-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KF/RIk9NldRpvmw2ST1wKUNbwpk6sfTF1XccXivT8t444LQOfB+sCyXHqqnEEuAv smiS4vz86EqkTeoxDlthSQ== 0000009779-98-000028.txt : 19980514 0000009779-98-000028.hdr.sgml : 19980514 ACCESSION NUMBER: 0000009779-98-000028 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980329 FILED AS OF DATE: 19980513 SROS: NYSE SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: FAIRCHILD CORP CENTRAL INDEX KEY: 0000009779 STANDARD INDUSTRIAL CLASSIFICATION: BOLTS, NUTS, SCREWS, RIVETS & WASHERS [3452] IRS NUMBER: 340728587 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06560 FILM NUMBER: 98618437 BUSINESS ADDRESS: STREET 1: 45025 AVIATION DR STREET 2: STE 400 CITY: DULLAS STATE: VA ZIP: 20166 BUSINESS PHONE: 7034785800 MAIL ADDRESS: STREET 1: 45025 AVIATION DRIVE STREET 2: SUITE 400 CITY: DULLES STATE: VA ZIP: 20166 FORMER COMPANY: FORMER CONFORMED NAME: BANNER INDUSTRIES INC /DE/ DATE OF NAME CHANGE: 19901118 10-Q 1 29 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 29, 1998 Commission File Number 1-6560 THE FAIRCHILD CORPORATION (Exact name of Registrant as specified in its charter) Delaware 34-0728587 (State or other jurisdiction of (I.R.S. Employer Identification No.) Incorporation or organization) 45025 Aviation Drive, Suite 400 Dulles, VA 20166 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (703)478-5800 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days. YES X NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Title of Class March 31, 1998 Class A Common Stock, $0.10 Par Value 18,197,640 Class B Common Stock, $0.10 Par Value 2,624,716 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES INDEX Page PART 1. FINANCIAL INFORMATION Item 1. Condensed Consolidated Balance Sheets as of March 29, 1998 (Unaudited) and June 30, 1997 3 Consolidated Statements of Earnings for the Three and Nine Months ended March 29, 1998 and March 30, 1997 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows for the Nine Months ended March 29, 1998 and March 30, 1997 (Unaudited) 7 Notes to Condensed Consolidated Financial Statements (Unaudited) 8 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 15 PART II. OTHER INFORMATION Item 1. Legal Information 23 Item 5. Other Information 23 Item 6. Exhibits and Reports on Form 8-K 23 * For purposes of Part 1 and this Form 10-Q, the term "Company" means The Fairchild Corporation, and its subsidiaries, unless otherwise indicated. For purposes of Part II, the term "Company" means The Fairchild Corporation, unless otherwise indicated. PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 1997 and March 29, 1998 (Unaudited) (In thousands) ASSETS
June 30, March 29, 1997 (*) 1998 CURRENT ASSETS: Cash and cash equivalents, $4,830 and$ $0 restricted $ 19,420 $ 61,813 Short-term investments 25,647 6,442 Accounts receivable-trade, less 151,361 128,440 allowances of $6,905 and $5,329 Inventories: Finished goods 292,441 171,462 Work-in-process 20,357 23,038 Raw materials 10,567 10,521 323,365 205,021 Net current assets of discontinued 17,884 14,580 operations Prepaid expenses and other current 34,490 59,390 assets Total Current Assets 572,167 475,686 Property, plant and equipment, net of accumulated depreciation of $126,990 and $122,747 121,918 114,308 Net assets held for sale 26,147 23,831 Net noncurrent assets of discontinued 14,495 2,496 operations Cost in excess of net assets acquired (Goodwill), less accumulated amortization of $36,672 and $40,806 154,129 165,442 Investments and advances, affiliated 55,678 22,338 companies Prepaid pension assets 59,742 59,572 Deferred loan costs 9,252 6,300 Long-term investments 4,120 215,863 Other assets 35,018 51,806 Total Assets $1,052,666 $1,137,642 *Condensed from audited financial statements The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 1997 and March 29, 1998 (Unaudited) (In thousands) LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, March 29, 1997 (*) 1998 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Bank notes payable and current maturities of long-term debt $ 47,322 $ 21,377 Accounts payable 75,522 61,664 Other accrued liabilities 97,318 88,495 Income taxes 5,863 38,116 Total Current Liabilities 226,025 209,652 LONG-TERM LIABILITES: Long-term debt, less current 416,922 278,140 maturities Other long-term liabilities 23,622 24,455 Retiree health care liabilities 43,351 42,757 Noncurrent income taxes 42,013 82,863 Minority interest in subsidiaries 68,309 66,637 TOTAL LIABILITIES 820,242 704,504 STOCKHOLDERS' EQUITY: Class A common stock, 10 cents par value; authorized 40,000 shares, 24,445 (20,234 in June) shares issued and 18,197 (13,992 in June) shares outstanding 2,023 2,444 Class B common stock, 10 cents par value; Authorized 20,000 shares, 2,625 (2,632 in June) shares Issued and outstanding 263 263 Paid-in capital 71,015 148,020 Retained earnings 209,949 322,528 Cumulative translation adjustment 939 (2,811) Net unrealized holding gain (loss) on (46) 14,540 available-for-sale securities Treasury Stock, at cost, 6,247 (6,242 in June) shares of Class A Common Stock (51,719) (51,836) TOTAL STOCKHOLDERS' EQUITY 232,424 433,138 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,052,666 $1,137,642 *Condensed from audited financial statements The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED STATEMENTS OF EARNINGS (Unaudited) For The Three (3) and Nine (9) Months Ended March 30, 1997 and March 29, 1998 (In thousands, except per share data)
Three Months Ended Nine Months Ended 3/30/97 3/29/98 3/30/97 3/29/98 REVENUE: Net sales $179,436 $164,164 $470,141 $567,142 Other income (expense), net 389 847 1,168 5,451 179,825 165,011 471,309 572,593 COSTS AND EXPENSES: Cost of goods sold 131,884 126,374 348,712 426,201 Selling, general & administrative 38,030 28,177 101,826 107,048 Research and development 24 42 69 139 Amortization of goodwill 1,240 1,573 3,460 4,179 171,178 156,166 454,067 537,567 OPERATING INCOME 8,647 8,845 17,242 35,026 Interest expense 13,500 9,369 39,629 38,027 Interest income (762) (587) (4,516) (1,501) Net interest expense 12,738 8,782 35,113 36,526 Investment income (loss), net 741 234 2,202 (4,946) Equity in earnings (loss) of affiliates 1,370 509 2,984 2,630 Minority interest (1,076) (21,905) (2,637) (23,780) Non-recurring income - 123,991 - 123,991 - Income (loss) from continuing (3,056) 102,892 (15,322) 96,395 operations before taxes Income tax provision (benefit) (2,939) 52,474 (9,448) 49,353 Earnings (loss) from continuing (117) 50,418 (5,874) 47,042 operations Earnings (loss) from discontinued operations, net 157 (1,578) (1,681) (4,260) Gain on disposal of discontinued operations, net - 46,548 - 76,522 Extraordinary items, net - (3,701) - (6,725) NET EARNINGS (LOSS) $ 40 $91,687 $(7,555) $112,579 Other Comprehensive income, net of tax: Foreign currency translation adjustments (2,359) (2,178) (2,197) (3,750) Unrealized holding gains (losses) on securities arising during the - 14,221 - 14,540 period Other Comprehensive income (2,359) 12,043 (2,197) 10,790 COMPREHENSIVE INCOME (LOSS) $(2,319)$103,730 $(9,752) $123,369 The accompanying notes to summarized financial information are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED STATEMENTS OF EARNINGS (Unaudited) For The Three (3) and Nine (9) Months Ended March 30, 1997 and March 29, 1998 (In thousands, except per share data)
Three Months Ended Nine Months Ended 3/30/97 3/29/98 3/30/97 3/29/98 Basic Earnings Per Share: Earnings (loss) from continuing operations $ (0.01) $ 2.52 $ (0.36) $ 2.62 Earnings (loss) from discontinued operations, net 0.01 (0.08) (0.10) (0.24) Gain on disposal of discontinued operations, net - 2.32 - 4.27 Extraordinary items, net - (0.18) - (0.37) NET EARNINGS (LOSS) $ 0.00 $ 4.58 $ (0.46) $ 6.28 Other Comprehensive income, net of tax: Foreign currency translation adjustments $(0.14) $ (0.11) $ (0.13) $(0.21) Unrealized holding gains (losses) on securities arising during the - 0.71 - 0.81 period Other Comprehensive income (0.14) 0.60 (0.13) 0.60 COMPREHENSIVE INCOME (LOSS) $(0.14) $ 5.18 $ (0.59) $6.88 Diluted Earnings Per Share: Earnings (loss) from continuing operations $(0.01) $ 2.41 $ (0.36) $2.50 Earnings (loss) from discontinued operations, net 0.01 (0.08) (0.10) (0.23) Gain on disposal of discontinued operations, net - 2.22 - 4.07 Extraordinary items, net - (0.18) - (0.36) NET EARNINGS (LOSS) $ 0.00 $ 4.38 $ (0.46) $5.98 Other Comprehensive income, net of tax: Foreign currency translation adjustments $(0.14) $(0.10) $ (0.13) $(0.20) Unrealized holding gains (losses) on securities arising during the - 0.68 - 0.77 period Other Comprehensive income (0.14) 0.58 (0.13) 0.57 COMPREHENSIVE INCOME (LOSS) $(0.14) $ 4.96 $ (0.59) $6.56 Weighted average shares outstanding: Basic 17,284 20,036 16,518 17,938 Diluted 17,284 20,922 16,518 18,813 The accompanying notes to summarized financial information are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For The Nine (9) Months Ended March 30, 1997 and March 29, 1998 (In thousands)
For the Nine Months Ended 3/30/97 3/29/98 Cash flows from operating activities: Net earnings (loss) $ (7,555) $112,579 Depreciation and amortization 15,523 16,268 Accretion of discount on long-term 3,702 2,744 liabilities Net gain on the disposition of -- (99,766) subsidiaries Net gain on the disposal of -- (135,736) discontinued operations Extraordinary items, net of cash -- 6,725 payments Distributed earnings of affiliates, 881 (165) net Minority interest 2,637 23,780 Changes in assets and liabilities (85,178) (48,466) Non-cash changes and working capital (13,311) 17,983 changes of discontinued operations Net cash used for operating (83,301) (104,054) activities Cash flows from investing activities: Purchase of property, plant and (7,426) (23,706) equipment Net proceeds received from (used for) (14,009) 9,202 investments Acquisition of subsidiaries, net of (52,555) (32,404) cash acquired Minority interest in subsidiaries -- (26,383) Net proceeds from the sale of 173,719 167,987 discontinued operations Changes in net assets held for sale (3,544) 2,239 Other, net 34 180 Investing activities of discontinued (1,418) (3,328) operations Net cash provided by investing 94,801 93,787 activities Cash flows from financing activities: Proceeds from issuance of debt 108,229 178,036 Debt repayments and repurchase of (131,737) (177,056) debentures, net Issuance of Class A common stock 861 54,176 Financing activities of discontinued (1,059) -- operations Net cash provided by (used for) (23,706) 55,156 financing activities Effect of exchange rate changes on (1,269) (2,496) cash Net increase in cash and cash (13,475) 42,393 equivalents Cash and cash equivalents, beginning 39,649 19,420 of the year Cash and cash equivalents, end of the period $ 26,174 $ 61,813 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share data) 1. FINANCIAL STATEMENTS The consolidated balance sheet as of March 29, 1998 and the consolidated statements of earnings and cash flows for the three and Nine months ended March 30, 1997 and March 29, 1998 have been prepared by the Company, without audit. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at March 29, 1998, and for all periods presented, have been made. The balance sheet at June 30, 1997 was condensed from the audited financial statements as of that date. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's June 30, 1997 Form 10-K, as amended, and Banner Aerospace, Inc.'s March 31, 1997 Form 10-K. The results of operations for the period ended March 29, 1998 are not necessarily indicative of the operating results for the full year. Certain amounts in prior years' quarterly financial statements have been reclassified to conform to the current presentation. The financial statements for the periods ended March 30, 1997 have been restated to present the results of Shared Technologies Fairchild Inc. and Fairchild Technologies as discontinued operations (see Note 3). Effective March 29, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive Income". SFAS 130 establishes standards for reporting and display of comprehensive income and its components in the financial statements, which the Company is presenting as part of its Statement of Earnings. 