<PAGE>
As filed with the Securities and Exchange Commission on January 15, 1999
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
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
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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.
---------------
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
, 1999
Dear Fellow Banner Stockholder:
Enclosed are a Notice of Special Meeting, Proxy Statement/Prospectus and
Proxy and Election Form relating to a special meeting of Banner Aerospace, Inc.
to be held at , on , 1999, at a.m., local time.
At this meeting, you will be asked to consider and vote upon the approval of
an Agreement and Plan of Merger, dated as of January 11, 1999 (the "Merger
Agreement"), a copy of which is attached as Appendix A to the attached Proxy
Statement/Prospectus, pursuant to which MTA, Inc., a wholly-owned subsidiary of
The Fairchild Corporation, will merge with and into Banner, and Banner will
become a wholly-owned subsidiary of Fairchild. Currently, Fairchild owns
approximately 85% of Banner's capital stock, consisting of Banner common stock
and Banner preferred stock, and public shareholders own the remainder.
Fairchild has agreed to vote its shares of Banner common stock in favor of the
merger.
In the merger, each share of Banner common stock you own will be converted
into the right to receive $11.00 in market value of shares of Fairchild Class A
Common Stock. The $11.00 per share price represents a 25.7% premium over $8.75
per share, the closing market price of Banner common stock on December 2, 1998,
which was the last full trading day before Fairchild announced that it had made
a proposal to acquire the shares owned by the public stockholders of Banner.
The $11.00 per share price may be adjusted based on the price of Fairchild
Class A Common Stock and the value of certain shares of AlliedSignal Inc.
common stock owned by Banner. 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 has received the opinion of its financial
advisor to the effect that the consideration to be received in the merger by
the holders of Banner common stock (other than Fairchild and its affiliates) is
fair to such holders from a financial point of view. Under Delaware law,
holders of Banner common stock are not entitled to exercise dissenters' rights
in connection with the merger.
The Board of Directors of Banner, acting on the unanimous recommendation of
the Special Committee, has approved the Merger Agreement with Fairchild. The
Special Committee and the Board of Directors believe that the proposed merger
is in the best interests of Banner's stockholders, other than Fairchild and its
affiliates. Therefore, the Board of Directors of Banner recommends that you
vote in favor of the Merger Agreement.
The Banner Board of Directors formed the Special Committee because some of
the nine board members have conflicts of interest regarding the merger. In
order to avoid these conflicts of interest, the Board of Directors 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.
Please read carefully the Proxy Statement/Prospectus, which describes in
more detail the Merger Agreement and the transactions contemplated thereby,
including a description of the conditions to consummation of the merger and the
effects of the merger on the rights of Banner stockholders.
<PAGE>
Whether or not you plan to attend the Special Meeting, I urge you to
complete, sign and promptly return the enclosed proxy card to ensure that your
shares will be voted at the meeting. The merger is an important decision for
Banner and its stockholders. The affirmative vote of a majority of the shares
of Banner common stock entitled to vote at the Special Meeting is required for
approval of the Merger Agreement and the transactions contemplated thereby.
Fairchild has agreed to vote its shares of Banner common stock for approval of
the Merger Agreement.
On behalf of the Board of Directors of Banner, I thank you for your support
and urge you to vote for adoption of the Merger Agreement.
Sincerely,
/s/ Jeffrey J. Steiner
Jeffrey J. Steiner
Chairman of the Board, Chief
Executive Officer and President
<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 (the "Merger Agreement") 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 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 , 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 , 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.
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 JANUARY 15, 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
("Banner 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 , (the "Special Meeting") and at any
adjournments of the Special Meeting. The Special Meeting is being convened to
consider and act upon a proposal to adopt the Merger Agreement and approve the
merger (each defined below).
This Proxy Statement/Prospectus also constitutes a prospectus of The
Fairchild Corporation relating to shares of Class A Common Stock of Fairchild
("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 (the "Merger Agreement"), among Banner, Fairchild and MTA, Inc., a
Delaware corporation and a wholly-owned subsidiary of Fairchild ("Merger Sub").
The Merger Agreement provides, among other things, that Merger Sub will merge
with and into Banner and, as a result, Banner will become a wholly-owned
subsidiary of Fairchild. At the effective time of the Merger (the "Effective
Time"), 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 (the "Merger Consideration"), 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.
Immediately prior to the Effective Time, each share of Series A Convertible
Paid-In-Kind Preferred Stock, liquidation value $9.20 per share, of Banner (the
"Banner Preferred Stock") 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, 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, a number of conditions must be met. Banner
and Fairchild are working toward completing the Merger as quickly as possible.
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.
This Proxy Statement/Prospectus incorporates by reference important business
and financial information about Fairchild and Banner that is not included in or
delivered with this Proxy Statement/Prospectus. This information is available
without charge to stockholders, upon written or oral request as described in
"Where You Can Find More Information" inside this document.
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.
Fairchild Class A Common Stock is listed on the New York Stock Exchange, Inc.
(the "NYSE") under the symbol "FA." On December 2, 1998, the last trading day
immediately preceding the public announcement
<PAGE>
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.
A copy of the Merger Agreement is attached as Appendix A to this Proxy
Statement/Prospectus. The 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.
All shares of Banner Common Stock outstanding immediately before the
Effective Time (including Banner Common Stock issuable as a result of mandatory
conversion from Banner Preferred Stock but excluding shares held by Fairchild
and its affiliates) will, as a result of the Merger, no longer be outstanding
and will automatically be canceled and retired and will cease to exist, and
each holder of Banner Common Stock and Banner Preferred Stock will cease to
have any rights with respect thereto, except the right to receive the Merger
Consideration. In accordance with the General Corporation Law of the State of
Delaware, Banner stockholders are not entitled to exercise dissenter's rights
in connection with the Merger.
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>
<CAPTION>
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
SUMMARY................................................................... 1
RISK FACTORS.............................................................. 8
Volatility of Stock Prices--Changes in Fairchild's stock price could
decrease the merger consideration, and will affect the value of
Fairchild Class A Common Stock in the future........................... 8
Litigation--Ongoing litigation could interfere with the merger.......... 8
Forward-Looking Statements--Future events and future results of
Fairchild and Banner may differ materially from what is expected....... 8
Risks Relating to Fairchild............................................. 9
Airline Industry Risks--Fairchild's business is in a cyclical industry
that depends on a limited number of aircraft manufacturers............. 9
Fairchild has Risks Resulting from Significant Amounts of Debt.......... 9
No Assurance of Successful Integration/Future Acquisitions--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
Competition--Fairchild's business is very competitive and increased
competition could adversely affect Fairchild........................... 10
History of Operating Losses in Fairchild's Technologies Business........ 10
Majority Control by Principal Stockholder............................... 11
Uncertainty of the Spin-Off............................................. 11
Government Regulation and Customer Qualifications--Changes in government
regulations or customer qualifications could adversely affect
Fairchild.............................................................. 12
Shares Eligible for Future Sale--Additional shares of Fairchild Class A
Common Stock may be sold in the future, which could adversely impact
the price of outstanding shares........................................ 12
Year 2000--Fairchild could be adversely affected if Year 2000 problems
are significant........................................................ 13
INFORMATION CONCERNING THE SPECIAL MEETING................................ 14
Time, Place, Date....................................................... 14
Purpose of the Special Meeting.......................................... 14
Record Date; Quorum; Outstanding Banner Common Stock Entitled To Vote... 14
Vote Required; Certain Banner Common Stock Voting in Favor of the
Merger................................................................. 14
No Dissenter's Rights................................................... 15
Action To Be Taken Under the Proxy...................................... 15
Proxy Solicitation...................................................... 15
THE MERGER................................................................ 16
Purpose and Background of the Merger.................................... 16
Recommendation of the Special Committee and Board of Directors of
Banner; Fairness of the Merger......................................... 20
Opinion of the Financial Advisor for the Special Committee.............. 21
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
<PAGE>
<TABLE>
<CAPTION>
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
CERTAIN 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............................................................. 31
Termination; Amendments; Withdrawal of Recommendations................. 32
COMPARATIVE MARKET PRICE AND DIVIDEND INFORMATION........................ 33
Banner Common Stock.................................................... 33
Price Range of Banner Common Stock..................................... 33
Banner Dividends....................................................... 34
Holders of Record...................................................... 34
Fairchild Class A Common Stock......................................... 34
Price Range of Fairchild Class A Common Stock.......................... 34
Fairchild Dividends.................................................... 35
CAPITALIZATION........................................................... 36
SELECTED CONSOLIDATED FINANCIAL DATA..................................... 37
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS.................... 38
DESCRIPTION OF FAIRCHILD................................................. 43
DESCRIPTION OF BANNER.................................................... 46
SELECTED CONSOLIDATED FINANCIAL INFORMATION FOR BANNER................... 49
BANNER MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 51
DESCRIPTION OF MERGER SUB................................................ 57
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 57
DESCRIPTION OF FAIRCHILD CAPITAL STOCK................................... 60
General................................................................ 60
Preferred Stock........................................................ 60
Common Stock........................................................... 60
Transfer Agent and Registrar........................................... 61
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
COMPARISON OF STOCKHOLDER RIGHTS.......................................... 61
Voting Rights........................................................... 61
Stockholder Proposals................................................... 61
SECURITIES OWNERSHIP...................................................... 62
Ownership of Banner Capital Stock....................................... 62
Ownership of Fairchild Class A Common Stock by Directors and Executive
Officers of Banner..................................................... 63
MANAGEMENT OF BANNER AS SURVIVING CORPORATION............................. 64
Directors of Banner..................................................... 64
Executive Officers of Banner............................................ 65
PROPOSALS BY STOCKHOLDERS OF BANNER....................................... 66
EXPERTS................................................................... 66
LEGAL MATTERS............................................................. 66
OTHER MATTERS............................................................. 66
BANNER AEROSPACE, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS......... F-1
APPENDIX A--AGREEMENT AND PLAN OF MERGER.................................. A-1
APPENDIX B--OPINION OF HOULIHAN LOKEY HOWARD & ZUKIN...................... B-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.
As used in this Proxy Statement/Prospectus, the term "Fairchild" refers to
The Fairchild Corporation and, where the context requires, to Fairchild and its
subsidiaries and the term "Banner" refers to Banner Aerospace, Inc. and, where
the context requires, to Banner and its subsidiaries.
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 the information is superseded by information in this Proxy
Statement/Prospectus.
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;
(b) Fairchild's Quarterly Reports on Form 10-Q for the periods ended
March 29, 1998 and September 27, 1998; and
(c) Fairchild's Current Report on Form 8-K dated December 28, 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;
(b) Banner's Quarterly Reports on Form 10-Q for the periods ended June
30, 1998 and September 30, 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 (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 10 days before the
special meeting date.
iv
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: Each of your shares of Banner Common Stock will be converted into the right
to receive $11.00 in market value in shares of Fairchild Class A Common
Stock (including any adjustments) (the "Merger Consideration").
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.
The amount of Fairchild Class A Common Stock for which you will be able to
exchange a cancelled share of Banner Common Stock will be 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: WHY IS THE PRICE SUBJECT TO ADJUSTMENT?
A: The number of shares of Fairchild Class A Common Stock that can be paid for
each share of Banner Common Stock is 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 over 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 those 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, the Merger Consideration will be adjusted (on an
after-tax basis per-share for each outstanding share of Banner Common
Stock) to reflect the amount by which such shares are outside the range.
The value of such shares will be based on 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. 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: Each of your shares of Banner Preferred Stock will be automatically
converted into one share of Banner Common Stock immediately before the
merger. Then, at the time of the merger, you will receive the right 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.
v
<PAGE>
Q: WHY IS THE BOARD OF BANNER RECOMMENDING THAT I VOTE FOR THE MERGER
AGREEMENT?
