-----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, R4lqHxgvGik2zPOEMW0SEY8dCigZnzdhIVyU0fdrMUyAWAP2hQMf85xX3jmDcvrw yAQ2qMseLO5WQaeWZuIwZQ== 0000950130-97-005446.txt : 19971210 0000950130-97-005446.hdr.sgml : 19971210 ACCESSION NUMBER: 0000950130-97-005446 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19971209 SROS: NYSE 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: S-3/A SEC ACT: SEC FILE NUMBER: 333-37297 FILM NUMBER: 97734317 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 S-3/A 1 AMENDMENT NO. 3 TO S-3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 9, 1997 REGISTRATION NO. 333-37297 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- AMENDMENT NO. 3 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- THE FAIRCHILD CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 34-0728587 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) WASHINGTON DULLES INTERNATIONAL AIRPORT 300 WEST SERVICE ROAD P.O. BOX 10803 CHANTILLY, VIRGINIA 20153 (703) 478-5800 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) DONALD E. MILLER, ESQ. SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY THE FAIRCHILD CORPORATION WASHINGTON DULLES INTERNATIONAL AIRPORT 300 WEST SERVICE ROAD P.O. BOX 10803 CHANTILLY, VIRGINIA 20153 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ---------------- COPIES TO: JAMES J. CLARK, ESQ. MARK C. SMITH, ESQ. CAHILL GORDON & REINDEL SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP 80 PINE STREET 919 THIRD AVENUE NEW YORK, NY 10005 NEW YORK, NY 10022-3903 (212) 701-3000 (212) 735-3000 ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED DECEMBER 9, 1997 PROSPECTUS , 1997 3,700,000 SHARES THE FAIRCHILD CORPORATION CLASS A COMMON STOCK Of the 3,700,000 shares of Class A Common Stock (the "Class A Common Stock"), $0.10 par value per share, of The Fairchild Corporation (the "Company") offered hereby (the "Offering"), 3,000,000 shares will be sold by the Company and 700,000 shares will be sold by certain Selling Stockholders. The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders. See "Principal and Selling Stockholders." The Class A Common Stock has one vote per share, while the Class B Common Stock of the Company, par value $0.10 per share (the "Class B Common Stock" and, together with the Class A Common Stock, the "Common Stock"), has ten votes per share. Upon completion of the Offering, Jeffrey J. Steiner, the Chairman of the Board, Chief Executive Officer and President of the Company, who holds substantially all of the Class B Common Stock, will have approximately 66.5% of the combined voting power of all outstanding shares of capital stock of the Company (approximately 65.7% if the Underwriters' over-allotment option is exercised in full). For information with respect to the voting rights and certain other features of the Class A Common Stock compared to the Class B Common Stock, see "Description of Capital Stock." The Class A Common Stock is listed on the New York Stock Exchange and the Pacific Stock Exchange, under the symbol "FA." On December 8, 1997, the last reported sale price of the Class A Common Stock on the New York Stock Exchange was $21 13/16 per share. See "Price Range of Class A Common Stock and Dividend Policy." SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE CLASS A COMMON STOCK OFFERED HEREBY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - --------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS PROCEEDS TO TO THE DISCOUNTS AND TO THE THE SELLING PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDERS - -------------------------------------------------------------------------------- Per Share..................... $ $ $ $ Total (3)..................... $ $ $ $ - --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting expenses estimated at $ , payable by the Company. (3) The Selling Stockholders have granted to the Underwriters an option, exercisable within 30 days of the date hereof, to purchase in the aggregate up to 547,000 additional shares of Class A Common Stock solely to cover over-allotments, if any. If such option is exercised in full, the total Price to the Public, Underwriting Discounts and Commissions, and Proceeds to the Selling Stockholders will be $ , $ and $ , respectively. See "Underwriting." The shares of Class A Common Stock are being offered by the several Underwriters when, as and if delivered to and accepted by the Underwriters against payment therefor and subject to various prior conditions, including their right to reject orders in whole or in part. It is expected that delivery of the shares of Class A Common Stock will be made in New York, New York on or about , 1997. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION BT ALEX. BROWN SBC WARBURG DILLON READ INC. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-3 under the Securities Act of 1933 (the "Securities Act") with respect to the Class A Common Stock offered hereby. This Prospectus, which is part of the Registration Statement, does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto, certain items of which are omitted in accordance with the rules and regulations of the Commission. The Company is subject to the information requirements of the Securities Exchange Act of 1934 (the "Exchange Act") and, in accordance therewith, files reports and other information with the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is hereby made to the Registration Statement and such exhibits and schedules filed as a part thereof as well as such reports and other information filed by the Company, which may be inspected and copied at prescribed rates at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: 7 World Trade Center, Suite 1300, New York, New York 10048, and Northwest Atrium Center, 500 West Madison Street, 14th Floor, Chicago, Illinois 60661. Copies of all or any portion of the Registration Statement may be obtained from the Public Reference Section of the Commission, upon payment of prescribed rates. The Commission also maintains a web site at http://www.sec.gov which contains reports, proxy, and information statements and other information regarding registrants that file electronically with the Commission. The Company's Class A Common Stock is listed on the New York Stock Exchange and the Pacific Exchange, and such reports, proxy statements, and other information statements may be inspected and copied at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005, and at the offices of the Pacific Exchange, 301 Pine Street, San Francisco, California 94104. The Company's executive offices are located at Washington Dulles International Airport, 300 West Service Road, Chantilly, Virginia 22021. Its telephone number is (703) 478-5800. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE The Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997, the Company's Quarterly Report on Form 10-Q for the quarter ended September 28, 1997, the Company's Current Report on Form 8-K dated December 8, 1997 and the description of the Company's Common Stock contained in the Company's registration statement on Form 8-A, dated October 5, 1987 in each case, if applicable, as amended, and all documents subsequently filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the Offering described herein shall be deemed to be incorporated in this Prospectus and to be a part hereof from the date of the filing of such document. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for all purposes to the extent that a statement contained in this Prospectus or in any other subsequently filed document which is also incorporated or deemed to be incorporated by reference modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of the Registration Statement or this Prospectus. The Company will provide without charge to each person to whom this Prospectus is delivered, upon written or oral request of such person, a copy (without exhibits unless such exhibits are specifically incorporated by reference into such document) of any or all documents incorporated by reference in this Prospectus. Requests for such copies should be directed to Donald E. Miller, Esq., Senior Vice President and General Counsel, The Fairchild Corporation, Washington Dulles International Airport, 300 West Service Road, P.O. Box 10803, Chantilly, Virginia 20153, by mail, and if by telephone (703) 478-5800. ---------------- CERTAIN PERSONS PARTICIPATING IN THE CLASS A COMMON STOCK OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE CLASS A COMMON STOCK OFFERING AND MAY BID FOR AND PURCHASE SHARES OF THE CLASS A COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and Consolidated Financial Statements (including the notes thereto) appearing elsewhere in, or incorporated by reference into, this Prospectus. Except where the context otherwise requires, as used herein, the "Company" refers to The Fairchild Corporation and its subsidiaries, and "Fiscal" in connection with a year shall mean the 12 months ended June 30 of such year. Except where otherwise indicated, the information in this Prospectus assumes that the Underwriters' over-allotment option is not exercised. THE COMPANY GENERAL The Company is the largest aerospace fastener manufacturer and is one of the largest independent aerospace parts distributors in the world. Through internal growth and strategic acquisitions, the Company has become one of the leading aircraft parts suppliers to aircraft manufacturers such as Boeing, Airbus, Lockheed Martin, British Aerospace and Bombardier and to airlines such as Delta Airlines and US Airways. The Company's primary focus is on the aerospace industry and its business consists primarily of two segments--aerospace fasteners and aerospace parts distribution. The aerospace fasteners segment, which accounted for approximately 51.4% of the Company's net sales in Fiscal 1997, pro forma for the Disposition (as defined below), manufactures and markets fastening systems used in the manufacturing and maintenance of commercial and military aircraft. The aerospace distribution segment, which accounted for approximately 35.9% of the Company's net sales in Fiscal 1997, pro forma for the Disposition, stocks and distributes a wide variety of aircraft parts to commercial airlines and air cargo carriers, original equipment manufacturers ("OEMs"), other distributors, fixed-base operators, corporate aircraft operators and other aerospace and non- aerospace companies. The Company's aerospace distribution business is conducted through its 64% owned subsidiary, Banner Aerospace, Inc. ("Banner"). On December 8, 1997, Banner and eight of its subsidiaries entered into an Asset Purchase Agreement pursuant to which such subsidiaries have agreed to transfer substantially all of their assets to Allied Signal Inc. ("Allied") for approximately $345 million of common stock of Allied (the "Disposition"). See "Recent Developments." The aerospace parts industry currently is enjoying positive trends driven by favorable economic conditions, strong growth in new commercial aircraft orders, an increase in miles flown by existing aircraft and the need to modify older aircraft to comply with noise regulations. In the first half of 1997, Airbus, Boeing and McDonnell Douglas deliveries totalled 277 aircraft, a 50% increase over the comparable period in 1996. In addition, backlog for those three manufacturers aggregated 2,391 aircraft at June 30, 1997. The Company believes it is well positioned to take advantage of these favorable industry trends and intends to leverage its worldwide brand name recognition and leading market positions in order to increase revenues and operating profits. The aerospace industry also continues to experience consolidation at both the manufacturer and supplier level. The Company believes that, upon completion of the Offering, it will be well positioned to pursue additional strategic acquisitions and take further advantage of such industry trends. The Company continually evaluates potential acquisitions and is currently in discussions with several parties regarding potential acquisitions. THE REFINANCING The Company intends to effect a series of transactions designed to: (i) reduce its total indebtedness and annual interest expense; (ii) increase the number of publicly held shares of Class A Common Stock; and (iii) increase the Company's operating and financial flexibility. The Company intends to enter into a new credit facility (the "New Credit Facility") that will provide for total lending commitments of up to $300 million. The New Credit Facility will be comprised of a revolving credit facility and a term loan facility. The effectiveness of the New Credit Facility is a condition to the closing of the Offering. See "Description of the New Credit Facility." 3 With the proceeds of the Offering, borrowings under the New Credit Facility and the after tax proceeds the Company has already received from the STFI Sale (as defined below) (collectively, the "Refinancing"), the Company will refinance substantially all of its existing indebtedness (other than indebtedness of Banner), consisting of the 11 7/8% Senior Debentures due 1999, the 12% Intermediate Debentures due 2001, the 13 1/8% Subordinated Debentures due 2006, the 13% Junior Subordinated Debentures due 2007 and its existing bank indebtedness. The Refinancing will reduce the Company's total net indebtedness by approximately $132 million and will reduce the Company's annual interest expense, on a pro forma basis, by approximately $21 million. The completion of the STFI Sale will reduce the Company's annual interest expense by approximately $3 million. In addition, a portion of the proceeds from the Disposition will be used to repay all of Banner's outstanding bank indebtedness, which will further reduce the Company's annual interest expense by an additional $14 million. RECENT DEVELOPMENTS On November 20, 1997, Shared Technologies Fairchild Inc. ("STFI"), a corporation of which the Company owns approximately 42% of the outstanding common stock, entered into a merger agreement with Intermedia Communications Inc. ("Intermedia") pursuant to which holders of STFI common stock will receive $15.00 per share in cash (the "STFI Sale"). In connection with the STFI Sale, the Company has received approximately $85 million in cash (before tax) in exchange for certain preferred stock of STFI and expects to receive an additional $93 million in cash (before tax) in the first three months of 1998 in exchange for the 6,225,000 shares of common stock of STFI owned by the Company. The Intermedia transaction replaces an earlier merger agreement with the Tel-Save Holdings, Inc. under which the Company would have received consideration primarily in common stock of Tel-Save Holdings, Inc. Consummation of the STFI Sale is subject to certain conditions. On December 8, 1997, Banner and eight of its subsidiaries entered into an Asset Purchase Agreement in connection with the Disposition. The assets to be transferred to Allied pursuant to the Asset Purchase Agreement consist primarily of Banner's hardware group, which includes the distribution of bearings, nuts, bolts, screws, rivets and other type of fasteners. Approximately $170 million of the consideration received from the Disposition will be used to repay outstanding term loans of Banner's subsidiaries and pay related fees. Consummation of the Disposition is subject to certain conditions. See "The Disposition." The Company is effecting the Disposition to concentrate its efforts on the rotables and jet engine businesses and because the Disposition presented a unique opportunity to realize a significant return on the sale of the hardware group. SOURCES AND USES The sources and uses of the funds received from the Offering, borrowings under the New Credit Facility, the after tax proceeds from the STFI Sale, and the proceeds from the Disposition are as follows as of September 28, 1997:
SOURCES - ------- (IN THOUSANDS) New Credit Facility............................................ $225,000 Offering....................................................... 66,750 STFI Sale(a)................................................... 134,511 Proceeds from Disposition(b)................................... 345,000 -------- Total sources................................................ $771,261 ======== USES - ---- Repayment of Existing Fairchild Credit Facilities(c)........... $240,145 Redemption of 11 7/8% Senior Debentures due 1999(d)............ 63,000 Redemption of 12% Intermediate Debentures due 2001(d).......... 117,600 Redemption of 13 1/8% Senior Subordinated Debentures due 2006(d)....................................................... 35,856 Redemption of 13% Junior Subordinated Debentures due 2007(d)... 25,063 Accrued Interest............................................... 10,218 Estimated fees and expenses.................................... 13,838 Excess Cash and short-term investments......................... 265,541 -------- Total uses................................................... $771,261 ========
4 - -------------------- (a) Of this amount, the Company has received approximately $85 million (before tax) and expects to receive the balance in the first three months of 1998. (b) The Company expects to receive the proceeds from the Disposition during the first three months of 1998. The Company will provide for deferred taxes of approximately $42 million in connection with the Disposition. (c) Includes Banner indebtedness. (d) Will be redeemed approximately 45 days after consummation of the Offering. CONTEMPLATED SPIN-OFF In order to focus its operations on the aerospace industry, the Company is considering distributing (the "Spin-Off") to its stockholders all of the stock of Fairchild Industrial Holdings Corp. ("FIHC"), which may own substantially all of the Company's non-aerospace operations. Although the Company's ability to effect a Spin-Off is uncertain, the Company may effect a Spin-Off as soon as is reasonably practicable following receipt of a solvency opinion relating to FIHC, and all necessary governmental and third party approvals. The solvency opinion with respect to FIHC is required by the Company's lenders and board of directors. In order to effect a Spin-Off, approval is required from the board of directors of the Company, however, shareholder approval is not required. The ability of the Company to consummate a Spin-Off is contingent, among other things, on the ability of the Company to obtain consents and waivers under the Company's existing indebtedness and the New Credit Facility. The Company is presently in negotiations with its lenders regarding obtaining such consents and waivers and at the present time the Company has not reached an agreement with its lenders that will allow the Company to consummate a Spin-Off. There is no assurance that the Company will be able to obtain the necessary consents and waivers from its lenders and consequently there is no assurance that the Company will be able to consummate a Spin-Off. In addition, the Company may sell, restructure or otherwise change the assets and liabilities that may be in FIHC at the time of a Spin-Off and may delay the timing of a Spin-Off to minimize the tax consequences thereof to the Company and its stockholders or for other reasons elect not to consummate a Spin-Off. See "Risk Factors-- Uncertainty and Tax and Other Consequences of a Spin-Off." At the time of a Spin-Off, if consummated, the business and assets of FIHC may consist of: (i) the Company's technology products segment, which consists of Fairchild Technologies (a worldwide producer of equipment for recordable compact disc and semiconductor manufacturers); (ii) the Company's 31.9% ownership interest in Nacanco Paketleme (the largest producer of aluminum cans in Turkey); and (iii) certain of the Company's real estate and miscellaneous investments, including approximately 80 acres of land in Long Island, New York currently under development. 5 THE OFFERING Class A Common Stock offered: By the Company........................... 3,000,000 shares By the Selling Stockholders.............. 700,000 shares ---------------- Total................................ 3,700,000 shares ================ Common Stock outstanding after the Offering: Class A Common Stock..................... 17,030,717 shares(a) Class B Common Stock..................... 2,625,616 shares ----------------- Total................................ 19,656,333 shares ================= Voting Rights............................... The holders of Class A Common Stock are entitled to one vote per share and the holders of Class B Common Stock to ten votes per share. Each share of Class B Common Stock is convertible at any time into one share of Class A Common Stock. Through beneficial ownership of substantially all outstanding shares of Class B Common Stock, Jeffrey J. Steiner, the Chairman of the Board, Chief Executive Officer and President of the Company, controls a majority of the combined voting power of both classes of Common Stock, which enables him to elect a majority of the directors of the Company and to determine the outcome of any other matter submitted to stockholders for approval (except for matters requiring approval of holders of both classes voting separately). Upon completion of the Offering, Mr. Steiner will have 66.5% of the combined voting power of all shares of capital stock of the Company (approximately 65.7% if the Underwriters over-allotment option is exercised in full). See "Principal and Selling Stockholders" and "Description of Capital Stock." Use of proceeds............................. Together with borrowings under the New Credit Facility, the after tax proceeds of the STFI Sale and the Disposition, the net proceeds of the Offering will be used to repay existing indebtedness of the Company. The Company will not receive any of the proceeds from the sale of the Class A Common Stock by the Selling Stockholders. NYSE Symbol................................. "FA"
---------------- RISK FACTORS An investment in the Class A Common Stock involves certain risks that a prospective investor should carefully consider before investing in the Class A Common Stock. See "Risk Factors." - -------------------- (a) Excludes 2,720,250 shares of Class A Common Stock issuable upon exercise of options and warrants outstanding as of September 28, 1997. 6 SUMMARY CONSOLIDATED FINANCIAL DATA The following table sets forth summary financial data for the Company and should be read in conjunction with the financial statements and related notes appearing elsewhere in this Prospectus. The summary financial data as of and for the five years ended June 30, 1997 have been derived from the Company's Consolidated Financial Statements, which were audited by Arthur Andersen LLP, the Company's independent accountants. The summary financial data as of and for the three months ended September 28, 1997 and September 29, 1996 have been derived from the Company's Consolidated Financial Statements and are unaudited. The unaudited pro forma statement of operations data for the Fiscal year ended June 30, 1997 and for the three months ended September 28, 1997 give effect to the Refinancing, the completion of the STFI Sale, and the Disposition as if they occurred on July 1, 1996 and July 1, 1997, respectively. The data presented below should be read in conjunction with the Financial Statements and related notes appearing elsewhere in this Prospectus. The unaudited pro forma balance sheet data as of September 28, 1997 give effect to the Refinancing, the completion of the STFI Sale and the Disposition as if they had occurred on such date. The pro forma financial data is not intended to be indicative of either future results of operations or results that might have been achieved had the Refinancing, the completion of the STFI Sale and the Disposition actually occurred on the dates specified.