2. BUSINESS COMBINATIONS On January 13, 1998, certain subsidiaries (the "Selling Subsidiaries"), of Banner Aerospace, Inc. ("Banner", a majority-owned subsidiary of the Registrant), completed the disposition of substantially all of the assets and certain liabilities of the Selling Subsidiaries to two wholly-owned subsidiaries of AlliedSignal Inc. (the "Buyers"), in exchange for unregistered shares of AlliedSignal Inc. common stock with an aggregate value equal to $369,000 (the "Banner Hardware Group Disposition"). The purchase price received by the Selling Subsidiaries was based on the consolidated net worth as reflected on an estimated closing date balance sheet for the assets (and liabilities) conveyed by the Selling Subsidiaries 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 consists primarily of Banner's hardware group, which includes the distribution of bearings, nuts, bolts, screws, rivets and other type of fasteners, and its PacAero unit. Approximately $196,000 of the common stock received from the Buyers was used to repay outstanding term loans of Banner's subsidiaries and related fees. The Company will account for its remaining investment in AlliedSignal common stock as an available-for-sale security. Banner effected the Banner Hardware Group Disposition to concentrate its efforts on the rotables and jet engine businesses and because the Banner Hardware Group Disposition presented a unique opportunity to realize a significant return on the disposition of the hardware group. As a result of the Banner Hardware Group Disposition and the repayment of outstanding term loans, the Company recorded non-recurring income of $123,991 for the three and nine months ended March 29, 1998. The Company has accounted for following acquisitions by the using the purchase method. The respective purchase price is assigned to the net assets acquired based on the fair value of such assets and liabilities at the respective acquisition dates. On March 2, 1998, the Company consummated the acquisition of Edwards and Lock Management Corporation, doing business as Special-T Fasteners ("Special-T"), in a business combination to be accounted for as a purchase (the "Special-T Acquisition"). The purchase price for the acquisition was approximately $47,600, of which $24,600 was paid in shares of Class A Common Stock of the Company and the remainder was paid in cash. The purchase price is subject to certain post-closing adjustments. The total cost of the acquisition exceeded the fair value of the net assets of Special-T by approximately $20,540, which is preliminarily being allocated as goodwill and amortized using the straight-line method over 40 years. Special-T manages the logistics of predominantly Company manufactured precision fasteners worldwide as utilized primarily in the aerospace industry, for government agencies, original equipment manufacturers ("OEM's"), and distributors. In December 1997, the Company acquired AS+C GmbH, Aviation Supply + Consulting ("AS&C") in a business combination accounted for as a purchase. The total cost of the acquisition was $13,245, which exceeded the fair value of the net assets of AS&C by approximately $7,350, which is preliminarily being allocated as goodwill and amortized using the straight- line method over 40 years. The Company purchased AS&C with cash borrowed. AS&C is an aerospace parts, logistics, and distribution company primarily servicing the European OEM market. In February 1997, the Company completed a transaction (the "Simmonds Acquisition") pursuant to which the Company acquired common shares and convertible debt representing an 84.2% interest, on a fully diluted basis, of Simmonds S.A. ("Simmonds"). The Company then initiated a tender offer to purchase the remaining shares and convertible debt held by the public. By June 30, 1997, the Company had purchased, or placed sufficient cash in escrow to purchase, all the remaining shares and convertible debt of Simmonds. The total purchase price of Simmonds, including the assumption of debt, was approximately $62,000, which the Company funded with available cash and borrowings. The Company recorded approximately $20,453 in goodwill as a result of this acquisition, which will be amortized using the straight-line method over 40 years. Simmonds is one of Europe's leading manufacturers and distributors of aerospace and automotive fasteners. On June 30, 1997, the Company sold all the patents of Fairchild Scandinavian Bellyloading Company ("SBC") to Teleflex Incorporated ("Teleflex") for $5,000, and immediately thereafter sold all the stock of SBC to a wholly owned subsidiary of Teleflex for $2,000. The Company may also receive additional proceeds of up to $7,000 based on future net sales of SBC's patented products and services. 3. DISCONTINUED OPERATIONS On November 20, 1997, Shared Technologies Fairchild Inc. ("STFI"), a corporation in which the Company owned approximately 42% of the outstanding common stock, entered into a merger agreement with Intermedia Communications Inc. ("Intermedia") pursuant to which holders of STFI common stock received $15.00 per share in cash (the "STFI Merger"). The Company was paid approximately $178,000 in cash (before tax and selling expenses) in exchange for the common and preferred stock of STFI owned by the Company. In the nine months ended March 29, 1998, the Company recorded a $98,817 gain, net of tax, on disposal of discontinued operations, from the proceeds received from the STFI Merger, which was completed on March 11, 1998. Accordingly, in the quarter ended March 29, 1998, the Company recorded a $68,843 gain, net of tax, on disposal of discontinued operations, from the proceeds received for the common stock of STFI. The results of STFI have been accounted for as discontinued operations. Earnings from discontinued operations includes the Company's net equity in earnings of $1,095 and $622 from the STFI investments during the nine months ended March 30, 1997 and March 29, 1998, respectively. For the Company's fiscal years 1995, 1996, and 1997, and for the first nine months of fiscal 1998, Fairchild Technologies ("Technologies") had operating losses of approximately $1.5 million, $1.5 million, $3.6 million, and $13.7 million, respectively. In addition, as a result of the downturn in the Asian markets, Technologies has experienced delivery deferrals, reduction in new orders, lower margins and increased price competition. In response, in February, 1998 (the "measurement date"), the Company adopted a formal plan to enhance the opportunities for disposition of Technologies, while improving the ability of Technologies to operate more efficiently. The plan includes a reduction in production capacity and headcount at Technologies, and the pursuit of potential vertical and horizontal integration with peers and competitors of the two divisions that constitute Technologies, or the inclusion of those divisions in a spin-off (see discussion under Item 2, "Management's Discussion and Analysis of Results and Financial Condition"). If the Company elects to include Technologies in the Spin-Off, the Company believes that it would be required to contribute substantial additional resources to allow Technologies the liquidity necessary to sustain and grow both the Fairchild Technologies' operating divisions. In connection with the adoption of such plan, the Company recorded an after-tax charge of $22,352 in discontinued operations in the third quarter ended March 29, 1998, of which, $13,377 (net of income tax benefit of $4,623) represents the estimated loss on the disposal of certain assets of Technologies, $4,197 (net of an income tax benefit of $1,450) relates to the net losses of Technologies since the measurement date, and $4,721 (net of an income tax benefit of $2,513) relates to a provision for expected operating losses over the next ten months at Technologies. While the Company believes that $22,000 is a reasonable charge for the expected losses in connection with the disposition of Technologies, there can be no assurance that this estimate is adequate. Earnings from discontinued operations for the nine months ended March 30, 1997 and March 29, 1998 includes net losses of $2,776 (net of a tax benefit of $667) and $4,287 (net of a tax benefit of $3,983), respectively, from Technologies until the adoption date of a formal plan on the measurement date. 4. PRO FORMA FINANCIAL STATEMENTS The unaudited pro forma consolidated financial information for the nine months ended March 29, 1998 and March 30, 1997, provide the results of the Company's operations as though the STFI Disposition, the Banner Hardware Group Disposition, and the Special-T Acquisition had been in effect since the beginning of each period. The pro forma information is based on the historical financial statements of the Company, Banner, STFI and Special-T, giving effect to the aforementioned transactions. In preparing the pro forma data, certain assumptions and adjustments have been made, including reduced interest expense for revised debt structures and estimates of changes to goodwill amortization. The following unaudited pro forma information are not necessarily indicative of the results of operations that actually would have occurred if the transactions had been in effect since the beginning of each period, nor are they indicative of future results of the Company.
Nine Months Ended March 30, March 29, 1997 1998 Net sales $343,289 $468,975 Gross profit 80,011 105,257 Loss from continuing operations (3,593) (4,868) Loss from continuing operations per share $ (0.22) $ (0.27)
The pro forma financial information has not been adjusted for non- recurring income and gains from disposal of discontinued operations that have occurred or are expected to occur from these transactions within the ensuing year. 5. EQUITY SECURITIES On December 19, 1997, the Company completed a secondary offering of public securities. The offering consisted of an issuance of 3,000,000 shares of the Company's Class A Common Stock at $20.00 per share (the "Offering"). On February 12, 1998, the Company issued 24,545 deferred compensation units pursuant to the Company's stock option deferral plan as a result of a cashless exercise of 30,000 stock options. On March 2, 1998, in accordance with the terms of Special-T Acquisition, the Company issued 1,057,515 restricted shares of Company's Class A Common Stock. (See Note 2). On March 13, 1998, the Company issued 47,283 restricted shares of Company's Class A Common Stock resulting from a cashless exercise of 100,000 warrants by Dunstan Ltd. The Company had 18,197,640 shares of Class A common stock and 2,624,716 shares of Class B common stock outstanding at March 29, 1998. Class A common stock is traded on both the New York and Pacific Stock Exchanges. There is no public market for the Class B common stock. Shares of Class A common stock are entitled to one vote per share and cannot be exchanged for shares of Class B common stock. Shares of Class B common stock are entitled to ten votes per share and can be exchanged, at any time, for shares of Class A common stock on a share-for-share basis. For the nine months ended March 29, 1998, 92,759 shares of Class A Common Stock were issued as a result of the exercise of stock options, and shareholders converted 7,800 shares of Class B common stock into Class A common stock. 6. DEBT On December 19, 1997, immediately following the Offering, the Company restructured its FHC and RHI Credit Agreements by entering into a new credit facility to provide the Company with a $300,000 senior secured credit facility (the "Facility") consisting of (i) a $75,000 revolving loan with a letter of credit sub-facility of $30,000 and a $10,000 swing loan sub-facility, and (ii) a $225,000 term loan. Advances made under the Facility will generally bear interest at a rate of, at the Company's option, either (i) 2% over the Citibank N.A. base rate, or (ii) 3% over the Eurodollar Rate ("LIBOR") for the first nine months following closing, and is subject to change based upon the Company's financial performance thereafter. The Facility is subject to a non-use commitment fee of 1/2% of the aggregate unused availability for the first nine months post-closing and is subject to change based upon the Company's financial performance thereafter. Outstanding letters of credit are subject to fees equivalent to the LIBOR margin rate. A borrowing base is calculated monthly to determine the amounts available under the Facility. The borrowing base is determined monthly based upon (i) the EBITDA of the Company's Aerospace Fastener business, as adjusted, and (ii) specified percentages of various marketable securities and cash equivalents. The Facility will mature on June 18, 2004. The term loan is subject to mandatory prepayment requirements and optional prepayments. The revolving loan is subject to mandatory prepayment requirements and optional commitment reductions. On March 29, 1998, the Company was in compliance with all the covenants under its credit agreements. On February 3, 1998, with the proceeds of the Offering, term loan borrowings under the Facility, and the after tax proceeds the Company received from the STFI Merger, the Company redeemed (collectively, the "Public Debt Repayment") all of its existing publicly held indebtedness (other than indebtedness of Banner), consisting of (i) $63,000 to redeem the 11 7/8% Senior Debentures due 1999; (ii) $117,600 to redeem the 12% Intermediate Debentures due 2001; (iii) $35,856 to redeem the 13 1/8% Subordinated Debentures due 2006; (iv) $25,063 to redeem the 13% Junior Subordinated Debentures due 2007; and (v) accrued interest of $10,562. The Company recognized an extraordinary loss of $6,725, net of tax, to write-off the remaining deferred loan fees and original issue discounts associated with early extinguishment of the Company's indebtedness pursuant to the Public Debt Repayment and refinancing of the FHC and RHI Credit Agreement facilities. In August 1997, the Company entered into a delayed-start swap interest rate lock hedge agreement (the "FHC Hedge Agreement") to reduce its exposure to increases in interest rates on variable rate debt. In December 1997, the Company amended the FHC Hedge Agreement. Beginning on February 17, 1998, the FHC Hedge Agreement will provide interest rate protection on $100,000 of variable rate debt for ten years, with interest being calculated based on a fixed LIBOR rate of 6.715%. On January 14, 1998, the FHC Hedge Agreement was further amended to provide interest rate protection with interest being calculated based on a fixed LIBOR rate of 6.24% from February 17, 1998 to February 17, 2003. On February 17, 2003, the bank will have a one-time option to either (i) elect to cancel the ten-year agreement; or (ii) do nothing and proceed with the transaction, using a fixed LIBOR rate of 6.715% for the period February 17, 2003 to February 19, 2008. No costs were incurred as a result of these transactions. On November 25, 1997, Banner amended its credit agreement to increase its revolving credit facility by $50,000. On January 13, 1998, Banner amended its credit agreement to (i) allow for the prepayment of all term loans and a portion of the revolving credit obligation without any reduction of the revolving credit facility; (ii) reduce the revolving credit facility interest rate to prime plus 0.25% or LIBOR plus 1.50%; and (iii) reduce the nonuse fee to a per annum rate equal to 0.30%. Also on January 13, 1998, in conjunction with the Banner Hardware Group Disposition, the outstanding balances of the term loans were reduced to zero. 7. RESTRICTED CASH On March 29, 1998, the Company did not have any restricted cash. On June 30, 1997, the Company had restricted cash of approximately $4,839, all of which was maintained as collateral for certain debt facilities. 8. SUMMARIZED STATEMENT OF EARNINGS INFORMATION The following table presents summarized historical financial information, on a combined 100% basis, of the Company's principal investments, which are accounted for using the equity method.