A: In the opinion of your 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 16.
Q: WHAT VOTE IS REQUIRED FOR THE MERGER TO OCCUR?
A: A majority of Banner's common stockholders must approve the merger.
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: 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.
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.
vi
<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, Airbus, 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. ("Merger Sub") is a wholly-owned subsidiary of Fairchild that will
merge with and into Banner to effect the merger. Merger Sub 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
A Special Meeting of Banner Stockholders will be held at , on ,
1999, at a.m., local time. The Special Meeting is being held to consider and
act upon a proposal to adopt the Agreement and Plan of Merger that is attached
to this document as Appendix A.
1
<PAGE>
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 is
entitled 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 , 1999. On the record date,
there were shares of Banner Common Stock outstanding and entitled to vote,
held by approximately stockholders of record.
The Merger
Purpose, Structure and Effects of the Merger (Page 16)
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 20)
Banner's Board of Directors, acting on the unanimous recommendation of its
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).
Factors Considered by Banner's Board of Directors and Its Special Committee
(Page 20)
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, which 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 which is discussed below.
. The Special Committee and the Board of Directors of Banner considered the
potential conflicts of interest of Banner management, discussed below.
2
<PAGE>
. 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 21)
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 B to this document. Please read the opinion.
Interests of Banner Management in the Merger (Pages 20, 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.
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 (the "Banner 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. The aggregate payment to be made to all public stockholders of
Banner will be approximately $41,000,000 in Fairchild Class A Common Stock.
Conditions to the Merger (Page 31)
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.
3
<PAGE>
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 32)
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.
4
<PAGE>
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 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 Banner (which
are included with this Proxy Statement/Prospectus), as well as in conjunction
with the Pro Forma Consolidated Financial Information of Fairchild, including
notes, that appears elsewhere in this document.
The first two columns on the left in the tables below present certain
historical per share amounts for Banner and Fairchild. The third column sets
forth the adjustments to Fairchild's historical amounts as a result of the
merger. The last column sets forth certain pro forma equivalent amounts based
on the number of shares of Fairchild Class A Common Stock which would have been
issued in the merger for each Banner share if the merger had taken place on
, 1999.
5
<PAGE>
<TABLE>
<CAPTION>
Banner Fairchild Merger Fairchild
Historical Historical Adjustment Pro Forma
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Three months ended September 30,
1998:
Earnings from continuing
operations per common share:
Basic........................... $ 0.02 $ 0.05 $ -- $ 0.05
Diluted......................... $ 0.02 $ 0.05 $ -- $ 0.05
Book value per common share....... $ 9.21 $19.49 $(0.24) $19.25
Three months ended September 30,
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:
Basic........................... $ 3.41 $ 2.78 $ 0.87 $ 3.65
Diluted......................... $ 2.97 $ 2.66 $ 0.72 $ 3.38
Book value per common share....... $10.50 $20.54
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 stockholders in
any of the periods represented in this schedule.
6
<PAGE>
RECENT DEVELOPMENTS
On December 28, 1998 Fairchild announced that it signed a definitive merger
agreement to acquire Kaynar Technologies Inc. ("Kaynar"), 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.
("Solair"), Banner'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.
7
<PAGE>
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.
VOLATILITY OF STOCK PRICES--CHANGES IN FAIRCHILD'S STOCK PRICE COULD DECREASE
THE MERGER CONSIDERATION, AND WILL AFFECT THE VALUE OF FAIRCHILD CLASS A COMMON
STOCK IN THE FUTURE.
The market prices of Fairchild Class A Common Stock and Banner Common Stock
may fluctuate significantly before the merger. After the merger, the market
price of Fairchild Class A Common Stock may fluctuate significantly. A number
of factors could affect the market price of these securities before the merger
and the market price of Fairchild Class A Common Stock after the merger,
including:
. Revenue or income below analysts' expectations;
. Quarterly fluctuations in financial results of Fairchild or other
aerospace products and services companies;
. Changes in analysts' estimates of the future financial performance of
Fairchild, its competitors or other aerospace products and services
companies;
. General business conditions in the aerospace products and services
industry;
. Sales or purchases of blocks of Banner Common Stock or Fairchild Class A
Common Stock; and
. Conditions in the financial markets in general, in which securities may
experience extreme price and volume fluctuations without regard to
operating performance.
LITIGATION--ONGOING LITIGATION COULD INTERFERE WITH THE MERGER.
The Stockholder Action, which is described at "The Merger--Litigation
Regarding the Merger," page 27, 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.
FORWARD-LOOKING STATEMENTS--FUTURE EVENTS AND FUTURE RESULTS OF FAIRCHILD AND
BANNER MAY DIFFER MATERIALLY FROM WHAT IS EXPECTED.
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 (including with respect to cost savings or other benefits expected to be
realized from the merger) 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.
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
8
<PAGE>
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 Fairchild
Airline Industry Risks--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.
Performance of the aerospace fasteners and aerospace distribution segments is
also influenced by conditions generally affecting the aerospace industry. 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. Several passenger airline carriers encountered significant
financial difficulties, resulting in some of those carriers going out of
business or filing for bankruptcy. 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 three months ended
September 27, 1998, the vast majority of Fairchild's revenues come from
customers providing parts or services to Airbus and Boeing and, 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. In
addition, a number of the historical customers of Fairchild's aerospace
distribution business are smaller domestic and foreign passenger airlines,
freight and package carriers, charter operators and aircraft leasing companies,
which may also suffer from the factors adversely affecting the airline industry
generally. As a result, certain of Fairchild's customers may pose credit risks
to Fairchild. Fairchild's inability to collect receivables could adversely
affect its results of operations.
Fairchild has Risks Resulting from Significant Amounts of Debt
At September 27, 1998, Fairchild had outstanding long-term debt of $327.5
million and, if Fairchild consummates the acquisition of Kaynar, Fairchild
expects to 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.
9
<PAGE>
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 any such default is waived by
Fairchild's lenders, the debt could become immediately payable and 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.
No Assurance of Successful Integration/Future Acquisitions--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, including 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.
Competition--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.
History of Operating Losses in Fairchild's 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 quarter of fiscal 1999, Technologies had operating losses of
approximately $1.5 million, $3.6 million, $48.7 million and $8.2 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, while facing a continuing need for product development.
10
<PAGE>
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 (i) a reduction
in production capacity and headcount at Technologies, and (ii) 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.
Majority Control by Principal Stockholder
The authorized common stock of Fairchild consists of 40,000,000 shares of
Class A Common Stock and 20,000,000 shares of Class B Common Stock. As of
December 31, 1998, 19,218,806 shares of Class A Common Stock and 2,624,662
shares of Class B Common Stock were issued and outstanding. Except for voting
with respect to additional issuances of Class B Common Stock and for class
votes as required by Delaware law, holders of both classes of common stock vote
together as a single class, with each share of Class A Common Stock having one
vote per share and each share of Class B Common Stock having ten votes per
share. Substantially all of the outstanding shares of the Class B Common Stock
are controlled, directly or indirectly, by 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, Mr. Steiner possesses approximately 64% of the combined voting
power of both classes of 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 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 Class A Common
Stock. The Class B Common Stock is 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 paid a fine of two million French Francs in
connection therewith.
Uncertainty of the Spin-Off
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
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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 the shareholders is uncertain, and 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, it is expected that FIHC may 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.
Government Regulation and Customer Qualifications--Changes in government
regulations or customer qualifications could adversely affect Fairchild.
The Federal Aviation Administration ("FAA") 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 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 (the "Fastener Act") 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 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 Act is
currently scheduled to become effective on June 30, 1999.
Shares Eligible for Future Sale--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 ("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.
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Year 2000--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 has taken appropriate measures to ensure that its information
processing systems, embedded technology and other infrastructure will be ready
for the Year 2000.
Fairchild has retained both technical review and modification consultants to
help it assess its Year 2000 readiness. Working with these consultants and
other advisors, Fairchild has formulated a plan to address Year 2000 issues.
Under this plan, Fairchild'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 and aerospace distribution segments are currently Year 2000 ready. At
Technologies, Fairchild 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. 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 problems. These contingency plans include identifying
alternative suppliers, distribution networks and service providers.
Although Fairchild's Year 2000 assessment, implementation and contingency
planning is not yet complete, Fairchild does not now 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. To date, Fairchild has incurred approximately $0.8 million in
costs that are directly attributable to addressing Year 2000 issues. Fairchild
management currently 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 problem.
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INFORMATION CONCERNING THE SPECIAL MEETING
Time, Place, Date
This Proxy Statement 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 (the "Special Committee") 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
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 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 (the "Record Date"). 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 10-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 shares of Banner
Common Stock issued and outstanding, held of record by 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 "DGCL"), 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
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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."
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 ("Harco") 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 (the "Exchange
Offer"), 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 the 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 might be made by Fairchild. 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
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negotiate the terms of a proposed transaction, to make a recommendation to the
full Banner Board of Directors concerning any proposed 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 Howard & Zukin ("Houlihan Lokey" or the "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 the Financial Advisors was subject to confirmation of the
existence of no conflict of interest (which was subsequently confirmed to be
the case). The Special Committee informed the Financial Advisor 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 Mr. Gerard 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 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 "Proposed Transaction").
The Fairchild Board delegated to senior management of Fairchild authority to
negotiate the Proposed Transaction (including the price to be paid) on behalf
of Fairchild, subject to final approval by the Fairchild Board. 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 as
to what would be an appropriate price to offer holders of the Nonaffiliated
Shares.
Subsequent to the Fairchild Board meeting, Mr. Steiner communicated to the
members of the Special Committee the terms of the Proposed Transaction. These
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 the Proposed
Transaction, including the proposed purchase price of $9.75 per share of Banner
Common Stock. The release indicated that the Proposed Transaction was subject
to certain conditions, including 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 the 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."
Over the next several weeks, the Financial Advisor 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 Banner and Fairchild for
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the period ending June 30, 2004 prepared by management of Banner and Fairchild,
respectively; 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 the Proposed
Transaction; and documentation relating to the merger. The Financial Advisor
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 ("Olshan") to
discuss its retention as counsel. They reviewed the 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 the Financial Advisor
and 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 the 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 the 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 the Financial Advisor 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, the Financial Advisor and Olshan
continued their due diligence activities. These included visits by the
Financial Advisor and Olshan to the principal offices of Banner, a visit by the
Financial Advisor 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 ("Cahill"),
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.
On January 7, 1999, the Special Committee again met with the Financial
Advisor and Olshan. The principal purpose of the meeting was to hear the
preliminary report of the Financial Advisor with regard to fairness of the
Proposed Transaction. Representatives of the Financial Advisor 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. The Financial Advisor then provided its preliminary range of
valuation of Banner, utilizing 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
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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.
A second draft of the merger agreement was circulated by Cahill on January 9
and negotiations on the document followed through the weekend. The Financial
Advisor 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 12, 1999, the Special Committee met with the Financial Advisor
and Olshan. Mr. Gerard updated the other members on the developments of the
prior five days. A representative of the Financial Advisor 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 the Proposed Transaction. Following these negotiations, all
principal outstanding issues were ultimately resolved. 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 Inc. 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. The Financial
Advisors 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 the Financial Advisors 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 that 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 the Financial Advisor. 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
Merger Sub.
On January 12, 1999, Banner and Fairchild jointly announced that they had
reached agreement on the terms of the merger.
