-----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, L6AsUB9SbHm9G66dHGMHMAcwCjDGBGEuSur4BBdOZIt3EXrEM+h5irARgLwei63C tHIqcqIBnUePMr7HshpTgQ== 0000009779-97-000020.txt : 19971114 0000009779-97-000020.hdr.sgml : 19971114 ACCESSION NUMBER: 0000009779-97-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970928 FILED AS OF DATE: 19971112 SROS: NYSE SROS: PSE 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: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06560 FILM NUMBER: 97714422 BUSINESS ADDRESS: STREET 1: 300 W SERVICE RD STREET 2: PO BOX 10803 CITY: CHANTILLY STATE: VA ZIP: 22021 BUSINESS PHONE: 7034785800 FORMER COMPANY: FORMER CONFORMED NAME: BANNER INDUSTRIES INC /DE/ DATE OF NAME CHANGE: 19901118 10-Q 1 20 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 September 28, 1997 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) Washington Dulles International Airport 300 West Service Road, PO Box 10803 Chantilly, VA 20153 (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 September 28, 1997 Class A Common Stock, $0.10 Par Value14,030,717 Class B Common Stock, $0.10 Par Value2,625,616 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES INDEX Page PART 1. FINANCIAL INFORMATION Item 1.Condensed Consolidated Balance Sheets as of September 28, 1997 (Unaudited) and June 30, 1997 . 3 Consolidated Statements of Earnings for the Three Months ended September 28, 1997 and September 29, 1996 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows for the Three Months ended September 28, 1997 and September 29, 1996 (Unaudited) 6 Notes to Condensed Consolidated Financial Statements (Unaudited) 7 Item 2.Management's Discussion and Analysis of Results of Operations and Financial Condition 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings 16 Item 6. Exhibits and Reports on Form 8-K 16 * For purposes of Part 1 and this Form 10-Q, the term "Company" means The Fairchild Corporation, and its subsidiaries, unless otherwise indicated. For purposes of Part II, the term "Company" means The Fairchild Corporation, unless otherwise indicated. PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS September 28, 1997 (Unaudited) and June 30, 1997 ASSETS
(In thousands) June 30, September 1997 (*) 28, 1997 CURRENT ASSETS: Cash and cash equivalents, $4,725 and $ 9,049 $ 19,420 $4,839 restricted Short-term investments 18,403 25,647 Accounts receivable-trade, less 172,239 168,163 allowances of $9,157 and $8,103 Inventories: Finished goods 305,048 297,223 Work-in-progress 29,812 26,887 Raw materials 24,807 18,626 359,667 342,736 Prepaid expenses and other current 39,595 33,631 assets Total Current Assets 598,953 589,597 Property, plant and equipment, net of 132,195 128,712 accumulated depreciation of $127,538 and $134,032 Net assets held for sale 26,262 26,147 Cost in excess of net assets 154,233 154,808 acquired, (Goodwill) less accumulated amortization of $37,895 and $36,672 Investments and advances, affiliated 55,337 55,678 companies Prepaid pension assets 59,512 59,742 Deferred loan costs 11,489 9,252 Other assets 45,135 43,397 TOTAL ASSETS $ 1,083,116 $ 1,067,333 *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 September 28, 1997 (Unaudited) and June 30, 1997 LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands) September June 30, 28, 1997 (*) 1997 CURRENT LIABILITIES: Bank notes payable and current $ 79,781 $ 47,422 maturities of long-term debt Accounts payable 84,797 84,953 Other accrued liabilities 91,289 105,199 Income taxes -- 5,881 255,867 243,455 Total Current Liabilities LONG-TERM LIABILITIES: Long-term debt, less current 412,261 416,922 maturities Other long-term liabilities 22,381 23,622 Retiree health care liabilities 43,284 43,387 Noncurrent income taxes 48,939 42,013 Minority interest in subsidiaries 69,178 68,309 TOTAL LIABILITIES 851,910 837,708 STOCKHOLDERS' EQUITY: Class A common stock, $0.10 par 2,027 2,023 value; authorized 40,000 shares, 20,272 shares issued (20,234 in June) and 14,031 shares outstanding (13,992 in June) Class B common stock, $0.10 par 263 263 value; authorized 20,000 shares, 2,626 shares issued and outstanding (2,633 in June) Paid-in capital 71,105 71,015 Retained earnings 210,441 209,949 Cumulative translation adjustment (865 ) (1,860 ) Net unrealized holding loss on (46 ) (46 ) available-for-sale securities Treasury Stock, at cost, 6,242 shares (51,719 ) (51,719 ) of Class A common stock TOTAL STOCKHOLDERS' EQUITY 231,206 229,625 TOTAL LIABILITIES AND STOCKHOLDERS' $ 1,083,116 $ 1,067,333 EQUITY *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) Months Ended September 28, 1997 and September 29, 1996
(In thousands, except per share data) Three Months Ended September September 29, 28, 1996 1997 REVENUE: Net sales $ 213,761 $ 146,090 Other income, net 5,357 223 219,118 146,313 COSTS AND EXPENSES: Cost of goods sold 161,699 106,280 Selling, general & administrative 45,479 35,846 Research and development 605 23 Amortization of goodwill 1,223 1,116 209,006 143,265 OPERATING INCOME 10,112 3,048 Interest expense 12,988 14,672 Interest income (398 ) (2,192 ) Net interest expense 12,590 12,480 1,897 (375 ) Investment income (loss), net Equity in earnings of affiliates 1,751 2,311 Minority interest (788 ) (785 ) 382 (8,281 ) EARNINGS (LOSS) BEFORE TAXES 110 3,663 Income tax benefit NET EARNINGS (LOSS) $ 492 $ (4,618 ) Primary earnings (loss) per share $ .03 $ (.28) Fully diluted earnings (loss) per .03 (.28) share Weighted average number of shares used in computing earnings per share: Primary 17,457 16,425 Fully Diluted 17,588 16,425 The accompanying notes to summarized financial information are an integral part of these statements.
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For The Three (3) Months Ended September 28, 1997 and September 29, 1996
(In thousands) Three Months Ended September September 28, 29, 1997 1997 (*) Cash flows provided by (used for) Operations: Net earnings (loss) 492 (4,618 ) $ $ Depreciation and amortization 6,857 5,268 Accretion of discount on long-term 34 1,100 liabilities Distributed earnings of affiliates, 715 1,499 net Minority interest 788 785 Changes in assets and liabilities (45,729 ) (49,923 ) (36,843 ) (45,889 ) Net cash used for operations Investments: Net proceeds from the sale of -- 173,719 discontinued operations Purchase of property, plant and (10,206 ) (2,131 ) equipment Net proceeds received from 7,815 15 investments Changes in net assets held for sale (139 ) (1,230 ) Other, net 45 5 (2,485 ) 170,378 Net cash provided by (used for) investments Financing: Proceeds from issuance of debt 95,109 33,627 Debt repayments and repurchase of (67,698 ) (77,783 ) debentures, net Issuance of Class A common stock 149 522 27,560 (43,634 ) Net cash provided by (used for) financing 1,397 594 Effects of exchange rate changes on cash Net increase (decrease) in cash and (10,371 ) 81,449 cash equivalents Cash and cash equivalents, beginning 19,420 39,649 of period Cash and cash equivalents, end of $ 9,049 $ 121,098 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 per share data) 1. FINANCIAL STATMENTS The consolidated balance sheet as of September 28, 1997 and the consolidated statements of earnings and cash flows for the three months ended September 28, 1997 and September 29, 1996 have been prepared by the Company, without audit. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at September 28, 1997, and for all periods presented, have been made. The balance sheet at June 30, 1997 was condensed from the audited financial statements as of that date. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's June 30, 1997 Form 10-K and Banner Aerospace, Inc.'s March 31, 1997 Form 10-K. The results of operations for the period ended September 28, 1997 are not necessarily indicative of the operating results for the full year. Certain amounts in prior years' quarterly financial statements have been reclassified to conform to the current presentation. 2. BUSINESS COMBINATIONS The Company's acquisitions described in this section have been accounted for using the purchase method. The respective purchase price assigned to the net assets acquired were based on the fair value of such assets and liabilities at the respective acquisition dates. In February 1997, the Company completed a transaction (the "Simmonds Acquisition") pursuant to which the Company acquired common shares and convertible debt representing an 84.2% interest, on a fully diluted basis, of Simmonds S.A. ("Simmonds"). The Company initiated a tender offer to purchase the remaining shares and convertible debt held by the public. By June 30, 1997, the Company had purchased, or placed sufficient cash in escrow to purchase, all the remaining shares and convertible debt of Simmonds. The total purchase price of Simmonds, including the assumption of debt, was approximately $62,000, which the Company funded with available cash. The Company recorded approximately $13,750 in goodwill as a result of this acquisition, which will be amortized using the straight-line method over 40 years. Simmonds is one of Europe's leading manufacturers and distributors of aerospace and automotive fasteners. In January 1997, Banner Aerospace, Inc. ("Banner"), a majority-owned subsidiary of the Company, acquired PB Herndon Company ("PB Herndon") in a business combination accounted for as a purchase. The total cost of the acquisition was $16,000, including the assumption of $1,300 in debt, which exceeded the fair value of the net assets of PB Herndon by approximately $3,500, which is being amortized using the straight-line method over 40 years. The Company purchased PB Herndon with available cash. PB Herndon is a distributor of specialty fastener lines and similar aerospace related components. On June 30, 1997, the Company sold all the patents of Fairchild Scandinavian Bellyloading Company ("SBC") to Teleflex Incorporated ("Teleflex") for $5,000, and immediately thereafter sold all the stock of SBC to a wholly owned subsidiary of Teleflex for $2,000. The Company may also receive additional proceeds of up to $7,000 based on future net sales of SBC's patented products and services. 3. RESTRICTED CASH The Company had approximately $4,725 and $4,839 of restricted cash on September 28, 1997 and June 30, 1997, respectively, all of which is maintained as collateral for certain debt facilities. 4. SUMMARIZED STATEMENT OF EARNINGS INFORMATION The following table presents summarized historical financial information, on a combined 100% basis, of the Company's principal investments, which are accounted for using the equity method.
