-----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, DvYII3wtho5CErqMMe4H0r6uc1/HEhGnG4CCg6/qXvIG7xfBEHLUzLLlBvk+8tQ5 h48EA7gDKZ8N2Q3lL3zytQ== 0000009779-00-000002.txt : 20000217 0000009779-00-000002.hdr.sgml : 20000217 ACCESSION NUMBER: 0000009779-00-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000102 FILED AS OF DATE: 20000216 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: 547184 BUSINESS ADDRESS: STREET 1: 45025 AVIATION DR STREET 2: STE 400 CITY: DULLES 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 65 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 January 2, 2000 Commission File Number 1-6560 THE FAIRCHILD CORPORATION (Exact name of Registrant as specified in its charter) Delaware 34-0728587 (State or other jurisdiction of I.R.S. Employer Identification No.) Incorporation or organization) 45025 Aviation Drive, Suite 400 Dulles, VA 20166 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code(703) 478-5800 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days. YES X NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Title of Class January 2, 2000 Class A Common Stock, $0.10 Par Value 22,270,316 Class B Common Stock, $0.10 Par Value 2,621,652 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES INDEX Page PART I.FINANCIAL INFORMATION Item 1. Condensed Consolidated Balance Sheets as of January 2, 2000 (Unaudited) and June 30, 1999 3 Consolidated Statements of Earnings (Unaudited) for the Three and Six Months ended January 2, 2000 and December 27, 1998 5 Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months ended January 2, 2000 and December 27, 1998 6 Notes to Condensed Consolidated Financial Statements (Unaudited) 7 Iem 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 17 Item 3. Quantitative and Qualitative Disclosure About Market Risk 25 PART II. OTHER INFORMATION Item 1. Legal Proceedings 26 Item 2. Changes in Securities and Use of Proceeds 26 Item 4. Submission of Matters to a Vote of Security Holders 26 Item 5. Other Information 27 Item 6. Exhibits and Reports on Form 8-K 27 All references in this Quarterly Report on Form 10-Q to the terms ``we,'' ``our,'' ``us,'' the ``Company'' and ``Fairchild'' refer to The Fairchild Corporation and its subsidiaries. All references to ``fiscal'' in connection with a year shall mean the 12 months ended June 30. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS January 2, 2000 (Unaudited) and June 30, 1999 (In thousands) ASSETS January 2, June 30, 2000 1999 CURRENT ASSETS: Cash and cash equivalents, $57,409 and $ 83,812 $ 54,860 $15,752 restricted Short-term investments 7,824 13,094 Accounts receivable-trade, less allowances 115,165 130,121 of $4,501 and $6,442 Inventories: Finished goods 134,503 137,807 Work-in-process 31,355 38,316 Raw materials 10,676 14,116 176,534 190,239 Prepaid expenses and other current assets 75,024 73,926 Total Current Assets 458,359 462,240 Property, plant and equipment, net of accumulated depreciation of $115,868 and $103,556 184,914 184,065 Net assets held for sale 19,969 21,245 Cost in excess of net assets acquired (goodwill), less accumulated amortization of $46,415 and $40,307 424,916 447,722 Investments and advances, affiliated 12,567 31,791 companies Prepaid pension assets 64,103 63,958 Deferred loan costs 14,228 13,077 Real estate investment 96,043 83,791 Long-term investments 27,129 15,844 Other assets 4,895 5,053 TOTAL ASSETS $ 1,307,123 $ 1,328,786 *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 January 2, 2000 (Unaudited) and June 30, 1999 (In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY January 2, June 30, LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999 CURRENT LIABILITIES: Bank notes payable and current maturities of $ 28,096 $ 28,860 long-term debt Accounts payable 37,762 72,271 Accrued liabilities: Salaries, wages and commissions 39,455 43,095 Employee benefit plan costs 4,413 5,204 Insurance 9,867 14,216 Interest 7,021 7,637 Other accrued liabilities 64,593 50,984 125,349 121,136 Net current liabilites of discontinued operations 7,181 10,999 Total Current Liabilities 198,388 233,266 LONG-TERM LIABILITES: Long-term debt, less current maturities 496,084 495,283 Other long-term liabilities 24,579 25,904 Retiree health care liabilities 45,928 44,813 Noncurrent income taxes 124,566 121,961 Minority interest in subsidiaries 58 59 TOTAL LIABILITIES 889,603 921,286 STOCKHOLDERS' EQUITY: Class A common stock, $0.10 par value; authorized 40,000 shares, 29,923 (29,754 in June) shares issued and 22,270 (22,259 in June) shares outstanding 2,983 2,975 Class B common stock, $0.10 par value; authorized 20,000 shares, 2,622 shares issued and outstanding 262 262 Paid-in capital 230,712 229,038 Retained earnings 263,060 252,030 Cumulative other comprehensive income (3,946) (2,703) Treasury stock, at cost, 7,653 (7,496 in (75,551) (74,102) June) shares of Class A common stock TOTAL STOCKHOLDERS' EQUITY 417,520 407,500 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,307,123 $1,328,786 *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 Six (6) Months Ended January 2, 2000 and December 27, 1998
(In thousands, except per share data) Three Six Months Ended Months Ended 01/02/00 12/27/98 01/02/00 12/27/98 REVENUE: Net sales $152,244 $151,181 $316,753 $299,720 Other income, net 2,782 350 7,610 769 155,026 151,531 324,363 300,489 COSTS AND EXPENSES: Cost of goods sold 114,372 133,119 235,734 246,986 Selling, general & administrative 35,377 27,272 67,205 55,446 Amortization of goodwill 3,012 1,360 6,108 2,638 Restructuring -- 3,040 - 6,057 155,801 161,751 315,104 305,070 OPERATING INCOME (LOSS) (775) (10,220) 9,259 (4,581) Interest expense 12,119 7,770 24,328 15,206 Interest income (822) (476) (1,557) (1,059) Net interest expense 11,297 7,294 22,771 14,147 Investment income 1,998 (1,027) 2,878 834 Nonrecurring gain - - 28,003 - Earnings (loss) from continuing (10,074) (17,894) operations before taxes (18,541) 17,369 Income tax (provision) benefit 3,866 6,724 (5,266) 6,433 Equity in earnings (loss) of (872) affiliates, net 652 (1,073) 1,689 Minority interest, net - 2,338 - 2,135 Earnings (loss) from continuing operations (7,080) (8,827) 11,030 (7,637) Gain (loss) on disposal of discontinued operations, net - (9,180) - (9,180) NET EARNINGS (LOSS) $(7,080) $(18,007) $ 11,030 $(16,817) Other comprehensive income (loss), net of tax: Foreign currency translation adjustments (1,434) 2,306 (3,082) 7,552 Unrealized holding changes on securities arising during the period 6,845 27,633 1,839 (2,755) Other comprehensive income (loss) 5,411 29,939 (1,243) 4,797 COMPREHENSIVE INCOME (LOSS) $(1,669) $ 11,932 $ 9,787 $ (12,020) BASIC AND DILUTED EARNINGS PER SHARE: Earnings (loss) from continuing $ (0.28) $ (0.40) $ 0.44 $ (0.35) operations Gain (loss) on disposal of discontinued operations, net - (0.42) - (0.41) NET EARNINGS $ (0.28) $ (0.82) $ 0.44 $ (0.76) Other comprehensive income (loss), net of tax: Foreign currency translation $ (0.06) $ 0.11 $ (0.12) $ 0.34 adjustments Unrealized holding changes on securities arising during the period 0.28 1.26 0.07 (0.12) Other comprehensive income (loss) 0.22 1.37 (0.05) 0.22 COMPREHENSIVE INCOME (LOSS) $ (0.06) $ 0.55 $ 0.39 $ (0.54) Weighted average shares outstanding: Basic 24,889 21,872 24,882 22,129 Diluted 24,889 21,872 24,977 22,129 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For The Six (6) Months Ended January 2, 2000 and December 27, 1998 (In thousands)
For the Six Months Ended 01/02/00 12/27/98 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ 11,030 $(16,817) Depreciation and amortization 19,738 11,476 Accretion of discount on long-term liabilities 1,923 2,578 Deferred loan fee amortization 577 388 Net gain on divestiture of investment in affiliate (25,747) - Net gain on divestiture of subsidiary (2,256) - Gain on sale of investments (2,851) - Undistributed loss (earnings) of affiliates, net 1,651 (777) Minority interest - (2,135) Change in assets and liabilities (50,810) (6,808) Non-cash charges and working capital changes of discontinued operations (12,049) (8,559) Net cash (used for) operating activities (58,794) (20,654) CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds received from (used for) investments 1,351 (15,648) Purchase of property, plant and equipment (16,575) (13,574) Net proceeds from divestiture of subsidiaries 61,906 60,397 Net proceeds from sale of affiliate investment 43,103 - Changes in net assets held for sale 4,419 3,335 Real estate investment (11,087) (16,163) Equity investment in affiliates (2,441) - Other, net - 238 Investing activities of discontinued operations 7,100 (223) Net cash provided by investing activities 87,776 18,362 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt 161,846 55,777 Debt repayments (161,178) (69,375) Issuance of Class A common stock 168 182 Purchase of treasury stock (622) (22,101) Financing activities of discontinued operations - 121 Net cash (used for) provided by financing activities 214 (35,396) Effect of exchange rate changes on cash (244) 4,150 Net change in cash and cash equivalents 28,952 (33,538) Cash and cash equivalents, beginning of the year 54,860 49,601 Cash and cash equivalents, end of the $ 83,812 $ 16,063 period 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 share data) 1.FINANCIAL STATEMENTS The consolidated balance sheet as of January 2, 2000 and the consolidated statements of earnings and cash flows for the six months ended January 2, 2000 and December 27, 1998 have been prepared by us, 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 January 2, 2000, and for all periods presented, have been made. The balance sheet at June 30, 1999 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 our June 30, 1999 Annual Report on Form 10-K. The results of operations for the period ended January 2, 2000 are not necessarily indicative of the operating results for the full year. Certain amounts in the prior year's quarterly financial statements have been reclassified to conform to the current presentation. 2.DIVESTITURES On December 1, 1999, we disposed of substantially all of the assets and certain liabilities of our Dallas Aerospace subsidiary to United Technologies Inc. for approximately $57.0 million. No gain or loss was recognized from this transaction, as the proceeds received approximated the net carrying value of the assets. Approximately $37.0 million of the proceeds from this disposition is required to be used to reduce indebtedness, unless our senior lenders approve and we otherwise determine. On September 3, 1999, we completed the disposal of our Camloc Gas Springs division to a subsidiary of Arvin Industries Inc. for approximately $2.7 million. In addition, we received $2.4 million from Arvin Industries for a covenant not to compete. We recognized a $2.3 million nonrecurring gain from this disposition. On July 29, 1999, we sold our 31.9% interest in Nacanco Paketleme to American National Can Group, Inc. for approximately $48.2 million. In the six months ended January 2, 2000, we recognized a $25.7 million nonrecurring gain from this divestiture. We also agreed to provide consulting services over a three-year period, at an annual fee of approximately $1.5 million. We used the net proceeds from the disposition to reduce our indebtedness. 3.DISCONTINUED OPERATIONS In 1998, we adopted a formal plan to dispose of Fairchild Technologies. Based on this plan, we have sold a majority of Fairchild Technologies' businesses, including most of its intellectual property, through a series of transactions. On April 14, 1999, we disposed of Fairchild Technologies photoresist deep-ultraviolet track equipment machines, spare parts and testing equipment to Apex Co., Ltd. in exchange for 1,250,000 shares of Apex stock valued at approximately $5.1 million. On June 15, 1999, we received $7.9 million from Suess Microtec AG and the right to receive 350,000 shares of Suess Microtec stock (or at least approximately $3.5 million) by September 2000 in exchange for certain inventory, fixed assets, and intellectual property of Fairchild Technologies' semiconductor equipment group. On May 1, 1999, we sold Fairchild CDI for a nominal amount. In July 1999, we received approximately $7.1 million from Novellus Systems, Inc. in exchange for Fairchild Technologies' Low- K dielectric product line and certain intellectual property. We have been exploring several alternative transactions regarding the disposition of Fairchild Technologies' optical disc equipment group and we expect to dispose of this unit prior to April 2000. As of January 2, 2000, we have a remaining accrual of $4.5 million, net of an income tax benefit of $3.3 million, for our current estimate of the remaining losses in connection with the disposition of Fairchild Technologies. While we believe that $4.5 million is a reasonable estimate for the remaining losses to be incurred from Fairchild Technologies, there can be no assurance that this estimate is adequate. 4.PRO FORMA FINANCIAL STATEMENTS The following table sets forth the derivation of the unaudited pro forma results, representing the impact of our acquisition of Kaynar Technologies (April 1999), our merger with Banner Aerospace (April 1999), and our dispositions of Dallas Aerospace (December 1999), Solair (December 1998) and the investment in Nacanco (July 1999), as if these transactions had occurred at the beginning of each of our fiscal periods. The pro forma information is based on the historical financial statements of these companies, giving effect to the aforementioned transactions. In preparing the pro forma data, certain assumptions and adjustments have been made which increase interest expense based on revised debt structures; increase goodwill amortization expense for the acquisition of Kaynar Technologies; and reduce minority interest as a result of our merger with Banner Aerospace. The unaudited pro forma information is not intended to be indicative of either future results of our operations or results that might have been achieved if these transactions had been in effect since the beginning of these fiscal periods. For the six months ended: Jan. 2, Dec. 27, 2000 1998 Net sales $ 295,059 $ 340,391 Gross profit 76.963 91,386 Net earnings (loss) (7,039) 70 Net earnings, per basic and diluted share $ (0.28) $ 0.00 5.EQUITY SECURITIES We had 22,270,316 shares of Class A common stock and 2,621,652 shares of Class B common stock outstanding at January 2, 2000. 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. The shares of Class A common stock are entitled to one vote per share and cannot be exchanged for shares of Class B common stock. The shares of Class B common stock are entitled to ten votes per share and can be exchanged, at any time, for shares of Class A common stock on a share-for-share basis. For the six months ended January 2, 2000, 34,657 shares of Class A common stock were issued as a result of the exercise of stock options. In accordance with the terms of our acquisition of Special-T, as amended, we issued 44,079 restricted shares of our Class A common stock during the six months ended January 2, 2000, as additional merger consideration. In addition, our Class A common stock outstanding was reduced as a result of 67,000 shares purchased during the first six months of fiscal 2000, which are considered as treasury stock for accounting purposes. During the six months ended January 2, 2000, we issued 96,027 deferred compensation units pursuant to our stock option deferral plan, as a result of the exercise of 214,891 stock options. Each deferred compensation unit is represented by one share of our treasury stock and is convertible into one share of Class A common stock after a specified period of time. 6.RESTRICTED CASH On January 2, 2000 and June 30, 1999, we had restricted cash of $57,409 and $15,752, respectively, all of which is maintained as collateral for certain debt facilities and escrow arrangements. 7.EARNINGS PER SHARE The following table illustrates the computation of basic and diluted earnings per share:
Three Months Ended Six Months Ended 01/02/2000 12/27/1998 01/02/2000 12/27/1998 Basic earnings per share: Earnings from continuing $ (7,080) $ (8,827) $ 11,030 $ (7,637) operations Common shares outstanding 24,889 21,872 24,882 22,129 Basic earnings from $ (0.28) $ (0.40) $ 0.44 $ (0.35) continuing operations per share Diluted earnings per share: Earnings from continuing $ (7,080) $ (8,827) $ 11,030 $ (7,637) operations Common shares outstanding 24,889 21,872 24,882 22,129 Options antidilutive antidilutive 2 antidilutive Warrants antidilutive antidilutive 93 antidilutive Total shares outstanding 24,889 21,872 24,977 22,129 Diluted earnings from $ (0.28) $ (0.40) $ 0.44 $ (0.35) continuing operations per share
Stock options entitled to purchase 1,855,960 shares of Class A common stock were antidilutive and not included in the earnings per share calculation for the six months ended January 2, 2000. These shares could be dilutive in subsequent periods. For the three-months ended January 2, 2000, and the periods ended December 27, 1998, the computation of diluted loss from continuing operations per share excluded the effect of incremental common shares attributable to the potential exercise of common stock options outstanding and warrants outstanding, because its effect was antidilutive. 8.RESTRUCTURING CHARGES In the six months ended January 2, 2000, we recorded $6.1 million of restructuring charges as a result of the continued integration of Kaynar Technologies into our aerospace fasteners segment. All of the charges recorded during the current six months were a direct result of product and plant integration costs incurred as of January 2, 2000. These costs were classified as restructuring and were the direct result of formal plans to move equipment, close plants and to terminate employees. Such costs are nonrecurring in nature. Other than a reduction in our existing cost structure, none of the restructuring charges resulted in future increases in earnings or represented an accrual of future costs. As of January 2, 2000, the majority of the integration plans have been executed. During the next six months, we expect to incur additional restructuring charges for product integration costs at our aerospace fasteners segment. We anticipate that our integration process will be substantially complete by the end of fiscal 2000. 9.CONTINGENCIES Government Claims The Corporate Administrative Contracting Officer, based upon the advice of the United States Defense Contract Audit Agency, alleged that a former subsidiary of ours did not comply with Federal Acquisition Regulations and Cost Accounting Standards in accounting for (i) the 1985 reversion of certain assets of terminated defined benefit pension plans, and (ii) pension costs upon the closing of segments of our former subsidiaries business. In January, we paid the government $1.1 million to settle these pension accounting issues. Environmental Matters Our 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 our financial condition, results of operations, or net cash flows, although we have expended, and can be expected to expend in the future, significant amounts for the investigation of environmental conditions and installation of environmental control facilities, remediation of environmental conditions and other similar matters, particularly in our aerospace fasteners segment. In connection with our plans to dispose of certain real estate, we must investigate environmental conditions and we may be required to take certain corrective action prior or pursuant to any such disposition. In addition, we have identified several areas of potential contamination at or from other facilities owned, or previously owned, by us, that may require us either to take corrective action or to contribute to a clean-up. We are also a defendant in certain lawsuits and proceedings seeking to require us to pay for investigation or remediation of environmental matters and we have been alleged to be a potentially responsible party at various "superfund" sites. We believe that we have recorded adequate reserves in our 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 environmental liability, unless such parties are contractually obligated to contribute and are not disputing such liability. As of January 2, 2000, the consolidated total of our recorded liabilities for environmental matters was approximately $9.1 million, which represented the estimated probable exposure for these matters. It is reasonably possible that our total exposure for these matters could be approximately $16.3 million. Other Matters On January 12, 1999, AlliedSignal made indemnification claims against us for $18.9 million, arising from the disposition to AlliedSignal of Banner Aerospace's hardware business. We believe that the amount of the claim is far in excess of any amount that AlliedSignal is entitled to recover from us. We are involved in various other claims and lawsuits incidental to our business. We, either on our own or through our insurance carriers, are contesting these matters. In the opinion of management, the ultimate resolution of the legal proceedings, including those mentioned above, will not have a material adverse effect on our financial condition, future results of operations or net cash flows. 10.CONSOLIDATING FINANCIAL STATEMENTS The following unaudited financial statements separately show The Fairchild Corporation and the subsidiaries of The Fairchild Corporation. These financial statements are provided to fulfill public reporting requirements and separately present guarantors of the 10 3/4% senior subordinated notes due 2009 issued by The Fairchild Corporation (the "Parent Company"). The guarantors are composed primarily of our domestic subsidiaries, excluding Fairchild Technologies, a real estate development venture, and certain other subsidiaries.
COnsolidating Balance Sheet January 2, 2000 Parent Non Fairchild Company Guarantors Guarantors Eliminations Historical Cash $ 66 $ 73,693 10,053 - $ 83,812 Market securities 71 7,753 - - 7,824 Accounts Receivable (including intercompany) less allowances 3,283 67,473 44,409 - 115,165 Inventory, net - 129,434 47,100 - 176,534 Prepaid and other current assets 511 68,827 5,686 - 75,024 Total current assets 3,931 347,180 107,248 - 458,359 Inventory in Subsidiaries 965,362 - - (965,362) - Net fixed assets 554 138,755 45,605 - 184,914 Net assets held for sale - 19,969 - - 19,969 Investment in affiliates 1,300 11,267 - - 12,567 Goodwill 5,303 384,837 34,776 - 424,916 Deferred loan costs 13,652 25 551 - 14,228 Prepaid pension assets - 64,103 - - 64,103 Real estate investment - - 96,043 - 96,043 Long-term investments - 27,129 - - 27,129 Other assets 16,818 (12,279) 356 - 4,895 Total assets $1,006,920 $ 980,986 $ 284,579 $ (965,362) $ 1,307,123 Bank notes payable & current maturities of debt $ 2,250 $ 2,229 $ 23,617 $ - $ 28,096 Accounts payable (including intercmopany) 97 20,164 17,501 - 37,762 Other accrued expense (18,352) 122,634 21,067 - 125,349 Net current liabilities of discontinued operations - - 7,181 - 7,181 Total current liabilities (16,005) 145,027 69,366 - 198,388 Long-term debt, less current maturities 481,893 8,761 5,430 - 496,084 Other long-term liabilities 405 16,526 7,648 - 24,579 Noncurrent intome taxes 123,107 1,226 233 - 124,566 Retiree health care liabilities - 41,250 4,678 - 45,928 Minority interest in subsidiaries - 9 49 - 58 Total liabilities 589,400 212,799 87,404 - 889,603 Class A common stock 2,783 200 5,084 (5,084) 2,983 Class B common stock 262 - - - 262 Paid-in-capital 3,813 226,899 243,405 (243,405) 230,712 Retained earnings 486,353 540,567 (46,987) (716,873) 263,060 Cumulative other comprehensive income (764) 1,145 (4,327) - (3,946) Treasury stock, at cost (74,927) (624) - - (75,551) Total stockholders' 417,520 768,187 197,175 (965,362) 417,520 equity Total liaabilities & stockholders' equity $1,006,920 $ 980,986 $ 284,579 $ (965,362) $ 1,307,123
CONSOLIDATING STATEMENT OF EARNINGS For the Six Months Ended January 2, 2000 Parent Non Fairchild Company Guarantors Guarantors Eliminations Historical Net Sales $ $ 234,852 $ 83,451 $ (1,550) $ 316,753 Cost and expenses Cost of sales - 175,728 61,556 (1,550) 235,734 Selling, general & administrative 2,380 45,577 11,638 - 59,595 Restructuring - 6,057 - - 6,057 Amortization of goodwill 257 5,345 506 - 6,108 2,637 232,707 73,700 (1,550) 307,494 Operating income (loss) (2,637) 2,145 9,751 - 9,259 Net interest expense 24,888 (5,907) 3,790 - 22,771 Investment (income) loss, net - (2,878) - - (2,878) Intercompany dividends - - 714 (714) - Nonreucrring income on disposition of subsidiary - - (28,003) - (28,003) Earnings (loss) before taxes (27,525) 10,930 33,250 714 17,369 Income tax (provision) benefit (4,644) (120) (502) - (5,266) Equity in earnings of affiliates and subsidiaries 43,199 (1,073) - (43,199) (1,073) Earnings (loss) from continuing operations 11,030 9,737 32,748 (42,485) 11,030 Earnings (loss) from disposal of discontinued operations - - 374 (374) - Net earnings (loss) $ 11,030 $ 9,737 $ 33,122 $ (42,859) $ 11,030
CONSOLIDATING STATEMENTS OF CASH FLOWS For the Six Months Ended January 2, 2000 Parent Non Fairchild Company Guarantors Guarantors Eliminations Historical Cash Flows from Operating Activities: Net earnings (loss) $ 11,030 $ 9,737 $ 33,122 $ (42,859) $ 11,030 Depreciation and amortization 349 15,175 4,214 - 19,738 Amortization of deferred loan fees 577 - - - 577 Accretion of discount on long-term liabilities 1,923 - - - 1,923 (Gain) on sale of affiliate investment and divestiture of subsidiary - - (28,003) - (28,003) (Gain) on sale of investments - (2,851) - - (2,851) Undistributed loss (earnings) of affiliates - 1,651 - - 1,651 Change in assets and liabilities (15,046) (72,871) (5,752) 42,859 (50,810) Non-cash charges and working capital changes of discontinued operations - - (12,049) - (12,049) Net cash (used for) provided by operating activities (1,167) (49,159) (8,468) - (58,794) Cash Flows from Investing Activities: Net proveeds from (used for) investments - 1,351 - - 1,351 Purchase of property, plant and equipment (5) (11,932) (4,638) - (16,575) Equity investment in affiliates - (2,441) - - (2,441) Net proceeds from sale of affiliate investment and divestiture of subsidiaries - 57,000 48,009 - 105,009 Real estate investment - - (11,087) - (11,087) Change in net assets held for sale - 4,419 - - 4,419 Investing activities of discontinued operations - - 7,100 - 7,100 Net cash (used for) provided by investing activities (5) 48,397 39,384 - 87,776 Cash Flows from Financing Activities: Proceeds from issuance of debt 45,600 110,459 5,787 - 161,846 Debt repayment and repurchase of debentures (including intercompany), net (44,557) (77,208) (39,413) - (161,178) Issuance of Class A common stock 168 - - - 168 Purchase of treasury stock - (622) - - (622) Net cash (used for) provided by financing activities 1,211 32,629 (33,626) - 214 Effect of exchange rate changes on cash - 33 (277) - (244) Net change in cash and cash equivalents 39 31,900 (2,987) - 28,952 Cash and cash equivalents, beginning of the year 27 41,793 13,040 - 54,860 Cash and cash equivalents, end of the year $ 66 $ 73,693 $ 10,053 $ - $ 83,812