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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 (i) 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; (ii) to recommend to the holders of the
Nonaffiliated Shares that such stockholders vote to approve and adopt the
merger agreement; and (iii) that the terms of the merger are fair 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, based on the unanimous recommendation of the Special
Committee, (x) approved and adopted the merger agreement; (y) determined to
recommend to the holders of the Nonaffiliated Shares that they vote to approve
and adopt the merger agreement; and (z) determined that the terms of the merger
were fair 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:
(i) 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;
(ii) 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;
(iii) the history of the negotiations with respect to the merger, and
the belief of the members of the Special Committee that $11.00 paid in
Fairchild Class A Common Stock per Nonaffiliated Share was the best price
that could be obtained from Fairchild;
(iv) 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 the Proposal;
(v) the stock price and trading volume history of the Banner Common
Stock;
(vi) the opinion of Houlihan Lokey as to the fairness from a financial
point of view of the $11.00 paid in Fairchild Class A Common Stock per
Nonaffiliated Share to be received by the holders of the Nonaffiliated
Shares and the analysis presented to the Special Committee by Houlihan
Lokey (see "--Opinion of Houlihan Lokey Howard & Zukin for the Special
Committee"); and
(vii) 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 the 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
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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:
(i) 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; (ii) the
Special Committee retained and was advised by independent legal counsel; and
(iii) the Special Committee retained Houlihan Lokey as 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 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 an
additional meeting of the Special Committee was warranted.
The Board of Directors of Banner. The Board of Directors, 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 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 are aware
of developments with respect to Banner, including its financial results. Mr.
Steiner, Dr. Steiner, Mr. Alcox and Mr. Hercot, given their status as
interested directors, abstained from voting.
Opinion of the Financial Advisor 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.
The Special Committee retained Houlihan Lokey to render an opinion (the
"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 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
B. 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.
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The 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 Banner and Fairchild prepared by the management of
Banner and 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.
In assessing the financial fairness of the consideration to be received in
the merger Houlihan Lokey: (i) analyzed the reasonableness of the trading value
of Banner's and Fairchild's publicly traded common stock; (ii) valued the
common equity of Banner using widely accepted valuation methodologies; and
(iii) analyzed the reasonableness of the trading value of the Fairchild 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: (i) a valuation of the
continuing operations of Banner, including all balance sheet assets that
contribute to the operations of Banner ("Operational Assets") and (ii) 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 involved the
multiplication of various earnings and cash flow measures by appropriate risk-
adjusted multiples. Multiples 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. Earnings and cash
flow multiples were calculated for the comparative companies based upon daily
trading prices. A comparative risk analysis between Banner and the public
companies formed the basis for the selection of appropriate risk-adjusted
multiples for Banner. The risk
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analysis incorporates 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.
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. The present value of the interim cash flows and
the terminal value was determined using a risk-adjusted rate of return or
"discount rate." The discount rate, 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 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 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 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. The comparable companies
were selected on the basis of operational and economic similarity with the
principal business operations of Fairchild. Earnings and cash flow multiples
were calculated 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.
Comparable Transaction Analysis. Houlihan Lokey also analyzed the
acquisition multiples paid in publicly announced, majority acquisitions of
selected companies in the aerospace manufacturing industry.
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<PAGE>
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: (i) a valuation of
the continuing operations at Fairchild, including all balance sheet assets that
contribute to the operations of Fairchild ("Fairchild Operational Assets") and
(ii) 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 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. The present value of the interim cash flows and the terminal value was
determined 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 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 be received by the public common stockholders of
Banner 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 (the "Retainer") 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 was to receive $100,000 upon the signing of the Retainer,
$125,000 when it provided the Special Committee with its oral advice as to the
merger and 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 for reasonable out-of-pocket expenses incurred in connection with
the rendering of the Opinion.
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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, Merger Sub 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 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. 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 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.
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
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<PAGE>
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 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 (including any person who served
as a director or executive officer of Banner at any time during fiscal 1998)
beneficially owned as of more than % of the outstanding Banner Common
Stock, approximately % of the outstanding share of Fairchild Class A Common
Stock and approximately % of the outstanding Fairchild Class B Common Stock.
Directors and executive officers of Fairchild owned as of , % of the
outstanding Banner Common Stock and % of the outstanding shares of Fairchild
Class A Common Stock. All Banner Common Stock held by such directors and
executive officers at the Effective Time 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
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<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 $1,100,000. 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 $41,000,000 to pay the Merger
Consideration to the holders of the Nonaffiliated Shares.
Regulatory Requirements
Except for the filing of the Merger Certificate 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 the Proposal, 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 "Stockholder Action"). 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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CERTAIN 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 Banner's tax advisors, 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:
(i) no gain or loss will be recognized by Fairchild, any of its wholly
owned subsidiaries, Banner or Merger Sub as a result of the Merger;
(ii) 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;
(iii) 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;
(iv) 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
(v) 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.
28
<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 (the "Merger Consideration"). 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 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, the paying agent, (the
"Paying Agent"), 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 (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. 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 .
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. 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
(collectively, the "Stock Option Plans"), 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.
Merger Sub has agreed not to engage in any activities prior to the Effective
Time except as provided in the merger agreement.
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.
30
<PAGE>
Fairchild and Banner have agreed in the merger agreement (i) 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; (ii) to consult with each other in
advance of making public announcements concerning the merger; and (iii) 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 Merger Sub, including with respect to the following
matters: (i) the due organization and valid existence of Banner and its
subsidiaries and similar corporate matters; (ii) the capitalization of Banner;
(iii) the due authorization, execution and delivery of the merger agreement and
its binding effect on Banner; (iv) 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; (v) the accuracy of Banner's SEC filings and financial
statements; (vi) the absence of certain changes or undisclosed liabilities;
(vii) certain litigation matters; (viii) the opinion of the Special Committee's
Financial Advisor; (ix) compliance with applicable laws; and (x) 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 Merger Sub to Banner, including with respect to the following
matters: (i) the due organization and valid existence of each of Fairchild and
Merger Sub and similar corporate matters; (ii) the capitalization of Fairchild;
(iii) the due authorization, execution and delivery of the merger agreement by
Fairchild and Merger Sub, and its binding effect on them; (iv) 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 Merger Sub, or with any
contract binding upon Fairchild and Merger Sub, or with any law, rule,
regulation, order, writ, injunction or decree binding upon any of such parties;
(v) the accuracy of the information provided by Fairchild and Merger Sub for
inclusion in this Proxy Statement/Prospectus; (vi) the formation and absence of
prior activities of Merger Sub; (vii) the absence of undisclosed liabilities;
(viii) compliance with applicable laws; (ix) Fairchild's ownership of Banner's
capital stock; (x) independent investigation of Banner by Fairchild and Merger
Sub; and (xi) 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, Merger Sub and Fairchild to consummate the merger
are subject to the fulfillment or waiver (if permissible) at or prior to the
Effective Time of certain conditions, including (i) the satisfaction of the
DGCL Vote Requirement; (ii) 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; (iii) all required governmental and third party
consents and approvals having been obtained and continuing to be in effect at
the Effective Time, 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 (iv) 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.
31
<PAGE>
The obligations of Fairchild and Merger Sub to effect the merger are further
subject to the fulfillment or waiver (if permissible) at or prior to the
Effective Time of the following conditions: (i) Banner taking all necessary
corporate actions to approve and comply with the merger agreement; (ii) 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; (ii)
Banner having performed in all material respects its obligations contained in
the merger agreement; (iii) Banner not having suffered a material adverse
change; and (iv) 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: (i) Fairchild and Merger Sub taking all
necessary corporate actions to approve and comply with the merger agreement;
(ii) the representations and warranties of Fairchild and Merger Sub in the
merger agreement being true in all material respects when made and as of the
date the merger is effected; (iii) Fairchild and Merger Sub having performed in
all material respects their obligations contained in the merger agreement; (iv)
Fairchild not having suffered a material adverse change; (v) Fairchild and
Merger Sub having obtained all consents required by their bank lenders to
effect the merger; (vi) the receipt of the opinion of Houlihan Lokey; and (vii)
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 Merger Sub 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 Merger Sub 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:
(i) by mutual written consent of Fairchild, Merger Sub and Banner (with
the concurrence of the Special Committee);
(ii) by any of Fairchild, Merger Sub or Banner (with the concurrence of
the Special Committee in the case of termination by 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 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 (c) 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;
(iii) by Fairchild or Merger Sub 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;
32
<PAGE>
(iv) by Banner with the concurrence of the Special Committee if Merger
Sub 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 Merger Sub, 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
(v) 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.
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 , 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 , 1999..................................
</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.
33
<PAGE>
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 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, 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 approximately holders of record at , 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), and February , 1999 (the Record Date).
<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 28, 1998.................................... 17 5/8 10 3/8
March , 1999 (through , 1999).................
Other Dates:
December 2, 1998..................................... $16 1/8 $15 5/8
January 11, 1999..................................... $16 $15 9/16
February , 1999....................................
</TABLE>
34
<PAGE>
On January , 1999, the last reported sale price of Fairchild Class A
Common Stock as quoted on the NYSE was $ . 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 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, the Fairchild Pro Forma Consolidated Financial
Statements and their related notes and the other information included in this
Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
September 27, Pro
1998 Forma(1)
(In thousands, except share data) ------------- --------
<S> <C> <C>
Cash and short-term investments........................ $225,230 $224,129
======== ========
Short-Term Debt........................................ $ 20,794 $ 20,794
Existing Credit Facilities............................. 322,500 322,500
Other Debt............................................. 7,853 7,853
-------- --------
Total Debt............................................. $351,147 $351,147
-------- --------
Stockholders' Equity
Class A common stock, $0.10 par value; 40,000,000
shares authorized; 26,695,026 (actual) and
29,339,048 (pro forma) shares issued; and 19,504,256
(actual) and 22,148,278 (pro forma) shares
outstanding......................................... 2,670 2,934
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...................................... 195,261 240,634
Retained earnings.................................... 312,229 312,229
Cumulative other comprehensive loss.................. (8,756) (8,756)
Treasury Stock, 7,190,770 shares of Class A common
stock............................................... (70,565) (70,565)
-------- --------
Total Stockholders' Equity............................. 431,101 476,738
-------- --------
Total Capitalization................................... $782,248 $827,885
======== ========
</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, the Company's independent accountants. The selected financial
data as of and for the three months ended September 27, 1998 and September 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 three 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
September 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 Three Months Ended
--------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 9/28/97 9/27/98
-------- -------- -------- ---------- ---------- ---------- ----------
(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 $ 194,362 $ 148,539
Gross profit........... 28,415 26,491 74,101 181,344 186,506 46,329 34,672
Operating income
(loss)................ (46,845) (30,333) (11,286) 33,499 45,443 12,956 5,639
Net interest expense... 66,670 64,113 56,459 47,681 42,715 12,975 6,853
Earnings (loss) from
continuing
operations............ 4,834 (56,280) (32,186) 1,816 52,399 1,229 1,190
Earnings (loss) per
share from continuing
operations:
Basic................ $ 0.30 $ (3.49) $ (1.98) $ 0.11 $ 2.78 $ 0.07 $ 0.05
Diluted.............. 0.30 (3.49) (1.98) 0.11 2.66 0.07 0.05
Pro Forma Data (1):
Net sales.............. $ 741,176 $ 148,539
Gross profit........... 186,506 34,672
Operating income....... 45,075 5,547
Earnings from
continuing
operations............ 78,323 1,301
Earnings per share
from continuing
operations............
Basic................ $ 3.65 $ 0.05
Diluted.............. 3.38 0.05
<CAPTION>
At September 27, 1998
---------------------
Pro
Balance Sheet Data: Actual Forma(1)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets........... $860,943 $828,680 $993,398 $1,052,666 $1,157,259 $1,122,477 $1,136,086
Long-term debt, less
current maturities.... 518,718 508,225 368,589 416,922 295,402 327,500 327,500
Stockholders' equity... 69,494 39,378 230,861 232,424 473,559 431,101 476,678
</TABLE>
- --------
(1) See "Unaudited Pro Forma Consolidated Financial Statements."