Three Months Ended September September 28, 29, 1997 1996 Net sales 82,025 80,037 $ $ Gross profit 35,686 34,997 Earnings from continuing operations 2,501 4,052 Net earnings 2,501 4,052
The Company owns approximately 31.9% of Nacanco Paketleme common stock. The Company recorded equity earnings of $1,692 and $1,877 from this investment for the three months ended September 28, 1997 and September 29, 1996, respectively. On September 28, 1997, the Company's investments in Shared Technologies Fairchild Inc. ("STFI") consisted of (i) $22,703 carrying value for $25,000 face value of 6% cumulative Convertible Preferred Stock, (ii) $11,666 carrying value for $20,000 face value of Special Preferred Stock, and (iii) $(2,332) carrying value for 6,225,000 shares of common stock. At the close of trading on September 26, 1997, STFI's common stock was quoted at $11.56 per share. Based on this price, the Company's investment in STFI common stock had an approximate market value of $71,977. The Company recorded equity earnings of $59 and $434 from these investments during the three months ended September 28, 1997 and September 29, 1996, respectively. On July 16, 1997, STFI entered into a definitive merger agreement (the "STFI/Tel-Save Merger") with Tel-Save Holdings, Inc. ("Tel-Save"), pursuant to which Tel-Save would acquire STFI in a business combination accounted for as a pooling of interests. Upon consummation of the STFI/Tel-Save Merger, the Company will receive shares of Tel-Save's common stock in exchange for its shares of STFI common stock and STFI cumulative convertible preferred stock. The price to be paid by Tel-Save is $11.25 for each share of STFI. This price may increase depending on the price of Tel-Save prior to the effective date of the merger. In addition, the Company will receive approximately $22,000 cash in redemption for its shares of STFI special preferred stock. Tel-Save and STFI have scheduled shareholder meetings on December 1, 1997, to vote on the planned merger. As a result of the transaction, the Company expects to recognize a pre-tax gain in excess of $100,000. 5. CREDIT AGREEMENTS On July 18, 1997, the FHC Credit Agreement was restructured to provide FHC with a $150,000 senior secured credit facility (the "FHC Facility") consisting of (i) a $75,000 revolver loan, with a letter of credit sub- facility of $12,000, and (ii) a $75,000 term loan. Advances made under the FHC Facility would generally bear interest at a rate of, at the Company's option, (i) 2% over the Citibank N.A. base rate, or (ii) 3 1/4% over the Eurodollar Rate ("LIBOR"). The FHC Facility is subject to a non-use commitment fee of 1/2% of the aggregate unused availability; and outstanding letters of credit are subject to fees of 3 1/2% per annum. A borrowing base is calculated monthly to determine the amounts available under the FHC Facility. The borrowing base is determined monthly based upon specified percentages of (i) FHC's accounts receivable, inventories, and the appraised value of equipment and real property, and (ii) assets pledged by RHI to secure the facility. The FHC Facility matures on July 28, 2000. The FHC Facility provides that on December 31, 1998, the Company must repay the term loan, in full, together with an amount necessary to reduce the outstanding revolving loans to $52,000, if the Company has not complied with certain financial covenant requirements as of September 30, 1998. The Company was in compliance with all of its credit agreements on September 28, 1997. In August 1997, the Company entered into a delayed-start swap interest rate lock hedge agreement (the "FHC Hedge Agreement") to reduce its exposure to increases in interest rates on variable rate debt. Beginning on December 15, 1997, the FHC Hedge Agreement will provide interest rate protection on $100,000 of variable rate debt for ten years, with interest being calculated based on a fixed LIBOR rate of 6.696%. 6. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES On September 28, 1997, the Company had $69,178 of minority interest, of which $68,856 represents approximately 40.7% of Banner's common stock outstanding on a consolidated basis. 7. EQUITY SECURITIES The Company had 14,030,717 shares of Class A common stock and 2,625,616 shares of Class B common stock outstanding at September 28, 1997. Class A common stock is traded on both the New York and Pacific Stock Exchanges. There is no public market for the Class B common stock. Shares of Class A common stock are entitled to one vote per share and cannot be exchanged for shares of Class B common stock. Shares of Class B common stock are entitled to ten votes per share and can be exchanged, at any time, for shares of Class A common stock on a share-for-share basis. For the three months ended September 28, 1997, 31,534 shares of Class A Common Stock were issued as a result of the exercise of stock options, and shareholders converted 6,900 shares of Class B common stock into Class A common stock. 8. EARNINGS PER SHARE Primary and fully diluted earnings per share are computed by dividing net income by the weighted average number of shares and share equivalents outstanding during the period. To compute the incremental shares resulting from stock options and warrants for primary earnings per share, the average market price of the Company's stock during the period is used. To compute the incremental shares resulting from stock options and warrants for fully diluted earnings per share, the greater of the ending market price or the average market price of the Company's stock is used. In computing primary and fully diluted earnings per share for the three months ended September 28, 1997, the conversion of options and warrants was assumed, as the effect was dilutive. In computing primary and fully diluted earnings per share for the three months ended September 29, 1996, the conversion of options and warrants was not assumed, as the effect was antidilutive. 9. CONTINGENCIES Government Claims The Corporate Administrative Contracting Officer (the "ACO"), based upon the advice of the United States Defense Contract Audit Agency, has made a determination that Fairchild Industries, Inc. ("FII"), a former subsidiary of the company, did not comply with Federal Acquisition Regulations and Cost Accounting Standards in accounting for (i) the 1985 reversion to FII of certain assets of terminated defined benefit pension plans, and (ii) pension costs upon the closing of segments of FII's business. The ACO has directed FII to prepare cost impact proposals relating to such plan terminations and segment closings and, following receipt of such cost impact proposals, may seek adjustments to contract prices. The ACO alleges that substantial amounts will be due if such adjustments are made. The Company believes it has properly accounted for the asset reversions in accordance with applicable accounting standards. The Company has held discussions with the government to attempt to resolve these pension accounting issues. Environmental Matters The Company's operations are subject to stringent Government imposed environmental laws and regulations concerning, among other things, the discharge of materials into the environment and the generation, handling, storage, transportation and disposal of waste and hazardous materials. To date, such laws and regulations have not had a material effect on the financial condition, results of operations, or net cash flows of the Company, although the Company has expended, and can be expected to expend in the future, significant amounts for investigation of environmental conditions and installation of environmental control facilities, remediation of environmental conditions and other similar matters, particularly in the Aerospace Fasteners segment. In connection with its plans to dispose of certain real estate, the Company must investigate environmental conditions and may be required to take certain corrective action prior or pursuant to any such disposition. In addition, management has identified several areas of potential contamination at or from other facilities owned, or previously owned, by the Company, that may require the Company either to take corrective action or to contribute to a clean-up. The Company is also a defendant in certain lawsuits and proceedings seeking to require the Company to pay for investigation or remediation of environmental matters and has been alleged to be a potentially responsible party at various "Superfund" sites. Management of the Company believes that it has recorded adequate reserves in its financial statements to complete such investigation and take any necessary corrective actions or make any necessary contributions. No amounts have been recorded as due from third parties, including insurers, or set off against, any liability of the Company, unless such parties are contractually obligated to contribute and are not disputing such liability. As of September 28, 1997, the consolidated total recorded liabilities of the Company for environmental matters approximated $8,300, which represented the estimated probable exposures for these matters. It is reasonably possible that the Company's total exposure for these matters could be approximately $13,000 on an undiscounted cash flow basis. Other Matters The Company is involved in various other claims and lawsuits incidental to its business, some of which involve substantial amounts. The Company, either on its own or through its insurance carriers, is contesting these matters. In the opinion of management, the ultimate resolution of the legal proceedings, including those aforementioned, will not have a material adverse effect on the financial condition, or future results of operations or net cash flows of the Company. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The Fairchild Corporation (the "Company") was incorporated in October 1969, under the laws of the State of Delaware. On November, 15, 1990, the Company changed its name from Banner Industries, Inc. to The Fairchild Corporation. RHI Holdings, Inc. ("RHI") is a direct subsidiary of the Company. RHI is the 100% owner of Fairchild Holding Corp. ("FHC") and the majority owner of Banner Aerospace, Inc. ("Banner"). The Company's principal operations are conducted through RHI and FHC. The Company also holds significant equity interests in Shared Technologies Fairchild Inc. ("STFI") and Nacanco Paketleme ("Nacanco"). The following discussion and analysis provide information which management believes is relevant to assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto. CAUTIONARY STATEMENT Certain statements in the financial discussion and analysis by management contain forward-looking information that involves risk and uncertainty, including current trend information, projections for deliveries, backlog, and other trend projections. Actual future results may differ materially depending on a variety of factors, including product demand; performance issues with key suppliers; customer satisfaction and qualification issues; labor disputes; governmental export and import policies; worldwide political stability and economic growth; legal proceedings; business combinations; investment risks; and acts of nature. RECENT DEVELOPMENTS On July 16, 1997, STFI entered into a definitive merger agreement (the "STFI/Tel-Save Merger") with Tel-Save Holdings, Inc. ("Tel-Save"), pursuant to which Tel-Save plans to acquire STFI in a business combination accounted for as a pooling of interests. Upon consummation of the STFI/Tel-Save Merger, the Company will receive shares of Tel-Save's common stock in exchange for its shares of STFI common stock and STFI cumulative convertible preferred stock. The price to be paid by Tel-Save is $11.25 for each share of STFI. This price may increase depending on the price of Tel-Save prior to the effective date of the merger. In addition, the Company will receive approximately $22 million cash in redemption for its shares of STFI special preferred stock. The Company expects the merger to be consummated prior to December 31, 1997. As a result of the transaction, the Company would recognize a pre-tax gain in excess of $100 million. On June 30, 1997, the Company sold all the patents of Fairchild Scandinavian Bellyloading Company ("SBC") to Teleflex Incorporated ("Teleflex") for $5.0 million, and immediately thereafter sold all the stock of SBC to a wholly owned subsidiary of Teleflex for $2.0 million. The Company may also receive additional proceeds of up to $7.0 million based on future net sales of SBC's patented products and services. In February 1997, the Company completed a transaction (the "Simmonds Acquisition") pursuant to which the Company acquired common shares and convertible debt representing an 84.2% interest, on a fully diluted basis, of Simmonds S.A. ("Simmonds"). The Company initiated a tender offer to purchase the remaining shares and convertible debt held by the public. By June 30, 1997, the Company had purchased, or placed sufficient cash in escrow to purchase, all the remaining shares and convertible debt of Simmonds. The total purchase price of Simmonds, including the assumption of debt, was approximately $62.0 million, which the Company funded with available cash. The Company recorded approximately $13.7 million in goodwill as a result of this acquisition, which will be amortized using the straight-line method over 40 years. Simmonds is one of Europe's leading manufacturers and distributors of aerospace and automotive fasteners. In January 1997, Banner, through its subsidiary, Dallas Aerospace, Inc., acquired PB Herndon Company ("PB Herndon") in a business combination accounted for as a purchase. The total cost of the acquisition was $16.0 million, including the assumption of $1.3 million in debt, which exceeded the fair value of the net assets of PB Herndon by approximately $3.5 million. The excess is being amortized using the straight-line method over 40 years. The Company purchased PB Herndon with available cash. PB Herndon is a distributor of specialty fastener lines and similar aerospace related components. RESULTS OF OPERATIONS The Company currently reports in two principal business segments: Aerospace Fasteners and Aerospace Distribution. The results of Fairchild Technologies, together with the results of Gas Springs and SBC (for the prior year period) are included in the Corporate and Other classification. The following table illustrates the historical sales and operating income of the Company's operations for the three months ended September 28, 1997 and September 29, 1996.
(In thousands) For the Quarter Ended September September 28, 1997 29, 1996 Sales by Segment: Aerospace Fasteners 76,847 55,047 $ $ Aerospace Distribution 122,914 84,107 Corporate and Other 18,847 9,654 Eliminations (a) (4,847 ) (2,718 ) 213,761 146,090 Total Sales $ $ Operating Income (Loss) by Segment: Aerospace Fasteners $ 2,510 $ 2,108 Aerospace Distribution 9,371 5,981 Corporate and Other (1,769 ) (5,041 ) 10,112 Total Operating Income $ $ 3,048 (a) Represents intersegment sales from the Aerospace Fasteners segment to the Aerospace Distribution segment.
CONSOLIDATED RESULTS Net sales of $213.8 million in the first quarter of Fiscal 1998 improved significantly by $67.7 million, or 46.3%, compared to sales of $146.1 million in the first quarter of Fiscal 1997. Sales growth was stimulated by the resurgent commercial aerospace industry, together with the effects that recent acquisitions contributed in the current quarter. Gross Margin as a percentage of sales was 24.4% and 27.3% in the first quarter of Fiscal 1998 and 1997, respectively. The lower margin in the current quarter is attributable to inefficiencies associated with increased production rates requiring the addition of new employees and the payment of overtime to existing employees within the Aerospace Fasteners segment, and a change in product mix and increased price competition in the Aerospace Distribution segment. Selling, General & Administrative expense as a percentage of sales was 21.3% and 24.5% in the first quarter of Fiscal 1998 and 1997, respectively. The improvement in the current quarter was attributable primarily to administrative efficiencies in correlation to the increase in sales. Research and Development expense increased in the current quarter, compared to the prior year quarter, as a result of product development within Fairchild Technologies. Additional research and development expenses will be incurred in the future. Other income increased $5.1 million in the current quarter, compared to the prior year quarter, due primarily to the sale of air rights over a portion of the property the Company owns and is developing in Farmingdale, New York. Operating income of $10.1 million in the first quarter of Fiscal 1998 increased $7.1 million, or 232%, compared to operating income of $3.0 million in the first quarter of Fiscal 1997. The increase in operating income was due primarily to the improved results provided by the Company's aerospace operations and the aforementioned increase in other income. Investment income, net, increased $2.3 million in the first quarter of Fiscal 1998, due primarily to recording unrealized gains on the fair market adjustments of trading securities in the first quarter of Fiscal 1998 while recording unrealized losses from trading securities in the first quarter of Fiscal 1997. Equity in earnings of affiliates decreased $.6 million in the first quarter of Fiscal 1998, compared to the first quarter of Fiscal 1997, due to slightly lower earnings by STFI and Nacanco. Income Taxes included a $.1 million tax benefit in the first quarter of Fiscal 1998, on pre-tax earnings of $.4 million. The tax benefit was due primarily to losses generated by domestic operations. Net earnings of $.5 million in the three months ended September 28, 1997, improved by $5.1 million compared to the $4.6 million net loss recorded in the three months ended September 29, 1996. This improvement is attributable to (i) the $7.1 million increase in operating income, and (ii) the $2.3 million increase in investment income, offset partially by a $3.6 million decrease in income tax benefit. SEGMENT RESULTS: AEROSPACE FASTENERS SEGMENT Sales in the Aerospace Fasteners segment increased by $21.8 million to $76.8 million, up 39.6% the first quarter of Fiscal 1998, compared to the first quarter of Fiscal 1997, reflecting significant growth in the commercial aerospace industry combined with the effect of the Simmonds acquisition. New orders have continued to exceed reported sales, resulting in a backlog of $201 million at September 28, 1997, up from $196 million at June 30, 1997. Excluding current quarter sales of $14.6 million contributed by Simmonds, sales increased 13.1% in Fiscal 1997, compared to the same quarter of the prior year. Operating income improved by $.4 million, or 19.1%, during the first quarter of Fiscal 1998, compared to the first quarter of Fiscal 1997. This improvement was attributable to the results of Simmonds. Excluding current quarter results of Simmonds, operating income would have decreased by $1.1 million in the first quarter of Fiscal 1998, compared to the same quarter of the prior year, reflecting inefficiencies associated with increased production rates which required the addition of employees and substantial overtime work. The Company anticipates that the productivity inefficiencies will gradually improve in the coming months. AEROSPACE DISTRIBUTION SEGMENT Aerospace Distribution sales were up $38.8 million, or 46.1%, for the first three months of Fiscal 1998, compared to the same period of the prior year. The improvement in the current period is due to increased sales to commercial airlines, original equipment manufacturers, and other distributors and increased sales of turbine parts and engine management services. In addition, incremental sales of $5.2 million by PB Herndon also contributed to the increase. Operating income was up $3.4 million, or 56.7%, for the first three months of Fiscal 1998, compared to the same period of the prior year, due primarily to the increase in sales and the related economies of scale. Lower gross margins, as a percentage of sales, resulting from a change in product mix together with increased price competition were offset by improved efficiencies of selling, general and administrative expenses, as a percentage of sales. This segment has benefited from the extended service lives of existing aircraft, growth from acquisitions and internal growth, which has increased its overall market share. CORPORATE AND OTHER The Corporate and Other classification includes Fairchild Technologies, Gas Springs Division and corporate activities. The results of SBC, which was sold at Fiscal 1997 year-end, are included in the prior period results. The group reported an increase in sales of $9.2 million, or 95.2%, in the first quarter of Fiscal 1998, as compared to the same period in Fiscal 1997, due primarily to an improvement in sales of Fairchild Technologies advanced semiconductor manufacturing equipment line. The operating loss decreased by $3.3 million in the first quarter of Fiscal 1998, compared to the first quarter of Fiscal 1997, as a result of an increase in other income, partially offset by increased losses at Fairchild Technologies. The operating results classified under Corporate and Other are affected by the operations of Fairchild Technologies Division ("The Division"), which may fluctuate because of industry cyclicality, the volume and timing of orders, the timing of new product shipments, customer's capital spending, and pricing changes by The Division and its competition. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES At September 28, 1997, cash and cash equivalents decreased to $9.0 million from $19.4 million at June 30, 1997, due to cash used for operations of $36.8 million and net capital expenditures of $10.2 million, offset partially by cash of $27.4 million provided from the increased borrowings from revolving debt and $10.2 million received from the sale of investments. The Company's principal cash requirements include debt service, capital expenditures, acquisitions, and payment of other liabilities. Other liabilities that require the use of cash include post- employment benefits for retirees, environmental investigation and remediation obligations, and litigation settlements and related costs. The Company maintains credit agreements with a consortium of banks, which provide revolving credit facilities to RHI and FHC, and a separate revolving credit facility and term loans to Banner. At September 28, 1997, the Company had available credit lines of $86.9 million. The Company anticipates that existing capital resources, cash generated from operations, and cash from borrowings and asset sales will be adequate to maintain the Company's current level of operations. The Company's management intends to take appropriate action to refinance portions of its debt, if necessary to meet long-term cash requirements. The Company recently announced plans to issue five million new shares of Class A common stock (the "Offering") and an intention to simultaneously enter into a new credit facility (the "New Credit Facility") that will provide total lending commitments of approximately $275 million. The Company expects to receive net proceeds from the Offering of approximately $132 million. The net proceeds from the Offering, together with borrowings of approximately $200 million under the New Credit Facility, will be used to refinance substantially all of the Company's existing indebtedness (other than the indebtedness at Banner), consisting of (i) $63.0 million of the 11 7/8% Senior Debentures due 1999; (ii) $117.8 million of the 12% Intermediate Debentures due 2001; (iii) $35.9 million of the 13 1/8% Subordinated Debentures due 2000; (iv) $25.1 million of the 13% Junior Subordinated Debentures due 2007; and (v) its existing bank indebtedness, other than Banner's. Contingent upon a successful completion, the refinancing plan will substantially reduce the Company's annual interest expense. On July 16, 1997, STFI entered into a definitive merger agreement (the "STFI/Tel-Save Merger") with Tel-Save Holdings, Inc. ("Tel-Save"), pursuant to which Tel-Save will acquire STFI in a business combination accounted for as a pooling of interests. Upon consummation of the STFI/Tel-Save Merger, the Company will receive shares of Tel-Save's common stock, in exchange for its shares of STFI common stock and STFI cumulative convertible preferred stock, as well as approximately $22.0 million cash in redemption of its shares of STFI special preferred stock. As a result of the transaction, the Company would recognize a pre-tax gain in excess of $100 million. With the year 2000 approaching, the Company is preparing all of its computer systems to be Year 2000 compliant. Substantially all of the systems within the Aerospace Fasteners segment are currently Year 2000 compliant. The Company expects to replace and upgrade some systems, which are not Year 2000 compliant, within the Aerospace Distribution segment and at Fairchild Technologies. The Company expects all of its systems will be Year 2000 compliant on a timely basis. However, there can be no assurance that the systems of other companies, on which the Company's systems rely, will also be timely converted. Management is currently evaluating the cost of ensuring that all systems are Year 2000 compliant. Management believes it has successfully restructured and repositioned the Company from a diversified industrial company to a focused Aerospace Industry participant. As worldwide airlines and aircraft manufacturers increase capacity to meet demand, the Company plans to benefit through internal growth, external growth and improved productivity. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board ("FASB") issued two pronouncements, Statement of Financial Accounting Standards No. 128 ("SFAS 128") "Earnings Per Share", and Statement of Financial Accounting Standards No. 129 ("SFAS 129") "Disclosure of Information about Capital Structure". SFAS 128 establishes accounting standards for computing and presenting earnings per share ("EPS"). SFAS 128 is effective for periods ending after December 15, 1997, including interim periods, and requires restatement of all prior period EPS data presented. Results from the calculation of simple and diluted earnings per share, as prescribed by SFAS 128, would not be materially different from the calculations for primary and fully diluted earnings per share for years ending June 30, 1997 and June 30, 1996. SFAS 129 establishes standards for disclosure of information about the Company's capital structure and becomes effective for periods ending after December 15, 1997. In June 1997, FASB issued two pronouncements, Statement of Financial Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive Income", and Statement of Financial Accounting Standards No. 131 ("SFAS 131") "Disclosures about Segments of an Enterprise and Related Information". SFAS 130 establishes standards for reporting and display of comprehensive income and its components in the financial statements. SFAS 131 supersedes Statement of Financial Accounting Standards No. 14 "Financial Reporting for Segments of a Business Enterprise" and requires that a public company report certain information about its operating segments in annual and interim financial reports. The Company will adopt SFAS 130 and SFAS 131 in Fiscal 1999. PART II. OTHER INFORMATION Item 1. Legal Proceedings Reference is made to Note 9 of Notes to Consolidated Financial Statements. Item 6. Exhibits and Reports on Form 8-K Exhibits: * 10(y)(iv) Amendment No. 3 dated as of September 26, 1997, to the RHI Credit Agreement dated as of May 27, 1996. * 10(af)(ii) Form Warrant Agreement issued to Stinbes Limited dated as of September 26, 1997, effective retroactively as of February 21, 1997. * 10(af)(iii) Extension of Warrant Agreement between Registrant and Stinbes Limited for 375,000 shares of Class A or Class B Common Stock dated as of September 26, 1997, effective retroactively as of February 21, 1997. * 10(ag) Interest Rate Hedge Agreement between Registrant and Citibank, N.A. dated as of August 19, 1997. * 27 Financial Data Schedules (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter. * Filed herewith. 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: November 12, 1997 EX-27 2
5 1,000 3-MOS JUN-30-1998 SEP-28-1997 9,049 18,403 181,396 9,157 359,667 598,953 259,733 127,538 1,083,116 255,867 412,261 0 0 2,028 229,178 1,083,116 213,761 219,118 161,699 209,006 0 0 12,590 382 (110) 492 0 0 0 492 0.03 0.03
EX-10 3 4 AMENDMENT NO. 3 Dated as of September 26, 1997 to RESTATED AND AMENDED CREDIT AGREEMENT Dated as of May 27, 1996 This Amendment No. 3 ("Amendment") dated as of September 26, 1997 is entered into between RHI Holdings, Inc., a Delaware corporation ("RHI") and Citicorp North America, Inc., as the sole "Senior Lender" (as defined in the Credit Agreement identified below) of RHI. Capitalized terms used herein without definition are used herein as defined in the Credit Agreement. PRELIMINARY STATEMENT: RHI, Citicorp North America, Inc., as Senior Lender, and the Administrative Agent are parties to that certain Restated and Amended Credit Agreement dated as of May 27, 1996, as heretofore amended (the "Credit Agreement"). RHI has entered into a certain Second Amended and Restated Credit Agreement dated as of July 18, 1997 (the "FHC Credit Agreement) in the capacity as a guarantor of the obligations thereunder of Fairchild Holding Corp., a Delaware corporation and wholly-owned subsidiary of RHI. The parties to the Credit Agreement are desirous of conforming certain provisions of the Credit Agreement to certain terms of the FHC Credit Agreement as they pertain to RHI. Subject to the terms and conditions stated herein, RHI and the sole Senior Lender of RHI have agreed to amend the Credit Agreement as set forth in Section 1. SECTION 1. Amendment to the Credit Agreement. Effective as of July 18, 1997, subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, the Credit Agreement is hereby amended to: 1.1 Delete the definition of "Tax Allocation Agreement" in its entirety and substitute the following therefor: "Tax Allocation Agreement" means that certain Eleventh Amended and Restated Tax Allocation Agreement dated as of July 18, 1997 among TFC, the Borrower, Fairchild Holding Corp. and certain Affiliates thereof, as in effect on July 18, 1997. 1.2 Delete the provisions of Section 9.04(c) in their entirety. 1.3 Amend the provisions of Section 9.07(b) to delete the provisions thereof in their entirety and substitute the following therefor: (b) Concurrently with the annual delivery to the independent accountants of the Borrower of a letter relating to financial exposure of the Borrower and its Subsidiaries with respect to Environmental Liabilities and Costs substantially in the form of that letter dated August 28, 1996 addressed to Arthur Andersen & Co., a copy of which has been delivered to the Administrative Agent prior to July 18, 1997, the Borrower shall deliver a like letter addressed to the Administrative Agent; provided, however, that in the event no such letter is provided to the independent accountants of the Borrower with respect to any given Fiscal Year, such letter shall be prepared with respect to such Fiscal Year and delivered to the Administrative Agent on October 31 of the calendar year in which such Fiscal Year ends. 1.4 Delete the provisions of Section 9.13 in their entirety. 1.5 Delete the provisions of Section 11.14 in their entirety. 1.6 Delete the provisions of Section 11.21 in their entirety. 1.7 Delete the provisions of Section 14.01(r) in their entirety. SECTION 2. Condition Precedent to Effectiveness of this Amendment. This Amendment shall become effective as of July 18, 1997 if, and only if, the Administrative Agent shall have received on or before September 26, 1997, an original copy of this Amendment executed by RHI and the sole Senior Lender. SECTION 3. Representations and Warranties. RHI hereby represents and warrants as follows: 3.1 This Amendment and the Credit Agreement as previously executed and amended and as amended hereby constitute legal, valid and binding obligations of RHI and are enforceable against RHI in accordance with their terms. 3.2 No Event of Default or Potential Event of Default exists or would result from any of the transactions contemplated by this Amendment. 3.3 Upon the effectiveness of this Amendment and as of the date hereof, RHI hereby reaffirms all covenants, representations and warranties made by it in the Credit Agreement to the extent the same are not amended hereby and agrees that all such covenants, representations and warranties shall be deemed to have been remade as of the date this Amendment becomes effective (unless a representation and warranty is stated to be given on and as of a specific date, in which case such representation and warranty shall be true, correct and complete as of such date). SECTION 4. Reference to and Effect on the Credit Agreement. 4.1 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, and each reference to the Credit Agreement in any other document, instrument or agreement executed and/or delivered in connection with the Credit Agreement shall mean and be a reference to the Credit Agreement as amended hereby. 