Nine Months Ended March 30, March 29, 1997 1998 Net sales $ 67,638 $ 63,615 Gross profit 25,778 23,095 Earnings from continuing operations 10,132 9,769 Net earnings 10,132 9,769
The Company owns approximately 31.9% of Nacanco Paketleme common stock. The Company recorded equity earnings of $2,975 and $3,093 from this investment for the nine months ended March 30, 1997 and March 29, 1998, respectively. 9. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES On March 29, 1998, the Company had $66,637 of minority interest, of which $66,619 represents Banner. Minority shareholders hold approximately 34% of Banner's outstanding common stock. 10. EARNINGS PER SHARE Effective December 28, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). This statement replaces the previously reported primary and fully diluted earnings (loss) per share with basic and diluted earnings (loss) per share. Unlike primary earnings (loss) per share, basic earnings (loss) per share excludes any diluted effects of options. Diluted earnings (loss) per share is very similar to the previously reported fully diluted earnings (loss) per share. All earnings (loss) per share have been restated to conform to the requirements of SFAS 128. The following table illustrates the computation of basic and diluted earnings (loss) per share:
For the Three For the Nine Months Ended Months Ended 3/30/97 3/29/98 3/30/97 3/29/98 Basic earnings per share: Earnings from continuing operations $ (117) $50,418 $(5,874) $47,042 Common shares outstanding 17,284 20,036 16,518 17,938 Basic earnings per share: Basic earnings from continuing operations per share $ (0.01) $ 2.52 $ (0.36) $ 2.62 Diluted earnings per share: Earnings from continuing operations $ (117) $50,418 $(5,874) $47,042 Common shares outstanding 17,284 20,036 16,518 17,938 Options antidilutive 595 antidilutive 579 Warrants antidilutive 291 antidilutive 296 Total shares outstanding 17,284 20,922 16,518 18,813 Diluted earnings from continuing operations per share $(0.01) $ 2.41 $ (0.36) $ 2.50
The computation of diluted loss per share for the three-month and nine- month periods ended March 30, 1997 excluded the effect of incremental common shares attributable to the potential exercise of common stock options outstanding and warrants outstanding, because their effect was antidilutive. 11. CONTINGENCIES Government Claims The Corporate Administrative Contracting Officer (the "ACO"), based upon the advice of the United States Defense Contract Audit Agency, has made a determination that Fairchild Industries, Inc. ("FII"), a former subsidiary of the Company, did not comply with Federal Acquisition Regulations and Cost Accounting Standards in accounting for (i) the 1985 reversion to FII of certain assets of terminated defined benefit pension plans, and (ii) pension costs upon the closing of segments of FII's business. The ACO has directed FII to prepare cost impact proposals relating to such plan terminations and segment closings and, following receipt of such cost impact proposals, may seek adjustments to contract prices. The ACO alleges that substantial amounts will be due if such adjustments are made, however, an estimate of the possible loss or range of loss from the ACO's assertion cannot be made. The Company believes it has properly accounted for the asset reversions in accordance with applicable accounting standards. The Company has held discussions with the government to attempt to resolve these pension accounting issues. Environmental Matters The Company's operations are subject to stringent Government imposed environmental laws and regulations concerning, among other things, the discharge of materials into the environment and the generation, handling, storage, transportation and disposal of waste and hazardous materials. To date, such laws and regulations have not had a material effect on the financial condition, results of operations, or net cash flows of the Company, although the Company has expended, and can be expected to expend in the future, significant amounts for investigation of environmental conditions and installation of environmental control facilities, remediation of environmental conditions and other similar matters, particularly in the Aerospace Fasteners segment. In connection with its plans to dispose of certain real estate, the Company must investigate environmental conditions and may be required to take certain corrective action prior or pursuant to any such disposition. In addition, management has identified several areas of potential contamination at or from other facilities owned, or previously owned, by the Company, that may require the Company either to take corrective action or to contribute to a clean-up. The Company is also a defendant in certain lawsuits and proceedings seeking to require the Company to pay for investigation or remediation of environmental matters and has been alleged to be a potentially responsible party at various "Superfund" sites. Management of the Company believes that it has recorded adequate reserves in its financial statements to complete such investigation and take any necessary corrective actions or make any necessary contributions. No amounts have been recorded as due from third parties, including insurers, or set off against, any liability of the Company, unless such parties are contractually obligated to contribute and are not disputing such liability. As of March 29, 1998, the consolidated total recorded liabilities of the Company for environmental matters approximated $7,070, which represented the estimated probable exposures for these matters. It is reasonably possible that the Company's total exposure for these matters could be approximately $11,870 on an undiscounted basis. Other Matters The Company is involved in various other claims and lawsuits incidental to its business, some of which involve substantial amounts. The Company, either on its own or through its insurance carriers, is contesting these matters. In the opinion of management, the ultimate resolution of the legal proceedings, including those aforementioned, will not have a material adverse effect on the financial condition, or future results of operations or net cash flows of the Company. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The Fairchild Corporation (the "Company") was incorporated in October 1969, under the laws of the State of Delaware. On November 15, 1990, the Company changed its name from Banner Industries, Inc. to The Fairchild Corporation. RHI Holdings, Inc. ("RHI") is a direct 100% owned subsidiary of the Company. RHI is the 100% owner of Fairchild Holding Corp. ("FHC") and the majority owner of Banner Aerospace, Inc. ("Banner"). The Company's principal operations are conducted through RHI and FHC. The Company holds a significant equity interest in Nacanco Paketleme ("Nacanco"), and, during the period covered by this report, held a significant equity interest in Shared Technologies Fairchild Inc. ("STFI"). (See Note 3 to Financial Statements, Discontinued Operations, as to the disposition of the Company's interest in STFI.) The following discussion and analysis provide information which management believes is relevant to assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto. CAUTIONARY STATEMENT Certain statements in the financial discussion and analysis by management contain forward-looking information that involves risk and uncertainty, including current trend information, projections for deliveries, backlog, and other trend projections. Actual future results may differ materially depending on a variety of factors, including product demand; performance issues with key suppliers; customer satisfaction and qualification issues; labor disputes; governmental export and import policies; worldwide political stability and economic growth; legal proceedings; business combinations; investment risks; and acts of nature. RECENT DEVELOPMENTS The Company has effected a series of transactions designed to: (i) reduce its total indebtedness and annual interest expense; (ii) increase the number of publicly held shares of Class A Common Stock; and (iii) increase the Company's operating and financial flexibility. On November 20, 1997, Shared Technologies Fairchild Inc. ("STFI"), a corporation in which the Company owned approximately 42% of the outstanding common stock, entered into a merger agreement with Intermedia Communications Inc. ("Intermedia") pursuant to which holders of STFI common stock received $15.00 per share in cash (the "STFI Merger"). The Company was paid approximately $178.0 million in cash (before tax and selling expenses) in exchange for the common and preferred stock of STFI owned by the Company. In the nine months ended March 29, 1998, the Company recorded a $98.8 million gain, net of tax, on disposal of discontinued operations, from the proceeds received from the STFI Merger, which was completed on March 11, 1998. Accordingly, in the quarter ended March 29, 1998, the Company recorded a $68.8 million gain, net of tax, on disposal of discontinued operations, from the proceeds received for the common stock of STFI. The results of STFI have been accounted for as discontinued operations. On December 19, 1997, the Company completed a secondary offering of public securities. The offering consisted of an issuance of 3,000,000 shares of the Company's Class A Common Stock at $20.00 per share (the "Offering"). On December 19, 1997, immediately following the Offering, the Company restructured its FHC and RHI Credit Agreements by entering into a new six- and-a-half-year credit facility to provide the Company with a $300 million senior secured credit facility (the "Facility") consisting of (i) a $75 million revolving loan with a letter of credit sub-facility of $30 million and a $10 million swing loan sub-facility, and (ii) a $225 million term loan. On January 13, 1998, certain subsidiaries (the "Selling Subsidiaries"), of Banner Aerospace, Inc. ("Banner", a majority-owned subsidiary of the Registrant), completed the disposition of substantially all of the assets and certain liabilities of the Selling Subsidiaries to two wholly-owned subsidiaries of AlliedSignal Inc. (the "Buyers"), in exchange for unregistered shares of AlliedSignal Inc. common stock with an aggregate value equal to $369 million (the "Banner Hardware Group Disposition"). The purchase price received by the Selling Subsidiaries was based on the consolidated net worth as reflected on an estimated closing date balance sheet for the assets (and liabilities) conveyed by the Selling Subsidiaries 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 consists primarily of Banner's hardware group, which includes the distribution of bearings, nuts, bolts, screws, rivets and other type of fasteners, and its PacAero unit. Approximately $196 million of the common stock received from the Buyers was used to repay outstanding term loans of Banner's subsidiaries and related fees. The Company will account for its remaining investment in AlliedSignal common stock as an available-for-sale security. Banner effected the Banner Hardware Group Disposition to concentrate its efforts on the rotables and jet engine businesses and because the Banner Hardware Group Disposition presented a unique opportunity to realize a significant return on the disposition of the hardware group. As a result of the Banner Hardware Group Disposition and the repayment of outstanding term loans, the Company recorded non-recurring income of $124 for the three and nine months ended March 29, 1998. On March 2, 1998, the Company consummated the acquisition of Edwards and Lock Management Corporation, doing business as Special-T Fasteners ("Special-T"), in a business combination to be accounted for as a purchase (the "Special-T Acquisition"). The purchase price for the acquisition was approximately $47.6 million, of which $24.6 million was paid in shares of Class A Common Stock of the Company and the remainder was paid in cash. The purchase price is subject to certain post-closing adjustments. The total cost of the acquisition exceeded the fair value of the net assets of Special-T by approximately $20.5 million, which is preliminarily being allocated as goodwill and amortized using the straight-line method over 40 years. Special-T manages the logistics of predominantly Company manufactured precision fasteners worldwide as utilized primarily in the aerospace industry, for government agencies, original equipment manufacturers ("OEM's"), and distributors. On February 3, 1998, with the proceeds of the Offering, term loan borrowings under the Facility, and the after tax proceeds the Company received from the STFI Merger, the Company redeemed (collectively, the "Public Debt Repayment") all of its existing publicly held indebtedness (other than indebtedness of Banner), consisting of (i) $63.0 million to redeem the 11 7/8% Senior Debentures due 1999; (ii) $117.6 million to redeem the 12% Intermediate Debentures due 2001; (iii) $35.9 million to redeem the 13 1/8% Subordinated Debentures due 2006; (iv) $25.1 million to redeem the 13% Junior Subordinated Debentures due 2007; and (vi) accrued interest of $10.6 million. On November 28, 1997, the Company acquired AS+C GmbH, Aviation Supply + Consulting ("AS&C") in a business combination accounted for as a purchase. The total cost of the acquisition was $13.2 million, which exceeded the fair value of the net assets of AS&C by approximately $7.4 million, which is preliminarily being allocated as goodwill and amortized using the straight-line method over 40 years. The Company purchased AS&C with cash borrowed. AS&C is an aerospace parts, logistics, and distribution company primarily servicing the European OEM market. RESULTS OF OPERATIONS The Company currently reports in two principal business segments: Aerospace Fasteners and Aerospace Distribution. The results of Gas Springs and SBC (for the prior year period) are included in the Corporate and Other classification. The following table illustrates the historical sales and operating income of the Company's operations for the three months and Nine ended March 29, 1998 and March 30, 1997, respectively.
(In thousands) Three Months Nine Months Ended Ended March March March March 30, 29, 30, 29, 1997 1998 1997 1998 Sales by Segment: Aerospace Fasteners $ 64,073 $102,857 $175,614 $270,718 Aerospace Distribution 113,743 60,865 294,835 303,393 Corporate and Other 4,738 1,442 9,385 4,166 Eliminations (a) (3,118) (1,000) (9,693) (11,135) Total Sales $179,436 $164,164 $470,141 $567,142 Operating Income (Loss) by Segment: Aerospace Fasteners $ 3,563 $ 9,668 $ 7,827 $ 18,560 Aerospace Distribution 9,061 2,085 21,114 19,170 Corporate and Other (3,977) (2,999) (11,699) (2,704) Total Operating Income $ 8,647 $ 8,845 $ 17,242 $ 35,026 (a) Represents intersegment sales from the Aerospace Fasteners segment to the Aerospace Distribution segment.
CONSOLIDATED RESULTS Net sales of $164.2 million in the third quarter of Fiscal 1998 decreased by $15.3 million, or 8.5%, compared to sales of $179.8 million in the third quarter of Fiscal 1997. This decrease is primarily attributable to the loss of revenues resulting from the Banner Hardware Group Disposition. Net Sales of $567.1 million in the Fiscal 1998 nine-month period improved by $97.0 million, or 20.6%, compared to sales of $470.1 million in the first nine months of Fiscal 1997. Approximately 24.0% of the current nine months sales growth was stimulated by the resurgent commercial aerospace industry. Recent acquisitions contributed approximately 12.4% to the sales growth, while dispositions decreased growth by approximately 15.8%. Gross Margin as a percentage of sales was 26.5% and 23.0% in the third quarter of Fiscal 1997 and 1998, respectively, and 25.8% and 24.9% in the nine-month period of Fiscal 1997 and 1998, respectively. Lower margins in the Fiscal 1998 periods is attributable to a change in product mix in the Aerospace Distribution segment as a result of the Banner Hardware Group Disposition. Partially offsetting overall lower margins, were improved margins within the Aerospace Fasteners segment resulting from efficiencies associated with increased production, improved skills of the work force, and reduction in the payment of overtime. Selling, General & Administrative expense as a percentage of sales was 21.2% and 17.2% in the third quarter of Fiscal 1997 and 1998, respectively, and 21.7% and 18.9% in the nine-month period of Fiscal 1997 and 1998, respectively. The improvement in the Fiscal 1998 periods is attributable primarily to administrative efficiencies relative to increasing sales. Other income increased $4.3 million in the current nine-month period, compared to the prior year nine-month period, due primarily to the sale of air rights over a portion of the property the Company owns and is developing in Farmingdale, New York. Operating income of $8.8 million in the third quarter of Fiscal 1998 increased 2.3%, compared to operating income of $8.6 million in the third quarter of Fiscal 1997. Operating income of $35.0 million in the nine- month period ended March 29, 1998, improved by $17.8 million, or 103.1%, compared to the nine-month period ended March 30, 1997. The increase in operating income was due primarily to the improved results provided by the Company's Aerospace Fasteners segment. Investment income (loss), net, decreased by $7.1 million in the first nine months of Fiscal 1998, due to recognition of unrealized losses on the fair market adjustments of investments previously classified as trading securities in the Fiscal 1998 periods while recording unrealized gains from trading securities in the Fiscal 1997 periods. Unrealized holding gains (losses) on available-for-sale investments are marked to market value through stockholders' equity and reported separately as part of comprehensive income (see discussion below). Minority interest increased by $21.1 million as a result of the $124.0 million non-recurring pre-tax gain recognized from the Banner Hardware Group Disposition. An income tax provision of $49.4 million in the first nine months of Fiscal 1998 represented a 42.0% effective tax rate on pre-tax earnings from continuing operations (excluding equity in earnings of affiliates and minority interest) of $117.5 million. The tax provision was slightly higher than the statutory rate because of goodwill associated with the Banner