37
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
OF THE FAIRCHILD CORPORATION
The unaudited pro forma consolidated statements of earnings for the year
ended June 30, 1998 and for the three months ended September 27, 1998 was
prepared to give effect to the merger, as if it occurred on July 1, 1997 and
July 1, 1998, respectively. The unaudited pro forma consolidated balance sheet
as of September 27, 1998 was prepared to give effect to the merger as if it had
occurred on such date.
The unaudited pro forma consolidated financial data are not necessarily
indicative of the results that would have been obtained had the merger 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 consolidated financial statements and notes thereto included
elsewhere in this Proxy Statement/Prospectus.
38
<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>
Adjustment
Fairchild for Pro
Historical Merger(1) Forma
---------- ---------- --------
<S> <C> <C> <C>
Sales.......................................... $741,176 $ -- $741,176
Costs and expenses:
Cost of sales................................ 554,670 -- 554,670
Selling, general & administrative............ 135,594 -- 135,594
Amortization of goodwill..................... 5,469 368 5,837
-------- ------- --------
695,733 368 696,101
-------- ------- --------
Operating income............................. 45,443 (368) 45,075
Net interest expense........................... (42,715) -- (42,715)
Investment loss, net........................... (3,362) -- (3,362)
Nonrecurring income............................ 124,028 -- 124,028
-------- ------- --------
Earnings before taxes.......................... 123,394 (368) 123,026
Income tax provision........................... (48,659) -- (48,659)
Equity in earnings of affiliates............... 3,956 -- 3,956
Minority interest.............................. (26,292) 26,292 --
-------- ------- --------
Earnings from continuing operations............ $ 52,399 $25,924 $ 78,323
======== ======= ========
Earnings per share from continuing operations:
Basic........................................ $ 2.78 $ 3.65
Diluted...................................... 2.66 3.38
Weighted average shares outstanding:
Basic........................................ 18,834 2,644 21,478
Diluted...................................... 19,669 3,470 23,139
</TABLE>
39
<PAGE>
THE FAIRCHILD CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS--PRO FORMA
For the three months ended September 27, 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
Adjustment
Fairchild for As
Historical Merger(1) Adjusted
---------- ---------- --------
<S> <C> <C> <C>
Sales.......................................... $148,539 $ -- $148,539
Cost and expenses:
Cost of sales................................ 113,867 -- 113,867
Selling, general & administrative............ 27,755 -- 27,755
Amortization of goodwill..................... 1,278 92 1,370
-------- ------ --------
142,900 92 142,992
-------- ------ --------
Operating income............................. 5,639 (92) 5,547
Net interest expense........................... (6,853) -- (6,853)
Investment income, net......................... 1,861 -- 1,861
-------- ------ --------
Earnings before taxes.......................... 647 (92) 555
Income tax provision........................... (291) -- (291)
Equity in earnings of affiliates............... 1,037 -- 1,037
Minority interest.............................. (203) 203 --
-------- ------ --------
Earnings from continuing operations............ $ 1,190 $ 111 $ 1,301
======== ====== ========
Earnings per share from continuing operations:
Basic........................................ $ 0.05 $ 0.05
Diluted...................................... 0.05 0.05
Weighted average shares outstanding:
Basic........................................ 22,401 2,644 25,045
Diluted...................................... 23,001 3,470 26,471
</TABLE>
40
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS
September 27, 1998
(in thousands)
<TABLE>
<CAPTION>
Fairchild Adjustment
Historical for Merger(2) As Adjusted
---------- ------------- -----------
<S> <C> <C> <C>
Cash.................................... $ 49,428 $(1,101) $ 48,327
Short-term investments.................. 175,802 -- 175,802
Accounts receivable, less allowances.... 110,191 -- 110,191
Inventory............................... 238,303 -- 238,303
Net current assets of discontinued
operations............................. 1,540 -- 1,540
Prepaid and other current assets........ 42,493 -- 42,493
---------- ------- ----------
Total current assets................ 617,757 (1,101) 616,656
Net fixed assets........................ 124,331 -- 124,331
Net assets held for sale................ 23,627 -- 23,627
Net noncurrent assets of discontinued
operations............................. 9,117 -- 9,117
Goodwill................................ 170,783 14,770 185,553
Investment in affiliates................ 27,361 -- 27,361
Prepaid pension assets.................. 61,961 -- 61,961
Deferred loan costs..................... 6,149 -- 6,149
Long-term investments................... 19,240 -- 19,240
Other assets............................ 62,151 -- 62,151
---------- ------- ----------
Total Assets........................ $1,122,477 $13,669 $1,136,146
========== ======= ==========
Bank notes payable & current maturities
of debt................................ $ 23,647 $ -- $ 23,647
Accounts payable........................ 52,569 -- 52,569
Other accrued expenses.................. 94,257 -- 94,257
---------- ------- ----------
Total current liabilities........... 170,473 -- 170,473
---------- ------- ----------
Long-term debt, less current
maturities............................. 327,500 -- 327,500
Other long-term liabilities............. 23,601 -- 23,601
Retiree health care liabilities......... 43,418 -- 43,418
Noncurrent income taxes................. 94,407 -- 94,407
Minority interest in subsidiaries....... 31,977 (31,968) 9
---------- ------- ----------
Total liabilities................... 691,376 (31,968) 659,408
---------- ------- ----------
Class A common stock.................... 2,669 264 2,933
Class B common stock.................... 263 -- 263
Paid-in capital......................... 195,261 45,373 240,634
Retained earnings....................... 312,229 -- 312,229
Cumulative other comprehensive loss..... (8,756) -- (8,756)
Treasury stock, at cost................. (70,565) -- (70,565)
---------- ------- ----------
Total stockholders' equity.......... 431,101 45,637 476,738
---------- ------- ----------
Total liabilities & stockholders'
equity................................. $1,122,477 $13,669 $1,136,146
========== ======= ==========
</TABLE>
41
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(1) Represents amortization of goodwill which will result from the merger and
the reduction of minority interest expense of $26,292 and $203 for the
year ended June 30, 1998 and the three months ended September 27, 1998,
respectively.
(2) For purposes of these unaudited pro forma statements, the purchase price
of the merger was calculated based on the closing market price of
Fairchild Class A Common Stock on January 8, 1998 of $15.50, divided into
$11.00 (the offer price). Based on this assumption, the unaudited pro
forma financial statements reflect Fairchild issuing 2,644,022 shares of
Fairchild Class A Common Stock as a result of the merger, resulting in an
increase in Fairchild's equity of $45,637. The $1,101 reduction in cash
represents the estimated costs of the merger. An increase in goodwill of
$14,770 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.
42
<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 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" and
"Incorporation of Certain Information by Reference."
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 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
43
<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.
44
<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
September 27, 1998 in the Aerospace Fasteners segment and Aerospace
Distribution segment amounted to $166 million, and $11 million, respectively.
Fairchild anticipates that in excess of 90% of the aggregate backlog at
September 27, 1998 will be delivered by September 30, 1999.
45
<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 ("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-base operations, corporate aircraft operators
and other aerospace and non-aerospace companies.
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.
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
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.
Dallas Aerospace, Inc. ("Dallas Aerospace"), 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 both Banner and Fairchild, 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.
46
<PAGE>
The sales order backlog amounted to $23.2 million and $82.8 million at March
31, 1998 and 1997, 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.
47
<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.
48
<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>
49
<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 six (6) months ended September
30, 1998 and 1997 are not necessarily indicative of the results to be expected
for the full year and are subject to audit at year end.
<TABLE>
<CAPTION>
For the Six Months Ended
September 30
-------------------------
(unaudited)
1998 1997
(In Thousands Except Per Share Data) ------------ ------------
<S> <C> <C>
Net sales............................................. $ 105,566 $ 239,844
Cost of goods sold.................................... 83,138 172,340
------------ ------------
Gross Profit........................................ 22,428 67,504
Selling, general and administrative expenses.......... 19,013 49,446
------------ ------------
Operating Income.................................... 3,415 18,058
Investment income..................................... 2,570 --
Interest expense, net................................. 3,261 7,777
------------ ------------
Income Before Taxes................................. 2,724 10,281
Provision for taxes................................... 660 4,010
------------ ------------
Net Income............................................ $ 2,064 $ 6,271
============ ============
Preferred stock dividends............................. 1,364 689
------------ ------------
Net Income Available for Common Shareholders........ $ 700 $ 5,582
============ ============
Basic earnings per common share....................... $ 0.03 $ 0.24
============ ============
Diluted earnings per common share..................... $ 0.03 $ 0.23
============ ============
Weighted average number of common shares:
basic................................................ 21,444 23,428
diluted.............................................. 21,856 23,797
<CAPTION>
As of September 30,
-------------------------
(unaudited)
1998 1997
------------ ------------
<S> <C> <C>
Balance Sheet Data:
Working capital....................................... $ 320,809 $ 309,723
Total assets.......................................... 416,642 436,290
Long-term debt, less current maturities............... 97,500 164,746
Stockholders' equity.................................. 235,697 190,439
</TABLE>
50
<PAGE>
BANNER MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On December 31, 1998, Banner completed 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. Banner's results of operations include Solair, which accounted
for approximately 33% of Banner's net sales for the six months ended September
30, 1998.
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 "Hardware Group Disposition"). 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 Six Months Ended September 30,
---------------------------------------
1998 1997
------------------- -------------------
Amount Percentage Amount Percentage
(In Thousands) -------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Net sales.............................. $105,566 100.0% $239,844 100.0%
Cost of goods sold..................... 83,138 78.8 172,340 71.9
-------- ----- -------- -----
Gross profit........................... 22,428 21.2 67,504 28.1
Selling, general and administrative.... 19,013 18.0 49,446 20.6
-------- ----- -------- -----
Operating income....................... $ 3,415 3.2% $ 18,058 7.5%
======== ===== ======== =====
</TABLE>
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<PAGE>
Operating Results
Six Months Ended September 30, 1998 and 1997
Net sales for the six months ended September 30, 1998 decreased $134.3
million, or 56.0%, from the comparable prior period. This decrease was the
result of the Hardware Group Disposition, which accounted for approximately 50%
of sales. Sales of rotables increased as a result of an increase in sales to
commercial airlines and as a result of an exclusive three-year agreement
between Solair and Delta Air Lines, which commenced in August 1997 (the "Delta
Contract"). Sales from the Delta Contract for the six months ended September
30, 1998 were approximately $8.3 million compared to $2.4 million for the
comparable period ended September 30, 1997. Sales of the engine group decreased
slightly compared to the prior period, due primarily to decreased engine sales,
partially offset by an increase in turbine parts and engine management sales.
The gross profit percentage for the six months ended September 30, 1998
decreased to 21.2% compared to 28.1% for the prior period. This decrease was
attributable primarily to the Hardware Group Disposition, which typically
earned higher margins than the engine and rotables groups. Excluding the
results of the Banner Hardware Group, the gross profit percentage for the six
months ended September 30, 1997 would have been 21.5%.
Selling, general and administrative ("SG&A") expenses decreased $30.4
million, or 61.5%, in the six months compared to the prior year. Excluding the
Hardware Group Disposition, SG&A expenses would have been $18.2 million or
16.5% of sales, compared to $19.0 million, or 18.0% of sales.
Investment income for the six months ended September 30, 1998 amounted to
$2.6 million. Banner recorded no investment income in fiscal 1998. For the six
months ended September 30, 1998, Banner recorded $1.5 million in dividend
income on shares of AlliedSignal common stock received from the Hardware Group
Disposition, and $1.1 million related to the sale and subsequent marking to
market of calls sold on the investment in AlliedSignal common stock. Through
the end of October 1998, Banner had sold calls on over 2 million shares of its
investment in AlliedSignal common stock, realizing approximately $2.8 million.