FISCAL THREE MONTHS ENDED ---------------------------------------------------- --------------------------- SEPTEMBER 29, SEPTEMBER 28, 1993 1994 1995 1996 1997(1) 1996 1997 -------- -------- -------- ---------- ---------- ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Net sales............... $247,080 $203,456 $256,840 $ 409,520 $ 731,960 $ 146,090 $ 213,761 Gross profit............ 42,609 28,415 37,614 94,911 205,123 39,810 52,062 Operating income (loss)................. (29,595) (46,845) (31,917) (9,115) 30,517 3,048 10,112 Net interest expense.... 67,162 66,670 64,371 56,586 47,798 12,480 12,590 Earnings (loss) from continuing operations.. (62,413) 4,834 (57,763) (33,661) (1,818) (5,052) 433 Earnings (loss) per share from continuing operations: Primary................ $ (3.87) $ 0.30 $ (3.59) $ (2.03) $ (0.10) $ (0.31) $ 0.02 Fully diluted.......... (3.87) 0.30 (3.59) (1.97) (0.10) (0.31) 0.02 PRO FORMA DATA (2): Net sales .............. $ 523,147 $ 159,096 Gross profit............ 130,944 30,603 Operating income........ 7,898 4,063 Net interest expense.... 9,339 3,212 Earnings from continuing operations............. 10,555 3,582 Earnings per share from continuing operations: Primary................ $ 0.52 $ 0.18 Fully diluted.......... 0.52 0.18 OTHER DATA: EBITDA (3).............. $ 5,739 $ (7,471) $(11,038) $ 14,857 $ 56,452 $ 8,316 $ 16,969 EBITDA margin (4)....... 2.3% N.M. N.M. 3.6% 7.7% 5.7% 7.9% Capital expenditures.... $ 5,802 $ 4,507 $ 5,911 $ 6,622 $ 22,116 $ 2,131 $ 10,206 Cash used for operating activities............. (21,120) (33,271) (25,525) (48,737) (96,957) (45,889) (36,843) Cash provided by (used for) investing activities............. (9,290) 166,068 (19,156) 57,540 79,975 170,378 (2,485) Cash provided by (used for) financing activities............. 57,431 (101,390) 12,345 (39,375) (1,455) (43,634) 27,560 AT SEPTEMBER 28, 1997 --------------------------- ACTUAL PRO FORMA(2) ------------- ------------- BALANCE SHEET DATA: Total assets............ $941,675 $866,621 $850,294 $1,009,938 $1,067,333 $1,083,116 $1,044,660 Long-term debt, less current maturities..... 566,491 522,406 509,715 368,589 416,922 412,261 225,000 Stockholders' equity.... 53,754 69,494 40,180 231,168 229,625 231,206 426,450
Footnotes on following page 7 - -------------------- (1) The actual results for Fiscal 1997 include results of Simmonds, a European manufacturer of aerospace fasteners, from its date of acquisition in February 1997. (2) See "Pro Forma Consolidated Financial Statements." (3) Earnings before interest, taxes, depreciation and amortization ("EBITDA") represents the sum of operating income before depreciation and amortization and restructuring and unusual charges of $15,469, $25,553, and $2,319 in Fiscal 1993, 1994, and 1996, respectively. EBITDA is not a measure of financial performance under generally accepted accounting principles ("GAAP") , may not be comparable to other similarly titled measures of other companies and should not be considered as an alternative either to net income as an indicator of the Company's operating performance, or to cash flows as a measure of the Company's liquidity. See the Company's Consolidated Financial Statements and the related notes thereto appearing elsewhere in this Prospectus. (4) Represents EBITDA as a percentage of net sales. 8 RISK FACTORS Prospective purchasers of the Class A Common Stock should carefully consider the following risk factors, as well as the other information contained in, and incorporated by reference in, this Prospectus, before making an investment in the Class A Common Stock. Information contained or incorporated by reference in this Prospectus contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. See, e.g., "Management's Discussion and Analysis of Financial Condition and Results of Operations". No assurance can be given that the future results covered by the forward-looking statements will be achieved. The following matters constitute cautionary statements identifying important factors with respect to such forward-looking statements, including certain risks and uncertainties, that could cause actual results to vary materially from the future results covered in such forward-looking statements. Other factors could also cause actual results to vary materially from the future results covered in such forward-looking statements. AIRLINE INDUSTRY RISKS/CYCLICALITY The Company's aerospace fasteners and aerospace distribution segments operate in historically cyclical industries. These segments are sensitive to general economic conditions and have been adversely affected by past recessions. Performance of the aerospace fasteners and aerospace distribution segments is also influenced by conditions generally affecting the aerospace industry, which, from 1990 to 1994, had experienced reduced demand for commercial aircraft, a decline in military spending and the postponement of overhaul and maintenance on existing aircraft. In past years, the aerospace industry has been adversely affected by a number of factors, including increased fuel and labor costs and intense price competition. Several passenger airline carriers encountered significant financial difficulties, resulting in certain of such carriers ceasing to conduct business or seeking protection from creditors under federal bankruptcy laws. Certain passenger airline carriers have continued to operate under the protection of federal bankruptcy laws and continue to purchase products from aerospace hardware providers. In the event that any of the Company's aerospace customers cease to conduct business or seek protection from creditors under federal bankruptcy laws, it is likely the Company would be classified as a general unsecured creditor of such customer and the Company would be forced to incur losses from the write-off of accounts receivable. The loss of any of the Company's significant customers could result in a decrease in the Company's net sales and have a material adverse effect upon the Company's business. Although no one customer accounted for more than 10% of the Company's net sales in fiscal 1997 or for the three months ended September 28, 1997, the vast majority of the Company's revenues come from customers providing parts or services to Airbus and Boeing and, accordingly, the Company is dependent on the business of those manufacturers. A number of the historical customers of the Company's aerospace distribution business are smaller domestic and foreign passenger airlines, freight and package carriers, charter airlines and aircraft leasing companies, which may also suffer from the factors adversely affecting the airline industry generally. As a result, certain of the Company's customers may pose credit risks to the Company. The Company's inability to collect receivables could adversely affect its results of operations. COMPETITION The markets for the Company's products and services are extremely competitive, and the Company faces competition from a number of sources in most of its product lines. Some of the Company's competitors have financial and other resources greater than those of the Company and are also well established as suppliers to the markets that the Company serves. Quality, performance, service and price are generally the prime competitive factors. There can be no assurance that the Company's markets will not attract additional competitors. See "Business--Competition." 9 DUAL CLASSES OF COMMON STOCK; CONTROL BY PRINCIPAL STOCKHOLDER The authorized Common Stock of the Company consists of 40,000,000 shares of Class A Common Stock and 20,000,000 shares of Class B Common Stock, of which 14,030,717 shares of Class A Common Stock and 2,625,616 shares of Class B Common Stock were outstanding as of September 28, 1997. Except for voting with respect to additional issuances of Class B Common Stock and for class votes as required by Delaware law, holders of both classes of Common Stock vote together as a single class, with each share of Class A Common Stock having one vote per share and each share of Class B Common Stock having ten votes per share. Substantially all of the outstanding shares of the Class B Common Stock are owned, directly or indirectly, by Jeffrey J. Steiner, the Company's Chairman of the Board, Chief Executive Officer and President. Through his ownership of 2,563,996 shares of the Class B Common Stock and 3,638,988 shares of the Class A Common Stock, Mr. Steiner owns 72.7% of the combined voting power of both classes of Common Stock (66.5% upon completion of this offering and 65.7% if the Underwriters' over-allotment option is exercised in full), which enables him to elect a majority of the directors of the Company and to determine the outcome of any other matter submitted to stockholders for approval (except for matters requiring approval of holders of both classes voting separately). The voting rights of the Class B Common Stock may make the Company less attractive as the potential target of a hostile tender offer or other proposal to acquire or merge with the Company, even if such actions would be in the best interests of the holders of Class A Common Stock. See "Description of Capital Stock--General." The Class B Common Stock is convertible into Class A Common Stock on a share-for-share basis and is subject to certain restrictions on transferability. See "Description of Capital Stock." Articles have appeared in the French press reporting an inquiry by a French magistrate into certain allegedly improper business transactions involving Elf Aquitaine, its former chairman and various third parties, including Maurice Bidermann. In connection with this inquiry, the magistrate has made inquiry into allegedly improper transactions between Mr. Steiner and that petroleum company. In response to the magistrate's request that Mr. Steiner appear in France as a witness, Mr. Steiner submitted written statements concerning the transactions and has offered to appear in person if certain arrangements were made. According to the French press, the magistrate also requested permission to commence an inquiry into transactions involving another French petroleum company, but her request was not granted. If the magistrate were to renew her request, and if it were granted, inquiry into transactions between such company and Mr. Steiner could ensue. The Board of Directors of the Company has formed a special committee of outside directors to advise it with respect to these matters, and the special committee has retained counsel. UNCERTAINTY AND TAX AND OTHER CONSEQUENCES OF A SPIN-OFF The Company may effect a Spin-Off as soon as is reasonably practicable following receipt of a solvency opinion relating to FIHC and all necessary governmental and third party approvals. The ability of the Company to consummate a Spin-Off is contingent, among other things, on the ability of the Company to obtain consents and waivers under the Company's existing indebtedness and the New Credit Facility. The Company is presently in negotiations with its lenders regarding obtaining such consents and waivers and at the present time the Company has not reached an agreement with its lenders that will allow the Company to consummate a Spin-Off. There is no assurance that the Company will be able to obtain the necessary consents and waivers from its lenders and consequently there is no assurance that the Company will be able to consummate a Spin-Off. In addition, the Company may encounter unexpected delays in effecting a Spin-Off, and the Company can make no assurance as to the timing thereof. In addition, prior to the consummation of a Spin-Off, the Company may sell, restructure or otherwise change the assets and liabilities that will be in FIHC, or for other reasons elect not to consummate a Spin-Off. Consequently, there can be no assurance that a Spin-Off will occur. Should a Spin-Off, as presently contemplated, occur prior to June of 1999, a Spin-Off will be a taxable transaction to shareholders of the Company and could result in a material tax liability to the Company and its stockholders. The amount of the tax to the Company and the shareholders is uncertain, and if the tax is material to the Company, the Company may elect not to consummate a Spin-Off. Because circumstances may change and because provisions of the Internal Revenue Code of 1986, as amended, may be further amended from time to time, the Company may, depending on various factors, restructure or delay the timing of a Spin-Off to minimize the tax consequences thereof to the Company and its stockholders. 10 Pursuant to a Spin-Off, it is expected that FIHC will assume certain liabilities (including contingent liabilities) of the Company and will indemnify the Company for such liabilities. In the event that FIHC is unable to satisfy the liabilities which it will assume in connection with a Spin-Off, the Company may have to satisfy such liabilities. See "Business--Contemplated Spin-Off." GOVERNMENT REGULATION The Federal Aviation Administration ("FAA") prescribes standards and licensing requirements for aircraft components, and licenses component repair stations worldwide. Comparable agencies also regulate these matters in other countries. If the Company fails to obtain a required license for one of its products or services or loses a license previously granted, the sale of the subject product or service will be prohibited by law until such license is obtained or requalified. The Company believes it is currently in material compliance with FAA requirements as in existence on the date hereof. However, there can be no assurance that changes in FAA regulations will not be adopted and that such changes will not adversely affect the results of operations of the Company. The Fastener Quality Act of 1991 (the "Fastener Act") regulates the manufacture and distribution of certain high grade industrial fasteners in the United States and imposes testing, certification and record keeping requirements on manufacturers and distributors of these fasteners. As a result of the Fastener Act, the Company and other distributors of certain types of fasteners are required to maintain records and product tracking systems. The Company has implemented tracking and traceability systems that comply with the regulations. Although compliance with the Fastener Act has not materially increased expenses for the Company, there can be no assurance that future regulations will not result in materially increased costs for the Company. SHARES ELIGIBLE FOR FUTURE SALE Immediately after completion of the Offering, the Company will have 19,656,333 shares of Common Stock outstanding, of which 12,731,716 shares will be freely tradable without restrictions or further registration under the Securities Act. Holders of the remaining shares, primarily Jeffrey J. Steiner, the Chairman of the Board, Chief Executive Officer and President of the Company, will be eligible to sell such shares pursuant to Rule 144 ("Rule 144") under the Securities Act at prescribed times and subject to the manner of sale, volume, notice and information restrictions of Rule 144. The Company and each of its executive officers and directors, including Mr. Jeffrey J. Steiner, and the Selling Stockholders have each agreed, subject to certain exceptions, not to sell or otherwise dispose of any shares of Common Stock or securities convertible into or exchangeable for Common Stock, without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), for a period of 90 days from the date of this Prospectus. The foregoing does not prohibit the Company from issuing the shares subject to the Underwriters' over-allotment option or issuing options pursuant to its stock option plans or shares pursuant to outstanding options or warrants. See "Shares Eligible for Future Sale." Sales of substantial numbers of shares of Class A Common Stock in the public market could adversely affect the market price of the Class A Common Stock. 11 USE OF PROCEEDS The net proceeds to be received by the Company from the Offering are estimated to be approximately $62.4 million after deduction of estimated offering expenses and the underwriting discounts. The net proceeds, together with borrowings of approximately $225.0 million under the New Credit Facility, and the after tax proceeds the Company has already received from the STFI Sale, will be used to repay the following indebtedness of the Company: (i) $63.0 million to redeem the 11 7/8% senior debentures due 1999; (ii) $117.6 million to redeem the 12% intermediate debentures due 2001; (iii) $35.9 million to redeem the 13 1/8% subordinated debentures due 2006; (iv) $25.1 million to redeem the 13% junior subordinated debentures due 2007; (v) approximately $75.1 million of bank indebtedness, which indebtedness has an interest rate of 9%; and (vi) accrued interest of $7.8 million. The Company will not receive any of the proceeds from the sale of the Class A Common Stock by the Selling Stockholders. DIVIDEND POLICY The Company has not paid a dividend since Fiscal 1992 on its Common Stock. The payment of cash dividends in the future will depend on the Company's earnings, financial condition and capital needs and on other factors deemed relevant by the Board of Directors at that time. It is the current policy of the Company's Board of Directors to retain earnings to finance the operations and expansion of the Company's business. PRICE RANGE OF CLASS A COMMON STOCK The Class A Common Stock is quoted on the New York Stock Exchange ("NYSE") under the symbol "FA." The following table shows, for the periods indicated, the range of high and low reported sale prices per share for the Class A Common Stock as quoted on the NYSE.
HIGH LOW ---- ------- FISCAL 1996 Quarter ended: October 1, 1995............................................ $ 6 $ 2 7/8 December 31, 1995.......................................... 8 3/4 4 3/4 March 31, 1996............................................. 9 7/8 8 June 30, 1996.............................................. 15 7/8 9 1/4 FISCAL 1997 Quarter ended: September 29, 1996......................................... $ 17 $12 1/4 December 29, 1996.......................................... 17 3/4 14 3/8 March 30, 1997............................................. 15 3/8 12 7/8 June 30, 1997.............................................. 18 11 5/8 FISCAL 1998 Quarter ended: September 28, 1997......................................... $28 11/16 $17 Through December 8, 1997................................... 28 11/16 20 7/8
On December 8, 1997, the last reported sale price of the Class A Common Stock as quoted on the NYSE was $21 13/16. As of October 1, 1997, there were approximately 1,370 holders of record of Class A Common Stock and approximately 53 holders of record of Class B Common Stock. 12 CAPITALIZATION The following table sets forth the cash position and the capitalization of the Company as of September 28, 1997, and on a pro forma basis to give effect to the sale of 3,000,000 shares of Class A Common Stock by the Company, additional borrowings of approximately $225.0 million under the New Credit Facility, the after tax proceeds from the STFI Sale, the $345.0 million in proceeds from the Disposition and the repayment of indebtedness with the proceeds thereof. This table should be read in conjunction with the Company's Consolidated Financial Statements, the Pro Forma Consolidated Financial Statements and the related notes thereto and the other financial information included elsewhere in this Prospectus.
SEPT. 28, AS PRO 1997 ADJUSTED(1) FORMA(2) --------- ----------- -------- (DOLLARS IN THOUSANDS) Cash and short-term investments.............. $ 27,452 $ 70,671 $292,993 ======== ======== ======== Short-term debt.............................. $ 4,060 $ 3,960 915 Existing Credit Facilities................... 237,000 162,000 -- New Credit Facility.......................... -- 225,000 225,000 11 7/8% Senior Debentures due 1999(3)........ 62,919 -- -- 12% Intermediate Debentures due 2001(3)...... 115,590 -- -- 13 1/8% Subordinated Debentures due 2006(3).. 35,218 -- -- 13% Junior Subordinated Debentures due 2007(3)..................................... 24,844 -- -- Other debt................................... 12,411 12,411 12,411 -------- -------- -------- Total debt................................... $492,042 $403,371 $238,326 -------- -------- -------- Stockholders' equity: Class A Common Stock, $0.10 par value; 40,000,000 shares authorized; 20,272,313 shares (actual); 23,272,313 shares (pro forma) issued; 14,030,717 shares (actual); 17,030,717 shares (pro forma) outstanding................................. 2,027 2,327 2,327 Class B Common Stock, $0.10 par value; 20,000,000 shares authorized; 2,625,616 shares (actual and pro forma) issued and outstanding...................... 263 263 263 Paid in capital.............................. 71,105 134,218 134,218 Retained earnings............................ 210,441 203,297 342,272 Cumulative translation adjustment............ (865) (865) (865) Net unrealized holding loss on available-for- sale securities............................. (46) (46) (46) Treasury stock............................... (51,719) (51,719) (51,719) -------- -------- -------- Total stockholders' equity................... 231,206 287,475 426,450 -------- -------- -------- Total capitalization......................... $723,248 $732,324 $664,776 ======== ======== ========
- --------------------- (1) Gives effect to the Refinancing and the use of proceeds thereof. (2) Gives effect to the completion of the STFI Sale and the Disposition and the use of proceeds thereof. On November 20, 1997, STFI, a corporation of which the Company owns approximately 42% of the outstanding common stock on a fully-diluted basis, entered into a merger agreement with Intermedia pursuant to which each common shareholder of STFI shall receive $15.00 per share in cash. The Company expects to realize an after tax gain of approximately $95.8 million upon consummation of such transaction. On December 8, 1997, Banner and eight of its subsidiaries entered into an Asset Purchase Agreement pursuant to which such subsidiaries have agreed to transfer substantially all of their assets to Allied for approximately $345 million of common stock of Allied. The assets transferred to Allied consists primarily of Banner's hardware group, which includes the distribution of bearings, nuts, bolts, screws, rivets and other type of fasteners. (3) The Debentures are reflected on the Company's balance sheet net of the remaining original issue discount and will be redeemed approximately 45 days after the consummation of the Offering. 13 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected financial data for the Company and should be read in conjunction with the financial statements and related notes appearing elsewhere in this Prospectus. The selected financial data as of and for the five years ended June 30, 1997 have been derived from the Company's Consolidated Financial Statements, which were audited by Arthur Andersen LLP, the Company's independent accountants. The selected financial data as of and for the three months ended September 28, 1997 and September 29, 1996 have been derived from the Company's Consolidated Financial Statements and are unaudited. The unaudited pro forma statement of operations data for the Fiscal year ended June 30, 1997 and for the three months ended September 28, 1997 give effect to, the Refinancing, the completion of the STFI Sale, and the Disposition, as if they occurred on July 1, 1996 and July 1, 1997, respectively. The data presented below should be read in conjunction with the financial statements and related notes appearing elsewhere in this Prospectus. The unaudited pro forma balance sheet data as of September 28, 1997 give effect to the Refinancing, the completion of the STFI Sale and the Disposition as if they had occurred on such date. The pro forma financial data is not intended to be indicative of either future results of operations or results that might have been achieved had the Refinancing, the completion of the STFI Sale and the Disposition actually occurred on the dates specified.