Hardware Group Disposition. Included in earnings (loss) from discontinued operations are the results of Fairchild Technologies ("Technologies") through January 1998, and the Company's equity in earnings of STFI prior to the STFI Merger. Losses increased in the fiscal 1998 periods as a result of increased losses recorded at Technologies and lower equity earnings contributed by STFI (See Note 3). In the nine months ended March 29, 1998, the Company recorded a $98.8 million gain, net of tax, on disposal of discontinued operations, from the proceeds received from the STFI Merger. In the quarter ended March 29, 1998, the Company recorded a $68.8 million gain, net of tax, on disposal of discontinued operations, from proceeds received for the common stock of STFI. Partially offsetting this gain was an after-tax charge of $22.4 million the Company recorded in the third quarter ended March 29, 1998 in connection with the adoption of a formal plan to enhance the opportunities for disposition of Technologies. Included in this charge was (i) $13.4 million (net of income tax benefit of $4.6 million) representing the estimated loss on the disposal of certain assets of Technologies; (ii) $4.2 million (net of an income tax benefit of $1.5 million) relating to the net losses of Technologies since the measurement date; and (iii) $4.7 million (net of an income tax benefit of $2.5 million) relating to a provision for additional operating losses. The Company's results are affected by the operations of Technologies, which may fluctuate because of industry cyclicality, the volume and timing of orders, the timing of new product shipments, customers' capital spending, and pricing changes by Technologies and its competition. Technologies has experienced a reduction of its backlog, and margin compression during the past nine months, which combined with the existing cost base, may impact future earnings from Technologies. While the Company believes that $22.4 million is a reasonable charge for the expected losses in connection with the disposition of Technologies, there can be no assurance that this estimate is adequate. (See Note 3). The Company recognized an extraordinary loss of $6.7 million, net of tax, to write-off the remaining deferred loan fees and original issue discounts associated with early extinguishment of the Company's indebtedness pursuant to the Public Debt Repayment and refinancing of the FHC and RHI Credit Agreement facilities. Net earnings of $112.6 million in the first nine months ended March 29, 1998, improved by $120.1 million compared to the $7.6 million net loss recorded in the nine months ended March 30, 1997. This improvement is attributable to a $17.8 million increase in operating income, a $124.0 million non-recurring gain from Banner Hardware Group Disposition, and the $76.5 million gain on the disposal of discontinued operations. Partially offsetting this increase was a $58.8 million increase in the income tax provision, a $21.1 million change in minority interest, a $7.1 decrease in investment income, and the $6.7 million extraordinary loss. Comprehensive income includes foreign currency translation adjustments and unrealized holding changes in the fair market value of available-for- sale investment securities. The fair market value of unrealized holding securities increased $14.5 million in the nine months ended March 29, 1998, primarily as a result of an increase in the value of AlliedSignal common stock which was received from the Banner Hardware Group Disposition. SEGMENT RESULTS: AEROSPACE FASTENERS SEGMENT Sales in the Aerospace Fasteners segment increased by $38.8 million, or 60.5%, in the third quarter and $95.1, or 54.2%, million for the Fiscal 1998 nine-month period, compared to the Fiscal 1997 periods, reflecting significant growth in the commercial aerospace industry combined with the effect of acquisitions. New orders have continued to be strong. The Company reduced backlog to $187 million at March 29, 1998, down from $196 million at June 30, 1997. Excluding sales contributed by acquisitions, sales increased approximately 31% and 27% for the three and nine months ended March 29, 1998,respectively, compared to the same periods in the prior year. Operating income improved by $6.1 million, or 171%, in the third quarter and $10.7 million, or 137%, in the Fiscal 1998 nine-month period, compared to the Fiscal 1997 periods. Acquisitions and marketing changes were contributors to this improvement. Excluding the results provided by acquisitions, operating income increased by approximately 100% in the third quarter and 88% for the nine months of Fiscal 1998, compared to the same periods in the prior year. The Company anticipates that manufacturing and productivity efficiencies will further improve operating income in the coming months. AEROSPACE DISTRIBUTION SEGMENT Aerospace Distribution sales were lower by $52.9 million, or 46.5% in the third quarter and up $8.6 million, or 2.9%, in the first nine months of Fiscal 1998, compared to the corresponding periods of the prior year. The loss of revenues as a result of the Banner Hardware Group Disposition was primarily responsible for the decrease in the current quarter, and partially offset sales increases in the first nine months of Fiscal 1998, which sales otherwise reflected a robust aerospace industry. Excluding sales contributed by dispositions, sales increased 35% and 33% for the three and nine months ended March 29, 1998, respectively, compared to the same periods in the prior year. Operating income decreased $7.0 million, in the third quarter and $1.9 million for the first nine months of Fiscal 1998, compared to the same period of the prior year, due to the Banner Hardware Group Disposition. Excluding the results from dispositions, operating income increased by 61% for the nine months of Fiscal 1998,compared to the same periods in the prior year. CORPORATE AND OTHER The Corporate and Other classification includes the Gas Springs Division and corporate activities. The results of SBC, which was sold at Fiscal 1997 year-end, are included in the prior period results. The group reported a decrease in sales of $3.3 million, in the third quarter and $5.2 million, in the first nine months of Fiscal 1998, as compared to the same periods in Fiscal 1997, due to the exclusion of SBC's results in the current periods. The operating loss decreased by $1.8 million in the third quarter and $9.2 million in the first nine months of Fiscal 1998, compared to the Fiscal 1997 periods, as a result of an increase in other income and a decrease in legal expenses. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased by $42.4 million from $19.4 million at June 30, 1997 to $61.8 million at March 29, 1998. Cash received of $178.0 from the STFI Merger and $54.2 from the Offering was partially offset by cash of $104.1 million used for operations, capital expenditures, including acquisitions of $56.1 million, and minority interest purchases of $26.4 million. The increase in cash used for operations was primarily attributable to increases in working capital (net of the Banner Hardware Group Disposition). The Company's principal cash requirements include debt service, capital expenditures, acquisitions, and payment of other liabilities. Other liabilities that require the use of cash include post- employment benefits for retirees, environmental investigation and remediation obligations, and litigation settlements and related costs. The Company maintains credit agreements with a consortium of banks, which provide a term loan and revolving credit facilities to the Company, and a separate revolving credit facility is made available to Banner. The Company anticipates that existing capital resources, cash generated from operations, and cash from borrowings and asset sales will be adequate to maintain the Company's current level of operations. For the Company's fiscal years ended June 30, 1995, 1996 and 1997, and for the first nine months of fiscal 1998, the Company had negative cash flows from operations of $25.0 million, $49.0 million, $100.1 million and $104.1 million, respectively. The Company believes that recent proceeds from dispositions and the recent equity offering, along with a refinancing of the Company's debt, will provide the Company with the necessary capital to overcome these negative cash flows. The Company plans to focus on its core businesses and capitalize on the resurgent aerospace industry in order to improve operating cash flows. With the proceeds of the Offering, borrowings under the Facility and the after tax proceeds received from the STFI Merger, the Company refinanced substantially all of its existing indebtedness (other than indebtedness at Banner), consisting of the 11 7/8% Senior Debentures due 1999, the 12% Intermediate Debentures due 2001, the 13 1/8% Subordinated Debentures due 2006, the 13% Junior Subordinated debentures due 2007 and its existing bank indebtedness. The Public Debt Repayment reduced the Company's total net indebtedness by approximately $132 million and reduced the Company's annual interest expense, on a pro forma basis, by approximately $21 million, and the STFI Merger reduced the Company's annual interest expense by approximately an additional $3 million. A portion of the proceeds from the Banner Hardware Group Disposition were used to repay all of Banner's outstanding term loan indebtedness, which will further reduce the Company's annual interest expense by approximately an additional $14 million. The operating income of the subsidiaries included in the Banner Hardware Group Disposition was $14.1 million for the nine months ended March 29, 1998, respectively. Whereas the Company will no longer benefit from the operations of the disposed Banner subsidiaries it expects to benefit from lower interest expense and dividends paid on the AlliedSignal stock. The Company has made an offer to exchange (the "Exchange Offer") its Class A common stock for up to a maximum of 4 million shares of Banner common stock. The purpose of the Exchange Offer is for the Company to increase its ownership of Banner to at least 80.1% such that the Company can include Banner in its United States consolidated corporate income tax return. Pending a successful Exchange Offer, the Company contemplates issuing approximately .6046 of a share of its Class A common stock for each validly tendered share of Banner common stock. For the Company's fiscal years 1995, 1996, and 1997, and for the first nine months of fiscal 1998, Technologies had operating losses of approximately $1.5 million, $1.5 million, $3.6 million, and $13.7 million, respectively. In addition, as a result of the downturn in the Asian markets, Technologies has experienced delivery deferrals, reduction in new orders, lower margins and increased price competition. In response, in February 1998, the Company adopted a formal plan to enhance the opportunities for disposition of Technologies, while improving the ability of Technologies to operate more efficiently. The plan includes a reduction in production capacity and headcount, and the pursuit of potential vertical and horizontal integration with peers and competitors of the two divisions that constitute Technologies, or the inclusion of those divisions in the Spin-Off. If the Company elects to include Technologies in the Spin-Off, the Company believes that it would be required to contribute substantial additional resources to allow Technologies the liquidity necessary to sustain and grow both the Fairchild Technologies' operating divisions. In order to focus its operations on the aerospace industry, the Company is considering distributing (the "Spin-Off") to its shareholders all of the stock of a subsidiary to be formed ("Spin-Co"), which may own substantially all of the Company's non-aerospace assets. Although the Company's ability to effect the Spin-Off is uncertain, the Company may effect a spin-off of certain non-aerospace assets as soon as it is reasonably practicable following receipt of a solvency opinion relating to Spin-Co and all necessary governmental and third party approvals. In order to effect the Spin-Off, approval is required from the board of directors of the Company, however, shareholder approval is not required. The composition of the assets and liabilities to be included in Spin-Co, and accordingly the ability of the Company to consummate the Spin-Off, is contingent, among other things, on obtaining consents and waivers under the Company's New Credit Facility. In addition, the Company may encounter unexpected delays in effecting the Spin-Off, and the Company can make no assurance as to the timing thereof. In addition, prior to the consummation of the Spin-Off, the Company may sell, restructure or otherwise change the assets and liabilities that will be in Spin-Co, or for other reasons elect not to consummate the Spin-Off. Consequently, there can be no assurance that the Spin-Off will occur. In connection with the possible Spin-Off, it is anticipated that the Company will enter into an indemnification agreement pursuant to which Spin- Co will assume and be solely responsible for all known and unknown past, present and future claims and liabilities of any nature relating to the pension matter described under "Legal Proceedings"; certain environmental liabilities currently recorded as $7.1 million, but for which it is reasonably possible the total expense could be $11.9 million on an undiscounted basis; certain retiree medical cost and liabilities related to discontinued operations for which the Company has accrued approximately $42.8 million as of March 29, 1998 (see Note 11 to the Company's Consolidated Financial Statements); and certain tax liabilities. In addition, the Spin-Co would also be responsible for all liabilities relating to the Technologies business and an allocation of corporate expenses. Responsibility for such liabilities would require significant commitments. Should the Spin-Off, as presently contemplated, occur prior to June of 1999, the Spin-Off may be a taxable transaction to shareholders of the Company and could result in a material tax liability to the Company and its shareholders. The amount of the tax to the Company and its shareholders is uncertain, and if the tax is material to the Company, the Company may elect not to consummate the Spin-Off. Because circumstances may change and because provisions of the Internal Revenue Code of 1986, as amended, may be further amended from time to time, the Company may, depending on various factors, restructure or delay the timing of the Spin-Off to minimize the tax consequences thereof to the Company and its shareholders. With the year 2000 approaching, the Company is preparing all of its computer systems to be Year 2000 compliant. Substantially all of the systems within the Aerospace Fasteners segment are currently Year 2000 compliant. The Company expects to replace and upgrade some systems, which are not Year 2000 compliant, within the Aerospace Distribution segment and at Fairchild Technologies. The Company expects all of its systems will be Year 2000 compliant on a timely basis. However, there can be no assurance that the systems of other companies, on which the Company's systems rely, will also be timely converted. Management is currently evaluating the cost of ensuring that all of its systems are Year 2000 compliant. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 131 ("SFAS 131") "Disclosures about Segments of an Enterprise and Related Information". SFAS 131 supersedes Statement of Financial Accounting Standards No. 14 "Financial Reporting for Segments of a Business Enterprise" and requires that a public company report certain information about its operating segments in annual and interim financial reports. The Company will adopt SFAS 131 in Fiscal 1999. In February 1998, FASB issued Statement of Financial Accounting Standards No. 132 ("SFAS 132") "Employers' Disclosures about Pensions and Other Postretirement Benefits". SFAS 132 revises and improves the effectiveness of current note disclosure requirements for employers' pensions and other retiree benefits by requiring additional information to facilitate financial analysis and eliminating certain disclosures which are no longer useful. SFAS 132 does not address recognition or measurement issues. The Company will adopt SFAS 132 in Fiscal 1999. PART II. OTHER INFORMATION Item 5. Other Information Articles have appeared in the French press reporting an inquiry by a French magistrate into certain allegedly improper business transactions involving Elf Acquitaine, a French petroleum company, its former chairman and various third parties, including Maurice Bidermann. In connection with this inquiry, the magistrate has made inquiry into allegedly improper transactions between Mr. Steiner and that petroleum company. In response to the magistrate's request that Mr. Steiner appear in France as a witness, Mr. Steiner submitted statements concerning the transactions and has offered to appear in person if certain arrangements were made. According to the French press, the magistrate also requested permission to commence an inquiry into transactions involving another French petroleum company, but her request was not granted. If the magistrate were to renew her request, and if it were granted, inquiry into transactions between such company and Mr. Steiner, could ensue. Mr. Steiner has recently been cited by a French prosecutor to appear on May 18, 1998, before the Tribunal de Grande Instance de Paris, to answer a charge of knowingly benefiting in 1990, from a misuse by Mr. Bidermann of corporate assets of Societe Generale Mobiliere et Immobiliere, a French corporation in which Mr. Bidermann is believed to have been the sole shareholder. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (* filed herewith): *10.1 Amendment No. 2 dated as of January 14, 1997, to the Interest Rate Hedge Agreement between Registrant and Citibank, N.A. dated as of August 19, 1997. *10.2 Letter Agreement dated February 27, 1998, between Registrant and John L. Flynn. *10.3 Letter Agreement dated February 27, 1998, between Registrant and Donald E. Miller. *10.4 Stock Option Deferral Plan dated February 9, 1998. *10.5 Amendment of Warrant Agreement dated February 9, 1998, between the Registrant and Stinbes Limited. 10.6 Stock Option Agreement dated November 20, 1997 between RHI Holdings, Inc. and Intermedia Communciations Inc. (Incorporated by reference to Scheduled 13D/A (Amendment No. 4) dated as of November 25, 1997 filed by the Company on December 1, 1997). 10.7 Stock Purchase Agreement dated November 25, 1997 between RHI Holdings, Inc. and Intermedia Communications Inc. (Incorporated by reference to Schedule 13D/A (Amendment No. 4) dated as of November 25, 1997 filed by the Company on December 1, 1997). 10.8 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). 10.9 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). 10.10 Agreement and plan of Merger dated January 28, 1998, as amended on February 20, 1998, and March 2, 1998, between the Company and the shareholders' of Special-T Fasteners (Incorporated by reference to Form 8-K dated as of March 2, 1998 filed by the Company on March 12, 1998). *10.11 Employment Agreement between Robert Edwards and Fairchild Holding Corp., dated March 2, 1998. *27 Financial Data Schedules. (b) Reports on Form 8-K: On January 28, 1998, the Company filed a Form 8-K to report on Item 2 and Item 7 regarding the completion of the Banner Hardware Group Disposition. On March 12, 1998 the Company filed a Form 8-K to report on Item 2 and Item 7 regarding the March 2, 1998 consummation of the Special-T Acquisition. On March 25, 1998, the Company filed a Form 8-K to report on Item 2 and Item 7 regarding the completion of the STFI Merger. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to the signed on its behalf by the undersigned hereunto duly authorized. For THE FAIRCHILD CORPORATION (Registrant) and as its Chief Financial Officer: By: Colin M. Cohen Senior Vice President and Chief Financial Officer Date: May 13, 1998 EX-27 2