4.2 Except as specifically amended above, the Credit Agreement and all other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. 4.3 The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of any Senior Lender or Agent or the Administrative Agent under the Credit Agreement or any of the other Loan Documents, nor constitute a waiver of any provision contained therein, except as specifically set forth herein. SECTION 5. Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. Delivery of an executed counterpart of this Amendment by telecopier shall be effective as delivery of a manually executed counterpart of this Amendment. SECTION 6. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. SECTION 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. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the date first above written. RHI HOLDINGS, INC. CITICORP NORTH AMERICA, INC. By: Karen L. Schneckenburger By: Timothy L. Freeman Vice President & Treasurer Vice President 457582.296344.01 November 10, 1997 EX-10 4 -3- THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SHARES OF CLASS A COMMON STOCK OR CLASS B COMMON STOCK [OR OTHER SECURITIES] ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT, OR (ii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, THAT AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933 IS AVAILABLE. THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN. EXERCISABLE AT ANY TIME ON OR PRIOR TO MARCH 13, 2002, SUBJECT TO THE CONDITIONS SET FORTH BELOW No. 6 Warrants to Purchase 375,000 Shares of Class A Common Stock or Class B Common Stock THE FAIRCHILD CORPORATION WARRANT CERTIFICATE THIS CERTIFIES THAT, for value received, STINBES LIMITED, as assignee of Jeffrey J. Steiner, or registered assigns (the "Holder"), is the owner of the number of Warrants set forth above, each of which entitles the owner thereof to purchase at any time on or prior to March 13, 2002 (subject to the conditions set forth below), one fully paid and nonassessable share of the Class A Common Stock, $.10 par value (the "Class A Common Stock"), or one fully paid and nonassessable share of the Class B Common Stock, $.10 par value (the "Class B Common Stock"), of The Fairchild Corporation, a Delaware corporation, p/k/a Banner Industries, Inc. (the "Company") (the Class A Common Stock and the Class B Common Stock are hereinafter jointly referred to as the "Common Stock"), at the purchase price of $7.67 per share, increased by two-tenths of one cent ($.002) for each day subsequent to March 13, 1997, but fixed at $7.80 per share after June 30, 1997, subject to adjustment (the "Warrant Price"). Payment of the Warrant Price may be made in cash or by certified or official bank check. As provided in the Warrant Agreement referred to below, the Warrant Price and the number or kind of shares which may be purchased upon the exercise of the Warrants evidenced by this Warrant Certificate are, upon the happening of certain events, subject to certain modification and adjustment. The number and kind of shares which may be purchased upon the exercise of the Warrants evidenced by this Warrant Certificate and the Warrant Price have been modified and adjusted for events which have occurred through the date hereof pursuant to Section 9 of the Warrant Agreement (as hereinafter defined). Notwithstanding the foregoing, the Holder hereof may not exercise the right to purchase Common Stock pursuant to the terms of this Warrant Certificate, except within the following window periods: (a) within 365 days after the merger of Shared Technologies Fairchild Inc. with AT&T Corporation, MCI Communications, Worldcom Inc., Tel-Save Holdings, Inc., or Teleport Communications Group, Inc.; (b) within 365 days after a change of control of the Company, as defined in the Fairchild Holding Corp. Credit Agreement with Citicorp et. al.; or (c) within 365 days after a change of control of Banner Aerospace, Inc., as defined in the Banner Aerospace, Inc. Credit Agreement with Citicorp. et. al. In no event may such right to purchase Common Stock be exercised after March 13, 2002. This Warrant Certificate is subject to, and entitled to the benefits of, all of the terms, provisions and conditions of a Warrant Agreement originally entered into as of March 13, 1986, between the Company and Drexel Burnham Lambert Incorporated, and subsequently assigned (through a series of transfers) to the Holder hereof. Such Warrant Agreement, as amended from time to time, together with the Extension of Warrant Agreement entered into between the Company and Holder as of the date hereof, are collectively referred to herein as the "Warrant Agreement." The Warrant Agreement is incorporated herein by reference and is made a part hereof. Without limitation, the Warrant Agreement sets forth the rights, limitations of rights, obligations, duties and immunities of the Company and the Holder with respect to this Warrant Certificate. Copies of the Warrant Agreement are on file at the principal office of the Company. The Holder hereof may be treated by the Company and all other persons dealing with this Warrant Certificate as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented hereby, or to the transfer hereof on the books of the Company, any notice to the contrary notwithstanding, and until such transfer on such books, the Company may treat the Holder hereof as the owner for all purposes. The Warrant Certificate, with or without other Warrant Certificates, upon surrender at the principal office of the Company, may be exchanged for another Warrant Certificate or Warrant Certificates of like tenor and date, evidencing Warrants entitling the Holder to purchase a like aggregate number of shares of Common Stock as the Warrants evidenced by the Warrant Certificate or Warrant Certificates surrendered entitle such Holder to purchase. If this Warrant Certificate shall be exercised in part, the Holder shall be entitled to receive upon surrender hereof, another Warrant Certificate or Warrant Certificates for the number of whole Warrants not exercised. No fractional shares of Common Stock will be issued upon the exercise of any Warrant or Warrants evidenced hereby, but in lieu thereof a cash payment will be made, as provided in the Warrant Agreement. No Holder shall be entitled to vote or receive dividends or be deemed the holder of Common Stock or any other securities of the Company which may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained in the Warrant Agreement or herein be construed to confer upon such Holder, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issue of stock, reclassification of stock, change of par value or change of stock to no par value, consolidation, merger, conveyance, or otherwise) or except as provided in the Warrant Agreement, to receive notice of meetings, or to receive dividends or subscription rights or otherwise, until the Warrant or Warrants evidenced by this Warrant Certificate shall have been exercised as provided in the Warrant Agreement. IN WITNESS WHEREOF, the Company has caused its duly authorized officers to execute this Warrant Certificate (or such officers' facsimile signatures to be printed hereon) and has caused its corporate seal (or facsimile thereof) to be printed hereon. This Warrant Certificate is dated as of September 26, 1997, effective retroactively as of February 21, 1997, extending and modifying all previously issued Warrant Certificates issued prior to the date hereof. All such previously issued Warrant Certificates are null and void. THE FAIRCHILD CORPORATION [SEAL] By: Colin M. Cohen Senior Vice President and Chief Financial Officer Attest: Donald E. Miller Senior Vice President and Corporate Secretary ASSIGNMENT (To be executed only upon assignment of Warrant Certificate) For value received, hereby sells, assigns and transfers unto the within Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint attorney, to transfer said Warrant Certificate on the books of the within-named Company, with full power of substitution in the premises. Dated: , 19___. NOTE: The above signature should correspond exactly with the name on the face of this Warrant Certificate. PURCHASE FORM (To be executed upon exercise of Warrant) To The Fairchild Corporation The undersigned hereby irrevocably elects to exercise the right of purchase represented by the within Warrant Certificate for, and to purchase thereunder, the following shares of Common Stock, as provided for therein, and tenders herewith payment of the purchase price in full in the form of [cash or certified or official bank check in the amount of $ ]: Shares of Class A Common Stock Shares of Class B Common Stock Please issue a certificate or certificates for such shares of Common Stock in the name of, and pay any cash for any fractional share to: Name: Address: Social Security or Tax I.D. Number: (Please Print) Signature NOTE: The above signature should correspond exactly with the name on the fact of this Warrant Certificate or with the name of assignee appearing in the assignment form below. And, if said number of shares shall not be all the shares purchasable under the within Warrant Certificate, a new Warrant Certificate is to be issued in the name of said undersigned for the balance remaining of the shares purchasable thereunder less any fraction of a share paid in cash. Dated: , 19___. EX-10 5 -3- EXTENSION OF WARRANT AGREEMENT BETWEEN THE FAIRCHILD CORPORATION AND STINBES LIMITED FOR 375,000 SHARES OF CLASS A OR CLASS B COMMON STOCK This Extension of Warrant Agreement (the "Extension") is made as of September 26, 1997, effective retroactively as of February 21, 1997, for the purpose of extending and modifying (as provided below) the Warrant Agreement dated as of March 13, 1986 (the "Warrant Agreement"), between The Fairchild Corporation, p/k/a Banner Industries, Inc., a Delaware corporation (the "Company"), and Stinbes Limited. Capitalized terms used but not otherwise defined herein shall have the meaning ascribed to them in the Warrant Agreement. RECITALS A. On March 13, 1986, the Company entered into the Warrant Agreement with Drexel Burnham Lambert ("DBL"), and (pursuant to the terms of the Warrant Agreement) issued to DBL warrants to purchase up to an aggregate of 200,000 shares of either Class A or Class B common stock of the Company (the "Warrants"). The Warrants were issued in conjunction with DBL acting as the underwriter for the public offering of certain of the Company's debentures. B. Pursuant to a Purchase and Sale Agreement dated as of January 4, 1989, Jeffrey J. Steiner ("Steiner"), DBL and the Company, Steiner purchased 187,500 Warrants from DBL (subject to all the benefits and obligations under the Warrant Agreement). C. Section 5.1 of the Warrant Agreement provides that the Warrant Price and the number of Warrant Shares are subject to adjustment upon the occurrence of certain events pursuant to the terms of Section 9 of the Warrant Agreement. In June, 1989, as a result of a two-for-one stock split (an adjustable event as defined in Section 9 of the Warrant Agreement) the number of Warrant Shares in favor of Steiner was increased to 375,000, and the Warrant Price was decreased to $7.67 per share. D. On September 12, 1991, the Board of Directors of the Company voted to renew the Warrants issued in favor of Steiner, which had expired on March 13, 1991, for an extended term to expire on March 13, 1993. On March 8, 1993, the Board of Directors of the Company voted to extend the Expiration Date of the Warrants to March 13, 1995. On February 16, 1995, the Board of Directors of the Company voted to extend the Expiration Date of the Warrants to March 13, 1997. E. On March 22, 1993, Steiner assigned the Warrants to Bestin Ltd. On May 31, 1993, Bestin Ltd. assigned the Warrants to Stinbes Limited. Stinbes Limited is an affiliate of Steiner. F. By Board action taken on February 21, 1997, and again on September 11, 1997, and September 26, 1997, the Board of Directors of the Company voted to extend the Expiration Date of the Warrants to March 13, 2002, subject to the modifications set forth below. G. Section 17 of the Warrant Agreement provides that the Company and the Holder may, from time to time, supplement or amend the Warrant Agreement in any manner which "the Company may deem necessary or desirable and which shall not be inconsistent with the provisions of the Warrants and which shall not adversely affect the interest of the Holders." NOW, THEREFORE, in consideration of the premises and the mutual agreements herein, and for other good and valuable consideration (the receipt and adequacy of which are hereby acknowledged), the parties hereto agree as follows: 1. Effective as of February 21, 1997, the Expiration Date of any issued Warrants, outstanding and unexpired on that date, shall be March 13, 2002. 