CONSOLIDATING BALANCE SHEET June 30, 1999 Parent Non Fairchild Company GuarantorsGuarantors Eliminations Historical Cash $ 27 $ 41,793 $ 13,040 $ - $ 54,860 Market securities 71 13,023 - - 13,094 Accounts Receivable (including intercompany), 549 52,929 76,643 - 130,121 less allowances Inventory, net (182) 145,080 45,341 - 190,239 Prepaid and other current assets 1,297 69,000 3,629 - 73,926 Total current assets 1,762 321,825 138,653 - 462,240 Investment in Subsidiaries 841,744 - - (841,744) - Net fixed assets 611 137,852 45,602 - 184,065 Net assets held for sale - 21,245 - - 21,245 Investments in affiliates 1,300 13,135 17,356 - 31,791 Goodwill 5,533 402,595 39,594 - 447,722 Deferred loan costs 13,029 26 22 - 13,077 Prepaid pension assets - 63,958 - - 63,958 Real estate investment - - 83,791 - 83,791 Long-term investment - 15,844 - - 15,844 Other assets 16,244 (11,865) 674 - 5,053 Total assets $880,223 $ 964,615 $ 325,692 $ (841,744) $ 1,328,786 Bank notes payable & current maturities of debt $ 2,250 $ 2,548 $ 24,062 $ - $ 28,860 Accounts payable (including intercompany) 972 12,824 58,475 - 72,271 Other accrued expenses 7,272 99,669 14,195 - 121,136 Net current liabilities of discontinued operations - - 10,999 - 10,999 Total current liabilities 10,494 115,041 107,731 - 233,266 Long-term debt, less current maturities 480,850 9,908 4,525 - 495,283 Other long-term liabilities 405 18,138 7,361 - 25,904 Noncurrent income taxes (19,026) 140,749 238 - 121,961 Retiree health care liabilities - 40,189 4,624 - 44,813 Minority interest in subsidiaries - 9 50 - 59 Total liabilities 472,723 324,034 124,529 - 921,286 Class A common stock 2,775 200 5,085 (5,085) 2,975 Class B common stock 262 - - - 262 Paid-in-capital 2,138 226,900 263,058 (263,058) 229,038 Retained earnings 477,191 413,483 (65,043) (573,601) 252,030 Cumulative other comprehensive income (764) (2) (1,937) - (2,703) Treasury stock, at cost (74,102) - - - (74,102) Total stockholders' equity 407,500 640,581 201,163 (841,744) 407,500 Total liabilities & stockholders' equity $880,223 $ 964,615 $ 325,692 $ (841,744) $ 1,328,786
CONSOLIDATING STATEMENT OF EARNINGS For the Six Months Ended December 27, 1998 Parent Non Fairchild Company Guarantors Guarantors Eliminations Historical Net Sales $ - $ 222,755 $ 77,707 $ (742) $ 299,720 Costs and expenses Cost of sales - 190,352 57,376 (742) 246,986 Selling, general & administrative 2,009 39,299 13,369 - 54,677 Amortization of goodwill 120 2,022 496 - 2,638 2,129 231,673 71,241 (742) 304,301 Operating income (loss) (2,129) (8,918) 6,466 - (4,581) Net interest expense 10,672 2,519 956 - 14,147 Investment (income) loss, net - (834) - - (834) Nonreucrring income on disposition of subsidiary - - - - - Earnings (loss) before taxes (12,801) (10,603) 5,510 - (17,894) Income tax (provision) benefit 3,033 3,692 (292) - 6,433 Equity in earnings of affiliates and subsidiaries (6,419) (919) 2,608 6,419 1,689 Minority interest - 2,135 - - 2,135 Earnings (loss) from continuing operation (16,187) (5,695) 7,826 6,419 (7,637) Earnings (loss) from disposal of discontinued operations - 2,316 (11,496) - (9,180) Extraordinary items - - - - - Net earnings (loss) $(16,187) $ (3,379) $ (3,670) $ 6,419 $ (16,817)
CONSOLIDATING STATEMENTS OF CASH FLOWS For the Six Months Ended December 27, 1998 Parent Non Fairchild Company Guarantors Guarantors Eliminations Historical Cash Flows from Operating Activities: Net earnings (loss) $(16,187) $(3,379) $ (3,670) $ 6,419 $ (16,817) Depreciation and amortization 151 6,612 4,713 - 11,476 Amortizatin of deferred loan fees 388 - - - 388 Accretion of discount on long-term liabilities 2,578 - - - 2,578 Undistributed loss (earnings) of affiliates - (777) - - (777) Minority interest - (2,135) - - (2,135) Change in assets and liabilities 15,294 (36,503) 20,820 (6,419) (6,808) Non-cash charges and working capital changes of discontinued operations - - (8,559) - (8,559) Net cash (used for) provided by operating activities 2,224 (36,182) 13,304 - (20,654) Cash Flows from Investing Activities: Net proceeds received from (used for) investments - (15,648) - - (15,648) Purchase of property, plane and equipment (27) (9,122) (4,425) - (13,574) Net proceeds from divestiture of subsidiary - 60,397 - - 60,397 Real estate investment - - (16,163) - (16,163) Change in net assets held for sale - 3,335 - - 3,335 Other changes, net - 238 - - 238 Investing activities of discontinued operations - - (223) - (223) Net cash (used for) provided by investing activities (27) 39,200 (20,811) - 18,362 Cash Flows from Financing Activities: Proceeds from issuance of debt - 44,600 11,177 - 55,777 Debt repayment and repurchase of debentures(including intercompany), net (2,250) (59,800) (7,325) - (69,375) Issuance of Class A common stock 53 129 - - 182 Purchase of treasury stock - (22,101) - - (22,101) Financing activities of discontinued operations - - 121 - 121 Net cash (used for) provided by financing activities (2,197) (37,172) 3,973 - (35,396) Effect of exchange rate changes on cash - - 4,150 - 4,150 Net change in cash - (34,154) 616 - (33,538) Cash and cash equivalents, beginning of the year - 42,175 7,426 - 49,601 Cash and cash equivalents, end of year $ - $ 8,021 $ 8,042 $ - $ 16,063
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The Fairchild Corporation was incorporated in October 1969, under the laws of the State of Delaware, under the name of Banner Industries, Inc. On November 15, 1990, we changed our name from Banner Industries, Inc. to The Fairchild Corporation. We are the owner of 100% of RHI Holdings, Inc. and Banner Aerospace, Inc. RHI is the owner of 100% of Fairchild Holding Corp. Our principal operations are conducted through Fairchild Holding and Banner Aerospace. The following discussion and analysis provide information which management believes is relevant to assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto. GENERAL We are a leading worldwide aerospace and industrial fastener manufacturer and distribution logistics manager and, through Banner Aerospace, an international supplier to airlines and general aviation businesses, distributing a wide range of aircraft parts and related support services. Through internal growth and strategic acquisitions, we have become one of the leading suppliers of fasteners to aircraft OEMs, such as Boeing, Lockheed Martin, Northrop Grumman, and the Airbus consortium of Aerospatiale, DaimlerChrysler Aerospace, British Aerospace and CASA. Our aerospace business consists of two segments: aerospace fasteners and aerospace distribution. The aerospace fasteners segment manufactures and markets high performance fastening systems used in the manufacture and maintenance of commercial and military aircraft. The aerospace distribution segment stocks and distributes a wide variety of aircraft parts to commercial airlines and air cargo carriers, fixed-base operators, corporate aircraft operators and other aerospace companies. CAUTIONARY STATEMENT Certain statements in this financial discussion and analysis by management contain certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operation and business. These statements relate to analyses and other information which are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies. These forward- looking statements are identified by their use of terms and phrases such as ``anticipate,'' ``believe,'' ``could,'' ``estimate,'' ``expect,'' ``intend,'' ``may,'' ``plan,'' ``predict,'' ``project,'' ``will'' and similar terms and phrases, including references to assumptions. These forward-looking statements involve risks and uncertainties, including current trend information, projections for deliveries, backlog and other trend projections, that may cause our actual future activities and results of operations to be materially different from those suggested or described in this Quarterly Report on Form 10- Q. These risks include: product demand; our dependence on the aerospace industry; reliance on Boeing and the Airbus consortium of companies; customer satisfaction and quality issues; labor disputes; competition, including recent intense price competition; our ability to integrate and realize anticipated synergies relating to the acquisition of Kaynar Technologies Inc.; our ability to achieve and execute internal business plans; worldwide political instability and economic growth; and the impact of any economic downturns and inflation, including recent weaknesses in the currency, banking and equity markets of countries in South America and in the Asia/Pacific region. If one or more of these risks or uncertainties materializes, or if underlying assumptions prove incorrect, our actual results may vary materially from those expected, estimated or projected. Given these uncertainties, users of the information included in this financial discussion and analysis by management, including investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. We do not intend to update the forward-looking statements contained in this Quarterly Report, even if new information, future events or other circumstances have made them incorrect or misleading. RESULTS OF OPERATIONS Business Transactions The following summarizes certain business combinations and transactions which significantly affect the comparability of the period to period results presented in this Management's Discussion and Analysis of Results of Operations and Financial Condition. Fiscal 2000 Transactions On December 1, 1999, we disposed of substantially all of the assets and certain liabilities of our Dallas Aerospace subsidiary to United Technologies Inc. for approximately $57.0 million. No gain or loss was recognized from this transaction, as the proceeds received approximated the net carrying value of these assets. Approximately $37.0 million of the proceeds from this disposition is required to be used to reduce indebtedness, unless our senior lenders approve and we otherwise determine. On July 29, 1999, we sold our 31.9% interest in Nacanco Paketleme to American National Can Group, Inc. for approximately $48.2 million. In the six months ended January 2, 2000, we recognized a $25.7 million nonrecurring gain from this divestiture. We also agreed to provide consulting services over a three-year period, at an annual fee of approximately $1.5 million. We used the net proceeds from the disposition to reduce our indebtedness. On September 3, 1999, we completed the disposal of our Camloc Gas Springs division to a subsidiary of Arvin Industries Inc. for approximately $2.7 million. In addition, we received $2.4 million from Arvin Industries for a covenant not to compete. We recognized a $2.3 million nonrecurring gain from this disposition. Fiscal 1999 Transactions On December 31, 1998, Banner Aerospace consummated the sale of Solair, Inc., its largest subsidiary in the rotables group of the aerospace distribution segment, to Kellstrom Industries, Inc., in exchange for approximately $60.4 million in cash and a warrant to purchase 300,000 shares of common stock of Kellstrom. In December 1998, Banner Aerospace recorded a $19.3 million pre-tax loss from the sale of Solair. This loss was included in cost of goods sold, as it was primarily attributable to the bulk sale of inventory at prices below its carrying amount. On February 22, 1999, we used available cash to acquire 77.3% of SNEP S.A. By June 30, 1999, we had purchased significantly all of the remaining shares of SNEP. The total amount paid was approximately $8.0 million, including $1.1 million of debt assumed, in a business combination accounted for as a purchase. The total cost of the acquisition exceeded the fair value of the net assets of SNEP by approximately $4.3 million, which is preliminarily being allocated as goodwill, and amortized over 40 years using the straight-line method. SNEP is a French manufacturer of precision machined self-locking nuts and special threaded fasteners serving the European industrial, aerospace and automotive markets. On April 8, 1999, we acquired the remaining 15% of the outstanding common and preferred stock of Banner Aerospace, Inc. not already owned by us, through the merger of Banner Aerospace with one of our subsidiaries. Under the terms of the merger with Banner Aerospace, we issued 2,981,412 shares of our Class A common stock to acquire all of Banner Aerospace's common and preferred stock (other than those already owned by us). Banner Aerospace is now our wholly-owned subsidiary. On April 20, 1999, we completed the acquisition of all the capital stock of Kaynar Technologies Inc. for approximately $222 million and assumed approximately $103 million of Kaynar Technologies debt, the majority of which was refinanced at closing. In addition, we paid $28 million for a covenant not to compete from the largest preferred shareholder of Kaynar Technologies. The total cost of the acquisition exceeded the fair value of the net assets of Kaynar Technologies by approximately $269.7 million, which is preliminarily being allocated as goodwill, and amortized over 40 years using the straight-line method. The acquisition was financed with existing cash, the sale of $225 million of 10 3/4% senior subordinated notes due 2009 and proceeds from a new bank credit facility. On June 18, 1999, we completed the acquisition of Technico S.A. for approximately $4.1 million and assumed approximately $2.2 million of Technico's existing debt. The total cost of the acquisition exceeded the fair value of the net assets of Technico by approximately $2.9 million, which is preliminarily being allocated as goodwill, and amortized over 40 years using the straight-line method. The acquisition was financed with additional borrowings from our credit facility. Consolidated Results We currently report in two principal business segments: aerospace fasteners and aerospace distribution. The results of the Gas Springs division, prior to its disposition, were included in the Corporate and Other classification. The following table illustrates the historical sales and operating income of our operations for the three and six months ended January 2, 2000 and December 27, 1998, respectively.
Actual Segment Results (In thousands) Three Six Months Ended Months Ended 1/2/2000 12/27/1998 1/2/2000 12/27/1998 Sales by Segment: Aerospace Fasteners $124,143 $102,764 $258,563 $199,322 Aerospace Distribution 28,101 46,838 57,451 97,366 Corporate and Other - 1,579 739 3,032 TOTAL SALES $152,244 $151,181 $316,753 $299,720 Operating Results by Segment: Aerospace Fasteners (a) $ 2,915 $ 10,647 $ 11,790 $ 18,477 Aerospace Distribution 2,082 (17,285) 4,339 (15,567) Corporate and Other (5,772) (3,582) (6,870) (7,491) OPERATING INCOME (LOSS) $ (775) $(10,220) $ 9,259 $(4,581) (a) - Includes restructuring charges of $3.0 million and $6.1 million in the three and six months ended January 2, 2000, respectively.
