Stock as
of March 31, 1997 (refer to Note 3 in the notes to consolidated financial
statements). In January 1998, Banner 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 Banner's
Common Stock in exchange for shares of Fairchild Class A Common Stock (the
"Exchange Offer"). As a result of the Exchange Offer, Fairchild's beneficial
ownership of Banner's Common Stock increased to 85.4% (refer to Note 16 in the
notes to consolidated financial statements).
Banner is an international supplier to the aerospace industry, distributing
a wide range of aircraft parts and related support services. Banner's products
are divided into two product groups: rotables and engines. Banner'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. Banner provides a number of services such as immediate shipment of
parts in aircraft on ground ("AOG") situations and customer tailored inventory
management programs. Banner also provides both long-term and short-term engine
leasing services to commercial airlines and air cargo carriers. Through its
subsidiaries, Banner 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-based operations, corporate aircraft operators and other
aerospace and non-aerospace companies.
Fiscal Year
The fiscal year ("fiscal") of Banner ends March 31. All references herein to
"1998," "1997" and "1996" mean the fiscal years ended March 31, 1998, 1997 and
1996.
Principles of Consolidation
The accompanying consolidated balance sheet includes the accounts of all
Banner'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.
F-7
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands Of Dollars Except Per Share Data)
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.
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. Banner'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 Banner 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, Banner generally uses
accelerated depreciation methods.
Major classes of assets and their depreciable lives are as follows:
<TABLE>
<S> <C>
Buildings and improvements.............................. 10-33 1/3 Years
Machinery and equipment................................. 3-10 Years
</TABLE>
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, Banner 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.
Banner reviews its long-lived assets, including property, plant and equipment,
F-8
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands Of Dollars Except Per Share Data)
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
Banner 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 Banner'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 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, Banner 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.
F-9
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands Of Dollars Except Per Share Data)
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.
<TABLE>
<CAPTION>
For the Year
Ended March 31,
---------------
(In Thousands, Except Per Share Data) 1998 1997
------------------------------------- ------- -------
<S> <C> <C>
Basic Earnings Per Common Share:
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, Banner adopted Statement of Financial
Accounting Standards No. 129, "Disclosure of Information about Capital
Structure" ("FAS 129"). This statement establishes standards for disclosing
information about an entity's capital structure. Banner'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.
Comprehensive Income
Effective March 31, 1998, Banner 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.
F-10
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands Of Dollars Except Per Share Data)
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, 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 operating segments in annual and interim
financial reports. Banner 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. Banner will adopt SFAS 132 in
fiscal 1999.
2. Dispositions:
On January 13, 1998, Banner 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 Banner 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 Banner'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 Banner'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 Banner's subsidiaries and related fees. The
remaining investment in AlliedSignal Inc. common stock has been accounted for
as an available-for-sale security. Banner 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, Banner recorded non-recurring income of $124,041 for
the twelve months ended March 31, 1998.
F-11
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands Of Dollars Except Per Share Data)
On January 2, 1998, Banner disposed of BAI, Inc. ("BAI") through a stock
purchase agreement. Banner did not realize a material gain on the transaction.
The following unaudited pro forma table illustrate consolidated sales and
operating income of Banner'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
Banner 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 Banner disposed of the Hardware Business and BAI
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
(In Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<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, Banner, 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, Banner loaned $1,300 to PB Herndon to repay loans made
from the Sellers to PB Herndon. To finance the acquisition of PB Herndon,
Banner 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 Banner'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, Banner 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 Banner's Common Stock in
exchange for 100% of the outstanding shares of Harco. The issuance of Banner'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
F-12
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands Of Dollars Except Per Share Data)
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 Banner'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.
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
------- -------- -------- --------
<S> <C> <C> <C> <C>
Senior Bank Loans:
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, Banner entered into a credit agreement ("Credit
Agreement") that provides for working capital and potential acquisitions. On
July 1, 1996, Banner amended the Credit Agreement ("Amended and Restated Credit
Agreement") to provide additional financing, as well as require that loans made
to Banner will not exceed a defined borrowing base which is based upon a
percentage of eligible accounts receivables and inventories. On December 12,
1996, Banner 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,
Banner 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 Banner'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, Banner'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 Banner 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. Banner
also has certain limitations on the incurrence of additional debt and has
restrictions on dividends and distributions on the capital stock of Banner in
that the aggregate amount of such dividends and distributions may not exceed
F-13
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands Of Dollars Except Per Share Data)
$150 in any fiscal year. At March 31, 1998, Banner was in compliance with all
covenants under the Second Amended and Restated Credit Agreement. Substantially
all of Banner's assets are pledged as collateral under the Second Amended and
Restated Credit Agreement.
In September 1995, Banner entered into several interest rate hedge
agreements ("Hedge Agreements") to manage its exposure to increases in interest
rates on its floating rate debt. Banner 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%, Banner 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, Banner 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%,
Banner will be required to pay interest at a floor rate of approximately 6.0%.
No cash outlay was required to obtain the Additional Hedge Agreement as the
cost of the cap was offset by the sale of the floor.
Banner recognizes interest expense under the provisions of the Hedge
Agreements and Additional Hedge Agreement based on the fixed rate. Banner 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, Banner 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, Banner 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.
F-14
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands Of Dollars Except Per Share Data)
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
------- ------ ------
<S> <C> <C> <C>
Current:
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>
The net deferred tax assets (liabilities) consisted of the following
components at March 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Deferred tax assets:
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>
F-15
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands Of Dollars Except Per Share Data)
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:
Banner 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, Banner 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, Banner granted all of its stockholders certain rights to
purchase Series A Convertible Paid-in-Kind Preferred Stock, $.01 par value. On
June 19, 1997, Banner issued Fairchild 3,085,885 shares of Preferred Stock for
$28,390 (refer to Note 14 in the notes to consolidated financial statements).
Banner entered into a Stock Exchange Agreement with Fairchild, effective May
12, 1997, pursuant to which Banner 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 Banner'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 Banner
a reasonable termination fee and Banner's out-of-pocket expenses. On July 1,
1997, Fairchild exercised its option to terminate the Stock Exchange Agreement.
As a result, Fairchild paid Banner a termination fee of $300 and out of pocket
expenses of $447, and also agreed to allow Banner to participate equally in
future royalties from FSBC, if any.
On October 17, 1996, Banner borrowed $5,000 from RHI under an unsecured
demand promissory note ("Promissory Note"). Under the terms of the Promissory
Note, Banner could select interest periods up to six months with an interest
rate during each such interest period determined at LIBOR plus the Applicable
LIBOR Margin as defined in the Second Amended and Restated Credit Agreement,
less 80 basis points. Banner 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, Banner 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
F-16
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands Of Dollars Except Per Share Data)
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, Banner 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.
Banner 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, Banner
had contributed less than $125 under these agreements. In addition, Fairchild
and Banner would share commission income to the extent commissions exceed
expenses. No such commissions have been received to date.
Banner 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.
Banner received $186 from Fairchild in fiscal 1998 for accounting support
Banner provided Fairchild.
Banner 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 Banner 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.
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
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>
F-17
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands Of Dollars Except Per Share Data)
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
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:
Banner 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.
F-18
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands Of Dollars Except Per Share Data)
11. Leases
Banner leases certain of its facilities, equipment and engines under
operating leases. The following represents future minimum operating lease
commitments at March 31, 1998:
<TABLE>
<S> <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:
Banner 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 Banner. In addition, Banner is subject to
certain guarantee provisions under the Delta Air Lines Procurement Program.
Banner does not expect to incur any penalties, but this is uncertain.
13. Stock Options:
Banner'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. Banner 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"). Banner 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.
F-19
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands Of Dollars Except Per Share Data)
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. Banner 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 Banner adopted the new fair value method for recognition
purposes. The following information is presented as if Banner 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>
F-20
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands Of Dollars Except Per Share Data)
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.
14. Equity Securities:
Banner 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, Banner 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, Banner's shareholders approved the following changes to
Banner's capital structure: (i) the total number of shares of capital stock
which Banner has the authority to issue was increased from 30,000,000 to
60,000,000; (ii) the number of authorized shares of Banner's Common Stock was
increased from 30,000,000 to 50,000,000; (iii) a new class of Preferred Stock,
par value $.01 per share, was created, and Banner 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,
Banner 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,
Banner 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 Inc. 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 Banner received at closing was $37.25. At March 31,
1998, the market value of the AlliedSignal Inc. 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 Banner 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>
F-21
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands Of Dollars Except Per Share Data)
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>
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 Banner, 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 Banner's Common Stock. The Exchange Offer expired on June 9, 1998.
Approximately 3,659,364 shares of Banner's Common Stock were validly tendered
for exchange and Fairchild issued approximately 2,212,361 shares of Fairchild
class A common stock to the tendering shareholders. As a result of the Exchange
Offer, Fairchild's beneficial ownership of Banner's Common Stock increased to
83.3%.
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, Banner received a letter from AlliedSignal making
indemnification claims against Banner for $18.9 million in connection with the
sale of the Banner Hardware Group to AlliedSignal on January 13, 1998. Although
Banner believes that the amount of such asserted claim is far in excess of any
amount that AlliedSignal is entitled to recover from Banner, Fairchild and
Banner are in the process of reviewing such claims and are unable to predict
the ultimate outcome of such matter.
F-22
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND MARCH 31, 1998
(In thousands)
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
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
========= =========
CURRENT LIABILITIES
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 tax................. 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
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.
F-23
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE NINE (9) MONTHS ENDED DECEMBER 31, 1998 AND 1997
(In thousands, except per share data)
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>
For the Nine Months Ended
December 31,
--------------------------
1998 1997
------------ ------------
(unaudited)
-----------
<S> <C> <C>
Net sales.......................................... $ 152,404 $ 359,458
Cost of goods sold................................. 120,346 256,085
------------ ------------
GROSS PROFIT..................................... 32,058 103,373
Selling, general and administrative expenses....... 26,366 77,601
------------ ------------
OPERATING INCOME................................. 5,692 25,772
Non-recurring loss................................. 19,320 --
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.
F-24
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE (3) MONTHS ENDED DECEMBER 31, 1998 AND 1997
(In thousands, except per share data)
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>
For the Three Months Ended
December 31,
----------------------------
1998 1997
------------- -------------
(unaudited)
-----------
<S> <C> <C>
Net sales........................................ $ 46,839 $ 119,614
Cost of goods sold............................... 37,209 83,745
------------- -------------
GROSS PROFIT................................... 9,630 35,869
Selling, general and administrative expenses..... 7,353 28,155
------------- -------------
OPERATING INCOME............................... 2,277 7,714
Non-recurring loss............................... 19,320 --
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.
F-25
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE (9) MONTHS ENDED DECEMBER 31, 1998 AND 1997
(In thousands)
<TABLE>
<CAPTION>
For the Nine
Months Ended
December 31,
-----------------
1998 1997
-------- -------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss).......................................... $(11,936) $ 8,294
Adjustments to reconcile net income (loss) 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.
F-26
<PAGE>
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
Banner, 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 Banner 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 Banner'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,
---------------------------
1998 1997
------------- ------------
<S> <C> <C>
Basic 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
============= ============
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.
F-27
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO SUMMARIZED FINANCIAL INFORMATION--(Continued)
DECEMBER 31, 1998 AND 1997
(In thousands, except share data, unless otherwise noted)
<TABLE>
<CAPTION>
For the Three Months Ended
December 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Basic 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
============= ============
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.
Banner'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, Banner repurchased 606,822 shares of its preferred stock
from a shareholder. The aggregate purchase price paid by Banner was
approximately $4.7 million, or $7.75 per share.
2) Dispositions
On December 31, 1998 (the "Closing Date"), Banner 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.
F-28
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO SUMMARIZED FINANCIAL INFORMATION--(Continued)
DECEMBER 31, 1998 AND 1997
(In thousands, except share data, unless otherwise noted)
In December 1998, Banner recorded a non-recurring pre-tax charge of
approximately $19.3 million on the loss from the sale of Solair. Gross proceeds
from the sale totaled approximately $60.4 million, which includes approximately
$1.3 million for the value assigned to the Kellstrom Warrant. Approximately
$50.0 million of the gross proceeds was used to pay down Banner'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.
On January 13, 1998, Banner 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 Banner 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, Banner 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 Banner'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 Banner'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 Banner 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>
F-29
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO SUMMARIZED FINANCIAL INFORMATION--(Continued)
DECEMBER 31, 1998 AND 1997
(In thousands, except share data, unless otherwise noted)
3) Related Party Transactions
On January 12, 1999, Banner 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 Banner'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 Banner, within a determined range. On January 15,
1999, Fairchild filed a combined Registration Statement, including Banner's
shareholder proxy statement. Immediately prior to the merger, each share of
Series A 7.5% convertible preferred stock of Banner will convert into one share
of Banner's common stock.
On July 7, 1998, Banner's Board of Directors announced Banner'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 Banner's senior lenders. Shares of Fairchild stock
purchased by Banner may not be sold unless they are registered on a
registration statement (or are sold pursuant to any applicable exemption under
securities laws). Banner has the right to demand that Fairchild register such
shares in order for Banner to sell them. As of December 31, 1998, Banner 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 Banner 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 Banner, 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 Banner's common stock. The Exchange Offer expired on June 9, 1998.
Prior to the expiration of the Exchange Offer, 3,659,424 shares of Banner'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 Banner's
common stock increased to 83.2%. Fairchild's current beneficial ownership is
approximately 85.4%.
4) Credit Agreement
On December 31, 1998, Banner 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, Banner was in compliance with all
covenants under the Second Amended and Restated Credit Agreement, as amended.
Substantially all of Banner's assets are pledged as collateral under the
amended Second Amended and Restated Credit Agreement. In February 1999, Banner
agreed to enter into a subordinated loan agreement with Fairchild whereby
Banner agreed to loan up to $30,000 to Fairchild, on an unsecured basis.
F-30
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO SUMMARIZED FINANCIAL INFORMATION--(Continued)
DECEMBER 31, 1998 AND 1997
(In thousands, except share data, unless otherwise noted)
5) Contingency
On January 12, 1999, Banner received a letter from AlliedSignal Inc. making
indemnification claims against Banner for $18.9 million in connection with the
Hardware Group Disposition. Although Banner believes that the amount of the
claim is far in excess of any amount that AlliedSignal Inc. is entitled to
recover from Banner, Banner is in the process of reviewing such claims and is
unable to predict the ultimate outcome of such matter.
F-31
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
THE FAIRCHILD CORPORATION,
MTA, INC.
AND
BANNER AEROSPACE, INC.
JANUARY 11, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE I
MERGER
1.1 The Merger......................................................... A-1
1.2 Filing............................................................. A-1
1.3 Effective Time of the Merger....................................... A-1
ARTICLE II
CERTIFICATE OF INCORPORATION; BY-LAWS
2.1 Certificate of Incorporation....................................... A-2
2.2 By-Laws............................................................ A-2
2.3 Directors.......................................................... A-2
2.4 Officers........................................................... A-2
ARTICLE III
CONVERSION OF SHARES
3.1 Banner Common and Preferred Stock.................................. A-2
3.2 MTA Common Stock; Fairchild Owned Common Stock..................... A-4
3.3 Exchange of Shares................................................. A-4
3.4 Stock Options...................................................... A-5
3.5 Fractional Shares.................................................. A-5
3.6 No Appraisal Rights................................................ A-5
3.7 Lost Certificates.................................................. A-5
ARTICLE IV
CERTAIN EFFECTS OF THE MERGER
4.1 Effect of the Merger............................................... A-5
4.2 Further Assurances................................................. A-6
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BANNER
5.1 Corporate Organization and Qualification........................... A-6
5.2 Capitalization..................................................... A-6
5.3 Authority Relative to This Agreement............................... A-6
5.4 Consents and Approvals; No Violation............................... A-7
5.5 SEC Reports; Financial Statements.................................. A-7
5.6 Absence of Certain Changes or Events............................... A-7
5.7 Undisclosed Liabilities............................................ A-8
5.8 Litigation......................................................... A-8
5.9 Registration Statement; Proxy Statement............................ A-8
5.10 Compliance with Applicable Laws.................................... A-8
5.11 Opinion of Investment Bankers...................................... A-8
</TABLE>
A-i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF FAIRCHILD AND MTA
6.1 Corporate Organization and Qualification......................... A-9
6.2 Capitalization................................................... A-9
6.3 Authority Relative to This Agreement............................. A-9
6.4 Consents and Approvals; No Violation............................. A-9
6.5 SEC Reports...................................................... A-10
6.6 Registration Statement; Proxy Statement.......................... A-10
6.7 Undisclosed Liabilities.......................................... A-10
6.8 Ownership of Shares.............................................. A-10
6.9 Interim Operations of MTA........................................ A-10
6.10 Compliance with Applicable Laws.................................. A-10
6.11 Brokers, Finders or Financial Advisors........................... A-11
6.12 Investigation by Fairchild and MTA............................... A-11
ARTICLE VII
STOCKHOLDERS' APPROVAL; SEC MATTERS
7.1 Stockholders' Approval........................................... A-11
7.2 Registration Statement; Proxy.................................... A-11
ARTICLE VIII
COVENANTS AND AGREEMENTS
8.1 Additional Agreements; Cooperation............................... A-12
8.2 Publicity........................................................ A-12
8.3 No Solicitation.................................................. A-12
8.4 Access to Information............................................ A-12
8.5 Bank Consents.................................................... A-13
8.6 Notification of Certain Matters.................................. A-13
8.7 Fees and Expenses................................................ A-13
8.8 Conduct of Business of Banner Pending the Merger................. A-13
8.9 Indemnification of Directors and Officers........................ A-13
8.10 Approval of Merger............................................... A-14
ARTICLE IX
CONDITIONS TO CLOSING
9.1 Conditions to Obligations of Each Party to Effect the Merger..... A-14
9.2 Additional Conditions to Obligations of Fairchild................ A-14
9.3 Additional Conditions to Obligations of Banner................... A-15
ARTICLE X
TERMINATION
10.1 Termination by Mutual Consent.................................... A-16
10.2 Termination by Fairchild, MTA or Banner.......................... A-16
10.3 Termination by Fairchild or MTA.................................. A-16
10.4 Termination by Banner............................................ A-16
10.5 Effect of Termination............................................ A-16
</TABLE>
A-ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE XI
MISCELLANEOUS
11.1 Survival of Representations and Warranties........................ A-16
11.2 Closing and Waiver................................................ A-17
11.3 Notice............................................................ A-17
11.4 Counterparts...................................................... A-18
11.5 Interpretation.................................................... A-18
11.6 Variations and Amendment.......................................... A-18
11.7 No Third Party Beneficiaries...................................... A-18
11.8 Governing Law..................................................... A-18
11.9 Entire Agreement.................................................. A-18
11.10 No Recourse Against Others........................................ A-18
11.11 Validity.......................................................... A-18
11.12 No Assignment..................................................... A-18
11.13 Joint and Several Liability....................................... A-18
</TABLE>
A-iii
<PAGE>
AGREEMENT AND PLAN OF MERGER, dated as of January 11, 1999, by and among The
Fairchild Corporation, a Delaware corporation ("Fairchild"), MTA, Inc., a
Delaware corporation and a wholly-owned subsidiary of Fairchild ("MTA"), and
Banner Aerospace, Inc., a Delaware corporation ("Banner").
W I T N E S S E T H :
WHEREAS, the Board of Directors of MTA has approved the merger of MTA with
and into Banner (the "Merger") upon the terms and subject to the conditions set
forth herein and in accordance with the laws of the State of Delaware;
WHEREAS, the Board of Directors of Banner, based upon the unanimous
recommendation of a special committee of independent directors of Banner, has
determined that it is advisable and in the best interests of Banner's
stockholders (other than Fairchild, MTA and their affiliates) for MTA to merge
with and into Banner upon the terms and subject to the conditions set forth
herein and in accordance with the laws of the State of Delaware;
WHEREAS, the Merger is intended to qualify for Federal income tax purposes as
a tax-free reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code");
WHEREAS, Fairchild is the sole owner of all of the outstanding common stock
of MTA and the Board of Directors of Fairchild, in Fairchild's capacity as the
sole stockholder of MTA and in Fairchild's capacity as party to this Agreement
has approved the Merger upon the terms and subject to the conditions set forth
herein.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants
and agreements herein contained, the parties hereto, intending to be legally
bound, agree as follows:
ARTICLE I
MERGER
1.1 The Merger. At the Effective Time (as hereinafter defined), MTA shall be
merged with and into Banner upon the terms and conditions provided herein and
in accordance with the Delaware General Corporation Law (the "DGCL"). The
Merger shall have the effect provided in the DGCL. Without limiting the
generality of the foregoing, (a) the separate existence and corporate
organization of MTA shall cease upon the Merger becoming effective as herein
provided and thereupon MTA and Banner shall be a single corporation, Banner
(herein sometimes called the "Surviving Corporation"); and (b) the corporate
existence of Banner, with all its purposes, powers and objects, shall continue
unaffected and unimpaired by the Merger.
1.2 Filing. As soon as practicable after fulfillment or waiver of the
conditions set forth in Sections 9.1, 9.2 and 9.3 or on such later date as may
be mutually agreed to between MTA and Banner, the parties hereto will cause to
be filed with the office of the Secretary of State of the State of Delaware, a
certificate of merger (the "Delaware Certificate of Merger"), in such form as
required by, and executed in accordance with, the relevant provisions of the
DGCL.
1.3 Effective Time of the Merger. The Merger shall be effective at the time
of the filing of the Delaware Certificate of Merger, or at such later time
specified in such Certificate of Merger, which time is herein sometimes
referred to as the "Effective Time" and the date thereof is herein sometimes
referred to as the "Effective Date."
A-1
<PAGE>
ARTICLE II
CERTIFICATE OF INCORPORATION; BY-LAWS
2.1 Certificate of Incorporation The Certificate of Incorporation of Banner,
as in effect immediately prior to the Effective Time, shall be the Certificate
of Incorporation of the Surviving Corporation until the same shall thereafter
be amended in accordance with law.
2.2 By-Laws. The By-Laws of Banner, as in effect immediately prior to the
Effective Time, shall be the By-Laws of the Surviving Corporation until the
same shall thereafter be altered, amended or repealed in accordance with law,
the Certificate of Incorporation of the Surviving Corporation or said By-Laws.
2.3 Directors. The directors of Banner at the Effective Time shall, from and
after the Effective Time, be the directors of the Surviving Corporation until
their successors are duly elected or appointed and qualified or until their
earlier death, resignation or removal in accordance with the Surviving
Corporation's Certificate of Incorporation and Bylaws.
2.4 Officers. The officers of Banner at the Effective Time shall, from and
after the Effective Time, be the officers of the Surviving Corporation until
their successors are duly elected or appointed and qualified or until their
earlier death, resignation or removal in accordance with the Surviving
Corporation's Certificate of Incorporation and Bylaws.
ARTICLE III
CONVERSION OF SHARES
3.1 Banner Common and Preferred Stock. (a) At the Effective Time, each share
of common stock, par value $1.00 per share, of Banner (the "Banner Common
Stock") issued and outstanding immediately prior to the Effective Time (except
for shares, if any (i) owned by Banner as treasury stock, (ii) owned by any
wholly owned Subsidiary of Banner, (iii) owned by Fairchild, or its direct or
indirect subsidiaries prior to the Merger or (iv) as otherwise provided in
Section 3.2) shall, by virtue of the Merger and without any action on the part
of the holder thereof, be converted into the right to receive such number of
validly issued, fully paid and nonassessable shares (the "Exchange Ratio") of
common stock, par value $0.10 per share, of Fairchild (the "Fairchild Common
Stock") as equals $11.00 (the "Price Target") divided by the average per share
closing price on the New York Stock Exchange (the "NYSE") of the Fairchild
Common Stock for the 20 most recent trading days ending on the third trading
day prior to the Effective Date; provided that the Exchange Ratio (x) shall not
be less than 0.6452, which represents an average Fairchild Common Stock price
of $17.05, and (y) shall not exceed 0.7885, which represents an average
Fairchild Common Stock price of $13.95, ((x) and (y) being referred to as the
"Collar"). The shares of Fairchild Common Stock to be delivered in exchange for
shares of Banner Common Stock pursuant to this Section 3.1(a) are hereinafter
sometimes called the "Merger Consideration."
The Merger Consideration set forth above assumes that the value of Banner's
holdings of AlliedSignal Inc.'s common stock (the "Allied Stock"), consisting
of 1,642,789 shares of Allied Stock (the "Allied Investment"), which excludes
Allied Stock owned by Banner subject to hedging arrangements, is between
$65,333,719 (the "Allied Floor Value") and $79,855,773 (the "Allied Ceiling
Value").
In the event the Allied Investment is less than the Allied Floor Value at the
close of the third trading day prior to the Effective Date, the Price Target
shall be decreased as follows:
(i) the gross amount of the adjustment shall be calculated by subtracting
the value of the Allied Investment from the Allied Floor Value and by
multiplying such amount by 0.6;
(ii) the resulting amount shall be divided by the number of all
outstanding shares of Banner Common Stock (including shares of Banner
Common Stock owned by Fairchild and its direct or indirect subsidiaries and
such shares deemed to exist as a result of the mandatory conversion of
Banner preferred stock set forth in clause (b) of this Section 3.1); and
A-2
<PAGE>
(iii) the per share dollar amount derived from the foregoing steps shall
then be subtracted from the Price Target.
In the event the Allied Investment is greater than the Allied Ceiling Value
at the close of the third trading day prior to the Effective Date, the Price
Target shall be increased as follows:
(i) the gross amount of the adjustment shall be calculated by subtracting
the Allied Ceiling Value from the value of the Allied Investment and by
multiplying such amount by 0.6;
(ii) the resulting amount shall be divided by all outstanding shares of
Banner Common Stock (including shares of Banner Common Stock owned by
Fairchild and its direct or indirect subsidiaries and such shares deemed to
exist as a result of the mandatory conversion of Banner preferred stock set
forth in clause (b) of this Section 3.1); and
(iii) the per share dollar amount derived from the foregoing steps shall
then be added to the Price Target.
For the purposes of the foregoing, the value of the Allied Investment shall
be calculated by adding: (i) the sum of the total number of shares of Allied
Stock owned by Banner and its direct or indirect subsidiaries at the close of
the third trading day preceding the Effective Date multiplied by the average
per share closing price on the NYSE of Allied Stock for the 20 most recent
trading days ending on the third trading day prior to the Effective Date, and
(ii) the net pre-tax cash proceeds, if any, received by Banner from the sale or
other disposition of any Allied Stock owned or to be received by Banner from
the date hereof through the close of the third trading day prior to the
Effective Date.
(b) Immediately prior to the Effective Time, in accordance with Sections
5.1(c), 5.2(b) and 5.3 of the Certificate of Designations, Preferences, Rights
and Limitations of the Banner Preferred, each share of Series A Convertible
Paid-In-Kind preferred stock, par value $.01 per share and liquidation value
$9.20 per share, of Banner (the "Banner Preferred") issued and outstanding
(except for shares, if any, owned by Banner as treasury stock or owned by any
wholly owned Subsidiary of Banner) shall, by virtue of the Merger and without
any action on the part of the holder thereof, be converted into one (1) share
of Banner Common Stock. The conversion of Banner Preferred is pursuant to the
provisions of Section 5.1(c) of the Certificate of Designation governing the
Banner Preferred, whereby shares of Banner Preferred shall be deemed to convert
to Banner Common Stock (the "Accelerated Mandatory Conversion"). At the
Effective Time, the shares of Banner Common Stock deemed held as a result of
the Accelerated Mandatory Conversion shall be converted into the right to
receive the Merger Consideration as set forth in Section 3.1(a), above.
(c) At the Effective Time all outstanding shares of Banner Common Stock, by
virtue of the Merger and without any action on the part of the holders thereof,
shall no longer be outstanding and shall be cancelled and retired and shall
cease to exist, and each holder of a certificate representing any such shares
of Banner Common Stock shall thereafter cease to have any rights with respect
to such shares of Banner Common Stock, except the right to receive the Merger
Consideration for such shares of Banner Common Stock specified in the foregoing
clause (a) of this Section 3.1 upon the surrender of such certificate in
accordance with Section 3.3.
(d) Immediately following the Accelerated Mandatory Conversion of shares of
Banner Preferred, by virtue of the Accelerated Mandatory Conversion and without
any action on the part of the holders thereof, the rights of the holders of any
converted shares of Banner Preferred, including without limitation, the right
to receive dividends on the next dividend payment date, shall cease and the
persons entitled to receive Banner Common Stock upon the Accelerated Mandatory
Conversion shall be treated for all purposes as having become the owners of
such shares of Banner Common Stock. At the Effective Time, such shares of
Banner Common Stock shall cease to exist (as set forth in clause (c), above)
and each holder of a certificate formerly representing any shares of Banner
Preferred shall thereafter cease to have any rights with respect to such shares
of Banner Common Stock as they are deemed to hold, except the right to receive
the Merger Consideration for such shares of Banner Common Stock specified in
the foregoing clause (a) upon the surrender of such former Banner Preferred
certificate in accordance with Section 3.3.
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3.2 MTA Common Stock; Fairchild Owned Stock. (a) At the Effective Time, each
share of common stock, par value $1.00 per share, of MTA ("MTA Common Stock")
issued and outstanding immediately prior to the Effective Time shall, by virtue
of the Merger and without any action on the part of the holder thereof, be
converted into one validly issued, fully paid and nonassessable share of common
stock, par value $1.00 per share, of the Surviving Corporation ("Surviving
Corporation Common Stock").
(b) At the Effective Time, all outstanding shares of Banner Common Stock
owned by Fairchild or MTA or any subsidiary thereof, by virtue of the Merger
and without any action on the part of the holders thereof, shall remain
outstanding and without any conversion thereof and no payment shall be made
with respect thereto.
3.3 Exchange of Shares. (a) Fairchild shall designate a bank, trust company
or transfer agent (as defined in the rules and regulations under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) reasonably satisfactory
to Banner to act as the Exchange Agent (the "Exchange Agent").
(b) As promptly as practicable, but in no event later than three business
days, after the Effective Time, Fairchild shall cause the Exchange Agent to
mail to each record holder, as of the Effective Time, of an outstanding
certificate or certificates that immediately prior to the Effective Time
represented shares of Banner Common Stock or Banner Preferred, as the case may
be (collectively, the "Certificates") a form letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon proper delivery of the Certificates to the
Exchange Agent) and instructions for use in effecting the surrender of the
Certificates for exchange.
(c) Upon surrender to the Exchange Agent of a Certificate, together with such
letter of transmittal duly executed, the holder of such Certificate shall be
entitled to receive in exchange therefor that number of shares of Fairchild
Common Stock that such holder has the right to receive under this Article III,
and such Certificate shall forthwith be cancelled. If any shares of Fairchild
Common Stock are to be issued to a person other than the person in whose name
the surrendered Certificate is registered, it shall be a condition of exchange
that such surrendered Certificate shall be properly endorsed or otherwise in
proper form for transfer and that the person requesting such exchange shall pay
any transfer or other taxes required by reason of the exchange by a person
other than the registered holder of the Certificate surrendered or such person
shall establish to the satisfaction of Fairchild that such tax has been paid or
is not applicable. Until surrendered in accordance with the provisions of this
Section 3.3, each Certificate shall represent, for all purposes, the right to
receive the Merger Consideration in respect of the number of shares of Banner
Common Stock evidenced by such Certificate (or, in the case of Banner
Preferred, deemed to be evidenced by such Certificate). No dividends or other
distributions that are declared after the Effective Time on shares of Fairchild
Common Stock and payable to the holders of record thereof after the Effective
Time will be paid to holders of Certificates until such holders surrender their
Certificates. Upon such surrender, Fairchild shall deposit with the Exchange
Agent and shall cause the Exchange Agent to pay to the record holders of the
shares of Fairchild Common Stock representing Merger Consideration, the
dividends or other distributions, excluding interest, that became payable after
the Effective Time and were not paid because of the delay in surrendering
Certificates for exchange.
(d) From and after the Effective Time, there shall be no transfers on the
stock transfer books of Banner of the shares of Banner Common Stock (including
deemed Banner Common Stock resulting from the Accelerated Mandatory Conversion
of Banner Preferred) that were outstanding immediately prior to the Effective
Time. If, after the Effective Time, Certificates are presented to Fairchild or
the Surviving Corporation, they shall be cancelled and exchanged as provided in
this Article III.
(e) None of Banner, Fairchild or the Surviving Corporation shall be liable
to any holder of Certificates with respect to any Merger Consideration
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
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3.4 Stock Options. (a) As of the Effective Time, by virtue of the Merger and
without any action on the part of holders thereof, each option (an "Option")
which has been granted under the 1990 Non-Qualified and Incentive Stock Option
Plan, as amended, of Banner or the 1996 Non-Employee Director Stock Option Plan
of Banner or the Stock Award Agreement for Phillipe Hercot dated September 13,
1996 (collectively, the "Option Plans") and is outstanding at the Effective
Time, whether or not then exercisable, shall be assumed by Fairchild and shall
be deemed to constitute an option to acquire Fairchild Common Stock on the
terms and conditions as were applicable under the respective Option, except
that (i) each Option shall be exercisable for the greatest number of whole
shares of Fairchild Common Stock equal to the product of the number of shares
of Banner Common Stock subject to such Option immediately prior to the
Effective Time multiplied by the Exchange Ratio; (ii) the exercise price per
share of Fairchild Common Stock shall be an amount equal to the exercise price
per share of Banner Common Stock specified under such Option in effect
immediately prior to the Effective Time divided by the Exchange Ratio (rounded
up to the nearest whole cent) and (iii) each Option to the extent not then
exercisable, shall become exercisable in full at the Effective Time. As soon as
practicable after the Effective Time, Fairchild shall deliver to each holder of
an Option an appropriate notice setting forth the holder's right to acquire
shares of Fairchild Common Stock, and the Option Agreements of each holder
shall be deemed to be appropriately amended so that the Options shall represent
the rights set forth above.
(b) Fairchild shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Fairchild Common Stock for delivery
upon exercise of the Options assumed in accordance with Section 3.4(a) and to
cause such shares to be registered under the Securities Act of 1933, as amended
(the "Securities Act"), and to be listed on the NYSE.
3.5 Fractional Shares. Notwithstanding any other provision of this
Agreement, each holder of shares of Banner Common Stock or Banner Preferred who
upon surrender of Certificates would be entitled to receive fractional shares
of Fairchild Common Stock shall not be entitled to receive dividends on or vote
such fractional shares of Fairchild Common Stock and shall receive, in lieu of
such fractional shares of Fairchild Common Stock, cash in an amount equal to
such fraction multiplied by the Market Value. "Market Value" shall mean the
mean between the high and low prices of Fairchild Common Stock as reported on
the NYSE on the trading day immediately following the Effective Time. All
references in this Agreement to Fairchild Common Stock to be issued as Merger
Consideration shall be deemed to include any cash in lieu of fractional shares
of Fairchild Common Stock payable pursuant to this Section 3.5.
3.6 No Appraisal Rights. In accordance with Section 262(b) of the DGCL, no
holder of shares of Banner Common Stock or Banner Preferred shall be entitled
to appraisal rights.
3.7 Lost Certificates. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Exchange Agent, the posting by such person of a bond in such reasonable amount
as Fairchild may direct as indemnity against any claim that may be made against
it with respect to such Certificate, Fairchild will issue, in exchange for such
lost, stolen or destroyed Certificate, Fairchild Common Stock and any cash in
lieu of fractional shares, and any unpaid dividends and distributions on shares
of Fairchild Common Stock deliverable in respect thereof pursuant to this
Agreement.
ARTICLE IV
CERTAIN EFFECTS OF THE MERGER
4.1 Effect of the Merger. On and after the Effective Time and pursuant to
the DGCL, the Surviving Corporation shall possess all the rights, privileges,
immunities, powers, and purposes of each of MTA and Banner; all the property,
real and personal, including subscriptions to shares, causes of action and
every other
asset (including books and records) of MTA and Banner, shall vest in the
Surviving Corporation without further act or deed; and the Surviving
Corporation shall assume and be liable for all the liabilities, obligations and
penalties of MTA and Banner; provided, however, that this shall in no way
impair or affect the
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indemnification obligations of any party pursuant to the indemnification
provisions of this Agreement or under any agreements or arrangements with
present or former directors and officers of Banner. No liability or obligation
due or to become due and no claim or demand for any cause existing against
either MTA or Banner, or any stockholder, officer or director thereof, shall be
released or impaired by the Merger, and no action or proceeding, whether civil
or criminal, then pending by or against MTA or Banner, or any stockholder,
officer or director thereof, shall abate or be discontinued by the Merger, but
may be enforced, prosecuted, settled or compromised as if the Merger had not
occurred, and the Surviving Corporation may be substituted in any such action
or proceeding in place of MTA or Banner.
4.2 Further Assurances. If at any time after the Effective Time, any further
action is necessary or desirable to carry out the purposes of this Agreement
and to vest the Surviving Corporation with full right, title and possession to
all assets, property, rights, privileges, powers and franchises of either of
MTA or Banner, the officers of such corporation are fully authorized in the
name of their corporation or otherwise to take, and shall take, all such
further action.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BANNER
Banner hereby represents and warrants to Fairchild and MTA that:
5.1 Corporate Organization and Qualification. Each of Banner and its
subsidiaries (i) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, (ii) is
qualified and in good standing as a foreign corporation in each jurisdiction
where the properties owned, leased or operated, or the business conducted, by
it require such qualification and (iii) has all requisite power and authority
to own its properties and to carry on its business as it is now being
conducted, except where failure to so qualify, be in good standing or have such
power and authority would not, individually or in the aggregate, result in an
adverse effect (other than any change resulting from or arising out of the
transactions contemplated by this Agreement or the announcement thereof) on the
financial condition, business or properties of Banner and its subsidiaries,
material to Banner and its subsidiaries as a whole (a "Banner Material Adverse
Effect").
5.2 Capitalization. The authorized capital stock of Banner consists of (i)
50,000,000 shares of Banner Common Stock, of which, as of January 11, 1999,
23,764,262 shares were issued and 21,517,295 shares were outstanding, and (ii)
10,000,000 shares of Banner Preferred, of which, as of January 11, 1999,
4,100,279 shares were issued and 3,493,457 shares were outstanding. All of the
outstanding shares have been duly authorized and validly issued and are fully
paid and nonassessable. As of January 11, 1999, options to acquire 1,131,300
shares of Banner Common Stock were reserved for issuance upon exercise of
outstanding Options pursuant to the Option Plans. Except as set forth above, as
otherwise known to Fairchild or MTA, and except for vested options to acquire
shares pursuant to the Option Plans, there are not as of the date hereof any
outstanding or authorized options, warrants, calls, rights (including
preemptive rights), commitments or any other agreements of any character to
which Banner is a party, or by which it may be bound, requiring it to issue,
transfer, sell, purchase, redeem or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for, or evidencing the
right to subscribe for, any shares of capital stock of Banner.
5.3 Authority Relative to This Agreement. Banner has the requisite corporate
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. This Agreement and the consummation by Banner
of the transactions contemplated hereby have been duly and validly authorized
by the Board of Directors of Banner, based upon the unanimous recommendation of
a special committee of independent directors of Banner (the "Special
Committee"), and no other corporate proceedings
on the part of Banner are necessary to authorize this Agreement or to
consummate the transactions contemplated hereby (other than the approval of
this Agreement and the Merger by the Stockholders of Banner
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in accordance with Section 251 of the DGCL, Banner's Certificate of
Incorporation and Section 8.1(a) hereof). This Agreement has been duly and
validly executed and delivered by Banner and, assuming this Agreement
constitutes the valid and binding agreement of Fairchild and MTA and that the
aforementioned approval of the stockholders of Banner is obtained, constitutes
the valid and binding agreement of Banner, enforceable against Banner in
accordance with its terms, except that the enforcement hereof may be limited by
(i) bankruptcy, insolvency, reorganization, moratorium or other similar laws
now or hereafter in effect relating to creditors' rights generally and (ii)
general principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law).
5.4 Consents and Approvals; No Violation. Neither the execution and delivery
of this Agreement by Banner nor the consummation by Banner of the transactions
contemplated hereby will (a) conflict with or result in any breach of any
provision of the Certificate of Incorporation or Bylaws of Banner; (b) require
of Banner or its subsidiaries any consent, approval, authorization or permit
of, or filing with or notification to, any governmental or regulatory
authority, except (i) pursuant to the applicable requirements of the Exchange
Act and the rules and regulations promulgated thereunder, (ii) the filing of
the Certificate of Merger pursuant to the DGCL, (iii) pursuant to state blue
sky takeover statutes, (iv) pursuant to NYSE delisting requirements or (v)
where the failure to obtain such consent, approval, authorization or permit, or
to make such filing or notification, would not, individually or in the
aggregate, have a Banner Material Adverse Effect; (c) except as set forth on
Schedule 5.4 attached hereto and made a part hereof, result in a violation or
breach of, or constitute a default under any of the terms, conditions or
provisions of any note, license, agreement or other instrument or obligation by
which Banner or any of its subsidiaries may be bound, except for such
violations, breaches and defaults as to which requisite waivers or consents
have been obtained or which would not, individually or in the aggregate, have a
Banner Material Adverse Effect; or (d) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to Banner or any of its
subsidiaries, except for violations which would not, individually or in the
aggregate, have a Banner Material Adverse Effect.
5.5 SEC Reports; Financial Statements. (a) Since January 1, 1996, Banner has
filed all periodic reports required to be filed by it with the Securities and
Exchange Commission (the "SEC") pursuant to the federal securities laws and the
SEC rules and regulations thereunder, all of which as of their respective dates
of filing complied in all material respects with all applicable requirements of
the Exchange Act (collectively, the "Banner SEC Reports"). None of the Banner
SEC Reports, including, without limitation, any financial statements or
schedules included therein, as of their respective dates, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading provided,
however, that no representation or warranty is made with respect to those
portions of the Banner SEC Reports that specifically make disclosures or are
required to make disclosures with respect to Fairchild.
(b) The consolidated financial statements (including the related notes
thereto) of Banner included in Banner SEC Reports complied in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with generally accepted accounting principles applied on a basis consistent
with prior periods (except as otherwise noted therein) and presented fairly the
consolidated financial position of Banner and its consolidated subsidiaries as
of their respective dates, and the consolidated results of their operations and
cash flows for the periods presented therein (subject, in the case of the
unaudited interim financial statements, to normal year-end adjustments and the
absence of notes thereto).
5.6 Absence of Certain Changes or Events. Since the date of this Agreement,
or as otherwise known to Fairchild or MTA at or prior to this Agreement, the
business of Banner has been carried on only in the ordinary and usual course,
and Banner has not suffered any Banner Material Adverse Effect, provided that
no representation or warranty is made with respect to any Banner Material
Adverse Effect known to or caused by Fairchild or MTA.
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5.7 Undisclosed Liabilities. Except as disclosed in Banner SEC Reports filed
prior to the date of this Agreement, as contemplated by this Agreement or as
otherwise known to Fairchild or MTA at or prior to the date of this Agreement,
there are no liabilities or obligations of Banner or its subsidiaries of any
kind whatsoever, whether accrued, contingent, absolute or otherwise, that would
be required by generally accepted accounting principles to be reflected on a
consolidated balance sheet of Banner, other than liabilities or obligations (i)
incurred in the ordinary course of business consistent with past practice since
the date of this Agreement, or (ii) which would not, individually or in the
aggregate, have a Banner Material Adverse Effect.
5.8 Litigation. Except as disclosed in Banner SEC Reports filed prior to the
date of this Agreement or for any litigation relating to the transactions
contemplated by this Agreement, (i) there are no actions, claims, suits,
proceedings or governmental investigations pending or, to the knowledge of
Banner, threatened against or involving Banner or any of its subsidiaries
which, individually or in the aggregate, are reasonably likely to have a Banner
Material Adverse Effect, and (ii) there are no judgments, decrees, injunctions,
rules or orders of any court or governmental or regulatory authority applicable
to Banner or any of its subsidiaries, which, individually or in the aggregate,
would have a Banner Material Adverse Effect.
5.9 Registration Statement; Proxy Statement. None of the information to be
supplied by and relating to Banner for inclusion or incorporation by reference
in the Registration Statement or the Proxy Statement (as such terms are
hereinafter defined in Section 7.2) will, at the time of the mailing of the
Proxy Statement and at the time of the stockholder meeting of Banner in
connection with the vote of such stockholders with respect to the Merger and
this Agreement (the "Stockholder Meeting"), contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. If at any time prior
to the Effective Time any event with respect to Banner should occur that is
required to be described in an amendment of, or a supplement to, the Proxy
Statement or the Registration Statement, such event shall be so described, and
such amendment or supplement shall be promptly filed with the SEC and, as
required by law, disseminated to the stockholders of Banner. With respect to
the information relating to Banner, the Registration Statement and the Proxy
Statement will comply as to form in all material respects with the requirements
of the Exchange Act. For purposes of this Section 5.9, any statement which is
made or incorporated by reference in the Proxy Statement or the Registration
Statement shall be deemed modified or superseded to the extent any later filed
document incorporated by reference in the Proxy Statement or the Registration
Statement or any statement included in the Proxy Statement or the Registration
Statement modifies or supersedes such earlier statement.
5.10 Compliance with Applicable Laws. Except as otherwise known to Fairchild
or MTA, Banner and its subsidiaries hold all permits, licenses, variances,
exemptions, orders, franchises and approvals or all governmental or regulatory
authorities necessary for the lawful conduct of their respective businesses,
except where the failure to so hold would not, individually or in the
aggregate, have a Banner Material Adverse Effect (the "Banner Permits"). Banner
and its subsidiaries are in compliance with the terms of Banner Permits, except
where the failure so to comply would not, individually or in the aggregate,
have a Banner Material Adverse Effect. Except as disclosed in Banner SEC
Reports filed prior to the date of this Agreement, the business of Banner is
not being conducted in violation of any law, ordinance or regulation of any
governmental or regulatory authorities, except for possible violations which,
individually or in the aggregate, would not have a Banner Material Adverse
Effect.
5.11 Opinion of Investment Bankers. The Special Committee has received the
opinion dated January 11, 1999 (the "Fairness Opinion") of Houlihan Lokey
Howard & Zukin (the "Investment Banker"), the Special Committee's investment
banker, to the effect that at the time of the execution and delivery of this
Agreement the consideration to be received in the Merger is fair to the holders
of shares of Banner Common Stock (other than Fairchild and MTA and their
affiliates) from a financial point of view.
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ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF FAIRCHILD AND MTA
Fairchild and MTA represent and warrant, jointly and severally, to Banner
that:
6.1 Corporate Organization and Qualification. Each of Fairchild and its
Significant Subsidiaries (as defined in Section 11.5 below) and MTA (i) is a
corporation duly organized, validly existing and in good standing under the
laws of its respective jurisdiction of incorporation, (ii) is qualified and in
good standing as a foreign corporation in each jurisdiction where the
properties owned, leased or operated, or the business conducted, by it require
such qualification and (iii) has all requisite power and authority to own its
properties and to carry on its business as it is now being conducted, except
where the failure to so qualify, be in such good standing or have such power
and authority would not, result in an adverse effect on the financial
condition, business or properties of Fairchild and its subsidiaries which would
be material to the ability of Fairchild and MTA to fulfill their obligations
under this Agreement (a "Fairchild Material Adverse Effect").
6.2 Capitalization. As of January 8, 1999: (i) the authorized capital stock
of Fairchild consisted of 40,000,000 shares of Fairchild Common Stock,
20,000,000 shares of Class B Common Stock, and 10,000,000 shares of Preferred
Stock; (ii) 19,218,806 shares of Fairchild Common Stock were issued and
outstanding; (iii) 2,624,662 shares of Fairchild Class B Common Stock were
issued and outstanding; (iv) no shares of Preferred Stock were issued and
outstanding; (v) 7,495,868 shares of Fairchild Common Stock were held in the
treasury of Fairchild; (vi) 1,839,831 shares of Fairchild Common Stock were
reserved for issuance pursuant to issued but unexercised stock options under
Fairchild's stock option plans; and (vii) 900,000 shares of Fairchild Common
Stock were reserved for issuance under issued but unexercised warrants to
purchase Fairchild's common stock. All of the outstanding shares have been duly
authorized and validly issued and are fully paid and nonassessable. Fairchild'
stock option plans provide for the issuance of 1,839,831 shares of Fairchild
Common Stock under outstanding but unexercised stock options, and allow for the
issuance of an additional 509,967 shares of Fairchild Common Stock for future
stock option grants.