2. Effective as of February 21, 1997, the Warrant Price shall be $7.67 per share, increased by two tenths of one cent ($.002) for each day subsequent to March 13, 1997, but fixed at $7.80 per share after June 30, 1997. 3. Effective as of February 21, 1997, the Warrants may not be exercised except within the following window periods: (a) within 365 days after the merger of Shared Technologies Fairchild Inc. with AT&T Corporation, MCI Communications, Worldcom Inc., Tel- Save Holdings, Inc., or Teleport Communications Group, Inc.; (b) within 365 days after a change of control of the Company, as defined in the Fairchild Holding Corp. Credit Agreement with Citicorp et. al.; or (c) within 365 days after a change of control of Banner Aerospace, Inc., as defined in the Banner Aerospace, Inc. Credit Agreement with Citicorp. et. al. In no event may the Warrants be exercised after March 13, 2002. 4. Effective as of February 21, 1997, each reference in the Warrant Agreement to "this Agreement" "hereunder", "hereof", "herein", or words of like import shall mean and be a reference to the Warrant Agreement, as amended previously and as extended and modified hereby, and each reference to the Warrant Agreement and any other document, instrument or agreement executed and/or delivered in connection with the Warrant Agreement shall mean and be a reference to the Warrant Agreement as amended previously and as extended and modified hereby. 5. Except as specifically modified herein, the Warrant Agreement shall remain in full force and effect and is hereby ratified and confirmed. 6. This Extension may be executed in multiple counterparts. IN WITNESS WHEREOF, the parties hereto have caused this Extension to be executed by their respective officers thereunto duly authorized as of the date first written above. THE FAIRCHILD CORPORATION By: Donald E. Miller Senior Vice President and Corporate Secretary STINBES LIMITED By: David Faust Vice President EX-10 6 SCHEDULE to the MASTER AGREEMENT Dated as of October 30, 1997 between Citibank, N.A. ("Party A"), a national banking association organized under the laws of the United States and Fairchild Holding Corp. ("Party B"), a Delaware corporation. Scope of Agreement As of the date of this Agreement, all Transactions entered into (whether before or after this Agreement is entered into) between the parties to this Agreement through Offices specified in Part 4(4) of this Schedule (and the respective rights and obligations of the parties in respect of those Transactions) shall be governed by, subject to, and determined in accordance with, the terms and conditions set out in this Agreement and the related Confirmations. PART 1 Termination Provisions In this Agreement: (1) "Specified Entity" does not apply. (2) "Specified Transaction" will have the meaning specified in Section 14 of the Agreement. (3) The "Cross-Default" provisions of Section 5(a)(vi) of the Agreement will apply to Party A and Party B. "Specified Indebtedness" means any obligation (whether present or future, contingent or otherwise, as principal or surety or otherwise) in respect of borrowed money, other than indebtedness in respect of deposits received. "Threshold Amount" means (i) with respect to Party A, 2% of the stockholders' equity of Party A and (ii) with respect to Party B, 2% of the stockholders' equity of Party B. (4) The "Credit Event Upon Merger" provisions of Section 5(b)(iv) of the Agreement will apply to Party A and Party B. The "Automatic Early Termination" provision of Section 6(a) of the Agreement will not apply to Party A or Party B; provided, however, where the Event of Default specified in Section 5(a)(vii)(1), (3), (4), (5), (6) or to the extent analogous thereto, (8) of the Agreement, is governed by a system of law which does not permit termination to take place after the occurrence of the relevant Event of Default, then the Automatic Early Termination provision of Section 6(a) of the Agreement will apply to Party A and Party B. (6) Payments on Early Termination. For the purpose of Section 6(e) of the Agreement: The Second Method and Market Quotation will apply. (7) "Termination Currency" means United States Dollars. (8) Additional Termination Events. (a) Section 5(b) of the Agreement is modified by adding at the end thereof the following subsection (vi): (vi) Impossibility. Due to the occurrence of a natural or man- made disaster, armed conflict, act of terrorism, riot, labor disruption or any other circumstance beyond its control after the date on which a Transaction is entered into, it becomes impossible (other than as a result of its own misconduct) for such a party (which will be the Affected Party): (1) to perform any absolute or contingent obligation, to make a payment or delivery or to receive a payment or delivery in respect of such Transaction or to comply with any other material provision of this Agreement relating to such Transaction; or to perform, or for any Credit Support Provider of such party to perform, any contingent or other obligation which the party (or such Credit Support Provider) has under any Credit Support Document relating to such Transaction. (b) An Impossibility shall be treated as an Illegality for purposes of Section 5(c) of the Agreement. (9) It shall constitute an Event of Default hereunder and Party B shall be deemed the Defaulting Party if an event of default (however described) occurs under the Credit Agreement dated as of July 18, 1997 among Fairchild Holding Corp., as Borrower, RHI Holdings, as Guarantor, the institutions from time to time party thereto as Lenders, the institution from time to time as issuing Banks, Citicorp USA, Inc., as Administration Agent and Collateral Agent, Nationsbank, N.A., as Syndication Agent and Salomon Brothers Inc., as Documentation Agent. (10) It shall constitute an Event of Default hereunder and Party B shall be deemed the Defaulting Party if the collateral pledged under the Credit Agreement no longer secures Party B's obligations hereunder. PART 2 Tax Representations (1) Payer Representations. For the purpose of Section 3(e) of the Agreement, Party A and Party B will make the following representation: It is not required by any applicable law, as modified by the practice of any relevant governmental revenue authority, of any Relevant Jurisdiction to make any deduction or withholding for or on account of any Tax from any payment (other than interest under Section 2(e), 6(d)(ii) or 6(e) of this Agreement) to be made by it to the other party under this Agreement. In making this representation, it may rely on: (x) the accuracy of any representation made by the other party pursuant to Section 3(f) of this Agreement; (y) the satisfaction of the agreement contained in Section 4(a)(i) or 4(a)(iii) of this Agreement and the accuracy and effectiveness of any document provided by the other party pursuant to Section 4(a)(i) or 4(a)(iii) of this Agreement; and (z) the satisfaction of the agreement of the other party contained in Section 4(d) of this Agreement; provided that it shall not be a breach of this representation where reliance is placed on clause (y) and the other party does not deliver a form or document under Section 4(a)(iii) by reason of material prejudice to its legal or commercial position. (2) Payee Representations. For the purpose of Section 3(f) of the Agreement, Party A and Party B make the representations specified below, if any: The following representation will apply to Party A: It is a national banking association organized under the laws of the United States and its U.S. taxpayer identification number is 13- 5266470 The following representation will apply to Party B: It is a corporation created or organized in the United States or under the laws of the United States or of any State and its U.S. taxpayer identification number is 541794337. PART 3 Documents to be Delivered For the purpose of Section 4(a) of the Agreement: (1) Tax forms, documents or certificates to be delivered are: As required under Section 4(a)(iii) of the Agreement. (2) Other documents to be delivered are: (a) Certified copies of all documents evidencing necessary corporate and other authorizations and approvals with respect to the execution, delivery and performance by the party of this Agreement. Party required to deliver: Party B Date by which to be delivered: Upon execution of this Agreement Covered by Section 3(d) Representation: Yes (b) A certificate of an authorized officer of the party, certifying the names, true signatures and authority of the officers of the party signing this Agreement. Party required to deliver: Party B Date by which to be delivered: Upon execution of this Agreement Covered by Section 3(d) Representation: Yes (c) An opinion of counsel to the party substantially in the form set forth in Exhibit I and covering such other matters as reasonably requested by the receiving party. Party required to deliver: Party B Date by which to be delivered: Upon execution of this Agreement Covered by Section 3(d) Representation: No (d) Such other document as the other party may reasonably request in connection with each Transaction. Party required to deliver: Party B Date by which to be delivered: Promptly upon request Covered by Section 3(d) Representation: Yes PART 4 Miscellaneous (1) Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of New York without reference to choice of law doctrine. (2) Process Agent. For the purpose of Section 13(c) of the Agreement: Party B appoints as its