Interest Expense
Interest expense for the six months ended September 30, 1998 decreased $4.5
million or 58.1% compared to the prior period. This decrease was the result of
a decrease from $165.2 million in the average outstanding debt balance during
the prior period, to $73.2 million in the current period. Banner utilized
approximately $194 million of the proceeds received from the Hardware Group
Disposition to reduce its debt. Interest expense also included the amortization
of deferred loan costs and charges for nonuse fees, agency fees and
compensating balances.
Income Taxes
The provision for taxes for the six months ended September 30, 1998 and
1997, amounted to $0.7 million and $4.0 million, respectively. The effective
tax rate for the six months ended September 30, 1998 and 1997 was 24.2% and
39.0%, respectively. The decrease in the effective tax rate for the six months
ended September 30, 1998 was due to the 70% exclusion permitted on dividend
income earned from the investment in AlliedSignal common stock.
Net Income
For the six months ended September 30, 1998 and 1997, Banner recorded net
income available to common shareholders of $0.7 million, or $0.03 basic
earnings per common share and $5.6 million, or $0.24 basic earnings per common
share, respectively.
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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 losses 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 available for sale securities decreased by $25.0 million, net
of taxes, for the six months ended September 30, 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.
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.
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<PAGE>
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.
Liquidity
Total capitalization as of September 30, 1998, March 31, 1998 and 1997,
amounted to $333.2 million, $307.0 million and $315.6 million, respectively.
The changes in the components of capitalization for the six months ended
September 30, 1998 included an increase of $48.6 million in debt and a decrease
of $22.4 million in equity. The increase in debt is the result of incremental
borrowings under the credit agreement to fund current working capital
requirements and purchase marketable securities, primarily Fairchild Class A
Common Stock. The decrease in equity was primarily the result of the market
decline on the shares of AlliedSignal common stock from March 31, 1998. The
changes in the components of capitalization for the twelve months ended March
31, 1998 included a decrease in debt of $116.5 million and an increase in
equity of $107.9 million. 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 the
non-recurring income of $124.0 million recorded as a
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<PAGE>
result of the Hardware Group Disposition and the $14.3 million net unrealized
gain recorded on the appreciation of the AlliedSignal common stock. Equity also
increased $33.9 million as a result of the issuance of Banner Preferred Stock
in June 1997. 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 $174.0 and $206.6 million at September 30, 1998 and
March 31, 1998, respectively. There is risk associated with market fluctuation
in the AlliedSignal common stock, which is inherent in stock investments.
At September 30, 1998, Banner had total debt outstanding of $97.5 million,
all of which was borrowed under its credit agreement. As of September 30, 1998,
the credit agreement provided for up to $121.5 million of borrowings for
working capital, capital expenditures and potential acquisitions, subject to
certain conditions and a borrowing base. Cash flow from operations, along with
funds available under the credit agreement 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
September 30, 1998.
Net cash used for operating activities for the six months ended September
30, 1998 and 1997 amounted to $17.9 million and $31.0 million, respectively.
The primary use of cash for operating activities for the six months ended
September 30, 1998 was an increase in inventories, and a decrease in payables
and accrued liabilities in the amount of $27.3 million and $19.1 million,
respectively. The primary source of cash from operating activities for the six
months ended September 30, 1998 was a decrease in receivables in the amount of
$14.9 million. The increase in inventories was the result of an increase in
anticipated sales volume. The decrease in receivables is due to several large
collections since March 31, 1998. The primary source of cash from operating
activities for the six months ended September 30, 1997 was an increase in
payables and accrued liabilities in the amount of $3.4 million, along with
scheduled depreciation and amortization expense of $2.7 million. The primary
use of cash for operating activities for the six months ended September 30,
1997 was an increase in receivables and inventories, in the amount of $21.0
million and $21.4 million, respectively. Net cash used for operating activities
for the fiscal year ended March 31, 1998 and March 31, 1997, amounted to $85.0
million and $32.7 million, respectively. The primary use of cash for operating
activities in fiscal 1998 and 1997 was an increase in inventory of $56.2
million and $37.5 million, respectively, which was mainly to support Banner's
sales growth.
Net cash used for investing activities for the six months ended September
30, 1998 and 1997, was $31.2 million and $2.6 million, respectively. The
primary use of cash for investing activities for the six months ended September
30, 1998 was the acquisition of investment securities. The primary use of cash
for investing activities for the six months ended September 30, 1997 was
capital expenditures, net of proceeds from the sale of fixed assets. Net cash
used for investing activities for the fiscal year ended March 31, 1998 amounted
to $4.6 million, which was used primarily for the acquisition of property,
plant and equipment. Net cash used for investing activities for the fiscal year
ended March 31, 1997 amounted to $20.4 million, which was used primarily for
business acquisitions, net of cash acquired.
Net cash provided by financing activities for the six months ended September
30, 1998 and 1997 was $49.2 million and $33.6 million, respectively. Net cash
provided by financing activities for the six months ended September 30, 1998
was the result of net borrowings on the revolver to fund current working
capital requirements. Net cash provided by financing activities for the six
months ended September 30, 1997 was comprised of $33.9 million received from
the Banner Preferred Stock rights offering, and net borrowings of $31.6 million
on the revolver, partially offset by repayment of $28.0 million of the
subordinated loan from a subsidiary of Fairchild. Net cash provided by
financing activities for the fiscal year ended March 31, 1998 amounted to $89.6
million, which was due to increased borrowings under Banner's credit agreement
and the
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<PAGE>
issuance of Banner Preferred Stock, offset by the repayment of debt, and
Banner's purchase of treasury stock. Net cash provided by financing activities
for the fiscal year ended March 31, 1997 amounted to $53.1 million, which was
due to increased bank borrowings under Banner's credit agreement and borrowings
under a subordinated loan agreement with the Fairchild subsidiary.
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. Banner
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.
Banner has retained both technical review and modification consultants to
help it assess its Year 2000 readiness. Working with these consultants and
other advisors, Banner has formulated a plan to address Year 2000 issues. Under
this plan, Banner'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.
Banner expects to complete its preparations for Year 2000 by early 1999. Banner
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, Banner is continually attempting to assess the level of Year
2000 preparedness of its key suppliers, distributors, customers and service
providers. To this end, Banner 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 Banner fails to
be Year 2000 compliant, Banner could suffer a material loss of business or
incur material expenses.
Banner is also developing and evaluating contingency plans to deal with
events affecting Banner 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 Banner's Year 2000 assessment, implementation and contingency
planning is not yet complete, Banner does not believe that Year 2000 issues
will materially affect its business, results of operations or financial
condition. However, Banner's Year 2000 efforts may not be successful in every
respect. To date, Banner has incurred approximately $0.2 million in costs that
are directly attributable to addressing Year 2000 issues. Banner's management
currently estimates that Banner will incur between $0.3 million and $0.4
million in additional costs during the remainder of 1999 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 operating segments in annual and interim
financial reports. Banner currently operates in only one reportable segment.
In February 1998, FASB issued SFAS No. 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.
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DESCRIPTION OF MERGER SUB
Merger Sub is a wholly-owned subsidiary of Fairchild formed to effect the
Merger. Merger Sub has not engaged in any operations to date. Merger Sub 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 ("Tax Indemnity"), Fairchild has agreed to
indemnify Banner from and against any federal, state, local and foreign income,
franchise, withholding and alternative minimum taxes
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<PAGE>
(including interest, additions to tax and penalties with respect thereto) for
periods ending on or before August 2, 1990 when 52.8% 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 $100 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 $100 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 Class A Common Stock of
Fairchild through open market purchases. The purchases by Banner will be made
from time to time depending on the market price of Fairchild stock, and may be
subject to the requirement of obtaining the consent of 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 1,246,400 shares of Fairchild stock at an average purchase
price of $17.79. At September 30, 1998, such shares were treated as non-current
available-for-sale securities and Banner recorded in stockholders' equity
unrealized holding losses since inception of $3.3 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 (the "Exchange
Offer"), 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 85.4%.
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 ("FSBC") from Fairchild in exchange for 230,000 shares
of Banner Common Stock initially. This transaction was approved by a special
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<PAGE>
committee of 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
six months ended September 30, 1998, Banner recorded royalty income from FSBC
of $202,000.
On December 20, 1996, Banner entered into an unsecured subordinated loan
agreement ("Subordinated Loan") 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.
Banner may from time to time make subordinated loans to Fairchild in order
to provide Fairchild with additional cash resources.
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<PAGE>
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
"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 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 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
Common Stock. Upon consummation of the Offering, there will be no shares of
Preferred Stock outstanding, and Fairchild has no present intention to issue
any shares of Preferred Stock.
Common Stock
The issued and outstanding shares of Common Stock are, and the shares of
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 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 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
Class A Common Stock and Class B Common Stock voting together as a single
class. The holders of 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 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 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 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 Common Stock payable in shares of that same class of Common Stock,
(b) makes any distribution upon either class of its Common Stock payable in
shares of that same class of Common Stock, (c) subdivides its outstanding
shares of either class of its Common Stock into a greater number of shares, or
(d) subdivides its outstanding shares of either class of its Common Stock into
a smaller number of shares, then and in any of
60
<PAGE>
such events Fairchild shall make, declare or effect a similar but ratable stock
dividend, distribution or subdivision on the shares of the other class of its
Common Stock, but payable in shares of such other class of 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 Class A Common Stock.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock of Fairchild is
ChaseMellon Shareholder Services LLC.
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
Bylaws (the "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 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 Fairchild
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.
61
<PAGE>
SECURITIES OWNERSHIP
Ownership of Banner Capital Stock
The table below sets forth as of December 31, 1998 the number and percentage
of Banner Common Stock and Banner Preferred Stock beneficially owned by (i)
each person known by Banner to own beneficially more than 5% of any class of
Banner Common Stock and Banner Preferred Stock; (ii) each director of Banner;
(iii) the five most highly compensated executive officers of Banner; and (iv)
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 December 31, 1998, 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......... 22,000(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)...... 22,133,496 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 with Citicorp N.A., 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 (i) 1,500 shares of Banner Common Stock held in a Self Directed
IRA Account; (ii) 12,500 shares of Banner Common Stock held by the spouse
of E. Juris; and (iii) 3,069 shares of Banner Preferred Stock held by the
spouse of E. Juris.
(4) Includes (i) 3,611 shares of Banner Common Stock owned by J. Steiner
through Banner's Profit Sharing/401(k) plan; (ii) 105,000 shares of Banner
Common Stock held by J. Steiner; (iii) 19,711 shares of Banner Preferred
Stock immediately convertible to Banner Common Stock held by J. Steiner;
and (iv) 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.
62
<PAGE>
Ownership of Fairchild Class A Common Stock by Directors and Executive Officers
of Banner
The table below sets forth as of December 31, 1998 the number and percentage
of Fairchild Class A Common Stock and Fairchild Class B Common Stock
beneficially owned by (i) each person known by Banner to own beneficially more
than 5% of any class of Banner Common Stock and Banner Preferred Stock; (ii)
each director of Banner; (iii) the five most highly compensated executive
officers of Banner; and (iv) 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 December 31,
1998, there were 19,218,806 and 2,624,662 shares of Fairchild Class A Common
Stock and Fairchild 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........ 46,062 * 600 * 86,868 * 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.................. 6,814,576 34.8% 2,954,596 98.5% 8,706,649 37.9% 2,954,596 98.5%
</TABLE>
- --------
*Represents less than one percent.