The following table illustrates sales and operating income of our operations by segment, on an unaudited pro forma basis, for the three and six months ended January 2, 2000 and December 27, 1998, respectively, as if we had operated in a consistent manner in each of the reported periods. The pro forma results represent the impact of our acquisition of Kaynar Technologies (April 1999), our merger with Banner Aerospace (April 1999), and our dispositions of Dallas Aerospace (December 1999) and Solair (December 1998), as if these transactions had occurred at the beginning of each of our fiscal periods. The pro forma information is based on the historical financial statements of these companies, giving effect to the aforementioned transactions. The pro forma information is not necessarily indicative of the results of operations, that would actually have occurred if the transactions had been in effect since the beginning of fiscal 1999, nor are they necessarily indicative of our future results.
Pro Forma Segment Results (In thousands) Three Six Months Months Ended Ended 1/2/2000 12/27/1998 1/2/200012/27/1998 Sales by Segment: Aerospace Fasteners $124,143 $152,531 $258,563 $ 303,199 Aerospace Distribution 17,551 16,805 35,757 34,160 Corporate and Other - 1,579 739 3,032 TOTAL SALES $141,694 $ 170,915 $295,059 $ 340,391 Operating Results by Segment: Aerospace Fasteners $ 2,915 $ 15,641 $ 11,790 $ 29,745 Aerospace Distribution 923 746 2,261 1,523 Corporate and Other (5,759) (3,582) (6,843) (7,491) OPERATING INCOME (LOSS) $(1,921) $ 12,805 $ 7,208 $ 23,777
Net sales of $152.2 million in the second quarter of fiscal 2000 increased by $1.1 million compared to sales of $151.2 million in the second quarter of fiscal 1999. Net sales of $316.8 million in the first six months of fiscal 2000 increased by $17.0 million, or 5.7%, compared to sales of $299.7 million in the first six months of fiscal 1999. The improvement is attributable primarily to the increase in revenues provided by the acquisition of Kaynar Technologies, offset partially from the dispositions of Solair and Dallas Aerospace. On a pro forma basis, net sales decreased 17.1% and 13.3% for the three and six months ended January 2, 2000, respectively, compared to the same periods ended December 27, 1998, reflecting weakening demand for our products by the domestic aerospace manufacturers and distributors. Gross margin as a percentage of sales was 24.9% and 11.9% in the second quarter of fiscal 2000 and fiscal 1999 and 25.6% and 17.6% for the first six months of fiscal 2000 and fiscal 1999, respectively. Included in cost of goods in the periods ended December 27, 1998, was a charge of $19.3 million that was recognized in the aerospace distribution segment from the bulk sale of inventory at prices below its carrying amount. Excluding this charge, gross margin as a percentage of sales would have been 24.7% and 24.0% in the three and six months ended December 1998, respectively. The higher margins in the fiscal 2000 period are attributable to cost improvement initiatives, offset partially by lower prices. In addition, our aerospace fasteners segment also benefited as a result of the acquisition of Kaynar Technologies and efficiencies achieved from the integration process of facilities. Selling, general & administrative expense as a percentage of sales was 23.2% and 18.0% in the second quarter of fiscal 2000 and 1999, respectively, and 21.2% and 18.5% in the first six months of fiscal 2000 and 1999, respectively. The increase is due primarily to our decision to maintain our sales and marketing infrastructure on lower sales volume. Other income increased $6.8 million in the first six months of fiscal 2000, compared to the first six months of fiscal 1999. The increase is due primarily to $3.1 million of income recognized from the disposition of non-core property during the current period and a $0.8 million increase in rental income. In the six months ended January 2, 2000, we recorded $6.1 million of restructuring charges as a result of the continued integration of Kaynar Technologies into our aerospace fasteners segment. All of the charges recorded during the current six months were a direct result of product and plant integration costs incurred as of January 2, 2000. These costs were classified as restructuring and were the direct result of formal plans to move equipment, close plants and to terminate employees. Such costs are nonrecurring in nature. Other than a reduction in our existing cost structure, none of the restructuring charges resulted in future increases in earnings or represented an accrual of future costs. As of January 2, 2000, the majority of the integration plans have been executed. During the next six months, we expect to incur additional restructuring charges for product integration costs at our aerospace fasteners segment. We anticipate that our integration process will be substantially complete by the end of fiscal 2000. Operating income for the three and six months ended January 2, 2000 improved by $9.4 million and $13.8 million, respectively, as compared to the same periods of the prior year. The increase in the current periods is due primarily to a charge of $19.3 million that was recognized in December 1998, from the bulk sale of inventory at prices below carrying amount, offset partially by $6.1 million of restructuring charges recognized through January 2, 2000. Net interest expense increased $8.6 million in the first six months of fiscal 2000, compared to the first six months of fiscal 1999. We expect the trend of reporting increased interest expense to continue throughout fiscal 2000, as a result of additional debt we incurred to finance the acquisition of Kaynar Technologies. Nonrecurring income of $28.0 million in the six months ended January 2, 2000 resulted from the disposition of our investment in Nacanco Paketleme and the disposition of our Camloc Gas Springs division. An income tax provision of $5.3 million in the first six months of fiscal 2000 represented a 30.3% effective tax rate on pre-tax earnings from continuing operations. The tax provision was slightly lower than the statutory rate because of lower tax rates at some of our foreign operations. Comprehensive income (loss) includes foreign currency translation adjustments and unrealized holding changes in the fair market value of available for-sale investment securities. Since June 30, 1999, foreign currency translation adjustments decreased by $3.1 million in the six months ended January 2, 2000. The fair market value of unrealized holding gains on investment securities we own increased by $1.8 million in the six months ended January 2, 2000. Segment Results Aerospace Fasteners Segment Sales in our Aerospace Fasteners segment increased by $21.4 million in the second quarter of fiscal 2000 and $59.2 million in the first six months of fiscal 2000, as compared to the same periods of fiscal 1999, reflecting growth from acquisitions, offset partially by weakened demand for our products in the commercial aerospace industry. On January 2, 2000, backlog was $201 million compared to $220 million at June 30, 1999. On a pro forma basis, sales decreased by 14.7% in the first six months of fiscal 2000, as compared to the same period of the prior year. Our operations in the United States continue to be negatively impacted by reduced bookings caused by inventory reduction efforts at Boeing and its rippling effect on pricing created by excess capacity in the marketplace. Operating income decreased by $7.7 million and $6.7 million in the second quarter and first six months of fiscal 2000, respectively, compared to the fiscal 1999 periods. Included in our current quarter and six months results are restructuring charges of $3.0 million and $6.1 million, respectively, incurred due to the integration of Kaynar Technologies into our Aerospace Fasteners business. Excluding restructuring charges, operating income decreased by $4.7 million and $0.6 million in the second quarter and first six months of fiscal 2000, respectively, compared to the fiscal 1999 periods, reflecting reduced margins due to pricing pressures, offset partially by cost improvement initiatives and acquisitions made during fiscal 1999. Operating expenses continue to be reviewed at all operations as management attempts to reduce operating costs to improve margins in the short term, without being detrimental to operating income on a long term basis. On a pro forma basis and excluding restructuring charges, operating income decreased by $11.9 million for the six months ended January 2, 2000, compared to the six months ended December 27, 1998, due to lower sales levels associated with the weak commercial aerospace industry. We believe the demand for aerospace fasteners in fiscal 2000 will remain stable in Europe and will continue to be soft in the United States commercial aerospace market. We anticipate that the negative impact on us of Boeing's inventory reduction program will diminish in the latter part of calendar 2000. We believe that our merger integration savings and production efficiency improvements will partially offset the weakening demand for our products. Aerospace Distribution Segment Sales in our aerospace distribution segment decreased by $18.7 million, or 40.0%, in the second quarter and $39.9 million, or 41.0%, in the first six months of fiscal 2000, compared to the fiscal 1998 periods. The decrease was due to the loss of revenues as a result of the disposition of Solair and Dallas Aerospace. On a pro forma basis, sales increased $1.5 million, or 4.7%, in the current six-month period. Operating income increased by $19.4 million in the second quarter and $19.9 million in the fiscal 2000 six-month period, compared to the fiscal 1999 periods. Included in the prior year periods, was a charge of $19.3 million attributable to the bulk sale of Solair inventory at prices below the carrying amount of inventory. On a pro forma basis, operating income increased 48.5% in the first six months ended January 2, 2000, compared to the first six months ended December 27, 1998, reflecting increases in margins and a reduction in corporate overhead. Corporate and Other The Corporate and Other classification included the Camloc Gas Springs division, prior to its disposition, and corporate activities. The group reported a decrease in sales in the second quarter and first six months of fiscal 2000, compared to the fiscal 1999 periods, as a result of the disposition of the Camloc Gas Springs division in September 1999. An operating loss of $6.9 million in the first six months of fiscal 2000 was a $0.6 million improvement, compared to the operating loss of $7.5 million reported in the first six months of fiscal 1999. The current period included other income of $6.9 million due primarily to income recognized from the disposition of non-core property. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Total capitalization as of January 2, 2000 and June 30, 1999 amounted to $941.7 million and $931.6 million, respectively. The changes in capitalization included an increase of $10.0 million in equity due primarily to our reported net earnings, offset partially by a reduction in comprehensive income. Debt remained the same and reflected a $31.7 million decrease in term loan borrowing, as a result of the proceeds received from the divestiture of Nacanco, offset by an increase in revolving loan facilities used to support our operations. We maintain a portfolio of investments classified primarily as available-for-sale securities, which had a fair market value of $27.6 million at January 2, 2000. The market value of these investments increased $1.8 million in the six months ended January 2, 2000. While there is risk associated with market fluctuations inherent in stock investments, and because our portfolio is not diversified, large swings in its value should be expected. We have an 88-acre site in Farmingdale, New York, which we are developing as a shopping center. We invested approximately $11.1 million into this project in the six months ended January 2, 2000. We estimate funding of approximately $11.2 million is needed to complete construction on the portions of the property currently under development. Net cash used by operating activities for the six months ended January 2, 2000 and December 27, 1998 was $58.8 million and $20.7 million, respectively. The primary use of cash for operating activities in the first six months of fiscal 2000 was a $43.3 million increase in inventories and a $22.9 million decrease in accounts payable and other accrued liabilities, offset partially by a $15.0 million decrease in accounts receivable. The primary use of cash for operating activities in the first six months of fiscal 1999 was a $47.5 million decrease in accounts payable and accrued liabilities, and increases in inventories of $20.1 million, offset partially by a $13.6 million decrease in accounts receivable and a $30.2 million increase in other non-current liabilities. Net cash provided by investing activities for the six months ended January 2, 2000 and December 27, 1998, amounted to $87.8 million and $18.4 million, respectively. In the first six months of fiscal 2000, the primary source of cash from investing activities was $105.0 million of net proceeds received from the dispositions of Dallas Aerospace, Nacanco and the Camloc Gas Springs division, offset partially by capital expenditures of $16.5 million. In the first six months of fiscal 1999, the primary source of cash from investing activities was $57.0 million of net proceeds received from the disposition of Solair, offset partially by $16.0 million used for capital expenditures. Net cash provided by (used for) financing activities for the six months ended January 2, 2000 and December 27, 1998, amounted to $0.2 million and $(35.4) million, respectively. Cash provided by financing activities in the first six months of fiscal 2000 included $161.9 million of proceeds from the issuance of debt and $0.2 million from the issuance of stock, offset by $161.2 million repayment of debt and a $0.6 million purchase of treasury stock. Cash used for financing activities in the first six months of fiscal 1999 included a $69.4 million repayment of debt and a $22.1 million purchase of treasury stock, offset partially by a $55.8 million net increase of additional debt. Our principal cash requirements include debt service, capital expenditures, acquisitions, real estate development, and payment of other liabilities. Other liabilities that require the use of cash include postretirement benefits, environmental investigation and remediation obligations, and litigation