5 9-MOS JUN-30-1998 MAR-29-1998 61,813 6,442 133,769 5,329 205,021 475,686 237,055 122,747 1,137,642 209,652 278,140 0 0 2,707 430,431 1,137,642 567,142 572,593 426,201 537,567 0 0 36,526 96,395 49,353 47,042 72,262 (6,725) 0 112,579 6.28 5.98
EX-10 3 Citibank, N.A. 399 Merit Avenue New York, NY 10043 CITIBANK SAMPLE CONFIRMATION Date: January 14,1998 To: Fairchild Holding Corporation ("Fairchild") Attention:Colin Cohen / Jeff Kenyon Fax No. 703-478-5915 From: Citibank, N.A. New York ("Citibank") Fax No: 416 - 941 - 7432 Transaction Reference Number: 50970148 The purpose of this letter agreement is to set forth the terms and conditions of the Transaction entered into between us on the Trade Date referred to below. This letter constitutes a "Confirmation" as referred to in the Master Agreement specified below. This Confirmation amends, restates and supersedes any prior Confirmation for this Transaction. This Confirmation evidences a complete binding agreement between you and us as to the terms of the Transaction to which this Confirmation relates. In addition, you and we agree to use our best efforts promptly to negotiate, execute and deliver a Master Agreement (Multicurrency-Cross Border) in the form published by the International Swaps and Derivatives Association, Inc. ("ISDA"), with such modifications as you and we shall in good faith agree. Upon the execution by you and us of such Master Agreement (the "Agreement"), this Confirmation will supplement, form a part of, and be subject to the Agreement. A copy of the Agreement has been, or promptly after the date hereof will be, delivered to you. If Fairchild Holding Corporation fails to execute and deliver or to negotiate in good faith the Agreement within 180 days of the Trade Date, Citibank may give Fairchild Holding Corporation notice that an Additional Termination Event has occurred and is continuing with respect to Fairchild Holding Corporation, in which event Fairchild Holding Corporation will be the only Affected Party. Prior to execution of the Agreement the provisions of the Master Agreement (Multicurrency-Cross Border), in the form published by ISDA, are incorporated by reference herein and form a par. of this Confirmation and, further, this Confirmation (together with all other Confirmations of Transactions previously entered into between us, notwithstanding anything to the contrary therein) shall be deemed to be subject to the terms of the Agreement, as if, on the Trade Date of the first such Transaction between us, you and we had executed the Agreement (without any Schedule thereto). The definitions and provisions contained in the 1991 ISDA Definitions (as published by ISDA) are incorporated by reference into this Confirmation. This Confirmation and ISDA Agreement will be governed by the laws of the State of New York. 1. In the event of any inconsistency between this Confirmation and the 1991 ISDA Definitions or the ISDA Agreement, this Confirmation will control for the purpose of the Transaction to which this Confirmation relates. 2. Each party will make each payment specified in this Confirmation as being payable by it, not later than the due date for value on that date in the place of the account specified below or otherwise specified in writing, in freely transferable funds and in a manner customary for payments in the required currency. 3. The terms of the particular Transaction to which this Confirmation relates are as follows: Notional Amount: USD 100,000,000 Trade Date: January 14, 1998 Effective Date: February 17, 198 Termination Date: February 19, 2008; provided, however, Citibank may elect to cancel this Transaction on February 17, 2003 by providing notice to Fairchild two Business Days prior to February 17. 2003, with such date subject to adjustment in accordance with Modified Following Business Day Convention. Fixed Amounts: Fixed Rate Payer: Fairchild Fixed Rate Payer Payment Dates: Quarterly on each February 17, May 17, August 17 and November 17 commencing May 17, 1998 to and including the Termination Date. Modified Following Business Day Convention applies Fixed Rate: 6.26 percent from February 17, 1998 to February 17. 2003 provided, however, that if Citibank elects not to cancel the transaction on February 17, 2003 as described above, the Fixed Rate for the Calculation Periods from February 17, 2003 to February 19, 2008 will be 6.715 percent. Fixed Rate Day Count Fraction Actuall360 Floating Amounts: Floating Rate Payer: Citibank Floating Rate Payer Payment Dates: Payment Dates: Quarterly on each February 17, May 17, August 17 and November 17 commencing May 17, 1998 to and including the Termination Date. Modified Following Business Day Convention applies Floating Rate Option: Either (1) a Floating Rate determined pursuant to the USD-LIBOR-BBA Floating Rate option With a Reset Date corresponding to the first day of the subject Calculation Period, or (2) a Floating Rate determined pursuant to the USD-LIBOR-BBA Floating Rate option with a Reset Date corresponding to the last day of the subject Calculation Period, whichever is lower. Designated Maturity 3 month Compounding: Inapplicable Floating Rate Payer Day Count Fraction: Actual/360 Floating Fate Reset Dates Either the first day of each Calculation Period or the last day of each Calculation Period, as provided above. 3. Other Business Days: New York and London Calculation Agent: Citibank, N.A. New York 4. Cash Settlement Provisions: Provided that no Early Termination Date has occurred or been designated with respect to this Transaction, each party may require this Transaction to be terminated and the remaining payment obligations under this Transaction to be settled and discharged on February 27, 2003 (the "Cash Settlement Date") by written or telephonic notice to the other party at approximately 11:00 a.m. New York time, on the day that is two Business Days prior to the Cash Settlement date (the "Cash Settlement Determination Date"). If such notice Is given, an amount (the "Cash Settlement Amount") shall be calculated as provided below on the Cash Settlement Determination Date, and the remaining payment obligations of each party under this Transaction shall be settled and discharged by payment of the Cash Settlement Amount on the Cash Settlement Date. The Cash Settlement Amount, as determined by Citibank in good faith on the Cash Settlement Determination Date, will be an amount equal to the amount which Citibank would be required to pay to the Counterparty or the Counterparty would be required to pay to Citibank in consideration for the termination as of the Cash Settlement Date of the outstanding rights and obligations of the parties under this Transaction. Upon payment of the Cash Settlement Amount and settlement of the Fixed Amount and Floating Amount (if any) payable on the Cash Settlement Date, this Transaction shall terminate and neither party shall have any further rights or obligations hereunder. 5.Account Details: Payments to Citibank: Account for payments: Citibank, N A. New York ABA # 021000089 Account No. 00167679 Financial Futures Reference Swap 50970148 Payments to Fairchild: Account for payments: To be provided. Fairchild hereby agrees (a) 1O check this Confirmation (Reference No.: 50970148) carefully and immediately upon receipt so that errors or discrepancies can be promptly identified and rectified and (b) to confirm that the foregoing correctly sets forth the terms of the agreement between Citibank and Fairchild Holding Corporation with respect to the particular Transaction to which this Confirmation relates, by manually signing this Confirmation and providing the other information requested herein and immediately returning an executed copy to Facsimile No. 416 - 941 - 7432. Very truly yours, CITIBANK, N.A. New York By: Susan Kellner Mgr., Global Markets Derivatives & Structured Products Operations and Technology 399 Park Ave./11th/Floor/Zn. 3 Agreed and Accepted By: FAIRCHILD HOLDING; CORPORATION By: Karen L. Schneckenburger Vice President & Treasurer EX-10 4 -2- AMENDMENT OF WARRANT AGREEMENT BETWEEN THE FAIRCHILD CORPORATION AND STINBES LIMITED FOR 375,000 SHARES OF CLASS A OR CLASS B COMMON STOCK This Amendment of Warrant Agreement (the "Amendment") is made as of February 9, 1998, for the purpose of modifying (as provided below) the Warrant Agreement dated as of March 13, 1986 (the "Warrant Agreement"), between The Fairchild Corporation, p/k/a Banner Industries, Inc., a Delaware corporation (the "Company"), and Stinbes Limited. Capitalized terms used but not otherwise defined herein shall have the meaning ascribed to them in the Warrant Agreement. RECITALS A. On March 13, 1986, the Company entered into the Warrant Agreement with Drexel Burnham Lambert ("DBL"), and (pursuant to the terms of the Warrant Agreement) issued to DBL warrants to purchase up to an aggregate of 200,000 shares of either Class A or Class B common stock of the Company (the "Warrants"). The Warrants were issued in conjunction with DBL acting as the underwriter for the public offering of certain of the Company's debentures. B. Pursuant to a Purchase and Sale Agreement dated as of January 4, 1989, Jeffrey J. Steiner ("Steiner"), DBL and the Company, Steiner purchased 187,500 Warrants from DBL (subject to all the benefits and obligations under the Warrant Agreement). C. Section 5.1 of the Warrant Agreement provides that the Warrant Price and the number of Warrant Shares are subject to adjustment upon the occurrence of certain events pursuant to the terms of Section 9 of the Warrant Agreement. In June, 1989, as a result of a two-for-one stock split (an adjustable event as defined in Section 9 of the Warrant Agreement) the number of Warrant Shares in favor of Steiner was increased to 375,000, and the Warrant Price was decreased to $7.67 per share. D. On September 12, 1991, the Board of Directors of the Company voted to renew the Warrants issued in favor of Steiner, which had expired on March 13, 1991, for an extended term to expire on March 13, 1993. On March 8, 1993, the Board of Directors of the Company voted to extend the Expiration Date of the Warrants to March 13, 1995. On February 16, 1995, the Board of Directors of the Company voted to extend the Expiration Date of the Warrants to March 13, 1997. E. On March 22, 1993, Steiner assigned the Warrants to Bestin Ltd. On May 31, 1993, Bestin Ltd. assigned the Warrants to Stinbes Limited. Stinbes Limited is an affiliate of Steiner. F. By Board action taken on February 21, 1997, and again on September 11, 1997, and September 26, 1997, the Board of Directors of the Company voted to extend the Expiration Date of the Warrants to March 13, 2002, subject to the following modifications: (i) effective as of February 21, 1997, the Expiration Date of any issued Warrants, outstanding and unexpired on that date, shall be March 13, 2002; (ii) effective as of February 21, 1997, the Warrant Price shall be $7.67 per share, increased by two tenths of one cent ($.002) for each day subsequent to March 13, 1997, but fixed at $7.80 per share after June 30, 1997. G. On February 9, 1997, the Board voted to modify the Warrant Agreement to: (i) revise the window periods during which the Warrants may be exercised; and (ii) to provide that the payment of the Warrant Price may be made in shares of the Company's Class A or Class B Common Stock. H. Section 17 of the Warrant Agreement provides that the Company and the Holder may, from time to time, supplement or amend the Warrant Agreement in any manner which "the Company may deem necessary or desirable and which shall not be inconsistent with the provisions of the Warrants and which shall not adversely affect the interest of the Holders." NOW, THEREFORE, in consideration of the premises and the mutual agreements herein, and for other good and valuable consideration (the receipt and adequacy of which are hereby acknowledged), the parties hereto agree as follows: 1. Effective as of February 9, 1998, the Warrants may not be exercised except within the following window periods: (a) within 365 days after the merger of Shared Technologies Fairchild Inc. with AT&T Corporation, MCI Communications, Worldcom Inc., Teleport Communications Group, Inc., or Intermedia Communications Inc.; (b) within 365 days after a change of control of the Company, as defined in the Fairchild Holding Corp. Credit Agreement with Citicorp et. al.; or (c) within 365 days after a change of control of Banner Aerospace, Inc., as defined in the Banner Aerospace, Inc. Credit Agreement with Citicorp. et. al. In no event may the Warrants be exercised after March 13, 2002. 2. Effective as of February 9, 1998, the payment of the Warrant Price may be made in cash or in shares of the Company's Class A or Class B Common Stock valued at Fair Market Value at the time of exercise, or combination thereof. For purposes hereof, "Fair Market Value" shall mean, in respect of any share of the Company's Common Stock, the closing price of the Company's Common Stock as reported on the New York Stock Exchange Composite Tape on the last trading day immediately preceding the day of exercise of the Warrant. 3. Effective as of February 9, 1998, each reference in the Warrant Agreement to "this Agreement" "hereunder", "hereof", "herein", or words of like import shall mean and be a reference to the Warrant Agreement, as amended, extended or modified previously or hereby, and each reference to the Warrant Agreement and any other document, instrument or agreement executed and/or delivered in connection with the Warrant Agreement shall mean and be a reference to the Warrant Agreement as amended, extended, or modified previously or hereby. 4. Except as specifically modified herein, the Warrant Agreement shall remain in full force and effect and is hereby ratified and confirmed. 5. This Amendment may be executed in multiple counterparts. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the date first written above. THE FAIRCHILD CORPORATION By: Donald E. Miller Senior Vice President and Corporate Secretary STINBES LIMITED By: David Faust Vice President EX-10 5 February 27, 1998 John L. Flynn, Esquire The Fairchild Corporation 300 West Service Road P.O. Box 10803 Chantilly, VA 20153 Dear John: This letter agreement between The Fairchild Corporation ("Fairchild") and you, relates to severance and change of control payments. Severance Payments. In exchange for your continued services as an executive of Fairchild or its successors, and subject to your having been, on the date of termination, an employee of Fairchild or its successors, for at least five years (and for purposes of determining duration of service, service for Fairchild and its successors shall be aggregated) and an officer of Fairchild or its successors, for at least three years (and for purposes of determining duration of service as an officer, service as an officer for Fairchild and its successors shall be aggregated), Fairchild for itself and its successors hereby agrees that if your employment shall be terminated either by Fairchild or its successors for any reason other than cause, or by you for Good Reason, you or your estate shall be entitled to receive from Fairchild or its successors as severance, an amount equal to the sum of: (i) two times your then current annual base salary, plus (ii) an amount in lieu of incentive bonus, irrespective of whether such incentive bonus would or could have been earned, equal to your then current annual base salary, which amount, i.e., the sum of (i) and (ii) above, shall be payable in a lump sum within ten days after the effective date of termination of your employment. In addition to the foregoing, you will be entitled to the immediate vesting of all stock options which you hold in the shares of Fairchild or its successor. Change of Control Payments. In addition, and notwithstanding whether the conditions for severance pay have been met, if a "Change of Control" (as defined in the attached Exhibit A) of Fairchild occurs while you are still an employee of Fairchild, you shall be entitled to receive from Fairchild or its successors an amount equal to the sum of: (i) two times your then current annual base salary, plus (ii) an amount in lieu of incentive bonus, irrespective of whether such incentive bonus would or could have been earned, equal to your then current annual base salary, which amount, i.e., the sum of (i) and (ii) above, shall be payable: (a) one-half in a lump sum on the date of Change of Control (the "First Change Payment") and, (b) as long as your employment continues, one-half over a one year period in four quarterly installments, commencing three months after the date of Change of Control (the "Second