6.3 Authority Relative to This Agreement. Each of Fairchild and MTA has the
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby. This Agreement and the
consummation by Fairchild and MTA of the transactions contemplated hereby have
been duly and validly authorized by the respective Boards of Directors of
Fairchild and MTA, and no other corporate proceedings on the part of Fairchild
or MTA are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by each of Fairchild and MTA and, assuming this
Agreement constitutes the valid and binding agreement of Banner, constitutes
the valid and binding agreement of each of Fairchild and MTA, enforceable
against each of them in accordance with its terms, except that the enforcement
hereof may be limited by (a) bankruptcy, insolvency, reorganization, moratorium
or other similar laws now or hereafter in effect relating to creditors' rights
generally and (b) general principles of equity (regardless of whether
enforceability is considered in a proceeding at law or in equity).
6.4 Consents and Approvals; No Violation. Neither the execution and delivery
of this Agreement by Fairchild or MTA nor the consummation by Fairchild or MTA
of the transactions contemplated hereby will (a) conflict with or result in any
breach of any provision of the Certificate of Incorporation or the Bylaws,
respectively, of Fairchild or MTA; (b) require of Fairchild or its subsidiaries
(except Banner) any consent, approval, authorization or permit of, or filing
with or notification to, any governmental or regulatory authority, except (i)
pursuant to the applicable requirements of the Securities Act and the Exchange
Act and the rules and regulations promulgated thereunder, (ii) the filing of
the Certificate of Merger pursuant to the DGCL, (iii) pursuant to NYSE listing
requirements with respect to the shares of Fairchild Common Stock constituting
the Merger Consideration and shares of Fairchild Common Stock to be issued
pursuant to options assumed in accordance with Section 3.4(a) or (iv) where the
failure to obtain such consent, approval, authorization or permit, or to make
such filing or notification, would not, individually or in the aggregate, have
a Fairchild
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Material Adverse Effect; (c) result in a violation or breach of, or constitute
a default under any of the terms, conditions or provisions of any note,
license, agreement or other instrument or obligation by which Fairchild or any
of its Significant Subsidiaries (other than Banner) may be bound, except for
such violations, breaches and defaults as to which requisite waivers or
consents have been obtained or which would not, individually or in the
aggregate, have a Fairchild Material Adverse Effect; or (d) violate any order,
writ, injunction, decree, statute, rule or regulation applicable to Fairchild
or any of its subsidiaries (other than Banner), except for violations which
would not, individually or in the aggregate, have a Fairchild Material Adverse
Effect.
6.5 SEC Reports. Since January 1, 1996, Fairchild has filed all periodic
reports required to be filed by it with the Securities and Exchange Commission
(the "SEC") pursuant to the federal securities laws and the SEC rules and
regulations thereunder.
6.6 Registration Statement; Proxy Statement. None of the information to be
supplied by Fairchild or MTA for inclusion or incorporation by reference in the
Registration Statement or the Proxy Statement (except for information about
Banner furnished by Banner to Fairchild) will, at the time of the mailing of
the Proxy Statement and at the time of the Stockholder Meeting, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. If at any
time prior to the Effective Time any event with respect to Fairchild, its
officers and directors or any of its subsidiaries shall occur and is required
to be described in an amendment of, or a supplement to, the Proxy Statement and
the Registration Statement, such event shall be so described, and such
amendment or supplement shall be promptly filed with the SEC and, as required
by law, disseminated to the stockholders of Banner. The Registration Statement
and the Proxy Statement (except with respect to information relating to Banner)
will comply as to form in all material respects with the provisions of the
Exchange Act. For purposes of this Section 6.6, any statement which is made or
incorporated by reference in the Proxy Statement or the Registration Statement
shall be deemed modified or superseded to the extent any later filed document
incorporated by reference in the Proxy Statement or the Registration Statement
or any statement included in the Proxy Statement or the Registration Statement
modifies or supersedes such earlier statement.
6.7 Undisclosed Liabilities. Since September 27, 1998, except as disclosed
in Fairchild's SEC Reports filed prior to the date of this Agreement or as
contemplated by this Agreement, there are no liabilities or obligations of
Fairchild or its subsidiaries of any kind whatsoever, whether accrued,
contingent, absolute or otherwise, that would be required by generally accepted
accounting principles to be reflected on a consolidated balance sheet of
Fairchild, other than liabilities or obligations (i) incurred in the ordinary
course of business consistent with past practice, or (ii) which would not,
individually or in the aggregate, have a Fairchild Material Adverse Effect.
6.8 Ownership of Shares. As of the date hereof, Fairchild owns directly or
indirectly 17,839,974 shares of Banner Common Stock, all of which Fairchild has
the right to vote with respect to the transactions contemplated hereby, and
3,413,109 shares of Banner Preferred. Neither Fairchild nor MTA owns or holds
any right, option or warrant, or otherwise is a party to any agreement,
arrangement or understanding, to acquire Banner Common Stock or Banner
Preferred.
6.9 Interim Operations of MTA. MTA was formed solely for the purpose of
engaging in the transaction contemplated hereby and has not engaged in any
business activities or conducted any operations other than in connection with
the transactions contemplated hereby.
6.10 Compliance with Applicable Laws. Except as otherwise known to Banner,
Fairchild and its subsidiaries hold all permits, licenses, variances,
exemptions, orders, franchises and approvals or all governmental or regulatory
authorities necessary for the lawful conduct of their respective businesses,
except where the failure to so hold would not, individually or in the
aggregate, have a Fairchild Material Adverse Effect (the "Fairchild Permits").
Fairchild and its subsidiaries are in compliance with the terms of Fairchild
Permits, except where the failure so to comply would not, individually or in
the aggregate, have a Fairchild
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Material Adverse Effect. Except as disclosed in Fairchild SEC Reports filed
prior to the date of this Agreement, the business of Fairchild is not being
conducted in violation of any law, ordinance or regulation of any governmental
or regulatory authorities, except for possible violations, if any, which,
individually or in the aggregate, would not have a Fairchild Material Adverse
Effect.
6.11 Brokers, Finders or Financial Advisors. No agent, broker, investment
banker, financial advisor or other firm or person is or will be entitled to any
brokers' or finders' fee or any other commission or similar fee from Banner as
a result of Fairchild or MTA being a party hereto or consummating any of the
transactions contemplated by this Agreement.
6.12 Investigation by Fairchild and MTA. Fairchild and MTA have conducted
their own independent review and analysis of the businesses, assets, condition,
operations and prospects of the Company and its subsidiaries. Each of Fairchild
and MTA:
(a) acknowledges that, other than as set forth in this Agreement, none
of Banner, its subsidiaries or any of their respective directors, officers,
employees, affiliates, agents or representatives makes any representation
or warranty, either express or implied, as to the accuracy or completeness
of any of the information provided or made available to Fairchild or MTA or
their respective agents or representatives prior to the execution of this
Agreement, and
(b) agrees, to the fullest extent permitted by law, that none of Banner,
its subsidiaries or any of their respective directors, officers, employees,
stockholders, affiliates, agents or representatives shall have any
liability or responsibility whatsoever to Banner or Fairchild on any basis
(including without limitation in contract, tort or otherwise) based upon
any information provided or made available, or statements made, to
Fairchild or MTA prior to the execution of this Agreement, except for
information provided or made available or statements made and known by such
parties to be false or misleading in any material respect.
ARTICLE VII
STOCKHOLDERS' APPROVAL;
SEC MATTERS
7.1 Stockholders' Approval (a) Banner shall submit this Agreement and the
transactions contemplated hereby for the approval of its stockholders at the
Stockholder Meeting as promptly as practicable and shall use all reasonable
efforts to obtain stockholder approval and adoption of this Agreement and the
transactions contemplated hereby, such Stockholder Meeting to be held as soon
as practicable following the date hereof, and Banner shall, through its Board
of Directors based upon the recommendation of the Special Committee, recommend
to its stockholders approval of the transactions contemplated by this
Agreement, subject to the provisions of Section 7.1(b) hereof.
(b) Notwithstanding the foregoing, the Special Committee or the Board of
Directors of Banner may at any time prior to the Effective Time withdraw,
modify or change any recommendation and declaration regarding this Agreement or
the Merger, or recommend and declare advisable any other offer or proposal, if,
in the opinion of the Special Committee or the Board of Directors after
consultation with its counsel, the failure to so withdraw, modify or change its
recommendation and declaration would be inconsistent with its fiduciary duties
to its stockholders under applicable law.
(c) From the date hereof to the Effective Time, Fairchild and MTA shall not
sell or otherwise dispose of any of the Banner Common Stock and Banner
Preferred owned by them. At the Stockholder Meeting, or any adjournment
thereof, Fairchild and MTA shall vote the shares of Banner Common Stock owned
by them in favor of the Merger.
7.2 Registration Statement; Proxy. Fairchild and Banner will, as promptly as
practicable, prepare and file with the SEC a proxy statement, a registration
statement on Form S-4 in respect of shares of Fairchild Common Stock comprising
the Merger Consideration (the "Registration Statement") and forms of proxy in
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connection with the vote of Banner's stockholders with respect to the Merger
and this Agreement (such proxy statements, together with any amendments thereof
or supplements thereto, in each case in the form or forms mailed to Banner's
stockholders, are herein called the "Proxy Statement"). Fairchild and Banner
will each use all reasonable efforts to cause the Registration Statement to
become effective and to cause the Registration Statement and the Proxy
Statement to be mailed to stockholders of Banner at the earliest practicable
date.
ARTICLE VIII
COVENANTS AND AGREEMENTS
8.1 Additional Agreements; Cooperation. (a) Subject to the terms and
conditions herein provided and to the fiduciary obligations owed to their
respective stockholders, each of the parties hereto agrees to use its
reasonable efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable to consummate and
make effective as promptly as practicable the transactions contemplated by this
Agreement, and to cooperate with each other in connection with the foregoing,
including using its reasonable efforts (i) to obtain all necessary waivers,
consents and approvals from other parties to loan agreements, leases and other
contracts, (ii) to obtain all necessary consents, approvals and authorizations
as are required to be obtained under any federal, state or foreign law or
regulations, (iii) to defend all lawsuits or other legal proceedings commenced
or instituted by persons or entities other than the parties hereto challenging
this Agreement or the consummation of the transactions contemplated hereby,
(iv) to lift or rescind any injunction or restraining order or other order
adversely affecting the ability of the parties to consummate the transactions
contemplated hereby, (v) to effect all necessary registrations and filings,
including, but not limited to, submissions of information requested by the NYSE
or governmental authorities, and (vi) to fulfill all conditions to this
Agreement.
(b) Each of the parties hereto agrees to furnish to the other party hereto
such necessary information and reasonable assistance as such other party may
request in connection with its preparation of necessary filings or submissions
to any regulatory or governmental agency or authority, including, without
limitation, any filing necessary under the provisions of the NYSE Rules or any
applicable Federal or state statute.
8.2 Publicity. Banner and Fairchild agree to consult with each other in
issuing any press release and with respect to the general content of other
public statements with respect to the transactions contemplated hereby, and
shall not issue any such press release prior to such consultation, except as
may be required by law.
8.3 No Solicitation. Banner agrees that, except with Fairchild's consent,
prior to the Effective Time or unless this Agreement is terminated, it shall
not, and shall not authorize or permit any of its directors, officers,
employees, agents or representatives to, directly or indirectly, solicit,
initiate, facilitate or encourage (including by way of furnishing or disclosing
non-public information) any inquiries or the making of any proposal with
respect to any merger, consolidation or other business combination involving
Banner or acquisition of any kind of all or substantially all of the assets or
capital stock of Banner (an "Acquisition Transaction") or negotiate, explore or
otherwise communicate in any way with any third party (other than Fairchild)
with respect to any acquisition transaction or enter into any agreement,
arrangement or understanding requiring it to abandon, terminate or fail to
consummate the Merger or any other transactions contemplated by this Agreement;
provided, that if at any time prior to the Effective Time, in the opinion of
the Special Committee of the Board of Directors after consultation with its
counsel, the failure to take any of the actions provided in this Section 8.3
would be inconsistent with the fiduciary duties of such Special Committee to
the stockholders of Banner under applicable law, such Special Committee may
take any such action.
8.4 Access to Information. As of the date of this Agreement until the
Effective Time, Banner will give Fairchild and its authorized representatives
(including counsel, environmental and other consultants, accountants and
auditors) full access to all facilities, personnel and operations and to all
books and records of it and its subsidiaries, will permit Fairchild to make
such inspections as it may require and will cause its officers
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and those of its subsidiaries to furnish Fairchild with such financial and
operating data and other information with respect to its business and
properties as Fairchild may request. Any and all information obtained by
Fairchild and its authorized representatives in the foregoing manner is
hereinafter referred to as the "Confidential Information"; provided, that the
term "Confidential Information" shall not include information that at the time
of its disclosure or thereafter is generally available and known to the public,
was within Fairchild's possession prior to its being furnished to Fairchild by
Banner or was acquired or developed by Fairchild without violation of any
obligation of Fairchild to Banner or any contractual, legal or fiduciary
obligation owed by Fairchild or any other person or entity to Banner. Fairchild
and MTA acknowledge that all information designated Confidential Information
will be treated in the same manner as Fairchild treats its own confidential
information.
8.5 Bank Consents. Each of Banner and Fairchild will reasonably cooperate
with each other to assist the other party in obtaining any consent required
from each of Fairchild's and Banner's bank lenders, to effect the Merger.
8.6 Notification of Certain Matters. Banner or Fairchild, as the case may be,
shall promptly notify the other of (i) its obtaining of actual knowledge as to
the matters set forth in clauses (x) and (y) below, or (ii) the occurrence, or
failure to occur, of any event which occurrence or failure to occur would be
likely to cause (x) any representation or warranty contained in this Agreement
to be untrue or inaccurate in any material respect at any time from the date
hereof to the Effective Time, or (y) any material failure of Banner, Fairchild
or MTA, as the case may be, or of any officer, director, employee or agent
thereof, to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it under this Agreement; provided, however, that
no such notification shall affect the representations or warranties of the
parties, the conditions to the obligations of the parties hereunder or any
liability that a party hereto may have to another party under this Agreement.
8.7 Fees and Expenses. In the event this Agreement is terminated, Banner,
Fairchild, and MTA shall bear their respective expenses incurred in connection
with the Merger, including, without limitation, the preparation, execution and
performance of this Agreement and the transactions contemplated hereby, and all
fees and expenses of investment bankers, finders, brokers, agents,
representatives, counsel and accountants.
8.8 Conduct of Business of Banner Pending the Merger. Except as contemplated
by this Agreement or with Fairchild's consent, during the period from the date
of this Agreement to the Effective Time, each of Banner and its subsidiaries
will conduct its operations according to its ordinary course of business
consistent with past practices, and will use all commercially reasonable
efforts to preserve intact its business organization, to keep available the
services of its officers and employees and to maintain satisfactory
relationships with suppliers, distributors, customers and others having
business relationships with it and will take no action which would materially
adversely affect the ability of the parties to consummate the transactions
contemplated by this Agreement.
8.9 Indemnification of Directors and Officers. (a) All rights to
indemnification now existing in favor of the present directors or officers of
Banner and its respective subsidiaries as provided in the DGCL, their
respective certificates or articles of incorporation or by-laws or otherwise in
effect on the date hereof shall survive the Merger for a period of six years,
and, during such period, the Certificate of Incorporation and Bylaws of the
Surviving corporation shall not be amended to reduce or limit the rights of
indemnity of the present directors or officers of Banner, or the ability of the
Surviving Corporation to indemnify them, nor to hinder, delay or make more
difficult the exercise of such rights of indemnity or the ability to indemnify.
In addition, Banner (and, after the Effective Time, the Surviving Corporation)
shall pay expenses in advance of the final disposition of any action or
proceeding to the full extent permitted by law to each director or officer of
Banner and its respective subsidiaries seeking indemnification pursuant to the
existing rights of indemnification required to be maintained in the preceding
sentence upon receipt of an undertaking by such director or officer to repay
all amounts so advanced if it is judicially determined that such person is not
entitled to indemnification.
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(b) From and after the Effective Time, the Surviving Corporation shall
maintain, and Fairchild agrees to cause the Surviving Corporation to maintain,
for not less than six years, Banner's current policies of directors' and
officers' liability insurance with respect to actions and omissions occurring
prior to the Effective Time to the extent available or, if not available,
substantially equivalent policies; provided that in no event shall the
Surviving Corporation be required to expend to maintain or procure insurance
coverage pursuant to this Section 8.9 an amount per annum in excess of 150% of
the current annual premiums for the twelve-month period ended September 30,
1998 (the "Maximum Premium") with respect to such insurance or, if the cost of
such coverage exceeds the Maximum Premium, the maximum amount of coverage that
can be purchased or maintained for the Maximum Premium. In the event any claim
is made against present directors or officers of the Company that is covered,
in whole or in part, or potentially so covered by insurance, the Surviving
Corporation and Fairchild shall do nothing that would forfeit, jeopardize,
restrict or limit the insurance coverage available for that claim until the
final disposition of that claim. Any such policy may in the sole discretion of
the Surviving Corporation be one or more "tail" policies for all or any portion
of the six-year period referred to above.
(c) This Section 8.9 shall survive the consummation of the Merger. The
provisions of this Section 8.9 are intended to be for the benefit of, and shall
be enforceable by, the present and former directors or officers of Banner, as
the case may be. If the Surviving Corporation or any of its successors or
assigns (i) consolidates with or merges into any other corporation or entity
and is not the continuing or surviving corporation or entity of such
consolidation or merger or (ii) transfers all or substantially all of its
properties or assets to any individual, corporation or any other entity, in
each such case, proper provision shall be made so that the successors and
assigns of the Surviving Corporation shall assume the obligations set forth in
this Section 8.9.
8.10 Approval of Merger. At the Stockholder Meeting, Fairchild shall vote or
cause to be voted all of the Banner Common Stock owned by it in favor of the
approval and adoption of this Agreement and the Merger.
ARTICLE IX
CONDITIONS TO CLOSING
9.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment or waiver by the Board of Directors of the waiving party
(subject to applicable law) at or prior to the Effective Date of each of the
following conditions:
(a) this Agreement and the Merger shall have been duly approved and
adopted at the Stockholder Meeting in accordance with the DGCL;
(b) no order, statute, rule, regulation, executive order, injunction,
stay, decree or restraining order shall have been enacted, entered,
promulgated or enforced by any court of competent jurisdiction or
governmental or regulatory authority or instrumentality that prohibits the
consummation of the Merger or the transactions contemplated hereby;
(c) all necessary consents and approvals of any United States or any
other governmental authority or any other third party required for the
consummation of the transactions contemplated by this Agreement shall have
been obtained except for such consents and approvals the failure to obtain
which individually or in the aggregate would not have a material adverse
effect on Fairchild (assuming the merger had taken place);
(d) the Registration Statement shall have become effective in accordance
with the provisions of the Securities Act. No stop order suspending the
effectiveness of the Registration Statement shall have been issued by the
SEC and remain in effect.
9.2 Additional Conditions to Obligations of Fairchild. The obligations of
Fairchild to effect the Merger shall be subject to the fulfillment or waiver
(subject to applicable law), at or prior to the Effective Date, of each of the
following conditions:
(a) Banner shall have furnished Fairchild with certified copies of
resolutions duly adopted by its Board of Directors approving the execution
and delivery of this Agreement and the Merger and all other necessary
corporate action to enable Banner to comply with the terms of this
Agreement;
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(b) Banner shall have performed or complied in all material respects
with all its agreements, obligations and covenants required by this
Agreement to be performed by it on or prior to the Effective Date;
(c) the representations and warranties of Banner contained herein shall
be true and correct in all material respects on the date of this Agreement
and the Effective Date as though such representations and warranties were
made at and on such date;
(d) there shall not have occurred since the date hereof any material
adverse change in the business, operations, assets, financial condition or
results of operations of Banner;
(e) all consents required by Fairchild's and Banner's bank lenders to
effect the Merger shall have been obtained; and
(f) Banner shall have delivered to Fairchild a certificate, dated the
Effective Date, of its Senior Vice President and Secretary to the effect of
(a), (b), (c),(d) and (e), above.
9.3 Additional Conditions to Obligations of Banner. The obligations of
Banner to effect the Merger shall be subject to the fulfillment or waiver
(subject to applicable law), at or prior to the Effective Date, of each of the
following conditions:
(a) Each of MTA and Fairchild shall have furnished Banner with certified
copies of resolutions duly adopted by its Board of Directors approving the
execution and delivery of this Agreement and the Merger and all other
necessary corporate action to enable MTA and Fairchild to comply with the
terms of this Agreement;
(b) Banner shall have been furnished with a resolution by the sole
stockholder of MTA approving the execution and delivery of this Agreement
and the Merger and all other necessary corporate action to enable MTA to
comply with the terms of this Agreement;
(c) MTA and Fairchild shall have performed or complied in all material
respects with all its agreements, obligations and covenants required by
this Agreement to be performed by it on or prior to the Effective Date;
(d) the representations and warranties of MTA and Fairchild contained
herein shall be true and correct in all material respects on the date of
this Agreement and the Effective Date as though such representations and
warranties were made at and on such date and Fairchild shall have delivered
to Banner a certificate, dated the Effective Date, of its President or
Senior Vice President and its Secretary to such effect;
(e) there shall not have occurred since the date hereof any material
adverse change in the business, operations, assets, financial condition or
results of operations of Fairchild;
(f) all consents required by Fairchild's and Banner's bank lenders to
effect the Merger shall have been obtained;
(g) Banner shall have received the Fairness Opinion, which shall not
have been revoked, rescinded or annulled;
(h) the shares of Fairchild Common Stock constituting the Merger
Consideration and the shares of Fairchild Common Stock reserved for
issuance upon exercise of options assumed in accordance with Section 3.4(a)
shall have been listed for trading on the NYSE; and
(i) Banner shall have delivered to Fairchild a certificate, dated the
Effective Date, of its Senior Vice President and Secretary to the effect of
(a), (b), (c), (d), (e), (f) and (h) above.
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ARTICLE X
TERMINATION
10.1 Termination by Mutual Consent. This Agreement may be abandoned at any
time prior to the Effective Time, before or after the approval by stockholders
of Banner, by the mutual written consent of all the parties (with the
concurrence of the Special Committee).
10.2 Termination by Fairchild, MTA or Banner. This Agreement may be
terminated and the Merger may be abandoned by any of Fairchild, MTA or Banner
(with the concurrence of the Special Committee in the case of termination by
Banner), before or after the approval by stockholders of Banner if (a) any
court of competent jurisdiction in the United States or some other governmental
body or regulatory authority shall have issued an order, decree or ruling or
taken any other action permanently restraining, enjoining or otherwise
prohibiting the Merger and such order, decree, ruling or other action shall
have become final and nonappealable, (b) the Merger shall not have been
consummated by May 31, 1999, provided that the right to terminate this
Agreement pursuant to this Section 10.2(b) shall not be available to any party
whose failure to fulfill any of its obligations under this Agreement results in
the failure of the Merger to occur on or before such date, or (c) this
Agreement and the Merger shall have been voted on by stockholders of Banner at
the Stockholder Meeting and the vote shall not have been satisfied the
condition set forth in Section 9.1(a).
10.3 Termination by Fairchild or MTA. This Agreement may be terminated and
the Merger may be abandoned by Fairchild or MTA, prior to the Effective Time,
before or after the approval by stockholders of Banner if Banner shall have
failed to perform in any material respect any of its material obligations under
this Agreement theretofore to be performed by Banner, which failure to perform
has not been cured within 30 days following receipt by Banner of notice of such
failure to perform from Fairchild or MTA.
10.4 Termination by Banner. This Agreement may be terminated by Banner (with
the concurrence of the Special Committee), prior to the Effective Time, before
or after the approval by stockholders of Banner (a) if Fairchild or MTA shall
have failed to perform in any material respect any of their material
obligations under this Agreement theretofore to be performed by Fairchild or
MTA, which failure to perform has not been cured within 30 days following
receipt by Fairchild of notice of such failure to perform from Banner or (b)
if, prior to consummation of the Merger, Banner shall have received a bona fide
written offer from a third party to acquire, directly or indirectly, for
consideration consisting of cash and/or securities, more than 50% of the
combined voting power of the shares of Banner Common Stock and Banner Preferred
then outstanding or all or substantially all the assets of Banner and the
Special Committee shall have determined in its good faith judgment (based on
the advice of a financial advisor of nationally recognized reputation) that the
terms of such offer are more favorable to Banner's stockholders than the
Merger.
10.5 Effect of Termination. In the event of the termination of this
Agreement pursuant to the foregoing provisions of this Article X, this
Agreement shall become void and have no effect, with no liability on the part
of any party or its stockholders or directors or officers in respect thereof
except for the provisions of Section 8.9 and agreements which survive the
termination of this Agreement and except for liability that MTA, Fairchild or
Banner might have arising from a breach of this Agreement.
ARTICLE XI
MISCELLANEOUS
11.1 Survival of Representations and Warranties. All representations and
warranties made in this Agreement and in any document or instrument delivered
pursuant to this Agreement shall not survive beyond the earlier of termination
of this Agreement or the Effective Time. This Section 11.1 shall not limit any
covenant or agreement of the parties hereto which by its terms contemplates
performance after the Effective Time.
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11.2 Closing and Waiver. If this Agreement shall not have been terminated in
accordance with the provisions of Section 10.1 hereof, a closing (the "Closing"
and the date and time thereof being the "Effective Time") will be held as soon
as practicable after the conditions set forth in Article IX shall have been
satisfied or waived. The Closing will be held at the offices of Cahill Gordon &
Reindel, 80 Pine Street, New York, New York or at such other places as the
parties may agree. Immediately thereafter, the Delaware Certificate of Merger
will be filed.
(a) At any time prior to the Effective Date, any party hereto may (i) extend
the time for the performance of any of the obligations or other acts of any
other party hereto, (ii) waive any inaccuracies in the representations and
warranties of the other party contained herein or in any document delivered
pursuant hereto, and (iii) waive compliance with any of the agreements of any
other party or with any conditions to its own obligations contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall
be valid only if set forth in an instrument in writing duly authorized by and
signed on behalf of such party.
11.3 Notice. (a) Any notice or communication to any party hereto shall be
duly given if in writing and delivered in person or mailed by first class mail
(registered or certified, return receipt requested), or overnight air courier
guaranteeing next day delivery, to such other party's address.
If to Fairchild or MTA:
45025 Aviation Drive
Suite 400
Dulles, VA 20166
Attention: Donald Miller, Esq.
with a copy to:
James J. Clark, Esq.
Cahill Gordon & Reindel
80 Pine Street
New York, NY 10005
If to Banner:
45025 Aviation Drive
Suite 300
Dulles, VA 20166
Attention: Warren Persavich
with copies to
Steven L. Gerard
Great Point Capital, Inc.
150 East 61 Street
New York, NY 10021
and
Steven Wolosky, Esq.
Olshan Grundman Frome Rosenzweig & Wolosky LLP
505 Park Avenue
New York, NY 10022
(b) All notices and communications will be deemed to have been duly given:
at the time delivered by hand, if personally delivered; five business days
after being deposited in the mail, if mailed; and the next business day after
timely delivery to the courier, if sent by overnight air courier guaranteeing
next day delivery.
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11.4 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11.5 Interpretation. The headings of articles and sections herein are for
convenience of reference, do not constitute a part of this Agreement, and shall
not be deemed to limit or affect any of the provisions hereof. As used in this
Agreement, "person" means any individual, corporation, limited or general
partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof; "subsidiary" of any person means (i) a corporation more
than 50% of the outstanding voting stock of which is owned, directly or
indirectly, by such person or by one or more other subsidiaries of such person
or by such person and one or more subsidiaries thereof or (ii) any other person
(other than a corporation) in which such person, or one or more other
subsidiaries of such person or such person and one or more other subsidiaries
thereof, directly or indirectly, have more than a majority ownership and voting
power relating to the policies, management and affairs thereof; and "voting
stock" of any person means capital stock of such person which ordinarily has
voting power for the election of directors (or persons performing similar
functions) of such person, whether at all times or only so long as no senior
class of securities has such voting power by reason of any contingency and
"knowledge" (or words of similar import) with regard to a party to this
agreement shall mean the actual knowledge of any officer of such party.
"Significant Subsidiary" shall have the meaning ascribed to it under Rule 1-02
of Regulation S-X of the SEC.
11.6 Variations and Amendment. This Agreement may be varied or amended only
by written action of Banner (with the concurrence of the Special Committee) and
Fairchild, before or after the Stockholder Meeting at any time prior to the
Effective Time.
11.7 No Third Party Beneficiaries. Nothing in this Agreement shall confer
any rights upon any person or entity which is not a party or permitted assignee
of a party to this Agreement.
11.8 Governing Law. This Agreement shall be governed by the laws of the
State of Delaware (regardless of the laws that might otherwise govern under
applicable Delaware principles of conflicts of law) as to all matters,
including but not limited to matters of validity, construction, effect,
performance and remedies.
11.9 Entire Agreement. This Agreement constitutes the entire agreement among
the parties with respect to the subject matter hereof and supersedes all other
prior agreements and understandings, both written and oral, between the parties
with respect to the subject matter hereof.
11.10 No Recourse Against Others. No director, officer or employee, as such,
of Banner, MTA or Fairchild or any of their respective subsidiaries shall have
any liability for any obligations of Banner, MTA or Fairchild, respectively,
under this Agreement for any claim based on, in respect of or by reason of such
obligations or their creation.
11.11 Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
11.12 No Assignment. Neither this Agreement, nor any of the rights,
interests or obligations hereunder, shall be transferred or assigned (except in
the case of MTA, by operation of law upon consummation of the Merger) without
the prior written consent of the other parties hereto.
11.13 Joint and Several Liability. Fairchild and MTA shall be jointly and
severally liable for all of the covenants, agreements and obligations made or
incurred by either of them under this Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Merger Agreement to
be executed by their duly authorized officers all as of the day and year first
above written.
Banner Aerospace, Inc.
By:
-------------------------------
Name:
Title:
The Fairchild Corporation
By:
-------------------------------
Name:
Title:
MTA, Inc.
By:
-------------------------------
Name:
Title:
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SCHEDULE 5.4
CONSENTS AND APPROVALS
Section 10.10 of the Second Amended and Restated Credit Agreement dated as
of December 12, 1996 among Banner and Banner Subsidiaries (collectively, the
"Borrowers"), Citicorp USA, Inc., as Administrative Agent and Arranger, and
Nationsbank, N.A., as Co-Arranger, Co-Agent and Syndications Agent, prohibits
the Borrowers from entering into any merger or consolidation.
A-20
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Year Ended June 30, 1998 Commission File Number 1-6560
THE FAIRCHILD CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 34-0728587
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
45025 Aviation Drive, Suite 400
Dulles, VA 20166
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703)478-5800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of exchange on which registered
Class A Common Stock, par value
$.10 per share New York and Pacific 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 ninety (90) days [X].
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 [ ].
On September 17, 1998, the aggregate market value of the common shares held
by nonaffiliates of the Registrant (based upon the closing price of these shares
on the New York Stock exchange) was approximately $197 million (excluding shares
deemed beneficially owned by affiliates of the Registrant under Commission
Rules).
As of September 17, 1998, the number of shares outstanding of each of the
Registrant's classes of common stock were as follows:
Class A common stock, $.10 par value 19,494,291
Class B common stock, $.10 par value 2,624,662
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement for the 1998
Annual Meeting of Stockholders' to be held on November 19, 1998 (the "1998 Proxy
Statement"), which the Registrant intends to file within 120 days after June 30,
1998, are incorporated by reference into Parts III and IV.
<PAGE>
THE FAIRCHILD CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED JUNE 30, 1998
PART I Page
Item 1. Business 4
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Stockholders 11
PART II
Item 5. Market for the Company's Common Equity and Related
Stockholder Matters 12
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition 15
Item 8. Financial Statements and Supplementary Data 27
Item 9. Disagreements on Accounting and Financial Disclosure 66
PART III
Item 10. Directors and Executive Officers of the Company 67
Item 11. Executive Compensation 67
Item 12. Security Ownership of Certain Beneficial Owners and
Management 67
Item 13. Certain Relationships and Related Transactions 67
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 68
<PAGE>
PART I
ITEM 1. BUSINESS
General
The Fairchild Corporation (the "Company") was incorporated in October
1969, under the laws of the State of Delaware. The Company is the largest
aerospace fastener manufacturer in the world and an international supplier to
the aerospace industry, distributing a wide range of aircraft parts and related
support services. Through internal growth and strategic acquisitions, the
Company is one of the leading aircraft parts suppliers to aircraft manufacturers
such as Boeing, Airbus, Lockheed Martin, British Aerospace and Bombardier and to
airlines such as Delta Air Lines and US Airways.
The Company's primary business focus is on the aerospace industry and its
aerospace business consists primarily of two segments: aerospace fasteners and
aerospace parts distribution. The aerospace fasteners segment manufactures and
markets high performance fastening systems used in the manufacturing and
maintenance of commercial and military aircraft by original equipment
manufacturers ("OEMs"). The aerospace distribution segment stocks and
distributes a wide variety of aircraft parts to commercial airlines and air
cargo carriers, other distributors, fixed-base operators, corporate aircraft
operators and other aerospace companies. The Company's aerospace distribution
business is conducted through its 83% owned subsidiary, Banner Aerospace, Inc.
("Banner"). For a comparison of the sales of the Company's business segments for
each of the last three fiscal years, see Item 7, "Management's Discussion and
Analysis of Results of Operations and Financial Condition", which is herein
incorporated by reference.
The Company also owns a technology products unit, which designs,
manufactures, and markets high performance production equipment and systems
required for the manufacture of semiconductor chips and recordable compact
discs, and a significant equity interest in Nacanco Paketleme ("Nacanco"), which
manufactures customized cans for the beverage industry in Turkey.
Recent Developments
Recent developments of the Company are incorporated herein by reference
from "Recent Developments and Significant Business Combinations" included in
Item 7 "Management's Discussion and Analysis of Results of Operations and
Financial Condition".
Financial Information about Business Segments
The Company's business segment information is incorporated herein by
reference from Note 20 of the Company's consolidated financial statements
included in Item 8, "Financial Statements and Supplementary Data".
Narrative Description of Business Segments
Aerospace Fasteners
The Company, through its Aerospace Fasteners segment, is a leading
worldwide manufacturer and supplier of fastening systems used in the
construction and maintenance of commercial and military aircraft. The Aerospace
Fasteners segment accounted for 50.9% of total sales for the year ended June 30,
1998.
Products
In general, aerospace fasteners produced by the Company are used to join
materials in applications that are not of themselves critical to flight.
Products range from standard aerospace screws, to more complex systems that
fasten airframe structures, and sophisticated latching or quick disconnect
mechanisms that allow efficient access to internal parts which require regular
servicing or monitoring. The Aerospace Fasteners segment also manufactures and
supplies fastening systems used in non-aerospace industrial and electronic niche
applications. The Aerospace Fasteners segment produces and sells products under
various trade names and trademarks including Voi-Shan (fasteners for aerospace
structures), Screwcorp (standard externally threaded products for aerospace
applications), RAM (custom designed mechanisms for aerospace applications),
Camloc (components for the industrial, electronic, automotive and aerospace
markets), and Tridair and Rosan (fastening systems for highly-engineered
aerospace, military and industrial applications).
Principal product lines of the Aerospace Fasteners segment include:
Standard Aerospace Airframe Fasteners - These fasteners consist of
standard externally threaded fasteners used in non-critical airframe
applications on a wide variety of aircraft. These fasteners include Hi-Torque
Speed Drive, Tri-Wing, Torq-Set, Phillips and Hex Heads.
Commercial Aerospace Structural and Engine Fasteners - These fasteners
consist of more highly engineered, permanent or semi-permanent fasteners used in
non-critical but more sophisticated airframe and engine applications, which
could involve joining more than two materials. These fasteners are generally
engineered to specific customer requirements or
<PAGE>
manufactured to specific customer specifications for special applications, often
involving exacting standards. These fasteners include Hi-Lok, Veri-Lite, Eddie-
Bolt2 and customer proprietary engine nuts.
Proprietary Products and Fastening Systems - These very highly engineered,
proprietary fasteners are designed by the Company for specific customer
applications and include high performance structural latches and hold down
mechanisms. These fasteners are usually proprietary in nature and are used
primarily in either commercial aerospace or military applications. These
fasteners include Visu-Lok, Composi-Lok, Keen-serts, Mark IV, Flatbeam and
Ringlock.
Highly Engineered Fastening Systems for Industrial Applications These
highly engineered fasteners are designed by the Company for specific niche
applications in the electronic, automotive and durable goods markets and are
sold under the Camloc trade name.
Sales and Markets
The products of the Aerospace Fasteners segment are sold primarily to
domestic and foreign OEMs of airframes, subcontracors to OEMs, engine
assemblies, and to the maintenance and repair market through distributors.
Sixty-six percent of its sales are domestic. Major customers include OEMs such
as Boeing, Airbus, and Aerospatiale and their subcontractors, as well as major
distributors such as AlliedSignal, Tri-Star Aerospace and Wesco Aircraft
Hardware. Recently, OEMs have significantly increased their production levels.
In addition, OEMs have implemented programs to reduce inventories and pursue
just-in-time relationships. This has allowed parts distributors to significantly
expand their business due to their ability to better meet OEM objectives. In
response, the Company, which formerly supplied the OEMs directly, is expanding
efforts to provide parts through its subsidiaries, which are distributors, such
as Special-T Fasteners in the Unites States and AS+C GmbH in Europe. No single
customer accounts for more than 10% of the Company's consolidated sales.
Products are marketed by a direct sales force team and distribution
companies in the United States and Europe. The direct sales force team is
organized by customer and region. The internal sales force is organized by
facility and product range and is focused on servicing customers needs,
identifying new product applications, and obtaining the approval of new
products. All the Company's products are marketed through centralized
advertising and promotional activities.
Revenues in the Aerospace Fasteners segment bear a strong relationship to
aircraft production. As OEMs searched for cost cutting opportunities during the
aerospace industry recession, parts manufacturers, including the Company,
accepted lower-priced orders and/or smaller quantity orders to maintain market
share, at lower profit margins. However, during recent years, this situation has
improved as build rates in the aerospace industry have increased and resulted in
capacity constraints. All though lead times have increased, the Company has been
able to provide its major customers with favorable pricing, while maintaining or
increasing margins by negotiating for larger minimum lot sizes that are more
economic to manufacture. In addition, the Company has eliminated "make and hold"
contracts under which large volume buyers would require current production of
parts for long-term unspecified dates of delivery. Overall, existing backlog is
anticipated to result in higher margins due to larger and more efficient lot
sizes, combined with the utilization of recently acquired customized production
capacity and training programs for all employees.
Fasteners also have applications in the automotive/industrial markets,
where numerous special fasteners are required (such as engine bolts, wheel bolts
and turbo charger tension bolts). The Company is actively targeting the
automotive market as a hedge against any potential downturn in the aerospace
industry.
Manufacturing and Production
The Aerospace Fasteners segment has eight primary manufacturing facilities,
of which three are located in the United States and five are located in Europe.
Each facility has virtually complete production capability, and subcontracts
only those production steps which exceed capacity. Each plant is designed to
produce a specified product or group of products, determined by the production
process involved and certification requirements. The Company's largest customers
have recognized its quality and operational controls by conferring ISO D1-9000A
status at all of its U.S. facilities, and ISO D1-9000 status at all of its
European facilities. All of its facilities are "preferred suppliers" and have
received all SPC and NADCAP approvals from OEMs. The Company is the first and
only aerospace fastener manufacturing company with all of its facilities holding
ISO-9000 approval.
The Company has a fully operational modern information system at all of
its U.S. facilities, which was expanded to most of its European operations in
Fiscal 1998. The Company will expand this information system
<PAGE>
to the remaining European operations in Fiscal 1999. The new system performs
detailed and timely cost analysis of production by product and facility. Updated
MIS systems also help the Company to better service its customers. OEMs require
each product to be produced in an OEM-qualified/OEM-approved facility.
Competition
Despite intense competition in the industry, the Company remains the
dominant manufacturer of aerospace fasteners. The worldwide aerospace fastener
market is estimated to be $1.7 billion (before distributor resales). The Company
holds approximately 23% of the market and competes with SPS Technologies,
Hi-Shear, and Huck, which the Company believes hold approximately 13%, 11% and
10% of the market, respectively. In Europe, its largest competitors are Blanc
Aero and Southco Fasteners.
The Company competes primarily in the highly-engineered "systems" segment
where its broad product range allow it to more fully serve each OEM and
distributor. The Company's product array is diverse and offers customers a large
selection to address various production needs. In addition, roughly 45% of the
Company's output is unique or is in a market where the Company has a small
number of competitors. The Company seeks to maintain its technological edge and
competitive advantage over its competitors, and has historically demonstrated
innovative production methods and new products to meet customer demands at fair
price levels.
Aerospace Distribution
The Company, through Banner (its Aerospace Distribution segment),
distributes a wide variety of aircraft parts, which it has purchased on the open
market or acquired from OEMs as an authorized distributor. No single distributor
arrangement is material to the Company's financial condition. The Aerospace
Distribution segment accounted for 48.3% of total sales in Fiscal 1998.
Products
An extensive inventory of products and a quick response time are essential
in providing service to its customers. Another key factor in selling to its
customers is Banner's ability to maintain a system that traces a part back to
the manufacturer.
Products of the Aerospace Distribution segment are divided into two
groups: rotables and engines. Rotables include flight data recorders, radar and
navigation systems, instruments, landing gear and hydraulic and electrical
components. Engines include jet engines and engine parts for use on both narrow
and wide body aircraft and smaller engines for corporate and commuter aircraft.
Banner provides a number of services such as immediate shipment of parts in
aircraft-on-ground situations. Banner also buys and sells commercial aircraft
from time to time.
Rotable parts are sometimes purchased as new parts, but are generally
purchased in the aftermarket which are then overhauled for the Company by
outside contractors, including OEMs and FAA-licensed facilities. Rotables are
sold in a variety of conditions such as new, overhauled, serviceable and "as
is". Rotables may also be exchanged instead of sold. An exchange occurs when an
aircraft part in inventory is exchanged for a part from the customer and the
customer is charged an exchange fee plus the actual cost to overhaul the part.
Engines and engine components are sold "as is", overhauled or disassembled for
resale as parts.
Sales and Markets
Subsidiaries of the Aerospace Distribution segment sell their products in
the United States and abroad to most of the world's commercial airlines and to
air cargo carriers, as well as other distributors, fixed-base operators,
corporate aircraft operators and other aerospace companies. Approximately 70.7%
of its sales are to domestic purchasers, some of whom may represent offshore
users.
The Aerospace Distribution segment conducts marketing efforts through its
direct sales force, outside representatives and, for some product lines,
overseas sales offices. Sales in the aviation aftermarket depend on price,
service, quality and reputation. The Aerospace Distribution segment's business
does not experience significant seasonal fluctuations nor depend on a single
customer. No single customer accounts for more than 10% of the Company's
consolidated revenue.
Competition
The rotables group competes with AAR Corp., Air Ground Equipment Services
("AGES"), Aviation Sales Company, The Memphis Group and other large and small
companies in a very fragmented industry. The major competitors for Banner's
engine group are OEMs such as General Electric Company and Pratt and Whitney, as
well as the engine parts division of AAR
<PAGE>
Corp., AGES, and many smaller companies.
Other Operations
Other operations include: Nacanco, real estate holdings, and a company
operating under the trade name of Fairchild Gas Springs Division ("Gas
Springs").
Nacanco Paketleme
Established in 1987, Nacanco is the largest manufacturer of aluminum cans
for soft drinks and beer in Turkey with an estimated 80% market share. Nacanco
generated EBITDA of approximately $38 million on annual sales of $101 million
for its fiscal year ended December 31, 1997. The Company owns 31.9% of Nacanco's
common stock with Pechiney International SA and its subsidiaries holding
substantially all of the balance. The Company has received cash dividends of
$5.7 million and $4.8 million in the years ended June 30, 1998 and 1997,
respectively.
Real Estate
The Company has significant real estate holdings having a book value of
approximately $67 million as of June 30, 1998. The Company's real estate
holdings consist of (i) approximately 80 acres on Long Island, New York which
are currently being developed into retail centers; (ii) various industrial
buildings from which the Company receives rental income; and (iii) property to
be used as landfills upon receipt of necessary licenses and government
approvals.
Gas Springs Division
A Fiscal 1995 start-up operation, Gas Springs manufactures gas load
springs and other devices used in raising, lowering or moving of heavy loads.
Its products have numerous consumer and industrial applications, including in
fitness equipment, sunbeds, furniture, automotive, and agricultural and
construction equipment. Annual sales were $5.8 million from Gas Springs in
Fiscal 1998.
Technology Products
Acquired by the Company in June 1994, Fairchild Technologies ("FT")
manufactures, markets and services capital equipment for recordable compact disc
("CD-R") and advanced semiconductor manufacturing. FT's products are used
worldwide to produce CD-Rs, CDs and CD-ROMs, as well as integrated circuits for
the data processing, communications, transportation, automotive and consumer
electronic industries, as well as for the military.
FT is a leader in microlithography semiconductor machinery manufacturing
in Europe and has four product lines, the first being equipment for wafer
microlithography processing. This includes the mainstay Series 6000 Flexible
Wafer Process Line, consisting of lithographic processing systems with flexible
material flow, modular design and high throughput, and the recently introduced
Falcon Modular Microlithography System for 0.25 micron (65/256 Mbit DRAM) device
manufacturing. The Falcon system has a fully modular design and is expandable to
accommodate expected technological advancements and specific customer
configurations.
FT has recently combined new and proven technology and a number of leading
edge components and systems in compact disc processing to develop its Compact
Disc Recordable ("CD-R10X") manufacturing system. The CD-R10X system is a state
of the art design for producing cost effective recordable CDs by combining a
high quality injection molding machine with scanning, inspection, and pneumatic
handling systems.
With an established base of controls/clean room technology and
software/configuration engineering, FT is able to provide systems with multiple
modular designs for a variety of customer applications. More than 1,000 FT wafer
production systems are in operation worldwide. Major customers in the wafer
product line include Motorola, Samsung, Siemens, GEC Plessey, Texas Instruments,
National Semiconductor, Macronix, and Erso. Other major customers include
Sonopress (Bertelsmann), and Krauss Maffei for the CD product line. The wafer
product line competes with Tokyo Electron, Dai Nippon Screen and the Silicon
Valley Group. Competitors in the CD product line consist of Robi Systems,
Leybold and Marubeni. (See Note 4 to the Company's Consolidated Financial
Statements, included in "Item 8 Financial Statements and Supplementary Data").
Foreign Operations
The Company's operations are located primarily in the United States and
Europe. Inter-area sales are not significant to the total revenue of any
geographic area. Export sales are made by U.S. businesses to customers in
non-U.S. countries, whereas foreign sales are made by the Company's non-U.S.
subsidiaries. For the Company's sales results by geographic area and
<PAGE>
export sales, see Note 21 of the Company's Consolidated Financial Statements
included in Item 8, Financial Statements and Supplementary Data.
Backlog of Orders
Backlog is important for all the Company's operations, due to the long-term
production requirements of its customers. The Company's backlog of orders as of
June 30, 1998 in the Aerospace Fasteners segment and Aerospace Distribution
segment amounted to $208.8 million, and $15.6 million, respectively. The Company
anticipates that in excess of 91% of the aggregate backlog at June 30, 1998 will
be delivered by June 30, 1999.