settlements and related costs. We expect that cash on hand, cash generated from operations, cash from borrowings and additional financing and asset sales will be adequate to satisfy our cash requirements in fiscal 2000. Our credit agreement requires us to comply with financial covenants at the end of each quarter, including: Maintaining an interest coverage ratio Maintaining a minimum consolidated fixed charge coverage ratio Maintaining a ratio of consolidated debt to earnings before interest, taxes, depreciation and amortization Maintaining a ratio of senior debt to earnings before interest, taxes, depreciation and amortization On January 2, 2000, we were in compliance with the credit agreement. Because of the recent downturn in the aerospace industry, our ability to meet these covenants is uncertain and there can be no assurance that we will be able to comply with these covenants in our next fiscal quarter ending April 2, 2000 or the future. Noncompliance with any of the financial covenants without cure or waiver would constitute an event of default under the credit agreement. An event of default resulting from a breach of a financial covenant can result, at the option of lenders holding a majority of the loans, in an acceleration of the principal and interest outstanding, and a termination of the revolving credit line. We are having ongoing conversations with our bankers to determine if they will be willing to grant a waiver or amendment in the event of default. We are uncertain if our bankers are willing to grant a waiver or amendment in the event of default. Discontinued Operations In 1998, we adopted a formal plan to dispose of Fairchild Technologies. Based on this plan, we have sold a majority of Fairchild Technologies' businesses, including most of its intellectual property, through a series of transactions. On April 14, 1999, we disposed of Fairchild Technologies photoresist deep-ultraviolet track equipment machines, spare parts and testing equipment to Apex Co., Ltd. in exchange for 1,250,000 shares of Apex stock valued at approximately $5.1 million. On June 15, 1999, we received $7.9 million from Suess Microtec AG and the right to receive 350,000 shares of Suess Microtec stock (or at least approximately $3.5 million) by September 2000 in exchange for certain inventory, fixed assets, and intellectual property of Fairchild Technologies' semiconductor equipment group. On May 1, 1999, we sold Fairchild CDI for a nominal amount. In July 1999, we received approximately $7.1 million from Novellus Systems, Inc. in exchange for Fairchild Technologies' Low- K dielectric product line and certain intellectual property. We have been exploring several alternative transactions regarding the disposition of Fairchild Technologies' optical disc equipment group and we expect to dispose of this unit prior to April 2000. As of January 2, 2000, we have a remaining accrual of $4.5 million, net of an income tax benefit of $3.3 million, for our current estimate of the remaining losses in connection with the disposition of Fairchild Technologies. While we believe that $4.5 million is a reasonable estimate for the remaining losses to be incurred from Fairchild Technologies, there can be no assurance that this estimate is adequate. Uncertainty of the Spin-Off In order to focus our operations on the aerospace industry, we have been considering for some time distributing to our stockholders certain of our assets via distribution of all of the stock of a new entity, which may own all or a part of our non-aerospace operations. Depending upon the composition of the assets and liabilities to be included in the spin-off, our ability to consummate the spin-off, if we should choose to do so, may be contingent, among other things, on attaining certain milestones under our credit facility, or waivers thereof, and all necessary governmental and third party approvals. There is no assurance that we will be able to reach such milestones or obtain the necessary waivers from our lenders. In addition, we may encounter unexpected delays in effecting the spin-off, and we can make no assurance as to the timing thereof, or as to whether the spin-off will ever occur. Depending on the ultimate structure and timing of the spin-off, it may be a taxable transaction to our stockholders and could result in a material tax liability to us as well as our stockholders. The amount of the tax to us is uncertain, and if the tax is material to us, we may elect not to consummate the spin-off. Because circumstances may change and provisions of the Internal Revenue Code of 1986, as amended, may be further amended from time to time, we may, depending on various factors, restructure or delay the timing of the spin- off to minimize the tax consequences to us and our stockholders, or elect not to consummate the spin-off. Under the spin-off, the newly created entity may assume certain of our liabilities, including contingent liabilities, and may indemnify us for such liabilities. If this entity is unable to satisfy liabilities assumed in connection with the spin-off, we may have to satisfy such liabilities. Year 2000 To date, we have not experienced any material problems as a result of the Year 2000 turnover. We do not anticipate that we will have any operating or system problems in connection with the leap year date of February 29, 2000. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes a new model for accounting for derivatives and hedging activities and supersedes and amends a number of existing accounting standards. It requires that all derivatives be recognized as assets and liabilities on the balance sheet and measured at fair value. The corresponding derivative gains or losses are reported based on the hedge relationship that exists, if any. Changes in the fair value of derivative instruments that are not designated as hedges or that do not meet the hedge accounting criteria in SFAS 133, are required to be reported in earnings. Most of the general qualifying criteria for hedge accounting under SFAS 133 were derived from, and are similar to, the existing qualifying criteria in SFAS 80 "Accounting for Futures Contracts." SFAS 133 describes three primary types of hedge relationships: fair value hedge, cash flow hedge, and foreign currency hedge. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137 to defer the required effective date of implementing SFAS 133, from fiscal years beginning after June 15, 1999 to fiscal years beginning after June 15, 2000. We will adopt SFAS 133 in fiscal 2001, and are currently evaluating the financial statement impact. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The table below provides information about our derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, which include interest rate swaps. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date. Expected Fiscal Year 2008 (a) Maturity Date Interest Rate Swaps: Variable to Fixed 100,000 Average cap rate 6.49% Average floor rate 6.24% Weighted average rate 6.95% Fair Market Value (777) (a) - On February 17, 2003, the bank with which we entered into the interest rate swap agreement will have a one-time option to elect to cancel this agreement. PART II. OTHER INFORMATION Item 1. Legal Proceedings The information required to be disclosed under this Item is set forth in Footnote 9 (Contingencies) of the Consolidated Financial Statements (Unaudited) included in this Report. Item 2. Changes in Securities and Use of Proceeds Our stock option deferral plan allows officers and directors who are accredited investors to defer the gain upon exercise of stock options by receiving deferred compensation units instead of shares of stock. The deferred compensation units may be deemed securities issued by the company. The shares issued to an officer or director upon expiration of the deferral period (in exchange for deferred compensation units) have been registered pursuant to a registration statement on form S-8. Under our stock option deferral plan, an aggregate of 50,310 deferred compensation units were issued in November 1999 to the following directors: Phillip David (15,862 deferred compensation units), Harold Harris (15,762 deferred compensation units), and Herbert Richey (18,666 deferred compensation units). Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of our Stockholders was held on November 18, 1999. Five matters of business were held to vote for the following purposes: Proposal 1 - to elect ten directors for the ensuing year; Proposal 2 - to amend the Director Stock Option Plan, to permit deferment of compensation; Proposal 3 - to approve the material terms of the performance goal for the fiscal 2000 incentive compensation award for the President and Chief Operating Officer; Proposal 4 - to approve the material terms of the performance goal for the fiscal 2000 incentive compensation award for the Chief Executive Officer; Proposal 5 to approve an amendment to the material terms of the performance goal for the fiscal 2000 incentive compensation awards for the Chief Executive Officer and for the President and Chief Operating Officer, by restricting the payment of certain "extraordinary transaction" bonuses in fiscal 2000. The following tables provide the results of shareholder voting on each proposal, expressed in number of shares: Proposal 1 Directors: Votes For Votes Withheld Melville R. Barlow 42,128,852 3,829,236 Mortimer M. Caplin 42,124,877 3,833,211 Philip David 42,128,132 3,829,956 Robert E. Edwards 42,126,904 3,831,184 Steven L. Gerard 42,130,352 3,827,736 Harold J. Harris 42,125,632 3,832,456 Daniel Lebard 42,130,582 3,827,506 Herbert S. Richey 42,123,022 3,835,066 Eric I. Steiner 42,087,141 3,870,947 Jeffrey J. Steiner 41,155,407 4,802,681 Votes For Votes Abstain Non-Vote Against Proposal 2 40,188,631 5,739,984 29,473 - Proposal 3 33,388,235 8,383,989 1,178,361 3,007,503 Proposal 4 33,381,145 8,388,543 1,180,897 3,007,503 Proposal 5 30,329,423 - - 15,628,665 Item 5. Other Information Articles have appeared in the French press reporting an inquiry by a French magistrate into certain allegedly improper business transactions involving Elf Acquitaine, a French petroleum company, its former chairman and various third parties, including Maurice Bidermann. In connection with this inquiry, the magistrate has made inquiry into allegedly improper transactions between Mr. Steiner and that petroleum company. In response to the magistrate's request that Mr. Steiner appear in France as a witness, Mr. Steiner submitted written statements concerning the transactions and appeared in person before the magistrate and others. The magistrate has put Mr. Steiner under examination (mis en examen) with respect to this matter and imposed a surety (caution) of ten million French francs which has been paid. Mr. Steiner has not been charged. Item 6. Exhibits and Reports on Form 8-K (a)Exhibits: *10.1 Amendment No. 1, dated as of November 29, 1999 to the Credit Agreement dated as of April 20, 1999. 10.2 Asset Purchase Agreement dated as of October 22, 1999, among The Fairchild Corporation, Banner Aerospace, Inc., Dallas Aerospace, Inc., and United Technologies Corporation, acting through its Pratt & Whitney Division (incorporated by reference to the Registrant's Report on Form 8- K dated December 13, 1999). *27 Financial Data Schedules. * - Filed herewith (b)Reports on Form 8-K: On October 26, 1999, and on December 13, 1999, as amended, we filed a Form 8-K to report on Item 5 and Item 7 regarding the disposition of Dallas Aerospace, Inc. The December 13, 1999 Form 8-K includes unaudited pro forma consolidated statements of earnings for the year ended June 30, 1999 and for the three months ended October 3, 1999, and unaudited pro forma consolidated balance sheet as of October 3, 1999, giving effect to the disposition of Dallas Aerospace. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to the signed on its behalf by the undersigned hereunto duly authorized. For THE FAIRCHILD CORPORATION (Registrant) and as its Chief Financial Officer: By: Colin M. Cohen Senior Vice President and Chief Financial Officer Date:February 16, 2000 EX-27 2
5 1,000 6-MOS JUN-30-2000 JAN-02-2000 83,812 7,824 119,666 4,501 176,534 458,359 300,782 115,868 1,307,123 198,388 496,084 0 0 3,245 414,275 1,307,123 316,753 324,363 235,734 315,104 0 0 22,771 17,369 5,266 11,030 0 0 0 11,030 0.44 0.44
EX-10 3 AMENDMENT NO. 1 dated as of November 29, 1999 to CREDIT AGREEMENT Dated as of April 20, 1999 THIS AMENDMENT NO. 1 ("Amendment") is entered into as of November 29, 1999 by and among The Fairchild Corporation, a Delaware corporation (the "Borrower"), and the institutions identified on the signature pages hereof as Lenders. Capitalized terms used herein but not defined herein shall have the meanings provided in the Credit Agreement (as defined below). W I T N E S S E T H: WHEREAS, the Borrower and the Lenders and Issuing Banks are parties to that certain Credit Agreement dated as of April 20, 1999 (together with the Exhibits and Schedules thereto, the "Credit Agreement"), pursuant to which the Lenders and Issuing Banks have agreed to provide certain financial accommodations to the Borrower; and WHEREAS, the Borrower has requested the consent of the Collateral Agent to certain actions not otherwise permitted under Article X of the Credit Agreement and certain amendments to Article X of the Credit Agreement and the Collateral Agent has identified certain provisions of the Credit Agreement which require clarification and amendment; NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Amendment to Credit Agreement. Effective as of November 29, 1999, upon satisfaction of the conditions precedent set forth in Section 3 below, the Credit Agreement is hereby amended as follows: 1.1 Section 1.01 is amended to delete the definitions of "Banner Companies", "Net Cash Proceeds of Sale", and "Net Cash Proceeds of Sale of Banner Companies" in their entirety and substitute the following therefor: "Banner Companies" means , collectively, Banner and those Persons and investments in Persons identified on Schedule 1.01.5 under the heading "Banner Aerospace, Inc." and their respective Capital Stock and assets; and "Banner Company" means any of the Banner Companies, individually. "Net Cash Proceeds of Sale" means: i) cash proceeds (including cash, equivalents readily convertible into cash, and such proceeds of any notes received as consideration or any other non-cash consideration) from the sale, assignment or other disposition of (but not the lease or license of) any Property other than sales of property permitted under Sections 10.02(d) and 10.09, net of (a) the costs of