FISCAL THREE MONTHS ENDED ----------------------------------------------------- --------------------------- SEPTEMBER 29, SEPTEMBER 28, 1993 1994 1995 1996 1997(1) 1996 1997 -------- --------- -------- ---------- ---------- ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Net sales............... $247,080 $ 203,456 $256,840 $ 409,520 $ 731,960 $ 146,090 $ 213,761 Gross profit............ 42,609 28,415 37,614 94,911 205,123 39,810 52,062 Operating income (loss)................. (29,595) (46,845) (31,917) (9,115) 30,517 3,048 10,112 Net interest expense.... 67,162 66,670 64,371 56,586 47,798 12,480 12,590 Earnings (loss) from continuing operations.. (62,413) 4,834 (57,763) (33,661) (1,818) (5,052) 433 Earnings (loss) per share from continuing operations: Primary................ $ (3.87) $ 0.30 $ (3.59) $ (2.03) $ (0.10) $ (0.31) $ 0.02 Fully diluted.......... (3.87) 0.30 (3.59) (1.97) (0.10) (0.31) 0.02 PRO FORMA DATA(2): Net sales .............. $ 523,147 $ 159,096 Gross profit............ 130,944 30,603 Operating income ....... 7,898 4,063 Net interest expense.... 9,339 3,212 Earnings from continuing operations............. 10,555 3,582 Earnings per share from continuing operations: Primary................ $ 0.52 $ 0.18 Fully Diluted.......... 0.52 0.18 OTHER DATA: EBITDA (3).............. $ 5,739 $ (7,471) $(11,038) $ 14,857 $ 56,452 $ 8,316 $ 16,969 EBITDA margin (4)....... 2.3% N.M. N.M. 3.6% 7.7% 5.7% 7.9% Capital expenditures.... $ 5,802 $ 4,507 $ 5,911 $ 6,622 $ 22,116 $ 2,131 $ 10,206 Cash used for operating activities............. (21,120) (33,271) (25,525) (48,737) (96,957) (45,889) (36,843) Cash provided by (used for) investing activities............. (9,290) 166,068 (19,156) 57,540 79,975 170,378 (2,485) Cash provided by (used for) financing activities............. 57,431 (101,390) 12,345 (39,375) (1,455) (43,634) 27,560 AT SEPTEMBER 28, 1997 --------------------------- ACTUAL PRO FORMA(2) ------------- ------------- BALANCE SHEET DATA: Total assets............ $941,675 $ 866,621 $850,294 $1,009,938 $1,067,333 $1,083,116 $1,044,660 Long-term debt, less current maturities..... 566,491 522,406 509,715 368,589 416,922 412,261 225,000 Stockholders' equity.... 53,754 69,494 40,180 231,168 229,625 231,206 426,450
- ------------------- (1) The actual results for Fiscal 1997 include results of Simmonds from its date of acquisition in February 1997. (2) See "Pro Forma Consolidated Financial Statements." (3) EBITDA represents the sum of operating income before depreciation and amortization and restructuring and unusual charges of $15,469, $25,553, and $2,319 in Fiscal 1993, 1994, and 1996, respectively. EBITDA is not a measure of financial performance under GAAP, may not be comparable to other similarly titled measures of other companies and should not be considered as an alternative either to net income as an indicator of the Company's operating performance, or to cash flows as a measure of the Company's liquidity. See the Company's Consolidated Financial Statements and the related notes thereto appearing elsewhere in this Prospectus. (4) Represents EBITDA as a percentage of net sales. 14 PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The unaudited pro forma consolidated statement of earnings for the year ended June 30, 1997 and for the three months ended September 28, 1997 has been prepared to give effect to the Offering, the New Credit Facility, the STFI Sale and the Disposition (collectively, the "Transactions") as if they occurred on July 1, 1996 and July 1, 1997, respectively. The unaudited pro forma consolidated balance sheet as of September 28, 1997 has been prepared to give effect to the Offering, the New Credit Facility, the STFI Sale and the Disposition as if they had occurred on such date. The unaudited pro forma consolidated financial data are not necessarily indicative of the results that would have been obtained had the Transactions been completed as of the dates presented or for any future period. The unaudited pro forma consolidated financial data should be read in conjunction with the Company's Consolidated Financial Statements and notes thereto included elsewhere in this Prospectus. 15 THE FAIRCHILD CORPORATION UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR ENDED JUNE 30, 1997
ADJUSTMENT FOR OFFERING AND STFI PRO FORMA HISTORICAL NEW CREDIT FACILITY SUBTOTAL SALE DISPOSITION(3) COMPANY ---------- ------------------- -------- ------ -------------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Sales................... $731,960 $ -- $731,960 $ -- $(208,813)(4) $523,147 Costs and expenses: Cost of sales......... 526,837 -- 526,837 -- (134,634) 392,203 Selling, general & administrative....... 161,967 -- 161,967 -- (51,271) 110,696 Research and development.......... 7,807 -- 7,807 -- -- 7,807 Amortization of goodwill............. 4,832 -- 4,832 -- (289) 4,543 -------- ------- -------- ------ --------- -------- 701,443 -- 701,443 -- (186,194) 515,249 -------- ------- -------- ------ --------- -------- Operating income...... 30,517 -- 30,517 -- (22,619) 7,898 Net interest expense.... (47,798) 15,176(1) (32,622) 8,833(2) 14,450 (9,339) Investment income, net.. 6,651 -- 6,651 -- 2,637 9,288 Equity in earnings of affiliates............. 4,598 -- 4,598 -- -- 4,598 Minority interest....... (3,514) -- (3,514) -- 2,220 (1,294) Non-recurring income.. 2,528 -- 2,528 -- -- 2,528 -------- ------- -------- ------ --------- -------- Earnings before taxes... (7,018) 15,176 8,158 8,833 (3,312) 13,679 Income tax provision (benefit).............. (5,200) 5,311 111 3,092 (79) 3,124 -------- ------- -------- ------ --------- -------- Earnings from continuing operations before nonrecurring charges or credits directly attributable to the transaction to give effect to the proposed disposition of STFI(5)................ $ (1,818) $ 9,865 $ 8,047 $5,741 $ (3,233) $ 10,555 ======== ======= ======== ====== ========= ======== Primary earnings per share: Continuing operations........... $ (0.10) $ 0.40 $ 0.52 Weighted average shares outstanding............ 17,230 3,000 20,230 20,230
16 THE FAIRCHILD CORPORATION UNAUDITED CONSOLIDATED STATEMENT OF EARNINGS FOR THE THREE MONTHS ENDED SEPTEMBER 28, 1997
ADJUSTMENT FOR OFFERING AND STFI PRO FORMA HISTORICAL NEW CREDIT FACILITY SUBTOTAL SALE DISPOSITION(3) COMPANY ---------- ------------------- -------- ------ -------------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Sales................... $213,761 $ -- $213,761 $ -- $(54,665) $159,096 Costs and expenses: Cost of sales......... 161,699 -- 161,699 -- (33,206) 128,493 Selling, general & administrative....... 40,122 -- 40,122 -- (15,342) 24,780 Research and development.......... 605 -- 605 -- -- 605 Amortization of goodwill............. 1,223 -- 1,223 -- (68) 1,155 -------- ------ -------- ------ -------- -------- 203,649 -- 203,649 -- (48,616) 155,033 -------- ------ -------- ------ -------- -------- Operating income...... 10,112 -- 10,112 -- (6,049) 4,063 Net interest expense.... (12,590) 3,457(1) (9,133) 2,176(2) 3,745 (3,212) Investment income, net.. 1,897 -- 1,897 -- 604 2,501 Equity in earnings of affiliates............. 1,692 -- 1,692 -- -- 1,692 Minority interest....... (788) -- (788) -- 352 (436) -------- ------ -------- ------ -------- -------- Earnings before taxes................ 323 3,457 3,780 2,176 (1,348) 4,608 Income tax provision (benefit).............. (110) 1,210 1,100 761 (835) 1,026 -------- ------ -------- ------ -------- -------- Earnings from continuing operations before nonrecurring charges or credits directly attributable to the transaction to give effect to the proposed disposition of STFI.... $ 433 $2,247 $ 2,680 $1,415 $ (513) $ 3,582 ======== ====== ======== ====== ======== ======== Primary earnings per share: Continuing operations.. $ 0.02 $ 0.13 $ 0.18 Weighted average shares outstanding............ 17,457 3,000 20,457 20,457
17 THE FAIRCHILD CORPORATION UNAUDITED PRO FORMA BALANCE SHEET AS OF SEPTEMBER 28, 1997
ADJUSTMENT FOR OFFERING AND NEW STFI PRO FORMA HISTORICAL CREDIT FACILITY SUBTOTAL SALE DISPOSITION(12) COMPANY ---------- --------------- ---------- -------- --------------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Cash.................... $ 9,049 $ -- $ 9,049 $ 93,033 (9) $ -- $ 102,082 Short-term investments.. 18,403 -- 18,403 -- 172,508(13) 190,911 Accounts receivable, less allowance......... 172,239 -- 172,239 -- (48,184) 124,055 Inventory............... 359,667 -- 359,667 -- (176,790) 182,877 Prepaid and other current assets......... 39,595 -- 39,595 -- (10,156) 29,439 ---------- -------- ---------- -------- --------- ---------- Total current assets.. 598,953 -- 598,953 93,033 (62,622) 629,364 Net fixed assets........ 132,195 -- 132,195 -- (12,553) 119,642 Net assets held for sale................... 26,262 -- 26,262 -- -- 26,262 Investment in affiliates............. 55,337 -- 55,337 (32,037)(10) -- 23,300 Goodwill................ 154,233 -- 154,233 -- (19,089) 135,144 Deferred loan costs..... 11,489 (2,542)(5) 8,947 -- (2,000)(14) 6,947 Prepaid pension assets.. 59,512 -- 59,512 -- -- 59,512 Other assets............ 45,135 -- 45,135 -- (646) 44,489 ---------- -------- ---------- -------- --------- ---------- Total Assets.......... $1,083,116 $ (2,542) $1,080,574 $ 60,996 $ (96,910) $1,044,660 ========== ======== ========== ======== ========= ========== Bank notes payable & current maturities of debt................... $ 79,781 $(63,100)(6) $ 16,681 $ (3,056)(11) $ (299) $ 13,326 Accounts payable........ 84,797 -- 84,797 -- (30,518) 54,279 Other accrued expenses.. 91,289 (11,618)(7) 79,671 -- 43,069(15) 122,740 ---------- -------- ---------- -------- --------- ---------- Total current liabilities.......... 255,867 (74,718) 181,149 (3,056) 12,252 190,345 Long-term debt, less current maturities..... 412,261 15,907(6) 428,168 (38,422)(11) (164,746)(16) 225,000 Other long-term liabilities............ 22,381 -- 22,381 -- (5,969) 16,412 Retiree health care liabilities............ 43,284 -- 43,284 -- -- 43,284 Noncurrent income taxes.................. 48,939 -- 48,939 -- -- 48,939 Minority interest in subsidiaries........... 69,178 -- 69,178 -- 25,052(17) 94,230 ---------- -------- ---------- -------- --------- ---------- Total liabilities..... 851,910 (58,811) 793,099 (41,478) (133,411) 618,210 ---------- -------- ---------- -------- --------- ---------- Total stockholders' equity............... 231,206 56,269(8) 287,475 102,474 (12) 36,501 426,450 ---------- -------- ---------- -------- --------- ---------- Total liabilities & stockholders' equity............... $1,083,116 $ (2,542) $1,080,574 $ 60,996 $ (96,910) $1,044,660 ========== ======== ========== ======== ========= ==========
18 NOTES TO THE UNAUDITED PRO FORMA FINANCIAL STATEMENTS (1) Represents the decrease of interest expense by $35,971, and $8,656 for the fiscal year ended June 30, 1997 and the three months ended September 28, 1997, respectively, due to the early extinguishment of the debentures and bank debt. This is offset by the increased interest expense of $20,795, and $5,199 for the fiscal year ended June 30, 1997 and the three months ended September 28, 1997, respectively, relating to the New Credit Facility (at assumed interest rates of 9%, which represents LIBOR plus 3%). (2) Represents the decrease of net interest expense by $8,833, and $2,176 for the fiscal year ended June 30, 1997 and the three months ended September 28, 1997, respectively, due to the early extinguishment of the debentures and bank debt and additional interest income from the invested proceeds of the STFI sale. (3) Represents the elimination of the results of operations associated with the Disposition of a portion of Banner's business (see note 4) and the associated reduction in interest expense due to the repayment of bank debt of Banner's subsidiaries. Investment income of $2,637 and $604 for the fiscal year ended June 30, 1997 and the three months ended September 28, 1997, respectively, represents cash dividends paid on holdings of Allied common stock. (4) Represents the reduction of Banner hardware group sales of $223,997 offset by $15,184 of additional sales recorded by the Fairchild Fasteners Group which represented intercompany sales to the Banner hardware group. These sales no longer require elimination as the Banner hardware group is now treated as a third party for pro forma purposes. The net result is a decrease in sales of $208,813. (5) The net decrease in deferred loan costs of $2,542 represents the write-off of existing deferred loan costs of $8,042 related to retired debt, offset by additional deferred loan costs of $5,500 related to costs for the New Credit Facility. (6) Represents the net decrease of current and long-term debt of $47,193 (net of $63,100 decrease in current debt and $15,907 increase in long-term debt) due to the Refinancing as follows: Proceeds from New Credit Facility.......................... 266,478 Payments on subordinated notes and debentures.............. (238,571) Payments on existing bank debt............................. (75,100) -------- Net decrease in short and long-term debt paid from proceeds of the equity offering...................... (47,193)
(7) The reduction of other accrued expenses by $11,618 represents (i) the payment of $7,771 of accrued interest on the retired debt and (ii) the reduction of income taxes payable of $3,847 due to the tax benefit derived from the write-off of deferred loan fees and original issue discounts on the retired debt. (8) The increase in stockholders' equity of $56,269 reflects the following: Gross proceeds from the sale of 3,000,000 shares of Class A common stock by the Company at $22.25 per share........... $66,750 Issuance costs............................................. (3,338) ------- Net proceeds from the Offering............................. 63,412 Extraordinary loss, net of tax, of write-off of deferred financing costs and original issue discount costs......... (7,143) ------- Net increase in stockholders' equity....................... $56,269 =======
(9) The increase in cash of $93,033 reflects the after tax proceeds of the STFI sale of $134,511, net of paying down $41,478 in debt. (10) Represents the carrying value of the STFI investment at September 28, 1997. (11) Represents the payment of debt from the use of the after tax proceeds of the STFI sale. 19 (12) Represents the removal of the operating net assets associated with the Disposition. The increase in stockholders' equity related primarily to the gain from the STFI sale as follows: Proceeds to be received from the STFI common stock............... $93,375 Proceeds received from the STFI preferred stock issuances........ 84,698 ------- Gross Proceeds................................................... 178,073 Less: Cash Expenses.............................................. (5,671) ------- Net proceeds..................................................... 172,402 Less: Non cash expenses from warrant issuances................... (6,660) ------- 165,742 Book Basis of STFI investment.................................... 32,037 ------- Gain from disposal before taxes.................................. 133,705 Income tax provision............................................. 37,891 ------- Net gain from disposal........................................... $95,814 ======= Additional paid in capital from issuance of warrants............. 6,660 ------- Net increase in equity......................................... 102,474 =======
(13) Represents a net increase of $172,508 in short-term investments. The Company will receive AlliedSignal, Inc. stock of $345,000 in exchange for the sale of a portion of the Company's aerospace distribution segment. The offsetting decrease of $172,492 results from the repayment of Banner long-term debt, associated interest and transaction fees. (14) Represents the write-off of existing deferred financing fees of $2,000 related to the repayment of the debt of Banner's subsidiaries. (15) Represents (i) an increase of accrued expenses of $41,826 for deferred taxes associated with the Disposition; (ii) an increase of $10,000 in accruals for transaction fees, indemnifications and other costs associated with the transaction; (iii) a decrease of accrued interest of $2,447 associated with the defeasance of the Banner bank debt (iv) a decrease of $6,310 in accruals associated with the business being sold to AlliedSignal. (16) Represents the redemption of $164,746 of long-term debt. (17) Represents the increase in the minority interest liability associated with Banner's increased net worth associated with the Disposition. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is the largest aerospace fastener manufacturer and is one of the largest independent aerospace parts distributors in the world. Through internal growth and strategic acquisitions, the Company has become one of the leading aircraft parts suppliers to aircraft manufacturers such as Boeing, Airbus, Lockheed Martin, British Aerospace and Bombardier and to airlines such as Delta Airlines and US Airways. The Company's primary business focus is on the aerospace industry and its business consists primarily of two aerospace segments--aerospace fasteners and aerospace parts distribution. The aerospace fasteners segment, which accounted for approximately 51.4% of the Company's net sales in Fiscal 1997, pro forma for the Disposition, manufactures and markets fastening systems used in the manufacturing and maintenance of commercial and military aircraft. The aerospace distribution segment, which accounted for approximately 35.9% of the Company's net sales in Fiscal 1997, pro forma for the Disposition, stocks and distributes a wide variety of aircraft parts to commercial airlines and air cargo carriers, OEMs, other distributors, fixed-base operators, corporate aircraft operators and other aerospace and non-aerospace companies. The Company's aerospace distribution business is conducted through its 64% owned subsidiary, Banner. On November 20, 1997, STFI, a corporation of which the Company owns approximately 42% of the outstanding common stock, entered into a merger agreement with Intermedia pursuant to which holders of STFI common stock will receive $15.00 per share in cash. In connection with the STFI Sale, the Company has received approximately $85 million in cash (before tax) in exchange for certain preferred stock of STFI and expects to receive an additional $93 million in cash (before tax) in the first three months of 1998 in exchange for the 6,225,000 shares of common stock of STFI owned by the Company. The Intermedia transaction replaces an earlier merger agreement with the Tel-Save Holdings, Inc. under which the Company would have received consideration primarily in common stock of Tel-Save Holdings, Inc. Consummation of the STFI Sale is subject to certain conditions. On December 8, 1997, Banner and eight of its subsidiaries entered into an Asset Purchase Agreement pursuant to which such subsidiaries have agreed to transfer substantially all of their assets to Allied for approximately $345 million of common stock of Allied. The assets sold to Allied consist primarily of Banner's hardware group, which includes the distribution of bearings, nuts, bolts, screws, rivets and other type of fasteners. Approximately $170 million of the common stock received from Allied will be used to repay outstanding term loans of Banner's subsidiaries and related fees. Consummation of the Disposition is subject to certain conditions. See "The Disposition." The Company is effecting the Disposition to concentrate its efforts on the rotables and jet engine businesses and because the Disposition presented a unique opportunity to realize a significant return on the sale of the hardware group. In the last two years, the Company's aerospace business segments have experienced significant growth. Set forth below is certain financial information regarding the Company's aerospace segments for the last eight fiscal quarters.
FOR THE TWELVE (12) MONTHS ENDED JUNE 30, 1996 ------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL ------- ------- ------- ------- -------- SALES Aerospace Fasteners............... $45,261 $48,063 $52,663 $51,112 $197,099 Aerospace Distribution (a)........ 31,039 35,538 43,220 44,033 153,830 ------- ------- ------- ------- -------- Total........................... $76,300 $83,601 $95,883 $95,145 $350,929 ======= ======= ======= ======= ======== OPERATING INCOME Aerospace Fasteners............... $(2,324) $ (488) $ (50) $ 223 $ (2,639) Aerospace Distribution (a)........ 1,292 1,131 1,646 1,362 5,431 ------- ------- ------- ------- -------- Total........................... $(1,032) $ 643 $ 1,596 $ 1,585 $ 2,792 ======= ======= ======= ======= ========
21
FOR THE TWELVE (12) MONTHS ENDED JUNE 30, 1997 ------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL ------- -------- -------- -------- -------- SALES Aerospace Fasteners................. $55,047 $ 56,494 $ 64,073 $ 93,412 $269,026 Aerospace Distribution.............. 36,034 47,973 48,833 54,928 187,768 ------- -------- -------- -------- -------- Total............................. $91,081 $104,467 $112,906 $148,340 $456,794 ======= ======== ======== ======== ======== OPERATING INCOME Aerospace Fasteners................. $ 2,108 $ 2,156 $ 3,563 $ 9,563 $ 17,390 Aerospace Distribution.............. 1,643 2,143 1,361 3,125 8,272 ------- -------- -------- -------- -------- Total............................. $ 3,751 $ 4,299 $ 4,924 $ 12,688 $ 25,662 ======= ======== ======== ======== ========
- --------------------- (a) Aerospace Distribution sales and operating income assumes the Company consolidated Banner's results for the first eight months of Fiscal 1996 and reflects the Disposition on a pro forma basis. RESULTS OF OPERATIONS The Company's Aerospace Fasteners and Aerospace Distribution segments account for over 90% of the Company's consolidated sales. Effective February 25, 1996, the Company began to consolidate the operating results of the Aerospace Distribution segment. The results of Fairchild Technologies, together with the results of Camloc Gas Springs division ("Gas Springs") and the Company's former subsidiary, Fairchild Scandinavian Bellyloading Company ("SBC"), are included in Corporate and Other. The Communications Services segment is no longer presented as it became a discontinued operation effective November 20, 1997 (see Note 24 of the consolidated year-end financial statements). The following table illustrates the historical sales and operating income of the Company's operations for the past three years ended June 30, 1995, 1996 and 1997, and for the three months ended September 29, 1996 and September 28, 1997.
FOR THE YEARS ENDED JUNE 30, FOR THE THREE MONTHS ENDED ------------------------------- --------------------------- SEPTEMBER 29, SEPTEMBER 28, 1995 1996 1997 1996 1997 --------- --------- --------- ------------- ------------- (IN THOUSANDS) SALES BY SEGMENT: Aerospace Fasteners... $ 215,364 $ 218,059 $ 269,026 $ 55,047 $ 76,847 Aerospace Distribution (a).................. -- 129,973 411,765 84,107 122,914 Corporate and Other (b).................. 41,476 67,330 66,382 9,654 18,847 Eliminations(c)....... -- (5,842) (15,213) (2,718) (4,847) --------- --------- --------- -------- -------- Sales................... $ 256,840 $ 409,520 $ 731,960 $146,090 $213,761 ========= ========= ========= ======== ======== OPERATING INCOME (LOSS) BY SEGMENT: Aerospace Fasteners (d).................. $ (11,497) $ 135 $ 17,390 $ 2,108 $ 2,510 Aerospace Distribution (a).................. -- 5,625 30,891 5,981 9,371 Corporate and Other (b).................. (20,420) (14,875) (17,764) (5,041) (1,769) --------- --------- --------- -------- -------- Operating income (loss)................. $ (31,917) $ (9,115) $ 30,517 $ 3,048 $ 10,112 ========= ========= ========= ======== ========
- --------------------- (a) Effective February 25, 1996, the Company became the majority shareholder of Banner and, accordingly, began consolidating their results as of that date. (b) Includes sales from Fairchild Technologies of $38.0 million, $60.3 million, and $51.8 million in 1995, 1996 and 1997, respectively, and gross margin from Fairchild Technologies of $11.1 million, $20.8 million, and $23.8 million, respectively. (c) Represents intersegment sales from the Aerospace Fasteners segment to the Aerospace Distribution segment. (d) Includes restructuring charges of $2.3 million in Fiscal 1996. 22 The following unaudited pro forma table illustrates sales and operating income of the Company's operations by segment, on a pro forma basis, as if the Company had operated in a consistent manner for the past three years ended June 30, 1995, 1996 and 1997, and for the three months ended September 29, 1996 and September 28, 1997. The pro forma results are based on the historical financial statements of the Company and Banner as though the Disposition and consolidation of Banner had been in effect since the beginning of each period. The pro forma information is not necessarily indicative of the results of operations that would actually have occurred if the transactions had been in effect since the beginning of each period, nor is it necessarily indicative of future results of the Company.