(1) The Class A Common Stock column includes shares of Class B Common Stock,
which are immediately convertible into 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 Class A Common Stock column. Certain
warrants that may be deemed to be owned by Jeffrey J. Steiner are
exercisable into either Class A Common Stock or Class B Common Stock and
appear in both Class A Common Stock and Class B Common Stock columns.
63
<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
(i) 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 (ii) 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.
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
64
<PAGE>
Name and Age Principal Occupations
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. Mr. Steiner is, and for
the past five years has served as, the
President of Cedco Holdings, Ltd., a Bermuda
Corporation (an investment company). 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 to serve until
the next annual meeting of the Board 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.
65
<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 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.
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.
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 shareholders of Banner.
66
<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 September 30, 1998 and March 31, 1998...... F-23
Consolidated Statements of Income and Comprehensive Income for the six
months ended
September 30, 1998 and 1997............................................ F-24
Consolidated Statements of Income and Comprehensive Income for the three
months ended
September 30, 1998 and 1997............................................ F-25
Consolidated Statements of Cash Flows for the six months ended
September 30, 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, 1998)
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
SEPTEMBER 30, 1998 AND MARCH 31, 1998
(In thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
------------- ---------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Marketable securities................................ $ 174,033 $ --
Receivables, less allowances of $2,693 at September
30, 1998 and $2,881 at March 31, 1998............... 33,153 48,046
Inventories.......................................... 149,577 122,236
Other current assets................................. 19,574 29,741
--------- ---------
376,337 200,023
--------- ---------
PROPERTY, PLANT AND EQUIPMENT (AT COST)
Land................................................. 15 15
Buildings and improvements........................... 2,560 2,430
Machinery and equipment.............................. 8,863 8,056
--------- ---------
11,438 10,501
Accumulated depreciation............................. (6,671) (6,008)
--------- ---------
4,767 4,493
--------- ---------
OTHER ASSETS
Investments.......................................... 21,858 206,626
Cost in excess of net tangible assets of purchased
businesses, net..................................... 12,075 12,292
Other................................................ 1,605 1,776
--------- ---------
35,538 220,694
--------- ---------
TOTAL ASSETS....................................... $ 416,642 $ 425,210
========= =========
CURRENT LIABILITIES
Accounts payable..................................... $ 22,271 $ 27,431
Accrued salaries..................................... 1,803 2,568
Other................................................ 31,454 44,626
--------- ---------
55,528 74,625
--------- ---------
LONG-TERM LIABILITIES
Long-term debt....................................... 97,500 48,900
Deferred federal and state income tax................ 25,174 41,194
Other................................................ 2,743 2,381
--------- ---------
125,417 92,475
--------- ---------
TOTAL LIABILITIES.................................. 180,945 167,100
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value per share, 10,000
shares authorized, 4,100 shares issued and
outstanding at September 30, 1998 and 3,810 shares
issued and outstanding at March 31, 1998............ 41 38
Common stock, $1.00 par value per share, 50,000
shares authorized, 23,730 shares issued, 21,483
outstanding at September 30, 1998 and 23,642 shares
issued, 21,395 shares outstanding at
March 31, 1998...................................... 23,730 23,642
Less: treasury stock at cost, 2,247 shares held in
treasury at September 30, 1998 and March 31, 1998... (23,331) (23,331)
Paid-in capital...................................... 152,292 150,460
Retained earnings.................................... 93,746 93,046
Cumulative other comprehensive income................ (10,781) 14,255
--------- ---------
TOTAL STOCKHOLDERS' EQUITY......................... 235,697 258,110
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $ 416,642 $ 425,210
========= =========
</TABLE>
The accompanying notes to summarized financial information are an integral part
of these consolidated balance sheets.
F-23
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE SIX (6) MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(In thousands, except per share data)
The consolidated income statements for the six (6) months ended September 30,
1998 and 1997 are not necessarily indicative of the results to be expected for
the full year and are subject to audit at year end.
<TABLE>
<CAPTION>
For the Six Months Ended
September 30,
--------------------------
1998 1997
------------ ------------
(unaudited)
-----------
<S> <C> <C>
Net sales.......................................... $ 105,566 $ 239,844
Cost of goods sold................................. 83,138 172,340
------------ ------------
GROSS PROFIT..................................... 22,428 67,504
Selling, general and administrative expenses....... 19,013 49,446
------------ ------------
OPERATING INCOME................................. 3,415 18,058
Investment income.................................. 2,570 --
Interest expense, net.............................. 3,261 7,777
------------ ------------
INCOME BEFORE TAXES.............................. 2,724 10,281
Provision for taxes................................ 660 4,010
------------ ------------
NET INCOME....................................... $ 2,064 $ 6,271
============ ============
Preferred stock dividends.......................... 1,364 689
------------ ------------
NET INCOME AVAILABLE FOR COMMON SHAREHOLDERS..... $ 700 $ 5,582
============ ============
Basic earnings per common share.................... $ 0.03 $ 0.24
============ ============
Diluted earnings per common share.................. $ 0.03 $ 0.23
============ ============
Weighted average number of common shares--basic.... 21,444 23,428
============ ============
Weighted average number of common shares--diluted.. 21,856 23,797
============ ============
Net income......................................... $ 2,064 $ 6,271
Other comprehensive income (loss):
Unrealized loss on available-for-sale securities,
net of tax benefit of $16,006..................... (25,036) --
------------ ------------
Comprehensive income (loss)........................ $ (22,972) $ 6,271
============ ============
</TABLE>
The accompanying notes to summarized financial information are an integral part
of these consolidated income statements.
F-24
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE (3) MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(In thousands, except per share data)
The consolidated income statements for the three (3) months ended September
30, 1998 and 1997 are not necessarily indicative of the results to be expected
for the full year and are subject to audit at year end.
<TABLE>
<CAPTION>
For the Three Months Ended
September 30,
----------------------------
1998 1997
------------- -------------
(unaudited)
-----------
<S> <C> <C>
Net sales........................................ $ 50,528 $ 122,914
Cost of goods sold............................... 39,341 88,955
------------- -------------
GROSS PROFIT................................... 11,187 33,959
Selling, general and administrative expenses..... 9,467 25,260
------------- -------------
OPERATING INCOME............................... 1,720 8,699
Investment income................................ 1,832 --
Interest expense, net............................ 1,932 3,745
------------- -------------
INCOME BEFORE TAXES............................ 1,620 4,954
Provision for taxes.............................. 410 1,930
------------- -------------
NET INCOME..................................... $ 1,210 $ 3,024
============= =============
Preferred stock dividends........................ 695 640
------------- -------------
NET INCOME AVAILABLE FOR COMMON SHAREHOLDERS... $ 515 $ 2,384
============= =============
Basic earnings per common share.................. $ 0.02 $ 0.10
============= =============
Diluted earnings per common share................ $ 0.02 $ 0.10
============= =============
Weighted average number of common shares--basic.. 21,458 23,428
============= =============
Weighted average number of common shares--
diluted......................................... 21,842 23,923
============= =============
Net income....................................... $ 1,210 $ 3,024
Other comprehensive income (loss):
Unrealized loss on available-for-sale securities,
net of tax benefit of $20,606................... (32,231) --
------------- -------------
Comprehensive income (loss)...................... $ (31,021) $ 3,024
============= =============
</TABLE>
The accompanying notes to summarized financial information are an integral part
of these consolidated income statements.
F-25
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX (6) MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(In thousands)
<TABLE>
<CAPTION>
For the Six
Months Ended
September 30,
------------------
1998 1997
-------- --------
(unaudited)
<S> <C> <C>
CASH FLOWS (USED FOR) OPERATING ACTIVITIES
Net income................................................ $ 2,064 $ 6,271
Adjustments to reconcile net income to net cash (used for)
operating activities--
Depreciation and amortization........................... 1,058 2,749
Change in receivables................................... 14,893 (21,017)
Change in inventories................................... (27,341) (21,378)
Change in payables and accrued liabilities.............. (19,097) 3,444
Change in other accounts................................ 10,488 (1,079)
-------- --------
Net cash (used for) operating activities.............. (17,935) (31,010)
-------- --------
CASH FLOWS (USED FOR) INVESTING ACTIVITIES
Acquisition of investment securities...................... (30,306) --
Acquisition of property, plant and equipment.............. (919) (2,557)
-------- --------
Net cash (used for) investing activities.............. (31,225) (2,557)
-------- --------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Net borrowings of revolver................................ 48,600 31,600
Repayment of subordinated loan............................ -- (28,000)
Repayment of term loan.................................... -- (3,850)
Repayments on other debt.................................. -- (154)
Issuance of preferred stock............................... -- 33,877
Exercise of stock options................................. 560 94
-------- --------
Net cash provided by financing activities............. 49,160 33,567
-------- --------
NET CHANGE IN CASH........................................ -- --
CASH, BEGINNING OF PERIOD................................. -- --
-------- --------
CASH, END OF PERIOD....................................... $ -- $ --
======== ========
</TABLE>
The accompanying notes to summarized financial information are an integral part
of these
consolidated statements of cash flows.
F-26
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO SUMMARIZED FINANCIAL INFORMATION
SEPTEMBER 30, 1998 AND 1997
(In thousands, except share data, unless otherwise noted)
The information furnished in this Form 10-Q for the interim period ended
September 30, 1998 reflects all adjustments which are, in the opinion of
management, of a normal recurring nature and are necessary to present a fair
statement of the results for the interim period. The condensed financial
information included herein has been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted. Although the Company believes that
the following disclosures are adequate to make the information presented not
misleading, it is suggested that this condensed financial information be read
in conjunction with the consolidated financial statements and the notes thereto
included in the Company's Form 10-K for the fiscal year ended March 31, 1998.
(1) Significant Accounting and Reporting Policies
Organization
Prior to an initial public offering on August 1, 1990, Banner Aerospace, Inc.
(the "Company") was a wholly-owned subsidiary of The Fairchild Corporation
("Fairchild"). As a result of the initial public offering, Fairchild's indirect
beneficial ownership of the Company's Common Stock was reduced from 100.0% to
47.2%. However, as a result of the additional shares of the Company's Common
Stock issued in connection with the acquisition of Harco, Inc. in fiscal 1996,
Fairchild became the majority owner of the Company and owned 59.3% of the
Company's Common Stock as of March 31, 1997. In January 1998, the Company
repurchased 2,246,967 shares of its own Common Stock for a total cost of
$23,331, which increased Fairchild's ownership to 66.3% as of March 31, 1998.
On June 9, 1998, Fairchild completed an Exchange Offer pursuant to which it
acquired 3,659,424 shares of the Company's Common Stock in exchange for shares
of Fairchild Class A common stock (the "Exchange Offer"). As a result of the
Exchange Offer, Fairchild's beneficial ownership of the Company's Common Stock
increased to 8.2% (refer to Note 6 in the notes to summarized financial
information). Fairchild's current beneficial ownership is approximately 85.4%
Description of the Business
The Company is an international supplier to the aerospace industry,
distributing a wide range of aircraft parts and related support services. The
Company's products are divided into two product groups: rotables and engines.
The Company's hardware product group, which included bearings, nuts, bolts,
screws, rivets and other types of fasteners, was disposed of as part of a
business combination completed on January 13, 1998 (refer to Note 5 in the
notes to summarized financial information). Rotables include flight data
recorders, radar and navigation systems, instruments, landing gear and
hydraulic and electrical components. Engines include jet engines, engine parts
and engine leasing for use on both narrow and wide body aircraft and smaller
engines for corporate and commuter aircraft. The Company provides a number of
services such as immediate shipment of parts in aircraft on ground ("AOG")
situations and customer tailored inventory management programs. The Company
also provides both long-term and short-term engine leasing services to
commercial airlines and air cargo carriers. Through its subsidiaries, the
Company sells its products in the United States and abroad to most of the
world's commercial airlines and air cargo carriers, as well as other
distributors, fixed-base operations, corporate aircraft operators and other
aerospace and non-aerospace companies.