Suppliers
The Company does not consider itself to be materially dependent upon any
one supplier, but is dependent upon a wide range of subcontractors, vendors and
suppliers of materials to meet its commitments to its customers. From time to
time the Company enters into exclusive supply contracts in return for logistics
and price advantages. The Company does not believe that any one of these
contracts would impair its operations if a supplier were unable to perform.
Personnel
As of June 30, 1998, the Company had approximately 3,900 employees.
Approximately 5% of these employees were covered by collective bargaining
agreements. The Company believes that its relations with its employees are good.
Environmental Matters
A discussion of Environmental Matters is included in Note 19 to the
Company's Consolidated Financial Statements, included in Item 8, "Financial
Statements and Supplementary Data" and is herein incorporated by reference.
ITEM 2. PROPERTIES
As of June 30, 1998, the Company owned or leased buildings totaling
approximately 1,708,000 square feet, approximately 1,022,000 square feet of
which was owned and 686,000 square feet was leased. The Aerospace Fasteners
segment's properties consisted of approximately 1,084,000 square feet, with
principal operating facilities of approximately 922,000 square feet concentrated
in Southern California, France and Germany. The Aerospace Distribution segment's
properties consisted of approximately 370,000 square feet, with principal
operating facilities of approximately 252,000 square feet located in Florida and
Texas. Corporate and Other operating properties consisted of approximately
129,000 square feet, with principal operating facilities of approximately
104,000 square feet located in California and Germany. The Company owns its
corporate headquarters building at Washington-Dulles International Airport.
The Company has several parcels of property which it is attempting to
market, lease and/or develop, including: (i) an eighty acre parcel located in
Farmingdale, New York, (ii) a six acre parcel in Temple City, California, (iii)
an eight acre parcel in Chatsworth, California, and (iv) several other parcels
of real estate, primarily located throughout the continental United States.
The following table sets forth the location of the larger properties used
in the continuing operations of the Company, their building square footage, the
business segment or groups they serve and their primary use. Each of the
properties owned or leased by the Company is, in management's opinion, generally
well maintained, is suitable to support the Company's business and is adequate
for the Company's present needs. All of the Company's occupied properties are
maintained and updated on a regular basis.
<TABLE>
<CAPTION>
Owned
or Square Business Primary
Location Leased Footage Segment/Group Use
<S> <C> <C> <C> <C>
Saint Cosme, Owned Aerospace
France 304,000 Fasteners Manufacturing
Torrance, Owned Aerospace
California 284,000 Fasteners Manufacturing
City of Industry, Owned Aerospace
California 140,000 Fasteners Manufacturing
Carrollton, Texas Leased Aerospace
126,000 Distribution Distribution
Dulles, Virginia Owned Corporate Office
125,000
Lakeland, Florida Leased Aerospace
70,000 Distribution Distribution
Ft. Lauderdale, Leased Aerospace
Florida 57,000 Distribution Distribution
Toulouse, France Owned Aerospace
56,000 Fasteners Manufacturing
Fremont, Leased Technology
California 55,000 Products Manufacturing
Kelkheim, Germany Owned Aerospace
52,000 Fasteners Manufacturing
Santa Anna, Owned Aerospace
California 50,000 Fasteners Manufacturing
Vaihingen, Leased Technology
Germany 49,000 Products Manufacturing
Chatsworth, Leased Aerospace
California 36,000 Fasteners Distribution
</TABLE>
<PAGE>
Information concerning long-term rental obligations of the Company at June
30, 1998, is set forth in Note 18 to the Company's consolidated financial
statements, included in Item 8, "Financial Statements and Supplementary Data",
and is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
A discussion of legal proceedings is included in Note 19 to the Company's
Consolidated Financial Statements, included in Item 8, "Financial Statements and
Supplementary Data" and is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Market Information
The Company's Class A Common Stock is traded on the New York Stock
Exchange and Pacific Stock Exchange under the symbol FA. The Company's Class B
Common Stock is not listed on any exchange and is not publicly traded. Class B
Common Stock can be converted to Class A Common Stock at any time.
Information regarding the quarterly price range of the Company's Class A
Common Stock is incorporated herein by reference from Note 22 of the Company's
Consolidated Financial Statements included in Item 8 Financial
Statements and Supplementary Data.
Holders of Record
The Company had approximately 1,321 and 51 record holders of its Class A
and Class B Common Stock, respectively, at September 15, 1998.
Dividends
The Company's current policy is to retain earnings to support the growth
of its present operations and to reduce its outstanding debt. Any future payment
of dividends will be determined at the discretion of the Company's Board of
Directors and will depend on the Company's financial condition, results of
operations and restrictive covenants in the Company's credit agreement that
limit the payment of dividends over the term of the agreement (See Note 8 of the
Company's Consolidated Financial Statements included in Item 8 Financial
Statements and Supplementary Data).
Sale of Unregistered Securities
Fourth Quarter, Fiscal Year 1998
On May 14, 1998, pursuant to the Company's stock option deferral plan, the
Company issued an aggregate of 12,081 deferred compensation units to certain
officers of the Company as a result of the exercise of stock options by such
individuals. Each deferred compensation unit entitles the recipient to receive
one share of the Company's Class A Common Stock upon expiration of the "deferral
period" for the stock options exercised.
On May 4, 1998, in accordance with the terms of Special-T Acquisition, the
Company issued 15,090 restricted shares of the Company's Class A Common Stock.
Third Quarter, Fiscal Year 1998
<PAGE>
On February 12, 1998, pursuant to the Company's stock option deferral
plan, the Company issued 24,545 deferred compensation units to an officer of the
Company, as a result of the exercise of stock options by such individual. Each
deferred compensation unit entitles the recipient to receive one share of Class
A Common Stock upon expiration of the "deferral period" for the stock options
exercised.
On March 2, 1998, in accordance with the terms of Special-T Acquisition,
the Company issued 1,057,515 restricted shares of the Company's Class A Common
Stock.
On March 13, 1998, the Company issued 47,283 restricted shares of the
Company's Class A Common Stock resulting from a cashless exercise of 100,000
warrants by Dunstan Ltd.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
Five-Year Financial Summary
(In thousands, except per share data)
<CAPTION>
For the years ended June 30,
Summary of Operations: 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Net sales $203,456 $220,351 $349,236 $680,763 $741,176
Gross profit 28,415 26,491 74,101 181,344 186,506
Operating income (loss) (46,845) (30,333) (11,286) 33,499 45,443
Net interest expense 66,670 64,113 56,459 47,681 42,715
Earnings (loss) from
continuing operations 4,834 (56,280) (32,186) 1,816 52,399
Earnings (loss) per share from
continuing
operations:
Basic $ 0.30 $(3.49) $ (1.98) $ 0.11 $ 2.78
Diluted 0.30 (3.49) (1.98) 0.11 2.66
Other Data:
EBITDA (7,471) (9,830) 12,078 57,806 66,045
EBITDA Margin N.M. N.M. 3.5% 8.5% 8.9%
Cash used for operating (100,0 (102,3
activities (33,271) (25,040) (48,951) (100,058) (102,300)
Cash provided by (used for)
investing activities 166,068 (19,156) 57,540 79,975 60,876
Cash provided by (used for) (101,390) 12,345 (39,637) (1,455) 73,895
financing activities
Balance Sheet Data:
Total assets 860,943 828,680 993,398 1,052,666 1,157,259
Long-term debt, less current
maturities 518,718 508,225 368,589 416,922 295,402
Redeemable preferred stock of 17,552 16,342 -- -- --
subsidiary
Stockholders' equity 69,494 39,378 230,861 232,424 473,559
per outstanding common
share $ 4.32 $ 2.50 $ 14.10 $ 13.98 $ 20.54
</TABLE>
The results of Banner Aerospace, Inc. are included in the periods since
February 25, 1996, when Banner became a majority-owned subsidiary. Prior to
February 25, 1996, the Company's investment in Banner was accounted for using
the equity method. Fiscal 1994 includes the gain on the sale of Rexnord
Corporation stock. Fiscal 1998 includes the gain from the Banner Hardware Group
Disposition. The results of the hardware group are included in the periods from
March 1996 through December 1997, until disposition (see Note 22 of the
Company's Consolidated Financial Statements). These transactions materially
affect the comparability of the information reflected in the selected financial
data.
EBITDA represents the sum of operating income before depreciation and
amortization. Included in EBITDA are restructuring and unusual charges of
$25,553 and $2,319 in Fiscal 1994 and 1996, respectively. The Company considers
EBITDA to be an indicative measure of the Company's operating performance due to
the significance of the Company's long-lived asset and because such data is
considered useful by the investment community to better understand the Company's
results, and can be used to measure the Company's ability to service debt, fund
capital expenditures and expand its business. EBITDA is not a measure of
financial performance under GAAP, may not be comparable to other similarly
titled measures of other companies and should not be considered as an
alternative either to net income as an indicator of the Company's operating
performance, or to cash flows as a measure of the Company's liquidity. Cash
expenditures for various long-term assets, interest expense, and income taxes
have been, and will be incurred which are not reflected in the EBITDA
presentation. Furthermore, EBITDA is not available for the discretionary use of
management and, prior to the payment of dividends, the Company uses EBITDA to
meet its capital expenditures and debt service requirements. EBITDA Margin
represents EBITDA
<PAGE>
as a percentage of net sales.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The Fairchild Corporation (the "Company") was incorporated in October
1969, under the laws of the State of Delaware. On November 15, 1990, the
Company changed its name from Banner Industries, Inc. to The Fairchild
Corporation. The Company is the owner of 100% of RHI Holdings, Inc.
("RHI") and the majority owner of Banner Aerospace, Inc. ("Banner"). RHI is
the owner of 100% of Fairchild Holding Corp. ("FHC"). The Company's
principal operations are conducted through Banner and FHC. The Company
holds a significant equity interest in Nacanco Paketleme ("Nacanco"), and,
during the period covered by this report, held a significant equity
interest in Shared Technologies Fairchild Inc. ("STFI"). (See Item 8, Note
4 to Financial Statements, as to the disposition of the Company's interest
in STFI.)
GENERAL
The Company is the largest aerospace fastener manufacturer in the world
and an international supplier to the aerospace industry, distributing a wide
range of aircraft parts and related support services. Through internal growth
and strategic acquisitions, the Company is one of the leading aircraft parts
suppliers to aircraft manufacturers such as Boeing, Airbus, Lockheed Martin,
British Aerospace and Bombardier and to airlines such as Delta Air Lines and US
Airways.
The Company's primary business focus is on the aerospace industry and its
business consists primarily of two segments: aerospace fasteners and aerospace
parts distribution. The aerospace fasteners segment manufactures and markets
high performance fastening systems used in the manufacturing and maintenance of
commercial and military aircraft. The aerospace distribution segment stocks and
distributes a wide variety of aircraft parts to commercial airlines and air
cargo carriers, original equipment manufacturers ("OEMs"), other distributors,
fixed-base operators, corporate aircraft operators and other aerospace
companies. The Company's aerospace distribution business is conducted through
its 83% owned subsidiary, Banner.
CAUTIONARY STATEMENT
Certain statements in the financial discussion and analysis by management
contain forward-looking information that involve risk and uncertainty, including
current trend information, projections for deliveries, backlog, and other trend
projections. Actual future results may differ materially depending on a variety
of factors, including product demand; performance issues with key suppliers;
customer satisfaction and qualification issues; labor disputes; governmental
export and import policies; worldwide political stability and economic growth;
and legal proceedings.
RECENT DEVELOPMENTS AND SIGNIFICANT BUSINESS COMBINATIONS
The Company has effected a series of transactions designed to: (i) reduce
its total indebtedness and annual interest expense; (ii) focus its operations in
aerospace manufacturing; (iii) increase the number of publicly held shares of
Class A Common Stock; and (iv) increase the Company's operating and financial
flexibility.
On November 20, 1997, STFI entered into a merger agreement with Intermedia
Communications Inc. ("Intermedia") pursuant to which holders of STFI common
stock received $15.00 per share in cash (the "STFI Merger"). The Company was
paid approximately $178.0 million in cash (before tax and selling expenses) in
exchange for the common and preferred stock of STFI owned by the Company. In the
nine months ended March 29, 1998, the Company recorded a $96.0 million gain, net
of tax, on disposal of discontinued operations, from the proceeds received from
the STFI Merger, which was completed on March 11, 1998. The results of STFI have
been accounted for as discontinued operations.
On November 28, 1997, the Company acquired AS+C GmbH, Aviation Supply +
Consulting ("AS&C") in a business combination accounted for as a purchase. The
total cost of the acquisition was $13.2 million, which exceeded the fair value
of the net assets of AS&C by approximately $7.4 million, which is preliminarily
being allocated as goodwill and amortized using the straight-line method over 40
years. The Company purchased AS&C with cash borrowed. AS&C is an aerospace
parts, logistics, and distribution company primarily servicing the European OEM
market.
On December 19, 1997, the Company completed a secondary offering of public
securities. The offering consisted of an issuance of 3,000,000 shares of the
Company's Class A Common Stock at $20.00 per share (the "Offering").
<PAGE>
On December 19, 1997, immediately following the Offering, the Company
restructured its FHC and RHI Credit Agreements by entering into a new
six-and-a-half-year credit facility to provide the Company with a $300 million
senior secured credit facility (the "Facility") consisting of (i) a $75 million
revolving loan with a letter of credit sub-facility of $30 million and a $10
million swing loan sub-facility, and (ii) a $225 million term loan.
On January 13, 1998, certain subsidiaries of Banner (the "Selling
Subsidiaries") completed the disposition of substantially all of the assets and
certain liabilities of its hardware business and PacAero unit to two
wholly-owned subsidiaries of AlliedSignal Inc. (the "Buyers"), in exchange for
shares of AlliedSignal Inc. common stock with an aggregate value equal to $369
million (the "Banner Hardware Group Disposition"). The purchase price received
by the Selling Subsidiaries was based on the consolidated net worth as reflected
on an adjusted closing date balance sheet for the assets (and liabilities)
conveyed by the Selling Subsidiaries to the Buyers. The assets transferred to
the Buyers consist primarily of Banner's hardware group, which includes the
distribution of bearings, nuts, bolts, screws, rivets and other type of
fasteners, and its PacAero Unit. Approximately $196 million of the common stock
received from the Buyers was used to repay outstanding loans of Banner's
subsidiaries and related fees. Banner effected the Banner Hardware Group
Disposition to concentrate its efforts on the rotables and jet engine businesses
and because the Banner Hardware Group Disposition presented a unique opportunity
to realize a significant return on the disposition of the hardware group.
On February 3, 1998, with the proceeds of the Offering, term loan
borrowings under the Facility, and a portion of the after tax proceeds the
Company received from the STFI Merger (collectively, the "Refinancing"), the
Company refinanced substantially all of its existing indebtedness (other than
indebtedness of Banner), consisting of (i) $63.0 million to redeem the 11 7/8%
Senior Debentures due 1999; (ii) $117.6 million to redeem the 12% Intermediate
Debentures due 2001; (iii) $35.9 million to redeem the 13 1/8% Subordinated
Debentures due 2006; (iv) $25.1 million to redeem the 13% Junior Subordinated
Debentures due 2007; and (vi) accrued interest of $10.6 million.
On March 2, 1998, the Company consummated the acquisition of Edwards and
Lock Management Corporation, doing business as Special-T Fasteners
("Special-T"), in a business combination to be accounted for as a purchase (the
"Special-T Acquisition"). The contractual purchase price for the acquisition was
valued at approximately $47.3 million, of which 50.1% was paid in shares of
Class A Common Stock of the Company and 49.9% was paid in cash according to
terms specified in the acquisition agreement. The total cost of the acquisition
exceeded the fair value of the net assets of Special-T by approximately $21.6
million, which amount is being allocated as goodwill, and amortized using the
straight-line method over 40 years. Special-T manages the logistics of worldwide
distribution of Company manufactured precision fasteners to customers in the
aerospace industry, for government agencies, original equipment manufacturers,
and other distributors.
On May 11, 1998, the Company commenced an offer to exchange (the "Exchange
Offer"), for each properly tendered share of Common Stock of Banner, a number of
shares of the Company'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 Banner's Common Stock. The Exchange Offer expired on June 9, 1998 and
3,659,364 shares of Banner's Common Stock were validly tendered for exchange,
and the Company issued 2,212,361 shares of Class A Common Stock to the tendering
shareholders. As a result of the Exchange Offer, the Company's ownership of
Banner Common Stock increased to 83.3%. The Company effected the Exchange Offer
to increase its ownership of Banner to over 80% in order for the Company to
include Banner in its United States consolidated corporate income tax return.
Fiscal 1997 Transactions
In February 1997, the Company completed a transaction (the "Simmonds
Acquisition") pursuant to which the Company acquired common shares and
convertible debt representing an 84.2% interest, on a fully diluted basis, of
Simmonds S.A. ("Simmonds"). The Company then initiated a tender offer to
purchase the remaining shares and convertible debt held by the public. By Fiscal
year-end, the Company had purchased, or placed sufficient cash in escrow to
purchase, all the remaining shares and convertible debt of Simmonds. The total
purchase price of Simmonds, including the assumption of debt, was approximately
$62.0 million, which the Company funded with available cash. The Company
recorded approximately $20.5 million in goodwill as a result of this
acquisition. Simmonds is one of Europe's leading manufacturers and distributors
of aerospace and automotive fasteners.
On June 30, 1997, the Company sold all the patents of Fairchild
Scandinavian Bellyloading Company ("SBC") to Teleflex Incorporated ("Teleflex")
for $5.0 million, and immediately thereafter sold all the
<PAGE>
stock of SBC to a wholly-owned subsidiary of Teleflex for $2.0 million. The
Company may also receive an additional amount of up to $7.0 million based on
future net sales of the patented products and services. In Fiscal 1997, the
Company recorded a $2.5 million nonrecurring gain as a result of these
transactions.
Fiscal 1996 Transactions
The Company, RHI and Fairchild Industries, Inc. ("FII"), the Company's
former subsidiary, entered into an Agreement and Plan of Merger dated as of
November 9, 1995 (as amended, the "Merger Agreement") with Shared Technologies
Inc. ("STI"). On March 13, 1996, in accordance with the Merger Agreement, STI
succeeded to the telecommunications systems and services business operated by
the Company's Fairchild Communications Services Company ("FCSC"). The
transaction was effected by a Merger of FII with and into STI (the "Merger"),
with the surviving company renamed STFI. Prior to the Merger, FII transferred
all of its assets to, and all of its liabilities were assumed by FHC, except for
the assets and liabilities of FCSC, and $223.5 million of FII's existing debt
and preferred stock. As a result of the Merger, the Company received shares of
Common Stock and Preferred Stock of STFI, representing approximately a 41%
ownership interest in STFI.
On February 22, 1996, pursuant to the Asset Purchase Agreement dated
January 26, 1996, the Company, through its subsidiaries, completed the sale of
certain assets, liabilities and the business of the D-M-E Company ("DME") to
Cincinnati Milacron Inc. ("CMI"), for a sales price of approximately $244.3
million, as adjusted. The sales price consisted of $74.0 million in cash, and
two 8% promissory notes in the aggregate principal amount of $170.3 million
(together, the "8% CMI Notes"). On July 29, 1996, CMI paid in full the 8% CMI
Notes.
On January 27, 1996, FII completed the sale of Fairchild Data Corporation
("Data") to SSE Telecom, Inc. ("SSE") for book value of approximately $4.4
million and 100,000 shares of SSE's common stock valued at $9.06 per share, or
$0.9 million, at January 26, 1996, and warrants to purchase an additional 50,000
shares of SSE's common stock at $11.09 per share.
Accordingly, DME and Data were accounted for as discontinued operations.
The combined net sales of DME and Data totaled $108.1 million (through January
26, 1996) and $180.8 million for Fiscal 1995. Net earnings from discontinued
operations were $9.2 million (through January 26, 1996) and $14.0 million for
Fiscal 1995.
Effective February 25, 1996, the Company completed the transfer of Harco,
Inc. to Banner in exchange for 5,386,477 shares of Banner common stock. The
exchange increased the Company's ownership of Banner common stock from
approximately 47.2% to 59.3%, resulting in the Company becoming the majority
shareholder of Banner. Accordingly, the Company has consolidated the results of
Banner since February 25, 1996. In June 1997, the Company purchased $28.0
million of newly issued Series A Convertible Paid-in-Kind Preferred Stock of
Banner.
RESULTS OF OPERATIONS
The Company currently reports in two principal business segments:
Aerospace Fasteners and Aerospace Distribution. The results of Gas Springs
and SBC are included in Corporate and Other. The following table
illustrates the historical sales and operating income of the Company's
operations for the past three years.
<TABLE>
<CAPTION>
(In thousands) For the years ended June 30,
1996 1997 1998
<S> <C> <C> <C>
Sales by Segment:
Aerospace Fasteners $218,059 $269,026 $387,236
Aerospace Distribution (a) 129,973 411,765 358,431
Corporate and Other 7,046 15,185 5,760
Eliminations (b) (5,842) (15,213) (10,251)
Total Sales $349,236 $680,763 $741,176
Operating Income (Loss) by Segment:
Aerospace Fasteners (c) $ 135 $ 17,390 $ 32,722
Aerospace Distribution (a) 5,625 30,891 20,330
Corporate and Other (17,046) (14,782) (7,609)
Total Operating Income (Loss)$(11,286) $ 33,499 $ 45,443
</TABLE>
(a) Effective February 25, 1996, the Company became the majority shareholder of
Banner Aerospace, Inc. and, accordingly, began consolidating their results as
of that date.
(b) Represents intersegment sales from the Aerospace Fasteners segment to the
Aerospace Distribution segment.
(c) Includes restructuring charges of $2.3 million in Fiscal 1996.
<PAGE>
The following unaudited pro forma table illustrates sales and operating
income of the Company's operations by segment, on a pro forma basis, as if the
Company had operated in a consistent manner for the past three years ended June
30, 1996, 1997 and 1998. The pro forma results are based on the historical
financial statements of the Company and Banner as though the Banner Hardware
Group Disposition and consolidation of Banner had been in effect since the
beginning of each period. The pro forma information is not necessarily
indicative of the results of operations that would actually have occurred if the
transactions had been in effect since the beginning of each period, nor is it
necessarily indicative of future results of the Company.
<TABLE>
<CAPTION>
For the years ended June 30,
1996 1997 1998
<S> <C> <C> <C>
Sales by Segment:
Aerospace Fasteners (a) $197,099 $269,026 $387,236
Aerospace Distribution 144,996 178,412 227,279
Corporate and Other 4,799 5,118 5,760
Eliminations - (29) -
Total Sales $346,894 $452,527 $620,275
Operating Income (Loss) by
Segment:
Aerospace Fasteners $ (2,639) $ 17,390 $ 32,722
Aerospace Distribution 4,881 9,739 9,740
Corporate and Other (15,731) (15,950) (7,609)
Total Operating Income
(Loss) $(13,489) $ 11,179 $ 34,853
(a) Fiscal 1998 results include comparable sales of approximately $59.2 million
and operating income of approximately $10.0 million provided from companies
acquired in Fiscal 1997 and 1998.
</TABLE>
Consolidated Results
Net sales of $741.2 million in 1998 increased by $60.4 million, or 8.9%,
compared to sales of $680.8 million in 1997. Sales growth was stimulated by the
resurgent commercial aerospace industry and business acquisitions over the past
18 months, partially offset by the loss of revenues as a result of the Banner
Hardware Group Disposition. Approximately 15.8% of the 1998 sales growth was
stimulated by the resurgent commercial aerospace industry. Recent acquisitions
contributed approximately 8.7% to the sales growth, while dispositions decreased
growth by approximately 15.0%. Net sales of $680.8 million in 1997 significantly
improved by $331.5 million, or 94.9%, compared to net sales of $349.2 million in
1996. Sales growth was stimulated by the improved commercial aerospace industry,
together with the effects of several strategic business acquisitions. On a pro
forma basis, net sales increased 30.5% and 37.1% in 1997 and 1998, respectively,
as compared to the previous Fiscal periods.
Gross Margin as a percentage of sales was 21.2%, 26.6% and 25.2% in 1996,
1997, and 1998, respectively. Decreased margins in the Fiscal 1998 period was
attributable to a change in product mix in the Aerospace Distribution segment as
a result of the Banner Hardware Group Disposition. Partially offsetting overall
lower margins were improved margins within the Aerospace Fasteners segment,
resulting from efficiencies associated with increased production, improved
skills of the work force, and reduction in the payment of overtime. The increase
in 1997 was attributable to higher revenues combined with continued productivity
improvements achieved during Fiscal 1997.
Selling, General & Administrative expense as a percentage of sales was
22.7%, 21.0%, and 19.1% in Fiscal 1996, 1997, and 1998, respectively. The
improvement in Fiscal 1998 was attributable primarily to administrative
efficiencies allowed by increased sales. The improvement in Fiscal 1997 was also
positively affected by administrative efficiencies allowed by increased sales
and also benefited from the positive results obtained from restructuring and
downsizing programs put in place prior periods.
Other income increased $6.5 million in 1998 as compared to 1997, due
primarily to the sale of air rights over a portion of the property the Company
owns and is developing in Farmingdale, New York.
Operating income of $45.4 million in Fiscal 1998 increased $11.9 million,
or 35.7%, compared to operating income of $33.5 million in Fiscal 1997. The
increase in operating income was due primarily to the improved results in the
Company's Aerospace Fasteners segment. Operating income of $33.5 million in
Fiscal 1997 increased $44.8 million compared to operating
<PAGE>
loss of $11.3 million in Fiscal 1996. The Fiscal 1997 increase in operating
income was due primarily to growth in sales and increased operational
efficiencies. On a pro forma basis, operating income increased $23.7 million in
Fiscal 1998, compared to Fiscal 1997, and $24.7 million in Fiscal 1997, compared
to Fiscal 1996.
Net interest expense decreased 10.4% in Fiscal 1998 compared to Fiscal
1997, and decreased 15.5% in Fiscal 1997 compared to Fiscal 1996. The decreases
were due to a series of transactions that significantly reduced the Company's
total debt. (See Recent Developments and Significant Business Combinations in
this section).
Investment income (loss), net, was $4.6 million, $6.7 million, and $(3.4)
million in 1996, 1997, and 1998, respectively. The $10.1 decrease in 1998 was
due to recognition of unrealized losses on the fair market adjustments of
investments previously classified as trading securities in the Fiscal 1998
periods while recording unrealized gains from trading securities in the Fiscal
1997 periods. Unrealized holding gains (losses) on available-for-sale
investments are marked to market value through stockholders' equity and reported
separately as part of comprehensive income (see discussion below). The 45.4%
increase in Fiscal 1997 was due primarily to gains realized from the sale of
investments in Fiscal 1997.
Nonrecurring income of $124.0 million in 1998 resulted from the Banner
Hardware Group Disposition. Nonrecurring income in 1997 includes the $2.5
million gain from the sale of SBC.
An income tax provision of $48.7 million in the first nine months of
Fiscal 1998 represented a 39.4% effective tax rate on pre-tax earnings from
continuing operations (excluding equity in earnings of affiliates and minority
interest) of $123.4 million. The tax provision was slightly higher than the
statutory rate because of goodwill associated with the Banner Hardware Group
Disposition, which is not deductible for tax purposes. Income taxes included a
$5.7 million tax benefit in Fiscal 1997 on a pre-tax loss of $7.1 million from
continuing operations. The tax benefit was due primarily to reversing Federal
income taxes previously provided due to a change in the estimate of the required
tax accruals. In Fiscal 1996, the tax benefit from the loss from continuing
operations was $29.8 million.
Equity in earnings of affiliates decreased $0.6 million in 1998, compared
to 1997, and $0.2 million in 1997, compared to 1996. The current year's decrease
is attributable to losses recorded by small start-up ventures. The prior year's
decrease was attributable to the lower earnings of Nacanco.
Minority interest increased by $22.8 million in Fiscal 1998 as a result of
the $124.0 million nonrecurring pre-tax gain recognized from the Banner Hardware
Group Disposition.
Included in earnings (loss) from discontinued operations are the results
of Fairchild Technologies ("Technologies") through January 1998, the Company's
equity in earnings of STFI prior to the STFI Merger, and the results of FCS, DME
and Data in Fiscal 1996. Losses increased in Fiscal 1998 as a result of
increased losses recorded at Technologies and lower equity earnings contributed
by STFI (See Note 4 to the Company's Consolidated Financial Statements).
In 1998, the Company recorded a $96.0 million gain, net of tax, on
disposal of discontinued operations, from the proceeds received from the STFI
Merger. Offsetting this gain was an after-tax charge of $36.2 million the
Company recorded in connection with the adoption of a formal plan to enhance the
opportunities for disposition of Technologies. Included in this charge was (i)
$28.2 million (net of an income tax benefit of $11.8 million) relating to the
net losses of Technologies since the measurement date, including the write down
of assets for impairment to estimated realizable value; and (ii) $8.0 million
(net of an income tax benefit of $4.8 million) relating to a provision for
operating losses over the next seven months at Technologies. The Company's
results are affected by the operations of Technologies, which may fluctuate
because of industry cyclicality, the volume and timing of orders, the timing of
new product shipments, customers' capital spending, and pricing changes by
Technologies and its competition. Technologies has experienced a reduction of
its backlog, and margin compression during the past year, which combined with
the existing cost base, is likely to impact future earnings from Technologies.
While the Company believes that $36.1 million is a reasonable charge for the
expected losses in connection with the disposition of Technologies, there can be
no assurance that this estimate is adequate. In Fiscal 1996, the Company
recorded a $54.0 million gain on disposal of discontinued operations resulting
from the sale of DME to CMI and a $163.1 million nontaxable gain resulting from
the Merger.
In 1998, the Company recognized an extraordinary loss of $6.7 million, net
of tax, to write-off the remaining deferred loan fees and original issue
discounts associated with early extinguishment of the Company's indebtedness
pursuant to the Public Debt Repayment and refinancing of the
<PAGE>
FHC and RHI Credit Agreement facilities. In 1996, the Company recognized an
extraordinary loss of $10.4 million, net of tax, as a result of premiums paid,
redemption costs, consent fees, and the write off of deferred loan fees
associated with the Senior Notes and bank debt extinguished prior to maturity.
Net earnings of $101.1 million in 1998, improved by $99.8 million,
compared to the $1.3 million net earnings recorded in 1997. This improvement is
attributable to a $11.9 million increase in operating income, a $124.0 million
non-recurring gain from the Banner Hardware Group Disposition, and the $59.7
million net gain on the disposal of discontinued operations. Partially
offsetting this increase was a $54.4 million increase in the income tax
provision, a $22.8 million change in minority interest, a $10.0 decrease in
investment income, and the $6.7 million extraordinary loss. Net earnings in 1997
improved $28.3 million, compared to 1996, after excluding the $216.7 million net
gain on disposal of discontinued operations in 1996. The 1997 increase reflected
a $44.8 million improvement in operating profit.
Comprehensive income includes foreign currency translation adjustments and
unrealized holding changes in the fair market value of available-for-sale
investment securities. The fair market value of unrealized holding securities
increased $20.6 million in 1998, primarily as a result of an increase in the
value of AlliedSignal common stock which was received from the Banner Hardware
Group Disposition.
Segment Results
Aerospace Fasteners Segment
Sales in the Aerospace Fasteners segment increased by $118.2 million to
$387.2 million, up 43.9% in Fiscal 1998, compared to Fiscal 1997, reflecting
significant growth in the commercial aerospace industry combined with the effect
of acquisitions. New orders have continued to be strong resulting in a backlog
of $209 million at June 30, 1998, up from $196 million at June 30, 1997.
Excluding sales contributed by acquisitions, sales increased approximately 21.9%
in Fiscal 1998 compared to the prior year. Sales in the Aerospace Fasteners
segment increased by $51.0 million to $269.0 million, up 23.4% in Fiscal 1997,
compared to the Fiscal 1996 period, reflecting significant growth in the
commercial aerospace industry, combined with the Simmonds acquisition. On a pro
forma basis, sales increased 43.9% in Fiscal 1998, compared to Fiscal 1997 and
36.5% in Fiscal 1997, compared to Fiscal 1996.
Operating income improved by $15.3 million, or 88.2%, in Fiscal 1998,
compared to Fiscal 1997. Acquisitions and marketing changes were contributors to
this improvement. Excluding the results provided by acquisitions, operating
income increased by approximately 30.8% in Fiscal 1998, compared to the same
period in the prior year. The Company anticipates that manufacturing and
productivity efficiencies will further improve operating income in the coming
months. Operating income improved from breakeven to $17.4 million during Fiscal
1997, compared to Fiscal 1996. This improvement was achieved as a result of
accelerated growth in the commercial aerospace industry, particularly in the
second half of the year. Certain efficiencies achieved during Fiscal 1997
continued to have positive effects on operating income. On a pro forma basis,
operating income increased $15.3 million in Fiscal 1998, as compared to Fiscal
1997, and $20.0 million in Fiscal 1997, as compared to Fiscal 1996.
The Company believes that the demand for aerospace fasteners in Fiscal 1999
will remain relatively high, given the forecasted build rates for new aircraft.
The Company anticipates that order rates may level off in late calendar 1998.
However, production volume should remain at a respectable level and production
efficiency improvements should allow the Company to generate an increase in
profits.
Aerospace Distribution Segment
Sales in the Aerospace Distribution segment decreased by $53.3 million, or
13.0% in Fiscal 1998, compared to Fiscal 1997. The exclusion of six months'
revenues as a result of the Banner Hardware Group Disposition was primarily
responsible for the decrease in the current year, in which sales otherwise
reflected a robust aerospace industry. Sales increased $281.8 million from
reporting twelve months of activity in Fiscal 1997 versus four months of
activity in Fiscal 1996, when the Company became the majority shareholder of
Banner and, accordingly, began consolidating their results. On a twelve-month
pro forma basis, sales increased $48.9 million, or 27.4%, in Fiscal 1998
compared to Fiscal 1997, and $33.4 million, or 23.0%, in Fiscal 1997 compared to
Fiscal 1996.
Operating income decreased $10.6 million in Fiscal 1998, compared to
Fiscal 1997, due to the Banner Hardware Group Disposition. Operating income
increased $25.3 million in 1997, compared to 1996, as a result of including only
four months of activity after consolidation of Banner in 1996. On a twelve-month
pro forma basis, operating income was stable in Fiscal 1998
<PAGE>
compared to Fiscal 1997, and increased $4.9 million, or 99.5%, in Fiscal 1997
compared to Fiscal 1996.
In Fiscal 1996, as a result of the transfer of Harco to Banner effective
February 25, 1996, the Company recorded four months of sales and operating
income of Banner, including Harco as part of the Aerospace Distribution segment.
This segment reported $130.0 million in sales and $5.6 million in operating
income for this four-month period ended June 30, 1996. In Fiscal 1996, the first
eight months of Harco's sales and operating income were included in the
Aerospace Fasteners segment.
Corporate and Other
The Corporate and Other classification includes the Gas Springs Division
and corporate activities. The results of SBC, which was sold at Fiscal 1997
year-end, are included in the prior period results. The group reported a
decrease in sales of $9.4 million, in 1998, as compared to 1997, due to the
exclusion of SBC's results in the current year. Sales increased in 1997 as a
result of improved results contributed by SBC. The operating loss decreased by
$7.2 million in 1998, compared to Fiscal 1997, as a result of an increase in
other income and a decrease in legal expenses. Over the past three years,
corporate administrative expense as a percentage of sales has decreased from
4.5% in 1996 to 2.8% in 1997 to 2.2% in 1998.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total capitalization as of June 30, 1998 and 1997 amounted to $789.6
million and $696.7 million, respectively. The changes in capitalization included
a decrease in debt of $148.2 million and an increase in equity of $241.1
million. The decrease in debt was primarily the result of the Refinancing and
repayment of outstanding term loans with approximately $194 million of
AlliedSignal Inc. common stock received from the Banner Hardware Group
Disposition, partially offset by additional borrowings. The increase in equity
was due to (i) Fiscal 1998 net income of $101.1 million, (ii) $53.3 million in
net proceeds received from the Offering, (iii) $64.5 million of Class A Common
Stock issued in connection with the Exchange Offering and the Special-T
acquisition, and (iv) the $20.6 million net unrealized gain recorded on the
appreciation of available-for-sale securities.
The Company maintains a portfolio of investments classified as
available-for-sale securities, which had a fair market value of $238.2 million
at June 30, 1998. Although the market value of these investments appreciated
$20.6 million in Fiscal 1998, there is risk associated with market fluctuations
inherent to stock investments. Additionally, because the Company's portfolio is
small and predominately consists of a large position in AlliedSignal common
stock, large swings in the value of the portfolio should be expected.
Net cash used by operating activities for the Fiscal 1998 and 1997
amounted to $102.5 million and $100.1 million, respectively. The primary use of
cash for operating activities in Fiscal 1998 was an increase in inventories from
continuing operations of $54.9 million. The primary use of cash for operating
activities in fiscal 1997 was an increase in accounts receivable of $48.7
million and inventories of $36.9 million which was mainly to support the
Company's sales growth.
Net cash provided from investing activities for Fiscal 1998 and 1997
amounted to $60.9 million and $80.0 million, respectively. In Fiscal 1998, the
sale of discontinued operations, including the STFI Disposition provided the
primary source of cash from investing activities amounting to $168.0 million,
which was slightly offset by the acquisition of subsidiaries in the amount of
$32.8 million. In Fiscal 1997, the primary source of cash from investing
activities was the sale of discontinued operations, including DME, of $173.7
million, which was slightly offset by the acquisition of subsidiaries in the
amount of $55.9 million.
Net cash provided by (used for) financing activities for the Fiscal 1998
and 1997 amounted to $74.1 million and $(1.5) million, respectively. Cash
provided by financing activities in fiscal 1998 included the issuance $53.8
million of stock from the Offering and $275.5 million from the issuance of
additional debt partially offset by the repayment of debt and the repurchase of
debentures of $258.0 million. The primary use of cash for financing activities
in Fiscal 1997 was cash used for the repayment of debt and the repurchase of
debentures of $155.6 million offset by proceeds from the issuance of additional
debt of $154.3 million.
The Company's principal cash requirements include debt service, capital
expenditures, acquisitions, and payment of other liabilities. Other liabilities
that require the use of cash include post-employment benefits for retirees,
environmental investigation and remediation obligations, and litigation
settlements and related costs. The Company expects that cash on hand, cash
generated from operations, and cash from borrowings and asset sales will be
adequate to satisfy cash requirements.
<PAGE>
With the proceeds of the Offering, borrowings under the Facility and a
portion of the after tax proceeds the Company received from the STFI Merger, the
Company refinanced substantially all of its existing indebtedness (other than
indebtedness at Banner), consisting of the 11 7/8% Senior Debentures due 1999,
the 12% Intermediate Debentures due 2001, the 13 1/8% Subordinated Debentures
due 2006, the 13% Junior Subordinated debentures due 2007 and its existing bank
indebtedness. The Refinancing reduced the Company's total net indebtedness by
approximately $132 million and reduced the Company's annual interest expense, on
a pro forma basis, by approximately $21 million. The completion of the STFI
Merger reduced the Company's annual interest expense by approximately $3
million. In addition, a portion of the proceeds from the Banner Hardware Group
Disposition were used to repay all of Banner's outstanding bank indebtedness,
which further reduced the Company's annual interest expense.
For the Company's fiscal years 1996, 1997, and 1998, Technologies had
pre-tax operating losses of approximately $1.5 million, $3.6 million, and $48.7
million, respectively. In addition, as a result of the downturn in the Asian
markets, Technologies has experienced delivery deferrals, reduction in new
orders, lower margins and increased price competition. In response, in February
1998, the Company adopted a formal plan to enhance the opportunities for the
disposition of Technologies, while improving the ability of Technologies to
operate more efficiently. The plan includes a reduction in production capacity,
work force, and the pursuit of potential vertical and horizontal integration
with peers and competitors of the two divisions that constitute Technologies, or
the inclusion of those divisions in a spin-off. If the Company elects to include
Technologies in a spin-off, the Company believes that it would be required to
contribute substantial additional resources to allow Technologies the liquidity
necessary to sustain and grow both the Fairchild Technologies' operating
divisions.
The Company is considering a transaction designed to separate the
aerospace fasteners business of the Company from the aerospace distribution and
other businesses of the Company. The transaction would consist of distributing
(the "Spin-Off") to its shareholders all of the stock of a subsidiary to be
formed ("Spin-Co"), consisting of the Company's aerospace fasteners segment. The
Spin-Off would result in the formation of two publicly traded companies, each of
which would be able to pursue an independent strategic path. The Company
believes this separation would offer both companies the opportunity to pursue
strategic objectives appropriate to different businesses and to create targeted
incentives for their management and key employees. In addition, the Spin-Off
would be expected to offer each entity greater financial flexibility in their
respective capital raising strategies.
The Company has conditioned the Spin-Off distribution upon, among other
things, (i) approval of the Spin-Off by the Company's shareholders; (ii)
receiving confirmation that the distribution will qualify as a tax-free
transaction under Section 355 of the Internal Revenue Code of 1986, as amended;
(iii) the transfer of assets and liabilities contemplated by an agreement to be
entered into between the Company and Spin-Co having been consummated in all
material respects; (iv) the Spin-Co Class A Common Stock having been approved
for listing on the New York Stock Exchange; (v) a Form 10 registration statement
with respect to Spin-Co Class A Common Stock becoming effective under the
Securities Exchange Act of 1934, as amended; and (vi) receipt of a satisfactory
solvency opinion for each entity. Although the Company's ability to effect the
Spin-Off is uncertain, the Company may effect the Spin-Off as soon as it is
reasonably practicable following receipt of the aforementioned items relating to
Spin-Co and all necessary governmental and third party approvals. In order to
effect the Spin-Off, approval is required from the board of directors of the
Company. The composition of the assets and liabilities to be included in
Spin-Co, and accordingly the ability of the Company to consummate the Spin-Off,
is contingent, among other things, on obtaining consents and waivers under the
Company's New Credit Facility. In addition, the Company may encounter unexpected
delays in effecting the Spin-Off, and the Company can make no assurance as to
the timing thereof. In addition, prior to the consummation of the Spin-Off, the
Company may sell, restructure or otherwise change the assets and liabilities
that will be in Spin-Co, or for other reasons elect not to consummate the
Spin-Off. Because circumstances may change and because provisions of the
Internal Revenue Code of 1986, as amended, may be further amended from time to
time, the Company may, depending on various factors, restructure or delay the
timing of the Spin-Off to minimize the tax consequences thereof to the Company
and its shareholders. Consequently, there can be no assurance that the Spin-Off
will ever occur.
Year 2000
As the end of the century nears, there is a widespread concern that many
existing computer programs that use only the last two digits to refer to a year
will not properly recognize a year that begins with the digits "20" instead of
"19." If not corrected, many computer applications could fail, create erroneous
results, or cause unanticipated systems failures,
<PAGE>
among other problems. The Company has begun to take appropriate measures to
ensure that its information processing systems, embedded technology and other
infrastructure will be ready for the Year 2000.
The Company has retained both technical review and modification
consultants to help it assess its Year 2000 readiness. Working with these
consultants and other advisors, the Company has formulated a plan to address
Year 2000 issues. Under this plan, the Company's systems are being modified or
replaced, or will be modified or replaced, as necessary, to render them, as far
as possible, Year 2000 ready. Substantially all of the material systems within
the Aerospace Fasteners segment are currently Year 2000 ready. Within the
Aerospace Distribution segment and at Fairchild Technologies, the Company
intends to replace and upgrade a number of important systems that are not Year
2000 compliant, and is assessing the extent to which current product inventories
may include embedded technology that is not Year 2000 ready. The Company expects
to complete initial testing of its most critical information technology and
related systems by June 30, 1999, and anticipates that it will complete its Year
2000 preparations by October 31, 1999. The Company could be subject to liability
to customers and other third parties if its systems are not Year 2000 compliant,
resulting in possible legal actions for breach of contract, breach or warranty,
misrepresentation, unlawful trade practices and other harm.
In addition, the Company is continually attempting to assess the level of
Year 2000 preparedness of its key suppliers, distributors, customers and service
providers. To this end, the Company has sent, and will continue to send,
letters, questionnaires and surveys to its significant business partners
inquiring about their Year 2000 efforts. If a significant business partner of
the Company fails to be Year 2000 compliant, the Company could suffer a material
loss of business or incur material expenses.
The Company is also developing and evaluating contingency plans to deal
with events affecting the Company or one of its business partners arising from
significant Year 2000 problems. These contingency plans include identifying
alternative suppliers, distribution networks and service providers.
Although the Company's Year 2000 assessment, implementation and
contingency planning is not yet complete, the Company does not now believe that
Year 2000 issues will materially affect its business, results of operations or
financial condition. However, the Company's Year 2000 efforts may not be
successful in every respect. To date, the Company has incurred approximately
$0.3 million in costs that are directly attributable to addressing Year 2000
issues. Management currently estimates that the Company will incur between $2.0
million and $3.0 million in additional costs during the next 18 months relating
to the Year 2000 problem.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131 ("SFAS 131") "Disclosures
about Segments of an Enterprise and Related Information." SFAS 131 supersedes
Statement of Financial Accounting Standards No. 14 "Financial Reporting for
Segments of a Business Enterprise" and requires that a public company report
certain information about its reportable operating segments in annual and
interim financial reports. Generally, financial information is required to be
reported on the basis that is used internally for evaluating segment performance
and deciding how to allocate resources to segments. The Company will adopt SFAS
131 in Fiscal 1999.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132 ("SFAS 132") "Employers' Disclosures about Pensions and Other
Postretirement Benefits." SFAS 132 revises and improves the effectiveness of
current note disclosure requirements for employers' pensions and other retiree
benefits by requiring additional information to facilitate financial analysis
and eliminating certain disclosures which are no longer useful. SFAS 132 does
not address recognition or measurement issues. The Company will adopt SFAS 132
in Fiscal 1999.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes a new model for accounting for derivatives and
hedging activities and supersedes and amends a number of existing accounting
standards. It requires that all derivatives be recognized as assets and
liabilities on the balance sheet and measured at fair value. The corresponding
derivative gains or losses are reported based on the hedge relationship that
exists, if any. Changes in the fair value of hedges that are not designated as
hedges or that do not meet the hedge accounting criteria in SFAS 133 are
required to be reported in earnings. Most of the general qualifying criteria for
hedge accounting under SFAS 133 were derived from, and are similar to, the
existing qualifying criteria in SFAS 80 "Accounting for Futures Contracts." SFAS
<PAGE>
133 describes three primary types of hedge relationships: fair value hedge, cash
flow hedge, and foreign currency hedge. The Company will adopt SFAS 133 in
Fiscal 1999 and is currently evaluating the financial statement impact.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company and the
report of the Company's independent public accountants with respect thereto, are
set forth below.
Page
Report of Independent Public Accountants 28
Consolidated Balance Sheets as of June 30, 1997 and 1998 29
Consolidated Statements of Earnings For Each of The Three Years Ended
June 30, 1996, 1997, and 1998 31
Consolidated Statements of Stockholders' Equity For Each of The Three
Years Ended June 30, 1996, 1997, and 1998 33
Consolidated Statements of Cash Flows For Each of The Three Years
Ended June 30, 1996, 1997, and 1998 34
Notes to Consolidated Financial Statements 35
Supplementary information regarding "Quarterly Financial Data (Unaudited)" is
set forth under Item 8 in Note 22 to Consolidated Financial Statements.
Report of Independent Public Accountants
To The Fairchild Corporation:
We have audited the accompanying consolidated balance sheets of The
Fairchild Corporation (a Delaware corporation) and consolidated subsidiaries as
of June 30, 1997 and 1998, and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1996, 1997 and 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 did not audit the
financial statements of Nacanco Paketleme (see Note 7), the investment in which
is reflected in the accompanying financial statements using the equity method of
accounting. The investment in Nacanco Paketleme represents 2 percent of total
assets as of June 30, 1998 and 1997, and the equity in its net income represents
17 percent, 257 percent, and 9 percent of earnings from continuing operations.