Process Agent in the State of New York: Not applicable (3) Offices. The provisions of Section 10(a) of the Agreement will not apply. (4) Multibranch Party. For the purpose of Section 10 of the Agreement: (a) Party A is a Multibranch Party and may act through the following Offices: New York and London. (b) Party B is not a Multibranch Party. (5) Addresses for Notices. For the purpose of Section 12(a) of the Agreement: (a) Address for notices or communications to Party A: Address: Citibank, N.A., New York Head Office 399 Park Avenue, 7th Floor New York, New York 10043 Attention: Vice President in Charge of Global Derivatives (For all purposes) (b) Address for notices or communications to Party B: Address: Fairchild Holding Corp. P.O. Box 10803 Chantilly, Virginia 20153 or overnight: 300 West Service Road Chantilly, Virginia 20102 Attention: Colin M. Cohen, Vice President Telefax No.: 703-478-5775 (For all purposes) (6) Calculation Agent. The Calculation Agent is Party A, unless otherwise specified in a Confirmation in relation to the relevant Transaction. (7) "Affiliate" will have the meaning specified in Section 14 of the Agreement. (8) Credit Support Document. None. (9) The Credit Support Provider. None. PART 5 Other Provisions ( l ) Existing Agreements. (a) Subject and without prejudice to Part 5(7) of this Schedule, effective as of the date hereof, this Agreement shall supersede any existing agreement or agreements between the parties relating to Transactions entered into through any of the Offices of the parties listed in Part 4(4) of this Schedule. (b) If, on the date hereof, any sum remains payable under that superseded agreement as a result of any Transaction, this Agreement shall apply in relation thereto with any necessary consequential amendments. (2) Confirmations. Notwithstanding anything to the contrary in the Agreement: (a) The parties hereto agree that with respect to each Transaction hereunder a legally binding agreement shall exist from the moment that the-parties hereto agree on the essential terms of such Transaction, which the parties anticipate will occur by telephone. (b) For each Transaction Party A and Party B agree to enter into hereunder, Party A shall promptly send to Party B a Confirmation setting forth the terms of such Transaction. Party B shall execute and return the Confirmation to Party A or request correction of any error within three Business Days of receipt. Failure of Party B to respond within such period shall not affect the validity or enforceability of such Transaction and shall be deemed to be an affirmation of such terms. (3) Additional Agreements. Each party agrees, upon learning of the occurrence of any event or commencement of any condition that constitutes (or that with the giving of notice or passage of time or both would constitute) an Event of Default or Termination Event with respect to such party, promptly to give the other party notice of such event or condition (or, in lieu of giving notice of such event or condition in the case of an event or condition that with the giving of notice or passage of time or both would constitute an Event of Default or Termination Event with respect to the party, to cause such event or condition to cease to exist before becoming an Event of Default or Termination Event). (4) Additional Representations. Section 3 of the Agreement is hereby amended by adding at the end thereof the following subsections: (g) Eligible Swap Participant. It is an "eligible swap participant" as that term is defined by the Commodity Futures Trading Commission at 17 C.F.R. ?? 35.1(b)(2). (h) Relationship Between Parties. (i) It is not relying on any advice, statements or recommendations (whether written or oral) of the other party regarding any Transaction, other than the written representations expressly made by that other party in this Agreement and in the Confirmation in respect of that Transaction; (ii) In respect of each Transaction under this Agreement, (1) it has the capacity to evaluate,(internally or through independent professional advice) that Transaction (including decisions regarding the appropriateness or suitability of that Transaction) and has made its own decision to enter into that Transaction; (2) it understands the terms, conditions and risks of that Transaction and is willing to accept those terms and conditions and to assume (financially and otherwise) those risks; (3) it is entering into that Transaction as principal and not as agent for any other party; and (4) it acknowledges and agrees that the other party is not acting as a fiduciary or advisor to it in connection with that Transaction. (i) It is entering into that Transaction for the purposes of managing its borrowings or investments, hedging its underlying assets or liabilities or in connection with a line of business, and not for purposes of speculation. (5) Additional Representations of Party B. Party B represents and warrants to Party A that (i) this Agreement constitutes a Hedge Agreement (as defined in the Credit Agreement) and (ii) Party B's obligations hereunder are secured by the Credit Agreement.. (6) Advances. If at any time any amounts due to Party A by Party B hereunder remain unpaid after the applicable grace period, if any, such amounts shall be advanced by Citicorp USA Inc. Party B acknowledges that each such advance shall constitute a Hedge Agreement Undertaking by CUSA as defined in the Deed of Trust and any and all such advances, together with interest thereon, as provided in this Agreement, shall be secured by the Deed of Trust and other loan documents executed in connection therewith. No such disbursement by CUSA shall in any way limit the rights and remedies of Party A under this Agreement arising by reason of the occurrence of such failure to pay by Party B (including without limitation, the right to terminate this Agreement and collect the amount, if any, owed by Party B in connection with this Agreement) and default by Party B under this Agreement shall also be a default under the Loan Agreement and Deed of Trust. (7) Set-off. Section 6 of the Agreement is amended by adding the following new subsection 6(f): (f) In addition to any rights of set-off a party may have as a matter of law or otherwise, upon the occurrence of an Event of Default with respect to a party ("X") the other party ("Y") will have the right (but will not be obliged) without prior notice to X or any other person to set-off any obligation of X owing to Y (whether or not arising under this Agreement, whether or not matured, whether or not contingent and regardless of the currency, place of payment or booking office of the obligation) against any obligation of Y owing to X (whether or not arising under this Agreement, whether or not matured, whether or not contingent and regardless of the currency, place of payment or booking office of the obligation). For the purpose of cross-currency set-off, Y may convert any obligation to another currency at a market rate determined by Y. If an obligation is unascertained, Y may in good faith estimate that obligation and set-off in respect of the estimate, subject to the relevant party accounting to the other when the obligation is ascertained. Nothing in this provision will be deemed to create a charge or other security interest. (8) Netting Provisions. If an Early Termination Date is designated, amounts determined in respect of all Terminated Transactions shall, to the fullest extent permitted by law, be aggregated with and netted against one another in performing the calculations contemplated by Section 6(e) of this Agreement. Any Terminated Transaction(s) that cannot be so aggregated and netted pursuant to the application of the previous sentence shall be aggregated and netted amongst themselves to the fullest extent permitted by law. Any Terminated Transactions that cannot be so aggregated and netted amongst themselves shall instead be (and is hereby agreed always to have been) governed by, and subject to, (i) the terms and conditions set out in any relevant agreement otherwise superseded by this Agreement as referred to in Part 5(l)(a) of this Schedule or (ii) if no such agreement exists, the terms and conditions set out in the relevant Confirmation(s) with respect to such Transaction(s). (9) Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of the Agreement or affecting the validity or enforceability of such provision in any other jurisdiction unless such severance shall substantially impair the benefits of the remaining portions of this Agreement or changes the reciprocal obligations of the parties. The parties hereto shall endeavor in good faith negotiations to replace the prohibited or unenforceable provision with a valid provision, the economic effect of which comes as close as possible to that of the prohibited or unenforceable provision. WAIVER OF JURY TRIAL. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDINGS. (11) Telephonic Recording. The parties agree, subject to any consent required by applicable law, that each may electronically record all telephonic conversations between them and that any such tape recordings may be submitted in evidence in any Proceedings relating to the Agreement. In the event of any dispute between the parties as to the terms of a Transaction governed by the Agreement or the obligations thereby created prior to the execution of a Confirmation for such Transaction, the parties may use electronic recordings between the persons who entered into such Transaction as the preferred evidence of the terms of such Transaction. (12) Escrow Payments. If by reason of the time difference between the cities in which payments are to be made, it is not possible for simultaneous payments to be made on any date on which both parties are required to make payments hereunder, either party may at its option and in its sole discretion notify the other party that payments on that date are to be made in escrow. In this case deposit of the payment due earlier on that date shall be made by 2:00 p.m. (local time at the place for the earlier payment) on that date with an escrow agent selected by the party giving the notice, accompanied by irrevocable payment instructions (i) to release the deposited payment to the intended recipient upon receipt by the escrow agent of the required deposit of the corresponding payment from the other party on the same date accompanied by irrevocable payment instructions to the same effect or (ii) if the required deposit of the corresponding payment is not made on that same date, to return the payment deposited to the party that paid it into escrow. The party that elects to have payments made in escrow shall pay the costs of the escrow arrangements and shall cause those arrangements to provide that the intended recipient of the payment due to be deposited first shall be entitled to interest on that deposited payment for each day in the period of its deposit at the rate offered by the escrow agent for that day for overnight deposits in the relevant currency in the office where it holds that deposited payment (at 11:00 a.m. local time on that day) if that payment is not released by 5:00 