sale, assignment or other disposition, (b) any income, franchise, transfer or other tax liability arising from such transaction and (c) amounts applied to the repayment of Indebtedness (other than the Obligations) secured by a Lien permitted by Section 10.03 on the asset disposed of, whether such net proceeds arise from any individual sale, assignment or other disposition or from any group of related sales, assignments or other dispositions received by: (1) the Borrower or any Restricted Subsidiary other than proceeds of sales of Permitted Dispositions, provided however that sales of Technologies Companies and Banner Companies shall be subject to the provisions of clauses (2) and (3) below; (2) the Borrower, any Restricted Subsidiary, or the Technologies Companies upon the completion of full liquidation of all Technologies Companies; and (3) the Borrower, any Restricted Subsidiary or any Banner Company (whether or not a Restricted Subsidiary) as Net Cash Proceeds of Sale of Banner Companies net of the amount of Net Cash Proceeds of Sale of Banner Companies required to be paid under Section 4.01(b)(i)(B); and (ii) to the extent provided in Section 9.07(b), proceeds of insurance on account of the loss of or damage to any such Property or Properties, and payments of compensation for any such Property or Properties taken by condemnation or eminent domain. "Net Cash Proceeds of Sale of Banner Companies" means cash proceeds (including cash, equivalents readily convertible into cash, and such proceeds of any notes received as consideration or any other non-cash consideration) from the sale, assignment or other disposition of (but not the lease or license of) any Property or Capital Stock of the Banner Companies, or any of them, other than sales of property permitted under Sections 10.02(d) and 10.09, net of (a) the costs of sale, assignment or other disposition, (b) any income, franchise, transfer or other tax liability arising from such transaction and (c) amounts applied to the repayment of Indebtedness (other than the Obligations) secured by a Lien permitted by Section 10.03 on the asset disposed of, whether such net proceeds arise from any individual sale, assignment or other disposition or from any group of related sales, assignments or other dispositions. and to add the following definitions thereto: "Farmingdale Guaranty"means that certain Guaranty executed and delivered by the Borrower in favor of Morgan Guaranty Trust Company of New York in connection with the Indebtedness incurred by Warthog, Inc., as the owner of the Farmingdale Property, and permitted under Section 10.01(f). "Farmingdale Security Instrument"means that certain Mortgage and Security Agreement of even date with the Farmingdale Guaranty executed and delivered by Warthog, Inc., as the owner of the Farmingdale Property, in connection with the Indebtedness permitted under Section 10.01(f) in favor of Morgan Guaranty Trust Company of New York. 1.2 Section 4.01(b)(i)(B) and (C) are amended to delete the provisions thereof in their entirety and substitute the following therefor: (B) The Borrower shall make or cause to be made a mandatory prepayment of the Obligations upon the Borrower's or any Subsidiary of the Borrower's receipt of Net Cash Proceeds of Sale of Permitted Dispositions and Net Cash Proceeds of Sale of Banner Companies in an amount equal to (1) one hundred percent (100%) of the first $25,000,000 of Net Cash Proceeds of Sale of Permitted Dispositions and Net Cash Proceeds of Sale of Banner Companies received and (2) fifty percent (50%) of the next $50,000,000 of Net Cash Proceeds of Sale of Permitted Dispositions and Net Cash Proceeds of Sale of Banner Companies received. (C) Notwithstanding the foregoing, upon the written request of the Borrower to the Collateral Agent that the mandatory prepayment with respect to Net Cash Proceeds of Sale of Banner Companies otherwise required under Section 4.01(b)(i)(A) and (B) be waived, an amount equal to such Net Cash Proceeds of Sale of Banner Companies so received shall be remitted to the Collateral Agent for deposit in the Cash Collateral Account and the Collateral Agent shall hold the same in such Cash Collateral Account (absent the occurrence of any Event of Default) until the earlier to occur of (Y) the date which is 225 days after the Borrower's or any of its Subsidiaries' receipt of such Net Cash Proceeds of Sale of Banner Companies or (Z) the date on which the Requisite Lenders shall have authorized the release of the amount so deposited (or a portion thereof) to the Borrower. In the event the amount so deposited to the Cash Collateral Account has not been released to the Borrower as referenced in clause (Z) above, the Collateral Agent shall withdraw such amount from the Cash Collateral Account on the date specified in clause (Y) above and apply the same as set forth in Section 4.01(b)(vii). 1.3 Section 8.01(c) is amended to delete the reference therein to "Exhibit I" and substitute therefore a reference to "Exhibit J". 1.4 Section 10.01(c) is amended to delete the language "Indebtedness arising from the following intercompany loans:" in its entirety and substitute therefor the language "Indebtedness arising from the following intercompany loans and other actions:", to delete the word "and" at the end of clause (iv) thereof, and add the following as clause (vi) and clause (vii) thereof: (vi) intercompany loans made after the Closing Date to Banner Capital Ventures, Inc., a Delaware corporation and Wholly-Owned Subsidiary of RHI, in addition to Permitted Existing Investments in Banner Capital Ventures, Inc., in an aggregate amount not to exceed $1,000,000; and (vii) the payment by any Subsidiary of the Borrower of dividends or other distributions on its Capital Stock which are permitted under Section 10.05(a); 1.5 Section 10.01(f) is amended to delete the reference therein to "October 3, 1999" and substitute therefor "January 31, 2000". 1.6 Section 10.04 is amended to (i) delete the provisions of clause (d) thereof in their entirety and substitute the following therefor: (d) Investments made by the Borrower and Restricted Subsidiaries in connection with acquisitions of assets or equity Securities of any Person (other than the Technologies Companies) in an aggregate amount not to exceed: (i) $17,500,000 in cash or assumed Indebtedness until such time as the outstanding principal balance of the Term Loans has been reduced by $25,000,000 in the aggregate under Section 4.01(b)(vii) from Net Cash Proceeds of Sale of Permitted Dispositions and Net Cash Proceeds of Sale of Banner Companies or (ii) thereafter (and when combined with Investments made as permitted under the foregoing clause (i), Investments made as permitted under clauses (j) and (k) below, and Indebtedness incurred as permitted under Section 10.01(c)(vi)), $35,000,000 in cash or assumed Indebtedness; provided that : (A) no Event of Default or Potential Event of Default has occurred and is continuing unwaived or, after giving effect to the making of any such Investment, no Potential Event of Default or Event of Default would occur and (B) on a pro forma basis, determined for the four (4) Fiscal Quarters immediately preceding any such Investment, giving effect to such Investment as though it occurred at the commencement of such four (4) Fiscal Quarter period, no breach of any covenant included in Article XI would have occurred; and provided further that the aforesaid limitations specified in clauses (i) and (ii) above shall: (1) be increased by the amount of the Net Cash Proceeds of Sale of Permitted Dispositions (other than Net Cash Proceeds of Sale received in connection with the sale or other disposition of Capital Stock of WatkinsJohnson Company held by the Borrower or any Subsidiary of the Borrower) net of the amount of such Net Cash Proceeds of Sale of Permitted Dispositions applied to the Obligations as provided under Section 4.01(b)(vii) and (2) include payments of cash made to Robert Edwards in accordance with the Third Amendment and Plan of Merger dated as of September 17, 1998 by and among the Borrower, Special-T Fasteners, Inc., and Robert Edwards, executed and delivered in connection with the Borrower's acquisition of Special-T Fasteners, Inc., and any related agreement entered into after the Closing Date, only to the extent the same exceed $2,000,000 in the aggregate; (ii) delete the word "and" at the end of clause (h) thereof, (iii) delete the "." at the end of clause (i) thereof and substitute a ";" therefor, and (iv) add the following clauses (j),(k), and (l) thereto: (j) Investments by the Borrower or Subsidiaries of the Borrower in the form of loans or advances to employees of the Borrower and its Subsidiaries in an aggregate amount not to exceed $750,000 at any time outstanding; provided that the same are evidenced by promissory notes delivered to the Collateral Agent as part of the Collateral; (k) Investments in the form of capital contributions by the Borrower, directly or through Wholly-Owned Subsidiaries of the Borrower, in Banner Investments UK in an amount not to exceed $3,000,000 in the aggregate; provided that no Event of Default shall have occurred and be continuing unwaived; (l) Investments in the form of intercompany loans permitted under Section 10.01 and not otherwise prohibited by this Section 10.04. 1.7 Section 10.05(a) is amended to insert after the words "dividends or distributions" therein the phrase ", whether in cash or evidenced by a promissory note,". 1.8 Section 10.06(a)(ii) is amended to delete the word "and" before clause (D) thereof and delete the provisions of clause (D) thereof in their entirety and substitute the following therefor: (D) any Technologies Company with or into any other Technologies Company or any Person which is not an Affiliate of the Borrower; and (E) any Subsidiary of the Borrower not described in clauses (A), (B), (C) or (D) above with and into any other such Subsidiary of the Borrower; provided that the prior written consent thereto of the Collateral Agent has been obtained; and 1.9 Section 10.14 is amended to delete the references therein to "Subsidiaries" and substitute therefor references to "Restricted Subsidiaries". 1.10 Section 12.01 is amended to add the following provision thereto as clause (o): (o) Farmingdale Guaranty. A demand shall have been made on the Borrower under the Farmingdale Guaranty or the obligations guaranteed under the Farmingdale Guaranty shall, as a result of a breach or default under clauses (a), (b), (c), (d), (e), (f), (g), (i), (k), (m), (o), (p) or (t) of Section 4.3 of the Farmingdale Security Instrument or of Section 8.2 of the Farmingdale Security Instrument or a breach or default under clause (h), (j), (l), (n), (q), (r) or (v) of Section 4.3 of the Farmingdale Security Instrument or the Farmingdale Property, or any part thereof, becoming an asset in a voluntary bankruptcy or insolvency proceeding, include the unpaid balance of the "Debt" as defined in the Farmingdale Security Instrument. 1.11 Schedules 1.01.4, 1.01.5 and 1.01.8 are deleted in their entirety and Schedules 1.01.4, 1.01.5 and 1.01.8 attached hereto and made a part hereof substituted therefor. The Borrower is hereby authorized and directed to update Schedule 1.01.4 as and when Investments or transfers are made in accordance with the terms of the Credit Agreement which would render such Schedule incomplete or inaccurate in any respect and to deliver copies of such updates of Schedule 1.01.4 to the Collateral Agent and Lenders promptly after the making of any such Investments or transfers, whereupon the updated Schedule will be substituted for the prior Schedule as part of the Credit Agreement. 2. Collateral Agent Consents. The Collateral Agent hereby consents to the following: a. As required by Section 10.02(b)(ii), the transfer of Kaynar Technologies Ltd., a U.K. company ("Kaynar UK") or its Subsidiary, Recoil (Europe) Ltd., a U.K. company ("Recoil"), to Camloc (U.K.) or liquidation or dissolution of Kaynar UK and/or Recoil into Camloc (U.K.); b. As required by Section 10.04, the formation of a new Wholly-Owned Subsidiary of Banner Energy Corporation of Kentucky, Inc. under the laws of Delaware and the name Fairchild Environmental Liability Management, Inc. ("ELMI"), the Capital Stock of which will consist of 1,000 authorized, issued and outstanding shares of common stock and 1,000 authorized, issued and outstanding shares of preferred stock subject to the terms described on Schedule 2-B attached hereto and made a part hereof ; provided that such Capital Stock held by the Borrower or any Restricted Subsidiary is pledged as part of the Collateral and ELMI becomes a Guarantor, whereupon the Borrower causes the same to execute and deliver the Loan Documents required under Section 9.14; c. As required by Section 10.02(b)(ii), the transfer of the Property described on Schedule 2-C attached hereto and made a part hereof by Banner Energy Corporation of Kentucky, Inc., a Subsidiary of the Borrower, to ELMI; d. As required by Section 10.04, the formation under the laws of Delaware by FHC of two new WhollyOwned Subsidiaries; provided that, promptly upon formation of the same, they become Guarantors, whereupon the Borrower causes the same to execute and deliver the Loan Documents required under Section 9.14 and provided further that such Subsidiaries otherwise comply with all applicable provisions of the Credit Agreement; e. As required by Section 10.06(a)(ii), the merger of Technico S.A. with and into Societe Nouvelle DEB SA. 3. Conditions to Effectiveness. The provisions of this Amendment shall become effective as of November 29, 1999, upon receipt by the Collateral Agent, by no later than 5:00 p.m. (New York time) on December 1, 1999, of executed counterparts of this Amendment signed on behalf of the Borrower, the Requisite Lenders, and the Collateral Agent. 4. Representations, Warranties and Covenants. 4.1 The Borrower hereby represents and warrants that this Amendment and the Credit Agreement, as amended hereby, constitute the legal, valid and binding obligations of the Borrower and are enforceable against the Borrower in accordance with their terms. 4.2 The Borrower hereby represents and warrants that, before and after giving effect to this Amendment, no Event of Default or Potential Event of Default has occurred and is continuing. 