The statements of Nacanco Paketleme were audited by other auditors whose report
has been furnished to us and our opinion, insofar as it relates to the amounts
included for Nacanco Paketleme, is based on the report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an 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, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of The Fairchild Corporation and consolidated
subsidiaries as of June 30, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1996, 1997 and 1998, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Washington, D.C.
September 22, 1998
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
ASSETS June 30, June 30,
1997 1998
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents, $4,839 and $746
restricted $ 19,420 $ 49,601
Short-term investments 25,647 3,962
Accounts receivable-trade, less allowances of 151,361 120,284
$6,905 and $5,655
Inventories:
Finished goods 292,441 187,205
Work-in-process 20,357 20,642
Raw materials 10,567 9,635
323,365 217,482
Net current assets of discontinued operations 17,884 11,613
Prepaid expenses and other current assets 34,490 53,081
Total Current Assets 572,167 456,023
Property, plant and equipment, net of
accumulated
depreciation of $131,646 and $82,968 121,918 118,963
Net assets held for sale 26,147 23,789
Net noncurrent assets of discontinued 14,495 8,541
operations
Cost in excess of net assets acquired
(Goodwill), less
accumulated amortization of $36,672 and 154,129 168,307
$42,079
Investments and advances, affiliated 55,678 27,568
companies
Prepaid pension assets 59,742 61,643
Deferred loan costs 9,252 6,362
Long-term investments 4,120 235,435
Other assets 35,018 50,628
TOTAL ASSETS $1,052,666 $1,157,259
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, June 30,
1997 1998
CURRENT LIABILITIES:
<S> <C> <C>
Bank notes payable and current maturities of
long-term debt $ 47,322 $ 20,665
Accounts payable 75,522 53,859
Accrued liabilities:
Salaries, wages and commissions 17,138 23,613
Employee benefit plan costs 1,764 1,463
Insurance 15,021 12,575
Interest 11,213 2,303
Other accrued liabilities 52,182 52,789
97,318 92,743
Income taxes 5,863 28,311
Total Current Liabilities 226,025 195,578
LONG-TERM LIABILITES:
Long-term debt, less current maturities 416,922 295,402
Other long-term liabilities 23,622 23,767
Retiree health care liabilities 43,351 42,103
Noncurrent income taxes 42,013 95,176
Minority interest in subsidiaries 68,309 31,674
TOTAL LIABILITIES 820,242 683,700
STOCKHOLDERS' EQUITY:
Class A common stock, 10 cents par value;
authorized 40,000,000
shares, 26,678,561 (20,233,879 in 1997)
shares issued and
20,428,591 (13,992,283 in 1997) shares 2,023 2,667
outstanding
Class B common stock, 10 cents par value;
authorized 20,000,000
shares, 2,624,716 (2,632,516 in 1997) 263 263
shares issued and outstanding
Paid-in capital 71,015 195,112
Retained earnings 209,949 311,039
Cumulative other comprehensive income 893 16,386
Treasury Stock, at cost, 6,249,970 (6,241,596
in 1997) shares
of Class A common stock (51,719) (51,908)
TOTAL STOCKHOLDERS' EQUITY 232,424 473,559
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$1,052,666 $1,157,259
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended June 30,
1996 1997 1998
<S> <C> <C> <C>
REVENUE:
Net sales $349,236 $680,763 $741,176
Other income, net 300 28 6,508
349,536 680,791 747,684
COSTS AND EXPENSES:
Cost of goods sold 275,135 499,419 554,670
Selling, general &
administrative 79,295 142,959 141,930
Research and development 94 100 172
Amortization of goodwill 3,979 4,814 5,469
Restructuring 2,319 - -
360,822 647,292 702,241
OPERATING INCOME (LOSS) (11,286) 33,499 45,443
Interest expense 64,521 52,376 46,007
Interest income (8,062) (4,695) (3,292)
Net interest expense 56,459 47,681 42,715
Investment income (loss), net 4,575 6,651 (3,362)
Non-recurring income (loss) (1,724) 2,528 124,028
Earnings (loss) from continuing
operations before taxes (64,894) (5,003) 123,394
Income tax (provision) benefit 29,839 5,735 (48,659)
Equity in earnings of affiliates,
net 4,821 4,598 3,956
Minority interest, net (1,952) (3,514) (26,292)
Earnings (loss) from continuing
operations (32,186) 1,816 52,399
Earnings (loss) from discontinued
operations, net 15,612 (485) (4,296)
Gain on disposal of discontinued
operations, net 216,716 - 59,717
Earnings (loss) before 200,142 1,331 107,820
extraordinary items
Extraordinary items, net
(10,436) - (6,730)
NET EARNINGS (LOSS) $189,706 $ 1,331 $101,090
Other comprehensive income, net
of tax:
Foreign currency translation
adjustments (606) (1,514) (5,140)
Unrealized holding gains (losses)
on securities arising - 74 20,633
During the period
Other comprehensive income (loss) (606) (1,440) 15,493
COMPREHENSIVE INCOME (LOSS) $189,100 $ (109) $116,583
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended June 30,
1996 1997 1998
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Earnings (loss) from continuing
operations $(1.98) $0.11 $2.78
Earnings (loss) from discontinued
operations, net 0.96 (0.03) (0.23)
Gain on disposal of discontinued
operations, net 13.37 - 3.17
Extraordinary items, net
(0.64) - (0.36)
NET EARNINGS (LOSS) $(0.64) $0.08 $5.36
Other comprehensive income, net
of tax:
Foreign currency translation
adjustments $(0.04) $(0.09) $(0.27)
Unrealized holding gains (losses)
on securities arising during the - - 1.10
period
Other comprehensive income
(0.04) (0.09) 0.83
COMPREHENSIVE INCOME (LOSS) $11.67 $(0.01) $6.19
DILUTED EARNINGS PER SHARE:
Earnings (loss) from continuing
operations $(1.98) $0.11 $2.66
Earnings (loss) from discontinued
operations, net 0.96 (0.03) (0.22)
Gain on disposal of discontinued
operations, net 13.37 - 3.04
Extraordinary items, net
(0.64) - (0.34)
NET EARNINGS (LOSS)
$11.71 $0.08 $5.14
Other comprehensive income, net of tax:
Foreign currency translation
adjustments $(0.04) $(0.09) $(0.26)
Unrealized holding gains (losses)
on securities arising during the - - 1.05
period
Other comprehensive income
(0.04) (0.09) 0.79
COMPREHENSIVE INCOME (LOSS) $11.67 $(0.01) $5.93
Weighted average shares
outstanding:
Basic 16,206 16,539 18,834
Diluted 16,206 17,321 19,669
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Cumulativ
e
Class Class Other
A B
CommonCommon Paid- Retain Treas Comprehen
in ed ury sive
Stock Stock Capital Earnings Stock Income Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1995 $1,965 $ 270 $67,011 $18,912 $(51,719) $2,939 39,378
Net earnings - - - 189,706 - - 189,706
Foreign currency
translation adjustments - - - - - (606) (606)
Fair market value of
stock warrants issued - - 1,148 - - - 1,148
Proceeds received from
options exercised 28 - 1,481 - - - 1,509
Exchange of Class B for
Class A
common stock
7 (7) - - - - -
Retirement of preferred
stock of subsidiary - - (274) - - - (274)
Balance, June 30, 1996
2,000 263 69,366 208,618 (51,719) 2,333 230,861
Net earnings
- - - 1,331 - - 1,331
Foreign currency
translation adjustments - - - - - (1,514) (1,514)
Fair market value of
stock warrants issued - - 546 - - - 546
Proceeds received from
options
exercised (234,935
shares) 23 - 1,103 - - - 1,126
Exchange of Class B for
Class A
Common stock (1,188
shares) - - - - - - -
Net unrealized holding
gain on
Available-for-sale
securities - - - - - 74 74
Balance, June 30, 1997
2,023 263 71,015 209,949 (51,719) 893 232,424
Net earnings
- - - 101,09 - - 101,0
0 90
Foreign currency
translation adjustments - - - - - (5,140) (5,14
0)
Compensation expense from
adjusted
terms to warrants and
options - - 5,655 - - - 5,655
Stock issued for Special-
T Fasteners 108 - 21,939 - - - 22,04
acquisition 7
Stock issued for Exchange
Offer 221 - 42,588 - - - 42,80
9
Equity Offering
300 - 53,268 - - - 53,56
8
Proceeds received from
stock options
exercised (141,259
shares) 10 - 652 - (189) - 473
Cashless exercise of
warrants (47,283 shares) 5 - (5) - - - -
Exchange of Class B for
Class A
common stock (7,800
shares) - - - - - - -
Net unrealized holding
gain on
available-for-sale
securities - - - - - 20,633 20,63
3
Balance, June 30, 1998 $ 2,667 $263 $195,112 $311,039 $(51,908)$16,386$473,559
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Twelve Months Ended
1996 1997 1998
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $189,706 $ 1,331 $101,090
Depreciation and amortization 21,045 24,307 20,036
Accretion of discount on long-term
liabilities 4,686 4,963 3,766
Net gain on the disposition of
subsidiaries - - (124,041)
Net gain on the sale of discontinued
operations (216,645) - (132,787)
Extraordinary items, net of cash
payments 4,501 - 10,347
Provision for restructuring (excluding
cash payments of $777 in 1996) 1,542 - -
(Gain) loss on sale of property, plant,
and equipment (9) (72) 246
(Undistributed) distributed earnings of
affiliates, net (3,857) (1,055) 1,725
Minority interest 1,952 3,514 26,292
Change in trading securities (5,346) (5,733) 9,275
Change in receivables (5,566) (48,693)(12,846)
Change in inventories (16,088) (36,868)(54,857)
Change in other current assets (2,989) (14,088)(26,643)
Change in other non-current assets 3,609 (16,565)(16,562)
Change in accounts payable, accrued
liabilities and other long-term liabilities (37,477) 6,102 80,677
Non-cash charges and working capital
changes of discontinued operations 11,985 (17,201) 11,789
Net cash used for operating activities (48,951)(100,058)(102,493)
Cash flows from investing activities:
Proceeds received from (used for)
investment securities, net 265 (12,951) (7,287)
Purchase of property, plant and
equipment (5,680) (15,014) (36,029)
Proceeds from sale of plant, property
and equipment 98 213 336
Equity investment in affiliates
(2,361) (1,749) (4,343)
Minority interest in subsidiaries
(2,817) (1,610) (26,383)
Acquisition of subsidiaries, net of cash
acquired - (55,916) (32,795)
Net proceeds received from the sale of
discontinued operations 71,559 173,719 167,987
Changes in net assets held for sale
5,894 385 2,140
Investing activities of discontinued
operations (9,418) (7,102) (2,750)
Net cash provided by investing
activities 57,540 79,975 60,876
Cash flows from financing activities:
Proceeds from issuance of debt
156,501 154,294 275,523
Debt repayments and repurchase of
debentures, net (195,420)(155,600)(258,014)
Issuance of Class A common stock
1,509 1,126 54,041
Financing activities of discontinued
operations (2,227) (1,275) 2,538
Net cash provided by (used for)
financing activities (39,637) (1,455) 74,088
Effect of exchange rate changes on cash
(485) 1,309 (2,290)
Net change in cash and cash equivalents
(31,533) (20,229) 30,181
Cash and cash equivalents, beginning of the
year 71,182 39,649 19,420
Cash and cash equivalents, end of the year
$39,649 $19,420 $49,601
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Corporate Structure: The Fairchild Corporation (the "Company") was
incorporated in October 1969, under the laws of the State of Delaware. The
Company is the majority owner of Banner Aerospace, Inc., ("Banner"). RHI
Holdings, Inc. ("RHI") is a direct subsidiary of the Company. RHI is the owner
of 100% of Fairchild Holding Corp. ("FHC"). The Company's principal operations
are conducted through FHC and Banner. The Company also holds a significant
equity interest in Nacanco Paketleme ("Nacanco"). Prior to March 10, 1998, the
Company held an equity interest in Shared Technologies Fairchild Inc. ("STFI").
The Company's investment in STFI resulted from a March 13, 1996 Merger of the
Communications Services Segment of the Company with Shared Technologies, Inc.
The merger of STFI into Intermedia Communications Inc., as discussed in Note 4,
completes the disposition of the Communications Services Segment. In February
1998, the Company adopted a formal plan to dispose of its interest in the
Fairchild Technologies segment. Accordingly, the Company's financial statements
present the results of the Communications Services Segment, STFI and Fairchild
Technologies as discontinued operations.
Fiscal Year: The fiscal year ("Fiscal") of the Company ends June 30. All
references herein to "1996", "1997", and "1998" mean the fiscal years ended June
30, 1996, 1997 and 1998, respectively.
Consolidation Policy: The accompanying consolidated financial statements
are prepared in accordance with generally accepted accounting principles and
include the accounts of the Company and all of its wholly-owned and
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Investments in companies in
which ownership interest range from 20 to 50 percent are accounted for using the
equity method (see Note 7).
Cash Equivalents/Statements of Cash Flows: For purposes of the Statements
of Cash Flows, the Company considers all highly liquid investments with original
maturity dates of three months or less as cash equivalents. Total net cash
disbursements (receipts) made by the Company for income taxes and interest were
as follows:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Interest $66,716 $48,567 $52,737
Income Taxes 9,279 (1,926) (987)
</TABLE>
Restricted Cash: On June 30, 1997 and 1998, the Company had restricted cash
of $4,839 and $746, respectively, all of which is maintained as collateral for
certain debt facilities. Cash investments are in short-term certificates of
deposit.
Investments: Management determines the appropriate classification of its
investments at the time of acquisition and reevaluates such determination at
each balance sheet date. Trading securities are carried at fair value, with
unrealized holding gains and losses included in earnings. Available-for-sale
securities are carried at fair value, with unrealized holding gains and losses,
net of tax, reported as a separate component of stockholders' equity.
Investments in equity securities and limited partnerships that do not have
readily determinable fair values are stated at cost and are categorized as other
investments. Realized gains and losses are determined using the specific
identification method based on the trade date of a transaction. Interest on
corporate obligations, as well as dividends on preferred stock, are accrued at
the balance sheet date.
Inventories: Inventories are stated at the lower of cost or market. Cost
is determined using the last-in, first-out ("LIFO") method at principal domestic
aerospace fastener manufacturing operations and using the first-in, first-out
("FIFO") method elsewhere. If the FIFO inventory valuation method had been used
exclusively, inventories would have been approximately $4,868 and $8,706 higher
at June 30, 1997 and 1998, respectively. Inventories from continuing operations
are valued as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1998
<S> <C> <C>
First-in, first-out (FIFO)
$293,469 $177,426
Last-in, First-out (LIFO)
29,896 40,056
Total inventories
$323,365 $217,482
</TABLE>
Properties and Depreciation: The cost of property, plant and equipment is
depreciated over estimated useful lives of the related assets. The cost of
leasehold improvements is depreciated over the lesser of the length of the
related leases or the estimated useful lives of the assets. Depreciation is
computed using the straight-line method for financial reporting purposes and
using accelerated depreciation methods for Federal
<PAGE>
income tax purposes. No interest costs were capitalized in any of the years
presented. Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1998
<S> <C> <C>
Land $ 13,438 $ 11,694
Building and improvements 54,907 47,579
Machinery and equipment 152,430 113,669
Transportation vehicles 864 676
Furniture and fixtures 25,401 16,362
Construction in progress 6,524 11,951
Property, plant and equipment at 253,564 201,931
cost
Less: Accumulated depreciation 131,646 82,968
Net property, plant and equipment $121,918 $118,963
</TABLE>
Amortization of Goodwill: Goodwill, which represents the excess of the cost
of purchased businesses over the fair value of their net assets at dates of
acquisition, is being amortized on a straight-line basis over 40 years.
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 1996, 1997 and 1998 was $3,827, $2,847 and
$2,406, respectively.
Impairment of 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.
Foreign Currency Translation: For foreign subsidiaries whose functional
currency is the local foreign currency, balance sheet accounts are translated at
exchange rates in effect at the end of the period and income statement accounts
are translated at average exchange rates for the period. The resulting
translation gains and losses are included as a separate component of
stockholders' equity. Foreign currency transaction gains and losses are included
in other income and were insignificant in Fiscal 1996, 1997 and 1998.
Research and Development: Company-sponsored research and development
expenditures are expensed as incurred.
Capitalization of interest and taxes: The Company capitalizes interest
expense and property taxes relating to property being developed.
Nonrecurring Income: Nonrecurring income of $124,028 in 1998 resulted from
disposition of Banner hardware group (See Note 2). Nonrecurring income of $2,528
in 1997 resulted from the gain recorded from the sale of Fairchild Scandinavian
Bellyloading Company ("SBC"), (See Note 2). Nonrecurring expense in 1996
resulted from expenses incurred in 1996 in connection with other, alternative
transactions considered but not consummated.
Stock-Based Compensation: In Fiscal 1997, the Company implemented
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation". SFAS 123 establishes financial accounting
standards for stock-based employee compensation plans and for transactions in
which an entity issues equity instruments to acquire goods or services from
non-employees. As permitted by SFAS 123, the Company will continue to use the
intrinsic value based method of accounting prescribed by APB Opinion No. 25, for
its stock-based employee compensation plans. Fair market disclosures required by
SFAS 123 are included in Note 12.
Use of Estimates: 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
<PAGE>
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Reclassifications: Certain amounts in prior years' financial
statements have been reclassified to conform to the 1998 presentation.
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 will adopt SFAS 131 in Fiscal 1999.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132 ("SFAS 132") "Employers' Disclosures about Pensions and Other
Postretirement Benefits." SFAS 132 revises and improves the effectiveness of
current note disclosure requirements for employers' pensions and other retiree
benefits by requiring additional information to facilitate financial analysis
and eliminating certain disclosures which are no longer useful. SFAS 132 does
not address recognition or measurement issues. The Company will adopt SFAS 132
in Fiscal 1999.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes a new model for accounting for derivatives and
hedging activities and supersedes and amends a number of existing accounting
standards. It requires that all derivatives be recognized as assets and
liabilities on the balance sheet and measured at fair value. The corresponding
derivative gains or losses are reported based on the hedge relationship that
exists, if any. Changes in the fair value of derivative 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. The Company will adopt SFAS 133 in
Fiscal 1999 and is currently evaluating the financial statement impact.
2. BUSINESS COMBINATIONS
The Company has accounted for the following acquisitions by using the
purchase method. The respective purchase price is assigned to the net assets
acquired based on the fair value of such assets and liabilities at the
respective acquisition dates.
In December 1997, the Company acquired AS+C GmbH, Aviation Supply +
Consulting ("AS&C") in a business combination accounted for as a purchase. The
total cost of the acquisition was $13,245, which exceeded the fair value of the
net assets of AS&C by approximately $7,350, which is preliminarily being
allocated as goodwill and amortized using the straight-line method over 40
years. The Company purchased AS&C with cash borrowings. AS&C is an aerospace
parts, logistics, and distribution company primarily servicing the European OEM
market.
On March 2, 1998, the Company consummated the acquisition of Edwards and
Lock Management Corporation, doing business as Special-T Fasteners
("Special-T"), in a business combination to be accounted for as a purchase (the
"Special-T Acquisition"). The contractual purchase price for the acquisition was
valued at approximately $47,300, of which 50.1% was paid in shares of Class A
Common Stock of the Company and 49.9% was paid in cash. The total cost of the
acquisition exceeded the fair value of the net assets of Special-T by
approximately $21,605, which amount is preliminarily being allocated as
goodwill, and amortized using the straight-line method over 40 years. Special-T
manages the logistics of worldwide distribution of Company manufactured
precision fasteners to customers in the aerospace industry, government agencies,
original equipment manufacturers ("OEM's"), and other distributors.
In February 1997, the Company completed a transaction (the "Simmonds
Acquisition") pursuant to which the Company acquired common shares and
convertible debt representing an 84.2% interest, on a fully diluted basis, of
Simmonds S.A. ("Simmonds"). The Company then initiated a tender offer to
purchase the remaining shares and convertible debt held by the public. By June
30, 1997, the Company had purchased, or placed sufficient cash in escrow to
purchase, all the remaining shares and convertible debt of Simmonds. The total
purchase price of Simmonds, including the assumption of debt, was approximately
$62,000, which the Company funded with available
<PAGE>
cash and borrowings. The Company recorded approximately $20,453 in goodwill as a
result of this acquisition, which will be amortized using the straight-line
method over 40 years. Simmonds is one of Europe's leading manufacturers and
distributors of aerospace and automotive fasteners.
On January 13, 1998, certain subsidiaries (the "Selling Subsidiaries"),
of Banner, completed the disposition of substantially all of the assets and
certain liabilities of the Selling Subsidiaries to two wholly-owned subsidiaries
of AlliedSignal Inc. (the "Buyers"), in exchange for shares of AlliedSignal Inc.
common stock with an aggregate value equal to $369,000 (the "Banner Hardware
Group Disposition"). The purchase price received by the Selling Subsidiaries was
based on the consolidated net worth as reflected on an adjusted closing date
balance sheet for the assets (and liabilities) conveyed by the Selling
Subsidiaries to the Buyers. The assets transferred to the Buyers consist
primarily of Banner's hardware group, which includes the distribution of
bearings, nuts, bolts, screws, rivets and other type of fasteners, and its
PacAero unit. Approximately $196,000 of the common stock received from the
Buyers was used to repay outstanding term loans of Banner's subsidiaries and
related fees. The Company will account for its remaining investment in
AlliedSignal Inc. common stock as an available-for-sale security. Banner
effected the Banner Hardware Group Disposition to concentrate its efforts on the
rotables and jet engine businesses and because the Banner Hardware Group
Disposition presented a unique opportunity to realize a significant return on
the disposition of the hardware group. As a result of the Banner Hardware Group
Disposition and the repayment of outstanding term loans, the Company recorded
non-recurring income of $124,028 for the year ended June 30, 1998.
On June 30, 1997, the Company sold all the patents of Fairchild
Scandinavian Bellyloading Company ("SBC") to Teleflex Incorporated ("Teleflex")
for $5,000, and immediately thereafter sold all the stock of SBC to a wholly
owned subsidiary of Teleflex for $2,000. The Company may also receive additional
proceeds of up to $7,000 based on future net sales
of SBC's patented products and services.
3. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
Effective February 25, 1996, the Company completed a transfer of the
Company's Harco Division ("Harco") to Banner in exchange for 5,386,477 shares of
Banner common stock. The exchange increased the Company's ownership of Banner
common stock from approximately 47.2% to 59.3%, resulting in the Company
becoming the majority shareholder of Banner. Accordingly, the Company has
consolidated the results of Banner since February 25, 1996. The Company recorded
a $427 nonrecurring loss from outside expenses incurred for this transaction in
1996.
In May 1997, Banner granted all of its stockholders certain rights to
purchase Series A Convertible Paid-in-Kind Preferred Stock. In June 1997, Banner
received net proceeds of $33,876 and issued 3,710,955 shares of preferred stock.
The Company purchased $28,390 of the preferred stock issued by Banner,
increasing its voting percentage to 64.0%.
On May 11, 1998, the Company commenced an offer to exchange (the "Exchange
Offer"), for each properly tendered share of Common Stock of Banner, a number of
shares of the Company'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 Banner's Common Stock. The Exchange Offer expired on June 9, 1998 and
3,659,364 shares of Banner's Common Stock were validly tendered for exchange and
the Company issued 2,212,361 shares Class A Common Stock to the tendering
shareholders. As a result of the Exchange Offer, the Company's ownership of
Banner Common Stock increased to 83.3%. The Company effected the Exchange Offer
to increase its ownership of Banner to more than 80% in order for the Company to
include Banner in its United States consolidated corporate income tax return.
On June 30, 1998, the Company had $31,674 of minority interest, of which
$31,665 represents Banner. Minority shareholders hold approximately 16.7% of
Banner's outstanding common stock.
In connection with the Company's December 23, 1993 sale of its interest in
Rexnord Corporation to BTR Dunlop Holdings, Inc. ("BTR"), the Company placed
shares of Banner, with a fair market value of $5,000, in escrow to secure the
Company's remaining indemnification of BTR against a contingent liability. Once
the contingent liability is resolved, the escrow will be released.
4. DISCONTINUED OPERATIONS AND NET ASSETS HELD FOR SALE
The Company, RHI and Fairchild Industries, Inc. ("FII"), RHI's subsidiary,
entered into an Agreement and Plan of Merger dated as of November 9, 1995 (as
amended, the "Merger Agreement") with Shared Technologies Inc. ("STI"). On March
13, 1996, in accordance with the Merger Agreement, STI succeeded to the
telecommunications systems and services business segment operated by the
Company's Fairchild Communications Services Company ("FCSC").
<PAGE>
The transaction was effected by a Merger of FII with and into STI (the
"Merger") with the surviving company renamed Shared Technologies Fairchild, Inc
("STFI"). Prior to the Merger, FII transferred all of its assets to, and all of
its liabilities were assumed by FHC, except for the assets and liabilities of
FCSC, and $223,500 of FII debt and preferred stock. As a result of the Merger,
the Company received shares of Common Stock and Preferred Stock of STFI
representing approximately a 41% ownership interest in STFI. The Merger was
structured as a reorganization under section 386(a)(1)(A) of the Internal
Revenue Code of 1986, as amended. In 1996, the Company recorded a $163,130 gain
from this transaction.
On November 20, 1997, STFI entered into a merger agreement with Intermedia
Communications Inc. ("Intermedia") pursuant to which holders of STFI common
stock received $15.00 per share in cash (the "STFI Merger"). The Company was
paid approximately $178,000 in cash (before tax and selling expenses) in
exchange for the common and preferred stock of STFI owned by the Company. In the
nine months ended March 29, 1998, the Company recorded a $95,960 gain, net of
tax, on disposal of discontinued operations, from the proceeds received from the
STFI Merger, which was completed on March 11, 1998. The results of STFI have
been accounted for as discontinued operations.
The results of FCSC and STFI have been accounted for as discontinued
operations. The net sales of FCSC totaled, $91,290 in 1996. Net earnings from
discontinued operations from FCSC and STFI was $7,901 $3,149, and $648 in 1996,
1997, and 1998, respectively.
For the Company's fiscal years 1996, 1997, and 1998, Fairchild
Technologies ("Technologies") had pre-tax operating losses of approximately $1.5
million, $3.6 million, and $48.7 million, respectively. In addition, as a result
of the downturn in the Asian markets, Technologies has experienced delivery
deferrals, reduction in new orders, lower margins and increased price
competition. In response, in February, 1998 (the "measurement date"), the
Company adopted a formal plan to enhance the opportunities for disposition of
Technologies, while improving the ability of Technologies to operate more
efficiently. The plan includes a reduction in production capacity and headcount
at Technologies, and the pursuit of potential vertical and horizontal
integration with peers and competitors of the two divisions that constitute
Technologies, or the inclusion of those divisions in a spin-off. If the Company
elects to include Technologies in a spin-off, the Company believes that it would
be required to contribute substantial additional resources to allow Technologies
the liquidity necessary to sustain and grow both the Fairchild Technologies'
operating divisions.
In connection with the adoption of such plan, the Company recorded an
after-tax charge of $36,243 in discontinued operations in Fiscal 1998, of which,
$28,243 (net of an income tax benefit of $11,772) relating to the net losses of
Technologies since the measurement date, including the write down of assets for
impairment to estimated realizable value; and (ii) $8,000 (net of an income tax
benefit of $4,806) relating to a provision for operating losses over the next
seven months at Technologies. While the Company believes that $36,243 is a
reasonable charge for the expected losses in connection with the disposition of
Technologies, there can be no assurance that this estimate is adequate.
Earnings from discontinued operations for the twelve months ended June 30,
1996, 1997, and 1998 includes net losses of $1,475, $3,634 and $4,944,
respectively, from Technologies until the adoption date of a formal plan on the
measurement date.
On February 22, 1996, pursuant to an Asset Purchase Agreement dated
January 26, 1996, the Company, through one of its subsidiaries, completed the
sale of certain assets, liabilities and the business of the D-M-E Company
("DME") to Cincinnati Milacron Inc. ("CMI"), for a sales price of approximately
$244,331, as adjusted. The sales price consisted of $74,000 in cash, and two 8%
promissory notes in the aggregate principal amount of $170,331 (together, the
"8% CMI Notes"). On July 29, 1996, CMI paid in full the 8% CMI Notes. As a
result of the sale of DME in 1996, the Company recorded a gain on disposal of
discontinued operations of approximately $54,012, net of a $61,929 tax
provision.
On January 27, 1996, FII completed the sale of Fairchild Data Corporation
("Data") to SSE Telecom, Inc. ("SSE") for book value of approximately $4,400 and
100,000 shares of SSE's common stock valued at $9.06 per share, or $906, at
January 26, 1996, and warrants to purchase an additional 50,000 shares of SSE's
common stock at $11.09 per share.
Accordingly, the results of DME and Data have been accounted for as
discontinued operations. The combined net sales of DME and Data totaled $108,131
for 1996. Net earnings from discontinued operations was $9,186, net of $5,695
for taxes in 1996.
Net assets held for sale at June 30, 1998, includes two parcels of
<PAGE>
real estate in California, and several other parcels of real estate located
primarily throughout the continental United States, which the Company plans to
sell, lease or develop, subject to the resolution of certain environmental
matters and market conditions. Also included in net assets held for sale are
limited partnership interests in (i) a real estate development joint venture,
and (ii) a landfill development partnership.
Net assets held for sale are stated at the lower of cost or at estimated
net realizable value, which consider anticipated sales proceeds, and other
carrying costs to be incurred during the holding period. Interest is not
allocated to net assets held for sale.
5. PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
The following unaudited pro forma information for 1996, 1997 and 1998
provides the results of the Company's operations as though (i) the disposition
of the Banner Hardware Group, DME, Data, and SBC (ii) the Merger of FCSC and
subsequent disposition of STFI, (iii) the transfer of Harco to Banner, resulting
in the consolidation of Banner, and (iv) Exchange Offer had been in effect since
the beginning of each period. The pro forma information is based on the
historical financial statements of the Company, Banner, DME, FCSC and SBC,
giving effect to the aforementioned transactions. In preparing the pro forma
data, certain assumptions and adjustments have been made which (i) reduce
interest expense for revised debt structures, (ii) increase interest income for
notes receivable, and (iii) reduce minority interest from increased ownership in
Banner and the preferred stock of a former subsidiary being redeemed.
The following unaudited pro forma financial information is not necessarily
indicative of the results of operations that actually would have occurred if the
transactions had been in effect since the beginning of each period, nor is it
necessarily indicative of future results of the Company. <TABLE> <CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Sales $346,893 $ 452,527 $620,275
Operating income (13,489) 11,179 34,853
Earnings (loss) from continuing operations (1,880) 3,616 4,628
Basic and diluted earnings (loss) from
continuing operations per share (0.10) 0.19 0.21
Net loss
(3,355) (18) (28,438)
Basic and diluted net loss per share
(0.18) (0.00) (1.35)
</TABLE>
The pro forma financial information does not reflect nonrecurring income
and gains from disposal of discontinued operations that have occurred from these
transactions.
6. INVESTMENTS
Investments at June 30, 1998 consist primarily of common stock investments
in public corporations, which are classified as available-for-sale securities.
Other short-term investments and long-term investments do not have readily
determinable fair values and primarily consist of investments in preferred and
common stocks of private companies and limited partnerships. A summary of
investments held by the Company consists of the following: <TABLE> <CAPTION>
June 30, 1997 June 30, 1998
Aggregate Aggregate
Fair Cost Fair Cost
Value Basis Value Basis
<S> <C> <C> <C> <C>
Short-term investments:
Trading securities - equity $16,094 $7,398 $ - $ -
Available-for-sale equity
securities - - 3,907 5,410
Other investments 9,553 9,553 55 55
$25,647 $16,951 $3,962 $ 5,465
Long-term investments:
Available-for-sale equity $ - $ - $234,307 $195,993
Other investments 4,120 4,120 1,128 1,128
$ 4,120 $ 4,120 $235,435 $197,121
</TABLE>
On June 30, 1998, the Company had gross unrealized holding gains from
available-for-sale securities of $38,314 and gross unrealized holding losses
from available-for-sale securities of $1,503.
<PAGE>
Investment income is summarized as follows:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Gross realized gain (loss) from sales $(1,744)$ 1,673 $ 364
Change in unrealized holding gain
(loss) from trading securities 5,527 4,289 (5,791)
Gross realized loss from impairments - - (182)
Dividend income 792 689 2,247
$4,575 $6,651 $(3,362)
</TABLE>
Subsequent to year-end, the Company's investment in AlliedSignal common
stock (included in long-term available-for-sale equity securities) declined in
value from $218 million at June 30, 1998 to $177 million at September 17, 1998.
Also subsequent to year-end the Company sold calls on 800,000 shares of
AlliedSignal common stock for approximately $1.8 million. These calls will be
marked to market through current income on a monthly basis until the calls
mature.
7. INVESTMENTS AND ADVANCES, AFFILIATED COMPANIES
The following table presents summarized historical financial information
on a combined 100% basis of the Company's principal investments, which are
accounted for using the equity method.
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Statement of Earnings:
Net sales $295,805 $102,962 $ 90,235
Gross profit 89,229 39,041 32,449
Earnings from continuing
operations 18,289 14,812 14,780
Net earnings 18,289 14,812 14,780
Balance Sheet at June 30:
Current assets $ 47,546 $ 33,867
Non-current assets 40,878 39,898
Total assets 88,424 73,765
Current liabilities 26,218 14,558
Non-current liabilities 740 1,471
</TABLE>
The Company owns approximately 31.9% of Nacanco common stock. The Company
recorded equity earnings of $5,487, $4,673, and $4,683 from this investment for
1996, 1997 and 1998, respectively.
Effective February 25, 1996, the Company increased its percentage of
ownership of Banner common stock from 47.2% to approximately 59.3%. Since
February 25, 1996, the Company has consolidated Banner's results. Prior to
February 25, 1996, the Company accounted for its investment in Banner using the
equity method and held its investment in Banner as part of investments and
advances, affiliated companies. The Company recorded equity in earnings of $363
from this investment in 1996.
The Company's share of equity in earnings of all unconsolidated affiliates
for 1996, 1997 and 1998 was $4,821, $4,598, and $3,956, respectively. The
carrying value of investments and advances, affiliated companies consists of the
following: <TABLE> <CAPTION>
June June
30, 30,
1997 1998
<S> <C> <C>
Nacanco $ 20,504 $19,329
STFI 31,978 -
Others 3,196 8,239
$ 55,678 $27,568
</TABLE>
On June 30, 1998, approximately $6,103 of the Company's $473,559
consolidated retained earnings are from undistributed earnings of 50 percent or
less currently owned affiliates accounted for using the equity method.
<PAGE>
8. NOTES PAYABLE AND LONG-TERM DEBT
At June 30, 1997 and 1998, notes payable and long-term debt consisted of
the following:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1998
<S> <C> <C>
Bank credit agreements $ 100 $ -
Other short-term notes payable 15,429 17,811
Short-term notes payable (weighted
average interest rates of 7.8% $ 15,529 $ 17,811
and 5.2% in 1997 and 1998,
respectively)
Bank credit agreements $ 177,250 $290,800
11 7/8% RHI Senior debentures due 1999 85,852 -
12% Intermediate debentures due 2001 115,359 -
13 1/8% Subordinated debentures due 2006 35,188 -
13% Junior Subordinated debentures due
2007 24,834 -
10.65% Industrial revenue bonds 1,500 1,500
Capital lease obligations, interest from
4.4% to 10.1% 1,897 923
Other notes payable, collateralized by
property, plant and
equipment, interest from 3.0% to 10.0% 6,835 5,033
448,715 298,256
Less: Current maturities (31,793) (2,854)
Net long-term debt $416,922 $295,402
</TABLE>
The Company maintains credit agreements (the "Credit Agreements") with a
consortium of banks, which provide revolving credit facilities to the Company
and Banner, and a term loan to the Company (collectively the "Credit
Facilities").
On December 19, 1997, immediately following the Offering, the Company
restructured its FHC and RHI Credit Agreements by entering into a new credit
agreement (the "New Credit Agreement") to provide the Company with a $300,000
senior secured credit facility (the "Facility") consisting of (i) a $75,000
revolving loan with a letter of credit sub-facility of $30,000 and a $10,000
swing loan sub-facility, and (ii) a $225,000 term loan. Advances made under the
Facility will generally bear interest at a rate of, at the Company's option,
either (i) 2% over the Citibank N.A. base rate, or (ii) 3% over the Eurodollar
Rate ("LIBOR") for the first nine months following closing, which is subject to
change based upon the Company's financial performance thereafter. The New Credit
Agreement is subject to a non-use commitment fee of ??% of the aggregate unused
availability for the first nine months post-closing and is subject to change
based upon the Company's financial performance thereafter. Outstanding letters
of credit are subject to fees equivalent to the LIBOR margin rate. A borrowing
base is calculated monthly to determine the amounts available under the New
Credit Agreement. The borrowing base is determined monthly based upon (i) the
EBITDA of the Company's Aerospace Fastener business, as adjusted, and (ii)
specified percentages of various marketable securities and cash equivalents. The
New Credit Agreement will mature on June 18, 2004. The term loan is subject to
mandatory prepayment requirements and optional prepayments. The revolving loan
is subject to mandatory prepayment requirements and optional commitment
reductions.
The New Credit Agreement requires the Company to comply with certain
financial and non-financial loan covenants, including maintaining a minimum net
worth and maintaining certain interest and fixed charge coverage ratios at the
end of each Fiscal Quarter. Additionally, the New Credit Agreement restricts
annual capital expenditures to $35,000 in 1999 and $25,000 in each year
thereafter. Substantially all of the Company's assets are pledged as collateral
under the New Credit agreement. The New Credit Agreement restricts the payment
of dividends to the Company's shareholders to an aggregate of $200 over the life
of the agreement. At June 30, 1998, the Company was in compliance with all the
covenants under the New Credit Agreement.
Banner maintains a credit agreement (the "Banner Credit Agreement") which
provides Banner and its subsidiaries with funds for working capital and
potential acquisitions. On November 25, 1997, Banner amended its credit
agreement to increase its revolving credit facility by $50,000. Immediately
following this amendment, the facility under the Banner Credit Agreement
consisted of (i) a $55,000 six-year term loan ("Banner 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
("Banner Revolver"). On January 13, 1998, in conjunction with the Banner
Hardware Group Disposition, the outstanding balances of the Banner Term Loan,
Tranche B Loan and Tranche C Loan were fully repaid (See Note 2).
Based on the Company's financial performance, the Banner Revolver
<PAGE>
bears interest at prime plus 1/4% to 1 1/2% or LIBOR plus 1 1/2% to 2 3/4% and
is subject to a nonuse fee of 30 to 50 basis points of the unused availability.
On June 30, 1998, Banner's performance level resulted in borrowings under the
Revolver bearing interest at prime plus 1/4% and LIBOR plus 1 1/2% and a nonuse
fee of 30 basis points for the quarter ending September 30, 1998. The Banner
Credit Agreement contains certain financial and nonfinancial covenants which
Banner 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. Banner also has certain limitations on the
incurring of additional debt, and has restrictions which limit dividends and
distributions on the capital stock of the Company to an aggregate of $150 in any
fiscal year. At June 30, 1998, Banner was in compliance with all covenants under
the Banner Credit Agreement. Substantially all of the Company's assets are
pledged as collateral under the Banner Credit Agreement.
On February 3, 1998, with the proceeds of the Offering, term loan
borrowings under the Facility, and the after tax proceeds the Company received
from the STFI Merger, the Company redeemed (collectively, the "Public Debt
Repayment") all of its existing publicly held indebtedness (other than
indebtedness of Banner), consisting of (i) $63,000 to redeem the 11 7/8% Senior
Debentures due 1999; (ii) $117,600 to redeem the 12% Intermediate Debentures due
2001; (iii) $35,856 to redeem the 13 1/8% Subordinated Debentures due 2006; (iv)
$25,063 to redeem the 13% Junior Subordinated Debentures due 2007; and (v)
accrued interest of $10,562.
The Company recognized an extraordinary loss of $6,730, net of $3,624 tax
benefit, to write-off the remaining deferred loan fees and original issue
discounts associated with the early extinguishment of the Company's indebtedness
pursuant to the Public Debt Repayment and refinancing of the FHC and RHI Credit
Agreement facilities.
The following table summarizes the Credit Facilities at June 30, 1998:
<TABLE>
<CAPTION>
Outstanding Outstanding
Revolving Term
Credit Loan Available
Facilities Facilities Facilities
<S> <C> <C> <C>
The Company:
Term Loan $ - $225,000 $225,000
Revolving credit facility - - 75,000
Banner Aerospace, Inc.:
Revolving credit facility 65,800 - 121,500
Total $ 65,800 $225,000 $421,500
</TABLE>
At June 30, 1998, the Company had letters of credit outstanding of
$18,658, which were supported by a sub-facility under the Credit Facilities. At
June 30, 1998, the Company had unused bank lines of credit aggregating $112,042,
at interest rates slightly higher than the prime rate. The Company also has
short-term lines of credit relating to foreign operations, aggregating $21,205,
against which the Company owed $10,088 at June 30, 1998.
The annual maturity of long-term debt obligations (exclusive of capital
lease obligations) and bank notes payable for each of the five years following
June 30, 1998, are as follows: $20,398 for 1999, $3,210 for 2000, $3,382 for
2001, $70,972 for 2002 and $107,594 for 2003.
In September 1995, Banner entered into several interest rate hedge
agreements ("Hedge Agreements") to manage its exposure to increases in interest
rates on its variable rate debt. The Hedge Agreements provide interest rate
protection on $60,000 of debt through September 2000, by providing an interest
rate cap of 7% if the 90-day LIBOR rate exceeds 7%. If the 90-day LIBOR rate
drops below 5%, Banner will be required to pay interest at a floor rate of
approximately 6%.
In November 1996, Banner entered into an additional hedge agreement
("Additional Hedge Agreement") with one of its major lenders to provide interest
rate protection on $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%, Banner will be required to
pay interest at a floor rate of approximately 6%. 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.
In August 1997, the Company entered into a delayed-start swap interest rate
lock hedge agreement (the "FHC Hedge Agreement") to reduce its exposure to
increases in interest rates on variable rate debt. In December 1997, the Company
amended the FHC Hedge Agreement. On February 17, 1998,
<PAGE>
the FHC Hedge Agreement began to provide interest rate protection on $100,000 of
variable rate debt for ten years, with interest being calculated based on a
fixed LIBOR rate of 6.715%. On January 14, 1998, the FHC Hedge Agreement was
further amended to provide interest rate protection with interest being
calculated based on a fixed LIBOR rate of 6.24% from February 17, 1998 to
February 17, 2003. On February 17, 2003, the bank will have a one-time option to
either (i) elect to cancel the ten-year agreement; or (ii) do nothing and
proceed with the transaction, using a fixed LIBOR rate of 6.715% for the period
February 17, 2003 to February 19, 2008. No costs were incurred as a result of
these transactions.
The Company recognizes interest expense under the provisions of the Hedge
Agreements and the 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.
The table below provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, which include interest rate swaps. For interest rate
swaps, the table presents notional amounts and weighted average interest rates
by expected (contractual) maturity dates. Notional amounts are used to calculate
the contractual payments to be exchanged under the contract. Weighted average
variable rates are based on implied forward rates in the yield curve at the
reporting date.
<TABLE>
<CAPTION>
Expected Maturity Date
1999 2000 2001 2002 2003 Thereafter
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Swaps:
Variable to Fixed - 20,000 60,000 - - 100,000
Average cap rate - 7.25% 6.81% - - 6.49%
Average floor - 5.84% 5.99% - - 6.24%
rate
Weighted average - 5.71% 5.74% - - 5.95%
rate
Fair Market Value - (19) (204) - - (6,295)
</TABLE>
9. PENSIONS AND POSTRETIREMENT BENEFITS
Pensions
The Company and its subsidiaries have defined benefit pension plans
covering most of its employees. Employees in foreign subsidiaries may
participate in local pension plans, which are in the aggregate insignificant.
The Company's funding policy is to make the minimum annual contribution required
by applicable regulations. The following table provides a summary of the
components of net periodic pension expense (income) for the plans:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Service cost (current period
attribution) $3,513 $2,521 $2,685
Interest cost of projected benefit
obligation 14,499 15,791 14,476
Actual return on plan assets
(39,430) (31,400) (40,049)
Amortization of prior service cost
81 (180) (184)
Net amortization and deferral
21,495 11,157 21,228
158 (2,111) (1,844)
Net periodic pension expense
(income) for other plans (118) 142 (108)
including foreign plans
Net periodic pension expense
(income) $ 40 $(1,969) $(1,952)
</TABLE>
<PAGE>
Assumptions used in accounting for the plans were:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Discount rate 8.5% 7.75% 7.0%
Expected rate of increase in 4.5% 4.5% 4.5%
salaries
Expected long-term rate of return 9.0% 9.0% 9.0%
on plan assets
</TABLE>
In Fiscal 1996, the Company recognized one-time charges of $857 from the
divestiture of subsidiaries, which resulted in a recognition of prior service
costs, and $84 from the early retirement window program at the Company's
corporate office. The reduction in liabilities due from the cessation of future
salary increases is not immediately recognizable in income, but will be used as
an offset against existing unrecognized losses. The Company will have a future
savings benefit from a lower net periodic pension cost due to the amortization
of a smaller unrecognized loss.
The following table sets forth the funded status and amounts recognized in
the Company's consolidated balance sheets at June 30, 1997 and 1998, for the
plans:
<TABLE>
<CAPTION>
June 30, June 30,
1997 1998
<S> <C> <C>
Actuarial present value of benefit
obligations:
Vested $198,300 $212,837
Nonvested 7,461 8,120
Accumulated benefit obligation 205,761 220,957
Effect of projected future compensation
increases 683 1,650
Projected benefit obligation 206,444 222,607
Plan assets at fair value 237,480 261,097
Plan assets in excess of projected
benefit obligations 31,036 38,490
Unrecognized net loss 29,592 23,798
Unrecognized prior service cost (571) (387)
Unrecognized net transition assets (315) (258)
Prepaid pension cost $59,742 $61,643
</TABLE>
Plan assets include Class A Common Stock of the Company valued at a fair
market value of $26,287 and $16,167 at June 30, 1997 and 1998, respectively.
Substantially all of the plan assets are invested in listed stocks and bonds.
Postretirement Health Care Benefits
The Company provides health care benefits for most retired employees.
Postretirement health care expense from continuing operations totaled $779,
$642, and $804 for 1996, 1997 and 1998, respectively. The Company accrual was
approximately $34,965 and $33,062 as of June 30, 1997 and 1998, respectively,
for postretirement health care benefits related to discontinued operations. This
represents the cumulative discounted value of the long-term obligation and
includes interest expense of $3,877, $3,349, and $3,714 for the years ended June
30, 1996, 1997 and 1998, respectively. The components of expense in Fiscal 1996,
1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Service cost of benefits earned $ 281 $ 140 $ 166
Interest cost on liabilities 4,377 3,940 3,979
Net amortization and deferral (2) (89) 373
Net periodic postretirement benefit $ 4,656 $ 3,991 $ 4,518
</TABLE>
A one-time credit of $3,938, resulting from the divestitures of
subsidiaries, was offset by $4,361 from DME's accumulated postretirement benefit
obligation for active employees, which was transferred to CMI as part of the
sale. The Company recognized the net effect of $423 as an expense in 1996.
<PAGE>
The following table sets forth the funded status for the Company's
postretirement health care benefit plans at June 30:
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Accumulated postretirement benefit
obligations:
Retirees $ 48,145 $54,654
Fully eligible active participants 390 632
Other active participants 2,335 2,911
Accumulated postretirement benefit
obligation 50,870 58,197
Unrecognized prior service cost --- (935)
Unrecognized net loss 6,173 16,387
Accrued postretirement benefit liability $ 44,697 $42,745
</TABLE>
In Fiscal 1998, the Company amended a former subsidiary's medical plan to
increase the retiree's contribution rate to approximately 20% of the negotiated
premium, resulting in a $1,003 decrease to unrecognized prior service costs.