p.m. local time on the date it is deposited for any reason other than the intended recipient's failure to make the escrow deposit it is required to make hereunder in a timely fashion. PART 6 FX Transactions and Currencv Options (1) The provisions of the 1992 ISDA FX and Currency Option Definitions as published by the International Swap Dealers Association, Inc. (the "FX Definitions") are hereby incorporated herein in their entirety and shall apply to FX Transactions, Currency Obligations and Currency Options entered into by the Offices of the parties specified in Part 4(4) of this Schedule. FX Transactions, Currency Obligations and Currency Options are each deemed to be Transactions pursuant to the ISDA Master Agreement. Regardless of any express provision or provisions to the contrary in respect of an FX Transaction or Currency Option (i) all FX Transactions and all Currency Options entered into between the parties prior to, on, or (until agreed otherwise by the parties) after the date of this Agreement shall be deemed to be Transactions for the purposes of this Agreement, and (ii) all Confirmations howsoever described and whether by means of electronic messaging system, letter, telex, facsimile or otherwise in respect of FX Transactions and Currency Options shall constitute "Confirmations" as referred to in this Agreement even where not so specified in the Confirmation. Such Confirmations will supplement, form a part of and be subject to this Agreement. (2) Section 1.2 of the FX Definitions is hereby amended by adding the following new subsections (c), (d) and (e). (c) Currency. "Currency" means money denominated in the lawful currency of any country or any "composite currency" such as the European Currency Unit. (d) Currency Obligation. "Currency Obligation" means the undertaking of a party hereunder to receive or deliver an amount of Currency pursuant to an FX Transaction, including a netted Currency Obligation under Section 1.4 hereof, unless otherwise agreed. (e) Designated Netting Office. "Designated Netting Office" means, as to either party, the office or offices specified as such in the Schedule and any other office specified from time to time by one party and agreed to in writing by the other. (3) Section 1.3 of the FX Definitions is hereby amended by substituting the following therefor in its entirety. Section 1.3 Settlement. On each Value Date each party will deliver to the other the amount of each Currency (if any) to be delivered by it under a Currency Obligation and take delivery of the amount of each Currency (if any) to be received by it under the Currency Obligation, in each case by wire transfer of same day (or immediately available) and freely transferable funds to the respective bank accounts designated by such party. Time shall be of the essence in this Agreement. (4) The FX Definitions are hereby amended by adding the following new Section 1.4. Section 1.4. Netting and Novation. (a) Unless otherwise agreed to by the parties hereto, whenever an FX Transaction is entered into between a pair of Designated Netting Offices of the parties which creates a Currency Obligation in the same Currency and for the same Value Date as an existing Currency Obligation between such Designated Netting Offices, such Currency Obligations shall automatically and without further action be netted, individually cancelled and simultaneously replaced through novation by a new Currency Obligation determined as follows: (i) if the cancelled Currency Obligations evidenced an undertaking by the same party to deliver the underlying Currency, the new Currency Obligation shall equal the aggregate of the cancelled Currency Obligations, and (ii) if the cancelled Currency Obligations evidenced undertakings by each party to deliver the underlying Currency, the amount of the underlying Currency to be delivered by each party under the cancelled Currency Obligations shall be compared, and the new Currency Obligation shall equal the amount by which the Currency Obligation of the party having the greater obligation with respect to such Currency exceeded the Currency Obligation of the party having the lesser obligation with respect to such Currency. Such new Currency Obligation shall be considered a "Currency Obligation" hereunder. (b) Unless otherwise agreed and specified in a Confirmation, the provisions of Section 1.4(a) above shall apply notwithstanding that either party (i) may fail to send out a Confirmation, (ii) may not on its books treat the Currency Obligations as cancelled and simultaneously replaced by a new Currency Obligation as provided herein, or (iii) may send out a Confirmation that incorrectly states any term of a Currency Obligation. (5) Section 2.2 of the FX Definitions is hereby amended by adding the following new subsections (u) and (v): (u) Call Option. "Call Option" means a Currency Option entitling, but not obligating, the Buyer to purchase from the Seller at the Strike Price a specified quantity of the Call Currency. (v) Put Option. "Put Option" means a Currency Option entitling, but not obligating, the Buyer to sell to the Seller at the Strike Price a specified quantity of the Put Currency. (6) The FX Definitions are hereby amended by adding the following new Section 2.5: Section 2.5. Discharge and Termination of Options. Unless otherwise agreed, any Call Option or any Put Option written by a party will automatically be terminated and discharged, in whole or in part, as applicable, against a Call Option or a Put Option, respectively, written by the other party, such termination and discharge to occur automatically upon the payment in full of the last Premium payable in respect of such Options; provided that such termination and discharge may only occur in respect of Currency Options: (a) each being with respect to the same Put Currency and the same Call Currency; (b) each having the same Expiration Date and Expiration Time; (c) each being of the same style, i.e. either both being American Style Options or both being European Style Options; (d) each having the same Strike Price; (e) neither of which shall have been exercised by delivery of a Notice of Exercise; and (f) each of which has been entered into by the same pair of Designated Netting Offices of the parties; and, upon the occurrence of such termination and discharge, neither party shall have any further obligation to the other party in respect of the relevant Currency Options or, as the case may be, parts thereof so terminated and discharged. In the case of a partial termination and discharge (i.e., where the relevant Currency Options are for different amounts of the Currency Pair), the remaining portion of the Currency Option which is partially discharged and terminated shall continue to be a Currency Option for all purposes hereunder. (7) Confirmations. With respect to FX Transactions and Currency Options, FX Transactions and Currency Options shall be promptly confirmed by the parties by Confirmations (which Confirmations shall be in a form agreed to by the parties) exchanged by mail, telex, facsimile or other electronic means. Unless either party objects to the terms contained in any such Confirmation within three (3) Local Business Days of receipt thereof, the terms of such Confirmation shall be deemed correct and accepted absent manifest error, unless a corrected Confirmation is sent by a party within such three day period, in which case the party receiving such corrected Confirmation shall have three (3) Local Business Days after receipt thereof to object to the terms contained in such corrected Confirmation. In the event of any conflict between the terms of a Confirmation and this Agreement, (a) the terms of this Agreement shall prevail in the case of an FX Transaction, and the Confirmation shall not modify the terms of this Agreement, and (b) the terms of the Confirmation shall prevail in the case of a Currency Option, and the terms of this Agreement shall be deemed modified with respect to such Currency Option. (8) The Designated Netting Offices of Party A are: New York and London The Designated Netting Office of Party B is: Virginia Notwithstanding the foregoing, netting start-up dates for netting between each pair of Designated Netting Offices shall be the dates mutually agreed upon by the parties. (9) Payments on Early Termination. For the purpose of Section 6(e) of the Agreement for FX Transactions, Currency Obligations and Currency Options only: The Second Method and Loss will apply. IN WITNESS WHEREOF the parties have executed this document on the respective dates specified below with effect from the date specified on the first page of this document. CITIBANK, N.A. FAIRCHILD HOLDING CORP. By: By: Colin M. Cohen Print Name: Print Name: Colin M. Cohen Title: Vice President Title: Sr. Vice President DATE: DATE: Citicorp USA, Inc. hereby executes this Agreement for the purpose of confirming its obligation to make advances as set forth in Section (6) of-Part 5 of this Schedule. CITICORP USA, INC. By: Print Name: Title: EXHIBIT I FORM OF OPINION OF COUNSEL FOR [X] (Date satisfactory to recipient) Citicorp USA, Inc. _______________ _______________ _______________ Ladies and Gentlemen: This opinion is furnished to you pursuant to the Schedule to the Master Agreement dated as of ________, 19_ (the "Agreement") between _____________("[X]") and you. Terms defined in the Agreement and used but not defined herein have the meanings given to them in the Agreement. We have acted as counsel to [X] in connection with the preparation, execution and delivery of the Agreement. In that connection we have examined such documents as we have deemed necessary or appropriate for the opinions expressed herein. Based on the foregoing and upon such investigations as we have deemed necessary, we are of the opinion that, so far as the laws of ____________ are concerned: (a) [X] is duly organized and validly existing and has the power and authority to execute and deliver, and to perform its obligations under, the Agreement. (b) The execution and delivery of the Agreement by [X] and the performance of its obligations thereunder have been and remain duly authorized by all necessary action and do not contravene any provision of its certificate of incorporation or by-laws (or equivalent constituent documents) or any law, regulation or contractual restriction binding on or affecting it or its property. (c) All consents, authorizations and approvals (including, without limitation, exchange control approvals) required for the execution and delivery by [X] of the Agreement and the performance of its obligations thereunder have been obtained and remain in full force and effect, all conditions thereof have been duly complied with, and no other action by, and no notice to or filing with, any governmental authority or regulatory body is required for such execution, delivery or performance. (d) The Agreement is a legal, valid and binding obligation of [X], enforceable against [X] in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally, and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law). Very truly yours, -----END PRIVACY-ENHANCED MESSAGE-----