F-27
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO SUMMARIZED FINANCIAL INFORMATION--(Continued)
SEPTEMBER 30, 1998 AND 1997
(In thousands, except share data, unless otherwise noted)
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.
(2) Earnings Per Common Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings per Share" (SFAS 128). This statement
replaces the previously reported primary and fully diluted earnings per common
share with basic earnings per common share and diluted earnings per common
share. Unlike primary earnings per common share, basic earnings per common
share excludes any dilutive effects of stock options. All earnings per common
share have been restated to conform to the requirements of SFAS 128.
The following is a reconciliation of the computations of basic earnings per
common share and diluted earnings per common share for the six and three months
ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
For the Six Months Ended
September 30,
-------------------------
1998 1997
------------ ------------
(In thousands, except per
share data)
<S> <C> <C>
Basic earnings per common share:
Net income available for common shareholders... $ 700 $ 5,582
Weighted average shares outstanding............ 21,444 23,428
Basic earnings per common share................ $ 0.03 $ 0.24
============ ============
Diluted earnings per common share:
Net income available for common shareholders... $ 700 $ 5,582
Weighted average shares outstanding............ 21,444 23,428
Incremental shares due to assumed exercise and
repurchase of stock options................... 412 369
------------ ------------
21,856 23,797
------------ ------------
Diluted earnings per common share.............. $ 0.03 $ 0.23
============ ============
</TABLE>
F-28
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO SUMMARIZED FINANCIAL INFORMATION--(Continued)
SEPTEMBER 30, 1998 AND 1997
(In thousands, except share data, unless otherwise noted)
Preferred Stock totaling 4,100,305 and 3,710,955 shares as of September 30,
1998 and 1997, respectively, that are convertible into Common Stock at a one-
to-one ratio have been excluded from the calculation of diluted earnings per
common share for the six months ended September 30, 1998 and 1997,
respectively, as the effects would be antidilutive. In addition, outstanding
stock options to purchase 135,000 and 40,000 shares of Common Stock as of
September 30, 1998 and 1997, respectively, were not included in the computation
of diluted earnings per common share for the six months ended September 30,
1998 and 1997, respectively, because the exercise price was greater than the
average market price of common shares for the period.
<TABLE>
<CAPTION>
For the Six Months Ended
September 30,
-------------------------
1998 1997
------------ ------------
(In thousands, except per
share data)
<S> <C> <C>
Basic earnings per common share:
Net income available for common shareholders... $ 515 $ 2,384
Weighted average shares outstanding............ 21,458 23,428
Basic earnings per common share................ $ 0.02 $ 0.10
============ ============
Diluted earnings per common share:
Net income available for common shareholders... $ 515 $ 2,384
Weighted average shares outstanding............ 21,458 23,428
Incremental shares due to assumed exercise and
repurchase of stock options................... 384 495
------------ ------------
21,842 23,923
------------ ------------
Diluted earnings per common share.............. $ 0.02 $ 0.10
============ ============
</TABLE>
Preferred Stock totaling 4,100,305 and 3,710,955 shares as of September 30,
1998 and 1997, respectively, that are convertible into Common Stock at a one-
to-one ratio have been excluded from the calculation of diluted earnings per
common share for the three months ended September 30, 1998 and 1997,
respectively, as the effects would be antidilutive. In addition, outstanding
stock options to purchase 140,000 shares of Common Stock as of September 30,
1998 were not included in the computation of diluted earnings per common share
for the three months ended September 30, 1998, because the exercise price was
greater than the average market price of common shares for the period.
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 129 "Disclosure of Information about Capital
Structure" (SFAS 129). This statement establishes standards for disclosing
information about an entity's capital structure. The Company's Preferred Stock
pays annual dividends of additional Preferred Stock at 7.5% per annum of the
liquidation value of $9.20 per share. Each share of Preferred Stock is
convertible into one share of Common Stock at any time; however, all shares not
previously converted will automatically be converted into Common Stock on the
fifth anniversary of the date of initial issuance of the Preferred Stock (June
19, 2002). The Preferred Stock has no voting rights. Preferred Stock issued and
outstanding at September 30, 1998 includes 148,204 shares related to the semi-
annual stock dividend declared on September 18, 1998 and payable on October 31,
1998. The additional shares of Preferred Stock are included as of September 30,
1998 to provide the retroactive effect in the balance sheet and diluted
earnings per common share computation.
F-29
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO SUMMARIZED FINANCIAL INFORMATION--(Continued)
SEPTEMBER 30, 1998 AND 1997
(In thousands, except share data, unless otherwise noted)
(3) Credit Agreement
On August 2, 1995, the Company entered into a credit agreement ("Credit
Agreement") that provides for working capital and potential acquisitions. On
July 1, 1996, the Company amended the Credit Agreement ("Amended and Restated
Credit Agreement") to provide additional financing, as well as require that
loans made to the Company will not exceed a defined borrowing base which is
based upon a percentage of eligible accounts receivables and inventories. On
December 12, 1996, the Company amended the Amended and Restated Credit
Agreement ("Second Amended and Restated Credit Agreement") to provide
additional financing and approve the incurrence of subordinated debt and
certain acquisitions. On November 25, 1997, the Company amended the Second
Amended and Restated Credit Agreement to provide additional financing.
Immediately following this amendment, the facility under the Second Amended and
Restated Credit Agreement included (i) a $55,000 six-year term loan ("Term
Loan"); (ii) a $30,000 seven-year term loan ("Tranche B Loan"); (iii) a $40,000
six-year term loan ("Tranche C Loan"); and (iv) a $121,500 six-year revolving
credit facility ("Revolver"). On January 13, 1998, the Company repaid the
outstanding balances of the Term Loan, Tranche B Loan and Tranche C Loan in
conjunction with the Hardware Business Disposition (refer to Note 5 in the
notes to summarized financial information).
Based on the Company's financial performance, the Revolver bears interest at
prime plus 1/4% to 1 1/4% or London Interbank Offered Rate ("LIBOR") plus 1
1/2% to 2 3/4% and is subject to a nonuse fee of 30 to 50 basis points of the
unused availability. On September 30, 1998, the Company's performance level
resulted in borrowings under the Revolver bearing interest at prime plus 1/4%
and LIBOR plus 1 1/2% and a nonuse fee of 30 basis points for the quarter
ending December 31, 1998. The Second Amended and Restated Credit Agreement
contains certain financial and nonfinancial covenants which the Company is
required to meet on a quarterly basis. The financial covenants include minimum
net worth and minimum earnings levels, and minimum ratios of interest coverage,
fixed charges and debt to earnings before interest, taxes, depreciation and
amortization. The Company also has certain limitations on the incurrence of
additional debt, and has restrictions that limit dividends and distributions on
the capital stock of the Company to an aggregate of $150 in any fiscal year. At
September 30, 1998, the Company was in compliance with all covenants under the
Second Amended and Restated Credit Agreement. Substantially all of the
Company's assets are pledged as collateral under the Second Amended and
Restated Credit Agreement.
In September 1995, the Company entered into several interest rate hedge
agreements ("Hedge Agreements") to manage its exposure to increases in interest
rates on its floating rate debt. The Company entered into the Hedge Agreements
with two of its major lenders to provide interest rate protection on $60,000 of
debt for a period of five years. Effectively, the Hedge Agreements provide for
a LIBOR cap of 7.0% if the 90 day LIBOR exceeds 7.0%. If the 90 day LIBOR drops
below the LIBOR floor of 5.0%, the Company will be required to pay interest at
a floor rate of approximately 6.0%. The above rates exclude any spread above
LIBOR. No cash outlay was required as the cost of the cap was offset by the
sale of the floor.
In November 1996, the Company entered into an additional hedge agreement
("Additional Hedge Agreement") with one of its major lenders to provide
interest rate protection on an additional $20,000 of debt for a period of three
years. Effectively, the Additional Hedge Agreement provides for a cap of 7 1/4%
if the 90 day LIBOR exceeds 7 1/4%. If the 90 day LIBOR drops below 5.0%, the
Company will be required to pay interest at a floor rate of approximately 6.0%.
No cash outlay was required to obtain the Additional Hedge Agreement as the
cost of the cap was offset by the sale of the floor.
F-30
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO SUMMARIZED FINANCIAL INFORMATION--(Continued)
SEPTEMBER 30, 1998 AND 1997
(In thousands, except share data, unless otherwise noted)
(4) Stock Options
The Company's Non-Qualified and Incentive Stock Option Plan (the "1990 Stock
Option Plan"), adopted in August 1990, authorizes the granting of options at
not less than the fair market value of the stock at the time of the granting of
the options. On September 13, 1996, the stockholders approved an amendment to
the 1990 Stock Option Plan to increase the number of shares of its common stock
("Common Stock") authorized to be issued under the 1990 Stock Option Plan and
to extend the period under which options may be exercised. The Company has
reserved for issuance two million shares of Common Stock under the 1990 Stock
Option Plan. The option price is payable in cash or, with the approval of the
compensation and stock option committee of the Board of Directors, in shares of
Common Stock, valued at fair market value at the time of exercise. The 1990
Stock Option Plan terminates in the year 2000; however, all stock options
outstanding as of August 2, 2000 continue to be exercisable pursuant to their
terms. Under the 1990 Stock Option Plan, all options granted are for a term of
seven years. Options granted on or before August 1, 1993 are immediately
exercisable and options granted subsequent to August 1, 1993 vest over a period
of three to four years.
On September 13, 1996, the stockholders approved the 1996 Non-Employee
Director Stock Option Plan (the "NED Stock Option Plan"). The Company has
reserved for issuance 150,000 shares of Common Stock under the NED Stock Option
Plan which terminates in the year 2006. However, all stock options outstanding
as of May 29, 2006 shall continue to be exercisable pursuant to their terms.
The option price is payable in cash or, with the approval of the compensation
and stock option committee of the Board of Directors, in shares of Common
Stock, valued at fair market value at the time of exercise. All options are for
a term of five years and vest immediately upon issuance of the grant. Each
newly elected non-employee director shall be granted an option for 5,000 shares
of Common Stock and on the date of each succeeding annual meeting, each non-
employee director elected at such meeting shall be granted an option for 1,000
shares of Common Stock.
Stock option activity under the 1990 Stock Option Plan, the NED Stock Option
Plan and non-employee director options granted prior to the approval of the NED
Stock Option Plan for fiscal year 1999 is as follows:
<TABLE>
<CAPTION>
Weighted
average
exercise
Shares price
--------- --------
<S> <C> <C>
Outstanding at March 31, 1998.......................... 1,107,750 $ 6.42
Granted................................................ 149,750 $11.59
Exercised.............................................. (89,033) $ 6.29
Terminated............................................. (29,750) $ 8.27
--------- ------
Outstanding at September 30, 1998...................... 1,138,717 $ 7.06
========= ======
</TABLE>
At September 30, 1998, 1,087,717 of the 1,138,717 options outstanding were
issued under the 1990 Stock Option Plan and have exercise prices between $4.88
and $11.81 per share. The remaining 51,000 options were issued under the NED
Stock Option Plan, or are non-employee director options granted prior to the
approval of the NED Stock Option Plan, and have exercise prices between $8.13
and $10.63 per share.