FOR THE YEARS ENDED JUNE 30, ------------------------------- 1995 1996 1997 --------- --------- --------- (IN THOUSANDS) PRO FORMA SALES BY SEGMENT: Aerospace Fasteners (a)..................... $ 190,287 $ 197,099 $ 269,026 Aerospace Distribution...................... 108,359 153,830 187,768 Corporate and Other......................... 41,476 67,330 66,382 Eliminations................................ -- -- (29) --------- --------- --------- $ 340,122 $ 418,259 $ 523,147 ========= ========= ========= PRO FORMA OPERATING INCOME (LOSS) BY SEGMENT: Aerospace Fasteners (a)..................... $ (15,736) $ (2,639) $ 17,390 Aerospace Distribution...................... (9,995) 5,431 8,272 Corporate and Other......................... (20,420) (14,876) (17,764) --------- --------- --------- Operating income (loss)....................... $ (46,151) $ (12,084) $ 7,898 ========= ========= =========
- --------------------- (a) Fiscal 1997 results include sales of $27.2 million and operating income of $1.2 million provided by the acquisition of Simmonds S.A. ("Simmonds"), a European manufacturer of aerospace fasteners acquired in February 1997 for approximately $62 million. FIRST QUARTER OF FISCAL 1998 COMPARED TO FIRST QUARTER OF FISCAL 1997 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. 23 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 $0.2 million in the first quarter of Fiscal 1998, compared to the first quarter of Fiscal 1997, due to slightly lower earnings by Nacanco Paketleme, (the largest producer of aluminum cans in Turkey) ("Nacanco"). Income Taxes included a $0.1 million tax benefit in the first quarter of Fiscal 1998, on pre-tax earnings of $0.4 million. The tax benefit was due primarily to losses generated by domestic operations. Net earnings of $0.5 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 $0.4 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 S.A. ("Simmonds"), a European manufacturer of aerospace fasteners acquired in February 1997 for approximately $62 million. 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 24 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. FISCAL 1997, 1996 AND 1995 CONSOLIDATED RESULTS Net sales of $731.9 million in Fiscal 1997 improved significantly by $322.4 million, or 78.7%, compared to sales of $409.5 million in Fiscal 1996. Sales growth was stimulated by the resurgent commercial aerospace industry, together with the effects of several strategic business combinations over the past 18 months. Net sales in Fiscal 1996 were up 59.3% from Fiscal 1995 reflecting strong sales performances from the Aerospace Fasteners segment and Fairchild Technologies ("FT"), included in the Corporate and Other business segment, and the inclusion of four months of sales from the Aerospace Distribution segment. On a pro forma basis, net sales increased 25.1% and 23.0% in Fiscal 1997 and 1996, respectively, as compared to the previous Fiscal periods. Gross Margin as a percentage of sales was 28.0%, 23.2%, and 14.6% in Fiscal 1997, 1996, and 1995, respectively. The increase in the current year was attributable to higher revenues combined with continued productivity improvements achieved during Fiscal 1997. The increase in Fiscal 1996 compared to Fiscal 1995 was due to consolidation of plants, elimination of product lines, substantial downsizing and new productivity programs put in place. Selling, General & Administrative expense as a percentage of sales was 21.8%, 23.9%, and 25.6% in Fiscal 1997, 1996, and 1995, respectively. The decrease in the current year was attributable primarily to the decrease in selling and marketing costs in correlation to the increase in sales. Operating income of $30.5 million in Fiscal 1997 increased $39.6 million compared to operating loss of $9.1 million in Fiscal 1996. The increase in operating income was due primarily to the current year's growth in sales and increased operational efficiencies. Operating income in Fiscal 1996 improved by $22.8 million over Fiscal 1995, due primarily to improved cost efficiencies applied in the Aerospace Fasteners segment and the sales increase from FT in the Corporate and Other business segment. On a pro forma basis, operating income increased $20.0 million in Fiscal 1997, as compared to Fiscal 1996, and $34.1 million in Fiscal 1996, as compared to Fiscal 1995. Net interest expense decreased 15.5% in Fiscal 1997 compared to Fiscal 1996, and decreased 12.1% in Fiscal 1996 compared to Fiscal 1995. The decreases are due to lower borrowings as a result of the sale of D-M-E Company ("DME") and the March 13, 1996 Merger, both of which significantly reduced the Company's total debt. Investment income, net, was $6.7 million, $4.6 million and $5.7 million in Fiscal 1997, 1996, and 1995, respectively. The 45.4% increase in Fiscal 1997 is due primarily to realized gains from the sale of investments in Fiscal 1997. The 19.8% decrease in Fiscal 1996 resulted from losses realized on the write-off of two foreign investments. 25 Equity in earnings of affiliates decreased $0.2 million in Fiscal 1997, compared to Fiscal 1996, and increased $3.2 million in Fiscal 1996, compared to Fiscal 1995. The current year's decrease is attributable to lower earnings of Nacanco. The prior year's increase was due primarily to higher earnings from Nacanco, which improved the Company's equity in earnings by $2.6 million. Nonrecurring income in Fiscal 1997 includes the $2.5 million gain from the sale of SBC. Income Taxes included a $5.2 million tax benefit in Fiscal 1997 on a pre-tax loss of $7.0 million from continuing operations. The tax benefit was due primarily to reversing Federal income taxes previously provided due to a change in the estimate of the required tax accruals. In Fiscal 1996, the tax benefit from the loss from continuing operations, excluding the nontaxable nonrecurring gain, was $26.3 million. Earnings from discontinued operations, net, include the earnings, net of tax, from STFI, DME and Fairchild Data Corporation, both former subsidiaries of the Company, in Fiscal 1997, 1996 and 1995. The $53.6 million gain on disposal of discontinued operations resulted primarily from the sale of DME to Cincinnati Milacron Inc. in Fiscal 1996. Fiscal 1996 also includes a $163.1 million nontaxable gain resulting from the March 13, 1996 Merger. Extraordinary items, net, resulted from premiums paid for, and redemption costs and consent fees associated with, the retirement of the Senior Notes and the write off of deferred loan fees, related primarily to 12 1/4% Senior Subordinated Notes due 1996 and bank debt extinguished prior to maturity. This totaled $10.4 million, net of a tax benefit, in Fiscal 1996. Net earnings in Fiscal 1997, compared to Fiscal 1996, after excluding the gain on sale of discontinued operations of $163.1 million from the March 13, 1996 Merger and the $53.6 million gain on sale of discontinued operations in 1996, improved $28.3 million, reflecting a $39.6 million improvement in operating profit. The net earnings increased $223.5 million in Fiscal 1996, compared to Fiscal 1995, due primarily to the $163.1 million nonrecurring pre- tax gain recorded from the March 13, 1996 Merger, and the $53.6 million gain, net of tax, from the sale of discontinued operations. SEGMENT RESULTS AEROSPACE FASTENERS SEGMENT Sales in the Aerospace Fasteners segment increased by $51.0 million to $269.0 million, up 23.4% in Fiscal 1997, compared to the Fiscal 1996 period, reflecting significant growth in the commercial aerospace industry, combined with the Simmonds acquisition. New orders have been strong in recent months resulting in a backlog of $195.7 million at June 30, 1997, up from $109.9 million at June 30, 1996. Sales increased slightly in Fiscal 1996 compared to Fiscal 1995. The Harco division was transferred to the Aerospace Distribution segment on February 25, 1996. On a pro forma basis, excluding Harco's sales, sales increased 36.5% in Fiscal 1997, compared to Fiscal 1996 and 3.6% in Fiscal 1996, compared to Fiscal 1995. Operating income improved from breakeven to $17.4 million during Fiscal 1997, compared to Fiscal 1996. This improvement was achieved as a result of accelerated growth in the commercial aerospace industry, particularly in the second half of the year. Certain efficiencies achieved during Fiscal 1997 continued to have positive effects on operating income. Operating income was positive in the Aerospace Fasteners segment, which was an $11.6 million improvement in the Fiscal 1996 period over the corresponding Fiscal 1995 period. During Fiscal 1996, operating losses decreased significantly in the Aerospace Fasteners segment, due primarily to the cost of management changes incurred in Fiscal 1995, consolidation of plants, eliminating unprofitable product lines, pricing adjustments, substantial work force downsizing and new productivity, quality and marketing programs. A restructuring charge of $2.3 million was recorded in Fiscal 1996, primarily for severance pay to employees terminated as a result of further downsizing. On a pro forma basis, excluding Harco, operating income increased $20.0 million in Fiscal 1997, as compared to Fiscal 1996, and $13.1 million in Fiscal 1996, as compared to Fiscal 1995. 26 AEROSPACE DISTRIBUTION SEGMENT Aerospace Distribution sales were up $281.8 million and operating income was up $25.3 million, primarily the result of reporting twelve months in Fiscal 1997 versus four months in Fiscal 1996. On a twelve-month pro forma basis, sales were up $33.9 million, or 22.1%, and operating income was up $2.8 million, or 52.3%. Sales increases in all three groups, hardware, rotables and engines, contributed to these strong results. This segment has benefited from the extended service lives of existing aircraft, growth from acquisitions and internal growth, which has increased market share. In Fiscal 1996, as a result of the transfer of Harco to Banner effective February 25, 1996, the Company recorded four months of sales and operating income of Banner, including Harco as part of the Aerospace Distribution segment. This segment reported $130.0 million in sales and $5.6 million in operating income for this four-month period ended June 30, 1996. In Fiscal 1996, the first eight months of Harco's sales and operating income were included in the Aerospace Fasteners segment. CORPORATE AND OTHER The Corporate and Other segment includes Fairchild Technologies, Camloc Gas Springs Division and Fairchild Scandinavian Bellyloading Co. AB (formerly the Technology Products segment). Sales improved at SBC which, was sold effective as of Fiscal 1997 year-end. Over the past three years, corporate administrative expense as a percentage of sales has decreased from 5.1% in 1995 to 3.5% in 1996 to 2.2% in 1997. BACKLOG OF ORDERS Backlog is significant to all the Company's operations, due to long-term production requirements of its customers. The Company's backlog of orders as of June 30, 1997 in the Aerospace Fasteners segment, Aerospace Distribution segment, and Fairchild Technologies amounted to $195.7 million, $90.9 million, and $63.1 million, respectively, with a "Book-to-Bill" ratio of 1.3, 1.1, and 1.8, respectively. The Company anticipates that approximately 94.8% of the aggregate backlog at June 30, 1997 will be delivered by June 30, 1998. 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 intends to enter into a New Credit Facility that will provide for total lending commitments of up to $300 million. The New Credit Facility will be comprised of a revolving credit facility and a term loan facility. See "Description of the New Credit Facility." With the proceeds of the Offering, borrowings under the New Credit Facility and the after tax proceeds the Company has already received from the STFI Sale, the Company will refinance substantially all of its existing indebtedness (other than indebtedness at Banner), consisting of the 11 7/8% Senior Debentures due 1999, the 12% Intermediate Debentures due 2001, the 13 1/8% Subordinated Debentures due 2006, the 13% Junior Subordinated Debentures due 2007 and its existing bank indebtedness. The Refinancing will reduce the Company's total net indebtedness by approximately $132 million and will reduce the Company's annual interest expense, on a pro forma basis, by approximately $21 million. The completion of the STFI Sale will reduce the Company's annual interest expense by approximately $3 million. In addition, a portion of the proceeds from the Disposition will be used to repay all of Banner's outstanding bank indebtedness, which will further reduce the Company's annual interest expense by an additional $14 million. 27 On November 20, 1997, STFI, a corporation of which the Company owns approximately 42% of the outstanding common stock, entered into a merger agreement with Intermedia pursuant to which holders of STFI common stock will receive $15.00 per share in cash. In connection with the STFI Sale the Company has received approximately $85 million in cash (before tax) in exchange for certain preferred stock of STFI and expects to receive an additional $93 million in cash (before tax) during the first three months of 1998 in exchange for the 6,225,000 shares of common stock of STFI owned by the Company. The Intermedia transaction replaces an earlier merger agreement with the Tel-Save Holdings, Inc. under which the Company would have received consideration primarily in common stock of Tel-Save Holdings, Inc. On December 8, 1997, Banner and eight of its subsidiaries entered into an Asset Purchase Agreement pursuant to which such subsidiaries have agreed to transfer substantially all of their assets to AlliedSignal Inc. ("Allied") for approximately $345 million of common stock of Allied. The assets to be transferred to Allied pursuant to the Asset Purchase Agreement consist primarily of Banner's hardware group, which includes the distribution of bearings, nuts bolts, screws, rivets and other type of fasteners. Approximately $170 million of the consideration received from the Disposition will be used to repay outstanding term loans of Banner's subsidiaries and related fees. Consummation of the Disposition is subject to certain conditions. See "The Disposition." The Company is effecting the Disposition to concentrate its efforts on the rotables and jet engine businesses and because the Disposition presented a unique opportunity to realize a significant return on the sale of the hardware group. Net cash used for operating activities for the fiscal years ended June 30, 1997 and 1996 amounted to $97.0 million and $48.7 million, respectively. The primary use of cash for operating activities in fiscal 1997 was an increase in accounts receivables of $56.0 million and inventories of $46.4 million which was mainly to support the Company's sales growth. The primary use of cash for operating activities in fiscal 1996 was a decrease in accounts payables, accrued liabilities and other long-term liabilities of $41.2 million. Net cash provided by investing activities for the fiscal years ended June 30, 1997 and 1996 amounted to $80.0 million and $57.5 million, respectively. The primary source of cash from investing activities in fiscal 1997 was the sale of discontinued operations, including DME, of $173.7 million which was slightly offset by the acquisition of subsidiaries in the amount of $55.9 million. The primary source of cash from investing activities in Fiscal 1996 was the sale of discontinued operations of $71.6 million. Net cash used for financing activities for the Fiscal years ended June 30, 1997 and 1996 amounted to $1.5 million and $39.4 million, respectively. The primary use of cash for financing activities in Fiscal 1997 was the repayment of debt and the repurchase of debentures of $157.0 million offset by proceeds from the issuance of additional debt of $154.4 million. The primary use of cash for financing activities in Fiscal 1996 was the repayment of debt and the repurchase of debentures of $197.8 million which was partially offset by proceeds from the issuance of additional debt of $157.9 million. The Company may effect a Spin-Off as soon as is reasonably practicable following receipt of a solvency opinion relating to FIHC and all necessary governmental and third party approvals. The solvency opinion with respect to FIHC is required by the Company's lenders and board of directors. In order to effect a Spin-Off, approval is required from the board of directors of the Company, however, shareholder approval is not required. The ability of the Company to consummate a Spin-Off is contingent, among other things, on the ability of the Company to obtain consents and waivers under the Company's existing indebtedness and the New Credit Facility. The Company is presently in negotiations with its lenders regarding obtaining such consents and waivers and at the present time the Company has not reached an agreement with its lenders that will allow the Company to consummate a Spin-Off. There is no assurance that the Company will be able to obtain the necessary consents and waivers from its lenders and consequently there is no assurance that the Company will be able to consummate a Spin-Off. In addition, the Company may encounter unexpected delays in effecting a Spin-Off, and the Company can make no assurance as to the timing thereof. In addition, prior to the consummation of a Spin-Off, the Company may sell, restructure or otherwise change the assets and liabilities that will be in FIHC, or for other reasons elect not to consummate a Spin-Off. Consequently, there can be no assurance that a Spin-Off will occur. 28 In connection with the Spin-Off, it is anticipated that the Company and FIHC will enter into an indemnification agreement pursuant to which FIHC will assume and be solely responsible for all known and unknown past, present and future claims and liabilities of any nature relating to the Pension Reversion Case (as described under "Business--Legal Proceedings"); certain environmental liabilities currently recorded as $8.3 million, but for which it is reasonably possible the total expense could be $13.0 million; certain retiree medical cost and liabilities related to discontinued operations for which the Company has accrued approximately $31.3 million as of September 28, 1997 (see Note 11 to the Company's Consolidated Financial Statements); and certain tax liabilities. In addition, FIHC would also be responsible for all liabilities relating to the Technologies business. Responsibility for such liabilities would require significant commitments from FIHC. Should a Spin-Off, as presently contemplated, occur prior to June of 1999, a Spin-Off will be a taxable transaction to shareholders of the Company and could result in a material tax liability to the Company and its stockholders. The amount of the tax to the Company and the Shareholders is uncertain, and if the tax is material to the Company, the Company may elect not to consummate a Spin-Off. Because circumstances may change and because provisions of the Internal Revenue Code of 1986, as amended, may be further amended from time to time, the Company may, depending on various factors, restructure or delay the timing of a Spin-Off to minimize the tax consequences thereof to the Company and its stockholders. 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 that 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. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In October 1996, the American Institute of Certified Public Accountants issued Statement of Position 96-1 ("SOP 96-1") "Environmental Remediation Liabilities." SOP 96-1 provides authoritative guidance on specific accounting issues related to the recognition, measurement, and display and disclosure of environmental remediation liabilities. The Company is required to implement SOP 96-1 in Fiscal 1998. The Company's present policy is similar to the policy prescribed by SOP 96-1, therefore, there will be no effect from implementation. 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 1998. 29 BUSINESS GENERAL The Company is the largest aerospace fastener manufacturer and is one of the largest independent aerospace parts distributors in the world. Through internal growth and strategic acquisitions, the Company has become one of the leading aircraft parts suppliers to aircraft manufacturers such as Boeing, Airbus, Lockheed Martin, British Aerospace and Bombardier and to airlines such as Delta Airlines and US Airways. The Company's primary business focus is on the aerospace industry and its business consists primarily of two segments--fasteners and aerospace parts distribution. The aerospace fasteners segment, which accounted for approximately 51.4% of the Company's net sales in Fiscal 1997, pro forma for the Disposition, manufactures and markets fastening systems used in the manufacturing and maintenance of commercial and military aircraft. The aerospace distribution segment, which accounted for approximately 35.9% of the Company's net sales in Fiscal 1997, pro forma for the Disposition, stocks and distributes a wide variety of aircraft parts to commercial airlines and air cargo carriers, OEMs, other distributors, fixed-base operators, corporate aircraft operators and other aerospace and non-aerospace companies The Company's aerospace distribution business is conducted through its 64% owned subsidiary, Banner. INDUSTRY OVERVIEW The aerospace parts industry currently is enjoying favorable trends driven by strong growth in new commercial aircraft orders, an increase in miles flown by existing aircraft, the need to modify older aircraft to comply with noise regulations and increased orders for wide bodied aircraft. Demand for aerospace fasteners and other aerospace parts is closely related to delivery and use rates for commercial and military aircraft. Delivery and use rates are in turn directly related to the actual and projected volume of passenger and freight traffic, average aircraft age, global fleet size and government defense expenditures. According to the Boeing 1997 Current Market Outlook (the "Boeing Market Outlook"), world air traffic grew 6.7% from 1995 to 1996, following a 6.6% increase from 1994 to 1995. Industry sources forecast that world air traffic will grow by more than 5% per year for the next ten years. Boeing also projects that during this period domestic and international airlines will lease or purchase over 7,000 new aircraft, thereby increasing the worldwide commercial fleet from approximately 11,500 aircraft at the end of 1996 to approximately 17,000 aircraft (net of retirements) at the end of 2006. Boeing, Airbus and McDonnell Douglas delivered over 277 new aircraft in the first six months of 1997 compared to 184 in the comparable period of the prior year. Orders for new aircraft at these manufacturers remained stable, with 313 orders in the first six months of 1997 compared to 291 in the comparable period of 1996. Cancellations, however, were greatly reduced--Boeing experienced only five cancellations in the first six months of 1997 as compared to 77 in the first six months of 1996. The Company believes that the world's airlines must continue to add capacity and order new airplanes to be able to meet the anticipated demand. The Company believes that over the next five years airlines will be required to replace a significant portion of their existing fleets as the large number of airplanes delivered in the 1960s become increasingly uneconomical to operate and the deadlines for compliance with the stringent noise regulations adopted in the United States and Europe approach. The Company's fastener business benefits from noise reduction modifications because modifying an airplane to comply with the noise regulations and remain serviceable requires a substantial number of fasteners. The Boeing Market Outlook reports that 560 airplanes in the U.S. fleet had been modified to meet the new noise standards and projects that 1,080 planes in the U.S. fleet will be noise modified. The Boeing Market Outlook projects that average airplane size should rise worldwide over the next ten years. As airlines seek to serve a growing number of air travelers with existing restrictions on arrival and 30 departure slots, airport gates and ramp capacity, commercial aircraft OEMs are experiencing increased orders for heavier, widebodied aircraft of intermediate size. Widebodied aircraft generally require a greater number of fasteners than smaller aircraft. AEROSPACE FASTENERS The Company, through its Aerospace Fasteners segment, is a leading worldwide manufacturer and supplier of fastening systems used in the construction and maintenance of commercial and military aircraft. The Aerospace Fasteners segment accounted for 36.4% and 35.2% of total Company sales for the year ended June 30, 1997 and for the three months ended September 28, 1997, respectively. PRODUCTS In general, aerospace fasteners produced by the Company are used to join materials in applications that are not of themselves critical to flight. Products range from standard aerospace screws, to more complex systems that fasten airframe structures, and sophisticated latching or quick disconnect mechanisms that allow efficient access to internal parts which require regular servicing or monitoring, The Aerospace Fasteners segment also manufactures and supplies fastening systems used in non-aerospace industrial and electronic niche applications. The Aerospace Fasteners segment produces and sells products under various trade names and trademarks including Voi-Shan(R) (fasteners for aerospace structures), Screwcorp(R) (standard externally threaded products for aerospace applications), RAM(R) (custom designed mechanisms for aerospace applications), Camloc(R) (components for the industrial, electronic, automotive and aerospace markets), Tridair(R) and Rosan(R) (fastening systems for highly-engineered aerospace, military and industrial applications). Principal product lines of the Aerospace Fasteners segment include: Standard Aerospace Airframe Fasteners--These fasteners consist of standard externally threaded fasteners used in non-critical airframe applications on a wide variety of aircraft. These fasteners include Hi-Torque Speed Drive(R), Tri-Wing(R), Torq-Set(R), Phillips(R) and Hex Heads(R). Commercial Aerospace Structural and Engine Fasteners--These fasteners consist of more highly engineered permanent or semi-permanent fasteners used in non-critical but more sophisticated airframe and engine applications, which could involve joining more than two materials. These fasteners are generally engineered to specific customer requirements or manufactured to specific customer specifications for special applications, often involving exacting standards. These fasteners include Hi-Lok(R), Veri-Lite(R), Eddie-Bolt2(R) and customer proprietary engine nuts. Proprietary Products and Fastening Systems--These very highly engineered proprietary fasteners are designed by the Company for specific customer applications and include high performance structural latches and hold down mechanisms. These fasteners are usually proprietary in nature and are primarily used in either commercial aerospace or military applications. These fasteners include Visu-Lok(R), Composi-Lok(R), Keen-serts(R), Mark IV(TM), Flatbeam(TM) and Ringlock(TM). Highly Engineered Fastening Systems for Industrial Applications--These highly engineered fasteners are designed by the Company for specific niche applications in the electronic, automotive and durable goods markets and are sold under the Camloc(R) trade name. SALES AND MARKETS The products of the Aerospace Fasteners segment are sold primarily to domestic and foreign OEMs, and to the maintenance and repair market through distributors. Sixty-six percent of its sales are domestic. Major customers include OEMs such as Boeing, McDonnell Douglas and Airbus and their subcontractors, as well as major distributors such as Burbank Aircraft Supply, Special-T and Wesco. In addition, OEMs have implemented 31 programs to reduce inventories and pursue just-in-time relationships. This has allowed parts distributors to significantly expand their business due to their ability to better meet OEM objectives. In response, the Company, which formerly supplied the OEMs directly, is expanding efforts to provide parts through distributors, by establishing master distributorship agreements, with Special-T, Wesco and others. No single customer accounts for more than 10% of consolidated sales. The Company's backlog of orders in the Aerospace Fasteners segment as of September 28, 1997 was $201 million. The Company anticipates that approximately 95% of such backlog will be delivered by September 28, 1998. Products are marketed by a direct sales force team which coordinates efforts with an internal technical sales force team. The direct sales force team is organized by customer and region. The internal sales force is organized by facility and product range and is focused on servicing customers needs, identifying new product applications, and obtaining the approval of new products. All the Company's products are leveraged through centralized advertising and promotional activities. Revenues in the Aerospace Fasteners segment bear a strong relationship to aircraft production. As OEMs searched for cost cutting opportunities during the aerospace industry recession, parts manufacturers, including the Company, accepted lower-priced and/or smaller orders to maintain market share, at lower profit margins. However, during the last two years, this situation has improved as build rates in the aerospace industry have increased and resulted in capacity constraints. As lead times have increased, the Company has been able to negotiate contracts with its major customers at more favorable pricing as well as larger minimum lot sizes that are more economic to manufacture. In addition, the Company has eliminated "make and hold" contracts under which large volume buyers require current production of parts for long-term unspecified dates of delivery. Overall, the Company believes existing backlog will result in higher margins due to larger and more efficient lot sizes. Fasteners also have applications in the automotive/industrial markets, where numerous special fasteners are required (such as engine bolts, wheel bolts and turbocharger tension bolts). The Company is actively targeting the automotive market as a hedge against any potential downturn in the aerospace industry. MANUFACTURING AND PRODUCTION The Aerospace Fasteners segment has seven primary manufacturing facilities, of which three are located in the United States and four are located in Europe. Each facility has virtually complete production capability, and subcontracts only those orders which exceed capacity. Each plant is designed to produce a specified product or group of products, determined by production process involved and certification requirements. The Company's largest customers have recognized its quality and operational controls by conferring ISO D1-9000A status at all of its U.S. facilities, and ISO D1-9000 status at all of its European facilities. The Company is the first and only aerospace fasteners manufacturing company with all facilities holding ISO-9000 approval. The Company has a fully operational modern information system at all of its U.S. facilities and will expand this information system to all its European operations in Fiscal 1998. The new system performs detailed and timely cost analysis of production by product and