Change Payments"). During said one year period, if your employment shall be terminated either by Fairchild (or its successors) for any reason other than cause, or by you for Good Reason, you shall be entitled to receive immediately: (i) the First Change Payment (if not already paid), (ii) any Second Change Payments not yet paid, and (iii) the full severance payment, if you qualify for such severance payment by dint of duration of service, as referred to in the preceding paragraph of this letter. Termination by Fairchild of your employment (other than for cause) within one hundred and eighty days prior to a Change of Control shall be deemed to have been a termination in contemplation of such Change of Control, entitling you to the First Change Payment hereunder. Enforcement. If you are the prevailing party in a suit or proceeding against Fairchild, or its successors, to enforce or defend your rights under this agreement, you shall be entitled to recover from Fairchild, or its successors, your reasonable attorneys' fees and other costs and expenses in connection with such suit or proceeding. Definition of Good Reason: "Good Reason" (as used in the preceding paragraph) includes any action by Fairchild (or its successors) which (i) results in a reduction in your compensation, position, authority, duties or responsibilities whether or not your senior management opportunities are substantially lessened, or (ii) results in your primary place of employment being relocated more than 35 miles from the current Dulles Airport location, or (iii) would be deemed a constructive termination under applicable law. Supplementary Executive Retirement Plan. You shall be entitled to participate in Fairchild's Supplementary Executive Retirement Plan (the "SERP"). Notwithstanding the provisions of the SERP, for purposes of determining years of service with Fairchild, or its successors, you shall be credited with two years of service for each of the first ten years you remain an active employee of Fairchild or its successors, but the foregoing shall not affect vesting requirements which shall remain in accordance with the SERP. Payments Pursuant to Base Salary or Incentive Compensation During Term of Employment. No sum payable to you upon a Change of Control shall limit or affect your entitlement to base salary or incentive compensation for all periods during which you are employed by Fairchild or its successors. Limitation on Payments Pursuant to IRC 280G. In no event shall any amounts payable pursuant to this letter agreement which are deemed to constitute "parachute payments" (as defined in Section 280G of the Internal Revenue Code, as amended by the Tax Reform Act of 1986, and as thereafter amended (the "Code")), when added to any other payments which are deemed to constitute "parachute payments" as defined in the Code, exceed 2.99 times your "base amount" (as defined in the Code). Please acknowledge your agreement with the terms of this letter agreement by signing the attached copy and returning same to The Fairchild Corporation (Attention, Mary Shaw). This letter agreement shall be effective as of the date of your acceptance. Very truly yours, THE FAIRCHILD CORPORATION By: Jeffrey J. Steiner Chairman of the Board, Chief Executive Officer and President ACCEPTED AND AGREED John L. Flynn EXHIBIT A "Change of Control" means the occurrence of any of the following events: (i) Any "Person", other than one or more "Permitted Holders", is or becomes the "Beneficial Owner", directly or indirectly, of more than 20% of the total voting power (the "Vote") of the "Voting Stock" of the Company, and the Permitted Holders "beneficially own", directly or indirectly, in the aggregate a lesser percentage of the Vote of all the Voting Stock of the Company than such other Person; provided, however, such other Person shall be deemed to beneficially own all Voting Stock of a corporation held by any other corporation (the "Parent Corporation"), if such other Person "beneficially owns", directly or indirectly, more than 20% of the Vote of the Voting Stock of such Parent Corporation, and the Permitted Holders "beneficially own", directly or indirectly, in the aggregate a lesser percentage of the Vote of the Voting Stock of such Parent Corporation; (ii) During any period of two consecutive years, individuals who at the beginning of any such period constituted the Board of Directors of the Company (together with any new directors whose election by such Board or whose nomination for election by the shareholders of the Company was approved by a vote of a majority of the directors of the Company then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office; (iii) The Company consolidates with or merges with or into another Person, pursuant to a transaction (a) in which the outstanding Voting Stock of the Company is changed into or exchanged for cash, securities or other property (other than any such transaction where the outstanding Voting Stock of the Company is changed into or exchanged for Voting Stock of the surviving corporation), and (b) in which the holders of the Vote of the Voting Stock of the Company immediately prior to such transaction own, directly or indirectly, less than a majority of the Vote of the Voting Stock of the surviving Person immediately after such transaction, and (c) by which an event described in Section (i) shall have occurred; or (iv) The Company is liquidated or dissolved, or all or substantially all of its directly or indirectly held assets are sold or otherwise conveyed to a third party other than one or more Permitted Holders. "Beneficial Owner" has the meaning set forth in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to be the Beneficial owner of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time; and the terms "beneficial ownership" and "beneficially owns" have meaning correlative to the foregoing; "Permitted Holders" means Jeffrey J. Steiner and his "associates" (as defined in Rule 12b-2 under the Exchange Act) or any other person directly or indirectly controlled by Jeffrey J. Steiner. "Person" shall be as defined in Section 13(d) and 14(d) of the Exchange Act. "Voting Stock" means, with respect to a corporation, (i) all classes of capital stock then outstanding of such corporation entitled to vote in elections of directors, and (ii) any security which may, at the option of the holder, be converted into or exchanged for Voting Stock. EX-10 6 February 27, 1998 Donald E. Miller, Esquire The Fairchild Corporation 300 West Service Road P.O. Box 10803 Chantilly, VA 20153 Dear John: This letter agreement between The Fairchild Corporation ("Fairchild") and you, relates to severance and change of control payments. Severance Payments. In exchange for your continued services as an executive of Fairchild or its successors, and subject to your having been, on the date of termination, an employee of Fairchild or its successors, for at least five years (and for purposes of determining duration of service, service for Fairchild and its successors shall be aggregated) and an officer of Fairchild or its successors, for at least three years (and for purposes of determining duration of service as an officer, service as an officer for Fairchild and its successors shall be aggregated), Fairchild for itself and its successors hereby agrees that if your employment shall be terminated either by Fairchild or its successors for any reason other than cause, or by you for Good Reason, you or your estate shall be entitled to receive from Fairchild or its successors as severance, an amount equal to the sum of: (i) two times your then current annual base salary, plus (ii) an amount in lieu of incentive bonus, irrespective of whether such incentive bonus would or could have been earned, equal to your then current annual base salary, which amount, i.e., the sum of (i) and (ii) above, shall be payable in a lump sum within ten days after the effective date of termination of your employment. In addition to the foregoing, you will be entitled to the immediate vesting of all stock options which you hold in the shares of Fairchild or its successor. Change of Control Payments. In addition, and notwithstanding whether the conditions for severance pay have been met, if a "Change of Control" (as defined in the attached Exhibit A) of Fairchild occurs while you are still an employee of Fairchild, you shall be entitled to receive from Fairchild or its successors an amount equal to the sum of: (i) two times your then current annual base salary, plus (ii) an amount in lieu of incentive bonus, irrespective of whether such incentive bonus would or could have been earned, equal to your then current annual base salary, which amount, i.e., the sum of (i) and (ii) above, shall be payable: (a) one-half in a lump sum on the date of Change of Control (the "First Change Payment") and, (b) as long as your employment continues, one-half over a one year period in four quarterly installments, commencing three months after the date of Change of Control (the "Second Change Payments"). During said one year period, if your employment shall be terminated either by Fairchild (or its successors) for any reason other than cause, or by you for Good Reason, you shall be entitled to receive immediately: (i) the First Change Payment (if not already paid), (ii) any Second Change Payments not yet paid, and (iii) the full severance payment, if you qualify for such severance payment by dint of duration of service, as referred to in the preceding paragraph of this letter. Termination by Fairchild of your employment (other than for cause) within one hundred and eighty days prior to a Change of Control shall be deemed to have been a termination in contemplation of such Change of Control, entitling you to the First Change Payment hereunder. Enforcement. If you are the prevailing party in a suit or proceeding against Fairchild, or its successors, to enforce or defend your rights under this agreement, you shall be entitled to recover from Fairchild, or its successors, your reasonable attorneys' fees and other costs and expenses in connection with such suit or proceeding. Definition of Good Reason: "Good Reason" (as used in the preceding paragraph) includes any action by Fairchild (or its successors) which (i) results in a reduction in your compensation, position, authority, duties or responsibilities whether or not your senior management opportunities are substantially lessened, or (ii) results in your primary place of employment being relocated more than 35 miles from the current Dulles Airport location, or (iii) would be deemed a constructive termination under applicable law. Supplementary Executive Retirement Plan. You shall be entitled to participate in Fairchild's Supplementary Executive Retirement Plan (the "SERP"). Notwithstanding the provisions of the SERP, for purposes of determining years of service with Fairchild, or its successors, you shall be credited with two years of service for each of the first ten years you remain an active employee of Fairchild or its successors, but the foregoing shall not affect vesting requirements which shall remain in accordance with the SERP. Payments Pursuant to Base Salary or Incentive Compensation During Term of Employment. No sum payable to you upon a Change of Control shall limit or affect your entitlement to base salary or incentive compensation for all periods during which you are employed by Fairchild or its successors. Limitation on Payments Pursuant to IRC 280G. In no event shall any amounts payable pursuant to this letter agreement which are deemed to constitute "parachute payments" (as defined in Section 280G of the Internal Revenue Code, as amended by the Tax Reform Act of 1986, and as thereafter amended (the "Code")), when added to any other payments which are deemed to constitute "parachute payments" as defined in the Code, exceed 2.99 times your "base amount" (as defined in the Code). Please acknowledge your agreement with the terms of this letter agreement by signing the attached copy and returning same to The Fairchild Corporation (Attention, Mary Shaw). This letter agreement shall be effective as of the date of your acceptance. Very truly yours, THE FAIRCHILD CORPORATION By: Jeffrey J. Steiner Chairman of the Board, Chief Executive Officer and President ACCEPTED AND AGREED Donald E. Miller EXHIBIT A "Change of Control" means the occurrence of any of the following events: (i) Any "Person", other than one or more "Permitted Holders", is or becomes the "Beneficial Owner", directly or indirectly, of more than 20% of the total voting power (the "Vote") of the "Voting Stock" of the Company, and the Permitted Holders "beneficially own", directly or indirectly, in the aggregate a lesser percentage of the Vote of all the Voting Stock of the Company than such other Person; provided, however, such other Person shall be deemed to beneficially own all Voting Stock of a corporation held by any other corporation (the "Parent Corporation"), if such other Person "beneficially owns", directly or indirectly, more than 20% of the Vote of the Voting Stock of such Parent Corporation, and the Permitted Holders "beneficially own", directly or indirectly, in the aggregate a lesser percentage of the Vote of the Voting Stock of such Parent Corporation; (ii) During any period of two consecutive years, individuals who at the beginning of any such period constituted the Board of Directors of the Company (together with any new directors whose election by such Board or whose nomination for election by the shareholders of the Company was approved by a vote of a majority of the directors of the Company then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office; (iii) The Company consolidates with or merges with or into another Person, pursuant to a transaction (a) in which the outstanding Voting Stock of the Company is changed into or exchanged for cash, securities or other property (other than any such transaction where the outstanding Voting Stock of the Company is changed into or exchanged for Voting Stock of the surviving corporation), and (b) in which the holders of the Vote of the Voting Stock of the Company immediately prior to such transaction own, directly or indirectly, less than a majority of the Vote of the Voting Stock of the surviving Person immediately after such transaction, and (c) by which an event described in Section (i) shall have occurred; or (iv) The Company is liquidated or dissolved, or all or substantially all of its directly or indirectly held assets are sold or otherwise conveyed to a third party other than one or more Permitted Holders. "Beneficial Owner" has the meaning set forth in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to be the Beneficial owner of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time; and the terms "beneficial ownership" and "beneficially owns" have meaning correlative to the foregoing; "Permitted Holders" means Jeffrey J. Steiner and his "associates" (as defined in Rule 12b-2 under the Exchange Act) or any other person directly or indirectly controlled by Jeffrey J. Steiner. "Person" shall be as defined in Section 13(d) and 14(d) of the Exchange Act. "Voting Stock" means, with respect to a corporation, (i) all classes of capital stock then outstanding of such corporation entitled to vote in elections of directors, and (ii) any security which may, at the option of the holder, be converted into or exchanged for Voting Stock. EX-10 7 3 THE FAIRCHILD CORPORATION STOCK OPTION DEFERRAL PLAN FEBRUARY 9, 1998 ARTICLE I BACKGROUND, PURPOSE, AND EFFECTIVE DATE The Fairchild Corporation, a Delaware corporation (the "Corporation"), by resolution of its Board of Directors, adopted The Fairchild Corporation Stock Option Deferral Plan (the "Plan"), effective as of February 9, 1998. 1.1 BACKGROUND AND PURPOSE OF THE PLAN. The Corporation wishes to provide certain Participants with the opportunity to defer payment of all of the compensation they receive in a particular year or years from the exercise of options to purchase stock in the Corporation. 1.2 EFFECTIVE DATE AND TERM. The Plan shall become effective as of February 9, 1998, and shall continue until such time as it is terminated by resolution of the Board of Directors in accordance with Article V. ARTICLE II DEFINITIONS The following terms have the following meanings unless the context clearly indicates otherwise: 2.1 "Beneficiary" is defined in Section 6.1. 2.2 "Benefit" is defined in Section 5.1. 2.3 "Board" means the Board of Directors of the Corporation. 2.4 "Compensation" means the excess value of a Stock Option (determined by the Fair Market Value of the shares of Stock issuable to a Participant upon exercise of a Stock Option, less the Option Price payable by the Participant pursuant to such Stock Option), where such excess value has been deferred pursuant to the terms of this Plan. 2.5 "Committee" means the Compensation and Stock Option Committee of the Board, which Committee shall administer the Plan. 2.6 "Corporation" means The Fairchild Corporation and its corporate successors. 2.7 "Deferral Date" means the date on which any deferred Compensation with respect to a Stock Option would have been received by a Participant if no Stock Option Deferral Election had been made. 2.8 "Deferred Compensation Account," "Account," or "Subaccount" means the accounts maintained on the books of the Corporation for each Participant pursuant to this Plan. 2.9 "Deferred Compensation Unit" is defined in Section 4.2. 2.10 "Deferred Stock Option Election Form" means the form by which an eligible person elects to become a Stock Option Deferral Participant, in the form attached hereto or as adopted by the Corporation from time to time. 2.11 "Designation of Beneficiary Form" means the form by which a Participant designates a beneficiary or beneficiaries or modifies a prior designation of a beneficiary or beneficiaries, in the form attached hereto or as adopted by the Corporation from time to time. 2.12 "Distribution Date" means the date designated by a Participant for the commencement of payment of amounts credited to his Account. 2.13 "Dividend Equivalents" is defined in Section 4.3. 2.14 "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. 2.15 "Fair Market Value" is defined in Section 4.2. 2.16 "Option Price" is the price at which Stock Options may be exercised, as per the terms of each Stock Option. 