4.3 The Borrower hereby reaffirms all agreements, covenants, representations and warranties made in the Credit Agreement, to the extent the same are not amended hereby, and made in the other Loan Documents to which it is a party; and agrees that all such agreements, covenants, representations and warranties shall be deemed to have been remade as of the effective date of this Amendment. To the extent the Credit Agreement is amended hereby to modify or add agreements, covenants and/or representations and warranties, such agreements, covenants and/or representations and warranties are made as of the date on which this Amendment becomes effective with respect thereto. 5. Reference to and Effect on the Credit Agreement. 5.1 Upon the effectiveness of this Amendment, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import shall mean and be a reference to the Credit Agreement as amended hereby. 5.2 Except as specifically amended above, the Credit Agreement shall remain in full force and effect, and is hereby ratified and confirmed. 5.3 The execution, delivery, and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Collateral Agent or Lenders, or constitute a waiver of any provision of any of the Loan Documents. 6. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 7. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 8. Counterparts. This Amendment may be executed by one or more of the parties hereto on any number of separate counterparts, each of which shall be deemed an original and all of which, taken together, shall be deemed to constitute one and the same instrument. Delivery of an executed counterpart of this Amendment by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. IN WITNESS WHEREOF, this Amendment has been duly executed as of the day and year first above written. THE FAIRCHILD CORPORATION CITICORP USA, INC., as Collateral Agent By: Karen L. Schneckenburger By: Suzanne Crymes Vice President & Treasurer Vice President Lenders: ALLIANCE INVESTMENT AVALON CAPITAL LTD. OPPORTUNITIES FUND, L.L.C. By_________________________ By_____________________ BANK OF AMERICA, N.A. BOEING CAPITAL CORPORATION By: Michael R. Heredia By: Daniel O. Anderson Senior Vice President Vice- President-Commercial CIBC, INC. CITIBANK, N.A. By: Koren Volk By: Claudio Phillips Authorized Signatory Vice President/Managing Director CITICORP, USA, INC. COMPAGNIE FINANCIERE DE CIC ET DE L'UNION EUROPEENNE By: Suzanne Crymes By: Brian O'Leary Vice President Vice President By: Sean Mounier First Vice President CREDIT AGRICOLE INDOSUEZ CREDIT SUISSE FIRST BOSTON By: Raymond A. Feelkenberg By: Bill O'Daly Vice President Vice President Senior Relationship Manager By: Gerard M. Russell By: Joel Glodowski Vice President, Manager Managing Director CRESCENT/MACH I PARTNERS, L.P. FLOATING RATE PORTFOLIO By__________________________ By____________________________ Name: Name: Title: Title: HIGHLAND CLO 1999-1 LTD. HIGHLAND LEGACY LIMITED By___________________________ By: James Bondero Name: President Title: KZH SHOSHONE LLC KZH WATERSIDE LLC By: Peter Ching By: Peter Chin Authorized Agent Authorized Agent MERRILL LYNCH PRIME RATE MERRILL LYNCH SENIOR FLOATING PORTFOLIO RATE FUND, INC. By___________________________ By____________________________ Name: Name: Title: Title: MERILL LYNCH SENIOR FLOATING ML CBO IV (CAYMAN) LTD. RAE FUND II, INC. By Highland Capital Management Company as Collateral Manager By___________________________ By: James Bondero Name: President Title: MORGAN STANLEY DEAN WITTER NATEXIS BANK By: Sheila Finnerty By: Peter J. van Tulder Vice President President and Manager Multinational Group By: Christine Dirringer Assistant Treasurer NUVEEN SENIOR FLOATING RATE OAK MOUNTAIN LIMITED FUND By: Lisa M. Mincheski By_____________________________ Managing Director Name: Title: PROVIDENT BANK OF MARYLAND RIGGS BANK By: Robert L. Smith By: Douglas H. Klamfoth Vice President Vice President SENIOR DEBT PORTFOLIO SRV-HIGHLAND, INC. By Boston Management and Research By Highland Capital Management, as as Investment Adviser Investment Advisor By___________________________ By: Kelly C. Walker Name: Vice President Title: THE FIRST NATIONAL BANK OF TYLER TRADING, INC. CHICAGO By___________________________ By_____________________________ Name: Name: Title: Title: VAN KAMPEN FLOATING RATE VAN KAMPEN PRIME RATE INCOME PORTOFOLIO TRUST By: Darvin D. Pierce By: Darvin D. Pierce Vice President Vice President SEQUILS I, LTD. By__________________________ Name: Title: CERTIFICATE OF INCORPORATION OF FAIRCHILD ENVIRONMENTAL LIABILITY MANAGEMENT, INC. FIRST. The name of the Corporation is Fairchild Environmental Liability Management, Inc. SECOND. The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. THIRD. The nature of the business or purpose to be conducted or promoted by the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH. The total number of shares of all classes of capital stock which the Corporation shall have authority to issue is 1,100 shares, consisting of 1,000 shares of Common Stock, par value $1.00 per share, and 100 shares of Preferred Stock, par value $1.00 per share. The following is a statement of the designations, preferences, voting powers, qualifications, and special or relative rights or privileges in respect of each class of capital stock of the Corporation. A. COMMON STOCK 1. General. There shall be one class of common stock of the Corporation (the "Common Stock"). The voting dividend and liquidation rights of the holders of the Common Stock are subject to and qualified by the rights of the holders of outstanding shares of Preferred Stock of any class or series as may be designated herein or by the Board of Directors of the Corporation. 2. Voting. The Common Stock shall have one vote per share, and, except as may be otherwise provided in this Article FOURTH or by law, the Common Stock shall vote as a single class on all actions to be taken by the stockholders of the Corporation. 3. Dividends. Dividends may be declared and paid on the Common Stock from funds lawfully available therefor as and when determined by the Board of Directors and subject to any preferential dividend rights of any then outstanding Preferred Stock. 4. Liquidation. Upon the dissolution or liquidation of the Corporation, whether voluntary or involuntary, holders of Common Stock will be entitled to receive all assets of the Corporation available for distribution to its stockholders, subject to any preferential, and participation rights of any then outstanding Preferred Stock. B. PREFERRED STOCK 1. Number of Shares. There shall be one class of Preferred Stock of the Corporation (the "Preferred Stock"). 2. Voting. Except as may be otherwise provided by law, the Preferred Stock shall be non-voting stock. 3. Dividends. The holders of Preferred Stock shall be entitled to receive a cumulative dividend at the rate of eight percent (8%) of the issue price per annum. The Corporation shall not declare or pay any dividend or distribution on the Common Stock, or redeem or purchase any shares of Common Stock (except dividends or other distributions payable solely in Common Stock), unless and until all cumulative dividends on the Preferred accrued to the date of such payment or distribution to holders of Common Stock have been declared and paid in full. 4. Liquidation. (a) Upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the shares of Preferred Stock shall be entitled, before any distribution or payment is made upon any stock ranking on liquidation junior to the Preferred Stock, to be paid any amount equal to the fair market value of such Preferred Stock, but not, in any event, more than $300 per share or less than 1.00 per share, plus any other dividends accrued but unpaid thereon, computed to the date payment thereof, such amount payable with respect to one share of Preferred Stock being sometimes referred to as the "Liquidation Preference Payment" and with respect to all shares of Preferred Stock being sometimes referred to as the "Liquidation Preference Payments." The Liquidation Preference Payment shall equal the book value for each share of Preferred Stock on the date of the liquidation, dissolution or winding up of the Corporation. The book value of each share of Preferred Stock shall be equal to the net assets of the Corporation divided by the number of shares of capital stock, all of which shall be deemed to be a single class of stock. Such book value shall be determined from the books of the Corporation in accordance with generally accepted accounting principles, consistently applied, and adjusted upward or downward, as the case may be, to the extent necessary to: (i) value any debt obligations of affiliated corporations to the Corporation at an amount equal to the unpaid principal amount of such obligations; (ii) provide an accrual and reserve for the Corporation's Liability assigned from affiliated corporations and assumed by the Corporation at an amount determined by the Corporation; (iii) provide appropriate accruals and reserves for all taxes (including, but not limited to, all taxes based on income); bonuses and other employee compensation (including, but not limited to, compensation payable after the end of the then-current fiscal year); reserves for contingent liability and such other reserves as the Board of Directors may deem proper; and such other items of income and expense attributable to any period prior to the date as of which the determination is made as the Board of Directors may deem proper; (iv) exclude any value for goodwill relating to the business of the Corporation or any of its subsidiaries or affiliates; (v) reflect the book value (as adjusted in the manner set forth in this subparagraph) of any subsidiary of the Corporation; (vi) provide for the effect on book value of the exercise of outstanding options, warrants or other rights to acquire any capital stock of the Corporation; (v) reflect corrections or errors. If, upon such liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, the assets to be distributed amount the holders of Preferred Stock shall be insufficient to permit payment to the holders of such Preferred Stock of the amount distributable as aforesaid, then the entire assets of the Corporation to be so distributed shall be distributed ratably among the holders of Preferred Stock. (b) Written notice of such liquidation, dissolution or winding up, stating a payment date, the amount of the Liquidation Preference Payments, and the place where such payments shall be payable, shall be delivered in person, mailed by certified or registered mail, return receipt requested, or sent by telecopier of telex, not less than 20 days prior to the payment date stated therein, to the holders of record of Preferred Stock, such notice to be addressed to each such holder at its address as shown on the books of the Corporation. The consolidation or merger of the Corporation into or with any other entity or entities which results in the exchange of outstanding shares of the Corporation for securities or other consideration issued or paid or caused to be issued or paid by any such entity or affiliate thereof (other than a merger to reincorporate the Corporation in a different jurisdiction), and the sale, lease, abandonment, transfer, or other disposition by the Corporation of all or substantially all its assets, shall be deemed to be a liquidation, dissolution, or winding up of the Corporation within the meaning of the provisions of this paragraph 4. FIFTH. The Corporation is to have perpetual existence. SIXTH. In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware: A. The Board of Directors of the Corporation is expressly authorized to adopt, amend, or repeal the By-Laws of the Corporation. B. Election of Directors need not be by written ballot unless the By-Laws of the Corporation shall so provide. C. The books of the Corporation may be kept at such place within or without the State of Delaware as the By-Laws of the Corporation may provide or as may be designated from time to time by the Board of Directors of the Corporation. SEVENTH. The Corporation eliminates the personal liability of each member of its Board of Directors to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided, however, that, to the extent provided by applicable law, the foregoing shall not eliminate the liability of a director (i) for any breach of such director's duty of loyalty to the Corporation or its stockholders, (ii) for acts and omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of Title 8 of the Delaware Code or (iv) for any transaction from which such director derived an improper personal benefit. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director for or with respect to any acts or omissions of such director prior to such amendment or repeal. EIGHTH: The Corporation reserves the right to amend or repeal any provision contained in this Certificate of Incorporation, in any manner now or hereafter prescribed by statute, and all rights conferred upon a stockholder herein are granted subject to this reservation. NINTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, upon the application of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement , the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. IN WITNESS WHEREOF, the undersigned have executed this Certificate this 2nd day of December, 1999. By: Donald E. Miller Sole Incorporator Schedule 1.01.4 to Credit Agreement Dated as of April 20, 1999 OPERATING UNITS Fairchild Fasteners Group Special-T Fasteners, Inc., a Delaware corporation Kaynar Technologies Inc., a Delaware corproation Kaynar Technologies Ltd., a U.K. corporation Recoil (Europe) Ltd., a U.K. corporation KTI Femipari Kft, a Hungarian corporation M&M Machine & Tool Co., a Delaware corporation KTI International Sales Corp., a Barbados corporation Marcliff Corporation, a Delaware corporation Marson Creative Fastener, Inc., a Delaware corporation Recoil Holdings, Inc., a Delaware corporation Recoil PTY, an Australian corporation Recoil Inc., a Delaware corporation Recoil Australia Holdings, Inc., a Delaware corporation Recoil Pte Ltd., a Singapore corporation Recoil Marketing BVBA, a Belgium corporation Recoil Thailand, a Thai corporation Fairchild Holding Corp., a Delaware corporation, manufacturing plants in California and sales offices throughout the U.S. Mairoll, Inc., a Delaware corporation, manufacturing plant in California until it is dividended up to Fairchild Holding Corp. Fairchild Fasteners Europe - Camloc GmbH, a German corporation Camloc (U.K.) Ltd., a U.K. corporation, U.K. customer team located in sales office in Leicester, England Fairchild Fasteners Europe - VSD GmbH, a German corporation Fairchild Fasteners Europe - Simmonds S.A.R.L., a French corporation SNEP SA, a French corporation Simmonds S.A., a French corporation Mecaero SNC, a French corporation Transfix S.A., a French corporation Eurosim Componentes Mecanicos de Seguranca, Lda., a