facility. Updated MIS systems also help the Company to better service its customers. OEMs require each product to be produced in an OEM-qualified/OEM-approved facility. COMPETITION Despite intense competition in the industry, the Company remains the dominant manufacturer of aerospace fasteners. The worldwide aerospace fastener market is estimated to be $1.3 billion (before distributor resales). The Company holds approximately 20% of the market and competes with SPS Technologies, Hi-Shear and Huck, which the Company believes hold approximately 13%, 11% and 10% of the market, respectively. In Europe, its largest competitors are Blanc Aero and Southco Fasteners. The Company competes primarily in the highly engineered "systems" segment, where its broad product range allows it to more fully serve each OEM and distributor. The Company's product array is diverse and offers 32 customers a large selection to address various production needs. In addition, roughly 45% of the Company's output is unique or is in a market where the Company has a small number of competitors. The Company seeks to maintain its technological edge and competitive advantage over its competitors, and has historically demonstrated its innovative production methods and new products to meet customer demands at fair price levels. AEROSPACE DISTRIBUTION The Company conducts its aerospace parts distribution through Banner. In February 1996, the Company increased its ownership of Banner from 47.2% to 59.3%, and further increased such ownership interest to 64% in June 1997. The Company, through its Aerospace Distribution segment, distributes a wide variety of aircraft parts, which it carries in inventory. In addition to selling products that it has purchased on the open market, the Company also acts as a non-exclusive authorized distributor of several different aerospace related product lines. No single distributor arrangement is material to the Company's financial condition. The Aerospace Distribution segment accounted for 35.9% of total Company sales in Fiscal 1997, pro forma for the Disposition. On December 8, 1997, Banner and eight of its subsidiaries entered into an Asset Purchase Agreement pursuant to which such subsidiaries have agreed to transfer substantially all of their assets to Allied for approximately $345 million of common stock of Allied. The assets transferred to Allied consists primarily of Banner's hardware group, which includes the distribution of bearings, nolts, bolts, screws, rivets and other types of fasteners. PRODUCTS Following consummation of the Disposition, the products of the Aerospace Distribution segment will be divided into two groups: rotables and engines. Rotables include flight data recorders, radar and navigation systems, instruments, landing gear and hydraulic and electrical components. Engines include jet engines and engine parts for use on both narrow and wide body aircraft and smaller engines for corporate and commuter aircraft. The Aerospace Distribution segment provides a number of services such as immediate shipment of parts in aircraft-on-ground situations. The Aerospace Distribution segment also provides products to OEMs to airlines under inventory management programs. The Aerospace Distribution segment also buys and sells commercial aircraft from time to time. Rotable parts are sometimes purchased as new parts, but are generally purchased as used parts which are then overhauled for the Company by outside contractors, including the original manufacturers and FAA-licensed facilities. Rotables are sold in a variety of conditions such as new, overhauled, serviceable and "as is." Rotables may also be exchanged instead of sold. An exchange occurs when an overhauled aircraft part in inventory is exchanged for a used part from the customer and the customer is charged an exchange fee plus the actual cost to overhaul the part. Engines and engine components are sold as is, overhauled or disassembled for resale as parts. SALES AND MARKETS Subsidiaries of the Aerospace Distribution segment sell their products in the United States and abroad to most of the world's commercial airlines and to air cargo carriers, as well as OEMs, other distributors, fixed base operators, corporate aircraft operators and other aerospace and nonaerospace companies. Approximately 76% of its sales, pro forma for the Disposition, are to domestic purchasers, some of whom may represent offshore users. The Aerospace Distribution segment markets its products and services through direct sales forces, outside representatives and, for some product lines, overseas sales offices. Sales in the aviation aftermarket depend on price, service, quality and reputation. The Aerospace Distribution segment's business does not experience significant seasonal fluctuations or depend on a single customer. No single customer accounts for more than 10% of the Company's consolidated revenue, pro forma for the Disposition. The Company's backlog of orders in the Aerospace Distribution segment as of September 28, 1997 was $22 million, pro forma for the Disposition. The Company anticipates that approximately 90% of such backlog will be delivered by September 28, 1998. 33 COMPETITION In the rotable group the major competitors are AAR Corp., Air Ground Equipment Services ("AGES"), Aviation Sales Company, The Memphis Group and other large and small companies in a very fragmented industry. The major competitors for Banner's engine group are OEMs such as General Electric Company and Pratt and Whitney, as well as the engine parts division of AAR Corp., AGES, and many smaller companies. TECHNOLOGIES Acquired by the Company in June 1994, Fairchild Technologies ("Technologies") is a global organization that manufactures, markets and services capital equipment for recordable compact disc ("CD-R") and advanced semiconductor manufacturing. Technologies' products are used to produce CD-Rs, CDs and CD-ROMs, as well as integrated circuits for the data processing, communications, transportation, automotive and consumer electronic industries, as well as for the military. PRODUCTS Technologies is a leader in microlithography manufacturing in Europe and has four product lines, the first being equipment for wafer microlithography processing. This includes the mainstay Series 6000 Flexible Wafer Process Line, consisting of lithographic processing systems with flexible material flow, modular design and high throughput, and the recently designed Falcon Modular Microlithography System for 0.25 micron (65/256 Mbit DRAM) device manufacturing. The Falcon system has a fully modular design and is expandable to accommodate expected technological advancements and specific customer configurations. Technologies has combined new and proven technology and a number of leading edge components and systems in compact disc processing to recently develop its Compact Disc Recordable ("CD-R10X") manufacturing system. The CD-R10X system is a state of the art design for producing cost effective recordable CDs by combining a high quality injection molding machine with scanning, inspection, and pneumatic handling systems. A third line is modular process equipment for use by the fabricators of liquid crystal displays. Technologies supplies advanced modular solutions with high throughput, small footprint and minimum cost of ownership. Technologies is also a leading manufacturer of photolithography processing equipment for photomask and thinfilm products. Technologies specializes in providing system solutions, and in coating, developing, priming, etching, stripping, cleaning and thermal processing of wafers, substrates and related semiconductor products. SALES AND MARKETS With a strong base of controls/clean room technology and software/services engineering, Technologies is able to provide systems with multiple modular designs for a variety of customer applications. Today, more than 1,000 Technologies wafer production systems are in operation worldwide. Approximately 60% of the Company's Fiscal 1997 business was derived from wafer related products and services. The remaining 40% was divided between LCD and CD related systems, products, and services. Major customers in the wafer product line include Motorola, Samsung, Siemens, GEC Plessey, Texas Instruments, National Semiconductor, Macronix, and Erso. Other major customers include Philips and Litton for the LCD product line, Sonopress (Bertelsmann), and Krauss Maffei for the CD product line, and Hyundai, NEC and Canon for the photomask product line. Approximately 76.3% of Technologies' sales were to foreign customers. MANUFACTURING AND PRODUCTION Technologies has two manufacturing facilities consisting of Fairchild Technologies GmbH, located in Vaihingen, Germany, and Fairchild Technologies USA, Inc. located in Fremont, California. 34 COMPETITION The wafer product line competes with Tokyo Electron, Dai Nippon Screen and the Silicon Valley Group. Competitors in the CD product line consist of Robi Systems, Leybold and Marubeni. Competition in the photomask product line is provided by Mitsubishi Toyo, Tasmo and Solid State Equipment. NACANCO PAKETLEME Established in 1987, Nacanco is the largest manufacturer of aluminum cans for soft drinks and beer in Turkey with an estimated 80% market share. Nacanco generated EBITDA of approximately $39 million on annual sales of $107 million for the fiscal year ended December 31, 1996. The Company owns 31.9% of the common stock, with Pechiney International SA and its subsidiaries holding substantially all of the balance. The Company received from Nacanco cash dividends in excess of $3 million in each of the past two fiscal years. REAL ESTATE The Company has significant real estate holdings having a book value of approximately $54.1 million as of June 30, 1997. The Company's real estate holdings consist of (i) 80 acres on Long Island, New York which are currently being developed into retail centers; (ii) various industrial buildings from which the Company receives rental income; and (iii) property to be used as landfills upon the receipt of necessary licenses and government approvals. CONTEMPLATED SPIN-OFF In order to focus its operations on the aerospace industry, the Company is considering distributing to its stockholders all of the stock of FIHC, which may own substantially all of the Company's non-aerospace operations. Although the Company's ability to effect a Spin-Off is uncertain, the Company may effect a Spin-Off as soon as is reasonably practicable following receipt of a solvency opinion relating to FIHC and all necessary governmental and third party approvals. The solvency opinion with respect to FIHC is required by the Company's lenders and board of directors. In order to effect a Spin-Off, approval is required from the board of directors of the Company, however, shareholder approval is not required. The ability of the Company to consummate a Spin-Off is contingent, among other things, on the ability of the Company to obtain consents and waivers under the Company's existing indebtedness and the New Credit Facility (as defined below). The Company is presently in negotiations with its lenders regarding obtaining such consents and waivers and at the present time the Company has not reached an agreement with its lenders that will allow the Company to consummate a Spin-Off. There is no assurance that the Company will be able to obtain the necessary consents and waivers from its lenders and consequently there is no assurance that the Company will be able to consummate a Spin-Off. In addition, the Company may sell, restructure or otherwise change the assets and liabilities that may be in FIHC at the time of a Spin-Off and may delay the timing of a Spin-Off to minimize the tax consequences thereof to the Company and its stockholders or for other reasons elect not to consummate a Spin-Off. See "Risk Factors-- Uncertainty and Tax and Other Consequences of a Spin-Off." At the time of a Spin-Off, if consummated, the business and assets of FIHC are expected to consist of: (i) the Company's technology products segment, which consists of Fairchild Technologies (a worldwide producer of equipment for recordable compact disc and semiconductor manufacturers); (ii) the Company's 31.9% ownership interest in Nacanco Paketleme, (the largest producer of aluminum cans in Turkey); and (iii) certain real estate and miscellaneous investments, including approximately 80 acres of land in Long Island, New York currently under development. In connection with a Spin-Off, it is anticipated that the Company and FIHC will enter into an indemnification agreement pursuant to which FIHC will assume and be solely responsible for all known and unknown past, present and future claims and liabilities of any nature relating to the Pension Reversion Case (as described under "Business--Legal Proceedings"); certain environmental liabilities currently recorded as $8.3 million, but for which it is reasonably possible the total expense could be $13.0 million; certain retiree medical cost and liabilities related to discontinued operations for which the Company has accrued approximately $31.3 million as of September 28, 1997 (see Note 11 to the Company's Consolidated Financial Statements); and certain tax liabilities. In addition, FIHC would also be responsible for all liabilities relating to the Technologies business. 35 RESEARCH AND PATENTS The Company's research and development activities have included: applied research; development of new products; testing and evaluation of, and improvements to, existing products; improvements in manufacturing techniques and processes; development of product innovations designed to meet government safety and environmental requirements; and development of technical services for manufacturing and marketing. The Company's sponsored research and development expenditures amounted to $7.8 million, $0.1 million and $1.0 million for the years ended June 30, 1997, 1996, and 1995, and $0.6 million for the three months ended September 28, 1997, respectively, substantially all of such expenditures being attributable to Fairchild Technologies. The Company owns patents relating to the design and manufacture of certain of its products and is a licensee of technology covered by the patents of other companies. The Company does not believe that any of its business segments are dependent upon any single patent. PERSONNEL As of June 30, 1997, pro forma for the Disposition, the Company had approximately 3,400 employees. Approximately 5% of these employees were covered by collective bargaining agreements. The Company believes that its relations with its employees are satisfactory. PROPERTIES As of June 30, 1997, pro forma for the Disposition, the Company owned or leased properties totalling approximately 1,631,000 square feet, approximately 1,046,000 square feet of which was owned and 585,000 square feet was leased. The Aerospace Fasteners segment's properties consisted of approximately 1,020,000 square feet, with principal operating facilities concentrated in Southern California, France and Germany. The Aerospace Distribution segment's properties consisted of approximately 380,000 square feet, with principal operating facilities of approximately 295,000 square feet located in Florida, and Texas. Corporate and other operating properties consisted of approximately 117,000 square feet, with principal operating facilities of approximately 82,000 square feet located in California and Germany. The Company owns its corporate headquarters at Washington-Dulles International Airport. The Company has several parcels of property which it is attempting to market, lease and/or develop, including: (i) an eighty acre parcel located in Farmingdale, New York; (ii) a six acre parcel in Temple City, California; (iii) an eight acre parcel in Chatsworth, California; and (iv) several other parcels of real estate, primarily located throughout the continental United States. 36 The following table sets forth the location of the larger properties used in the continuing operations of the Company, their square footage, the business segment or groups they serve and their primary use. Each of the properties owned or leased by the Company is, in management's opinion, generally well maintained, suitable to support the Company's business and adequate for the Company's present needs. All of the Company's occupied properties are maintained and updated on a regular basis.
OWNED OR SQUARE PRIMARY LOCATION LEASED FOOTAGE BUSINESS SEGMENT/GROUP USE -------- -------- ------- ---------------------- ------------- Saint Cosme, France... Owned 304,000 Aerospace Fasteners Manufacturing Torrance, California.. Owned 284,000 Aerospace Fasteners Manufacturing Carrollton, Texas..... Leased 173,000 Aerospace Distribution Distribution City of Industry, California........... Owned 140,000 Aerospace Fasteners Manufacturing Chantilly, Virginia... Owned 125,000 Corporate Office Lakeland, Florida..... Leased 65,000 Aerospace Distribution Distribution Ft. Lauderdale, Florida.............. Leased 57,000 Aerospace Distribution Distribution Toulouse, France...... Owned 56,000 Aerospace Fasteners Manufacturing Fremont, California... Leased 54,000 Technology Products Manufacturing Santa Ana, California........... Owned 50,000 Aerospace Fasteners Manufacturing Vaihingen, Germany.... Leased 49,000 Technology Products Manufacturing Kelkheim, Germany..... Leased 42,000 Aerospace Fasteners Manufacturing Fremont, California... Leased 31,000 Technology Products Manufacturing
ENVIRONMENTAL MATTERS The Company's operations are subject to stringent Federal, state and local 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. The Company expects that FIHC will assume substantially all of the Company's environmental liabilities in connection with a Spin-Off. See "The Spin-Off." See "Risk Factors--Uncertainty and Other Tax Consequences of The Spin-Off." As of September 28, 1997, the consolidated total recorded liabilities of the Company for environmental matters approximated $8.3 million, which represented the estimated probable exposures for these matters. It is reasonably possible that the Company's total exposure for these matters could be approximately $13.0 million on an undiscounted basis. 37 LEGAL PROCEEDINGS The Workers Compensation Bureau of the State of Ohio is seeking reimbursement from the Company for up to $5.4 million for workers compensation claims which were insured under a self-insured program of the Company. The Company has contested a significant portion of this claim and believes that the ultimate disposition of this claim will not be material. 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., a former subsidiary of the Company ("FII"), 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 (collectively, the "Pension Reversion Case"). 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. In connection with the Spin-Off, the Company expects that FIHC will assume all of the Company's liabilities, if any, associated with this matter. See "The Spin-Off." See "Risk Factors-- Uncertainty and Other Tax Consequences of Spin-Off." 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 discussed above, will not have a material adverse effect on the financial condition, or future results of operations or net cash flows of the Company. 38 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth information with respect to the directors and executive officers of the Company.
NAME AGE POSITION ---- --- -------- Michael T. Alcox.......... 50 Vice President and Director Melville R. Barlow........ 68 Director Robert D. Busey........... 54 Vice President Mortimer M. Caplin........ 81 Director Colin M. Cohen............ 46 Senior Vice President, Chief Financial Officer, Controller and Director Philip David.............. 65 Director John L. Flynn............. 51 Senior Vice President Harold J. Harris.......... 68 Director Harold R. Johnson......... 74 Senior Vice President Robert H. Kelley.......... 50 Vice President Jeffrey P. Kenyon......... 37 Vice President Samuel J. Krasney......... 72 Director Daniel Lebard............. 58 Director Senior Vice President, General Counsel and Donald E. Miller.......... 50 Secretary David Wynne-Morgan........ 66 Senior Vice President Jacques S. Moskovic....... 60 Senior Vice President and Director Herbert S. Richey......... 75 Director Moshe Sanbar.............. 71 Director Karen L. Schneckenburger.. 48 Vice President Robert A. Sharpe II....... 40 Director Eric I. Steiner........... 36 Executive Vice President, Chief Operating Officer and Director Jeffrey J. Steiner........ 60 Chairman of the Board, Chief Executive Officer and President
Michael T. Alcox served as Senior Vice President and the Chief Financial Officer of the Company from December 1987 through September 1996. He also served as Treasurer of the Company from September 1990 until November 1991. Mr. Alcox served as Vice President and Chief Financial Officer of RHI Holdings, Inc. and as Vice President and Chief Financial Officer of Fairchild Industries from 1990 through March 1996. Since September 30, 1996, Mr. Alcox serves as a Vice President to the Company, not employed on a full time basis. Mr. Alcox is a director of Banner. Mr. Alcox also owns and operates travel and real estate businesses. He became a director of the Company in 1988. Melville R. Barlow was a consultant to the Company from September 1995 through June 1996. From July 1991 through March 1994, he was President of Pilkington Aerospace, Inc., a manufacturer of aircraft transparencies. From June 1984 through March 1991, he was a Corporate Vice President of General Dynamics and General Manager of General Dynamics Electronics Division, a manufacturer of military aircraft automatic test equipment. He became a director of the Company in 1996. Robert D. Busey has served as Vice President of the Company since September 1992. Mr. Busey also served as Vice President of Fairchild Industries from November 1993 through March 1996. Prior to September 1992, Mr. Busey was Assistant Vice President of the Company and held other management positions with Fairchild Industries. Mortimer M. Caplin has been a senior member of the law firm of Caplin & Drysdale since 1964. Mr. Caplin serves as a director of Presidential Realty Corporation and Danaher Corporation. He became a director of the Company in 1990. 39 Colin M. Cohen was Managing Director of Citicorp Securities, Inc. until September 1996. He served in such capacity for more than five years. Mr. Cohen became a director of the Company in September 1996, and the Company's Senior Vice President--Business Development and Finance, and Chief Financial Officer, effective October 1, 1996. He became Controller of the Company effective March 31, 1997. Pursuant to his employment agreement with the Company, Mr. Cohen is to be nominated for election as a director every fiscal year during his term of employment. Philip David was a consultant to the Company from January 1988 to June 1993. He was also an employee of the Company from January 1988 to December 1989. He was a Professor of Urban Development at Massachusetts Institute of Technology until June 1988. Dr. David is also a director of IRI International, Inc. He became a director of the Company in 1985. John L. Flynn has served as Senior Vice President, Tax, of the Company since September 1994 and Vice President, Tax, since August 1989. Mr. Flynn also served as Vice President, Tax, of Fairchild Industries from November 1986 through March 1996. Harold J. Harris is President of Wm. H. Harris, Inc. He is a director of Capital Properties Incorporated of Rhode Island. He became a director of the Company in 1985. Harold R. Johnson, Brig. Gen., USAF (Ret.), has served as Senior Vice President, Business Development, of the Company since November 1990. General Johnson also served as Vice President of Fairchild Industries from February 1988 through March 1996. Robert H. Kelley has served as Vice President, Employee Benefits, of the Company since November 1993. He also served as Vice President of Fairchild Industries from November 1993 through March 1996. Prior thereto, he held other management positions with Fairchild Industries. Jeffrey P. Kenyon has served as Vice President of the Company since November 1996. Prior to that, he served as Vice President of Citicorp Securities, Inc., for more than five years. Samual J. Krasney retired in 1993 as the Chairman of the Board, Chief Executive Officer and President of Banner, positions he had held since June 1990. He continues to serve as a director of Banner and also serves as the Vice Chairman of the Board of the Company. He served as the Chief Operating Officer of the Company from December 1985 until December 1989. Mr. Krasney has served as the managing partner of ABBA Capital Enterprises since October 1985. Mr. Krasney is a director of FabriCenters of America, Inc. and Waxman Industries, Inc. He became a director of the Company in 1968. Due to health reasons, Mr. Krasney does not intend to stand for election as a director of the Company at the November, 1997 annual meeting of stockholders. Daniel Lebard is the Chairman of the Board of Daniel Lebard Management Development SA, a consulting firm in Paris, France, which sells management services. He has served in such capacity for more than the last five years. Since 1995, he also serves as Chief Executive Officer of Groupe Sofrecid SA and Kvaerner-Clecim SA, engineering companies whose headquarters are in Paris. He became a director of the Company in 1996. Donald E. Miller has served as Senior Vice President and General Counsel of the Company since January 1991 and Corporate Secretary since January 1995. Mr. Miller also served as Vice President and General Counsel of Fairchild Industries from November 1991 through March 1996. Prior to 1991, Mr. Miller was a principal of the law firm of Temkin & Miller, Ltd. in Providence, Rhode Island. Mr. Miller is a director of Shared Technologies Fairchild Inc. and General Counsel of Banner. David Wynne-Morgan has served as Senior Vice President of the Company, on a part time basis, responsible for Corporate Communications since September 11, 1997. He is a founding partner of WMC Communications Ltd. where he continues to serve. From 1991 to 1994, Mr. Wynne-Morgan served as President and Chief Executive Officer of Hill Knowlton for Europe, the Middle East and Africa. 40 Jacques S. Moskovic has served as Senior Vice President of the Company since October 1996. He has served as President and CEO of Fairchild Technologies since September 1994, and as Chairman of Fairchild Technologies since August 1997. Prior to that, he served as Chairman and President of Compagnie Pour Le Developpement Industriel, a French based company specializing in the production, sales and service of equipment to the electronics industry, which was acquired by the Company in 1995. Mr. Moskovic held such position for more than five years. He became a director of the Company in 1997. Herbert S. Richey served as President of Richey Coal Company, a coal properties-brokerage and consulting company, until December 1993. He became a director of the Company in 1977. Karen L. Schneckenburger has served as Vice President of the Company since September 1992 and as Treasurer of the Company since November 1991. Ms. Schneckenburger also served as Treasurer of Fairchild Industries from August 1989 through March 1996. Prior thereto, she served as Director of Finance of Fairchild Industries from 1986 through 1989. Moshe Sanbar has served as President of the Israel National Committee in Tel Aviv and as a member of the executive board of the International Chamber of Commerce in Paris since 1996. He served as a Senior Vice President and Financial Advisor for the Eisenberg Group of Companies (an international import-export firm) from 1996 to January 1997. From 1988 through 1995 he was Chairman of the Board of Bank Leumi (Israel) and its group, worldwide. He became a director of the Company in 1997. Robert A. Sharpe II has served as Executive Vice President and Chief Financial Officer of Fairchild Fasteners, a division of Fairchild Holding Corp., since July 1996, and as consultant for Fairchild Fasteners from October 1995 through July 1996. He served as Vice President, Corporate Development, of Smithfield Foods, Inc., a pork-products company, from July 1994 through July 1996. Prior to that time, Mr. Sharpe served as Senior Vice President of NationsBank Corporation and held other management positions with NationsBank. Mr. Sharpe is a director of Capital Associates, Inc. and Capital Associates International, Inc. He became a director of the Company in 1995. Dr. Eric I. Steiner has served as Executive Vice President and Chief Operating Officer of the Company since November 1996, and as President and Chief Executive Officer of Fairchild Fasteners, a division of Fairchild Holding Corp., since August 1995. Prior thereto, he served as Senior Vice President, Operations of the Company from May 1992 through November 1996, and as President of Camloc/RAM Products, one of the Company's operating units, from September 1993 to February 1995. He served as Vice President, Business Planning, of the Company from March 1991 until May 1992. He also served as Vice President of Fairchild Industries from May 1992 through March 1996. He received an M.B.A. from Insead in France in 1990. Prior thereto, he received an M.D. in 1988 from Faculte de Medicine de Paris and was a medical doctor at Hospitaux De Paris in France until November 1989. He has been a director of Banner since September 1992, and a Senior Vice President of Banner since May 1997. Dr. Steiner became a director of the Company in 1988. He is the son of Jeffrey J. Steiner. Jeffrey J. Steiner has served as the Chairman of the Board and the Chief Executive Officer of the Company since December 1985, and as President of the Company since July 1, 1991. He has served as the Chairman of the Board, Chief Executive Officer and President of Banner since September 1993. He has served as the Chairman, President and Chief Executive Officer of RHI Holdings since 1988. He served as the Vice Chairman of the Board of Rexnord Corporation from July 1992 to December 1993, and as the Chairman, President and Chief Executive Officer of Fairchild Industries from July 1991 through March 1996. Mr. Steiner is and for the past five years has been President of Cedco Holdings Ltd., a Bermuda corporation (a securities investor). He serves as a director of The Franklin Corporation and The Copley Fund, and as director and Vice Chairman of the Board of Shared Technologies Fairchild Inc. He became a director of the Company in 1985. He is the father of Dr. Eric I. Steiner. 41 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding ownership of the Class A Common Stock and Class B Common Stock as of October 31, 1997 by (i) each person or entity who owns of record or beneficially five percent or more of the Company's capital stock, (ii) each director and the five most highly paid executive officers of the Company, (iii) all directors and executive officers of the Company as a group, and (iv) each stockholder selling shares of Common Stock in the Offering (collectively, the "Selling Stockholders"). To the knowledge of the Company, each of such stockholders has sole voting and investment power as to the shares shown unless otherwise noted. Unless otherwise noted, the address of each holder of five percent or more of the Company's stock is the Company's corporate address.