2.17 "Participant" means a person who (i) has been designated by the Committee to be entitled to participate in this Plan and (ii) is deemed to be an "Accredited Investor" (as defined under Federal Securities Laws). A Participant need not be an employee of the Corporation. Participants participating in the Plan shall provide such certifications and other evidence as the Corporation may reasonably require to establish that they are Accredited Investors. 2.18 "Plan" means this Stock Option Deferral Plan and any amendments thereto. 2.19 "Rule 16b-3" means Rule 16b-3 of the General Rules and Regulations under the Exchange Act as promulgated by the Securities Exchange Commission or its successor, as amended and in effect from time to time. 2.20 "Stock" means the Corporation's Class A Common Stock, $.10 par value. 2.21 "Stock Option" means options to purchase stock in the Corporation, approved by the Corporation's Board, a committee of non-employee directors, or stockholders of the Corporation in compliance with Rule 16b-3. 2.22 "Stock Option Deferral Election" means an election to defer payment of Compensation on the exercise of a Stock Option until a date specified by the Participant. 2.23 "Stock Option Deferral Participant" means a Participant who has made a Stock Option Deferral Election and who has been designated by the Committee as eligible to participate in the Plan. ARTICLE III CONTRIBUTIONS 3.1 ELIGIBILITY. Participation in the Plan shall be limited to eligible Participants (as defined in Section 2.17 hereof). The Committee shall have full discretion in determining such eligibility. 3.2 DEFERRED COMPENSATION. During the period in which this Plan remains in effect, each Participant may elect to defer Compensation from the exercise of Stock Options by completing a Deferred Stock Option Election Form and providing same to the Corporation prior to the exercise of such Stock Option. Upon a Participant's election to defer Compensation, the Corporation shall (in lieu of issuing Stock to such Participant upon exercise of the applicable Stock Option) credit the Participant's Deferred Compensation Account with Deferred Compensation Units, as further provided in Article IV. ARTICLE IV ACCOUNTS AND INVESTMENT 4.1 DEFERRED COMPENSATION ACCOUNTS. The Corporation shall establish on its books the necessary accounts to reflect accurately the Corporation's liability to each Participant who has deferred Compensation under the Plan. To each Deferred Compensation Account shall be credited, as applicable, Deferred Compensation Units (as provided in Section 4.2 below) and Dividend Equivalents (as provided in Section 4.3 below). Payments to the Participant under the Plan shall be debited to the appropriate Accounts. 4.2 DEFERRED COMPENSATION UNITS. A Participant who has elected to defer Compensation on the exercise of a Stock Option shall have the amount of such Compensation credited to his or her Deferred Compensation Account in the form of Deferred Compensation Units. As used herein, "Deferred Compensation Units" means the right to receive a specified number of shares of Stock, determined by dividing the deferred Compensation by the Fair Market Value of the Corporation's Stock as of the Deferral Date. For purposes of the Plan, "Fair Market Value" shall mean the fair market value of a share of the Stock as of a given date measured as (i) the closing price of a share of the Stock on the principal exchange on which shares of Stock are then trading, if any, on such date, or, if shares were not traded on such date, then on the next preceding trading day during which a sale occurred; or (ii) if such Stock is not publicly traded on an exchange or a successor quotation system, the mean between the closing bid and asked prices for the Stock on the trading date closest to the Deferral Date as determined in good faith by the Committee; or (iii) if the Stock is not publicly traded, the fair market value established by the Committee acting in good faith. 4.3 DIVIDEND EQUIVALENTS. If Deferred Compensation Units exist in a Participant's Deferred Compensation Account on a dividend record date for the Stock, Dividend Equivalents shall be credited to the Participant's Account on the corresponding dividend payment date. As used herein, "Dividend Equivalents" means the right of a Participant to receive a specified number of shares of Stock, equal to (i) (a) the per share cash dividends declared by the Corporation from time to time, multiplied by (b) the number of Deferred Compensation Units credited to the Account of the Participant as of each applicable dividend record date, divided by (ii) the Fair Market Value on the related dividend payment date. 4.4 RECAPITALIZATION. In the event of any change in the Corporation's Stock outstanding, by reason of any stock split or dividend, recapitalization, merger, consolidation, combination, or exchange of stock or similar corporate change, such equitable adjustments, if any, by reason of any such change, shall be made in the number of Deferred Compensation Units credited to each Participant's Deferred Compensation Account. 4.5 VESTING. At all times a Participant shall have a 100% nonforfeitable right to the amounts credited to his or her accounts, irrespective of any continuing relationship between the Participant and the Corporation. 4.6 STOCK OWNERSHIP. Until such time as shares of Stock which a Participant is entitled to receive pursuant to Deferred Compensation Units and Dividend Equivalents are distributed to the Participant as per Article V hereof, the Participant shall not be entitled to vote such shares, receive dividend with respect to such shares (except in the form of Dividend Equivalents, as provided in Section 4.3), or have other ownership interest in such shares. ARTICLE V DISTRIBUTION OF BENEFITS 5.1 DISTRIBUTION PURSUANT TO DEFERRED STOCK OPTION ELECTION FORM. The number of shares of Stock equal to the number of Deferred Compensation Units and Dividend Equivalents (in each case, rounded down to the nearest whole unit) credited to each Participant's Deferred Compensation Account (collectively, the "Benefit"), shall be distributed to the Participant on the date(s) selected by the Participant pursuant to his or her Deferred Stock Option Election Form. The date of distribution selected by the Participant must be no earlier than seven (7) months from the Deferral Date. 5.2 DISTRIBUTION UPON DEATH. In the event of a Participant's death, the Corporation shall pay the entire remaining Benefit, in a lump sum (or, in the event of a Participant's death after commencement of the payment of the Benefit under Section 5.1, the remaining balance of the Benefit, in a lump sum) to the Participant's Beneficiary as selected by the Participant pursuant to his or her Designation of Beneficiary Form. 5.3 DISTRIBUTION IN THE EVENT OF CHANGE OF CONTROL. In the event of a Change of Control (as defined below), the Corporation shall pay the Benefit to the Participant in one lump sum. If the transaction giving rise to a Change of Control was approved in advance by a majority of the Board, payment of the Benefit shall be made at the closing of such transaction. If the transaction giving rise to a Change of Control was not approved in advance by a majority of the Board, payment of the Benefit shall be made immediately upon the occurrence of the event or transaction giving rise to the Change of Control. For purpose of this Section, a "Change of Control" means the occurrence of any of the following events: (i) Any Person (as defined below), other than one or more Permitted Holders (as defined below), is or becomes the Beneficial Owner (as defined below), directly or indirectly, of more than 20% of the total voting power (the "Vote") of the Voting Stock (as defined below) of the Corporation, and the Permitted Holders "beneficially own", directly or indirectly, in the aggregate a lesser percentage of the Vote of all the Voting Stock of the Corporation than such other Person; provided, however, such other Person shall be deemed to beneficially own all Voting Stock of a corporation held by any other corporation (the "parent corporation"), if such other Person "beneficially owns", directly or indirectly, more than 20% of the Vote of the Voting Stock of such parent corporation, and the Permitted Holders "beneficially own", directly or indirectly, in the aggregate a lesser percentage of the Vote of the Voting Stock of such parent corporation; (ii) During any period of two consecutive years, individuals who at the beginning of any such period constituted the Board of Directors of the Corporation (together with any new directors whose election by such Board or whose nomination for election by the shareholders of the Corporation was approved by a vote of a majority of the directors of the Corporation then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Corporation then in office; (iii) The Corporation consolidates with or merges with or into another Person, pursuant to a transaction (a) in which the outstanding Voting Stock of the Corporation is changed into or exchanged for cash, securities or other property (other than any such transaction where the outstanding Voting Stock of the Corporation is changed into or exchanged for Voting Stock of the surviving corporation), and (b) in which the holders of the Vote of the Voting Stock of the Corporation immediately prior to such transaction own, directly or indirectly, less than a majority of the Vote of the Voting Stock of the surviving Person immediately after such transaction, and (c) by which an event described in Section 5.3(i) shall have occurred; or (iv) The Corporation is liquidated or dissolved, or all or substantially all of its directly or indirectly held assets are sold or otherwise conveyed to a third party other than one or more Permitted Holders. "Beneficial Owner" has the meaning set forth in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to be the Beneficial Owner of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time; and the terms "beneficial ownership" and "beneficially owns" have meanings correlative to the foregoing; "Permitted Holders" means Jeffrey J. Steiner and his "associates" (as defined in Rule 12b-2 under the Exchange Act) or any other person directly or indirectly controlled by Jeffrey J. Steiner. "Person" shall be as defined in Section 13(d) and 14(d) of the Exchange Act. "Voting Stock" means, with respect to a corporation, (i) all classes of capital stock then outstanding of such corporation entitled to vote in elections of directors, and (ii) any security which may, at the option of the holder, be converted into or exchanged for Voting Stock. 5.4 DISTRIBUTION IN THE EVENT OF EMPLOYMENT TERMINATION In the event a Participant's employment with the Corporation (or any of its subsidiaries) is terminated other than by the Participant's own election, the Corporation shall pay the entire remaining Benefit to the Participant in one lump sum, within thirty days after such employment termination. ARTICLE VI AMENDMENT, SUSPENSION, OR TERMINATION 6.1 BENEFICIARY. "Beneficiary" shall mean any one or more persons, corporations, trusts, estates, or any combination thereof, last designated by a Participant to receive the Benefit provided under this Plan. Any designation made hereunder shall be revocable, shall be in writing, either on a facsimile of the form annexed hereto and shall be effective when delivered to the Committee at its principal office. If the Committee, in its sole discretion, determines that there is not a valid designation, the Beneficiary shall be the executor or administrator of the Participant's estate. 6.2 NON-ASSIGNABILITY. The interest of any Participant and Beneficiary under this Plan (other than the Corporation) shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, attachment or encumbrance, or to the claims of creditors of such person, and any attempt to effectuate any such actions shall be void; nor shall any such amount be in any manner subject to the debts, contracts, liabilities, engagements, or torts of the Participant. 6.3 INTEREST OF PARTICIPANT. The Participant and any Beneficiary shall, in respect to Accounts and any Benefit to be paid, be and remain simply a general unsecured creditor of the Corporation in the same manner as any other creditor having a general claim against the Corporation. At no time shall the Participant be deemed to have any right, title or interest, legal or equitable, in any asset of the Corporation, including, but not limited to, any Stock. 6.4 WITHHOLDING. The participants and their Beneficiaries, distributees, and personal representatives, will bear all Federal, foreign, state, local, or other income or other taxes imposed on amounts paid under this Plan. All such taxes shall be computed by, and remitted to, the Corporation at each Payment Date, for deposit by the Corporation with the appropriate taxing jurisdiction. 6.5 CONSENT. By electing to become a Participant, each Participant shall be deemed conclusively to have accepted and consented to all the terms of this Plan and all actions or decisions made by the Corporation or the Committee with regard to the Plan. Such terms and consent shall also apply to and be binding upon the Beneficiaries, distributees, and personal representatives and other successors in interest of each Participant. 6.6 SEVERABILITY. In the event any provision of this Plan would serve to invalidate the Plan, that provision shall be deemed to be null and void, and the Plan shall be construed as if it did not contain the particular provision that would make it invalid. 6.7 FUNDING. This Plan shall not be a funded plan. The Corporation shall not set aside any funds, or make any investments or set aside stock, for the specific purpose of making payments under the Plan. All Benefits paid under the Plan shall be paid from the general assets of the Corporation. Benefits payable under the Plan may be reflected on the accounting records of the Corporation, but such accounting shall not be construed to create or require the creation of a trust, custodial or escrow account. Notwithstanding the foregoing, the Corporation shall at all times maintain a sufficient number of shares of authorized Stock to distribute in satisfaction of all Deferred Compensation Units. 6.8 EXCLUSIVITY OF PLAN. This Plan is intended solely for the purpose of deferring compensation to the Participants to the mutual advantage of the parties. Nothing contained in this Plan shall in any way affect or interfere with the right of a Participant to participate in any other benefit plan in which he or she may be entitled to participate. 6.9 NO RIGHT TO CONTINUED SERVICE. This Plan shall not confer any right to continued service of a Participant with the Corporation. 6.10 NOTICE. Each notice and other communication to be given pursuant to this Plan shall be in writing and shall be deemed given only when (a) delivered by hand, (b) transmitted by telex or telecopier (provided that a copy is sent at approximately the same time by registered or certified mail, return receipt requested), (c) received by the addressee, if sent by registered or certified mail, return receipt requested, or by Express Mail, Federal Express, or other overnight delivery service, to the Corporation at its principal office and to a Participant at the last known address of such Participant (or to such other address or telecopier number as a party may specify by notice given to the other party pursuant to this Section). 6.11 CLAIMS PROCEDURES. If a Participant or a Participant's Beneficiary does not receive benefits to which he or she believes he or she is entitled, such person may file a claim in writing with the Committee. The Committee shall establish a claims procedure under which: (a) the Committee shall be required to provide adequate notice in writing to the Participant or the Beneficiary whose claim for benefits has been denied, setting forth specific reasons for such denial, written in a manner calculated to be understood by the Participant or the Beneficiary; and (b) the Committee shall afford a reasonable opportunity to the Participant or the Beneficiary whose claim for Benefits has been denied for a full and fair review by the Committee of the decision denying the claim. 6.12 DELAWARE LAW CONTROLLING. This Plan shall be construed in accordance with the laws of the State of Delaware. 6.13 BINDING ON SUCCESSORS. This Plan shall be binding upon the Participant and the Corporation, their heirs, successors, legal representatives, and assigns. ARTICLE VII ADMINISTRATION 7.1 The Plan shall be administered by the Committee. The Committee shall act by vote of a majority of its members or by unanimous written consent. The Plan may be amended, modified, or terminated by the Committee, except that no such action shall (without the consent of the Participant, or, if the Participant has deceased, any Beneficiary or Beneficiaries, distributees, or personal representative) alter the rights of a Participant with respect to the Deferred Account established pursuant to this Plan prior to the date of such amendment, modification, or termination. EX-10 8 EXHIBIT 10.11 EMPLOYMENT AGREEMENT between ROBERT EDWARDS and FAIRCHILD HOLDING CORP. Dated March 2, 1998 EMPLOYMENT AGREEMENT dated as of March 2, 1998, between Fairchild Holding Corp., a Delaware corporation (the "Company") and Robert Edwards, a California resident ("Edwards"). W I T N E S S E T H : WHEREAS, Edwards has executed an Agreement and Plan of Merger dated January 28, 1998, as amended by Amendment No. 1 dated February 20, 1998 (the "Merger Agreement") among The Fairchild Corporation ("Fairchild"), Special-T Fasteners, Inc. ("Special T"), Edwards Lock & Management Company and Edwards; and WHEREAS, in connection with the transactions contemplated by the Merger Agreement, the parties desire Edwards to serve in certain capacities with the Company. NOW, THEREFORE, in consideration of the mutual covenants set forth herein, the parties agree as follows: 1. Definitions. Capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the Merger Agreement. As used herein, the following capitalized terms have the following meanings: "Agreement" shall mean this Agreement and any amendments hereto. "Agreement Term" shall have the meaning ascribed to it in Section 2(a). "Board of Directors" shall mean the members of the board of directors of the Company, excluding Edwards. "Business" shall mean the manufacture, sale, distribution or other involvement in the aerospace and industrial hardware business, including, without limitation, the manufacture, sale, or distribution of fasteners. "Cause" shall have the meaning ascribed to it in Section 10. "Compensation" shall mean the compensation to which Edwards is entitled under Section 5, paid in the manner provided in Section 5. "Effective Time" has the meaning ascribed to such term in the Merger Agreement. "Salary" has the meaning ascribed to such term in Section 5. 