The accumulated postretirement benefit obligation was determined using a
discount rate of 7.0%, and a health care cost trend rate of 6.7% for pre- age-65
and post-age-65 employees, respectively, gradually decreasing to 5.5% in the
year 2003 and thereafter.
Increasing the assumed health care cost trend rates by 1% would increase
the accumulated postretirement benefit obligation as of June 30, 1998, by
approximately $1,666, and increase the net periodic postretirement benefit cost
by approximately $129 for Fiscal 1998.
10. INCOME TAXES
The provision (benefit) for income taxes from continuing operations is
summarized as follows:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Current:
Federal $(40,640) 5,612 (4,860)
State 1,203 1,197 500
Foreign (3,805) (49) 3,893
(43,242) 6,760 (467)
Deferred:
Federal 17,060 (15,939) 46,092
State (3,657) 3,444 3,034
13,403 (12,495) 49,126
Net tax provision (benefit) $(29,839) $(5,735) $ 48,659
</TABLE>
The income tax provision (benefit) for continuing operations differs from
that computed using the statutory Federal income tax rate of 35%, in Fiscal
1996, 1997 and 1998, for the following reasons:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Computed statutory amount $(22,713) $(1,751) 43,188
State income taxes, net of applicable
federal tax benefit 782 778 4,362
Nondeductible acquisition valuation
items 1,329 1,064 1,204
Tax on foreign earnings, net of tax
credits 1,711 (1,938) (1,143)
Difference between book and tax basis
of assets acquired and 1,040 (1,102) 4,932
liabilities assumed
Revision of estimate for tax accruals
(3,500) (5,335) (3,905)
Other
(8,488) 2,549 21
Net tax provision (benefit) $(29,839) (5,735) 48,659
</TABLE>
<PAGE>
The following table is a summary of the significant components of the
Company's deferred tax assets and liabilities, and deferred provision or
benefit for the following periods:
<TABLE>
<CAPTION>
1996 1997 1998
Deferred Deferred Deferred
(Provision)(Provision)June 30,(Provision)June 30,
Benefit Benefit 1997 Benefit 1998
<S> <C> <C> <C> <C> <C>
Deferred tax assets:
Accrued expenses (1,643) 504 6,440 (3,853) 2,587
Asset basis differences 1,787 (1,492) 572 7,540 8,112
Inventory - 2,198 2,198 (2,198) -
Employee compensation
and benefits (26) (267) 5,141 (55) 5,086
Environmental reserves (737) (1,253) 3,259 207 3,466
Loss and credit
carryforward (23,229) (8,796) - - -
Postretirement benefits (1,273) 138 19,472 (1,338) 18,134
Other 2,186 2,079 7,598 4,506 12,104
(22,935) (6,889) 44,680 4,809 49,489
Deferred tax liabilities:
Asset basis differences 16,602 (3,855) (26,420) (54,012)(80,432)
Inventory 4,684 2,010 - (1,546) (1,546)
Pensions 1,516 (1,038) (19,281) 95 (19,186)
Other (13,270) 22,267 (7,240) 1,528 (5,712)
9,532 19,384 (52,941) (53,935)(106,876)
Net deferred tax
liability $(13,403) $12,495 $(8,261) $(49,126)$(57,387)
</TABLE>
The amounts included in the balance sheet are as follows:
<TABLE>
<CAPTION>
June June
30, 30,
1997 1998
<S> <C> <C>
Prepaid expenses and other current
assets:
Current deferred $ 11,307 $ -
Income taxes payable:
Current deferred $ (2,735) $34,553
Other current 8,598 (6,242)
$ 5,863 $28,311
Noncurrent income tax liabilities:
Noncurrent deferred $ 22,303 $22,834
Other noncurrent 19,710 72,342
$ 42,013 $95,176
</TABLE>
The 1996, 1997 and 1998 net tax benefits include the results of reversing
$3,500, $5,335, and $3,905 respectively, of federal income taxes previously
provided for due to a change in the estimate of required tax accruals.
Domestic income taxes, less available credits, are provided on the
unremitted income of foreign subsidiaries and affiliated companies, to the
extent the Company intends to repatriate such earnings. 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 June 30, 1998, the
amount of domestic taxes payable upon distribution of such earnings was not
significant.
In the opinion of management, adequate provision has been made for all
income taxes and interest, and any liability that may arise for prior periods
will not have a material effect on the financial condition or results of
operations of the Company.
11. EQUITY SECURITIES
On December 19, 1997, the Company completed a secondary offering of public
securities. The offering consisted of the issuance of 3,000,000 shares of the
Company's Class A Common Stock at $20.00 per share (the "Offering").
In accordance with the terms of the Special-T Acquisition, the Company
issued 1,072,605 restricted shares of the Company's Class A Common Stock in
Fiscal 1998. Additionally, the Company established an employee stock plan to
issue up to 44,900 additional shares of Class A Common Stock to Special-T
employees.
On March 13, 1998, the Company issued 47,283 restricted shares of the
Company's Class A Common Stock resulting from a cashless exercise of 100,000
warrants by Dunstan Ltd.
On May 11, 1998, the Company commenced an offer to exchange (the "Exchange
Offer"), for each properly tendered share of Common Stock of Banner, a number of
shares of the Company'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 Banner's Common Stock. The Exchange Offer expired on June 9, 1998 and
approximately 3,659,364 shares of Banner's Common Stock were validly tendered
for exchange and the Company issued
<PAGE>
approximately 2,212,361 shares Class A Common Stock to the tendering
shareholders. As a result of the Exchange Offer, the Company's ownership of
Banner Common Stock increased to 83.3%. The Company effected the Exchange Offer
to increase its ownership of Banner to more than 80% in order for the Company to
include Banner in its United States consolidated corporate income tax return.
The Company had 20,428,591 shares of Class A common stock and 2,624,716
shares of Class B common stock outstanding at June 30, 1998. Class A common
stock is traded on both the New York and Pacific Stock Exchanges. There is no
public market for the Class B common stock. Shares of Class A common stock are
entitled to one vote per share and cannot be exchanged for shares of Class B
common stock. Shares of Class B common stock are entitled to ten votes per share
and can be exchanged, at any time, for shares of Class A common stock on a
share-for-share basis. In Fiscal 1998, 141,259 shares of Class A Common Stock
were issued as a result of the exercise of stock options and shareholders
converted 7,800 shares of Class B common stock into Class A common stock.
During Fiscal 1998, the Company issued 36,626 deferred compensation units
("DCU's) pursuant to the Company's stock option deferral plan as a result of a
cashless exercise of 45,000 stock options. Each DCU is represented by one share
of the Company's Treasury Stock and is convertible into a share of the Company's
Class A Common Stock after a specified period of time.
12. STOCK OPTIONS AND WARRANTS
Stock Options
The Company's 1986 Non-Qualified and Incentive Stock Option Plan (the
"1986 Plan"), authorizes the issuance of 4,541,000 shares of Class A Common
Stock upon the exercise of stock options issued under the 1986 Plan. At the 1998
Annual Meeting, stockholders will be asked to approve an amendment to increase
the number of shares authorized under the 1986 Plan to 5,141,000 shares of Class
A Common Stock. The purpose of the 1986 Plan is to encourage continued
employment and ownership of Class A Common Stock by officers and key employees
of the Company and its subsidiaries, and provide additional incentive to promote
the success of the Company. The 1986 Plan authorizes the granting of options at
not less than the market value of the common stock at the time of the grant. The
option price is payable in cash or, with the approval of the Company's
Compensation and Stock Option Committee of the Board of Directors, in shares of
common stock, valued at fair market value at the time of exercise. The options
normally terminate five years from the date of grant, subject to extension of up
to 10 years or for a stipulated period of time after an employee's death or
termination of employment. The 1986 plan expires on April 9, 2006; however, all
stock options outstanding as of April 9, 2006 shall continue to be exercisable
pursuant to their terms.
The Company's ten year 1996 Non-Employee Directors Stock Option Plan (the
"1996 NED Plan") authorizes the issuance of 250,000 shares of Class A Common
Stock upon the exercise of stock options issued under the 1996 NED Plan. The
1996 NED Plan authorizes the granting of options at the market value of the
common stock on the date of grant. An initial stock option grant for 30,000
shares of Class A Common Stock will be made to each person who becomes a new
non-employee Director, on such date, with the options to vest 25% each year from
the date of grant. On the date of each annual meeting, each person elected as a
non-employee Director at such meeting will be granted an option for 1,000 shares
of Class A Common Stock, which will vest immediately. The exercise price is
payable in cash or, with the approval of the Stock Option Committee, in shares
of Class A or Class B Common Stock, valued at fair market value at the date of
exercise. All options issued under the 1996 NED Plan will terminate five years
from the date of grant or a stipulated period of time after a Non-Employee
Director ceases to be a member of the Board. The 1996 NED Plan is designed to
maintain the Company's ability to attract and retain highly qualified and
competent persons to serve as outside directors of the Company.
On November 17, 1994, the Company's stockholders approved the grant of
stock options of 190,000 shares to outside Directors of the Company to replace
expired stock options. These stock options expire five years from the date of
the grant.
<PAGE>
A summary of stock option transactions under the 1986 Plan, the 1996 NED
Plan, and prior plans are presented in the following tables:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
<S> <C> <C>
Outstanding at July 1, 1995 1,699,781 5.14
Granted 540,078 4.33
Exercised (286,869) 5.26
Expired (659,850) 6.06
Forfeited (19,653) 4.30
Outstanding at June 30, 1996 1,273,487 4.27
Granted 457,350 14.88
Exercised (234,935) 4.79
Expired (1,050) 4.59
Forfeited (9,412) 3.59
Outstanding at June 30, 1997 1,485,440 7.46
Granted 357,250 24.25
Exercised (141,259) 4.70
Forfeited (46,650) 7.56
Outstanding at June 30, 1998 1,654,781 $ 7.46
Exercisable at June 30, 1996 399,022 4.59
Exercisable at June 30, 1997 486,855 4.95
Exercisable at June 30, 1998 667,291 $ 6.58
</TABLE>
A summary of options outstanding at June 30, 1998 is presented as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Average Weighted
Average Remaining Average
Range of Number Exercise Contract Number Exercise
Exercise Prices Outstanding Price Life Exercisable Price
<S> <C> <C> <C> <C> <C>
$3.50 - $8.625 848,791 $ 4.07 1.8 years 516,010 $ 4.05
$13.625 - $16.25 472,240 $14.98 3.4 years 151,281 $ 15.22
$18.5625 - $25.0625 333,750 $24.02 4.1 years - -
$3.50 - $25.0625 1,654,781 $ 7.46 3.2 years 667,291 $ 6.58
</TABLE>
The weighted average grant date fair value of options granted during 1996,
1997, and 1998 was $1.95, $6.90, and $11.18, respectively. The fair value of
each option granted is estimated on the grant date using the Black-Scholes
option pricing model. The following significant assumptions were made in
estimating fair value: <TABLE> <CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Risk-free interest rate 5.5% - 6.6% 6.0% - 6.7% 5.4% -6.3%
Expected life in years 4.27 4.65 4.66
Expected volatility 46% - 47% 43% - 45% 44% - 45%
Expected dividends none none none
</TABLE>
The Company recognized compensation expense of $104 as a result of stock
options that were modified in 1998. The Company is applying APB Opinion No. 25
in accounting for its stock option plans. Accordingly, no compensation cost has
been recognized for the granting of stock options in 1996, 1997 or 1998. If
stock options granted in 1996, 1997 and 1998 were accounted for based on their
fair value as determined under SFAS 123, pro forma earnings would be as follows:
<TABLE> <CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Net earnings:
As reported $189,706 $ 1,331 $101,090
Pro forma 189,460 283 99,817
Basic earnings per share:
As reported $ 11.71 $ 0.08 $ 5.36
Pro forma 11.69 0.02 5.30
Diluted earnings per share:
As reported $ 11.71 $ 0.08 $ 5.14
Pro forma 11.69 0.02 5.07
</TABLE>
The pro forma effects of applying SFAS 123 are not representative of the
effects on reported net earnings for future years. The effect of SFAS 123 is not
applicable to awards made prior to 1996 and additional awards in future years
are expected.
Stock Option Deferral Plan
On February 9, 1998, the Board adopted a Stock Option Deferral Plan,
<PAGE>
subject to approval by the shareholders at the 1998 Annual Meeting. Pursuant to
the Stock Option Deferral Plan, certain officers (at their election) may defer
payment of the "Compensation" they receive in a particular year or years from
the exercise of Company stock options. "Compensation" means the excess value of
a stock option, determined by the difference between the fair market value of
shares issueable upon exercise of a stock option, and the option price payable
upon exercise of the stock option. An officer's deferred Compensation shall be
in the form of "Deferred Compensation Units," representing the number of shares
of Common Stock that the officer shall be entitled to receive upon expiration of
the deferral period. (The number of Deferred Compensation Units issueable to an
officer is determined by dividing the amount of the deferred Compensation by the
fair market value of the Company's stock as of the date of deferral.)
Stock Warrants
On April 25, 1997, the Company issued warrants to purchase 100,000 shares
of Class A Common Stock, at $12.25 per share, to Dunstan Ltd. as incentive
remuneration for the performance of certain investment banking services. The
warrants were earned on a pro-rata basis over a six-month period ending October
31, 1997. The warrants became exercisable on November 1, 1997, and on March 13,
1998, the Company issued 47,283 restricted shares of the Company's Class A
Common Stock resulting from the cashless exercise of these warrants. The Company
recorded expenses of $191 and $300 in 1997 and 1998, respectively, for stock
warrants earned based on a grant date fair value of $5.46.
Effective as of February 21, 1997, the Company approved the continuation
of an existing warrant to Stinbes Limited (an affiliate of Jeffrey Steiner) to
purchase 375,000 shares of the Company's Class A or Class B Common Stock at
$7.67 per share. The warrant was modified to extend the exercise period from
March 13, 1997, to March 13, 2002, and to increase the exercise price per share
by $.002 for each day subsequent to March 13, 1997, but fixed at $7.80 per share
after June 30, 1997. In addition, the warrant was modified to provide that the
warrant may not be exercised except within the following window periods: (i)
within 365 days after the merger of STFI with AT&T Corporation, MCI
Communications, Worldcom Inc., Teleport Communications Group, Inc., or
Intermedia Communications Inc.; (ii) within 365 days after a change of control
of the Company, as defined in the Company's Credit Agreement; or (iii) within
365 days after a change of control of Banner, as defined in the Banner Credit
Agreement. The payment of the warrant price may be made in cash or in shares of
the Company's Class A or Class B Common Stock, valued at fair market value at
the time of exercise, or combination thereof. In no event may the warrant be
exercised after March 13, 2002. As a result of the STFI Disposition, these
warrants became exercisable through March 9, 1999. Accordingly, the Company
recognized a charge of $5,606 in 1998.
On November 9, 1995, the Company issued warrants to purchase 500,000
shares of Class A Common Stock, at $9.00 per share, to Peregrine Direct
Investments Limited ("Peregrine"), in exchange for a standby commitment it
received on November 8, 1995, from Peregrine. The Company elected not to
exercise its rights under the Peregrine commitment. The warrants are immediately
exercisable and will expire on November 8, 2000.
On February 21, 1996, the Company issued warrants to purchase 25,000
shares of Class A Common Stock, at $9.00 per share, to a non-employee for
services provided in connection with the Company's various dealings with
Peregrine. The warrants issued are immediately exercisable and will expire on
November 8, 2000.
The Company recorded nonrecurring expenses of $1,148 for the grant date
fair value of the stock warrants issued in 1996. The warrants issued in 1996
were outstanding at June 30, 1998.
13. EARNINGS PER SHARE
Effective December 28, 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 (loss) per
share with basic and diluted earnings (loss) per share. Unlike primary earnings
(loss) per share, basic earnings (loss) per share excludes any diluted effects
of options. Diluted earnings (loss) per share is very similar to the previously
reported fully diluted earnings (loss) per share. All earnings (loss) per share
have been restated to conform to the requirements of SFAS 128.
<PAGE>
The following table illustrates the computation of basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Basic earnings per share:
Earnings (loss) from continuing
operations $(32,186) $ 1,816 $ 52,399
Weighted average common shares
outstanding 16,206 16,539 18,834
Basic earnings per share:
Basic earnings (loss) from continuing
operations per share $ (1.98) $ 0.11 $ 2.78
Diluted earnings per share:
Earnings (loss) from continuing
operations $(32,186) $ 1,816 $ 52,399
Weighted average common shares
outstanding 16,206 16,539 18,834
Diluted effect of options Antidilutive 449 546
Diluted effect of warrants Antidilutive 333 289
Total shares outstanding 16,206 17,321 19,669
Diluted earnings (loss) from
continuing operations per share $ (1.98) $ 0.11 $ 2.66
</TABLE>
The computation of diluted earnings (loss) from continuing operations per
share for 1996 excluded the effect of incremental common shares attributable to
the potential exercise of common stock options outstanding and warrants
outstanding, because their effect was antidilutive. No adjustments were made to
earnings per share calculations for discontinued operations and extraordinary
items.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("SFAS 107"),
"Disclosures about Fair Value of Financial Instruments", requires disclosures of
fair value information about financial instruments, whether or not recognized in
the balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. SFAS 107
excludes certain financial instruments and all non-financial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
The carrying amount reported in the balance sheet approximates the fair
value for cash and cash equivalents, short-term borrowings, current maturities
of long-term debt, and all other variable rate debt (including borrowings under
the Credit Agreements).
Fair values for equity securities, and long-term public debt issued by the
Company are based on quoted market prices, where available. For equity
securities not actively traded, fair values are estimated by using quoted market
prices of comparable instruments or, if there are no relevant comparable
instruments, on pricing models or formulas using current assumptions. The fair
value of limited partnerships, other investments, and notes receivable are
estimated by discounting expected future cash flows using a current market rate
applicable to the yield, considering the credit quality and maturity of the
investment.
The fair value for the Company's other fixed rate long-term debt is
estimated using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
Fair values for the Company's other off-balance-sheet instruments (letters
of credit, commitments to extend credit, and lease guarantees) are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counter parties' credit standing. The
fair value of the Company's other off-balance-sheet instruments at June 30, 1998
was not material.
<PAGE>
The carrying amounts and fair values of the Company's financial
instruments at June 30, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 19,420 $19,420 $49,601 $49,601
Investment securities:
Short-term equity securities
16,094 16,122 3,907 3,907
Short-term other investments
9,553 9,592 55 193
Long-term equity securities
- - 234,307 234,307
Long-term other investments
4,120 4,617 1,128 1,128
Notes receivable:
Long-term
1,300 1,300 850 850
Short-term debt
15,529 15,529 17,811 17,811
Long-term debt:
Bank credit agreement
177,250 177,250 290,800 290,800
Senior notes and subordinated
debentures 261,233 270,995 - -
Industrial revenue bonds
1,500 1,500 1,500 1,500
Capitalized leases
1,897 1,897 923 923
Other
6,835 6,835 5,033 5,033
</TABLE>
15. RESTRUCTURING CHARGES
In Fiscal 1996, the Company recorded restructuring charges in the
Aerospace Fasteners segment in the categories shown below. All costs classified
as restructuring were the direct result of formal plans to close plants, to
terminate employees, or to exit product lines. Substantially all of these plans
have been executed. Other than a reduction in the Company's existing cost
structure and manufacturing capacity, none of the restructuring charges resulted
in future increases in earnings or represented an accrual of future costs. The
costs included in restructuring were predominately nonrecurring in nature and
consisted of the following significant components:
<TABLE>
<CAPTION>
<S> <C>
Write down of inventory to net realizable value related to
discontinued product lines (a) $ 156
Write down of fixed assets related to discontinued product
lines 270
Severance benefits for terminated employees (substantially
all paid within twelve months) 1,368
Plant closings facility costs (b)
389
Contract termination claims
136
$2,319
</TABLE>
(a) Write down was required because product line was discontinued.
(b) Includes lease settlements, write-off of leasehold improvements,
maintenance, restoration and clean up costs.
16. EXTRAORDINARY ITEMS
In Fiscal 1998 the Company recognized an extraordinary loss of $6,730, net
of tax, to write-off the remaining deferred loan fees and original issue
discounts associated with early extinguishment of the Company's indebtedness
pursuant to the Public Debt Repayment and refinancing of the FHC and RHI Credit
Agreement facilities (See Note 8).
During Fiscal 1996, the Company used the Merger transaction and cash
available to retire fully all of the FII's 12 1/4% senior notes ("Senior
Notes"), FII's 9 3/4% subordinated debentures due 1998, and bank loans under a
credit agreement of a former subsidiary of the Company, VSI Corporation. The
redemption of the Senior Notes at a premium, consent fees paid to holders of the
Senior Notes, the write off of the original issue discount on FII 9 3/4%
subordinated debentures and the write off of the remaining deferred loan fees
associated with the issuance of the debt retired, resulted in an extraordinary
loss of $10,436, net of a tax benefit, in 1996.
17. RELATED PARTY TRANSACTIONS
The Company and its subsidiaries are all parties to a tax sharing
agreement whereby the Company files a consolidated federal income tax return.
Each subsidiary makes payments to the Company based on the amount
<PAGE>
of federal income taxes, if any, the subsidiary would have paid if it had filed
a separate tax return.
The Company and Banner paid for a chartered aircraft used from time to time
for business related travel. The owner of the chartered aircraft is a company
51% owned by an immediate family member of Mr. Jeffrey Steiner. Cost for such
flights charged to the Company and Banner are comparable to those charged in
arm's length transactions between unaffiliated third parties.
The Company and Banner prepaid hours for a chartered helicopter used from
time to time for business related travel. The owner of the chartered helicopter
is a company controlled by Mr. Jeffrey Steiner. Cost for such flights charged to
the Company and Banner are comparable to those charged in arm's length
transactions between unaffiliated third parties.
Prior to the consolidation of Banner on February 25, 1996, the Aerospace
Fasteners segment had sales to Banner of $3,663 in 1996.
18. LEASES
The Company holds certain of its facilities and equipment under long-term
leases. The minimum rental commitments under non-cancelable operating leases
with lease-terms in excess of one year, for each of the five years following
June 30, 1998, are as follows: $3,174 for 1999, $4,145 for 2000, $3,400 for
2001, $2,217 for 2002 and $1,526 for 2003. Rental expense on operating leases
from continuing operations for Fiscal 1996, 1997 and 1998 was $6,197, $4,928,
and $8,610, respectively. Minimum commitments under capital leases for each of
the five years following June 30, 1998, are $322 for 1999, $275 for 2000, $238
for 2001, $164 for 2002, and $143 for 2003, respectively. At June 30, 1998, the
present value of capital lease obligations was $923. At June 30, 1998, capital
assets leased, included in property, plant, and equipment consisted of:
<TABLE>
<CAPTION>
<S> <C>
Buildings and improvements $ 70
Machinery and equipment 5,272
Furniture and fixtures 197
Less: Accumulated depreciation (2,898)
$ 2,641
</TABLE>
19. CONTINGENCIES
Government Claims
The Corporate Administrative Contracting Officer (the "ACO"), based upon
the advice of the United States Defense Contract Audit Agency, has made a
determination that Fairchild Industries, Inc. ("FII"), a former subsidiary of
the Company, did not comply with Federal Acquisition Regulations and Cost
Accounting Standards in accounting for (i) the 1985 reversion to FII of certain
assets of terminated defined benefit pension plans, and (ii) pension costs upon
the closing of segments of FII's business. The ACO has directed FII to prepare
cost impact proposals relating to such plan terminations and segment closings
and, following receipt of such cost impact proposals, may seek adjustments to
contract prices. The ACO alleges that substantial amounts will be due if such
adjustments are made, however, an estimate of the possible loss or range of loss
from the ACO's assertion cannot be made. The Company believes it has properly
accounted for the asset reversions in accordance with applicable accounting
standards. The Company has held discussions with the government to attempt to
resolve these pension accounting issues.
Environmental Matters
The Company's operations are subject to stringent Government imposed
environmental laws and regulations concerning, among other things, the discharge
of materials into the environment and the generation, handling, storage,
transportation and disposal of waste and hazardous materials. To date, such laws
and regulations have not had a material effect on the financial condition,
results of operations, or net cash flows of the Company, although the Company
has expended, and can be expected to expend in the future, significant amounts
for investigation of environmental conditions and installation of environmental
control facilities, remediation of environmental conditions and other similar
matters, particularly in the Aerospace Fasteners segment.
In connection with its plans to dispose of certain real estate, the
Company must investigate environmental conditions and may be required to take
certain corrective action prior or pursuant to any such disposition. In
addition, management has identified several areas of potential contamination at
or from other facilities owned, or previously owned, by
<PAGE>
the Company, that may require the Company either to take corrective action or to
contribute to a clean-up. The Company is also a defendant in certain lawsuits
and proceedings seeking to require the Company to pay for investigation or
remediation of environmental matters and has been alleged to be a potentially
responsible party at various "Superfund" sites. Management of the Company
believes that it has recorded adequate reserves in its financial statements to
complete such investigation and take any necessary corrective actions or make
any necessary contributions. No amounts have been recorded as due from third
parties, including insurers, or set off against, any liability of the Company,
unless such parties are contractually obligated to contribute and are not
disputing such liability.
As of June 30, 1998, the consolidated total recorded liabilities of the
Company for environmental matters approximated $8,659, which represented the
estimated probable exposures for these matters. It is reasonably possible that
the Company's total exposure for these matters could be approximately $14,995.
Other Matters
The Company is involved in various other claims and lawsuits incidental to
its business, some of which involve substantial amounts. The Company, either on
its own or through its insurance carriers, is contesting these matters. In the
opinion of management, the ultimate resolution of the legal proceedings,
including those aforementioned, will not have a material adverse effect on the
financial condition, or future results of operations or net cash flows of the
Company.
20. BUSINESS SEGMENT INFORMATION
The Company reports in two principal business segments. The Aerospace
Fasteners segment includes the manufacture of high performance specialty
fasteners and fastening systems. The Aerospace Distribution segment distributes
a wide range of aircraft parts and related support services to the aerospace
industry. The results of Fairchild Technologies, which is primarily engaged in
the designing and manufacturing of capital equipment and systems for recordable
compact disc and advance semiconductor manufacturing, were previously reported
under Corporate and Other, along with the results of two smaller operations.
Fairchild Technologies is now recorded in discontinued operations.
The Company's financial data by business segment is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Sales:
Aerospace Fasteners $ $ $
218,059 269,026 387,236
Aerospace Distribution (a)
129,973 411,765 358,431
Corporate and Other
7,046 15,185 5,760
Eliminations (b)
(5,842) (15,213) (10,251)
Total Sales $ $ $
349,236 680,763 741,176
Operating Income (Loss):
Aerospace Fasteners (c) $ $ $
135 17,390 32,722
Aerospace Distribution (a)
5,625 30,891 20,330
Corporate and Other
(17,046) (14,782) (7,609)
Operating Income (Loss) $ $ $
(11,286) 33,499 45,443
Capital Expenditures:
Aerospace Fasteners $ $ $
3,841 8,964 31,221
Aerospace Distribution 3,812
1,556 4,787
Corporate and Other 996
283 1,263
Total Capital Expenditures $ $ $
5,680 15,014 36,029
Depreciation and Amortization:
Aerospace Fasteners $ $ $
14,916 16,112 16,260
Aerospace Distribution
1,341 5,138 3,412
Corporate and Other 364
4,788 3,057
Total Depreciation and $ $ $
Amortization 21,045 24,307 20,036
Identifiable Assets at June 30:
Aerospace Fasteners $ $ $
252,200 346,533 427,927
Aerospace Distribution
329,477 428,436 452,397
Corporate and Other
411,721 277,697 276,935
Total Identifiable Assets $ $ $
993,398 1,052,66 1,157,25
6 9
</TABLE>
(a) Effective February 25, 1996, the Company became the majority shareholder of
Banner Aerospace, Inc. and, accordingly, began consolidating their results.
(b) Represents intersegment sales from the Aerospace Fasteners segment to the
Aerospace Distribution segment.
(c) Includes restructuring charges of $2.3 million in Fiscal 1996.
<PAGE>
21. FOREIGN OPERATIONS AND EXPORT SALES
The Company's operations are located primarily in the United States
and Europe. Inter-area sales are not significant to the total sales of any
geographic area. The Company's financial data by geographic area is as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Sales by Geographic Area:
United States $ $ $
292,136 580,453 613,325
Europe
56,723 100,310 127,851
Other
377 - -
Total Sales $ $ $
349,236 680,763 741,176
Operating Income (Loss) by
Geographic Area:
United States $ $ $
(12,175) 27,489 28,575
Europe
1,037 6,010 16,868
Other
(148) - -
Total Operating Income (Loss) $ $ $
(11,286) 33,499 45,443
Identifiable Assets by Geographic
Area at June 30:
United States $ $ $
929,649 855,233 903,054
Europe
63,749 197,433 254,205
Total Identifiable Assets $
993,398 $1,052,6 $1,157,2
66 59
</TABLE>
Export sales are defined as sales to customers in foreign countries by the
Company's domestic operations. Export sales amounted to the following:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Export Sales
Europe $ $ $
27,330 48,187 68,515
Asia (excluding Japan)
6,766 21,221 19,744
Canada
8,878 17,797 16,426
Japan
11,958 19,819 12,056
South America
2,118 4,414 11,038
Other
6,447 11,493 10,340
Total Export Sales $ $ $
63,497 122,931 138,119
</TABLE>
<PAGE>
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table of quarterly financial data has been prepared from the
financial records of the Company without audit, and reflects all adjustments
which are, in the opinion of management, necessary for a fair presentation of
the results of operations for the interim periods presented: <TABLE> <CAPTION>
Fiscal 1997 quarters ended Sept. 29 Dec. 29 March 30June 30
<S> <C> <C> <C> <C>
Net sales $ $ $ $
138,244 152,461 179,436 210,622
Gross profit
37,092 36,785 47,552 59,915
Earnings (loss) from continuing
operations (3,797) (1,960) (117) 7,690
per basic share
(0.22) (0.12) (0.01) 0.47
per diluted share
(0.22) (0.15) (0.01) 0.44
Earnings (loss) from discontinued
operations, net (821) (1,017) 157 1,196
per basic share
(0.05) (0.06) 0.01 0.07
per diluted share
(0.05) (0.06) 0.01 0.07
Net earnings (loss)
(4,618) (2,977) 40 8,886
per basic share
(0.27) (0.18) - 0.54
per diluted share
(0.27) (0.18) - 0.51
Market price range of Class A Stock:
High 17 17 3/8 15 3/8 18
Low 12 1/4 14 3/8 12 7/8 11 5/8
Close 16 14 5/8 13 3/8 18
Fiscal 1998 quarters ended Sept. 28 Dec. 28 March 29June 30
<S> <C> <C> <C> <C>
Net sales $ $ $ $
194,362 208,616 164,164 174,034
Gross profit
46,329 56,822 37,790 45,565
Earnings (loss) from continuing
operations 1,229 (4,605) 50,418 5,357
per basic share
0.07 (0.27) 2.52 0.25
per diluted share
0.07 (0.27) 2.41 0.24
Loss from discontinued operations, net
(737) (1,945) (1,578) (36)
Per basic share
(0.04) (0.11) (0.08) 0.24
Per diluted share
(0.04) (0.11) (0.08) 0.44
Gain (loss) from disposal of (16,805)
discontinued operations, net - 29,974 46,548
Per basic share (0.78)
- 1.75 2.32
Per diluted share (0.76)
- 1.75 2.23
Extraordinary items, net
- (3,024) (3,701) (5)
Per basic share
- (0.18) (0.18) -
Per diluted share
- (0.18) (0.18) -
Net earnings (loss) (11,489)
492 20,400 91,687
Per basic share (0.53)
0.03 1.19 4.58
per diluted share (0.52)
0.03 1.19 4.38
Market price range of Class A Stock:
High 28 3/8 28 11/16 25 23
Low 17 19 5/16 19 7/16 18 3/16
Close 26 7/8 21 1/2 21 1/4 20 3/16
</TABLE>
<PAGE>
Included in earnings (loss) from continuing operations are (i) a $2,528
nonrecurring gain from the sale of SBC in the fourth quarter of Fiscal 1997, and
(ii) a $123,991 nonrecurring gain from the Banner Hardware Group Disposition.
Gain (loss) on disposal of discontinued operations includes (i) gains (losses)
of $29,974, $68,900, and $(2,914) in the second, third and fourth quarter of
Fiscal 1998, respectively, resulting from the gain on the STFI disposition, and
(ii) losses of $22,352 and $13,891 in the third and fourth quarter of Fiscal
1998, respectively, resulting from the estimated loss on dispoal of certain
assets of Technologies. Earnings from discontinued operations, net, includes the
results of Technologies and STFI (until disposition) in each quarter.
Extraordinary items relate to the early extinguishment of debt by the Company.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 5. OTHER INFORMATION
Articles have appeared in the French press reporting an inquiry by a
French magistrate into certain allegedly improper business transactions
involving Elf Acquitaine, a French petroleum company, its former chairman and
various third parties, including Maurice Bidermann. In connection with this
inquiry, the magistrate has made inquiry into allegedly improper transactions
between Mr. Steiner and that petroleum company. In response to the magistrate's
request that Mr. Steiner appear in France as a witness, Mr. Steiner submitted
written statements concerning the transactions and appeared in person before the
magistrate and others. Mr. Steiner, who has been put under examination (mis en
examen), by the magistrate, with respect to this matter, has not been charged.
Mr. Steiner has been cited by a French prosecutor to appear on November 7,
1998, before the Tribunal de Grande Instance de Paris, to answer a charge of
knowingly benefiting in 1990, from a misuse by Mr. Bidermann of corporate assets
of Societe Generale Mobiliere et Immobiliere, a French corporation in which Mr.
Bidermann is believed to have been the sole shareholder.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this Item is incorporated herein by reference
from the 1998 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
from the 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
from the 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
from the 1998 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this Report:
(a)(1) Financial Statements.
All financial statements of the registrant as set forth under Item 8 of
this report on Form 10-K (see index on Page 15).
(a)(2) Financial Statement Schedules and Report of Independent Public
Accountants.
Schedule Number Description Page
I Condensed Financial Information of Parent Company 70
II Valuation and Qualifying Accounts 74
All other schedules are omitted because they are not required.
<PAGE>
Report of Independent Public Accountants
To The Fairchild Corporation:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of The Fairchild Corporation and subsidiaries
included in this Form 10-K and have issued our report thereon dated September
22, 1998. Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedules listed in the index
on the preceding page are the responsibility of the Company's management and are
presented for the purpose of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in the audits
of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.
September 22, 1998
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
<TABLE>
THE FAIRCHILD CORPORATION
CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANY
BALANCE SHEETS (NOT CONSOLIDATED)
(In thousands)
<CAPTION>
June 30, June 30,
ASSETS 1997 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 234 $ -
Accounts receivable 384 400
Prepaid expenses and other current assets 250 (1,230)
Total current assets 868 (830)
Property, plant and equipment, less accumulated 486 677
depreciation
Investments in subsidiaries 390,355 627,634
Investments and advances, affiliated companies 1,435 963
Goodwill 4,133 14,333
Noncurrent tax assets 29,624 45,439
Other assets 2,403 21,031
Total assets $ 429,304 $ 709,247
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ - $ 2,250
Accounts payable and accrued expenses 8,315 10,218
Total current liabilities 8,315 12,468
Long-term debt 190,567 222,750
Other long-term liabilities 797 470
Total liabilities 199,679 235,688
Stockholders' equity:
Class A common stock 2,023 2,467
Class B common stock 263 263
Retained earnings and other equity 227,339 470,829
Total stockholders' equity 229,625 473,559
Total liabilities and stockholders' equity $ 429,304 $ 709,247
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
<PAGE>
Schedule I
THE FAIRCHILD CORPORATION AND
CONSOLIDATED SUBSIDIARIES
CONDENSED FINANCIAL STATEMENTS OF THE
COMPANY
STATEMENT OF EARNINGS (NOT CONSOLIDATED)
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended June 30,
1996 1997 1998
<S> <C> <C> <C>
Costs and Expenses:
Selling, general & administrative 5,148 3,925 3,516
Amortization of goodwill 130 130 147
5,278 4,055 3,663
Operating loss (5,278 ) (4,055 ) (3,663 )
Net interest expense 28,387 25,252 24,048
Investment income, net 1 16 208
Equity in earnings of affiliates 269 480 (613 )
Nonrecurring expense (1,064 ) -- --
Loss from continuing operations before (34,459 ) (28,811 ) (28,116 )
taxes
Income tax provision (benefit) (12,509 ) (15,076 ) (10,580 )
Loss before equity in earnings of (21,950 ) (13,735 ) (17,536 )
subsidiaries
Equity in earnings of subsidiaries 211,656 15,066 118,626
Net earnings (loss) 189,706 1,331 101,090
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
<PAGE>
Schedule I
THE FAIRCHILD CORPORATION
CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANY
STATEMENT OF CASH FLOWS (NOT CONSOLIDATED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the Years Ended June 30,
1996 1997 1995
<S> <C> <C> <C>
Cash provided by (used for) operations $ 36,916 $ (14,271 ) $(80,099)
Investing activities:
Equity investments in affiliates (21 ) 2,092 (141)
(21 ) 2,092 (141)
Financing activities:
Proceeds from issuance of debt 9,400 225,000
-
Debt repayments (42,265 )
- (198,867)
Issuance of common stock 1,509 1,126
53,848
(40,756 ) 10,526 79,981
Net decrease in cash $(3,861 ) $(1,653 ) $ (259)
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
<PAGE>
Schedule I
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED FINANCIAL STATEMENTS OF THE COMPANY
NOTES TO FINANCIAL STATEMENTS (NOT CONSOLIDATED)
(In thousands)
1. BASIS OF PRESENTATION
In accordance with the requirements of Regulation S-X of the Securities and
Exchange Commission, the financial statements of the Company are condensed and
omit many disclosures presented in the consolidated financial statements and
the notes thereto.
2. LONG-TERM DEBT
<TABLE>
<CAPTION>
June 30, June 30,
1997 1998
<S> <C> <C>
Bank Credit Agreement $ -- $225,000
12% Inter. Debentures Due 2001 128,000 --
13 1/8% Sub. Debentures Due 2006 35,856 --
13% Jr. Sub. Debenture Due 2007 30,063 --
Less: Original issue discounts (3,352) --
$ 190,567 $ 225,000
</TABLE>
Maturities of long-term debt for the next five years are as follows: $2,250 in
1999, $2,250 in 2000, $2,250 in 2001, $3,375 in 2002, and $107,438 in 2003.
3. DIVIDENDS FROM SUBSIDIARIES
Cash dividends paid to The Fairchild Corporation by its consolidated
subsidiaries were $5,000, $10,000, and $42,100 in 1998, 1997, and 1996,
respectively. The Fairchild Corporation also received dividends of Banner
stock with a fair market value of $187,424 from its subsidiaries in 1998.
4. CONTINGENCIES
The Company is involved in various other claims and lawsuits incidental to its
business, some of which involve substantial amounts. The Company, either on
its own or through its insurance carriers, is contesting these matters. In the
opinion of management, the ultimate resolution of the legal proceedings will
not have a material adverse effect on the financial condition, or future
results of operations or net cash flows of the Company.
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Changes in the allowance for doubtful accounts are as follows:
<TABLE>
<CAPTION>
For the Years Ended June 30,
1996 1997 1998
<S> <C> <C> <C>
Beginning balance $ 2,738 $ 5,449 $ 6,905
Charges to cost and expenses 1,766 1,978 2,240
Charges to other accounts (a) 2,405 445 (2,642)
Amounts written off (1,460) (967) (848)
Ending Balance $ 5,449 $ 6,905 $ 5,655
</TABLE>
(a) Recoveries of amounts written off in prior periods, foreign currency
translation and the change in related noncurrent taxes. Fiscal 1998 includes a
reduction of $2,801 relating to the assets disposed as a result of the Banner
Hardware Group Disposition.
(a)(3) Exhibits.
3.1 Registrant's Restated Certificate of Incorporation (incorporated by
reference to Exhibit "C" of Registrant's Proxy Statement dated October 27,
1989).
3.2 Registrant's Amended and Restated By-Laws, as amended as of November 21,
1996 (incorporated by reference to the Registrant's Quarterly Report on From
10-Q for the quarter ended December 29, 1996) (the "December 1996 10- Q").
4.1 Specimen of Class A Common Stock certificate (incorporated by reference
to Registration Statement No. 33-15359 on Form S-2).
4.2 Specimen of Class B Common Stock certificate (incorporated by reference
from Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1989) (the "1989 10-K").
10. Material Contracts
(Stock Option Plans)
10.1 1988 U.K. Stock Option Plan of Banner Industries, Inc. (incorporated by
reference from Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1988) (the "1988 10-K").
10.2 Description of grants of stock options to non-employee directors of
Registrant (incorporated by reference to the 1988 10-K).
10.3 1986 Non-Qualified and Incentive Stock Option Plan (incorporated by
reference to Registrant's Proxy Statement dated November 15, 1990).
10.4 1986 Non-Qualified and Incentive Stock Option Plan (incorporated by
reference to Registrant's Proxy Statement dated November 21, 1997).
<PAGE>
10.5 1996 Non-Employee Directors Stock Option Plan (incorporated by reference
to Registrant's Proxy Statement dated November 21, 1997).
10.6 Stock Option Deferral Plan dated February 9, 1998(incorporated by
reference to Registrant's Quarterly Report on From 10-Q for the quarter ended
March 29, 1998) (the "March 1998 10-Q").
(Employee Agreements)
10.7 Amended and Restated Employment Agreement between Registrant and Jeffrey
J. Steiner dated September 10, 1992 (incorporated by reference from
Registrant's Annual Report on Form 10-K for the fiscal year ended June 30,
1993) (the "1993 10-K").
10.8 Letter Agreement dated September 9, 1996, between Registrant and Colin
M. Cohen (incorporated by reference from Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1997) (the "1997 10-K")
10.9 Employment Agreement between RHI Holdings, Inc., and Jacques Moskovic,
dated as of December 29, 1994. (incorporated by reference to the Registrant's
Annual Report on Form 10-K/A for the fiscal year ended June 30, 1996) (the
"1996 10-K/A").
10.10 Employment Agreement between Fairchild France, Inc., and Jacques
Moskovic, dated as of December 29, 1994. (incorporated by reference to the
1996 10-K/A).
10.11 Employment Agreement between Fairchild France, Inc., Fairchild CDI,
S.A., and Jacques Moskovic, dated as of April 18, 1997 (incorporated by
reference to the Registrant's Annual Report on From 10-K for the fiscal year
ended June 30, 1995) (the "1995 10-K").
10.12 Employment Agreement between Robert Edwards and Fairchild Holding Corp.,
dated March 2, 1998 (incorporated by reference to the March 1998 10- Q).
10.13 Letter Agreement dated February 27, 1998, between Registrant and John L.
Flynn (incorporated by reference to the March 1998 10-Q).
10.14 Letter Agreement dated February 27, 1998, between Registrant and Donald
E. Miller (incorporated by reference to the March 1998 10-Q).
*10.15 Promissory Note in the amount of $100,000, issued by Robert Sharpe to
the Registrant, dated July 1, 1998 (filed herewith).
*10.16 Promissory Note in the amount of $200,000 issued by Robert Sharpe to the
Registrant, dated July 1, 1998 (filed herewith).
(Credit Agreements)
10.15 Credit Agreement dated as of March 13, 1996, among Fairchild
Holding Corporation ("FHC"), Citicorp USA, Inc. and certain financial
institutions (incorporated by reference from Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1996) (the "1996 10-K").
10.16 Restated and Amended Credit Agreement dated as of July 26, 1996,
(the "FHC Credit Agreement"), among FHC, Citicorp USA, Inc. and certain
financial institutions (incorporated by reference to the 1996 10- K).
10.17 Amendment No. 1, dated as of January 21, 1997, to the FHC Credit
Agreement dated as of March 13, 1996 (incorporated by reference to the
Registrant's Quarterly Report on From 10-Q for the quarter ended March 30,
1997) (the "March 1997 10-Q").
10.18 Amendment No. 2 and Consent, dated as of February 21, 1997,
to the FHC Credit Agreement dated as of March 13, 1996 (incorporated by
reference to the March 30,1997 10-Q).
10.19 Amendment No. 3, dated as of June 30, 1997, to the FHC
Credit Agreement dated as of March 13, 1996 (incorporated by reference to
the 1997 10-K).
10.20 Second Amended And Restated Credit Agreement dated as of July
18, 1997, to the FHC Credit Agreement dated as of March 13, 1996
(incorporated by reference to the 1997 10-K).
10.21 Restated and Amended Credit Agreement dated as of May 27, 1996,
(the "RHI Credit Agreement"), among RHI, Citicorp USA, Inc. and certain
financial institutions. (incorporated by reference to the 1996 10- K).
10.22 Amendment No. 1 dated as of July 29, 1996, to the RHI Credit
<PAGE>
Agreement (incorporated by reference to the 1996 10-K).
10.23 Amendment No. 2 dated as of April 7, 1997, to the RHI Credit
Agreement (incorporated by reference to the 1997 10-K).
10.24 Amendment No. 3 dated as of September 26, 1997, to the RHI
Credit Agreement (incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 28, 1997) (the "September
1997 10-Q").
10.25 Third Amended and Restated Credit Agreement, dated as of
December 19, 1997, among RHI, FHC, the Registrant, Citicorp USA, Inc. and
certain financial institutions (incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 28, 1997) (the
"December 1997 10-Q").
10.26 Interest Rate Hedge Agreement between Registrant and Citibank,
N.A. dated as of August 19, 1997 (incorporated by reference to the September
1997 10-Q).
10.27 Amendment dated as of December 23, 1997, to the Interest Rate
Hedge Agreement between Registrant and Registrant and Citibank, N.A. dated as
of August 19, 1997(incorporated by reference to the December 1997 10-Q).
10.28 Amendment dated as of January 14, 1997, to the Interest Rate
Hedge Agreement between Registrant and Citibank, N.A. dated as of August 19,
1997 (incorporated by reference to the March 1998 10-Q).
(Stinbes Warrants)
10.29 Form Warrant Agreement (including form of Warrant) issued by the
Company to Drexel Burnham Lambert on March 13, 1986, subsequently purchased
by Jeffrey Steiner and subsequently assigned to Stinbes Limited (an affiliate
of Jeffrey Steiner), for the purchase of Class A or Class B Common Stock
(incorporated herein by reference to Exhibit 4(c) of the Company's
Registration Statement No. 33-3521 on Form S-2).
10.30 Form Warrant Agreement issued to Stinbes Limited dated as of
September 26, 1997, effective retroactively as of February 21, 1997
(incorporated by reference to the September 1997 10-Q).
10.31 Extension of Warrant Agreement between Registrant and Stinbes
Limited for 375,000 shares of Class A or Class B Common Stock dated as of
September 26, 1997, effective retroactively as of February 21, 1997
(incorporated by reference to the September 1997 10-Q).
10.32 Amendment of Warrant Agreement dated February 9, 1998, between
the Registrant and Stinbes Limited (incorporated by reference to the March
1998 10-Q).
(Other Material Contracts)
10.33 Voting Agreement dated as of July 16, 1997, between RHI
Holdings, Inc., and Tel-Save Holdings, Inc., (incorporated by reference to
the Registrant's Schedule 13D/A, Amendment No. 3, filed July 22, 1997,
regarding Registrant's stock ownership in Shared Technologies Fairchild
Inc.).
10.34 Stock Option Agreement dated November 20, 1997 between RHI
Holdings, Inc. and Intermedia Communications Inc. (Incorporated by reference
to Scheduled 13D/A (Amendment No. 4) dated as of November 25, 1997 filed by
the Company on December 1, 1997).
10.35 Stock Purchase Agreement dated November 25, 1997 between RHI
Holdings, Inc. and Intermedia Communications Inc. (Incorporated by reference
to Schedule 13D/A (Amendment No. 4) dated as of November 25, 1997 filed by
the Company on December 1, 1997).