CLASS A STOCK CLASS B STOCK CLASS A STOCK CLASS B STOCK BENEFICIALLY OWNED BENEFICIALLY OWNED BENEFICIALLY OWNED BENEFICIALLY OWNED BEFORE OFFERING BEFORE OFFERING AFTER THE OFFERING(22) AFTER THE OFFERING ------------------------- ---------------------- ------------------------------- ---------------------- PERCENT PERCENT PERCENT PERCENT SHARES(1) OF CLASS SHARES(1) OF CLASS SHARES(1) OF CLASS SHARES(1) OF CLASS --------- -------- --------- -------- ------------- ---------- --------- -------- Michael T. Alcox.... 29,175(2) * 600 * 29,175(2) * 600 * Melville R. Barlow.. 7,500(2) * -- -- 7,500(2) * -- -- Mortimer M. Caplin.. 89,500(2) * -- -- 89,500(2) * -- -- Colin M. Cohen...... 38,042(2) * -- -- 38,042(2) * -- -- J.J. Cramer & Co.(14)............ 1,795,800(3) 12.8% -- -- 1,795,800 10.5% -- -- Philip David........ 54,500(2) * -- -- 54,500(2) * -- -- Fairchild Master Retirement Trust(15).......... 1,125,375(4) 8.0% -- -- 1,125,375(4) 6.6% -- -- FMR Corp(16)........ 790,000(5) 5.6% -- -- 790,000(5) 4.6% Harold J. Harris.... 130,700(2)(6) * -- -- 102,900(2)(6) * -- -- Samuel J. Krasney(17)........ 700,000 5.0% -- -- 527,800 3.1% -- -- Daniel Lebard....... 7,500(2) * -- -- 7,500(2) * -- -- Donald E. Miller.... 80,400(2)(7) * -- -- 80,400(2)(7) * -- -- Jacques S. Moskovic........... 28,350(2) * -- -- 28,350(2) * -- -- Paske Investments, Ltd.(18)........... 6,402,684(4)(8) 37.8% 2,908,996(11) 97.0% 6,102,684(4)(8) 30.6% 2,908,996(11) 97.0% Herbert S. Richey... 43,000(2) * -- -- 43,000(2) * -- -- Moshe Sanbar........ -- -- -- -- -- -- -- -- Robert A. Sharpe II................. 18,200(2) * -- -- 18,200(2) * -- -- Eric I. Steiner..... 146,686(2)(9) 1.0% 15,000 * 146,686(2)(9) * 15,000 * Jeffrey J. Steiner(19)........ 6,741,834(10) 39.3% 2,938,996(12) 98.0% 6,241,834(10) 31.0% 2,938,996(12) 98.0% Peregrine Direct Investments Limited(20)........ 250,000 1.7% -- -- 250,000 1.4% -- -- Bankers Trust New York Corporation (21)............... 250,000 1.7% -- -- 250,000 1.4% -- -- All directors and executive officers as a group (22 persons)........... 8,217,892(2)(13) 46.7% 2,954,596(13) 98.5% 7,517,892(2)(13) 36.5% 2,954,596(13) 98.5%
- --------------------- * Represents less than one percent. (1) The Class A Stock column includes shares of Class B Stock, which are immediately convertible into Class A Stock on a share-for-share basis. Options that are exercisable immediately or within sixty days after October 31, 1997 appear in the Class A Stock column. Certain warrants that may be deemed to be owned by Mr. Jeffrey J. Steiner are exercisable into shares of either Class A Stock or Class B Stock and appear in both the Class A Common Stock and Class B Common Stock columns. (2) Includes exercisable stock options to purchase Class A Common Stock, as follows: M. Alcox, 19,175 shares; M. Barlow, 7,500 shares; M. Caplin, 10,750 shares; C. Cohen, 37,500 shares; P. David, 32,000 shares; H. Harris, 39,500 shares; D. Lebard, 7,500 shares; D. Miller, 64,600 shares; J. Moskovic, 28,350 shares; H. Richey, 37,000 shares; R. Sharpe, 18,000 shares; E. Steiner, 81,800 shares; J. Steiner, 163,850 shares; Directors and Executive Officers as a group, 593,275 shares. (3) Based on information as of December 5, 1997, contained in a Schedule 13D dated December 5, 1997, filed with the SEC by J.J. Cramer & Co., Cramer Capital Corporation, Cramer Partners, L.P., James J. Cramer and Karen L. Cramer. (4) Based on information provided by the stockholder. 42 (5) Based on information as of August 31, 1997, contained in a Schedule 13G dated September 10, 1997, filed with the SEC by Fidelity Management & Research Company, a wholly owned subsidiary of FMR Corp., and a registered investment advisor ("FMR"). According to the Schedule 13G: (i) FMR has sole dispositive power with respect to all 790,000 shares of such Class A Common Stock, and sole voting power with respect to 383,000 shares of such Class A Common Stock; and (ii) various persons have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the Class A Common Stock. The Schedule 13G indicates that the interest of one person, Fidelity Management Trust Company, in such Class A Common Stock amounted to 423,000 shares or 3.02% of the total outstanding Class A Common Stock. (6) Includes 27,000 shares of Class A Common Stock, owned by the Wm. H. Harris, Inc. Profit-Sharing Plan. (7) Includes 300 shares of Class A Common Stock owned by Mr. Donald Miller as custodian for his child; Mr. Miller disclaims any beneficial interest therein. (8) Paske Investments, Ltd. owns no shares of record. It is the beneficial owner of shares of Class A Common Stock owned of record or beneficially by its indirect wholly owned subsidiaries, as follows: (A) Stinbes Limited (Address: c/o ATC Trustees (Cayman) Ltd., P.O. Box 30592 SMB, Piccadilly Centre, 2nd Floor, Grand Cayman, Cayman Islands, B.W.I.), 3,256,296 shares (including (i) 347,300 shares of Class A Common Stock, (ii) 2,533,996 shares of Class B Common Stock convertible on a one-to-one basis to Class A Common Stock, and (iii) warrants to purchase 375,000 shares of Class A Common Stock or Class B Common Stock); and (B) Bestin Ltd. (Address: c/o ATC Trustees (BVI) Ltd., Abbot Building, 2nd Floor, P.O. Box 933, Road Town, Tortola, B.V.I.), 3,146,388 shares. Of the foregoing shares, 1,000,000 shares of Class B Common Stock and 3,146,388 of Class A Common Stock have been pledged to NationsBank N.A., to secure guarantees of loans to Mr. Jeffrey Steiner; and 100,000 shares of Class B Common Stock have been pledged to Banque de Camondo (Suisse) S.A., to secure a line of credit to Bestin Worldwide Limited. The warrants to purchase 375,000 shares of Class A Common Stock or Class B Common Stock may be exercised only within specified periods after the occurrence of certain events, as provided in the warrant certificates. Paske Investments, Ltd. is a wholly-owned subsidiary of The Friday Trust, a trust organized under the laws of Jersey, Channel Islands, of which the sole trustee is Lloyds Bank Trust Company (Channel Islands) Limited. The Friday Trust is deemed the beneficial owner of the same shares of Class A Common Stock deemed beneficially owned by Paske Investments, Ltd. (9) Includes 5,000 shares of Class A Common Stock owned by Dr. Eric Steiner as custodian for his children; Dr. Steiner disclaims any beneficial interest therein. (10) Mr. Jeffrey Steiner is the settlor and a beneficiary of The Friday Trust (the sole stockholder of Paske Investments, Ltd.), and as such may be deemed to beneficially own the same shares of Class A Common Stock deemed beneficially owned by Paske Investments, Ltd., as discussed in footnote (8) to this table. Class A Common Stock shown in the table as owned by Mr. Jeffrey Steiner include: (i) 6,402,684 shares owned directly or beneficially by Paske Investments and subsidiaries (see footnote (8)); (ii) 105,400 shares owned of record by Mr. Steiner; (iii) exercisable stock options to purchase 163,850 shares of Class A Common Stock (see footnote (2)); (iv) 37,500 shares of Class A Common Stock owned by Mr. Steiner as custodian for his children; (v) 30,000 shares of Class B Common Stock (convertible on a one-to-one basis to Class A Common Stock) owned by Mr. Steiner as custodian for his children; and (vi) 2,400 shares of Class A Common Stock owned by the Jeffrey Steiner Family Foundation. Mr. Steiner disclaims beneficial ownership of shares owned by the Jeffrey Steiner Family Foundation and shares owned by him as custodian for his children. (11) Paske Investments, Ltd. owns no shares of record. It is the beneficial owner of shares of Class B Common Stock owned of record or beneficially by its indirect wholly owned subsidiaries, as follows: Stinbes Limited (Address: c/o ATC Trustees (Cayman) Ltd., P.O. Box 30592 SMB, Piccadilly Centre, 2nd Floor, Grand Cayman, Cayman Islands, B.W.I.), 2,908,996 shares (including (i) 2,533,996 shares of Class B Common Stock, and (ii) warrants to purchase 375,000 shares of Class A Common Stock or Class B Common Stock). Paske Investments, Ltd. is a wholly-owned subsidiary of The Friday Trust, a trust organized under the laws of Jersey, Channel Islands, of which the sole trustee is Lloyds Bank Trust Company (Channel Islands) Limited. The Friday Trust is deemed the beneficial owner of the same shares of Class B Common Stock deemed beneficially owned by Paske Investments, Ltd. 43 (12) Mr. Jeffrey Steiner is the settlor and a beneficiary of The Friday Trust (the sole stockholder of Paske Investments, Ltd.), and as such may be deemed to beneficially own the same shares of Class B Common Stock deemed beneficially owned by Paske Investments, Ltd., as disclosed in footnote (11) to this table. Class B Common Stock shown in the table as owned by Mr. Jeffrey Steiner include: (i) 2,908,996 shares, or warrants to purchase shares, owned directly or beneficially by Paske Investments and subsidiaries (see footnote 11); and (ii) 30,000 shares of Class B Common Stock owned by Mr. Steiner as custodian for his children. Mr. Steiner disclaims beneficial ownership of shares owned by him as custodian for his children. (13) Includes warrants as described in footnotes above. (14) J.J. Cramer & Co.'s address is 100 Wall Street, New York, NY 10005. (15) Fairchild Master Retirement Trust's address is 300 West Service Road, P.O. Box 10803, Chantilly, VA 20153. (16) FMR Corp's address is, Fidelity Management & Research Co., 82 Devonshire Street, Boston, MA 02109. (17) Samuel J. Krasney's address is 25700 Science Park Drive, Cleveland, OH 44122. (18) Paske Investments, Ltd.'s address is The Friday Trust, Stinbes Limited, Bestin Ltd., c/o Lloyds Bank International (Jersey) Ltd., P.O. Box 482, Commercial House, Commercial Street, St. Helier, Jersey JE4 8W2, Channel Islands, British Isles. (19) Jeffrey J. Steiner's address is 110 East 59th Street, New York, NY 10022. (20) Peregrine Direct Investments Limited's address is 23/F New World Tower, 16-18 Queens Road Central, Hong Kong, China. The shares reflected represent shares issuable upon exercise of warrants with a $9.00 per share exercise price. (21) Bankers Trust New York Corporation address is One Bankers Trust Plaza, 130 Liberty Street, New York, NY 10006. The shares reflected represent shares issuable upon exercise of warrants with a $9.00 per share exercise price. (22) Assumes no exercise of the Underwriters' over-allotment option. Of the 547,000 shares subject to such option, 250,000 shares will be provided by Bankers Trust New York Corporation, 250,000 shares will be provided by Peregrine Direct Investments Limited, 27,800 shares will be provided by Samuel J. Krasney and 19,200 shares will be provided by Harold J. Harris. Of the 700,000 shares to be sold by the selling stockholders, 500,000 shares will be sold by Jeffrey J. Steiner (including the sale of 300,000 shares by Paske Investments, Ltd.), 172,200 shares will be sold by Samuel J. Krasney and 27,800 shares will be sold by Harold J. Harris. 44 THE DISPOSITION On December 8, 1997, Banner and certain of its subsidiaries entered into an Asset Purchase Agreement pursuant to which such subsidiaries have agreed to transfer substantially all of their assets to Allied for approximately $345 million of common stock of Allied based on the average trading price of the Allied common stock for twenty consecutive trading days immediately prior to the closing of the transaction. The assets to be transferred to Allied consist primarily of Banner's hardware group, which includes the distribution of bearings, nuts, bolts, screws, rivets and other type of fasteners. The Company plans to use $170 million of the common stock received from Allied to repay outstanding term loans of Banner's subsidiaries and pay related fees and the remainder of the $175 million of common stock of Allied will be pledged to Banner's banks. The Asset Purchase Agreement contains customary provisions for such agreements including representations and warranties with respect to the conduct of the business prior to closing and various closing conditions, including the continued accuracy of the representations and warranties, the receipt of all governmental consents and the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The Asset Purchase Agreement provides for certain purchase price adjustments after the closing of the Disposition. Such adjustments, if any, will be made following the receipt of an unaudited consolidated balance sheet of the business acquired by Allied pursuant to the Asset Purchase Agreement, and may include the surrender of shares of Allied common stock received by Banner or the receipt by Banner of additional shares of Allied common stock. The Asset Purchase Agreement has a non-competition provision pursuant to which Banner and the subsidiaries party to the Asset Purchase Agreement have agreed, subject to certain exceptions, not to compete for a period of three years from the closing of such transaction with Allied in the business of supplying to the aerospace industry aircraft hardware, chemicals or related support services. In connection with the Asset Purchase Agreement, Banner and Allied will enter into an escrow agreement pursuant to which Banner will deposit $3.5 million in Allied Common Stock in connection with the purchase price adjustment. In addition, in connection with the Disposition, Allied will enter into a registration rights agreement with certain demand and piggyback registration rights with respect to Allied common stock to be received by Banner. In addition, each party has agreed to indemnify each other for any losses suffered due to a breach of a representation, warranty or covenant. 45 DESCRIPTION OF CAPITAL STOCK GENERAL The authorized capital stock of the Company consists of 40,000,000 shares of Class A Common Stock, par value $0.10 per share, 14,030,717 of which were issued and outstanding as of September 28, 1997, 20,000,000 shares of Class B Common Stock, par value $0.10 per share, 2,625,616 of which were issued and outstanding as of September 28, 1997, and 10,000,000 shares of Preferred Stock, par value $0.10 per share, none of which are issued and outstanding. The Class A Common Stock and the Class B Common Stock are sometimes collectively referred to herein as the "Common Stock." PREFERRED STOCK The Board of Directors of the Company is authorized, subject to the limitations prescribed by law, to provide by resolutions for the issuance of the Preferred Stock in one or more series, to establish the number of shares to be included in each such series and to fix and state the voting powers, the designations, preferences and relative, participating, optional or other special rights, or qualifications, limitations or restrictions thereof, applicable to the shares of each series. Satisfaction of any dividend preferences of outstanding shares of Preferred Stock would reduce the amount of funds available for the payment of dividends on shares of Common Stock. Holders of shares of Preferred Stock may be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up of the Company before any payment is made to the holders of shares of Common Stock. Under certain circumstances, the issuance of shares of Preferred Stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of the Company's securities or the removal of incumbent management. The Board of Directors of the Company, without stockholder approval, may issue shares of Preferred Stock with voting and conversion rights which could adversely affect the holders of shares of Common Stock. Upon consummation of the Offering, there will be no shares of Preferred Stock outstanding, and the Company has no present intention to issue any shares of Preferred Stock. COMMON STOCK The issued and outstanding shares of Common Stock are, and the shares of Class A Common Stock being offered in this Offering will be upon payment therefor, validly issued, fully paid and nonassessable. The powers, preferences and rights of holders of Class A Common Stock and Class B Common Stock, and the qualifications, limitations or restrictions thereof, are substantially identical, except as otherwise required by law or expressly provided in this section. Each holder of Class A Common Stock is entitled to one (1) vote per share and each holder of Class B Common Stock is entitled to ten (10) votes per share. Except as set forth below, all actions submitted to a vote of stockholders shall be voted on by the holders of Class A Common Stock and Class B Common Stock voting together as a single class. The holders of Class A Common Stock and Class B Common Stock shall vote separately as classes with respect to amendments to the Restated Certificate of Incorporation that alter or change the powers, preferences or special rights of their respective classes of stock so as to affect them adversely and with respect to such other matters as may require class votes under Delaware Law. Notwithstanding anything in the Restated Certificate of Incorporation to the contrary, the affirmative vote of the holders of all outstanding shares of capital stock of the Company entitled to vote, voting together as a single class, shall be required to authorize additional shares of Class A Common Stock or Class B Common Stock, or upon certain proposals to issue authorized but unissued shares of Class B Common Stock. Class B Common Stock is convertible into Class A Common Stock at any time at the option of the holder or automatically if at any time the number of outstanding shares of Class B Common Stock as reflected on the stock transfer books of the Company is less than 300,000. If the Company at any time (a) declares a stock dividend upon either class of its Common Stock payable in shares of that same class of Common Stock, (b) makes any distribution upon either class of its Common Stock payable in shares of that same class of Common Stock, (c) subdivides its outstanding shares of either class of its Common Stock into a greater number of shares, or (d) subdivides its outstanding shares of either class of its Common Stock into a smaller number of shares, then and in any of such events the 46 Company shall make, declare or effect a similar but ratable stock dividend, distribution or subdivision on the shares of the other class of its Common Stock but payable in shares of such other class of Common Stock and only on a share for share basis. Cash dividends are payable in such relative amounts as the Board of Directors of the Company may determine; provided, however, that in no event will cash dividends payable with respect to the Class B Common Stock exceed one hundred percent (100%) of the cash dividends payable with respect to the Class A Common Stock. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is ChaseMellon Shareholder Services LLC. 47 DESCRIPTION OF THE NEW CREDIT FACILITY The Company intends to enter into the New Credit Facility to retire the existing indebtedness of the Company and its subsidiaries and provide for the working capital needs of the Company. The New Credit Facility will provide for total lending commitments of up to $300 million. The New Credit Facility will be comprised of (i) a $75 million Revolving Credit Facility ("Revolving Credit Facility"), and (ii) a $225 million Term Loan Facility. Borrowings under the New Credit Facility, together with the proceeds from the Offering, and the after tax proceeds the Company has already received from the STFI Sale will be used to repay the Company's long term indebtedness as described under "Use of Proceeds." The proceeds of the loans made under the Revolving Credit Facility may also be used to fund the Company's working capital needs, capital expenditures and other general corporate purposes, including the issuance of letters of credit. Effectiveness of the New Credit Facility is a condition to the closing of the Offering. Borrowings under the New Credit Facility will bear interest annually at the Company's option at the rate of (i) LIBOR plus a spread or (ii) the Base Rate (defined as, generally, the higher of the Federal Funds Rate, as published by the Federal Reserve Bank of New York, plus 0.5%, or the Administrative Agent's prime lending rate) plus a spread. In addition, the Company must pay a fee on the face amount of each letter of credit outstanding at a rate of the LIBOR margin. It is expected that the obligations under the New Credit Facility will be secured by a pledge of all of the capital stock and assets of the domestic subsidiaries of the Company and by a pledge of 65% of the capital stock of the Company's foreign subsidiaries. The New Credit Facility will contain various covenants that limit, among other things, subject to certain exceptions, indebtedness, liens, transactions with affiliates, restricted payments and investments, mergers, consolidations and dissolutions, sales of assets, dividends and distributions and certain other business activities. 48 UNDERWRITING Subject to certain terms and conditions of an Underwriting Agreement dated , 1997 (the "Underwriting Agreement"), the underwriters named below (the "Underwriters"), who are represented by Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), BT Alex. Brown Incorporated and SBC Warburg Dillon Read Inc. (the "Representatives"), have severally agreed to purchase from the Company and the Selling Stockholders the respective number of shares of Class A Common Stock set forth opposite their names below.