2. Agreement Term. The Company will employ Edwards and Edwards will work for the Company for the period commencing on the date of this Agreement and ending on the second anniversary thereof, unless extended or sooner terminated as provided in Section 10. 3. Duties. During the Agreement Term, Edwards shall serve as Vice President of the Company and as Chief Executive Officer of Special T, and as such shall be in charge of worldwide logistics for the Company. In addition, Edwards shall have such other responsibilities and duties that the Company may, from time to time, reasonably require. 4. Non-Competition; Non-Solicitation; Confidentiality. (a) During the Agreement Term and for a period of two years commencing on the date of termination or expiration of this Agreement, Edwards will not engage in any capacity in a business (x) competitive with the Business and (y) located anywhere in the world, except as an officer, director, shareholder or employee of the Company or its affiliates and subsidiaries. (b) During the Agreement Term and for a period of two years commencing on the date of termination or expiration of this Agreement, Edwards will not, unless acting with the express written consent of the Board of Directors of the Company, directly or indirectly, solicit or interfere with, or endeavor to entice away: (i) any person who was employed by the Company in the Business during the twelve month period immediately preceding the date of termination or expiration of this Agreement; (ii) any person who otherwise performed services on a regular basis for the Company in the Business during the twelve month period immediately preceding the date of termination or expiration of this Agreement; or (iii) with respect to the Business, any person or entity who was a customer or client of the Company (with whom Edwards or the Company has had substantial business contact) or any person or entity who requested or received a proposal from the Company (if Edwards or the Company has had substantial business contact with such person or entity or has expended substantial efforts in the preparation of any such proposal). (c) During the Agreement Term and at all times thereafter Edwards agrees to hold in confidence all matters and things related to the business of the Company or any of its affiliates and subsidiaries of a confidential or secret nature as to which Edwards may now have knowledge or acquire knowledge during the Agreement Term and will not, without the consent of the Board of Directors, use any such matter or thing or disclose to others any such matter or thing related to the business of the Company or any of its affiliates and subsidiaries, provided, however, that in each case, Edwards does not agree to hold in confidence information (i) otherwise publicly available (other than as a result of a breach of the terms of this Agreement by Edwards), (ii) required to be disclosed by applicable law or court order, or (iii) disclosed to him by a party who to his knowledge has no duty of confidence to the Company or any of its affiliates and subsidiaries. (d) It is expressly understood by and between the Company and Edwards that the covenants contained in this Section 4 shall be deemed to be a series of independent covenants. The Company and Edwards expressly agree that the character, duration and geographical scope of these covenants are reasonable in light of the circumstances as they exist at the date upon which this Agreement has been executed. However, should a determination nonetheless be made by any tribunal of competent jurisdiction that the character, duration or geographical scope of these covenants are unreasonable in light of the circumstances as they then exist, then it is the intention and agreement of the Company and Edwards that these covenants shall be construed by such tribunal in such a manner as to impose only those restrictions on the conduct of Edwards which are reasonable in light of the circumstances as they then exist and necessary to insure the Company of the intended benefit of these covenants. If, in any proceeding, such tribunal shall refuse to enforce all of the separate covenants deemed included herein because, taken together, they are more extensive than necessary to assure the Company of the intended benefit, it is expressly understood and agreed between the parties that those of such covenants which, if eliminated, would permit the remaining separate covenants to be enforced in such proceeding shall, for the purposes of such proceeding, be deemed eliminated herefrom. 5. Compensation. In consideration for his services to the Company, the Company shall pay to Edwards a salary equal to $520,000 per year, payable in equal installments, less tax withholding, in accordance with the Company's payroll practices (the "Salary"). It is hereby understood that Special T will change its fiscal year to June 30. 6. Vacation. Edwards shall be entitled to vacation periods annually during Edwards' employment under this Agreement consistent with the Company's vacation policy for employees generally (which shall be no less favorable to Edwards than under the Company's policy for senior management of Fairchild). 7. Reimbursement for Expenses. The Company shall reimburse Edwards for all reasonable and necessary expenses and other disbursements actually incurred by Edwards for and on behalf of the Company in the performance of Edwards' duties upon submission of adequate documentation of such expenses. 8. Automobile Expenses. Edwards shall be entitled to reimbursement of out of pocket expenses for business use of an automobile during the Agreement Term in an amount equal to that which senior management of Fairchild is reimbursed. 9. Benefits. Edwards shall be entitled to participate in any employee benefit plan, program or policy of Fairchild (including, but not limited to, any pension plan), whether funded or unfunded, now existing or established hereafter, for the benefit of its employees generally and/or its employees and key personnel to the extent that Edwards is eligible under the general provisions thereof. 10. Extension and Termination (a) Automatic Extension. Unless the Agreement Term and Edwards' employment hereunder is terminated as provided in this Section 10, the Agreement Term shall be subject to automatic, one-year extensions. (b) Termination Upon Notice. Either party may at any time during the Agreement Term, upon six months prior written notice to the other party, terminate the Agreement Term and Edwards' employment hereunder, without Cause, in which event Edwards shall be entitled to his Compensation, benefits and reimbursable expenses accrued through the effective date of such termination. Edwards shall have no right to receive any other compensation or benefit hereunder after the effective date of such termination. (c) Termination Upon Death. If Edwards shall die during the Agreement Term, this Agreement shall terminate, except that Edwards' legal representatives shall be entitled to receive his Compensation, benefits and reimbursable expenses accrued through the effective date of such termination. (d) Termination Upon Disability. If, during the Agreement Term, Edwards shall become physically or mentally disabled, whether totally or partially, so that he is unable substantially to perform his services hereunder for a period of three consecutive months, or for shorter periods aggregating six months during any twelve month period, the Company may, at any time after the last day of the three consecutive months of disability, or the day on which the shorter periods of disability shall have equaled in the aggregate six months, by written notice to Edwards, but before Edwards has recovered from such disability, terminate the Agreement Term and Edwards' employment hereunder, and upon such termination no further sums shall be due to Edwards as a result of such termination. Prior to the effective date of such termination, notwithstanding such disability, Edwards shall be entitled to receive a disability benefit payment, after a seven (7) day elimination period, of sixty percent (60%) of his Compensation, which shall increase after a ninety (90) day elimination period to seventy-five percent (75%) of his Compensation, commencing on the date of disability and continuing up to and including the date of such termination, such payment to be Edwards' sole and exclusive entitlement to compensation (except as may be available under applicable disability plans). (e) Termination by the Company for Cause. The Company may at any time during the Agreement Term, by written notice to Edwards, immediately terminate the Agreement Term and Edwards' employment hereunder for Cause, in which event Edwards shall be entitled to receive his Compensation, benefits and reimbursable expenses accrued through the effective date of such termination. Edwards shall have no right to receive any other compensation or benefit hereunder after the effective date of such termination. As used herein, the term for "Cause" shall be deemed to mean (i) the willful and continued failure by Edwards after written notice from the Board of Directors, to substantially perform his duties hereunder, (ii) any act of intentional dishonesty by Edwards involving or affecting the Company or any of its affiliates and subsidiaries, (iii) any misappropriation by Edwards of any asset of the Company or any of its affiliates and subsidiaries, (iv) the intentional engaging by Edwards in conduct which is materially injurious, monetarily or otherwise, to the Business or the reputation of the Company or any of its affiliates and subsidiaries, (v) gross negligence or recklessness by Edwards in the performance of his duties hereunder, (vi) conviction of Edwards of a felony or crime involving moral turpitude, (vii) any breach by Edwards of his material obligations under this Agreement, (viii) abuse of alcohol or other substances so as to interfere with the performance of Edwards' duties hereunder or (ix) intoxication or use of illegal substances "on the job." 11. Certain Remedies. If Edwards commits a breach, or threatens to commit a breach, of any of the provisions of this Agreement, the Company shall have the following rights and remedies: (a) The right and remedy to seek to have the provisions of Section 4 of this Agreement specifically enforced, it being acknowledged and agreed that any such breach or threatened breach may cause irreparable injury to the Company and that money damages may not provide an adequate remedy to the Company; and (b) The right and remedy to require Edwards to account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits (collectively, "Benefits") derived or received by Edwards as the result of any breach of Section 4 hereof or as a result of any transaction constituting "Cause" under clause (ii) or (iii) of the definition of such term set forth in Section 10 hereof and Edwards hereby agrees to account for and pay over such Benefits to the Company. Each of the rights and remedies enumerated above shall be independent of the other, and shall be severally enforceable, and all of such rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available to the Company under the law or in equity. 12. 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), facsimile or overnight air courier advertising guarantied next day delivery, to such other party's address. (i) If to Edwards: Robert Edwards 20660 Nordhoff Street Chatsworth, CA 91311 Facsimile: (818) 998-1412 with a copy to: Michael K. Lindsey Paul, Hastings, Janofsky & Walker LLP 555 South Flower Street Los Angeles, CA 90071-2371 Facsimile: (213) 627-0705. (ii) If to the Company: c/o The Fairchild Corporation 300 West Service Road Chantilly, VA 20153 Facsimile: (703) 478-5775 Attention: Donald E. Miller, Esq. with a copy to: James J. Clark, Esq. Cahill Gordon & Reindel 80 Pine Street New York, NY 10005 Facsimile: (212) 269-5420. (b) All notices and communications will be deemed to have been duly given (i) at the time delivered by hand, if personally delivered, (ii) five business days after being deposited in the mail, if mailed, (iii) when receipt acknowledged, if sent by facsimile and (iv) the next business day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. 13. Successors and Assigns. This Agreement is personal in its nature and, except as expressly permitted pursuant to Section 10(c), neither of the parties hereto shall, without the consent of the other, assign or transfer this Agreement or any rights or obligations hereunder, except that the Company may assign this Agreement to any affiliate or subsidiary; provided that such assignment will not alter in any fashion the definition of the "Business" set forth in Section 1 hereof. 14. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York without regard to the principles of conflict of laws thereof. Each of the parties to this Agreement irrevocably and unconditionally submits to the exclusive jurisdiction of any state or federal court sitting in the City of New York over any claims for injunctive or other equitable relief arising out of or relating to this Agreement. 15. No Recourse Against Others. No director, officer or employee, as such, of the Company or any of its affiliates and subsidiaries shall have any liability for any obligations of the Company under this Agreement for any claim based on, in respect of or by reason of such obligations or their creation. 16. Attorneys' Fees. In any action or proceeding brought to enforce any provision of this Agreement by any party hereto, or where any provision hereof is validly asserted as a defense by such party, such party, if successful, shall be entitled to recover reasonably attorneys' fees in addition to any other available remedy. 17. 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. 18. Modification; Waiver. This Agreement may be modified or amended only with the written consent of each party hereto. No party hereto shall be released from its obligations hereunder without the written consent of the other party. The observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) by the party entitled to enforce such term, but any such waiver shall be effective only if in a writing signed by the party against which such waiver is to be asserted. Except as otherwise specifically provided herein, no delay on the part of any party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party hereto of any right, power or privilege hereunder operate as a waiver of any other right, power or privilege hereunder nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. 19. Headings. The headings in this Agreement are for convenience of reference only and shall not control or affect the meaning or construction of this Agreement. 20. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 21. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. This Agreement shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other party. 22. Interpretation. As used in this Agreement: (i) "person" means any natural person, corporation, limited or general partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof; (ii) "subsidiary" of any person means (x) a corporation more than fifty percent 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 (y) 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 at least a majority ownership and voting power relating to the policies, management and affairs thereof; (iii) "affiliate" of any person means (x) any other person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such person (including any subsidiaries of such person) and (y) if such person is a natural person, includes (1) any member of the immediate family (including parents, spouse and children) of such natural person and (2) any trust whose principal beneficiary is such natural person or one or more members of such immediate family and any person who is controlled by any such member or trust; provided, however, that any limited partner of a partnership shall not be an affiliate of such partnership solely by virtue of its status as a limited partner. (iv) "control" (including, with its correlative meanings, "controlled by" and "under common control with") means possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise); provided, however, that any person which owns directly or indirectly ten percent or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation or ten percent or more of the partnership or other ownership interests of any other person (other than as a limited partner or non-managing member of such other person) will be deemed to control such corporation or other person. 23. Arbitration. All claims, other than claims for injunctive or other equitable relief, arising out of or relating to this Agreement shall be settled by arbitration, conducted before a panel of three arbitrators in New York, New York, in accordance with the applicable rules and procedures of the American Arbitration Association then in effect. Arbitration shall be the exclusive remedy for any such claim except only as to the failure to abide by an arbitration award rendered hereunder. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction. Such arbitration shall be final and binding on the parties. The costs and expenses of arbitration shall be borne equally by the parties, except as provided in Section 16 hereof. 24. Adjustment. In the event the Company or Special T makes any material acquisition or disposition, the Company and Edwards agree to negotiate in good faith to make any necessary adjustments to this Agreement to reflect such acquisition or disposition. IN WITNESS WHEREOF, the Company and Edwards have executed this Agreement as of the date first above written. FAIRCHILD HOLDING CORP. By Name: Title: Robert Edwards -----END PRIVACY-ENHANCED MESSAGE-----