10.36 Asset Purchase Agreement dated as of December 8, 1997, among
Banner Aerospace, Inc. and seven of its subsidiaries (Adams Industries, Inc.,
Aerospace Bearing Support, Inc., Aircraft Bearing Corporation, Banner
Distribution, Inc., Burbank Aircraft Supply, Inc., Harco, Inc. and PacAero),
AlliedSignal Inc. and AS BAR LLC (incorporated by reference to Banner
Aerospace, Inc.'s Report on Form 8-K dated January 28, 1998).
10.37 Asset Purchase Agreement dated as of December 8, 1997, among
Banner Aerospace, Inc. and two of its subsidiaries (PB Herndon Aerospace,
Inc. and Banner Aerospace Services, Inc.), AlliedSignal Inc. and AS BAR PBH
LLC (incorporated by reference to Banner Aerospace, Inc.'s Report on Form 8-
K dated January 28, 1998).
10.38 Agreement and plan of Merger dated January 28, 1998, as amended
on February 20, 1998, and March 2, 1998, between the Company and the
shareholders' of Special-T Fasteners (Incorporated by reference to Form 8-K
dated as of March 2, 1998 filed by the Company on March 12, 1998).
<PAGE>
*10.41 Registration Rights Agreement between Registrant and Banner
Aerospace, Inc., dated as of July 7, 1998 (filed herewith).
10.39 Purchase Agreement by and between BTR Dunlop Holdings, Inc., RHI
Holdings, Inc., and Registrant, dated as of December 2, 1993 (incorporated by
reference to Registrant's current report on Form 8-K dated December 23,
1993).
10.40 Agreement and Plan of Merger dated as of November 9, 1995 by and
among The Fairchild Corporation, RHI, FII and Shared Technologies, Inc. ("STI
Merger Agreement") (incorporated by reference from the Registrant's Form 8-K
dated as of November 9, 1995).
10.41 Amendment No. 1 to STI Merger Agreement dated as of February
2, 1996 (incorporated by reference from the Registrant's Form 8-K dated as
of March 13, 1996).
10.42 Amendment No. 2 to STI Merger Agreement dated as of February
23, 1996 (incorporated by reference from the Registrant's Form 8-K dated as
of March 13, 1996).
10.43 Amendment No. 3 to STI Merger Agreement dated as of March 1,
1996 (incorporated by reference from the Registrant's Form 8-K dated as of
March 13, 1996).
10.44 Asset Purchase Agreement dated as of January 23, 1996, between
The Fairchild Corporation, RHI and Cincinnati Milacron, Inc. (incorporated by
reference from the Registrant's Form 8-K dated as of January 26, 1996).
10.45 Stock Exchange Agreement between The Fairchild Corporation and
Banner Aerospace, Inc. pursuant to which the Registrant exchanged Harco, Inc.
for shares of Banner Aerospace,Inc. (incorporated by reference to the Banner
Aerospace, Inc. Definitive Proxy Statement dated and filed with the SEC on
February 23, 1996 with respect to the Special Meeting of Shareholders of
Banner Aerospace, Inc. held on March 12, 1996).
10.46 Allocation Agreement dated April 13, 1992 by and among The
Fairchild Corporation, RHI, Rex-PT Holdings, Rexnord Corporation, Rexnord
Puerto Rico, Inc. and Rexnord Canada Limited (incorporate by reference to
1992 10-K).
11 Computation of earnings per share (found at Note 1 in Item 8 to
Registrant's Consolidated Financial Statements for the fiscal year ended June
30, 1997).
*22 List of subsidiaries of Registrant (incorporated by reference to
the 1997 10-K).
*23.1 Consent of Arthur Andersen LLP, independent public accountants.
*23.2 Consent of Price Waterhouse Coopers, independent public accountants.
*27 Financial Data Schedules.
99.1 Financial statements, related notes thereto and Auditors' Report of
Banner Aerospace, Inc. for the fiscal year ended March 31, 1998 (incorporated
by reference to the Banner Aerospace, Inc. Form 10-K for fiscal year ended
March 31, 1998).
99.2 Financial statements, related notes thereto and Auditors' Report of
Nacanco Paketleme for the fiscal year ended December 31, 1997 (incorporated
by reference to the Registrant's Form 8-K filed on June 26, 1998).
*Filed herewith.
(b) Reports on Form 8-K
On March 12, 1998, the Company filed a From 8-K to report the acquisition
of Special-T Fasteners. On April 23, 1998, May 5, 1998, and May 7, 1998, the
Company filed amendments to said Form 8-K, to report (Item 7) audited financial
statements of Special-T Fasteners, and unaudited pro forma consolidate financial
statements giving effect to the acquisition of Special-T Fasteners.
On June 26, 1998, the Company filed a Form 8-K to report (Item 5) audited
financial statements for the years ended December 31, 1997, 1996 and 1995 for
Nacanco Paketleme, a 32% owned equity affiliate.
SIGNATURES
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, thereunto duly authorized.
<PAGE>
THE FAIRCHILD CORPORATION
By: /s/
Colin M. Cohen
Senior Vice President and
Chief Financial Officer
Date: September 23, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant, in
their capacities and on the dates indicated.
By: /s/ JEFFREY J. STEINER Chairman, Chief Executive September 23,
1998
Jeffrey J. Steiner Officer and Director
By: /s/ MICHAEL T. ALCOX Vice President and Director September 23,
1998
Michael T. Alcox
By: /s/ MELVILLE R. BARLOW Director September 23,
1998
Melville R. Barlow
By: /s/ MORTIMER M. CAPLIN Director September 23,
1998
Mortimer M. Caplin
By: /s/ COLIN M. COHEN Senior Vice President, September 23,
Chief 1998
Colin M. Cohen Financial Officer and
Director
By: /s/ PHILIP DAVID Director September 23,
1998
Philip David
By: /s/ ROBERT EDWARDS Director September 23,
1998
Robert Edwards
By: /s/ HAROLD J. HARRIS Director September 23,
1998
Harold J. Harris
By: /s/ DANIEL LEBARD Director September 23,
1998
Daniel Lebard
By: /s/ JACQUES S. MOSKOVIC Senior Vice President September 23,
1998
Jacques S. Moskovic And Director
By: /s/ HERBERT S. RICHEY Director September 23,
1998
Herbert S. Richey
By: /s/ MOSHE SANBAR Director September 23,
1998
Moshe Sanbar
By: /s/ ROBERT A. SHARPE II Senior Vice President, September 23,
1998
Robert A. Sharpe II Operations and Director
By: /s/ ERIC I. STEINER President, Chief Operating September 23,
1998
Eric I. Steiner Officer and Director
<PAGE>
PROMISSORY NOTE
$100,000 Dulles, Virginia
July 1, 1998
FOR VALUE RECEIVED, the undersigned (the "Maker"), promises to pay Fairchild
Holding Corp. (the "Company") the principal sum of $100,000, together with
interest at 5.48% per annum (the "Applicable Rate"), payable at the offices of
the Company in Dulles, Virginia, on October 1, 1998.
The obligation represented by this Note shall constitute the general
obligation of the Maker. It shall constitute a default hereunder if the
principal and interest is not paid when due and payable. If Maker fails to pay
principal and interest when due, the Note, plus accrued interest, will continue
to bear interest at the Applicable Rate from the date the Loan is due and as
long as any principal and interest remain outstanding.
The Maker waives all exemptions to the extent permitted by law, diligence in
collection, demand, presentment for payment, protest, and notice of protest and
of non-payment. Time is of the essence in connection with this Note, which shall
be construed in accordance with, and governed in all respects by, the laws of
the State of Delaware.
IN WITNESS WHEREOF, this Note has been duly executed by the undersigned Maker
on the date first above written.
Robert A. Sharpe
<PAGE>
PROMISSORY NOTE
$200,000 Dulles, Virginia
July 1, 1998
FOR VALUE RECEIVED, the undersigned (the "Maker"), promises to pay Fairchild
Holding Corp. (the "Company") the principal sum of $200,000 on June 20, 2001,
plus interest at 5.48% per annum (the "Applicable Rate") on September 30 of each
year for the period then ended, both payable at the offices of the Company in
Dulles, Virginia.
The obligation represented by this Note shall constitute the general
obligation of the Maker. It shall constitute a default hereunder if the
principal and interest is not paid when due and payable. If Maker fails to pay
principal and interest when due, the Note, plus accrued interest, will continue
to bear interest at the Applicable Rate from the date the Loan is due and as
long as any principal and interest remain outstanding.
The Maker waives all exemptions to the extent permitted by law, diligence in
collection, demand, presentment for payment, protest, and notice of protest and
of non-payment. Time is of the essence in connection with this Note, which shall
be construed in accordance with, and governed in all respects by, the laws of
the State of Delaware.
IN WITNESS WHEREOF, this Note has been duly executed by the undersigned
Maker on the date first above written.
Robert A. Sharpe
<PAGE>
REGISTRATION RIGHTS
AGREEMENT
By and Between
THE FAIRCHILD
CORPORATION
And
BANNER
AEROSPACE, INC.
Dated as
of July 7, 1998
REGISTRATION RIGHTS
AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into as of July 7, 1998, by and between The Fairchild Corporation, a Delaware
corporation (the "Company") and Banner Aerospace, Inc., a Delaware corporation
("Banner").
R E C I T A L S:
On July 7, 1998, Banner announced its intention to purchase up to 2.5
million shares of Class A Common Stock of the Company through open market
purchases (the "Subject Shares").
In connection therewith, the Company has agreed to grant demand
registration rights agreement in favor of Banner for the registration and sale
of such shares.
NOW, THEREFORE, the parties to this Agreement agree as follows:
ARTICLE I
DEFINITIONS
<PAGE>
1.1 Certain Definitions.
"Affiliate" shall have the meaning given to such term in Rule 12b-2
promulgated under the Exchange Act.
"Commission" shall mean the Securities and Exchange
Commission.
"Common Stock" shall mean the shares of Class A Common Stock, $.10 par
value, of the Company.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
and all rules and regulations promulgated thereunder.
"Holder" shall mean Banner or any Permitted Transferee of
Registrable Common Stock. There may be more than one Holder at
any time.
"NASDAQ" shall mean the National Association of Securities
Dealers Automated Quotation System.
"Person" shall mean any individual, group, partnership, corporation,
trust, joint stock company, unincorporated organization, joint venture or other
entity of whatever nature.
"Registration Statement" shall mean a registration statement relating to
the Common Stock on such form as counsel to the Company deems appropriate to be
filed with the Commission, as such registration statement may be amended from
time to time.
"Securities Act" shall mean the Securities Act of 1933, as amended, and
all rules and regulations promulgated thereunder.
"Subject Shares" shall have the meaning ascribed in the
Recitals hereof.
1.2 Permitted Transferees. "Permitted Transferees" shall mean any
subsidiary of Banner to whom Banner has (a) transferred five percent (5%) or
more of the aggregate Subject Shares and (b) assigned its registrations rights
under this Agreement. In the event that Banner transfers the requisite
percentage of Subject Shares and assigns its registration rights under this
Agreement, it shall be a condition precedent to such transfer and assignment
that Banner give prior written notice thereof to the Company.
1.3 Registrable Common Stock. "Registrable Common Stock" means the Subject
Shares held by Banner or its Permitted Transferees (as the case may be), until
such time as the Common Stock ceases to be registrable as provided in Section
2.2 of this Agreement.
1.4 Registration Expenses. "Registration Expenses" shall mean any and all
expenses reasonably attributable to the registration of the Registrable Common
Stock, including, without limitation, the following expenses: (a) all filing
fees; (b) all fees and expenses of complying with securities or blue sky laws
(including reasonable fees and disbursements of counsel for the underwriters in
connection with blue sky qualification of the Registrable Common Stock); (c) all
fees and expenses incurred in connection with the listing of the Registrable
Common Stock on any securities exchange or other market (including, but not
limited to, NASDAQ) pursuant to Section 3.4(j) of this Agreement and all fees of
the National Association of Securities Dealers; (d) the fees and disbursements
of counsel retained by the Company in connection with each such registration or
listing on a stock exchange and of its independent public accountants; (e) the
fees and disbursements of counsel retained by Holder and any underwriter; (f)
all commissions, fees and disbursements of underwriters; (g) all underwriting
discounts and commissions applicable to the Registrable Common Stock; (h) all
printing expenses; and (i) all other out-of-pocket expenses of the Company
incurred in connection with the registration of the Registrable Common Stock.
ARTICLE II
SECURITIES SUBJECT TO THIS AGREEMENT
2.1 Securities Subject to this Agreement. The securities entitled to the
benefits of this Agreement are shares of the Registrable Common Stock.
<PAGE>
2.2 Termination of Entitlement. For purposes of this Agreement, the
Subject Shares will cease to be Registrable Common Stock when: (a) a
Registration Statement with respect to the sale of the Subject Shares shall have
become effective under the Securities Act and the Subject Shares shall have been
transferred pursuant to such Registration Statement; (b) the Subject Shares
shall have been transferred pursuant to Rule 144 (or any successor provisions)
under the Securities Act; (c) certificates for the Subject Shares not bearing a
legend restricting transfer thereof under the Securities Act shall have been
delivered by the Company and, in the opinion of counsel for the Company,
transfer of such shares may be made without registration or qualification under
the Securities Act; or (d) the Subject Shares shall have ceased to be
outstanding.
ARTICLE III
REGISTRATION RIGHTS
3.1 Demand Registration.
(a) Request for Registration. At any time, a Holder of Registrable
Common Stock may make a written request for registration under the
Securities Act of all or part of its Registrable Common Stock (a "Demand
Registration"). Except as set forth below, there shall be no limit on the
number of Demand Registrations that may be requested by Banner or its
Permitted Transferees, as the case may be.
Such requests for a Demand Registration will specify the aggregate
number of shares proposed to be sold and will also specify the intended
method of disposition thereof. The Company will use its best efforts to
effect such registration; provided, however, that the Company shall not be
obligated to take any action to effect any such registration, qualification
or compliance pursuant to this Agreement: (i) within sixty (60) days
immediately following the effective date of a Registration Statement
pertaining to a public offering of securities of the Company (other than a
registration relating solely to employee benefit plans); (ii) if at the
time of the request to register the Holder's Registrable Common Stock, the
Company gives notice within thirty (30) days of such request that it
intends to initiate within sixty (60) days thereafter a registered public
offering (other than a registration relating solely to employee benefit
plans); or (iii) if at the time of the request, the Holder could sell all
of the Registrable Common Stock requested to be registered under Rule 144
during the three-month period following such request, or if, in the opinion
of counsel for the Company reasonably satisfactory to the Holder, the
proposed sale of its Registrable Common Stock is otherwise exempt from
registration under the Securities Act.
(b) Effective Registration and Expenses. A Registration Statement
will not count as a Demand Registration until it has become effective.
Except as set forth below in Section 3.1(d), in any registration initiated
as a Demand Registration, Banner or its Permitted Transferee, as the case
may be, will pay or cause to be paid all Registration Expenses in
connection therewith, whether or not the Registration Statement becomes
effective.
(c) Underwriting. If the Holder intends to distribute the Registrable
Common Stock covered by its request by means of an underwritten offering,
it shall so advise the Company as a part of its request made pursuant to
Section 3.1(a). The Holder of the Registrable Common Stock to be registered
thereunder may select and obtain the investment banker or investment
bankers and manager or managers that will administer the offering;
provided, however, that such investment bankers and managers must be
reasonably satisfactory to the Company.
(d) Priority on Demand Registration. If the Underwriter does not
limit the number of Registrable Common Stock to be underwritten in a Demand
Registration, the Company may include securities for its own account or the
account of others in such registration if the underwriters so agree and if
the number of Registrable Common Stock which would otherwise have been
included in such registration and underwriting will not thereby be limited.
In the event that the Company elects to include securities for its own
account
<PAGE>
or the account of others pursuant to this Section 3.1(d), then
notwithstanding anything to the contrary, the Company will pay or cause to
be paid, the pro rata portion of: (i) any filing fees for such securities
to be registered by the Company; (ii) underwriting discounts and
commissions applicable to the Company's securities; and (iii) any
additional incremental costs, including without limitation, printing
expenses attributable to the offer, sale and registration of the Company's
securities in such Demand Registration.
3.2 Piggy-Back Registration.
(a) If at any time or from time to time during the five-year period
commencing from the date of this Agreement, the Company proposes to file a
Registration Statement under the Securities Act with respect to an offering
for its own account or for the account of others of any class of equity
security (other than a registration relating solely to employee benefit
plans or a registration on any registration form which dos not include
substantially the same information as would be required to be included in a
Registration Statement covering the sale of Registrable Common Stock), then
the Company shall in each case give written notice of such proposed filing
to the Holder of Registrable Common Stock at least sixty (60) days before
the anticipated filing date (the "Piggy-Back Registration Notice"), and
such notice shall offer the Holder the opportunity to register such
Registrable Common Stock as such Holder may request in writing to the
Company within twenty (20) days after the date of the Piggy-Back
Registration Notice (a "Piggy-Back Registration").
(b) Underwriting. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holder as part of the Piggy-Back Registration
Notice. The Company shall have the right to select and obtain the services
of the investment banker or investment bankers and manager or managers that
will administer the offering. The right of a Holder to registration shall
be conditioned upon such Holder's participating in such underwriting and
the inclusion of such Holder's Registrable Common Stock in the underwriting
to the extent provided herein.
(c) Subject to the provisions of Section 3.2(d), the Company shall
use its best efforts to cause the managing underwriter or underwriters of a
proposed underwritten offering to commit to the Holder of Registrable
Common Stock who has requested within twenty (20) days of receipt of the
Company's notice to be included in the registration for such offering (the
"Requesting Holder") to include such Registrable Common Stock in such
offering on the same terms and conditions as any similar securities of the
Company included therein; provided, however, that the Company shall not be
required to effect any such registration for any Holder if at the time of
the request such Holder could sell all of the Registrable Common Stock
specified in its request under Rule 144, or in any other transaction that
is exempt from registration under the Securities Act, during the
three-month period following such request.
(d) Priority on Piggy-Back Registration. Notwithstanding any other
division of this Section 3.2, if the underwriter for the Company determines
that market factors require a limitation of the number of shares to be
underwritten, the underwriter may exclude some or all Registrable Common
Stock from such registration and underwriting. The Company shall so advise
the Holder and the number of shares of Registrable Common Stock to be
offered by the Holder pursuant to the Piggy-Back Registration will be
reduced to the extent necessary to reduce the total number of shares of
Common Stock to be included in such offering to the number recommended by
the underwriter(s).
(e) Expenses. In connection with a Piggy-Back Registration, the
Company will pay all of the Registration Expenses, except for the pro rata
portion of: (i) any filing fees attributable to the Holder's Registrable
Common Stock; (ii) underwriting discounts and commissions applicable to the
Holder's Registrable Common Stock; and (iii) any additional incremental
costs, including, without limitation, printing expenses attributable to the
offer, sale and registration of the Holder's Registrable Common Stock in
<PAGE>
such Piggy-Back Registration.
3.3 Holdback Agreements.
(a) Registrations on Public Sale or Distribution. To the extent not
inconsistent with applicable law, the Holder agrees not to effect any
public sale or distribution of Registrable Common Stock, including a sale
pursuant to Rule 144 under the Securities Act during the sixty (60) day
period prior to, and during the ninety (90) day period beginning on, the
effective date of a Registration Statement in which shares of its
Registrable Common Stock are registered (except as part of such
registration), if and to the extent requested by the Company or by the
underwriter(s) in the case of an underwritten public offering.
(b) Stop Orders; Suspension of Effectiveness. If, in the case of
either a Demand Registration or a Piggy-Back Registration, a stop order is
imposed or if for any other reason the effectiveness of either a Demand
Registration or Piggy-Back Registration is suspended, then the Holder
agrees to stop distribution of its Common Stock thereunder immediately upon
written notice thereof from the Company.
3.4 Registration Procedures. Whenever the Holder has requested that any
Registrable Common Stock be registered pursuant to this Agreement, the Company
will use its best efforts to effect the registration of such Registrable Common
Stock in accordance with the intended method of distribution therefore as
quickly as is reasonably practicable, and in connection with any such request,
the Company will:
(a) in connection with a request pursuant to Section 3.1, prepare and
file with the Commission, not later than ninety (90) days after receipt of
a request to file a Registration Statement with respect to Registrable
Common Stock, a Registration Statement on any form for which the Company
then qualifies and which counsel for the Company shall deem appropriate and
which form shall be available for the registration of such Registrable
Common Stock in accordance with the intended method of distribution
thereof, and use its best efforts to cause such Registration Statement to
become effective; provided that if the Company shall furnish to the Holder
certified resolutions signed by the Chief Executive Officer of the Company
stating that in the good faith judgement of the Board of Directors it would
be significantly disadvantageous to the Company and its stockholders for
such a Registration Statement to be filed on or before the date filing
would be required, the Company shall have an additional period of not more
than sixty (60) days within which to file such Registration Statement;
(b) in connection with a registration pursuant to Section 3.1,
prepare and file with the Commission such amendments and supplements to
such Registration Statement and the prospectus used in connection therewith
as may be necessary to keep such Registration Statement effective for a
period of not less than one hundred eighty (180) days or such shorter
period which will terminate when all Registrable Common Stock covered by
such Registration Statement have been sold (but not before the expiration
of the ninety (90) day period referred to in Section 4(3) of the Act and
Rule 174 thereunder, if applicable), and comply with the provisions of the
Securities Act with respect to the disposition of all Registrable Common
Stock covered by such Registration Statement during such period in
accordance with the intended methods of disposition by the Holders set
forth in such Registration Statement;
(c) furnish to each seller of Registrable Common Stock, prior to
filing a Registration Statement, copies of such Registration Statement as
proposed to be filed, and thereafter such number of copies of such
Registration Statement, each amendment and supplement thereto (in each case
including all exhibits thereto), the prospectus included in such
Registration Statement (including each preliminary prospectus) and such
other documents as such seller may reasonably request in order to
facilitate the disposition of the Registrable Common Stock owned by such
seller;
(d) use its best efforts to register or qualify such Registrable
Common Stock under such other securities or blue sky laws of such
jurisdiction as any seller reasonably requests and do any and all other
acts and things which may
<PAGE>
be reasonably necessary or advisable to enable such seller to consummate
the disposition in such jurisdiction of the Registrable Common Stock owned
by such seller; provided, that the Company will not be required to (i)
qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this paragraph (d), (ii) subject
itself to taxation in any such jurisdiction or (iii) consent to general
service of process in any such jurisdiction;
(e) notify each seller of the Registrable Common Stock, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such Registration Statement contains an untrue
statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein
misleading. The Company will prepare a supplement or amendment to such
prospectus as may be appropriate and use its best efforts to cause such
supplement or amendment to become effective so that, as thereafter
delivered to the purchasers of such Registrable Common Stock, such
prospectus will not contain an untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading;
(f) enter into customary agreements (including an underwriting
agreement in customary form) and take such other actions as are reasonably
required in order to expedite or facilitate the disposition of such
Registrable Common Stock;
(g) make available for inspection by any seller of Registrable Common
Stock, any underwriter participating in any disposition pursuant to such
Registration Statement, and any attorney, accountant or other agent
retained by any such seller or underwriter (collectively, the
"Inspectors"), all financial and other records, pertinent corporate
documents and properties of the Company (collectively, the "Records") as
shall be reasonably necessary to enable them to exercise their due
diligence responsibility, and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such
Inspectors in connection with such Registration Statement. Records which
the Company determines, in good faith, to be confidential and which it
notifies the Inspectors are confidential shall not be disclosed by the
Inspectors unless (i) the disclosure of such records is necessary to avoid
or correct a misstatement or omission in the Registration Statement or (ii)
the release of such Records is ordered pursuant to a subpoena or other
order from a court of competent jurisdiction. Each seller of Registrable
Common Stock agrees that it will, upon learning that disclosure of such
Records is sought in a court of competent jurisdiction, give notice to the
Company and allow the Company, at the Company's expense, to undertake
appropriate action to prevent disclosure of the Records deemed
confidential.
(h) in the event such sale is pursuant to an underwritten offering,
use its best efforts to obtain (i) a "cold comfort" letter from the
Company's independent public accountants in customary form and covering
such matters of the type customarily covered by "cold comfort" letters as
the Holder or the managing underwriter reasonably request and (ii) an
opinion or opinions of counsel for the Company in customary form;
(i) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering
a period of twelve (12) months, beginning within three months after the
effective date of the Registrable Statement, which earning statement shall
satisfy the provisions of Section 11(a) of the Securities Act; and
(j) cause all such Registrable Common Stock to be listed on each
securities exchange or market on which similar securities issued by the
Company are then listed, provided that the applicable listing requirements
are satisfied.
The Company may require each seller of Registrable Common Stock as to
which any registration is being effected to furnish
<PAGE>
to the Company such information regarding the distribution of such securities as
the Company may from time to time reasonably request in writing.
The Holder agrees that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 3.4(e) hereof, such
Holder will forthwith discontinue disposition of Registrable Common Stock
pursuant to the Registration Statement covering such Registrable Common Stock
until such Holder's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 3.4(e) hereof, and, if so directed by the
Company such Holder will deliver to the Company (at the Company's expense) all
copies, other than permanent file copies then in such Holder's possession, of
the prospectus covering such Registrable Common Stock at the time of receipt of
such notice.
3.5 Indemnification and Contribution.
(a) Indemnification by the Company. The Company agrees to indemnify,
to the extent permitted by law, the Holder, its officers, directors and
agents and each Person who controls such Holder (within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act) from
and against any losses, claims, damages, liabilities and expenses resulting
from any untrue statement of material fact contained in any Registration
Statement, prospectus or preliminary prospectus or any omission of a
material fact required to be stated therein or necessary to make the
statements therein (in the case of a prospectus, in the light of the
circumstances under which they were made) not misleading, except insofar as
the same are caused by or contained in any information or affidavit with
respect to such Holder furnished in writing to the Company by, or on behalf
of, such Holder, expressly for inclusion in any Registration Statement or
prospectus.
(b) Indemnification by Holder. In connection with any Registration
Statement in which the Holder is participating, such Holder will furnish to
the Company in writing such information and affidavits with respect to such
Holder as the Company reasonably requests for use in connection with any
such Registration Statement or prospectus and agrees to indemnify, to the
extent permitted by law, the Company, its directors and officers and each
Person who controls the Company (within the meaning of Section 14 of the
Securities Act or Section 20 of the Exchange Act) from and against any
losses, claims, damages, liabilities and expenses resulting from any untrue
statement of a material fact or any omission or a material fact required to
be stated in the Registration Statement or preliminary, final or summary
prospectus or any amendment thereof or supplement thereto, or necessary to
make the statements therein (in the case of a preliminary, final or summary
prospectus, in the light of the circumstances under which they were made)
not misleading to the extent, but only to the extent, that such untrue
statement or omission is contained in any information or affidavit with
respect to such Holder so furnished in writing by, or on behalf of, such
Holder expressly for inclusion in any Registration Statement or prospectus.
(c) Conduct of Indemnification Proceedings. Any person entitled to
indemnification hereunder agrees promptly to give written notice to the
indemnifying party after the receipt of such person of any written notice
of the commencement of any action, suit, proceeding or investigation or
threat thereof made in writing for which such person will claim
indemnification or contribution pursuant to this Agreement and, unless in
the reasonable judgment of such indemnified party a conflict of interest
may exist between such indemnified party and the indemnifying party with
respect to such claim, permit the indemnifying party to participate in and
assume the defense of such claim with counsel reasonably satisfactory to
such indemnified party. If the indemnifying party is not entitled to, or
elects not to, assume the defense of a claim, it will not be obligated to
pay the fees and expenses of more than one counsel with respect to such
claim, unless in the reasonable judgment of such indemnified party a
conflict of interest may exist between such indemnified party and any other
of such indemnified parties with respect to such claim, in which event the
indemnifying party shall be obligated to pay the reasonable fees and
expenses of such additional counsel or counsels. The indemnifying party
will not be subject to any liability for any settlement made
<PAGE>
without its consent, which consent shall not be unreasonably withheld.
(d) Contribution. If the indemnification provided for in this Section
3.5 from the indemnifying party is unavailable to an indemnified party
hereunder in respect to any losses, claims, damages, liabilities or
expenses referred to herein, then the indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable to such indemnified party as a result of such losses, claims,
damages, liabilities or expenses in such proportion as is appropriate to
reflect the relative fault of the indemnifying party and indemnified
parties in connection with the actions which resulted in such losses
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative fault of such indemnifying party and
indemnified parties shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged
untrue statement of a material fact or omission or alleged omission to
state a material fact, has been made by, or related to information supplied
by, such indemnifying party and indemnified parties, and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such action. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include, subject to the limitations set forth in
Section 3.5(c), any legal or other fees or expenses reasonably incurred by
such party in connection with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 3.5(d) were determined by pro rata
allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person.
3.6 Participation in Underwritten Registrations. The Holder may not
participate in any underwritten registration hereunder unless such Holder (a)
agrees to sell its Registrable Common Stock on the basis provided in any
underwriting arrangements approved by the persons entitled hereunder to approve
such arrangements and (b) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements.
3.7 Rule 144. The Company covenants that it will file the reports required
to be filed by it under the Exchange Act and the rules and regulations adopted
by the Commission thereunder; and it will take such further action as any Holder
may reasonably request, all to the extent required from time to time to enable
such Holder to sell Registrable Common Stock without registration under the
Securities Act within the limitation of the exemptions provided by (a) Rule 144,
or (b) any similar rule or regulation hereafter adopted by the Commission. Upon
the request of any Holder, the Company will deliver to such Holder a written
statement as to whether it has complied with such requirements.
ARTICLE IV
MISCELLANEOUS
4.1 Inconsistent Agreements. The Company will not hereafter enter into
any agreement with respect to its securities which is inconsistent with this
Agreement. The Company has not previously entered into any agreement with
respect to any of its securities granting any registration rights to any person.
4.2 Amendments and Waivers. Except as otherwise provided herein, the
provisions of this Agreement may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given
unless the Company has obtained the written consent of Holders of at least a
majority of the Registrable Common Stock which are then outstanding affected by
such amendment, modification, supplement, waiver or departure.
4.3 Notices. All notices, requests, demands and other communications under
this Agreement must be in writing and will
<PAGE>
be deemed duly given, unless otherwise expressly indicated to the contrary, (i)
when personally delivered, (ii) upon receipt of a telephonic facsimile
transmission with confirmed telephonic transmission answer back, (iii) three (3)
days after having been deposited in the United States Mail, certified or
registered, return receipt required, postage prepaid, or (iv) business day after
having been dispatched by a nationally recognized overnight courier service,
addressed to the parties or their permitted assigns at the following addresses
(or at such other address or number as is given in writing by any of the parties
to the others) as follows:
If to the Company: The Fairchild Corporation
45025 Aviation Drive
Suite 400
Dulles, VA 20166-7516
Attn: Senior Vice President
If to Banner: Banner Aerospace, Inc.
45025 Aviation Drive
Suite 300
Dulles, VA 20166-7556
Attn: Senior Vice President
4.4 Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their successors
and permitted assigns.
4.5 Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
4.6 Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
4.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
4.8 Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions contained herein shall not be in any way impaired
thereby, it being intended that all of the rights and privileges of the parties
to this Agreement shall be enforceable to the fullest extent permitted by law.
4.9 Entire Agreement. This Agreement constitutes the entire agreement with
respect to the subject matter hereof and supersedes all prior written and oral
agreements with respect thereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
THE FAIRCHILD CORPORATION
By: Donald E. Miller, Sr. Vice
President
BANNER AEROSPACE, INC.
By: Eugene W. Juris, Vice
President and CFO
<PAGE>
To the Board of Directors
Of Nacanco Paketleme Sanayi vd Ticaret A.s.
22 September 1998
We agree to the inclusion in the Fairchild Company's annual Report on Form 10-K
of our report dated 12 March 1998 on our audit of the financial statements of
Nacanco Paketleme Sanayi vd Ticaret A.S.
Regards,
Zeynep Uras
Partner
PriceWaterhouse Coopers
BJK Plaza Spo Caddesi No: 92
B Blok, Kat 9 Akaretler
Besilctas 80680 Istanbul-Turkey
<PAGE>
THE FAIRCHILD CORPORATION
Alphabetical Listing of Subsidiaries as of 6/30/98
THE FAIRCHILD CORPORATION [DE] (The Ultimate)
A10 Inc. [DE] (3rd level sub)
Aero International, Inc. [Ohio] (2nd level sub)
Aero International, Inc. [Ohio] (2nd level sub)
Aircraft Tire Corporation [DE] (1st level sub) Aviation Full
Services (Hong Kong) Limited [Hong Kong] (7th level sub) Aviatrada GmbH
Aviation Support + Services [Germany] (7th level sub) Banner Aero
(Australia) Pty, Ltd. [Australia] (2nd level sub) Banner Aerospace (U.K.)
Limited [U.K.] (3rd level sub) Banner Aerospace Foreign Sales Corporation
[US Virgin Islands] (2nd level sub)
Banner Aerospace Holding Company I, Inc.[DE] (1st level sub)
Banner Aerospace Holding Company II, Inc.[DE] (2nd level sub) Banner
Aerospace Services, Inc. [Ohio] (2nd level sub) Banner Aerospace, Inc. [DE]
(1st level sub) Banner Aerospace-Singapore, Inc. [DE] (2nd level sub)
Banner Capital Ventures, Inc.[DE] (2nd level sub) Banner Energy Corporation
of Kentucky, Inc. [DE] (1st level sub) Banner Industrial Distribution,
Inc.[DE] (2nd level sub) Banner Industrial Products, Inc.[DE] (1st level
sub) Banner Investments (U.K.) Limited [U.K.] (3rd level sub) BAR DE, Inc.
[DE] (2nd level sub) Camloc (UK) Limited [UK] (5th level) Camloc Holdings
Inc. [DE] Convac Dresden GmbH [Germany] (5th level) Convac France S.A.
[France] (5th level) DAC International, Inc. [TX] (2nd level sub) Dah Dah,
Inc. [DE] (2nd level) Dallas Aerospace, Inc. [TX] (2nd level sub)
Discontinued Aircraft, Inc. [TX] (2nd level sub) Discontinued Services,
Inc.[DE] (2nd level sub)
Eurosim Componentes Mec??nicos de Seguran??a, Lda. [Portugal] (6th
level sub)
F. F. Handels GmbH [Germany] (2nd level sub)
Fairchild Arms International Ltd. [Canada] (3rd level sub)
Fairchild AS+C oHG Aviation Supply + Consulting (GmbH & Co.) [Germany]
(6th level sub)
Fairchild CDI S.A. [France] (1st level sub)
Fairchild Data Corporation [DE] (3rd level sub)
Fairchild Export Sales Corporation [Barbados] (2nd level sub)
Fairchild Fastener Group Ltd. [U.K.] (4th level sub)
Fairchild Fasteners Corp.[DE] (3rd level sub)
Fairchild Fasteners Europe--Camloc GmbH [Germany] (5th level sub)
Fairchild Fasteners Europe--Simmonds S.A.R.L. [France] (4th level sub)
Fairchild Fasteners Europe--VSD GmbH [Germany] (5th level sub)
Fairchild Finance Company [Republic of Ireland] (3rd level sub)
Fairchild France, Inc.[DE] (2nd level sub)
Fairchild Germany, Inc. [DE] (3rd level sub)
Fairchild Holding Corp. [Delaware] (2nd level sub)
Fairchild Retiree Medical Services, Inc. [DE] (4th level sub)
Fairchild Technologies Europe Ltd. [U.K.] (4th level sub)
Fairchild Technologies GmbH [Germany] (4th level sub)
Fairchild Technologies USA, Inc. [DE] (4th level sub)
Fairchild Titanium Technologies, Inc.[DE] (1st level sub)
Faircraft Sales Ltd.[DE] (1st level sub)
GCCUS, Inc. [CA] (2nd level sub)
Georgetown Jet Center, Inc. [DE] (2nd level sub)
Harco Northern Ireland, Ltd. [N. Ireland--UK] (2nd level sub)
Jenkins Coal Dock Company, Inc.[DE] (2nd level sub)
JJS Limited [United Kingdom] (4th level sub)
Mairoll, Inc. [DE] (3rd level sub)
Matrix Aviation, Inc. [KS] (2nd level sub)
M??caero S.A. [France] (7th level sub)
Meow, Inc. [DE] (3rd level sub)
MTA, Inc. [DE] (2nd level)
Nasam Incorporated [CA] (2nd level sub)
Northking Insurance Company Limited [Bermuda] (2nd level sub)
Oink Oink, Inc. [DE] (3rd level sub)
PB Herndon Aerospace, Inc. [Missouri] (3rd level sub)
Plymouth Leasing Company [DE] (1st level sub)
Professional Aircraft Accessories, Inc. [FL] (3rd level sub)
Professional Aviation Associates, Inc. [GA] (2nd level sub)
Quack Quack, Inc. [DE] (3rd level sub)
Recycling Investments II, Inc. [DE] (2nd level sub)
Recycling Investments, Inc. [DE] (2nd level sub)
RHI Holdings, Inc.[DE] (1st level sub)
Simmonds Mecaero Fasteners, Inc.[DE] (3rd level sub)
Simmonds S.A. [France] (5th level sub)
Solair, Inc. [FL] (2nd level sub)
Sovereign Air Limited [DE] (2nd level sub)
Special-T Fasteners, Inc. [DE] (1st level sub)
Transfix S.A. [France] (6th level sub)
Tri-Fast S.A.R.L. [France] (2nd level sub)
VSI Holdings, Inc. [DE] (3rd level sub)
<PAGE>
Consent of the Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statement File Nos. 35-27317, 33-21698, 33-06183, 333-49779, and
333- 62037.
Arthur Andersen LLP
Washington, DC
September 22, 1998
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarterly Period Ended December 27, 1998
Commission File Number 1-6560
THE FAIRCHILD CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 34-0728587
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
45025 Aviation Drive, Suite 400
Dulles, VA 20166
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703) 478-5800
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Title of Class January 31, 1998
Class A Common Stock, $0.10 Par Value 19,222,606
Class B Common Stock, $0.10 Par Value 2,624,062
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1.Condensed Consolidated Balance Sheets as of June 30, 1998 and
December 27, 1998 (Unaudited) 3
Consolidated Statements of Earnings for the Three and Six Months ended
December 28, 1997 and December 27, 1998 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Six Months ended
December 28, 1997 and December 27, 1998 (Unaudited) 7
Notes to Condensed Consolidated Financial Statements (Unaudited) 8
Item 2.Management's Discussion and Analysis of Results of Operations and
Financial Condition 13
Item 3.Quantitative and Qualitative Disclosure About Market Risk 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2 Changes in Securities and Use of Proceeds 23
Item 4.Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
</TABLE>
* For purposes of Part I and this Form 10-Q, the term "Company" means The
Fairchild Corporation, and its subsidiaries, unless otherwise indicated. For
purposes of Part II, the term "Company" means The Fairchild Corporation, unless
otherwise indicated.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 27, 1998 (Unaudited)
(In thousands)
ASSETS
June 30, Dec. 27,
1998 1998
CURRENT ASSETS: (*)
Cash and cash equivalents, $746 and $0
restricted $ 49,601 $ 16,063
Short-term investments 3,962 216,260
Accounts receivable-trade, less 120,284 95,435
allowances of $5,655 and $3,079
Inventories:
Finished goods 187,205 146,466
Work-in-process 20,642 19,074
Raw materials 9,635 9,142
217,482 174,682
Net current assets of discontinued 11,613 1,670
operations
Prepaid expenses and other current 53,081 52,870
assets
Total Current Assets 456,023 556,980
Property, plant and equipment, net of
accumulated
depreciation of $82,968 and $98,382 118,963 124,446
Net assets held for sale 23,789 20,794
Net noncurrent assets of discontinued 8,541 10,945
operations
Cost in excess of net assets acquired
(Goodwill), less
accumulated amortization of $42,079 168,307 167,262
and $43,581
Investments and advances, affiliated 27,568 28,416
companies
Prepaid pension assets 61,643 62,246
Deferred loan costs 6,362 5,879
Long-term investments 235,435 36,398
Other assets 50,628 70,275
TOTAL ASSETS $1,157,259 $1,083,641
*Condensed from audited financial statements.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 27, 1998 (Unaudited)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, Dec. 27,
1998 1998
CURRENT LIABILITIES: (*)
Bank notes payable and current
maturities of long-term debt $ 20,665 $ 25,287
Accounts payable 53,859 36,511
Accrued salaries, wages and commissions 23,613 19,837
Accrued employee benefit plan costs 1,463 1,741
Accrued insurance 12,575 12,234
Accrued interest 2,303 1,581
Other accrued liabilities 52,789 56,424
Income taxes 28,311 8,397
Total Current Liabilities 195,578 162,012
LONG-TERM LIABILITES:
Long-term debt, less current maturities 295,402 278,229
Other long-term liabilities 23,767 24,707
Retiree health care liabilities 42,103 43,127
Noncurrent income taxes 95,176 107,871
Minority interest in subsidiaries 31,674 28,075
TOTAL LIABILITIES 683,700 644,021
STOCKHOLDERS' EQUITY:
Class A common stock, $0.10 par value;
authorized 40,000 shares, 26,709
(26,679 in June) shares issued and
19,219 (20,429 in June) shares
outstanding 2,667 2,671
Class B common stock, $0.10 par value;
authorized 20,000 shares, 2,624
(2,625 in June) shares issued
issued and outstanding 263 263
Paid-in capital 195,112 195,291
Retained earnings 311,039 294,222
Cumulative other comprehensive income 16,386 21,183
Treasury Stock, at cost, 7,490
(6,250 in June) shares of Class A
common stock (51,908) (74,009)
TOTAL STOCKHOLDERS' EQUITY 473,559 439,620
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,157,259 $1,083,641
*Condensed from audited financial statements
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF EARNINGS (Unaudited)
For The Three (3) and Six (6) Months Ended December 28, 1997 and December 27,
1998
(In thousands, except per share data)
Three Months Ended Six Months Ended
12/28/97 12/27/98 12/28/97 12/27/98
REVENUE:
Net sales $208,616 $151,181 $402,978 $299,720
Other income, net 49 350 4,604 769
208,665 151,531 407,582 300,489
COSTS AND EXPENSES:
Cost of goods sold 151,794 113,799 299,827 227,666
Selling, general & administrative 42,259 27,272 78,968 55,446
Amortization of goodwill 1,387 1,360 2,606 2,638
195,440 142,431 381,401 285,750
OPERATING INCOME 13,225 9,100 26,181 14,739
Interest expense 15,683 7,770 28,658 15,206
Interest income (524) (476) (914) (1,059)
Net interest expense 15,159 7,294 27,744 14,147
Investment income (loss) (7,077) (1,027) (5,180) 834
Non-recurring loss on disposition
of subsidiary - (19,320) - (19,320)
Loss from continuing operations
before taxes (9,011) (18,541) (6,743) (17,894)
Income tax benefit 4,869 6,724 3,863 6,433
Equity in earnings of affiliates,
net 279 652 1,379 1,689
Minority interest, net (742) 2,338 (1,875) 2,135
Loss from continuing operations (4,605) (8,827) (3,376) (7,637)
Loss from discontinued operations,
net (1,945) - (2,682) -
Gain (loss) on disposal of
discontinued operations, net 29,974 (9,180) 29,974 (9,180)
Extraordinary items, net (3,024) - (3,024) -
NET EARNINGS (LOSS) $ 20,400 $(18,007) $20,892 $(16,817)
Other comprehensive income (loss), net of tax:
Foreign currency translation
adjustments (2,567) 2,306 (1,572) 7,552
Unrealized holding gains (losses)
on securities - 27,633 - (2,755)
Other comprehensive income (loss) (2,567) 29,939 (1,572) 4,797
COMPREHENSIVE INCOME (LOSS) $ 17,833 $ 11,932 $ 19,320 $(12,020)
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF EARNINGS (Unaudited)
For The Three (3) and Six (6) Months Ended December 28, 1997 and December 27,
1998
(In thousands, except per share data)
Three Months Ended Six Months Ended
12/28/97 12/27/98 12/28/97 12/27/98
BASIC EARNINGS PER SHARE:
Loss from continuing operations $ (0.27) $(0.40) $(0.20) $(0.35)
Loss from discontinued operations,
net (0.11) - (0.16) -
Gain (loss) on disposal of
discontinued operations, net 1.75 (0.42) 1.78 (0.41)
Extraordinary items, net (0.18) - (0.18) -
NET EARNINGS (LOSS) $ 1.19 $(0.82) $ 1.24 $(0.76)
Other comprehensive income (loss), net of tax:
Foreign currency translation
adjustments $(0.15) $ 0.11 $(0.09) $ 0.34
Unrealized holding losses on
securities arising during the period - 1.26 - (0.12)
Other comprehensive income (loss) (0.15) 1.37 (0.09) 0.22
COMPREHENSIVE INCOME (LOSS) $ 1.04 $ 0.55 $ 1.15 $(0.54)
DILUTED EARNINGS PER SHARE:
Loss from continuing operations $(0.27) $(0.40) $(0.20) $(0.35)
Loss from discontinued operations,
net (0.11) - (0.16) -
Gain (loss) on disposal of
discontinued operations, net 1.75 (0.42) 1.78 (0.41)
Extraordinary items, net (0.18) - (0.18) -
NET EARNINGS (LOSS) $1.19 $ (0.82) $ 1.24 $(0.76)
Other comprehensive income (loss), net of tax:
Foreign currency translation
adjustments $(0.15) $ 0.11 $(0.09) $ 0.34
Unrealized holding losses on
securities arising during the period - 1.26 - (0.12)
Other comprehensive income (loss) (0.15) 1.37 (0.09) 0.22
COMPREHENSIVE INCOME (LOSS) $ 1.04 $ 0.55 $ 1.15 $(0.54)
Weighted average shares outstanding:
Basic 17,088 21,872 16,864 22,129
Diluted 17,088 21,872 16,864 22,129
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For The Six (6) Months Ended December 28, 1997 and December 27, 1998
(In thousands)
For the Six Months Ended
12/28/97 12/27/98
Cash flows from operating activities:
Net earnings (loss) $ 20,892 $(16,817)
Depreciation and amortization 11,632 9,503
Accretion of discount on long-term
liabilities 1,686 2,578
Net loss on divestiture of subsidiary - 13,500
Net gain on disposal of discontinued
operations (29,974) -
Extraordinary items, net of cash payments 3,024 -
Distributed (undistributed) earnings of
affiliates, net 344 (777)
Minority interest 1,875 (2,135)
Change in assets and liabilities (96,975) (34,110)
Non-cash charges and working capital
changes of discontinued operations (4,349) (8,559)
Net cash used for operating activities (91,845) (36,817)
Cash flows from investing activities:
Purchase of property, plant and equipment (15,964) (13,574)
Acquisition of subsidiaries, net of cash
acquired (11,774) -
Proceeds received from (used for)
investment securities, net 5,786 (15,648)
Net proceeds received from the divestiture - 60,397
of subsidiary
Net proceeds received from the disposal of 84,733 -
discontinued operations
Changes in net assets held for sale (324) 3,335
Other, net 179 238
Investing activities of discontinued
operations (3,119) (223)
Net cash provided by investing activities
59,517 34,525
Cash flows from financing activities:
Proceeds from issuance of debt 143,712 55,777
Debt repayments and repurchase of
debentures, net (145,130) (69,375)
Issuance of Class A common stock 53,921 182
Purchase of treasury stock - (22,101)
Financing activities of discontinued
operations - 121
Net cash provided by (used for) financing
activities 52,503 (35,396)
Effect of exchange rate changes on cash (688) 4,150
Net change in cash and cash equivalents 19,487 (33,538)
Cash and cash equivalents, beginning of the
year 19,420 49,601
Cash and cash equivalents, end of the
period $ 38,907 $ 16,063
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except share data)
1. FINANCIAL STATEMENTS
The consolidated balance sheet as of December 27, 1998 and the consolidated
statements of earnings and cash flows for the six months ended December 28, 1997
and December 27, 1998 have been prepared by the Company, without audit. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows at December 27, 1998, and for all periods presented,
have been made. The balance sheet at June 30, 1998 was condensed from the
audited financial statements as of that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's June 30, 1998 Annual Report on Form 10-K and the Banner
Aerospace, Inc. ("Banner") March 31, 1998 Annual Report on Form 10-K. The
results of operations for the period ended December 27, 1998 are not necessarily
indicative of the operating results for the full year. Certain amounts in the
prior year's quarterly financial statements have been reclassified to conform to
the current presentation.