NUMBER UNDERWRITERS OF SHARES Donaldson, Lufkin & Jenrette Securities Corporation................ BT Alex. Brown Incorporated........................................ SBC Warburg Dillon Read Inc........................................ --------- Total............................................................ 3,700,000 =========
The Underwriting Agreement provides that the obligations of the several Underwriters to purchase and accept delivery of the shares of Class A Common Stock offered hereby are subject to approval by their counsel of certain legal matters and to certain other conditions. The Underwriters are obligated to purchase and accept delivery of all shares of Common Stock offered hereby (other than those covered by the over-allotment option described below) if any are purchased. The Underwriters initially propose to offer the shares of Class A Common Stock in part directly to the public, initially at the price to the public set forth on the cover page of this Prospectus and in part to certain dealers (including the Underwriters) at such price, less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may re-allow, to certain other dealers a concession not in excess of $ per share. After the Offering, the public offering price and other selling terms may be changed by the Representatives without notice. The Selling Stockholders have granted to the Underwriters an option exercisable within 30 days after the date of this Prospectus to purchase, from time to time, up to an aggregate of 547,000 additional shares of Class A Common Stock at the initial public offering price less underwriting discounts and commissions. The Underwriters may exercise such option solely to cover over-allotments, if any, made in connection with the Offering. To the extent that such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase its pro rata portion of such additional shares based on such Underwriter's percentage underwriting commitment in the Offering as indicated in the preceding table. The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. Each of the Company, its executive officers and directors and certain stockholders of the Company (including the Selling Stockholders) has agreed, subject to certain conditions, not to (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, 49 right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any Common Stock (regardless of whether any of the transactions described in clause (i) or (ii) is to be settled by the delivery of Common Stock, or such other securities, in cash or otherwise) for a period of 90 days after the date of this Prospectus without the prior written consent of DLJ. In addition, during such period, the Company has also agreed not to file any registration statement with respect to, and each of its executive officers, directors and certain stockholders of the Company (including the Selling Stockholders) has agreed not to make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock without DLJ's prior written consent. In connection with the Offering, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Class A Common Stock. Specifically, the Underwriters may overallot the Offering, creating a syndicate short position. The Underwriters may bid for and purchase shares of Class A Common Stock in the open market to cover syndicate short positions or to stabilize the price of the Class A Common Stock. These activities may stabilize or maintain the market price of the Class A Common Stock above independent market levels. The Underwriters are not required to engage in these activities and may end any of these activities at any time. DLJ from time to time performs investment banking and other financial services for the Company and its affiliates for which it receives advisory or transaction fees of the nature and in amounts customary in the industry for such services. Bankers Trust Company, an affiliate of BT Alex. Brown, is a lender under the Company's existing credit facilities. A portion of the net proceeds to be received by the Company from the Offering will be used to repay indebtedness under the Company's existing credit facilities. 50 SHARES ELIGIBLE FOR FUTURE SALE Future sales of substantial amounts of Common Stock in the public market or the perception that such sales could occur, could adversely affect market prices prevailing from time to time. Sales of substantial amounts of Common Stock in the public market could adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future. Upon completion of this Offering, the Company will have outstanding 19,656,333 shares of Common Stock, assuming no exercise of the Underwriters' over-allotment option and no exercise of outstanding options. Of these shares, 12,731,716 shares of Common Stock will be freely tradable without restriction under the Securities Act, unless owned by "affiliates" of the Company, as that term is defined in Rule 144. Substantially all the remaining 6,924,617 shares of Common Stock outstanding upon completion of this Offering are Restricted Shares. Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or 144(k) promulgated under the Securities Act, which are summarized below. In general, under Rule 144 as currently in effect, a person (or persons whose shares are required to be aggregated) who has beneficially owned shares of Common Stock for at least one year that were acquired from the Company (or any "affiliate" of the Company) is entitled to sell within any three month period a number of shares that does not exceed the greater of one percent of the then outstanding shares of Common Stock (216,563 shares immediately after completion of this Offering assuming no exercise of the Underwriters' over- allotment option) or the average weekly reported trading volume of the Common Stock during the four calendar weeks preceding the date on which notice of such sale is given, provided certain manner of sale and notice requirements as to the availability of current public information are satisfied (which requirements as to the availability of current public information is currently satisfied). Affiliates of the Company must also comply with the restrictions and requirements of Rule 144, other than the one-year holding period requirement, in order to sell shares of Common Stock that are not "restricted securities" (such as shares acquired by affiliates of the Company in the Initial Public Offering, in open-market purchases, or in this Offering). Under Rule 144(k), a person who is not deemed an "affiliate" of the Company at any time during the three months preceding a sale by such person, and who has beneficially owned such shares of Common Stock for at least two years, would be entitled to sell such shares without regard to volume limitations, manner of sale provisions, notification requirements or the availability of current public information concerning the Company. As defined in Rule 144, an "affiliate" of an issuer is a person that directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such issuer. The Company, its executive officers and directors, the Selling Stockholders and certain other holders of Common Stock of the Company have agreed that, subject to certain exceptions for a period of 90 days after the date of this Prospectus, they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Commission a registration statement under the Securities Act relating to any additional shares of its Common Stock, or securities convertible into or exchangeable or exercisable for any shares of its Common Stock, or disclose the intention to make any such offer, sale, pledge, disposal or filing, without the prior written consent of DLJ. LEGAL MATTERS Certain legal matters with respect to the shares of Common Stock offered hereby will be passed upon for the Company by Cahill Gordon & Reindel (a partnership including a professional corporation), New York, New York, and for the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. EXPERTS The consolidated financial statements of the Company at June 30, 1997 and for each of the three years in the period ended June 30, 1997 included in this prospectus and registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. 51 THE FAIRCHILD CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS: Report of Independent Public Accountants................................... F-1 Consolidated Balance Sheets................................................ F-4 Consolidated Statements of Earnings........................................ F-6 Consolidated Statements of Stockholders' Equity............................ F-7 Consolidated Statements of Cash Flows...................................... F-8 Notes to Consolidated Financial Statements................................. F-9 CONSOLIDATED INTERIM FINANCIAL STATEMENTS: Consolidated Balance Sheets at June 30, 1997 and September 28, 1997........ F-36 Consolidated Statements of Earnings for the three months ended September 29, 1996 and September 28, 1997................................. F-38 Consolidated Statements of Cash Flows for the three months ended September 29, 1996 and September 28, 1997................................. F-39 Notes to Consolidated Interim Financial Statements......................... F-40 Schedule I................................................................. F-44 Schedule II................................................................ F-48
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Fairchild Corporation: We have audited the accompanying consolidated balance sheets of The Fairchild Corporation (a Delaware corporation) and subsidiaries as of June 30, 1996 and 1997, and the related consolidated statements of earnings, stockholders' equity and cash flows for the years ended June 30, 1995, 1996 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Fairchild Corporation and subsidiaries as of June 30, 1996 and 1997, and the results of their operations and their cash flows for the years ended June 30, 1995, 1996 and 1997, in conformity with generally accepted accounting principles. Arthur Andersen LLP Washington, D.C. September 5, 1997 (except with respect to the matter discussed in Note 24, as to which the date is December 8, 1997) F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Fairchild Corporation: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of The Fairchild Corporation and subsidiaries included in this Form 10-K and have issued our report thereon dated September 5, 1997. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules on page F-44 through F-48 are the responsibility of the Company's management and are presented for the purpose of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Washington, D.C. September 5, 1997 (except with the matter discussed in Note 24, as to which the date is December 8, 1997) F-2 [THIS PAGE INTENTIONALLY LEFT BLANK] F-3 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30, JUNE 30, 1996 1997 ASSETS ---------- ---------- Current Assets: Cash and cash equivalents............................... $ 39,649 $ 19,420 (of which $8,224 and $4,839 is restricted, respective- ly) Short-term investments.................................. 10,498 25,647 Accounts receivable-trade, less allowances of $6,327 and $8,103................................................. 98,694 168,163 Notes receivable........................................ 170,384 -- Inventories: Finished goods........................................ 236,263 297,223 Work-in-process....................................... 16,294 26,887 Raw materials......................................... 18,586 18,626 ---------- ---------- 271,143 342,736 Prepaid expenses and other current assets............... 19,275 33,631 ---------- ---------- Total Current Assets.................................... 609,643 589,597 Property, plant and equipment, net...................... 87,956 128,712 Net assets held for sale................................ 45,405 26,147 Cost in excess of net assets acquired, (Goodwill) less accumulated amortization of $31,912 and $36,672, respectively........................................... 140,201 154,808 Investments and advances, affiliated companies.......... 53,471 55,678 Deferred loan costs..................................... 7,825 9,252 Prepaid pension assets.................................. 57,660 59,742 Long-term investments................................... 585 4,120 Notes receivable and other assets....................... 7,192 39,277 ---------- ---------- Total Assets............................................ $1,009,938 $1,067,333 ========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-4 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, JUNE 30, 1996 1997 LIABILITIES AND STOCKHOLDERS' EQUITY ---------- ---------- Current Liabilities: Bank notes payable and current maturities of long-term debt.................................................. $ 84,892 $ 47,422 Accounts payable....................................... 65,478 84,953 Accrued salaries, wages and commissions................ 17,367 19,166 Accrued insurance...................................... 16,340 15,397 Accrued interest....................................... 10,748 16,011 Other.................................................. 37,302 54,625 Income taxes........................................... 24,635 5,881 ---------- ---------- Total Current Liabilities.............................. 256,762 243,455 Long-term debt......................................... 368,589 416,922 Other long-term liabilities............................ 18,605 23,622 Retiree health care liabilities........................ 44,452 43,387 Noncurrent income taxes................................ 31,737 42,013 Minority interest in subsidiaries...................... 58,625 68,309 ---------- ---------- Total Liabilities...................................... 778,770 837,708 Stockholders' Equity: Class A common stock, 10 cents par value; authorized 40,000,000 shares, 20,233,879, (19,997,756 in 1996) shares issued, and 13,992,283 (13,756,160 in 1996) shares outstanding.................................... 2,000 2,023 Class B common stock, 10 cents par value; authorized 20,000,000 shares, 2,632,516 shares issued and outstanding (2,633,704 in 1996)....................... 263 263 Paid-in capital........................................ 69,366 71,015 Retained earnings...................................... 208,618 209,949 Cumulative translation adjustment...................... 2,760 (1,860) Net unrealized holding loss on available-for-sale secu- rities................................................ (120) (46) Treasury stock, at cost, 6,241,596 shares of Class A common stock.......................................... (51,719) (51,719) ---------- ---------- Total Stockholders' Equity............................. 231,168 229,625 ---------- ---------- Total Liabilities and Stockholders' Equity............. $1,009,938 $1,067,333 ========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-5 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED JUNE 30, ------------------------------- 1995 1996 1997 Revenue: Net sales of products....................... $ 256,840 $ 409,520 $ 731,960 Other income (expense)...................... 1,169 635 (658) --------- --------- --------- 258,009 410,155 731,302 Costs and expenses: Cost of goods sold.......................... 219,226 314,609 526,837 Selling, general & administrative........... 65,830 98,075 161,309 Research and development.................... 974 94 7,807 Amortization of goodwill.................... 3,896 4,173 4,832 Restructuring............................... -- 2,319 -- --------- --------- --------- 289,926 419,270 700,785 Operating income (loss)...................... (31,917) (9,115) 30,517 Interest expense............................. 67,742 64,658 52,493 Interest income.............................. (3,371) (8,072) (4,695) --------- --------- --------- Net interest expense......................... 64,371 56,586 47,798 Investment income, net....................... 5,705 4,575 6,651 Equity in earnings of affiliates............. 1,607 4,821 4,598 Minority interest............................ (2,293) (1,952) (3,514) --------- --------- --------- Loss from continuing operations before nonrecurring income and taxes............... (91,269) (58,257) (9,546) Nonrecurring income (loss)................... -- (1,724) 2,528 --------- --------- --------- Earnings (loss) from continuing operations before taxes................................ (91,269) (59,981) (7,018) Income tax benefit........................... 33,506 26,320 5,200 --------- --------- --------- Earnings (loss) from continuing operations... (57,763) (33,661) (1,818) Earnings from discontinued operations, net... 23,843 17,087 3,149 Gain (loss) on disposal of discontinued operations, net............................. (259) 216,716 -- --------- --------- --------- Earnings (loss) before extraordinary items... (34,179) 200,142 1,331 Extraordinary items, net..................... 355 (10,436) -- --------- --------- --------- Net earnings (loss).......................... $ (33,824) $ 189,706 $ 1,331 ========= ========= ========= Primary Earnings (Loss) Per Share: Earnings (loss) from continuing operations.. $ (3.59) $ (2.03) $ (0.10) Earnings from discontinued operations, net.. 1.48 1.03 0.18 Gain (loss) on disposal of discontinued operations, net............................ (0.01) 13.06 -- --------- --------- --------- Earnings (loss) before extraordinary items.. (2.12) 12.06 0.08 Extraordinary items, net.................... 0.02 (0.63) -- --------- --------- --------- Net earnings (loss) per share............... $ (2.10) $ 11.43 $ 0.08 ========= ========= ========= Fully Diluted Earnings (Loss) Per Share: Earnings (loss) from continuing operations.. $ (3.59) $ (1.97) $ (0.10) Earnings from discontinued operations, net.. 1.48 1.00 .18 Gain (loss) on disposal of discontinued operations, net............................ (0.01) 12.67 -- --------- --------- --------- Earnings (loss) before extraordinary items.. (2.12) 11.70 0.08 Extraordinary items, net.................... 0.02 (.61) -- --------- --------- --------- Net earnings (loss) per share............... $ (2.10) $ 11.09 $ 0.08 ========= ========= ========= Weighted Average Number of Shares used in Computing Earnings Per Share: Primary...................................... 16,103 16,600 17,230 Fully diluted................................ 16,103 17,100 17,321
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-6 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
CLASS A CLASS B CUMULATIVE COMMON COMMON PAID-IN RETAINED TRANSLATION TREASURY STOCK STOCK CAPITAL EARNINGS ADJUSTMENT STOCK OTHER TOTAL Balance, July 1, 1994... $1,965 $ 270 $66,775 $ 52,736 $ 872 $(51,719) $(1,405) $ 69,494 Net loss................ -- -- -- (33,824) -- -- -- (33,824) Cumulative translation adjustment, net........ -- -- -- -- 2,989 -- -- 2,989 Gain on purchase of preferred stock of subsidiary............. -- -- 236 -- -- -- -- 236 Reduction of minimum liability for pensions............... -- -- -- -- -- -- 1,405 1,405 Net unrealized holding loss on available-for- sale securities........ -- -- -- -- -- -- (120) (120) ------ ----- ------- -------- ------- -------- ------- -------- Balance, June 30, 1995.. 1,965 270 67,011 18,912 3,861 (51,719) (120) 40,180 Net earnings............ -- -- -- 189,706 -- -- -- 189,706 Cumulative translation adjustment, net........ -- -- -- -- (1,101) -- -- (1,101) Fair market value of stock warrants issued.. -- -- 1,148 -- -- -- -- 1,148 Proceeds received from stock options exercised.............. 28 -- 1,481 -- -- -- -- 1,509 Exchange of Class B for Class A common stock... 7 (7) -- -- -- -- -- -- Gain realized on retirement of preferred stock of subsidiary.... -- -- (274) -- -- -- -- (274) ------ ----- ------- -------- ------- -------- ------- -------- Balance, June 30, 1996.. 2,000 263 69,366 208,618 2,760 (51,719) (120) 231,168 Net earnings............ -- -- -- 1,331 -- -- -- 1,331 Cumulative translation adjustment, net........ -- -- -- -- (4,620) -- -- (4,620) Fair market value of stock warrants issued.. -- -- 546 -- -- -- -- 546 Proceeds received from options exercised...... 23 -- 1,103 -- -- -- -- 1,126 Net unrealized holding gain on available-for- sale securities........ -- -- -- -- -- -- 74 74 ------ ----- ------- -------- ------- -------- ------- -------- Balance, June 30, 1997 ....................... $2,023 $ 263 $71,015 $209,949 $(1,860) $(51,719) $ (46) $229,625 ====== ===== ======= ======== ======= ======== ======= ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-7 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED JUNE 30, ------------------------------ 1995 1996 1997 Cash flows from operating activities: Net earnings (loss)........................... $(33,824) $ 189,706 $ 1,331 Adjustments to reconcile net earnings (loss) to net cash used for operating activities: Depreciation and amortization............... 20,879 21,653 25,935 Accretion of discount on long-term liabilities................................ 4,773 4,686 4,963 Net gain on the merger of subsidiaries...... -- (162,703) -- Net gain on the sale of discontinued operations................................. -- (53,942) -- Extraordinary items, net of cash payments... -- 4,501 -- Provision for restructuring (excluding cash payments of $777 in 1996).................. -- 1,542 -- (Gain) loss on sale of property, plant and equipment.................................. 655 (9) (72) Undistributed earnings of affiliates........ (500) (3,829) (2,329) Minority interest........................... 2,293 1,952 3,514 Change in trading securities................ 1,879 (5,346) (5,733) Change in receivables....................... (3,623) (7,677) (55,965) Change in inventories....................... (8,578) (10,747) (46,389) Change in other current assets.............. (3,039) (1,468) (14,237) Change in other non-current assets.......... 3,492 1,030 (17,859) Change in accounts payable, accrued liabilities, and other long-term liabilities................................ (21,541) (41,255) 8,610 Non-cash charges and working capital changes of discontinued operations................. 11,609 13,169 1,274 -------- --------- --------- Net cash used for operating activities........ (25,525) (48,737) (96,957) Cash flows from investing activities: Proceeds received from (used for) investment securities, net.............................. 12,281 265 (12,951) Purchase of property, plant and equipment..... (5,911) (6,622) (22,116) Proceeds from sale of property, plant and equipment.................................... 151 122 213 Equity investments in affiliates.............. (1,051) (2,361) -- Minority interest in subsidiaries............. -- (2,817) (1,610) Acquisition of subsidiaries, net of cash acquired..................................... (607) -- (55,916) Net proceeds from the sale of discontinued operations................................... -- 71,559 173,719 Changes in net assets held for sale........... 1,441 5,894 385 Investing activities of discontinued operations................................... (25,460) (8,500) (1,749) -------- --------- --------- Net cash (used for) provided by investing activities................................... (19,156) 57,540 79,975 Cash flows from financing activities: Proceeds from issuance of debt................ 71,712 157,877 154,394 Debt repayments and repurchase of debentures.. (57,417) (197,825) (156,975) Issuance of Class A common stock.............. -- 1,509 1,126 Financing activities of discontinued operations................................... (1,950) (936) -- -------- --------- --------- Net cash provided by (used for) financing activities................................... 12,345 (39,375) (1,455) Effect of exchange rate changes on cash....... 1,150 (961) (1,792) Net decrease in cash and cash equivalents..... (31,186) (31,533) (20,229) Cash and cash equivalents, beginning of the year......................................... 102,368 71,182 39,649 -------- --------- --------- Cash and cash equivalents, end of the year.... $ 71,182 $ 39,649 $ 19,420 ======== ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-8 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Corporate Structure: The Fairchild Corporation (the "Company") was incorporated in October 1969, under the laws of the State of Delaware. RHI Holdings, Inc. ("RHI") is a direct subsidiary of the Company. RHI is the owner of 100% of Fairchild Holding Corp. ("FHC") and the majority owner of Banner Aerospace, Inc., ("Banner"). The Company's principal operations are conducted through FHC and Banner. As of June 30, 1997, the Company held significant equity interests in Shared Technologies Fairchild Inc. ("STFI") and Nacanco Paketleme ("Nacanco"). Nonrecurring income for 1996 was $161,406 and includes a $163,130 nontaxable gain resulting from the merger of Fairchild Communications Services Company into Shared Technologies Inc. (See Note 3). The Company's investment in STFI resulted from a March 13, 1996 Merger of the Communications Services Segment of the Company with Shared Technologies, Inc. (See Note 3). The proposed sale of STFI to Intermedia Communications Inc., as discussed in Note 24, completes the disposition of the Communications Services Segment. The Company's financial statements have been restated to present the results of the Communications Services Segment and STFI as discontinued operations. Fiscal Year: The fiscal year ("Fiscal") of the Company ends June 30. All references herein to "1995", "1996", and "1997" mean the fiscal years ended June 30, 1995, 1996 and 1997, respectively. Consolidation Policy: The accompanying consolidated financial statements are prepared in accordance with generally accepted accounting principles and include the accounts of the Company and all of its wholly-owned and majority- owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in companies in which ownership interest range from 20 to 50 percent are accounted for using the equity method (see Note 9). Cash Equivalents/Statements of Cash Flows: For purposes of the Statements of Cash Flows, the Company considers all highly liquid investments with original maturity dates of three months or less as cash equivalents. Total net cash disbursements (receipts) made by the Company for income taxes and interest were as follows:
1995 1996 1997 Interest........................................... $66,262 $66,843 $48,684 Income Taxes....................................... (3,056) 9,279 (1,926)