Portugese corporation Simmonds Mecaero Fasteners, Inc., a Delaware corporation Fairchild AS+C oHG Aviation Supply + Consulting (GmbH & Co.), a German partnership Fairchild Technologies Optical Disc Equipment Group GmbH, a German corporation, after the Optical Disc assets are transferred and sold (see footnote 1 below) Fairchild Fasteners Corp. Technico SA Societe Nouvelle DEB SA SCI de La Praz Gas Spring Division Camloc (U.K.) Ltd., a U.K. corporation, Gas Spring Division Fairchild Technologies Group Fairchild Technologies USA, Inc., a California corporation Fairchild Technologies Optical Disc Equipment Group GmbH, a German corporation1 Convac France S.A., a French corporation Fairchild Technologies Europe Limited, a U.K. corporation Fairchild Technologies Korea Limited, a Korean corporation Fairchild Technologies Semiconductor Equipment Group GmbH, a German corporation Fairchild Germany, Inc., a Delaware corporation Snails, Inc., a Delaware corporation Fairchild CDI S.A., a French corporation MediaDisc SA, a French corporation, 41% investment Cutek Research, Inc., a California corporation, 20.77% investment-fully diluted Banner Aerospace, Inc. Aero International, Inc., an Ohio corporation Banner Aero (Australia) Pty. Ltd., an Australian corporation Banner Aerosoace Foreign Sales Corporation, U.S. Virgin Islands Banner Aerospace Services, Inc., an Ohio corporation Banner Aerospace-Singapore, Inc., a Delaware corporation BAR DE, Inc., a Delaware corporation D A C International, Inc., a Texas corporation Discontinued Aircraft, Inc., a Texas corporation Discontinued Services, Inc., a Delaware corporation GCCUS, Inc., a California corporation Georgetown Jet Center, Inc., a Delaware corporation Harco Northern Ireland Limited, a N. Ireland corporation Matrix Aviation, a Kansas corporation Nasam Incorporated, a California corporation Dallas Aerospace, Inc., a Texas corporation PB Herndon Aerospace, Inc., a Missouri corporation Professional Aviation Associates, Inc., a Georgia corporation Professional Aircraft Accessories, Inc., a Florida corporation _______________________________ 1The Optical Disc business will be transferred to a new subsidiary yet to be formed and sold to Fairchild Technologies USA. The remaining entity will become part of the Fairchild Fasteners Group Operating Unit and may be renamed. SCHEDULE 1.01.5 to Credit Agreement Dated as of April 20, 1999 as amended by Amendment No. 1 and Consent Dated as of November 29, 1999 PERMITTED DISPOSITIONS I Technologies Companies: Fairchild Technologies Semiconductor Equipment Group GmbH Convac France S.A. Fairchild Technologies Europe Limited Fairchild Technologies Optical Disc Equipment Group GmbH1 Fairchild Germany, Inc. Fairchild Technologies Korea Limited Fairchild Technologies USA, Inc. Fairchild CDI S.A. Mediadisc S.A.2 CuTek Research, Inc.3 Snails, Inc. II Nacanco Paketleme Sanayi Ve Ticaret A.S. III Eagle Environmental4: Banner Capital Ventures, Inc., a Subsidiary of RHI Note Receivable ($9,371,909 as of 3/28/99) held by Banner Capital Ventures, Inc. and payable by Eagle Environmental, L.P. Recycling Investments, Inc., a Subsidiary of RHI Equity Investment in Eagle Environmental, L.P. held by Recycling Investments, Inc. Recycling Investments II, Inc., a Subsidiary of RHI which holds an investment in "Eagle Environmental" for Royal Oaks Landfill IV Investments: Holder Investment TFC Billecart Expansion Euroactividade State of Israel - 12 year Variable Rate Bonds Teuza Fund Rotlex Nevatim Triangle Venture Oramir Semiconductor Equipment Ltd.5 Technical Devices Note Receivable ($863,363 as of 3/28/99) Stelfast Fasteners Note Receivable ($137,923 as of 3/28/99) Banner Industrial Products, Inc.6 Plymouth Leasing Company7 Banner Energy Corporation of Kentucky,Inc. ("BECK")8 Faircraft Sales Ltd.9 Fairchild Export Sales Corporation Aircraft Tire Corporation Fairchild Titanium Technologies, Inc.10 RHI Medical Resources, Inc. S.A.R.L. Soustiel 2000 Bolshoi Fund (Antiques) Celtronix Ltd. Visionix Ltd. Fairchild Scandinavian Bellyloading Company - Royalty Agreement with Teleflex Gobble Gobble, Inc. MISAT Ltd.11 Northking Insurance Company Limited, a Bermuda corporation (re-insurance collateral and guaranty) Tutor Time Learning Systems, Inc. Turkiye Is Bankasi GDRs Recycling Investments, Inc. ("RII") Recycling Investments II, Inc. ("R-II") Banner Capital Ventures, Inc. Sovereign Air Limited - Bristol Holdings Banner Industrial Distribution, Inc. F.F. Handels GmbH Aero International, Inc. FHC S.S.E. Telecom, Inc. common stock & warrants Colt Royalty Agreement Teuza Management and Development (1991) Limited12 A10 Inc.13 Mairoll, Inc. (exclusive of Fastener Business assets/liabilities) Fairchild Arms International Ltd. Suchomimous Terensis, Inc. Fairchild Data Corporation D-M-E Iberica S.A. Quack Quack, Inc. Banner Investments (UK) Limited JJS Limited StarLine Communications Fairchild Fastener Group Ltd. Mairoll, Inc. (FHC) V&V Redondo Beach Limited Partnership, a California partnership (49% interest)14 Hartz-Rex Associates, a New Jersey partnership (49% interest)15 Warthog, Inc. A10 Inc. (FHC) Fairchild Retiree Medical Services, Inc. Camloc (U.K.) (FHC) Camloc (U.K.) Gas Spring Division RII (RHI) Eagle Environmental, Limited Partnership, a Delaware partnership (49.9% limited partnership interest)16 R-II (RHI) Eagle Environmental II, Limited Partnership (49.9% limited partnership interest)17 BECK (TFC) Jenkins Coal Dock Company, Inc. (shell corporation; 80% owned)18 KenCoal Associates, an Ohio partnership (80% interest; inactive entity with no assets or liabilities)19 Snails, Inc. Fairchild CDI S.A. Mediadisc S.A. CuTek Research, Inc. Boussugue Note Receivable (FF 2,799,400) Banner Companies Kellstrom Warrants (Banner) Shared Technologies Cellular, Inc. (BAR DE, Inc.) CICI Preferred B Stock (BAR DE, Inc.) Net Holdings, Inc. Note in principal amount of $5,000,000 V Farmingdale Property: See attached description by parcel. VI Other Real Estate: Owner Real Estate Location Mairoll, Inc. (FHC) Sloane Street Real Property (London) Chatsworth, California Real Property Temple City, California Real Property RHI (TFC) West Milwaukee Real Property (Wisconsin) Corporate Office Building (Virginia) Watermann St. Real Property (Rhode Island) Plymouth Leasing Company20 Trucking terminals located in Huron,Ohio (leased to Conway Freight) and Mansfield, Ohio (unoccupied) BECK (TFC) 700 acres of unimproved land in Kentucky Faircraft Sales 50 acres including a coal mine in Vincennes, Indiana Ltd. (TFC) V&V Redondo Beach Partnership (FHC) Real Property located in Redondo Beach, California Hartz-Rex Associates Hasbrouck Heights Real Property (NJ) (FHC) Bristol Holdings (RHI) Rhode Island Real Property VII Fairchild Finance Company VIII Banner Aerospace, Inc. Investments in: Watkins-Johnson Company (Banner) Subsidiaries21: Dallas Aerospace, Inc. Aero International, Inc. Banner Aero (Australia) Pty Ltd. Banner Aerospace Foreign Sales Corporation Banner Aerospace-Singapore, Inc. Discontinued Aircraft, Inc. Discontinued Services, Inc. Harco Northern Ireland Limited Banner Aerospace Services, Inc. BAR DE, Inc. DAC International, Inc. GCCUS, Inc. Georgetown Jet Center, Inc. Matrix Aviation, Inc. NASAM Incorporated PB Herndon Aerospace, Inc. Professional Aviation Associates, Inc. Professional Aircraft Accessories, Inc. IX Other Non-Fasteners Businesses Investments in non-fasteners businesses received in exchange for any Permitted Disposition _______________________________ 1 Until optical disc business transferred out 2 Equity interest of 41% held by Snails, Inc. 3 20.77% equity interest, on a fully diluted basis, held by Snails, Inc. 4 Individual items reflected below are also reflected elsewhere in this Schedule, but grouped here to encompass all of "Eagle Environmental" as well 5 Israel corporation; 28.26% interest held by TFC 6 Wholly-owned subsidiary of TFC required to continue in existence for 7 years; held assets of Roanoke Locomotive, Inc. 7 See entry under Real Estate below 8 Wholly-owned subsidiary of TFC 9 Wholly-owned subsidiary of TFC 10 Holds 50% interest in Normvest, a Russian venture 11 Israel corporation; 43.78% interest held by RHI 12 Israel corporation; 40% interest held by FHC 13 Wholly-owned subsidiary of FHC 14 51% interest held by Vestar California II Limited 15 49% interest held by Hartz Hasbrouck Limited Partnership; 2% interest held by Dudley Godfrey 16 50.1% interest held by Khodara Environmental, Inc. 17 50.1% interest held by Khodara Environmental II, Inc. 18 20% interest held by Kinemotive Energy Corporation 19 20% interest held by Kinemotive Energy Corporation 20 Wholly-owned subsidiary of TFC 21 Capital Stock and Assets of the Subsidiaries are Permitted Dispositions Schedule 1.01.8 to Credit Agreement Dated as of April 20, 1999 PERMITTED EXISTING INVESTMENTS Fairchild Holding Corp. D-M-E Iberica S.A. (Spain) (46%) Teuza Management & Development Ltd. (Israel) (40%) Fairchild Arms International Ltd. (Canada) Simmonds Mecaero Fasteners, Inc. Fairchild Finance Company (Republic of Ireland) Fairchild Data Corporation Quack Quack, Inc. A10, Inc. Fairchild Retiree Medical Services, Inc. Mairoll, Inc. V&V Redondo Beach Limited Partnership (49%) Hartz-Rex Associates (49%) Warthog, Inc. Banner Investments (U.K.) Limited (United Kingdom) JJS Ltd. (United Kingdom) Fairchild Fastener Group Limited (United Kingdom) Camloc (U.K.) Limited (United Kingdom) Fairchild Germany, Inc. Fairchild Technologies Korea Limited (Korea) (50%) Fairchild Technologies USA, Inc. Fairchild Technologies Europe Limited (United Kingdom) Fairchild Technologies Korea Limited (Korea) (50%) Fairchild Technologies Semiconductor Equipment Group GmbH (Germany) Convac France SA (France) Snails, Inc. Fairchild CDI S.A. (France) MediaDisc S.A. (France) (41%) Cutek Research, Inc. (California) (20.77% on a fully diluted basis, Preferred A and B Stock) Loan to Roger Boussugue et.al. FF 2,799,400 Suchomimous Terensis, Inc. VSI Holdings, Inc. Fairchild Fasteners Europe - VSD GmbH (Germany) (1%) Camloc Holdings Fairchild Fasteners Europe - Camloc GmbH (1%) Fairchild Technologies Optical Disc Equipment Group GmbH (Germany) Fairchild Fasteners Europe - VSD GmbH (99%) Fairchild AS+C oHG Aviation Supply + Consulting (GmbH & Co.) (Germany) (50%) Aviation Full Service (Hong Kong) Limited (Hong Kong) (99.9%) Fairchild Fasteners Europe - Camloc GmbH (99%) Fairchild AS+C oHG Aviation Supply + Consulting (GmbH & Co.) (Germany) (50%) Aviation Full Service (Hong Kong) Limited (Hong Kong) (99.9%) Fairchild Fasteners Corp. Fairchild Fasteners Europe - Simmonds S.A.R.L. (10%) Meow, Inc. Fairchild Fasteners Europe - Simmonds S.A.R.L. (90%) SNEP S.A. (France) Simmonds S.A. (France) Mecaero SNC (France) Eurosim Componentes Mecanicos de Seguranca, Lda. (Portugal) (99.85%) Transfix S.A. (France) (99.98%) Kaynar Technologies Inc. Fairchild Technologies GmbH Investment in Fairchild Technologies USA, Inc. - Preferred Stock DM 5,000,000 Officer Loan Program designed to encourage officer stock ownership in the Company $ 173,938 Officer Loan Program designed to encourage officer stock ownership in the Company $ 750,000 Loan to Robert Sharpe $ 200,000 Loan to Mel Borer $ 300,000 S.S.E. Telecom, Inc. Common Stock & Warrants $ 1,047,735 Starline Communications FF 999,272 RHI Holdings, Inc. Banner Industrial Distribution, Inc. F.F. Handels GmbH (Germany) Fairchild France, Inc. Northking Insurance Company Limited (Bermuda) Sovereign Air Limited Fairchild Holding Corp. Aero International, Inc. (19%) Gobble Gobble, Inc. Nacanco Paketleme Sanayi Ve Ticaret A.S. (Turkey) (31.86%) MISAT Ltd. (Israel) (43.78%) Banner Capital Ventures, Inc., plus an estimated future commitment to fund Eagle Environmental for $1,000,000 Recycling Investments, Inc. Eagle Environmental, L.P. (49.9%) Recycling Investments II, Inc. Eagle Environmental II, L.P. (49.9%) Visionix Ltd. (Israel) (22 to 23%) Medical Resources, Inc. S.A.R.L. Soustiel 2000 Turkiye IS Bankasi Celtronix Ltd. Bolshoi Fund (Antiques) Loan to Peter Levine Tutor Time Learning Systems, Inc. Investment in Stock of The Fairchild Corporation The Fairchild Corporation Faircraft Sales Ltd. Banner Industrial Products, Inc. Banner Aerospace Holding Company I, Inc. Banner Aerospace Holding Company II, Inc. Banner Energy Corporation of Kentucky, Inc. Jenkins Coal Dock Company, Inc. KenCoal Associates (Ohio) (Partnership) Fairchild Export Sales Corporation (Barbados) Aircraft Tire Corporation Fairchild Titanium Technologies, Inc. Normvest (USSR)(50%) Plymouth Leasing Company Special-T Fasteners, Inc., plus contingent cash purchase price adjustments to be paid to Robert E. Edwards up to $2,000,000 RHI Holdings, Inc. Banner Aerospace, Inc. Billecart Expansion Euroactividade State of Israel - 12 year Variable Rate Bonds Teuza Fund Rotlex Oramir Semiconductor Equipment Ltd. Nevatim Triangle Venture Note Receivable - Technical Devices Note Receivable - Stelfast Fasteners Banner Aerospace, Inc. Aero International, Inc. (Ohio) (81%) Banner Aero (Australia) Pty. Ltd. (Australia) Banner Aerospace Foreign Sales Corporation (U.S. Virgin Islands) Banner Aerospace Services, Inc. (Ohio) BAR DE, Inc. (0.9%) Banner Aerospace-Singapore, Inc. BAR DE, Inc. (98.6%) D A C International, Inc. (Texas) Discontinued Aircraft, Inc. (Texas) Discontinued Services, Inc. GCCUS, Inc. (California) Georgetown Jet Center, Inc. Harco Northern Ireland Limited (N. Ireland - U.K.) Matrix Aviation, Inc. (Kansas) Nasam Incorporated (California) Dallas Aerospace, Inc. (Texas) PB Herndon Aeropace, Inc. (Missouri) BAR DE, Inc. (0.5%) Professional Aviation Associates, Inc. (Georgia) Professional Aircraft Accessories, Inc. (Florida) Kellstrom Warrants Watkins-Johnson Company Shared Technologies Cellular, Inc. Common Stock Investment in CICI Preferred B Stock Note Receivable - Net Holdings, Inc. Kaynar Technologies Inc. Kaynar Technologies Ltd. (United Kingdom) Recoil (Europe) Ltd. (United Kingdom) K.T.I. Fempari Kft (Hungary) KTI International Sales Corporation (Barbados) Marcliff Corporation Marson Creative Fastener, Inc. Edson Manufacturing, Inc. note payable to Marson Creative Fastener, Inc. $231,237.26 M&M Machine & Tool Co. Recoil Holdings, Inc. Recoil PTY (Australia) (99%) Recoil Marketing BVBA (Belgium) (0.13%) Recoil Pte Ltd. (Singapore) (50%) Recoil Thailand (Thailand) (0.1%) Recoil Inc. Recoil Thailand (Thailand) (0.1%) Recoil Australia Holdings, Inc. Recoil PTY (Australia) (1%) Recoil Pte Ltd. (Singapore) (50%) Recoil Thailand (Thailand) (0.1%) Recoil Marketing BVBA (Belgium) (99.87%) Recoil Thailand (Thailand) (74.3%) Shares in Pacific Horizon Funds -----END PRIVACY-ENHANCED MESSAGE-----