(5) Dispositions
On January 13, 1998, the Company completed the disposition of substantially
all of the assets and certain liabilities of its hardware companies and PacAero
unit (the "Hardware Business") to two wholly-owned
F-31
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO SUMMARIZED FINANCIAL INFORMATION--(Continued)
SEPTEMBER 30, 1998 AND 1997
(In thousands, except share data, unless otherwise noted)
subsidiaries of AlliedSignal Inc. (the "Buyers") in exchange for unregistered
shares of AlliedSignal Inc. common stock with an aggregate value equal to
$369,000 (the "Hardware Business Disposition"). The determination of the number
of AlliedSignal Inc. shares received by the Company was based on the average
closing price of such stock on the New York Stock Exchange for a period of
twenty days preceding the closing. The Hardware Business consisted of the
following companies: Adams Industries, Inc., Aerospace Bearing Support, Inc.,
Aircraft Bearing Corporation, Banner Distribution, Inc., Burbank Aircraft
Supply, Inc., Harco, Inc., PB Herndon Aerospace, Inc. (which collectively
comprise the Company's Hardware Business), Banner Aerospace Services, Inc.
(which transferred only those assets related to the Hardware Business) and
PacAero. The purchase price received for the Hardware Business was based on the
consolidated net worth as reflected on an estimated closing date balance sheet
for the assets (and liabilities) conveyed by the Hardware Business to the
Buyers. In fiscal 1999, the final closing date balance sheet was completed with
no change in purchase price proceeds. The assets transferred to the Buyers
consisted primarily of the Company's Hardware Business, which included the
distribution of bearings, nuts, bolts, screws, rivets and other types of
fasteners, and its PacAero unit. Approximately $194,000 of the common stock
received from the Buyers was used to repay outstanding term loans and a portion
of the revolver balance of the Company's subsidiaries, and related fees. The
remaining investment in AlliedSignal Inc. common stock has been accounted for
as a current available-for-sale security at September 30, 1998 (previously
classified as non-current) and the Company recorded in stockholders' equity
unrealized holding losses since inception of $5.6 million or $1.14 per share,
net of tax benefits, from the decline in the market value of the AlliedSignal
Inc. common stock since January 13, 1998. The Company effected the Hardware
Business Disposition to concentrate its efforts on the rotables and jet engine
businesses and because the Hardware Business Disposition presented a unique
opportunity to realize a significant return. As a result of the Hardware
Business Disposition and the repayment of outstanding term loans and a portion
of the revolver balance, the Company recorded non-recurring income of $124,041
for the twelve months ended March 31, 1998.
On January 2, 1998, the Company disposed of BAI, Inc. ("BAI") through a
stock purchase agreement. The Company did not realize a material gain on the
transaction.
F-32
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO SUMMARIZED FINANCIAL INFORMATION--(Continued)
SEPTEMBER 30, 1998 AND 1997
(In thousands, except share data, unless otherwise noted)
The following unaudited pro forma table illustrates consolidated net sales,
operating income, net income, net income available for common shareholders and
earnings per common share of the Company's operations, on a pro forma basis for
the six and three months ended September 30, 1997 to give effect to the
Hardware Business Disposition and the disposition of BAI. The unaudited pro
forma consolidated financial information is based on the historical financial
information of the Company for the six and three months ended September 30,
1997. The unaudited pro forma consolidated financial information is presented
for informational purposes only and is not necessarily indicative of what
earnings and results of operations would have been had the Hardware Business
Disposition and the disposition of BAI occurred at the beginning of the period
presented, nor is such information intended necessarily to be indicative of the
future results of operations that may occur.
Unaudited Supplemental Pro Forma Information
<TABLE>
<CAPTION>
For the Six For the Three
Months Ended Months Ended
September September 30,
30, 1997 1997
------------ -------------
(In thousands, except per
share data)
<S> <C> <C>
Net sales...................................... $109,977 $56,435
======== =======
Operating income............................... $ 5,464 $ 2,701
======== =======
Net income..................................... $ 3,283 $ 1,621
======== =======
Net income available for common shareholders... $ 2,594 $ 981
======== =======
Earnings per common share basic................ $ 0.11 $ 0.04
======== =======
</TABLE>
6) Related Party Transactions
On July 7, 1998, the Company's Board of Directors announced its approval of
the purchase by the Company of up to 2.5 million shares of class A common stock
of Fairchild through open market purchases. The purchases by the Company will
be made from time to time depending on the market price of Fairchild stock, and
may be subject to the requirement of obtaining the consent of the Company's
senior lenders. Shares of Fairchild stock purchased by the Company may not be
sold unless they are registered on a registration statement (or are sold
pursuant to any applicable exemption under securities laws). The Company has
the right to demand that Fairchild register such shares in order for the
Company to sell them. During the three month period ended September 30, 1998,
the Company purchased 940,800 shares of Fairchild stock at an average purchase
price of $19.83. As of November 6, 1998, the Company had purchased 1,246,400
shares of Fairchild stock at an average purchase price of $17.79. At September
30, 1998, such shares were treated as non-current available-for-sale securities
and the Company recorded in stockholders' equity unrealized holding losses
since inception of $3.3 million, net of tax benefits, from the decline in the
market value of the Fairchild stock.
On May 11, 1998, Fairchild commenced an offer to exchange (the "Exchange
Offer"), for each properly tendered share of Common Stock of the Company, a
number of shares of Fairchild's class A common stock, par value $0.10 per
share, equal to the quotient of $12.50 divided by $20.675 up to a maximum of
4,000,000 shares of the Company's Common Stock. The Exchange Offer expired on
June 9, 1998. As such, 3,659,424 shares of the Company's Common Stock were
validly tendered for exchange and Fairchild issued 2,212,469 shares of
Fairchild class A common stock to the tendering shareholders. As a result of
the Exchange Offer,
F-33
<PAGE>
BANNER AEROSPACE, INC. AND SUBSIDIARIES
NOTES TO SUMMARIZED FINANCIAL INFORMATION--(Continued)
SEPTEMBER 30, 1998 AND 1997
(In thousands, except share data, unless otherwise noted)
Fairchild's beneficial ownership of the Company's Common Stock increased to
83.2%. Fairchild's current beneficial ownership is approximately 85.4%
On May 23, 1997, the Company granted all of its stockholders certain rights
to purchase Series A Convertible Paid-in-Kind Preferred Stock, $.01 par value.
On June 19, 1997, the Company issued Fairchild 3,085,885 shares of Preferred
Stock for $28,390.
The Company entered into a Stock Exchange Agreement with Fairchild,
effective May 12, 1997, pursuant to which the Company could acquire Fairchild
Scandinavian Bellyloading Company AB ("FSBC") from Fairchild in exchange for
230,000 shares of Common Stock initially. This transaction was approved by a
special committee of the Board of Directors, and was approved by the Company's
stockholders at a meeting on June 18, 1997. Under the terms of the Stock
Exchange Agreement, Fairchild could terminate the agreement if it sold FSBC to
a third party by reason of an unsolicited offer, but Fairchild would be
obligated to pay the Company a reasonable termination fee and the Company's
out-of-pocket expenses. On July 1, 1997, Fairchild exercised its option to
terminate the Stock Exchange Agreement. As a result, Fairchild paid the Company
a termination fee of $300 and out of pocket expenses of $447, and also agreed
to allow the Company to participate equally in future royalties from FSBC, if
any. For the six months ended September 30, 1998, the Company recorded royalty
income from FSBC of $202.
On December 20, 1996, the Company entered into an unsecured subordinated
loan agreement ("Subordinated Loan") with RHI Holdings, Inc. ("RHI"), which is
a wholly-owned subsidiary of Fairchild. The purpose of the Subordinated Loan
was to provide funds for acquisitions and working capital requirements of the
acquired companies. The Subordinated Loan bore interest at 10.0% per annum for
the period commencing on the date of the initial draw and continuing for a
period of six months from the initial draw date. Thereafter, the Subordinated
Loan bore interest at 11.2% per annum. The principal and accrued interest
were deferred until the maturity date of November 15, 2003, subject to
acceleration in certain events specified in the Subordinated Loan. A commitment
fee of 1.5% per annum for six months from the initial draw date, and 3.0% per
annum thereafter, was accrued and payable on the last day of each month, based
on the balance outstanding. As of March 31, 1997, the Company borrowed $28,000
under the Subordinated Loan, to fund the purchase of PB Herndon Aerospace, Inc.
and other working capital requirements. The Subordinated Loan was repaid in
June 1997 as a result of the Preferred Stock issuance. Interest paid to RHI
from December 1996 to June 1997 totaled $1,047.
7) Subsequent Event
In November 1998, the Company committed to repurchase 606,822 shares of its
convertible Preferred Stock (refer to Note 2 in the Notes to Summarized
Financial Information) from an existing shareholder. The aggregate purchase
price to be paid by the Company is approximately $4.7 million, or $7.75 per
share. The Company's obligation under this commitment is conditioned upon the
Board of Director's consent and consent from the Company's senior lenders. The
closing date of such transaction is expected to be November 16, 1998.
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APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
THE FAIRCHILD CORPORATION,
MTA, INC.
AND
BANNER AEROSPACE, INC.
JANUARY 11, 1999
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Table of Contents
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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
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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
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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
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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."
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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
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(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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<PAGE>
(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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<PAGE>
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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<PAGE>
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.
A-17
<PAGE>
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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<PAGE>
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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<PAGE>
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.
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<PAGE>
APPENDIX B
[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;
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<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
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law (the "DGCL") 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
"Act").
The registrant's Bylaws (the "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.*
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).
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>
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<PAGE>
(Employee Agreememt)
<TABLE>
<CAPTION>
TT
<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).
</TABLE>
(Credit Agreements)
<TABLE>
<CAPTION>
TT
<C> <S>
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 Form 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).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
TT
<C> <S>
10.22 Amendment No. 1 dated as of July 29, 1996, to the RHI Credit 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).
</TABLE>
(Stinbes Warrants)
<TABLE>
<CAPTION>
TT
<C> <S>
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 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).
10.30 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).
</TABLE>
(Other Material Contracts)
<TABLE>
<CAPTION>
TT
<C> <S>
10.33 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).
10.34 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).
10.35 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).
10.36 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).
10.37 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>
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<C> <S>
10.38 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).
10.39 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).
10.40 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).
10.41 Registration Rights Agreement between Registrant and Banner Aerospace,
Inc., dated as of July 7, 1998 (incorporated by reference to the 1998
10-K).
10.42 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).
10.43 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).
10.44 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).
10.45 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.)
10.46 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).
10.47 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).
10.48 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).
10.49 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).
10.50 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).
10.51 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).
10.52 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>
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<C> <S>
10.53 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).
10.54 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)
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).
</TABLE>
- --------
* To be filed by amendment.
II-5
<PAGE>
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.
(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
II-6
<PAGE>
(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-7
<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 January 15, 1999.
The Fairchild Corporation
/s/ Donald E. Miller
By: _________________________________
Name Donald E. Miller
Title Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated on January 15, 1999.
<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)
/s/ Philip David Director
- -------------------------------------
Philip David
/s/ Robert E. Edwards Director
- -------------------------------------
Robert E. Edwards
<PAGE>
<TABLE>
<S> <C>
</TABLE>
Signature Title
/s/ Harold J. Harris Director
- -------------------------------------
Harold J. Harris
/s/ Daniel Lebard Director
- -------------------------------------
Daniel Lebard
/s/ Jacques S. Moskovic Director
- -------------------------------------
Jacques S. Moskovic
Director
- -------------------------------------
Herbert S. Richey
Director
- -------------------------------------
Moshe Sanbar
Director
- -------------------------------------
Robert A. Sharpe II
/s/ Eric I. Steiner 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 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 23.1
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our
report 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 all references to our Firm included in this Form S-4 registration
statement.
ARTHUR ANDERSEN LLP
Washington, D.C.
January 14, 1999
<PAGE>
EXHIBIT 23.2
To the Board of Directors
Of Nacanco Paketleme Sanayi ve Ticaret A.S.
14 January 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