2. BUSINESS COMBINATIONS
The Company has accounted for the following acquisitions by using the
purchase method. The respective purchase price is assigned to the net assets
acquired based on the fair value of such assets and liabilities at the
respective acquisition dates.
On November 28, 1997, the Company acquired AS+C GmbH, Aviation Supply +
Consulting ("AS+C") in a business combination accounted for as a purchase. The
total cost of the acquisition was $14.0 million, which exceeded the fair value
of the net assets of AS+C by approximately $8.1 million, which is allocated as
goodwill and amortized using the straight-line method over 40 years. The Company
purchased AS+C with cash borrowings. AS+C is an aerospace parts, logistics, and
distribution company primarily servicing the European original equipment
manufacturers ("OEM's") market.
On March 2, 1998, the Company consummated the acquisition of Edwards and
Lock Management Corporation, doing business as Special-T Fasteners
("Special-T"), in a business combination accounted for as a purchase. The cost
of the acquisition was approximately $50.0 million, of which 50.1% of the
contractual purchase price was paid in shares of Class A Common Stock of the
Company and 49.9% was paid in cash. The total cost of the acquisition exceeded
the fair value of the net assets of Special-T by approximately $23.6 million,
which is preliminarily being allocated as goodwill, and amortized using the
straight-line method over 40 years. Special-T manages the logistics of worldwide
distribution of Company manufactured precision fasteners to customers in the
aerospace industry, government agencies, OEM's, and other distributors.
On January 13, 1998, Banner completed the disposition of substantially all
of the assets and certain liabilities of certain subsidiaries to AlliedSignal
Inc., in exchange for shares of AlliedSignal Inc. common stock with an aggregate
value equal to $369 million. The assets transferred to AlliedSignal Inc.
consisted primarily of Banner's hardware group, which included the distribution
of bearings, nuts, bolts, screws, rivets and other types of fasteners, and its
PacAero unit. Approximately $196 million of the common stock received from
AlliedSignal Inc. was used to repay outstanding term loans of Banner's
subsidiaries and related fees. The Company accounts for its remaining investment
in AlliedSignal Inc. common stock as an available-for-sale security.
On December 31, 1998, Banner consummated the sale of Solair, Inc., it's
largest subsidiary in the rotables group, to Kellstrom Industries, Inc.
("Kellstrom"), in exchange for approximately $57.0 million in cash and a warrant
to purchase 300,000 shares of common stock of Kellstrom. As a result of this
transaction, the Banner recorded a non-recurring pre-tax loss of approximately
$19.3 million in the current quarter.
3. DISCONTINUED OPERATIONS
For the Company's fiscal years ended June 30, 1996, 1997, 1998, and for the
first six months of fiscal 1999, Fairchild Technologies ("Technologies") had
pre-tax operating losses of approximately $1.5 million, $3.6 million, $48.7
million,and $16.1 million, respectively. The after-tax operating loss from
Technologies exceeded the previous recorded estimate for expected losses on
disposal by $2.9 million through December 1998. An additional after-tax charge
of $6.2 million was recorded in the six months ended December 27, 1998, based on
the current estimate of the remaining losses in connection with the disposition
of Technologies. While the Company believes that $6.2 million is a reasonable
charge for the remaining expected losses in connection with the disposition of
Technologies, there can be no assurance that this estimate is adequate.
Additional information regarding discontinued operations is set forth in
Footnote 4 of the Consolidated Financial Statements of the Company's June 30,
1998 Annual Report on Form 10-K.
<PAGE>
4. PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma consolidated financial information for the six
months ended December 28, 1997, present the results of the Company's operations
as though the divestitures of Banner's hardware group and Solair, and the
acquisitions of Special-T and AS+C, had been in effect since the beginning of
fiscal 1998. The unaudited pro forma consolidated financial information for the
six months ended December 27, 1998 provide the results of the Company's
operations as though the divestiture of Solair had been in effect since the
beginning of fiscal 1999. The pro forma information is based on the historical
financial statements of the Company, Banner, Special-T, and AS+C giving effect
to the aforementioned transactions. In preparing the pro forma data, certain
assumptions and adjustments have been made, including reduced interest expense
for revised debt structures and estimates of changes to goodwill amortization.
The following unaudited pro forma information are not necessarily indicative of
the results of operations that actually would have occurred if the transactions
had been in effect since the beginning of each period, nor are they indicative
of future results of the Company.
For the Six Months Ended
December 28, December 27,
1997 1998
Net sales $259,672 $271,401
Gross profit 59,039 66,081
Earnings (loss) from continuing operations (6,313) 4,960
Earnings (loss) from continuing operations,
per share $ (0.37) $ 0.22
The pro forma financial information has not been adjusted for non-recurring
gains from disposal of discontinued operations, reductions in interest expense
and investment income that have occurred or are expected to occur from these
transactions within the ensuing year.
5. EQUITY SECURITIES
The Company had 19,219,006 shares of Class A common stock and 2,624,662
shares of Class B common stock outstanding at December 27, 1998. Class A common
stock is traded on both the New York and Pacific Stock Exchanges. There is no
public market for the Class B common stock. Shares of Class A common stock are
entitled to one vote per share and cannot be exchanged for shares of Class B
common stock. Shares of Class B common stock are entitled to ten votes per share
and can be exchanged, at any time, for shares of Class A common stock on a
share-for-share basis. For the six months ended December 27, 1998, 13,825 shares
of Class A Common Stock were issued as a result of the exercise of stock
options, and shareholders converted 54 shares of Class B common stock into Class
A common stock. In accordance with terms of the Special-T Acquisition, as
amended, during the six months ended December 27, 1998, the Company issued 9,911
restricted shares of the Company's Class A Common Stock for additional merger
consideration. Additionally, the Company's Class A common stock outstanding was
effectively reduced as a result of 1,239,750 shares purchased by Banner. The
shares purchased by Banner are considered as treasury stock for accounting
purposes.
6. RESTRICTED CASH
On December 27, 1998, the Company did not have any restricted cash. On June
30, 1998, the Company had restricted cash of approximately $746, all of which
was maintained as collateral for certain debt facilities.
7. SUMMARIZED STATEMENT OF EARNINGS INFORMATION
The following table presents summarized historical financial information,
on a combined 100% basis, of the Company's principal investments, which are
accounted for using the equity method.
<PAGE>
For the Six Months Ended
December 28, December 27,
1997 1998
Net sales $ 48,841 $ 40,226
Gross profit 18,191 15,236
Earnings from continuing operations 8,132 8,929
Net earnings 8,132 8,929
The Company owns approximately 31.9% of Nacanco Paketleme common stock.
The Company recorded equity earnings of $1,680 (net of an income tax provision
of $904) and $1,841 (net of an income tax provision of $991) from this
investment for the six months ended December 28, 1997 and December 27, 1998,
respectively.
8. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
On December 27, 1998, the Company had $28,075 of minority interest, of
which $28,066 represents Banner. Minority shareholders hold approximately 17% of
Banner's outstanding common stock. For additional information regarding the
Company's proposal to acquire all the remaining stock in Banner it does not
already own, please refer to Note 11.
9. EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted
earnings per share:
Three Months Ended Six Months Ended
12/28/97 12/27/98 12/28/97 12/27/98
Basic earnings per share:
Loss from continuing operations $ (4,605) $ (8,827) $ (3,376) $ (7,637)
Common shares outstanding 17,088 21,872 16,864 22,129
Basic loss per share:
Basic loss from continuing
operations per share $ (0.27) $ (0.40) $ (0.20) $ (0.35)
Diluted earnings per share:
Loss from continuing operations $ (4,605) $ (8,827) $ (3,376) $ (7,637)
Common shares outstanding 17,088 21,872 16,864 22,129
Options antidilutive antidilutive antidilutive antidilutive
Warrants antidilutive antidilutive antidilutive antidilutive
Total shares outstanding 17,088 21,872 16,864 22,129
Diluted loss from continuing
operations per share $ (0.27) $(0.40) $ (0.20) $ (0.35)
For the three-month and six-month periods ended December 28, 1997 and
December 27, 1998, the computation of diluted loss from continuing operations
per share exclude the effect of incremental common shares attributable to the
potential exercise of common stock options outstanding and warrants outstanding,
because their effect was antidilutive. No adjustments were made to earnings per
share calculations for discontinued operations and extraordinary items.
<PAGE>
10. CONTINGENCIES
Government Claims
The Corporate Administrative Contracting Officer (the "ACO"), based upon
the advice of the United States Defense Contract Audit Agency, has made a
determination that Fairchild Industries, Inc. ("FII"), a former subsidiary of
the Company, did not comply with Federal Acquisition Regulations and Cost
Accounting Standards in accounting for (i) the 1985 reversion to FII of certain
assets of terminated defined benefit pension plans, and (ii) pension costs upon
the closing of segments of FII's business. The ACO has directed FII to prepare
cost impact proposals relating to such plan terminations and segment closings
and, following receipt of such cost impact proposals, may seek adjustments to
contract prices. The ACO alleges that substantial amounts will be due if such
adjustments are made, however, an estimate of the possible loss or range of loss
from the ACO's assertion cannot be made. The Company believes it has properly
accounted for the asset reversions in accordance with applicable accounting
standards. The Company has held discussions with the government to attempt to
resolve these pension accounting issues.
Environmental Matters
The Company's operations are subject to stringent government imposed
environmental laws and regulations concerning, among other things, the discharge
of materials into the environment and the generation, handling, storage,
transportation and disposal of waste and hazardous materials. To date, such laws
and regulations have not had a material effect on the financial condition,
results of operations, or net cash flows of the Company, although the Company
has expended, and can be expected to expend in the future, significant amounts
for investigation of environmental conditions and installation of environmental
control facilities, remediation of environmental conditions and other similar
matters, particularly in the Aerospace Fasteners segment.
In connection with its plans to dispose of certain real estate, the Company
must investigate environmental conditions and may be required to take certain
corrective action prior or pursuant to any such disposition. In addition,
management has identified several areas of potential contamination at or from
other facilities owned, or previously owned, by the Company, that may require
the Company either to take corrective action or to contribute to a clean-up. The
Company is also a defendant in certain lawsuits and proceedings seeking to
require the Company to pay for investigation or remediation of environmental
matters and has been alleged to be a potentially responsible party at various
"Superfund" sites. Management of the Company believes that it has recorded
adequate reserves in its financial statements to complete such investigation and
take any necessary corrective actions or make any necessary contributions. No
amounts have been recorded as due from third parties, including insurers, or set
off against, any liability of the Company, unless such parties are contractually
obligated to contribute and are not disputing such liability.
As of December 27, 1998, the consolidated total recorded liabilities of the
Company for environmental matters was approximately $8.9 million, which
represented the estimated probable exposures for these matters. It is reasonably
possible that the Company's total exposure for these matters could be
approximately $15.0 million.
Other Matters
In connection with the disposition of Banner's hardware business, the
Company received notice on January 12, 1999 from AlliedSignal making
indemnification claims against the Company for $18.9 million. Although the
Company believes that the amount of the 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.
The Company is involved in various other claims and lawsuits incidental to
its business, some of which involve substantial amounts. The Company, either on
its own or through its insurance carriers, is contesting these matters. In the
opinion of management, the ultimate resolution of the legal proceedings,
including those mentioned above, will not have a material adverse effect on the
financial condition, or future results of operations or net cash flows of the
Company.
<PAGE>
11. SUBSEQUENT EVENTS
On December 28, 1998, the Company announced that it had signed a definitive
merger agreement to acquire Kaynar Technologies Inc. ("Kaynar"), an aerospace
and industrial fastener manufacturer and tooling company, through a merger of
Kaynar with a wholly-owned subsidiary of the Company. The purchase price is $239
million for Kaynar common and preferred stock, $28 million for a covenant not to
compete from the majority Kaynar shareholder, and the Company will assume
approximately $98 million of Kaynar's debt. A majority of the holders of all
classes of Kaynar stock have agreed to vote in favor of the merger. The
transaction is subject to certain conditions, including financing and regulatory
approval.
On January 11, 1999, the Company reached an agreement and plan of merger to
acquire all of the remaining stock of Banner not already owned by the Company.
Currently, the Company owns approximately 85% of Banner's capital stock,
consisting of Banner common stock and Banner preferred stock, and public
shareholders own the remainder. The merger agreement is subject to approval by
Banner stockholders, and certain other conditions being satisfied or waived.
Pursuant to the merger agreement, each outstanding share of Banner's common
stock, other than shares owned by the Company and its affiliates, will be
converted into the right to receive $11.00 in market value of newly issued
shares of the Company's Class A Common Stock. The merger consideration is
subject to adjustments based on the price of the Company's Class A Common Stock
and the value of certain shares of AlliedSignal common stock owned by Banner.
The Company and Banner believe that combining will more closely coordinate the
activities of the two companies. In addition, the Company expects that the
merger will provide opportunities for reducing expenses, including saving the
costs of operating Banner as a separate public company. After the merger, Banner
will be a wholly-owned subsidiary of Fairchild.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Fairchild Corporation (the "Company") was incorporated in October 1969,
under the laws of the State of Delaware. On November 15, 1990, the Company
changed its name from Banner Industries, Inc. to The Fairchild Corporation. The
Company is the owner of 100% of RHI Holdings, Inc. ("RHI") and the majority
owner of Banner Aerospace, Inc. ("Banner"). RHI is the owner of 100% of
Fairchild Holding Corp. ("FHC"). The Company's principal operations are
conducted through Banner and FHC. The Company holds a significant equity
interest in Nacanco Paketleme ("Nacanco"), and, during the period covered by
this report, held a significant equity interest in Shared Technologies Fairchild
Inc. ("STFI"). (See Note 4 to the June 30, 1998 Form 10-K Consolidated
Financial Statements, as to the disposition of the Company's interest in STFI.)
The following discussion and analysis provide information which management
believes is relevant to assessment and understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the consolidated financial statements and
notes thereto.
<PAGE>
GENERAL
The Company is a leading worldwide aerospace and industrial fastener
manufacturer and distributor. Through its 83% owned subsidiary, Banner, the
Company is also an international supplier to the aerospace industry,
distributing a wide range of aircraft parts and related support services.
Through internal growth and strategic acquisitions, the Company has become one
of the leading aircraft parts suppliers to aircraft manufacturers and aerospace
hardware distributors.
The Company's aerospace business consists of two segments: aerospace
fasteners and aerospace parts distribution. The aerospace fasteners segment
manufactures and markets high performance fastening systems used in the
manufacture and maintenance of commercial and military aircraft. The aerospace
distribution segment stocks and distributes a wide variety of aircraft parts to
commercial airlines and air cargo carriers, fixed-base operators, corporate
aircraft operators and other aerospace companies.
CAUTIONARY STATEMENT
Certain statements in the financial discussion and analysis by management
contain forward-looking information that involve risk and uncertainty, including
current trend information, projections for deliveries, backlog, and other trend
projections. Actual future results may differ materially depending on a variety
of factors, including product demand; performance issues with key suppliers;
customer satisfaction and qualification issues; labor disputes; governmental
export and import policies; worldwide political stability and economic growth;
and legal proceedings.
RESULTS OF OPERATIONS
Business Combinations
The following business combinations completed by the Company over the past
twelve months significantly effect the comparability of the results from the
current period to the prior period.
On November 20, 1997, STFI entered into a merger agreement with Intermedia
Communications Inc. ("Intermedia") pursuant to which holders of STFI common
stock received $15.00 per share in cash (the "STFI Merger"). The Company was
paid approximately $178.0 million in cash (before tax and selling expenses) in
exchange for the common and preferred stock of STFI owned by the Company. The
results of STFI have been accounted for as discontinued operations.
On November 28, 1997, the Company acquired AS+C GmbH, Aviation Supply +
Consulting ("AS+C") in a business combination accounted for as a purchase. The
total cost of the acquisition was $14.0 million, which exceeded the fair value
of the net assets of AS+C by approximately $8.1 million, which is allocated as
goodwill and amortized using the straight-line method over 40 years. The Company
purchased AS+C with cash borrowings. AS+C is an aerospace parts, logistics, and
distribution company primarily servicing the European original equipment
manufacturers ("OEMs") market.
<PAGE>
On March 2, 1998, the Company consummated the acquisition of Edwards and
Lock Management Corporation, doing business as Special-T Fasteners
("Special-T"), in a business combination accounted for as a purchase. The cost
of the acquisition was approximately $50.0 million, of which 50.1% of the
contractual purchase price for the acquisition was paid in shares of Class A
Common Stock of the Company and 49.9% was paid in cash. The total cost of the
acquisition exceeded the fair value of the net assets of Special-T by
approximately $23.6 million, which is preliminarily being allocated as goodwill,
and amortized using the straight-line method over 40 years. Special-T manages
the logistics of worldwide distribution of Company manufactured precision
fasteners to customers in the aerospace industry, government agencies, OEMs, and
other distributors.
On January 13, 1998, Banner completed the disposition of substantially all
of the assets and certain liabilities of certain subsidiaries to AlliedSignal
Inc., in exchange for shares of AlliedSignal Inc. common stock with an aggregate
value equal to $369 million. The assets transferred to AlliedSignal Inc.
consisted primarily of Banner's hardware group, which included the distribution
of bearings, nuts, bolts, screws, rivets and other types of fasteners, and its
PacAero unit. Approximately $196 million of the common stock received from
AlliedSignal Inc. was used to repay outstanding term loans of Banner's
subsidiaries and related fees. The Company accounts for its remaining investment
in AlliedSignal Inc. common stock as an available-for-sale security.
On December 31, 1998, Banner consummated the sale of Solair, Inc., it's
largest subsidiary in the rotable group, to Kellstrom Industries, Inc.
("Kellstrom"), in exchange for approximately $57 million in cash and a warrant
to purchase 300,000 shares of common stock of Kellstrom. As a result of this
transaction, the Company recorded a non-recurring loss of approximately $19.3
million in the quarter ended December 27, 1998.
Consolidated Results
The Company currently reports in two principal business segments: Aerospace
Fasteners and Aerospace Distribution. The results of the Gas Springs Division
are included in the Corporate and Other classification. The following table
illustrates the historical sales and operating income of the Company's
operations for the three and six months ended December 27, 1998 and December 28,
1997, respectively.
(In thousands) Three Months Ended Six Months Ended
12/28/97 12/27/98 12/28/97 12/27/98
Sales by Segment:
Aerospace Fasteners $ 91,014 $102,764 $167,861 $ 199,322
Aerospace Distribution 119,614 46,838 242,528 97,366
Corporate and Other 1,362 1,579 2,724 3,032
Intersegment Eliminations(a) (3,374) - (10,135) -
TOTAL SALES $ 208,616 $151,181 $402,978 $ 299,720
Operating Results by Segment:
Aerospace Fasteners $ 6,382 $ 10,647 $ 8,892 $ 18,477
Aerospace Distribution 7,714 2,035 17,085 3,753
Corporate and Other (871) (3,582) 204 (7,491)
OPERATING INCOME $ 13,225 $ 9,100 $ 26,181 $ 14,739
<PAGE>
(a) Represents intersegment sales from the Aerospace Fasteners segment to the
Aerospace Distribution segment.
The following table illustrates sales and operating income of the Company's
operations by segment, on an unaudited pro forma basis, as though the
divestitures of Banner's hardware group and Solair, and the acquisitions of
Special-T and AS+C had been in effect for the three and six months ended
December 28, 1997, and the divestiture of Solair had been in effect for the
three and six months ended December 27, 1998. The pro forma information is based
on the historical financial statements of the Company, Banner, Special-T, and
AS+C giving effect to the aforementioned transactions. The pro forma information
is not necessarily indicative of the results of operations that would actually
have occurred if the transactions had been in effect since the beginning of each
period, nor is it necessarily indicative of future results of the Company.
(In thousands) Three Mnths Ended Six Months Ended
12/28/97 12/27/98 12/28/97 12/27/98
Sales by Segment:
Aerospace Fasteners $ 98,391 $102,764 $184,215 $199,322
Aerospace Distribution 34,710 34,946 72,733 69,047
Corporate and Other 1,362 1,579 2,724 3,032
TOTAL SALES $134,463 $139,289 $259,672 $271,401
Operating Results by Segment:
Aerospace Fasteners $ 8,011 $ 10,647 $ 12,480 $ 18,477
Aerospace Distribution 1,849 1,652 5,574 3,575
Corporate and Other (1,505) (3,582) (265) (7,491)
OPERATING INCOME $ 8,355 $ 8,717 $ 17,789 $ 14,561
Net sales of $151.2 million in the second quarter of fiscal 1999 decreased
by $57.4 million, or 27.5%, compared to sales of $208.6 million in the second
quarter of fiscal 1998. Net sales of $299.7 million in the first six months of
fiscal 1999 decreased by $103.3 million, or 25.6%, compared to sales of $403.0
million in the first six months of fiscal 1998. This decrease is primarily
attributable to the loss of revenues resulting from the disposition of Banner's
hardware group. Approximately 2.3% of the fiscal 1999 second quarter and 2.9% of
the current six months sales growth was stimulated by the commercial aerospace
industry. Recent acquisitions contributed approximately 3.5% and 4.1% to sales
growth in the fiscal 1999 second quarter and six-month periods, respectively.
While divestitures decreased growth by approximately 33.4% and 32.6% in the
fiscal 1999 second quarter and six-month periods, respectively. On a pro forma
basis, net sales increased 3.6% and 4.5% for the three and six months ended
December 27, 1998, respectively, compared to the same periods ended December 28,
1997.
Gross margin as a percentage of sales was 20.3% and 24.7% in the second
quarter of fiscal 1998 and 1999, respectively, and 25.6% and 24.0% in the first
six months of fiscal 1998 and 1999, respectively. The lower margins in the
fiscal 1999 period are attributable to a change in product mix in the Aerospace
Distribution segment as a result of the disposition of Banner's hardware group.
Partially offsetting the overall lower margins was an improvement in margins
within the Aerospace Fasteners segment resulting from acquisitions, efficiencies
associated with increased production, improved skills of the work force, and
reduction in the payment of overtime.
Selling, general & administrative expense as a percentage of sales was
20.3% and 18.0% in the second quarter of fiscal 1998 and 1999, respectively, and
19.6% and 18.5% in the six month period of fiscal 1998 and 1999, respectively.
The improvement in the fiscal 1999 periods is attributable primarily to
administrative efficiencies of the Company's ongoing operations.
Other income decreased $3.8 million in the first six months of fiscal 1999,
compared to the first six months of fiscal 1998. The Company recognized $4.4
million of income in the prior period from the involuntary conversion of air
rights over a portion of the property the Company owns and is developing in
Farmingdale, New York.
<PAGE>
Operating income of $9.1 million in the second quarter of fiscal 1999
decreased 31.2%, compared to operating income of $13.2 million in the second
quarter of fiscal 1998. Operating income of $14.7 million in the first six
months of fiscal 1999 decreased 43.7%, compared to operating income of $26.2
million in the fiscal 1998 six-month period. The decreases are primarily
attributable to the loss of operating income resulting from the disposition of
Banner's hardware group and the decrease in other income.
Net interest expense decreased $7.9 million, or 51.9%, in second quarter of
fiscal 1999, compared to the second quarter of fiscal 1998. Net interest expense
decreased $13.6 million, or 49.0%, in first six months of fiscal 1999, compared
to the same period of fiscal 1998. The decreases in the current year were due to
a series of transactions completed in fiscal 1998, which significantly reduced
the Company's total debt.
Investment income (loss) improved by $6.0 million in the first six months
of fiscal 1999, compared to the same period of fiscal 1998, due to recognizing
realized gains in the fiscal 1999 period while recording unrealized holding
losses on fair market adjustments of trading securities in the fiscal 1998
period.
The Company recognized a $19.3 million non-recurring loss in the second
quarter and first six months of fiscal 1999 as a result of its recent
divestiture Solair, Inc.
Minority interest improved by $4.0 million in the first six months of
fiscal 1999 due to losses reported by Banner in the fiscal 1999 periods
primarily resulting from the divestiture of Solair, Inc.
An income tax benefit of $6.4 million in the first six months of fiscal
1999 represented a 36.0% effective tax rate on pre-tax losses from continuing
operations. The tax provision was slightly higher than the statutory rate
because amortization of goodwill is not deductible for income tax purposes.
<PAGE>
Included in loss from discontinued operations for the six months ended
December 28, 1997, are the results of Fairchild Technologies ("Technologies")
and the Company's equity in earnings of STFI prior to the STFI Merger. The
Company reported a $30.0 million after-tax gain on disposal of discontinued
operations in the fiscal 1998 periods resulting from the disposition of a
portion of its investment in STFI. The Company reported a $9.2 million loss on
disposal of discontinued operations in the fiscal 1999 periods. This charge is
the result of the after-tax operating loss from Technologies exceeding the
previous estimate for expected losses from disposal by $2.9 million through
December 1998, and the Company taking an additional $6.2 million after-tax
charge based on the current estimate of remaining losses in connection with the
disposition. While the Company believes that $6.2 million is a reasonable charge
for the remaining expected losses in connection with the disposition of
Technologies, there can be no assurance that this estimate is adequate.
In the fiscal 1998 periods ended December 28, 1997, the Company recorded a
$3.0 million extraordinary loss, net, from the write-off of deferred loan fees
associated with the early extinguishment of credit facilities that were
significantly modified and replaced as part of a refinancing.
Comprehensive income (loss) includes foreign currency translation
adjustments and unrealized holding changes in the fair market value of available
for-sale investment securities. Foreign currency translation adjustments
increased by $2.3 million and $7.6 million in the three and six months ended
December 27, 1998. The fair market value of unrealized holding securities
increased by $27.6 million in the second quarter and declined by $2.8 million in
the six months ended December 27, 1998. The changes reflect primarily market
fluctuations in the value of AlliedSignal common stock, which the Company
received from the disposition of Banner's hardware group.
Segment Results
Aerospace Fasteners Segment
Sales in the Aerospace Fasteners segment increased by $11.8 million in the
second quarter of fiscal 1999 and $31.5 million in the first six months of
fiscal 1999, compared to same periods of fiscal 1998, reflecting growth
experienced in the commercial aerospace industry combined with the effect of
acquisitions. Approximately 4.8% and 9.0% of the increase in sales resulted from
internal growth in the current quarter and six-month period, respectively, while
acquisitions contributed approximately 8.1% and 9.7% of the increase in the
current quarter and six-month period, respectively. New orders have leveled off
in recent months. Backlog was reduced to $158 million at December 27, 1998, down
from $177 million at June 30, 1998. On a pro forma basis, including the results
from acquisitions in the prior period, sales increased by 4.4% and 8.2% in the
second quarter and first six months of fiscal 1999, respectively, compared to
the same periods of the prior year.
Operating income improved by $4.3 million, or 66.8%, in the second quarter
and $9.6 million, or 108%, in the first six months of fiscal 1999, compared to
the fiscal 1998 periods. Acquisitions and marketing changes contributed to this
improvement. Approximately 67.4% of the increase in operating income during the
first six months of fiscal 1999 reflected internal growth, while acquisitions
contributed approximately 40.4% to the increase. On a pro forma basis, operating
income increased by 32.9% and 48.1%, for the quarter and six months ended
December 27, 1998, respectively, compared to the quarter and six months ended
December 28, 1997.
<PAGE>
Aerospace Distribution Segment
Aerospace Distribution sales decreased by $72.8 million, or 60.8% in the
second quarter and $145.2 million, or 59.9%, for the fiscal 1999 six-month
period, compared to the fiscal 1998 periods, due primarily to the loss of
revenues as a result of the disposition of Banner's hardware group.
Approximately 58.4% of the decrease in sales in the current six-month period
resulted from divestitures, and approximately 1.5% resulted from a decrease in
internal growth. On a pro forma basis, excluding sales contributed by
dispositions, sales increased 0.7% in the second quarter and decreased 5.1% in
the first six months of fiscal 1999, compared to the same periods in the prior
year.
Operating income decreased $5.7 million in the second quarter and $13.3
million in the first six months of fiscal 1999, compared to the same periods of
the prior year, due primarily to the disposition of Banner's hardware group. On
a pro forma basis, excluding results from dispositions, operating income
decreased $0.2 million in the second quarter and $2.0 million in the first six
months of fiscal 1999, compared to the same periods of the prior year.
Corporate and Other
The Corporate and Other classification includes the Gas Springs Division
and corporate activities. The group reported a slight improvement in sales in
the fiscal 1999 periods, compared to fiscal 1998 periods. An operating loss of
$7.5 million in the first six months of fiscal 1999 was $7.7 million lower than
operating income of $0.2 million reported in the first six months of fiscal
1998. The comparable period in the prior year included other income of $4.4
million realized as a result of the sale of air rights over a portion of the
property the Company owns and is developing in Farmingdale, New York and a
decline in legal expenses.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total capitalization as of June 30, 1998 and December 27, 1998 amounted to
$789.6 million and $743.1 million, respectively. The changes in capitalization
included an decrease in debt of $12.6 million and a decrease in equity of $33.9
million. The decrease in debt was the result proceeds received from the
divestiture of Solair used to reduce debt, offset partially from additional
borrowings for investment purposes and the purchase of some of the Company's
common stock. The decrease in equity was due primarily to a $22.1 million
purchase of treasury stock and the $16.8 million reported loss, offset partially
by a $4.8 million increase in cumulative other comprehensive income.
The Company maintains a portfolio of investments classified as
available-for-sale securities, which had a fair market value of $252.7 million
at December 27, 1998. The market value of these investments decreased $2.8
million in the first six months of fiscal 1999. While there is risk associated
with market fluctuations inherent to stock investments, and because the
Company's portfolio is small and predominately consists of a large position in
AlliedSignal common stock, large swings in the value of the portfolio should be
expected. In the six months ended December 27, 1998, the Company reclassified a
large portion of its investment portfolio to current assets as a result of an
increased probability that these investments will be liquidated during the next
twelve months, subject to market conditions.
<PAGE>
Net cash used by operating activities for the six months ended December 28,
1997 and December 27, 1998 was $91.8 million and $36.8 million, respectively.
The primary use of cash for operating activities in the first six months of
fiscal 1999 was a decrease of $47.5 million in accounts payable and accrued
liabilities, and increases in inventories of $20.1 million and other non-current
assets of $17.6 million. Partially offsetting the use of cash from operating
activities was a $30.2 increase in other non-current liabilities and a $13.6
million decrease in accounts receivable. In the first six months of fiscal 1998
the primary use of cash for operating activities was a $33.7 million increase in
inventories, $16.6 million increase in other current assets and accounts
receivable of $7.3 million and a $35.0 million decrease in accounts payable and
other accrued liabilities.
Net cash provided from investing activities for the six months ended
December 27, 1998 and December 28, 1997, amounted to $59.5 million and $34.5
million, respectively. In the first six months of fiscal 1999, the primary
source of cash from investing activities was $57.0 million of net proceeds
received from disposition of Solair, Inc., offset partially by $16.0 million of
capital expenditures and $15.6 million used to purchase investments. In the
first six months of fiscal 1998, the primary source of cash from investing
activities were $84.7 million of net proceeds received from investment
liquidations in STFI, offset partially by $16.0 million of capital expenditures.
Net cash provided by (used for) financing activities for the six months
ended December 27, 1998 and December 28, 1997, amounted to $52.5 million and
$(35.4) million, respectively. Cash used for financing activities in the first
six months of fiscal 1999 included a $69.4 million repayment of debt and the
$22.1 million purchase of treasury stock, offset partially by a $55.8 million
net increase from the issuance of additional debt. The primary source of cash
provided by financing activities in the first six months of fiscal 1998 was the
net proceeds received from the issuance of additional stock of $53.7 million.
The Company's principal cash requirements include debt service, capital
expenditures, acquisitions, and payment of other liabilities. Other liabilities
that require the use of cash include postretirement benefits, environmental
investigation and remediation obligations, and litigation settlements and
related costs. The Company expects that cash on hand, cash generated from
operations, and cash from borrowings and asset sales will be adequate to satisfy
cash requirements.
<PAGE>
Proposed Mergers
On December 28, 1998, the Company announced that it had signed a definitive
merger agreement to acquire Kaynar Technologies Inc. ("Kaynar"), an aerospace
and industrial fastener manufacturer and tooling company, through a merger of
Kaynar with a wholly-owned subsidiary of the Company. The purchase price is $239
million for Kaynar common and preferred stock, $28 million for a covenant not to
compete from the majority Kaynar shareholder, and the Company will assume
approximately $98 million of Kaynar's debt. A majority of the holders of all
classes of Kaynar stock have agreed to vote in favor of the merger. The
transaction is subject to certain conditions, including financing and regulatory
approval.
On January 11, 1999, the Company reached an agreement and plan of merger to
acquire all of the remaining stock of Banner not already owned by the Company.
Currently, the Company owns approximately 85% of Banner's capital stock,
consisting of Banner common stock and Banner preferred stock, and public
shareholders own the remainder. The merger agreement is subject to approval by
Banner stockholders, and certain other conditions being satisfied or waived.
Pursuant to the merger agreement, each outstanding share of Banner's common
stock, other than shares owned by the Company and its affiliates, will be
converted into the right to receive $11.00 in market value of newly issued
shares of the Company's Class A Common Stock. The merger consideration is
subject to adjustments based on the price of the Company's Class A Common Stock
and the value of certain shares of AlliedSignal common stock owned by Banner.
The Company and Banner believe that combining will more closely coordinate the
activities of the two companies. In addition, the Company expects that the
merger will provide opportunities for reducing expenses, including saving the
costs of operating Banner as a separate public company. After the merger, Banner
will be a wholly-owned subsidiary of Fairchild.
Discontinued Operations
For the Company's fiscal years ended June 30, 1996, 1997, 1998, and for the
first six months of fiscal 1999, Fairchild Technologies ("Technologies") had
pre-tax operating losses of approximately $1.5 million, $3.6 million, $48.7
million, and $16.1 million, respectively. In response, in February 1998, the
Company adopted a formal plan to enhance the opportunities for disposition of
Technologies, while improving the ability of Technologies to operate more
efficiently. The plan includes a reduction in production capacity, work force,
and the pursuit of potential vertical and horizontal integration with peers and
competitors of Technologies. The Company believes that it may be required to
contribute substantial additional resources to provide Technologies with the
liquidity necessary to continue operating before such integration is completed.
<PAGE>
Uncertainty of the Spin-Off
In order to focus its operations on the aerospace industry, the Company has
been considering for some time distributing (the "Spin-Off") to its stockholders
certain of its assets via distribution of all of the stock of Fairchild
Industrial Holdings Corp. ("FIHC"), which may own all or a substantial part of
the Company's non-aerospace operations. The Company is still in the process of
deciding the exact composition of the assets and liabilities to be included in
FIHC, but such assets would be likely to include certain real estate interests
and the Company's 31.9% interest in Nacanco Paketleme (the largest producer of
aluminum cans in Turkey). The ability of the Company to consummate the Spin-Off,
if it should choose to do so, would be contingent, among other things, on
obtaining consents and waivers under the Company's credit facility and all
necessary governmental and third party approvals. There is no assurance that the
Company will be able to obtain the necessary consents and waivers from its
lenders. In addition, the Company may encounter unexpected delays in effecting
the Spin-Off, and the Company can make no assurance as to the timing thereof.
There can be no assurance that the Spin-Off will occur.
Depending on the ultimate structure and timing of the Spin-Off, it may be a
taxable transaction to stockholders of the Company and could result in a
material tax liability to the Company and its stockholders. The amount of the
tax to the Company and the shareholders is uncertain, and if the tax is material
to the Company, the Company may elect not to consummate the Spin-Off. Because
circumstances may change and provisions of the Internal Revenue Code of 1986, as
amended, may be further amended from time to time, the Company may, depending on
various factors, restructure or delay the timing of the Spin-Off to minimize the
tax consequences thereof to the Company and its stockholders, or elect not to
consummate the Spin-Off. Pursuant to the Spin-Off, it is expected that FIHC may
assume certain liabilities (including contingent liabilities) of the Company and
may indemnify the Company for such liabilities. In the event that FIHC is unable
to satisfy the liabilities, which it will assume in connection with the
Spin-Off, the Company may have to satisfy such liabilities.
Year 2000
As the end of the century nears, there is a widespread concern that many
existing computer programs that use only the last two digits to refer to a year
will not properly recognize a year that begins with the digits "20" instead of
"19." If not corrected, many computer applications could fail, create erroneous
results, or cause unanticipated systems failures, among other problems. The
Company has begun to take appropriate measures to ensure that its information
processing systems, embedded technology and other infrastructure will be ready
for the Year 2000.
<PAGE>
The Company has retained both technical review and modification consultants
to help it assess its Year 2000 readiness. Working with these consultants and
other advisors, the Company has formulated a plan to address Year 2000 issues.
Under this plan, the Company's systems are being modified or replaced, or will
be modified or replaced, as necessary, to render them, as far as possible, Year
2000 compliant. Substantially all of the material systems within the Aerospace
Fasteners segment are currently Year 2000 compliant. At Technologies, the
Company intends to replace and upgrade a number of important systems that are
not Year 2000 compliant, and is assessing the extent to which current product
inventories may include embedded technology that is not Year 2000 compliant. The
Company expects to complete initial testing of its most critical information
technology and related systems by June 30, 1999, and anticipates that it will
complete its Year 2000 preparations by October 31, 1999. The Company could be
subject to liability to customers and other third parties if its systems are not
Year 2000 compliant, resulting in possible legal actions for breach of contract,
breach or warranty, misrepresentation, unlawful trade practices and other harm.
In addition, the Company is continually attempting to assess the level of
Year 2000 preparedness of its key suppliers, distributors, customers and service
providers. To this end, the Company has sent, and will continue to send,
letters, questionnaires and surveys to its significant business partners
inquiring about their Year 2000 efforts. If a significant business partner of
the Company fails to Year 2000 compliant, the Company could suffer a material
loss of business or incur material expenses.
The Company is also developing and evaluating contingency plans to deal
with events affecting the Company or one of its business partners arising from
significant Year 2000 problems. These contingency plans include identifying
alternative suppliers, distribution networks and service providers.
Although the Company's Year 2000 assessment, implementation and contingency
planning is not yet complete, the Company does not now believe that Year 2000
issues will materially affect its business, results of operations or financial
condition. However, the Company's Year 2000 efforts may not be successful in
every respect. To date, the Company has incurred approximately $0.8 million in
costs that are directly attributable to addressing Year 2000 issues. Management
currently estimates that the Company will incur between $2 million and $3
million in additional costs during the next 12 months relating to the Year 2000
problem.
<PAGE>
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 will adopt SFAS
131 in fiscal 1999.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132 ("SFAS 132") "Employers' Disclosures about Pensions and Other
Postretirement Benefits." SFAS 132 revises and improves the effectiveness of
current note disclosure requirements for employers' pensions and other retiree
benefits by requiring additional information to facilitate financial analysis
and eliminating certain disclosures which are no longer useful. SFAS 132 does
not address recognition or measurement issues. The Company will adopt SFAS 132
in fiscal 1999.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes a new model for accounting for derivatives and
hedging activities and supersedes and amends a number of existing accounting
standards. It requires that all derivatives be recognized as assets and
liabilities on the balance sheet and measured at fair value. The corresponding
derivative gains or losses are reported based on the hedge relationship that
exists, if any. Changes in the fair value of hedges that are not designated as
hedges or that do not meet the hedge accounting criteria in SFAS 133 are
required to be reported in earnings. Most of the general qualifying criteria for
hedge accounting under SFAS 133 were derived from, and are similar to, the
existing qualifying criteria in SFAS 80 "Accounting for Futures Contracts." SFAS
133 describes three primary types of hedge relationships: fair value hedge, cash
flow hedge, and foreign currency hedge. The Company will adopt SFAS 133 in
fiscal 1999 and is currently evaluating the financial statement impact.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The table below provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, which include interest rate swaps. For interest rate
swaps, the table presents notional amounts and weighted average interest rates
by expected (contractual) maturity dates. Notional amounts are used to calculate
the contractual payments to be exchanged under the contract. Weighted average
variable rates are based on implied forward rates in the yield curve at the
reporting date.
<TABLE>
<CAPTION>
Expected Fiscal year Maturity Date
1999 2000 2001 2002 2003 Thereafter
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Swaps:
Variable to Fixed - 20,000 60,000 - - 100,000
Average cap rate - 7.25% 6.81% - - 6.49%
Average floor rate - 5.84% 5.99% - - 6.24%
Weighted average - 4.99% 4.80% - - 5.44%
rate
Fair Market Value - (88) (731) - - (9,828)
</TABLE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required to be disclosed under this Item is set forth in
Footnote 10 (Contengencies) of the Consolidated Financial Statements (Unaudited)
included in this Report.
Item 2 Changes in Securities and Use of Proceeds
On December 4, 1998, Banner Aerospace, Inc. (a subsidiary of the Company)
donated 6,650 unregistered shares of the Company's Class A Common Stock to
Brandeis University. Such shares were previously treated as Treasury Shares by
the Company. As this was a charitable contribution, no proceeds were received
either by the Company or its subsidiary in connection with the donation.
Item 4. Submission of Matters to a vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on November 19,
1998. Seven matters of business were held to vote for the following purposes:
(1) to elect fourteen directors of the Company for the ensuing year ("Proposal
1"); (2) to amend the Company's Stock Option Plan by increasing the number of
shares issuable thereunder ("Proposal 2"); (3) to amend the Company's Stock
Option Plan to permit plan participants to defer the gain that would otherwise
be received by such participants upon the exercise of an option ("Proposal 3");
(4) to approve the grant of stock options to certain executive officers and
employees under the Company's Stock Option ("Proposal 4"); (5) to approve the
material terms of performance goals for fiscal 1999 incentive compensation award
for the Company's President and Chief Operating Officer ("Proposal 5"); (6) to
approve the material terms of performance goals for fiscal 1999 incentive
compensation award for the Company's Chief Executive Officer ("Proposal 6"); and
(7) to approve the amendment to a warrant issued to an affiliate of the
Company's Chief Executive Officer ("Proposal 7"). The following tables provide
the shareholder election results in number of shares:
<PAGE>
Proposal 1
Directors: Votes For Votes
Withheld
Michael T. Alcox
43,306,167 201,656
Melville R. Barlow
43,302,267 205,556
Mortimer M. Caplin
43,269,587 238,236
Colin M. Cohen
43,312,279 195,544
Philip David
43,305,592 202,231
Robert E. Edwards
43,307,212 200,611
Harold J. Harris
43,313,884 193,939
Daniel Lebard
43,308,789 199,034
Jacques S. Moskovic
43,280,157 227,666
Herbert S. Richey
43,281,494 226,329
Moshe Sanbar
43,310,784 197,039
Robert A. Sharpe
43,304,697 203,126
Eric I. Steiner
43,297,871 209,952
Jeffrey J. Steiner
43,298,870 208,953
<PAGE>
Votes For Votes Abstain Non-Vote
Against
Proposal 2
40,363,495 3,082,510 61,818 2,235,142
Proposal 3
41,339,967 2,108,882 58,973 2,235,143
Proposal 4
41,139,504 2,284,684 83,635 2,235,142
Proposal 5
36,676,003 675,496 81,954 8,309,512
Proposal 6
36,652,364 681,247 99,842 8,309,512
Proposal 7
36,647,952 683,542 101,960 8,309,511
Item 5. Other Information
Articles have appeared in the French press reporting an inquiry by a
French magistrate into certain allegedly improper business transactions
involving Elf Acquitaine, a French petroleum company, its former chairman and
various third parties, including Maurice Bidermann. In connection with this
inquiry, the magistrate has made inquiry into allegedly improper transactions
between Mr. Steiner and that petroleum company. In response to the magistrate's
request that Mr. Steiner appear in France as a witness, Mr. Steiner submitted
written statements concerning the transactions and appeared in person before the
magistrate and others. Mr. Steiner, who has been put under examination (mis en
examen), by the magistrate, with respect to this matter, has not been charged.
Mr. Steiner appeared before the Tribunal de Grande Instance de Paris to
answer a charge of knowingly benefiting in 1990 from a misuse by Mr. Bidermann
of corporate assets of Societe Generale Mobiliere et Immobiliere, a French
corporation in which Mr. Bidermann is believed to have been the sole
shareholder. Mr. Steiner has paid a fine of two million French Francs in
connection therewith.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(Stinbes Warrants)
*10.1 Amendment of Warrant Agreement dated December 12, 1998, effective
retroactively as of September 17, 1998, between Registrant and Stinbes
Limited.
(Other Material Contracts)
10.2 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 Registrants' Registration Statement on
Form S-4, filed on January 15, 1999).
10.3 Agreement and Plan of Reorganization by and among The Fairchild
Corporation, Dah Dah, Inc. and Kaynar Technologies Inc. dated as of
December 26, 1998 (incorporated by reference to Registrant's Report on
Form 8-K dated December 30, 1998).
10.4 Voting and Option Agreement by and among The Fairchild Corporation, Dah
Dah, Inc., CFE Inc., and General Electric Capital Corporation dated as
of December 26, 1998 (incorporated by reference to Registrant's Report
on Form 8-K dated December 30, 1998).
10.5 Voting Agreement by and between The Fairchild Corporation and Jordan A.
Law dated as of December 26, 1998 (incorporated by reference to
Registrant's Report on Form 8-K dated December 30, 1998).
10.6 Voting Agreement by and between The Fairchild Corporation and David A.
Werner dated as of December 26, 1998 (incorporated by reference to
Registrant's Report on Form 8-K dated December 30, 1998).
10.7 Voting Agreement by and between The Fairchild Corporation and Robert L.
Beers dated as of December 26, 1998 (incorporated by reference to
Registrant's Report on Form 8-K dated December 30, 1998).
10.8 Voting Agreement by and between The Fairchild Corporation and LeRoy A.
Dack dated as of December 26, 1998 (incorporated by reference to
Registrant's Report on Form 8-K dated December 30, 1998).
*27 Financial Data Schedules.
* - Filed herewith
(b) Reports on Form 8-K:
There have been no reports on Form 8-K filed during the quarter.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to the signed on its behalf by the undersigned
hereunto duly authorized.
For THE FAIRCHILD CORPORATION (Registrant) and as its
Chief Financial Officer:
By: Colin M. Cohen
Senior Vice President and
Chief Financial Officer
Date: February 5, 1999
<PAGE>
AMENDMENT OF WARRANT AGREEMENT
BETWEEN THE FAIRCHILD CORPORATION AND
STINBES LIMITED
FOR 375,000 SHARES OF CLASS A OR CLASS B COMMON STOCK
This Amendment of Warrant Agreement (the "Amendment"), dated December 28,
1998, effective retroactively as of September 17, 1998, is made for the purpose
of modifying (as provided below) the Warrant Agreement dated as of March 13,
1986 (the "Warrant Agreement"), between The Fairchild Corporation, p/k/a Banner
Industries, Inc., a Delaware corporation (the "Company"), and Stinbes Limited.
Capitalized terms used but not otherwise defined herein shall have the meaning
ascribed to them in the Warrant Agreement. This amendment was approved (as a
form of compensation to Jeffrey Steiner) by the Company's shareholders at the
1998 Annual Meeting held on November 19, 1998.
RECITALS
A. On March 13, 1986, the Company entered into the Warrant
Agreement with Drexel Burnham Lambert ("DBL"), and (pursuant
to the terms of the Warrant Agreement) issued to DBL
warrants to purchase up to an aggregate of 200,000 shares of
either Class A or Class B common stock of the Company (the
"Warrants"). The Warrants were issued in conjunction with
DBL acting as the underwriter for the public offering of
certain of the Company's debentures.
B. Pursuant to a Purchase and Sale Agreement dated as of January 4, 1989,
Jeffrey J. Steiner ("Steiner"), DBL and the Company, Steiner purchased
187,500 Warrants from DBL (subject to all the benefits and obligations
under the Warrant Agreement).
C. Section 5.1 of the Warrant Agreement provides that the
Warrant Price and the number of Warrant Shares are subject
to adjustment upon the occurrence of certain events pursuant
to the terms of Section 9 of the Warrant Agreement. In
June, 1989, as a result of a two-for-one stock split (an
adjustable event as defined in Section 9 of the Warrant
Agreement) the number of Warrant Shares in favor of Steiner
was increased to 375,000, and the Warrant Price was
decreased to $7.67 per share.
D. On September 12, 1991, the Board of Directors of the Company
voted to renew the Warrants issued in favor of Steiner,
which had expired on March 13, 1991, for an extended term to
expire on March 13, 1993. On March 8, 1993, the Board of
Directors of the Company voted to extend the Expiration Date
of the Warrants to March 13, 1995. On February 16, 1995,
the Board of Directors of the Company voted to extend the
Expiration Date of the Warrants to March 13, 1997.
E. On March 22, 1993, Steiner assigned the Warrants to Bestin
Ltd. On May 31, 1993, Bestin Ltd. assigned the Warrants to
Stinbes Limited. Stinbes Limited is an affiliate of
Steiner.
F. By Board action taken on February 21, 1997, and again on
September 11, 1997, and September 26, 1997, the Board of
Directors of the Company voted to extend the Expiration Date
of the Warrants to March 13, 2002, subject to the following
modifications: (i) effective as of February 21, 1997, the
Expiration Date of any issued Warrants, outstanding and
unexpired on that date, shall be March 13, 2002; (ii)
effective as of February 21, 1997, the Warrant Price shall
be $7.67 per share, increased by two tenths of one cent
($.002) for each day subsequent to March 13, 1997, but fixed
at $7.80 per share after June 30, 1997.
G. On February 9, 1998, the Board voted to modify the Warrant Agreement to:
(i) revise the window periods during which the Warrants may be exercised;
and (ii) to provide that the payment of the Warrant Price may be made in
shares of the Company's Class A or Class B Common Stock.
H. On September 17, 1998, subject to shareholder approval, in
recognition of services performed by Mr. Steiner, the
Compensation Committee and the Board voted to modify the
Warrant Agreement to: (i) revise the window period during
which the Warrants may be exercised; (ii) to revise the
Warrant Price; and (iii) to provide that these amendments to
the Warrants shall be deemed additional compensation to the
Chief Executive Officer;
I. Section 17 of the Warrant Agreement provides that the Company and the
Holder may, from time to time, supplement or amend the Warrant Agreement in
any manner which "the Company may deem necessary or desirable and which
shall not be inconsistent with the provisions of the Warrants and which
shall not adversely affect the interest of the Holders."
<PAGE>
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein, and for other good and valuable consideration (the receipt and adequacy
of which are hereby acknowledged), the parties hereto agree as follows:
1. Effective as of September 17, 1998, the Warrants may not be
exercised except within any one of the following window
periods: (a) Window Period One: at any time on or prior to
March 9, 2000 (two years from the date of the merger of
Shared Technologies Fairchild, Inc. with Intermedia
Communications, Inc.); (b) Window Period Two: within 365
days after a change of control of the Company, as defined in
the Fairchild Holding Corp. Credit Agreement with Citicorp
et. al.; or (c) Window Period Three: within 365 days after
a change of control of Banner Aerospace, Inc., as defined in
the Banner Aerospace, Inc. Credit Agreement with Citicorp.
et. al. In no event may the Warrants be exercised after
March 13, 2002.
2. Effective as of September 17, 1998, the Warrant Price at which the Warrants
may be exercised during Window Period One shall be $7.80 per share, plus
two tenths of one cent ($.002) for each day subsequent to March 9, 1999.
The Warrant Price at which the Warrants may be exercised during Window
Periods Two and Three shall be $7.80 per share.
3. The amendments made to the Warrants effective as of September 17, 1998
(outlined above) are made in recognition of the services performed by Mr.
Jeffrey Steiner in connection with the extraordinary transactions during
fiscal 1998 and are intended to be deemed additional compensation. The
amendments were approved by the Company's shareholders at the 1998 Annual
Meeting (held on November 19, 1998).
4. Each reference in the Warrant Agreement to "this Agreement"
"hereunder", "hereof", "herein", or words of like import
shall mean and be a reference to the Warrant Agreement, as
amended, extended or modified previously or hereby, and each
reference to the Warrant Agreement and any other document,
instrument or agreement executed and/or delivered in
connection with the Warrant Agreement shall mean and be a
reference to the Warrant Agreement as amended, extended, or
modified previously or hereby.
<PAGE>
5. Except as specifically modified herein, the Warrant Agreement shall remain
in full force and effect and is hereby ratified and confirmed.
6. This Amendment may be executed in multiple counterparts.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
by their respective officers thereunto duly authorized as of the date first
written above.
THE FAIRCHILD CORPORATION
By: ___________/s/_______________
Donald E. Miller
Executive Vice President and Corporate
Secretary
STINBES LIMITED
By: __________/s/___________________
David Faust
Vice President
<PAGE>
APPENDIX D
[Letterhead of Houlihan, Lokey Howard & Zukin Capital]
January 11, 1999
The Special Committee of the Board of Directors of Banner Aerospace, Inc.
c/o Mr. Steven L. Gerard
Chairman of the Special Committee of the Board of Directors
150 East 61st Street
New York, NY 10021
Gentlemen:
We understand that The Fairchild Corporation ("Fairchild") has proposed to
purchase the remaining outstanding shares of Banner Aerospace, Inc. ("Banner"
or the "Company") that it does not already own for $11.00 per share payable in
Fairchild common stock pursuant to the terms of an agreement and plan of merger
(the "Agreement") dated January 11, 1999, among the Company, Fairchild and MTA,
Inc., a wholly owned subsidiary of Fairchild. As more specifically set forth in
the Agreement, each Banner shareholder will be entitled to receive common stock
in Fairchild at the exchange rate of $11.00 per Banner share subject to certain
adjustments in the Agreement. Such transaction and all related transactions are
referred to collectively herein as the "Transaction."
You have requested our opinion (the Opinion) as to the matters set forth
below. The Opinion does not address the Company's underlying business decision
to effect the Transaction. We have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of the
Company. Furthermore, at your request, we have not negotiated the Transaction.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the Company's annual reports to shareholders and Form 10-K
for the fiscal years ended March 31, 1995 through March 31, 1998 and
quarterly reports on Form 10-Q for the two quarters ended September 30,
1998, and interim financial statements for the period ended October 31,
1998, which the Company's management has identified as being the most
current financial statements available;
2. reviewed Fairchild's annual reports to shareholders and Form 10-K for
the fiscal years ended June 30, 1995 through June 30, 1998, and quarterly
report on Form 10-Q of Fairchild for the quarter ended September 30, 1998;
3. reviewed Fairchild's results, prepared by management, for the fiscal
year ending June 30, 1998, pro-forma the acquisition of Kaynar Technologies
Inc.;
4. reviewed a draft copy of the Agreement among The Fairchild
Corporation, MTA, Inc. and Banner Aerospace, Inc. dated January 1999;
5. met with certain members of the senior management of the Company and
Fairchild to discuss the operations, financial condition, future prospects
and projected operations and performance of the Company and Fairchild,
respectively;
6. visited the business offices of the Company and Fairchild located in
Chantilly, Virginia;
7. reviewed pro forma financial statements and projections for the
Company and Fairchild dated December 30, 1998 prepared by the management of
the Company and Fairchild for the years ending June 30, 1998 through 2004;
8. reviewed the charter and by-laws of the Company;
D-1
<PAGE>
9. reviewed the historical market prices and trading volume for the
Company's and Fairchild's publicly traded securities;
10. reviewed certain other publicly available financial data for certain
companies that we deemed comparable to the Company and Fairchild, and
publicly available prices and premiums paid in other transactions that we
considered similar to the Transaction;
11. reviewed drafts of certain documents to be delivered at the closing
of the Transaction; and
12. conducted such other studies, analyses and inquiries as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of the Company and Fairchild, and, except as
disclosed in such financial forecasts and projections, that there has been no
material change in the assets, financial condition, business or prospects of
the Company or Fairchild since the date of the most recent financial statements
made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company or Fairchild and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of the
Company or Fairchild. Our opinion is necessarily based on business, economic,
market and other conditions as they exist and can be evaluated by us at the
date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that the
consideration to be received by the public common stockholders of the Company
in connection with the Transaction is fair to them from a financial point of
view.
HOULIHAN LOKEY HOWARD & ZUKIN CAPITAL
D-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law makes provision for the
indemnification of officers and directors of corporations in terms sufficiently
broad to indemnify the officers and directors of the registrant under certain
circumstances for liabilities (including reimbursement of expenses incurred)
arising under the Securities Act of 1933, as amended.
The registrant's Bylaws provide that the registrant may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
registrant), by reason of the fact that he is or was a director, officer,
employee or agent of the registrant or is or was serving at the request of the
registrant as a director, officer, employee or agent of another corporation or
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
3.1 Registrant's Restated Certificate of Incorporation (incorporated
by reference to Exhibit "C" of Registrant's Proxy Statement dated
October 27, 1989).
3.2 Registrant's Amended and Restated By-Laws, as amended as of
November 21, 1996 (incorporated by reference to the Registrant's
quarterly Form 10-Q for the quarter ended December 29, 1996 (the
"December 1996 10-Q")).
4.1 Specimen of Class A Common Stock certificate (incorporated by
reference to Registration Statement No. 33-15359 on Form S-2).
4.2 Specimen of Class B Common Stock certificate (incorporated by
reference to Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1989 (the "1989 10-K"))
5.1 Opinion of Cahill Gordon & Reindel as to the legality of the
Common Stock.*
5.2 Opinion of John L. Flynn, Esq., as to certain tax matters.
10. Material Contracts
10.1 1988 U.K. Stock Option Plan of Banner Industries, Inc.
(incorporated by reference from Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1988)
(the "1988 10-K").
10.2 Description of grants of stock options to non-employee directors
of Registrant (incorporated by reference to the 1988 10-K).
10.3 1986 Non-Qualified and Incentive Stock Option Plan (incorporated
by reference to Registrant's Proxy Statement dated November 15,
1990).
10.4 1986 Non-Qualified and Incentive Stock Option Plan (incorporated
by reference to Registrant's Proxy Statement dated November 21,
1997).
10.5 1996 Non-Employee Directors Stock Option Plan (incorporated by
reference to Registrant's Proxy Statement dated November 21,
1997).
10.6 Stock Option Deferral Plan dated February 9, 1998 (incorporated by
reference to Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 29, 1998) (the "March 1998 10-Q").
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
10.7 Amended and Restated Employment Agreement between Registrant and Jeffrey
J. Steiner dated September 10, 1992 (incorporated by reference from
Registrants Annual Report on Form 10-K for the fiscal year ended June
30, 1993) (the "1993 10-K").
10.8 Letter Agreement dated September 9, 1996, between Registrant and Colin
M. Cohen (incorporated by reference from Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1997) (the "1997 10-K").
10.9 Employment Agreement between RHI Holdings, Inc., and Jacques Moskovic,
dated as of December 29, 1994 (incorporated by reference to the
Registrant's Annual Report on Form 10-K/A for the fiscal year ended June
30, 1996) (the "l996 10-K/A").
10.10 Employment Agreement between Fairchild France, Inc., and Jacques
Moskovic, dated as of December 29, 1994 (incorporated by reference to
the 1996 10-K/A).
10.11 Employment Agreement between Fairchild France, Inc., Fairchild CDI,
S.A., and Jacques Moskovic, dated as of April 18, 1997 (incorporated by
reference to the Registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 1995) (the "l995 10-K").
10.12 Employment Agreement between Robert Edwards and Fairchild Holding Corp.,
dated March 2, 1998 (incorporated by reference to the March 1998 10-Q).
10.13 Letter Agreement dated February 27, 1998, between Registrant and John L.
Flynn (incorporated by reference to the March 1998 10-Q).
10.14 Letter Agreement dated February 27, 1998, between Registrant and Donald
E. Miller (incorporated by reference to the March 1998 10-Q).
10.15 Promissory Note in the amount of $100,000, issued by Robert Sharpe to
the Registrant, dated July 1, 1998 (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1998) (the "1998 10-K").
10.16 Promissory Note in the amount of $200,000 issued by Robert Sharpe to the
Registrant, dated July 1, 1998 (incorporated by reference to the 1998
10-K).
10.17 Credit Agreement dated as of March 13, 1996, among Fairchild Holding
Corporation ("FHC"),
Citicorp USA, Inc. and certain financial institutions (incorporated by
reference from Registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 1996) (the "1996 10-K").
10.18 Restated and Amended Credit Agreement dated as of July 26, 1996, (the
"FHC Credit Agreement"), among FHC, Citicorp USA, Inc. and certain
financial institutions (incorporated by reference to the 1996 10-K).
10.19 Amendment No. 1, dated as of January 21, 1997, to the FHC Credit
Agreement dated as of March 13, 1996 (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
30, 1997) (the "March 1997 10-Q").
10.20 Amendment No. 2 and Consent, dated as of February 21, 1997, to the FHC
Credit Agreement dated as of March 13, 1996 (incorporated by reference
to the March 30,1997 10-Q).
10.21 Amendment No. 3, dated as of June 30,1997, to the FHC Credit Agreement
dated as of March 13, 1996 (incorporated by reference to the 1997 10-K).
10.22 Second Amended And Restated Credit Agreement dated as of July 18, 1997,
to the FHC Credit Agreement dated as of March 13, 1996 (incorporated by
reference to the 1997 10-K).
10.23 Restated and Amended Credit Agreement dated as of May 27, 1996, (the
"RHI Credit Agreement"), among RHI, Citicorp USA, Inc. and certain
financial institutions. (incorporated by reference to the 1996 10-K).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
CC
<C> <S>
10.24 Amendment No. 1 dated as of July 29, 1996, to the RHI Credit Agreement
(incorporated by reference to the 1996 10-K).
10.25 Amendment No. 2 dated as of April 7, 1997, to the RHI Credit Agreement
(incorporated by reference to the 1997 10-K).
10.26 Amendment No. 3 dated as of September 26, 1997, to the RHI Credit
Agreement (incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 28, 1997) (the
"September 1997 10-Q").
10.27 Third Amended and Restated Credit Agreement, dated as of December 19,
1997, among RHI, FHC, the Registrant, Citicorp USA, Inc. and certain
financial institutions (incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 28, 1997)
(the "December 1997 10-Q").
10.28 Interest Rate Hedge Agreement between Registrant and Citibank, N.A.
dated as of August 19, 1997 (incorporated by reference to the September
1997 10-Q).
10.29 Amendment dated as of December 23,1997, to the Interest Rate Hedge
Agreement between Registrant and Registrant and Citibank, N.A. dated as
of August 19, 1997 (incorporated by reference to the December 1997 10-
Q).
10.30 Amendment dated as of January 14, 1997, to the Interest Rate Hedge
Agreement between Registrant and Citibank, N.A. dated as of August 19,
1997 (incorporated by reference to the March 1998 10-Q).
10.31 Form Warrant Agreement (including form of Warrant) issued by the Company
to Drexel Burnham Lambert on March 13, 1986, subsequently purchased by
Jeffrey Steiner and subsequently assigned to Stinbes Limited (an
affiliate Jeffrey Steiner), for the purchase of Class A or Class B
Common Stock (incorporated herein by reference to Exhibit 4(c) of
Fairchild's Registration Statement No. 33-3521 on Form S-2).
10.32 Form Warrant Agreement issued to Stinbes Limited dated as of September
26, 1997, effective retroactively as of February 21, 1997 (incorporated
by reference to the September 1997 10-Q).
10.33 Extension of Warrant Agreement between Registrant and Stinbes Limited
for 375,000 shares of Class A or Class B Common Stock dated as of
September 26, 1997, effective retroactively as of February 21, 1997
(incorporated by reference to the September 1997 10-Q).
10.34 Amendment of Warrant Agreement dated February 9, 1998, between the
Registrant and Stinbes Limited (incorporated by reference to the March
1998 10-Q).
10.35 Agreement and Plan of Reorganization by and among The Fairchild
Corporation, Dah Dah, Inc. and Kaynar Technologies Inc. dated as of
December 26, 1998 (incorporated by reference to Registrant's Report on
Form 8-K dated December 30, 1998).
10.36 Voting and Option Agreement by and among The Fairchild Corporation, Dah
Dah, Inc., CFE Inc., and General Electric Capital Corporation dated as
of December 26, 1998 (incorporated by reference to Registrant's Report
on Form 8-K dated December 30, 1998).
10.37 Voting Agreement by and between The Fairchild Corporation and Jordan A.
Law dated as of December 26, 1998 (incorporated by reference to
Registrant's Report on Form 8-K dated December 30, 1998).
10.38 Voting Agreement by and between The Fairchild Corporation and David A.
Warner dated as of December 26, 1998 (incorporated by reference to
Registrant's Report on Form 8-K dated December 30, 1998).
10.39 Voting Agreement by and between The Fairchild Corporation and Robert L.
Beers dated as of December 26, 1998 (incorporated by reference to
Registrant's Report on Form 8-K dated December 30, 1998).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
CC
<C> <S>
10.40 Voting Agreement by and between The Fairchild Corporation and LeRoy A.
Dack dated as of December 26, 1998 (incorporated by reference to
Registrant's Report on Form 8-K dated December 30, 1998).
10.41 Asset Purchase Agreement dated as of December 8, 1997, among Banner
Aerospace, Inc. and seven of its subsidiaries (Adams Industries, Inc.,
Aerospace Bearing Support, Inc., Aircraft Bearing Corporation, Banner
Distribution, Inc., Burbank Aircraft Supply, Inc., Harco, Inc. and
PacAero), AlliedSignal Inc. and AS BAR LLC (incorporated by reference to
Banner Aerospace, Inc.'s Report on Form 8-K dated January 28, 1998).
10.42 Asset Purchase Agreement dated as of December 8, 1997, among Banner
Aerospace, Inc. and two of its subsidiaries (PB Herndon Aerospace, Inc.
and Banner Aerospace Services, Inc.), AlliedSignal Inc. and AS BAR PBH
LLC (incorporated by reference to Banner Aerospace, Inc.'s Report on
Form 8-K dated January 28, 1998).
10.43 Registration Rights Agreement between Registrant and Banner Aerospace,
Inc., dated as of July 7, 1998 (incorporated by reference to the 1998
10-K).
10.44 Agreement and Plan of Merger dated January 28, 1998, as amended on
February 20, 1998, and March 2, 1998, between the Company and the
shareholders' of Special-T Fasteners (incorporated by reference to Form
8-K dated as of March 2, 1998 filed by Fairchild on March 12, 1998).
10.45 Stock Purchase Agreement dated November 25, 1997 between RHI Holdings,
Inc. and Intermedia Communications Inc. (incorporated by reference to
Schedule 13D/A (Amendment No. 4) dated as of November 25, 1997 filed by
Fairchild on December 1, 1997).
10.46 Stock Option Agreement dated November 20, 1997 between RHI Holdings,
Inc. and Intermedia Communications Inc. (incorporated by reference to
Scheduled 13D/A (Amendment No. 4) dated as of November 25, 1997 filed by
Fairchild on December 1, 1997).
10.47 Voting Agreement dated as of July 16,1997, between RHI Holdings, Inc.,
and Tel-Save Holdings, Inc., (incorporated by reference to the
Registrant's Schedule 13D/A, Amendment No. 3, filed July 22, 1997,
regarding Registrant's stock ownership in Shared Technologies Fairchild
Inc.)
10.48 Agreement and Plan of Merger dated as of November 9, 1995 by and among
The Fairchild Corporation, RHI, FII and Shared Technologies, Inc. ("STI
Merger Agreement") (incorporated by reference from the Registrant's Form
8-K dated as of November 9,1995).
10.49 Amendment No. 1 to STI Merger Agreement dated as of February 2, 1996
(incorporated by reference from the Registrant's Form 8-K dated as of
March 13,1996).
10.50 Amendment No. 2 to STI Merger Agreement dated as of February 23, 1996
(incorporated by reference from the Registrant's Form 8-K dated as of
March 13, 1996).
10.51 Amendment No. 3 to STI Merger Agreement dated as of March 1, 1996
(incorporated by reference from the Registrant's Form 8-K dated as of
March 13, 1996).
10.52 Stock Exchange Agreement between The Fairchild Corporation and Banner
Aerospace, Inc. pursuant to which the Registrant exchanged Harco, Inc.
for shares of Banner Aerospace, Inc. (incorporated by reference to the
Banner Aerospace, Inc. Definitive Proxy Statement dated and filed with
the SEC on February 23, 1996 with respect to the Special Meeting of
Shareholders of Banner Aerospace, Inc. held on March 12, 1996).
10.53 Asset Purchase Agreement dated as of January 23, 1996, between The
Fairchild Corporation, RHI and Cincinnati Milacron, Inc. (incorporated
by reference from the Registrant's Form 8-K dated as of January 26,
1996).
10.54 Purchase Agreement by and between BTR Dunlop Holdings, Inc., RHI
Holdings, Inc., and Registrant, dated as of December 2, 1993
(incorporated by reference to Registrant's current report on Form 8-K
dated December 23, 1993).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
CC
<C> <S>
10.55 Allocation Agreement dated April 13, 1992 by and among The Fairchild
Corporation, RHI, Rex-PT Holdings, Rexnord Corporation, Rexnord Puerto
Rico, Inc. and Rexnord Canada Limited (incorporated by reference to 1992
10-K).
10.56 Agreement and Plan of Merger by and between the Fairchild Corporation,
MTA, Inc. and Banner Aerospace, Inc. dated as of January 11, 1999.
(filed within as Appendix "A" to the Proxy Statement/Prospectus included
as part of this Registration Statement).
10.57 Unsecured subordinated Promissory Note, dated , 1999, between The
Fairchild Corporation and Banner Aerospace, Inc.
11.1 Statement Regarding Computations of per share Earnings (incorporated by
reference from the Fairchild Form 10-K for the fiscal year ended June
30, 1998).
21.1 List of Subsidiaries of Registrant (incorporated by reference from the
Fairchild Form 10-K for the fiscal year ended June 30, 1997).
23.1 Consent of Arthur Andersen LLP, independent public accountants.
23.2 Consent of Basaran Serbest Muhasebeci Mali Musavirlik A.S., independent
public accountants.
23.3 Consent of Cahill Gordon & Reindel (to be included in Exhibit 5.1).
23.4 Consent of John L. Flynn (to be included in Exhibit 5.2).
24.1 Power of Attorney (set forth on the signature page of the Registration
Statement).
99.1 Letter of Transmittal for Banner Common Stock Certificates*.
99.2 Letter of Transmittal for Banner Preferred Stock Certificates*.
</TABLE>
- --------
* To be filed by amendment.
Item 22. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, subject to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue. The undersigned Registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
of 1933, each filing of the registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that it
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(2) To deliver or cause to be delivered with the prospectus, to each
person to whom the prospectus is sent or given, the latest annual report to
security holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule
14c-3 under the Securities Exchange Act of 1934; and, where interim
financial information required to be presented by Article 3 of Regulation
S-X is not set forth in the prospectus, to deliver, or cause to be
delivered to each person to whom the prospectus is sent or given, the
latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
II-5
<PAGE>
(3) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this
Form S-4 within one business day of receipt of such request, and to send
the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to
the effective date of the registration statement through the date of
responding to the request.
(4) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
(5) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; or
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(6) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(7) To remove from registration by means of post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in The City of New York,
State of New York, on February 26, 1999.
The Fairchild Corporation
/s/ Donald E. Miller
By: _________________________________
Name Donald E. Miller
Title Executive Vice President
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Donald E. Miller acting alone, his true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any or all amendments or
supplements to this Registration Statement and to file the same with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
necessary or appropriate to be done with this Registration Statement and any
amendments or supplements hereto, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C>
</TABLE>
Signature Title
/s/ Jeffrey J. Steiner Chairman of the Board, Chief Executive
- ------------------------------------- Officer
Jeffrey J. Steiner
/s/ Michael T. Alcox Director
- -------------------------------------
Michael T. Alcox
/s/ Melville R. Barlow Director
- -------------------------------------
Melville R. Barlow
/s/ Mortimer M. Caplin Director
- -------------------------------------
Mortimer M. Caplin
/s/ Colin M. Cohen Senior Vice President, Chief Financial
- ------------------------------------- Officer, Controller and Director
Colin M. Cohen (Principal Accounting Officer)
(Principal Financial Officer)
<PAGE>
<TABLE>
<S> <C>
</TABLE>
Signature Title
Director
- -------------------------------------
Philip David
/s/ Robert E. Edwards Director
- -------------------------------------
Robert E. Edwards
/s/ Harold J. Harris Director
- -------------------------------------
Harold J. Harris
Director
- -------------------------------------
Daniel Lebard
/s/ Jacques S. Moskovic
- ------------------------------------- Senior Vice President and Director
Jacques S. Moskovic
Director
- -------------------------------------
Herbert S. Richey
Director
/s/ Moshe Sanbar
- -------------------------------------
Moshe Sanbar
/s/ Robert A. Sharpe II Senior Vice President-Operations and
- ------------------------------------- Director
Robert A. Sharpe II
President, Chief Operating Officer and
Director
- -------------------------------------
Eric I. Steiner
<PAGE>
LOGO
PROXY PROXY
BANNER AEROSPACE, INC.
SPECIAL MEETING, [ ], 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Eugene W. Juris, Warren D. Persavich and Bradley T. Lough, each with power
of substitution, are hereby authorized to vote all shares of common stock of
Banner Aerospace, Inc. which the undersigned would be entitled to vote if
personally present at the Special Meeting of Stockholders of Banner Aerospace,
Inc., to be held on [ ], 1999, and at any adjournments, as designated
on the reverse hereof.
A MAJORITY (OR IF ANY ONE, THEN THAT ONE) OF THE ABOVE PERSONS OR THEIR
SUBSTITUTES WHO SHALL BE PRESENT AND ACTING AT THE MEETING SHALL HAVE THE POWERS
CONFERRED HEREBY.
PLEASE MARK, SIGN, DATE AND MAIL THIS PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
DO NOT SUBMIT ANY STOCK CERTIFICATES WITH THIS PROXY CARD.
(Continued and to be signed on reverse side.)
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY.
A Vote FOR approval and adoption of the below-described
Agreement and Plan of Merger is recommended by
the Board of Directors.
1. To consider and act upon a proposal to adopt an Agreement and Plan of
Merger among Banner Aerospace, Inc., The Fairchild Corporation and Merger
Sub, Inc., as more fully described in the accompanying Proxy Statement.
FOR AGAINST ABSTAIN
2. To withdraw Banner's common stock from listing on the New York Stock
Exchange upon consummation of the proposed merger.
FOR AGAINST ABSTAIN
3. To transact such other business as may property come before the meeting or
any adjournment or postponement thereof.
This Proxy when property executed will be voted in the
manner directed herein by the undersigned stockholders). If
no direction is made, this Proxy will be voted for proposal
no. 1 above and will be voted as recommended by the Proxy
holders listed on the reverse hereof as to any other matters
which may property come before the meeting.
<PAGE>
Dated: ______________, 1999
Signature(s) ______________________________
___________________________________________
Signature of Stockholder(s)--please sign name exactly as
imprinted (do not print). Please indicate any change of
address. NOTE: Executors, administrators, trustees and
others signing in a representative capacity should indicate
the capacity in which they sign. if shares are held jointly,
EACH holder should sign.
<PAGE>
EXHIBIT 5.2
DRAFT
John L. Flynn, Esq.
c/o The Fairchild Corporation
45025 Aviation Drive, Suite 400
Dulles, VA 20166-7516
, 1999
Banner Aerospace, Inc.
45025 Aviation Drive, Suite 300
Dulles, VA 20166-7556
Ladies and Gentlemen:
You have requested my opinion as to whether the proposed merger (the
"Merger") of MTA, Inc., a Delaware corporation ("Subco") that is a direct,
wholly owned subsidiary of The Fairchild Corporation, a Delaware corporation
("Parent"), with and into Banner Aerospace, Inc., a Delaware Corporation ("the
Company"), will constitute a "Reorganization" within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). Any
capitalized terms not defined herein have the meanings ascribed to them in the
Agreement and Plan of Merger by and among Parent, Subco, and the Company dated
as of January 11, 1999 (such Agreement, including all schedules and exhibits
thereto, hereinafter referred to as the "Merger Agreement").
In rendering this opinion, I have relied, with your consent, upon the
following assumptions.
<PAGE>
-2-
1. The representations and undertakings of Parent set forth in the Certificate
attached hereto as Exhibit A, and the representations and undertakings of
the Company set forth in the Certificate attached hereto as Exhibit B, are
accurate and complete and will be accurate and complete as of the Effective
Time.
2. The Merger will be consummated in accordance with the Agreement.
3. The Registration Statement on Form S-4 (the "Registration Statement")
covering the registration of The Fairchild Corporation Class A Common Stock
under the Securities Act of 1933, as amended (the "Act"), as filed by
Parent with the Securities and Exchange Commission ("SEC") on , 1999, is
accurate and complete.
This opinion is based upon existing laws, regulations, Internal
Revenue Service positions, and judicial decisions, any of which may be changed
at any time with retroactive effect. I assume no obligation to modify or
supplement my opinion if, after the date hereof, any such laws, regulations,
positions, or decisions change or I become aware of any facts that might change
my opinion.
Based on and subject to the foregoing assumptions, I am of the opinion
that, for Federal income tax purposes:
(a) The Merger will be treated as a reorganization within the meaning of
Section 368(a) of the Code; and
<PAGE>
-3-
(b) No gain or loss will be recognized by Parent, Subco, the Company, or any
Company stockholder as a result of the Merger (except with respect to any
cash received in lieu of a fractional share of The Fairchild Corporation
Class A Common Stock).
(c) The basis of the shares of Parent Common Stock to be received by the
stockholders of the Company (including any fractional share interest to
which they may be entitled) will be the same as the basis of the shares of
Company Common Stock surrendered in exchange therefor.
(d) The holding period of the shares of Parent Common Stock to be received by
the stockholders of the Company in the exchange (including any fractional
share interest to which they may be entitled) will include the holding
period of the shares of Company Common Stock to be surrendered in exchange
therefor, provided the shares of Company Common Stock are held as capital
assets in the hands of the stockholders of the Company at the Effective
Time.
(e) A stockholder of the Company who receives cash in lieu of a fractional
share of Parent Common Stock will be treated as if the fractional share
were distributed as part of the exchange and then redeemed by Parent, with
the cash being received in full payment for the fractional share.
This opinion is intended for the use of the Company in connection with
the Merger. This opinion may not be relied upon, or quoted, in whole or in
part, by any other person or for any other purpose.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of my name in the Registration Statement
and in the Proxy Statement of the Company and the Prospectus of Parent included
therein. My consent to such reference does not constitute a consent under
Section 7 of the Act, as in consenting to such reference I have not certified
any part of such Registration Statement and do not otherwise come within the
categories of a person whose consent is required under Section 7 or under the
rules and regulations of the SEC thereunder.
Very truly yours,
John L. Flynn, Esq.
Senior Vice President, Tax
The Fairchild Corporation
<PAGE>
EXHIBIT 10.57
UNSECURED SUBORDINATED PROMISSORY NOTE
--------------------------------------
_____________, 1999
FOR VALUE RECEIVED, the undersigned, The Fairchild Corporation, a
Delaware corporation with its chief executive office located at 45025 Aviation
Drive, Suite 400, Dulles, Virginia 20166-7516 (the "Maker"), promises to pay to
the order of Banner Aerospace, Inc., a Delaware corporation ( the "Holder"), on
July 1, 2004 (the "Maturity Date"), the unpaid principal amount of all advances
and other loans ("Advances") made on the date hereof or hereafter by the Holder
to the Maker.
The Maker also promises to pay interest on the unpaid principal amount
evidenced hereby (including amounts of deferred interest added to principal in
accordance with the provisions hereof from time to time) from the date such
Advance is made (and such deferred interest is added to principal hereof) until
the same shall have been paid in full at an interest rate equal to ten percent
(10%) per annum, which interest shall be calculated in arrears, monthly, on the
basis of a 365 day year and actual days elapsed, and the amount thereof added to
the principal amount of indebtedness evidenced hereby. Accrued interest shall
be calculated and shall be payable on the earlier of the Maturity Date or the
date the principal amount evidenced hereby is paid in full and this Unsecured
Subordinated Promissory Note is cancelled.
The Holder is authorized to endorse the date and amount of each
Advance made by the Holder to the Maker hereunder, each interest payment made in
kind as aforesaid, and each repayment or prepayment of principal with respect
thereto on the schedule annexed hereto and made a part hereof, or a continuation
thereof which shall be attached hereto and made a part hereof, which endorsement
shall constitute prima facie evidence, absent demonstrated error, of the
----- -----
accuracy of the information so endorsed; provided that the failure by the Holder
-------- ----
to make such endorsement, or any error with respect thereto, shall not affect
the obligations of the Maker under this Unsecured Subordinated Promissory Note.
In lieu of endorsing such schedule as hereinabove provided, the Holder is
authorized to record such Advances, interest payments made in kind, and
repayments or prepayments in its books and records, such books and records
constituting prima facie evidence, absent demonstrated error, of the accuracy of
----- -----
the information contained therein.
All payments of principal and interest in respect of this Unsecured
Subordinated Promissory Note shall be made to the Holder in lawful money of the
United States of America at the Holder's address at 45025 Aviation Drive, Suite
300, Dulles,
<PAGE>
Virginia 20166 or at such other place as may, from time to time, be designated
by the Holder.
Upon the occurrence of a Note Event of Default, the Holder may
accelerate the maturity hereof by written notice to the Maker, with a copy to
Citicorp USA, Inc., as Collateral Agent, at 399 Park Avenue, 6th Floor, Zone 4,
New York, New York 10043, Attn: Suzanne Crymes, Telecopy No. 212-793-1290.
By accepting this Unsecured Subordinated Promissory Note, the Holder
for itself and its successors and assigns agrees that it will not, so long as
any Senior Indebtedness is outstanding: (i) without the prior consent of the
holders of the Senior Indebtedness, transfer or assign this Unsecured
Subordinated Promissory Note or any of the Subordinatd Indebtedness or
subordinate this Unsecured Subordinated Promissory Note or any of the
Subordinated Indebtedness to any other Indebtedness of the Maker; (ii) take any
collateral from the Maker or any Affiliate of the Maker as security for the
Subordinated Indebtedness; or (iii) initiate or be a party to any proceeding or
action (other than a proceeding or action initiated by the holders of the Senior
Indebtedness) under any bankruptcy, reorganization, compromise, arrangement,
insolvency, readjustment of debt, dissolution or liquidation or similar law of
any jurisdiction pursuant to which it is sought to adjudicate the Maker bankrupt
or insolvent.
The Holder, by its acceptance of this Unsecured Subordinated
Promissory Note, covenants and agrees that the Subordinated Indebtedness is and
shall be subordinated and subject and junior in right of payment, to the extent
and in the manner set forth hereinbelow, to the prior payment in full, in cash,
of all of the Senior Indebtedness:
Insolvency, Liquidation, etc. In the event of any insolvency,
-----------------------------
bankruptcy, receivership, liquidation, reorganization, reformation,
readjustment, composition or other similar proceeding for the liquidation,
dissolution or other winding up of the Maker, voluntary or involuntary, whether
or not involving insolvency or bankruptcy proceedings, or any assignment by the
Maker for the benefit of creditors, or any other marshalling of the assets of
the Maker, then and in any such event:
(i) all Senior Indebtedness (including, without limitation, interest
accrued thereon after the commencement of any such proceedings,
whether or not allowed in such proceedings) shall first be paid
in full, in cash, before any payment or distribution of any
character, whether in cash, securities or other property, shall
be made on
2
<PAGE>
account of or applied on the Subordinated Indebtedness;
(ii) any payment or distribution of any character, whether in cash,
securities or other property, which would otherwise (but for this
clause) be payable or deliverable in respect of the Subordinated
Indebtedness shall be paid or delivered directly to the
Administrative Agent on behalf of the holders of Senior
Indebtedness, until all Senior Indebtedness shall have been paid
in full, after giving effect to any concurrent payment or
distribution, or provision thereof, to the holders of the Senior
Indebtedness; and
(iii) the Holder irrevocably authorizes and empowers the Collateral
Agent, on behalf of each holder of Senior Indebtedness (and its
successors and assigns), to demand, sue for, collect and receive
all such payments and distributions and to receipt therefor, and
to file and prove all such claims and take all such other action
in the name of all holders of the Subordinated Indebtedness or
otherwise, as the Collateral Agent, on behalf of the holders of
Senior Indebtedness, may determine to be necessary or
appropriate, in each instance, as more particularly set forth
under Debtor Relief below.
-------------
No Payments and/or Enforcement in Certain Circumstances. From and
-------------------------------------------------------
after the occurrence of any Event of Default or Potential Event of Default under
the terms of the Fairchild Credit Agreement, the Holder shall not be entitled to
receive any payments hereunder (other than payments of interest in kind as
aforesaid), whether or not due and payable, and shall not ask, demand, sue for,
take or receive, by setoff or in any manner, all or any part of the Subordinated
Indebtedness or any security therefor, and shall have no right to enforce any
claim with respect to the Subordinated Indebtedness, or otherwise take any
action against the Maker or its property, in each case unless and until all
Senior Indebtedness shall have been fully paid and satisfied in cash and all
financing arrangements between the Maker and the Fairchild Lenders and Fairchild
Issuing Banks shall have been terminated, or such payment in full in cash shall
have been duly provided for in a manner satisfactory to the holders of the
Senior Indebtedness.
Turnover. In the event any direct or indirect payment or distribution
--------
shall be received by the Holder in contravention of the aforesaid subordination
provisions hereof, then such payment or distribution shall be held in trust for
and shall be
3
<PAGE>
paid over or delivered to the Collateral Agent on behalf of the holders of the
Senior Indebtedness until all Senior Indebtedness shall have been paid in full,
in cash, after giving effect to any concurrent payment or distribution to the
holders of the Senior Indebtedness. The Senior Indebtedness shall not be deemed
to have been paid in full, nor shall provision be deemed to have been made for
such payment, unless all holders of the Senior Indebtedness shall have received
(after giving effect to all concurrent payments or distributions to holders of
Senior Indebtedness) cash equal to the amount of all Senior Indebtedness at the
time outstanding.
Subrogation. Subject to the prior payment, in full, in cash, of all
-----------
Senior Indebtedness, the holders of the Subordinated Indebtedness shall be
subrogated to the rights of the holders of Senior Indebtedness to receive
payments or distributions of assets of the Maker made on the Senior Indebtedness
until the Subordinated Indebtedness shall be paid in full; and, for the purposes
of such subrogation, no payments or distributions to holders of Senior
Indebtedness of any cash, property or securities to which holders of
Subordinated Indebtedness would be entitled except for the provisions hereof and
no turnover of any payment pursuant to the provisions hereof to holders of
Senior Indebtedness by the holders of the Subordinated Indebtedness, shall, as
between the Maker, its creditors other than holders to Senior Indebtedness, and
the holders of Subordinated Indebtedness, be deemed to be a payment by the Maker
to or on account of Senior Indebtedness, it being understood that the provisions
hereof are and are intended to be solely for the purpose of defining the
relative rights of the holders of the Senior Indebtedness, on the one hand, and
the holders of Subordinated Indebtedness on the other hand.
Debtor Relief. Should any action be taken by or against the Maker for
-------------
any relief or arrangement under any federal or state bankruptcy or insolvency
law (including, but not limited to, the appointment of a receiver, the making of
an assignment for the benfit of creditors, the holding of a meeting of creditors
for the purpose of working out the Maker's debts or the appointment of a
creditor committee or receiver to supervise or administer the business or assets
of the Maker), or should the Maker become insolvent or take steps to wind up or
dissolve its business, the Holder by its acceptance hereof irrevocably
authorizes and empowers the Collateral Agent, on behalf of the Fairchild Lenders
and Fairchild Issuing Banks, as its attorney-in-fact to enforce or file any
document or proof of claim for the Subordinated Indebtedness in the name of the
holders of the Senior Indebtedness or the Holder. In the event the Collateral
Agent requires possession of this Unsecured Subordinated Promissory Note in
order to seek enforcement hereof as attorney-in-fact, the Holder shall deliver,
or cause the delivery of, this
4
<PAGE>
Unsecured Subordinated Promissory Note to the Collateral Agent within three (3)
days after receipt by the Holder of a written request to such effect from the
Collateral Agent. The Holder agrees to provide the Collateral Agent with all
information and documents necessary to present claims or seek enforcement as
aforesaid. The Holder further authorizes and empowers the Collateral Agent, as
attorney-in-fact, to receive and give receipt for any payments or other
distributions on the Subordinated Indebtedness and to apply them to the Senior
Indebtedness, to serve on any committee appointed to supervise or administer the
business or assets of the Maker and to vote its claim with respect to any
proposed plan of reorganization, dissolution, or liquidation.
Certain Definitions. The following terms when used in this Unsecured
-------------------
Subordinated Promissory Note shall, except where the context otherwise requires,
have the following meanings (such definitions to be equally applicable to the
singular and plural forms thereof):
"Fairchild Credit Agreement" shall mean that certain Third Amended and
--------------------------
Restated Credit Agreement dated as of December 19, 1997, by and among the Maker,
the financial institutions from time to time party thereto as "Lenders" and
"Issuing Banks", and Citicorp USA, Inc., a Delaware corporation, as Collateral
Agent.
"Fairchild Lenders" shall mean the "Lenders" under the Fairchild
-----------------
Credit Agreement.
"Fairchild Issuing Banks" shall mean the "Issuing Banks" under the
-----------------------
Fairchild Credit Agreement.
"Note Event of Default" shall mean the occurrence of any of the
---------------------
following events:
(i) failure to pay any principal or interest payable under this Unsecured
Subordinated Promissory Note as and when due in accordance with the
terms hereof, whether by acceleration or otherwise, and such default
shall continue unremedied for 90 days;
(ii) the Maker shall (a) apply for or consent to the appointment of a
receiver, trustee, or liquidator for itself or all or a substantial
part of its Property, (b) make a general assignment for the benefit of
creditors, (c) be adjudicated a bankrupt or insolvent, (d) file a
voluntary petition in bankruptcy or petition or answer seeking a
reorganization or an arrangement with its creditors, (e) take
advantage of any bankruptcy, reorganization, insolvency, readjustment
of debt, dissolution or liquidation law or statute or file
5
<PAGE>
an answer admitting the material allegations of a petition filed
against it in any proceeding under any such law or statute;
(iii)an order, judgment or decree shall be entered, without the
application, approval or consent of the Maker, by any court of
competent jurisdiction, approving a petition seeking reorganization of
the Maker or all or a substantial part of the Property of the Maker,
or appointing a receiver, trustee or liquidator of the Maker, and such
order, judgment, or decree shall continue for a period of 90 days;
(iv) an Event of Default shall occur under the Fairchild Credit Agreement
and acceleration of the Senior Indebtedness be made as a result
thereof.
"Senior Indebtedness" shall mean all principal of and interest on
-------------------
(including without limitation, all interest accruing after the filing of any
petition for the bankruptcy or insolvency of the Maker, whether or not allowed
in any bankruptcy or insolvency proceeding) the "Obligations" of the Maker
presently existing or at any time hereafter arising under the Fairchild Credit
Agreement, and all extensions, substitutions, renewals, refinancings and
refundings thereof.
"Subordinated Indebtedness" shall mean all outstanding principal of
-------------------------
and unpaid interest accrued on all Indebtedness of the Maker evidenced by this
Unsecured Subordinated Promissory Note, and all extensions and renewals thereof.
Other Definitions. Terms to which meanings are ascribed in the
-----------------
Fairchild Credit Agreement are, unless the context otherwise requires, used
herein with such meanings.
Non-impairment of the Holder's Creditor Status. Nothing otherwise
----------------------------------------------
contained herein is intended to or shall impair, as between the Maker, its
creditors other than the holders of Senior Indebtedness, and the holders of the
Subordinated Indebtedness, the obligations of the Maker, which are, subject to
the terms of the subordination provisions hereof, absolute and unconditional, to
pay the Subordinated Indebtedness as and when the same shall become due and
payable in accordance with its terms, or to affect the relative rights of the
Holder and creditors of the Maker other than the holders of the Senior
Indebtedness, or shall anything herein or therein prevent the Holder from
exercising all rights permitted it hereunder upon the acceleration of the
Subordinated Indebtedness, subject to the rights hereunder of the holders of
Senior Indebtedness in respect of cash, property or securities of the Maker
received upon the
6
<PAGE>
exercise of any such remedy and subject to the limitations of the rights of the
Holder set forth herein.
Non-Waiver of Rights. No right of any present or future holder of the
--------------------
Senior Indebtedness to enforce subordination as herein provided shall at any
time in any way be prejudiced or impaired by any act or failure to act on the
part of the Maker or by any act or failure to act, in good faith, by any such
holder, or by any non-compliance by the Maker with the terms, provisions and
covenants of this Unsecured Subordinated Promissory Note, regardless of any
knowledge thereof any such holder may have or be otherwise charged with.
Non-Modification; Assignability. The terms of subordination of this
-------------------------------
Unsecured Subordinated Promissory Note may not be amended, supplemented or
modified in any manner without the prior written consent of the holders of the
Senior Indebtedness. This Unsecured Subordinated Promissory Note is not
assignable by the Maker and shall be assignable by the Holder to an Affiliate of
the Holder only upon the prior written notice to the Collateral Agent and
delivery to the Collateral Agent of written acknowledgment of the terms hereof
by such assignee of the Holder.
The Maker hereby waives presentment for payment, demand, notice of
dishonor, protest and notice of protest and other notices of any kind. No delay
on the part of the Holder in exercising any of the Holder's rights hereunder
shall operate as a waiver of such rights. This Unsecured Subordinated
Promissory Note shall be governed by, and for all purposes construed in
accordance with, the laws of the State of New York applicable to agreements made
and to be performed in such state.
THE FAIRCHILD CORPORATION
By _________________________
Karen L. Schneckenburger
Vice President and Treasurer
7
<PAGE>
Accepted and agreed this ____ day of ______, 1999
BANNER AEROSPACE, INC.
Pay to the order of
Citicorp USA, Inc.,
as Administrative Agent
By:___________________________________________
Eugene W. Juris
Vice President
BANNER AEROSPACE, INC.
By:____________________________________
Eugene W. Juris
Vice President
8
<PAGE>
SCHEDULE OF Advances
--------------------
The Fairchild Corporation (Maker)
to
Banner Aerospace, Inc. (Holder)
Advance Repayment
Date Amount Amount Balance
---- ------ ------ -------
9
<PAGE>
EXHIBIT 23.1
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our report
dated May 20, 1998 (except with respect to the matters discussed in Note 16 to
the consolidated financial statements, as to which the date is January 14, 1999)
related to the Banner Aerospace, Inc. and the Subsidiaries annual financial
statements included in this registration statement and to the incorporation by
reference in this registration statement of our report dated September 22, 1998
included in The Fairchild Corporation's Form 10-K for the year ended June 30,
1998 and to the incorporation by reference in this registration statement of our
reports dated April 9, 1998 and February 7, 1997 related to the Edwards and Lock
Management Corporation annual financial statements included in The Fairchild
Corporation's Form 8-K dated March 2, 1998, and to all references to our Firm
included in this Form S-4 registration statement.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 25, 1999
<PAGE>
EXHIBIT 23.2
To the Board of Directors
Of Nacanco Paketleme Sanayi ve Ticaret A.S.
25 February 1999
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of the Fairchild
Corporation of our report dated 12 March 1998 on our audit of the financial
statements of Nacanco Paketleme Sanayi ve Ticaret A.S. appearing in The
Fairchild Corporation Annual Report on Form 10-K for the year ended 30 June
1998.
Regards,
Zeynep Uras, SMMM
Partner