Restricted Cash: On June 30, 1996 and 1997, the Company had restricted cash of $8,224 and $4,839, respectively, all of which is maintained as collateral for certain debt facilities. Cash investments are in short-term certificates of deposit. Investments: Management determines the appropriate classification of its investments at the time of acquisition and reevaluates such determination at each balance sheet date. Trading securities are carried at fair value, with unrealized holding gains and losses included in earnings. Available-for-sale securities are carried at fair value, with unrealized holding gains and losses, net of tax, reported as a separate component of stockholders' equity. Investments in equity securities and limited partnerships that do not have readily determinable fair values are stated at cost and are categorized as other investments. Realized gains and losses are determined using the specific identification method based on the trade date of a transaction. Interest on corporate obligations, as well as dividends on preferred stock, are accrued at the balance sheet date. Inventories: Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out ("LIFO") method at principal domestic aerospace manufacturing operations and using the first-in, first-out ("FIFO") method elsewhere. If the FIFO inventory valuation method had been used exclusively, inventories F-9 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) would have been approximately $4,756 and $4,868 higher at June 30, 1996 and 1997, respectively. Inventories from continuing operations are valued as follows:
JUNE 30, JUNE 30, 1996 1997 (IN THOUSANDS) First-in, first-out (FIFO)................................ $239,800 $312,840 Last-in, first-out (LIFO)................................. 31,343 29,896 -------- -------- Total inventories......................................... $271,143 $342,736 ======== ========
Properties and Depreciation: The cost of property, plant and equipment is depreciated over estimated useful lives of the related assets. The cost of leasehold improvements is depreciated over the lesser of the length of the related leases or the estimated useful lives of the assets. Depreciation is computed using the straight-line method for financial reporting purposes and using accelerated depreciation methods for Federal income tax purposes. No interest costs were capitalized in any of the years presented. Property, plant and equipment consisted of the following:
JUNE 30, JUNE 30, 1996 1997 Land.................................................... $ 10,408 $ 13,438 Buildings and improvements.............................. 40,853 56,124 Machinery and equipment................................. 94,406 158,944 Transportation vehicles................................. 767 899 Furniture and fixtures.................................. 18,466 26,815 Construction in progress................................ 2,329 6,524 -------- --------- 167,229 262,744 Less: Accumulated depreciation (79,273) (134,032) -------- --------- Net property, plant and equipment....................... $ 87,956 $ 128,712 ======== =========
Amortization of Goodwill: Goodwill, which represents the excess of the cost of purchased businesses over the fair value of their net assets at dates of acquisition, is being amortized on a straight-line basis over 40 years. Deferred Loan Costs: Deferred loan costs associated with various debt issues are being amortized over the terms of the related debt, based on the amount of outstanding debt, using the effective interest method. Amortization expense for these loan costs for 1995, 1996 and 1997 was $3,794, $3,827, and $2,847, respectively. Impairment of Long-Lived Assets: In Fiscal 1997, the Company adopted Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used, and for long-lived assets and certain identifiable intangibles to be disposed of. The Company reviews its long-lived assets, including property, plant and equipment, identifiable intangibles and goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine recoverability of its long-lived assets the Company evaluates the probability that future undiscounted net cash flows will be less than the carrying amount of the assets. Impairment is measured based on the difference between the carrying amount of the assets and fair value. The implementation of SFAS 121 did not have a material effect on the Company's consolidated results of operations. Foreign Currency Translation: For foreign subsidiaries whose functional currency is the local foreign currency, balance sheet accounts are translated at exchange rates in effect at the end of the period and income F-10 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) statement accounts are translated at average exchange rates for the period. The resulting translation gains and losses are included as a separate component of stockholders' equity. Foreign transaction gains and losses are included in other income and were insignificant in Fiscal 1995, 1996 and 1997. Research and Development: The Company capitalizes software development costs upon the establishment of technological feasibility. The establishment of technological feasibility and the ongoing assessment of recoverability require considerable judgment by management with respect to certain external factors, including anticipated future revenues, estimated economic life and changes in software and hardware technologies. Software development costs are amortized on a straight-line basis over the lesser of five years or the expected life of the product. All other Company-sponsored research and development expenditures are expensed as incurred. Capitalized software development costs were $3,651 at June 30, 1997. Capitalization of interest and taxes: The Company capitalizes interest expense and property taxes relating to property being developed. Nonrecurring Income: Nonrecurring income in 1997 resulted from the $2,528 gain recorded from the sale of Fairchild Scandinavian Bellyloading Company ("SBC"), (See Note 2). Earnings Per Share: Primary and fully diluted earnings per share are computed by dividing net income available to holders of the Company's common stock, 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 1997 and in computing fully diluted earnings per share for 1996, the conversion of options and warrants was assumed, as the effect was dilutive. In computing primary earnings per share for Fiscal 1996, only the dilutive effect from the conversion of options was assumed, as the effect from the conversion of warrants alone was antidilutive. In computing primary and fully diluted earnings per share for Fiscal 1995, the conversion of options and warrants was not assumed, as the effect was antidilutive. Stock-Based Compensation: In Fiscal 1997, the Company implemented Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock- Based Compensation". SFAS 123 establishes financial accounting standards for stock-based employee compensation plans and for transactions in which an entity issues equity instruments to acquire goods or services from non- employees. As permitted by SFAS 123, the Company will continue to use the intrinsic value based method of accounting prescribed by APB Opinion No. 25, for its stock-based employee compensation plans. Fair market disclosures required by SFAS 123 are included in Note 15. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications: Certain amounts in prior years' financial statements have been reclassified to conform to the 1997 presentation. Recently Issued Accounting Pronouncements: In October 1996, the American Institute of Certified Public Accountants issued Statement of Position 96-1 ("SOP 96-1") "Environmental Remediation Liabilities". SOP 96-1 provides authoritative guidance on specific accounting issues related to the recognition, measurement, and F-11 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) the display and disclosure of environmental remediation liabilities. The Company is required to implement SOP 96-1 in Fiscal 1998. The Company's present policy is similar to the policy prescribed by SOP 96-1; therefore there will be no effect from implementation. 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 differ materially from the calculations for primary and fully diluted earnings per share for the years ending June 30, 1995, 1996 and 1997. 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 1998. 2. ACQUISITIONS The Company's acquisitions described in this section have been accounted for using the purchase method. The purchase prices assigned to the net assets acquired were based on the fair value of such assets and liabilities at the respective acquisition dates. 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. PB Herndon is a distributor of specialty fastener lines and similar aerospace related components. The total cost of the acquisition was $16,000, which exceeded the fair value of the net assets of PB Herndon by approximately $3,451. The excess is being amortized using the straight-line method over 40 years. The Company purchased PB Herndon with available cash. 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 Fiscal year- end, the Company had purchased, or placed sufficient cash in escrow to purchase, all the remaining shares and convertible debt of Simmonds. The total purchase price of Simmonds, including the assumption of debt, was approximately $62,000, which the Company funded with available cash. The Company recorded approximately $13,000 in goodwill as a result of this acquisition. Simmonds is one of Europe's leading manufacturers and distributors of aerospace and automotive fasteners. In September 1994, the Company acquired all of the outstanding common stock of Fairchild Scandinavian Bellyloading Company AB ("SBC") for the assumption of a minimal amount of debt. SBC is a designer and manufacturer of a patented cargo loading system, which is installed in the cargo area of commercial aircraft. On June 30, 1997, the Company sold all the patents of 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 F-12 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Company may also receive an additional amount of up to $7,000 based on future net sales of SBC's patented products and services. In Fiscal 1997, the Company recorded a $2,528 nonrecurring gain as a result of these transactions. On November 28, 1994, the Company's former Communications Services segment completed the acquisition of substantially all of the telecommunications assets of JWP Telecom, Inc. ("JWP") for approximately $11,000, plus the assumption of approximately $3,000 of liabilities. JWP is a telecommunications system integrator, specializing in the distribution, installation and maintenance of voice and data communications equipment. Pro forma information is not required for these acquisitions. 3. MERGER AGREEMENT The Company, RHI and Fairchild Industries, Inc. ("FII"), RHI's subsidiary, entered into an Agreement and Plan of Merger dated as of November 9, 1995 (as amended, the "Merger Agreement") with Shared Technologies Inc. ("STI"). On March 13, 1996, in accordance with the Merger Agreement, STI succeeded to the telecommunications systems and services business operated by the Company's Fairchild Communications Services Company ("FCSC"). The transaction was effected by a Merger of FII with and into STI (the "Merger") with the surviving company renamed Shared Technologies Fairchild Inc. ("STFI"). Prior to the Merger, FII transferred all of its assets to, and all of its liabilities were assumed by FHC, except for the assets and liabilities of FCSC, and $223,500 of the FII's existing debt and preferred stock. As a result of the Merger, the Company received shares of Common Stock and Preferred Stock of STFI representing approximately a 41% ownership interest in STFI. The Merger was structured as a reorganization under section 386(a)(1)(A) of the Internal Revenue Code of 1986, as amended. In 1996, the Company recorded a $163,130 gain from this transaction. Subsequent to year-end the Company entered into an agreement to sell its investment in STFI. See Note 24 for further discussion. 4. MAJORITY INTEREST BUSINESS COMBINATION Effective February 25, 1996, the Company completed a transfer of the Company's Harco Division ("Harco") to Banner in exchange for 5,386,477 shares of Banner common stock. The exchange increased the Company's ownership of Banner common stock from approximately 47.2% to 59.3%, resulting in the Company becoming the majority shareholder of Banner. Accordingly, the Company has consolidated the results of Banner since February 25, 1996. The Company recorded a $427 nonrecurring loss from outside expenses incurred for this transaction in 1996. Banner is a leading international supplier to the aerospace industry as a distributor, providing a wide range of aircraft parts and related support services. Harco is a distributor of precision fasteners to the aerospace industry. In May 1997, Banner granted all of its stockholders certain rights to purchase Series A Convertible Paid-in-Kind Preferred Stock. In June 1997, Banner received net proceeds of $33,876 and issued 3,710,955 shares of preferred stock. The Company purchased $28,390 of the preferred stock issued by Banner, increasing its voting percentage to 64.0%. In connection with the Company's December 23, 1993 sale of its interest in Rexnord Corporation to BTR Dunlop Holdings, Inc. ("BTR"), the Company placed shares of Banner, with a fair market value of $5,000, in escrow to secure the Company's remaining indemnification of BTR against a contingent liability. Once the contingent liability is resolved, the escrow will be released. F-13 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) 5. DISCONTINUED OPERATIONS AND NET ASSETS HELD FOR SALE On February 22, 1996, pursuant to an Asset Purchase Agreement dated January 26, 1996, the Company, through one of its subsidiaries, completed the sale of certain assets, liabilities and the business of the D-M-E Company ("DME") to Cincinnati Milacron Inc. ("CMI"), for a sales price of approximately $244,331, as adjusted. The sales price consisted of $74,000 in cash, and two 8% promissory notes in the aggregate principal amount of $170,331 (together, the "8% CMI Notes"). On July 29, 1996, CMI paid in full the 8% CMI Notes. As a result of the sale of DME in 1996, the Company recorded a gain on disposal of discontinued operations of approximately $54,012, net of a $61,929 tax provision. On January 27, 1996, FII completed the sale of Fairchild Data Corporation ("Data") to SSE Telecom, Inc. ("SSE") for book value of approximately $4,400 and 100,000 shares of SSE's common stock valued at $9.06 per share, or $906, at January 26, 1996, and warrants to purchase an additional 50,000 shares of SSE's common stock at $11.09 per share. Accordingly, the results of DME and Data have been accounted for as discontinued operations. The combined net sales of DME and Data totaled $180,773 and $108,131 for 1995 and 1996, respectively. Net earnings from discontinued operations was $13,994 net of $10,183 for taxes in 1995 and, $9,186, net of $5,695 for taxes in 1996. Net assets held for sale at June 30, 1997, includes two parcels of real estate in California, and several other parcels of real estate located primarily throughout the continental United States, which the Company plans to sell, lease or develop, subject to the resolution of certain environmental matters and market conditions. Also included in net assets held for sale are limited partnership interests in (i) a real estate development joint venture, and (ii) a landfill development partnership. Net assets held for sale are stated at the lower of cost or at estimated net realizable value, which reflect anticipated sales proceeds, and other carrying costs to be incurred during the holding period. Interest is not allocated to net assets held for sale. See Note 24 for discontinuance of STFI. 6. PRO FORMA FINANCIAL STATEMENTS (UNAUDITED) The following unaudited pro forma information for the twelve months ended June 30, 1995 and June 30, 1996, provides the results of the Company's operations as though (i) the disposition of DME and Data, (ii) the Merger of FCSC, and (iii) the transfer of Harco to Banner, resulting in the consolidation of Banner, had been in effect since the beginning of each period. The pro forma information is based on the historical financial statements of the Company, DME, FCSC and Banner, giving effect to the aforementioned transactions. In preparing the pro forma data, certain assumptions and adjustments have been made which (i) reduce interest expense for revised debt structures, (ii) increase interest income for notes receivable, (iii) reduce minority interest from Series C Preferred Stock of FII being redeemed, and (iv) adjust equity in earnings of affiliates to include the estimated results of STFI. The following unaudited pro forma financial information is not necessarily indicative of the results of operations that actually would have occurred if the transactions had been in effect since the beginning of each period, nor is it necessarily indicative of future results of the Company. F-14 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
1995 1996 Sales.................................................... $481,991 $597,407 Loss from continuing operations.......................... (32,972) (15,766) Primary loss from continuing operations per share........ (2.05) (.96) Net loss................................................. (32,876) (15,766) Primary net loss per share............................. (2.04) (.96)
The pro forma financial information has not been adjusted for nonrecurring income and gains from disposal of discontinued operations that have occurred from these transactions. 7. EXTRAORDINARY ITEMS During Fiscal 1996, the Company used the Merger transaction and cash available to retire fully all of the FII's 12 1/4% senior notes ("Senior Notes"), FII's 9 3/4% subordinated debentures due 1998, and bank loans under a credit agreement of a former subsidiary of the Company, VSI Corporation. The redemption of the Senior Notes at a premium, consent fees paid to holders of the Senior Notes, the write-off of the original issue discount on FII 9 3/4% subordinated debentures and the write off of the remaining deferred loan fees associated with the issuance of the debt retired, resulted in an extraordinary loss of $10,436, net of a tax benefit, in 1996. During Fiscal 1995, the Company recognized extraordinary gains and losses from the early extinguishment of debt resulting from repurchases of its debentures on the open market or in negotiated transactions, and the write- offs of certain deferred costs associated with the issuance of securities repurchased. Early extinguishment of the Company's debt resulted in an extraordinary gain of $355, net of a tax provision, in 1995. 8. INVESTMENTS Short-term investments at June 30, 1997, consist primarily of common stock investments in public corporations which are classified as trading securities. All other short-term investments and all long-term investments do not have readily determinable fair values and consist primarily of investments in preferred and common stocks of private companies and limited partnerships. A summary of investments held by the Company consists of the following:
1996 1997 ----------------- ----------------- AGGREGATE AGGREGATE NAME OF ISSUER OR FAIR COST FAIR COST TYPE OF EACH ISSUE VALUE BASIS VALUE BASIS Short-term investments: Trading securities: Common stock............................. $10,362 $ 5,954 $16,094 $ 7,398 Other investments........................ 136 136 9,553 9,553 ------- ------- ------- ------- $10,498 $ 6,090 $25,647 $16,951 ======= ======= ======= ======= Other long-term investments: Other investments........................ $ 585 $ 585 $ 4,120 $ 4,120 ======= ======= ======= ======= Investment income is summarized as follows: 1995 1996 1997 Gross realized gain (loss) from sales.... $ 3,948 $(1,744) $ 1,673 Change in unrealized holding gain (loss) from trading securities................. (36) 5,527 4,289 Gross realized loss from impairments..... (652) -- -- Dividend income.......................... 2,445 792 689 ------- ------- ------- $ 5,705 $ 4,575 $ 6,651 ======= ======= =======
F-15 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) 9. INVESTMENTS AND ADVANCES, AFFILIATED COMPANIES The following table presents summarized historical financial information on a combined 100% basis of the Company's principal investments, which are accounted for using the equity method.
1995 1996 1997 Statement of Earnings: Net sales......................................... $313,888 $295,805 $102,962 Gross profit...................................... 100,644 89,229 39,041 Earnings from continuing operations............... 9,623 18,289 14,812 Discontinued operations, net...................... -- -- -- Net earnings...................................... 9,623 18,289 14,812 Balance Sheet at June 30: Current assets.................................... $ 53,843 $ 47,546 Non-current assets................................ 37,201 40,878 Total assets...................................... 91,044 88,424 Current liabilities............................... 27,392 26,218 Non-current liabilities........................... 1,194 740
The Company owns approximately 31.9% of Nacanco common stock. The Company recorded equity earnings of $2,859, $5,487, and $4,673 from this investment for 1995, 1996 and 1997, respectively. Effective February 25, 1996, the Company increased its percentage of ownership of Banner common stock from 47.2% to approximately 59.3%. Since February 25, 1996, the Company has consolidated Banner's results. Prior to February 25, 1996, the Company accounted for its investment in Banner using the equity method and held its investment in Banner as part of investments and advances, affiliated companies. The Company recorded equity in earnings of $138 and $363 from this investment for 1995 and 1996, respectively. The Company is accounting for an investment in a public fund, which is controlled by an affiliated investment group of the Company, at market value. The amortized cost basis of the investment was $923 and had been written down by $71, before tax, to market value. The Company recorded a gross unrealized holding gain (loss) of $(120) and $114 from this investment in 1995 and 1997, respectively. The Company's share of equity in earnings of all unconsolidated affiliates for 1995, 1996 and 1997 was $1,607, $4,821, and $4,598, respectively. The carrying value of investments and advances, affiliated companies consists of the following:
JUNE 30, JUNE 30, 1996 1997 Nacanco.................................................... $20,886 $20,504 STFI....................................................... 30,559 31,978 Others..................................................... 2,026 3,196 ------- ------- $53,471 $55,678 ======= =======
On June 30, 1997, approximately $9,056 of the Company's $209,949 consolidated retained earnings was from undistributed earnings of 50 percent or less currently owned affiliates accounted for by the equity method. F-16 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) 10. NOTES PAYABLE AND LONG-TERM DEBT At June 30, 1996 and 1997, notes payable and long-term debt consisted of the following:
JUNE 30, JUNE 30, 1996 1997 Bank credit agreements................................. $ 73,500 $ 100 Other short-term notes payable......................... 3,035 15,529 -------- -------- Short-term notes payable (weighted average interest rates of 8.6% and 7.8% in 1996 and 1997, respectively)......................................... $ 76,535 $ 15,629 ======== ======== Bank credit agreements................................. $112,500 $177,250 11 7/8% RHI Senior debentures due 1999................. 85,769 85,852 12% Intermediate debentures due 2001................... 114,495 115,359 13 1/8% Subordinated debentures due 2006............... 35,061 35,188 13% Junior Subordinated debentures due 2007............ 24,800 24,834 10.65% Industrial revenue bonds........................ 1,500 1,500 Capital lease obligations, interest from 4.4% to 10.5%................................................. 65 1,897 Other notes payable, collateralized by property, plant and equipment, interest from 4.3% to 10.0%............ 2,756 6,835 -------- -------- 376,946 448,715 Less: Current maturities............................... (8,357) (31,793) -------- -------- Net long-term debt..................................... $368,589 $416,922 ======== ========
Bank Credit Agreements: The Company maintains credit agreements (the "Credit Agreements") with a consortium of banks, which provide revolving credit facilities to RHI, FHC and Banner, and term loans to Banner (collectively the "Credit Facilities"). On July 26, 1996, the Company amended and restated the terms and provisions of FHC's credit agreement, in their entirety (the "FHC Credit Agreement"). The FHC Credit Agreement extends to July 28, 2000, the maturity of FHC's revolving credit facility (the "FHC Revolver"). The FHC Revolver has a borrowing limit of $52,000, however, availability is determined monthly by calculation of a borrowing base comprised of specified percentages of FHC's accounts receivable, inventories and the appraised value of equipment and real property. The FHC Revolver generally bears interest at a base rate of 1 1/2% over the greater of (i) Citibank New York's base rate, or (ii) the Federal Funds Rate plus 1 1/2% for domestic borrowings and at 2 1/2% over Citibank London's base rate for foreign borrowings. FHC's Revolver is subject to a non- use commitment fee of 1/2% on the average unused availability; and outstanding letters of credit are subject to fees of 2 3/4% per annum. The FHC Credit Agreement was further amended on February 21, 1997 to permit the Simmonds Acquisition. Terms modified by the February 21, 1997 amendment included a provision in which the borrowing rate on the FHC Revolver will increase by 1/4% on each of September 30, 1997 and December 31, 1997, in the event that the FHC Credit Agreement is not restructured or refinanced by such date. The FHC Credit Agreement requires FHC to comply with certain financial and non-financial loan covenants, including maintaining a minimum net worth of $150,000 and maintaining certain interest and fixed charge coverage ratios at the end of each Fiscal Quarter. Additionally, the FHC Credit Agreement restricts annual capital expenditures of FHC to $12,000. Substantially all of FHC's assets are pledged as collateral under the FHC Credit Agreement. At June 30, 1997, FHC was in compliance with all the covenants under the FHC Credit Agreement. FHC may transfer available cash as dividends to the Company. However, the FHC Credit Agreement restricts the Company from paying any dividends to stockholders. F-17 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) 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) up to $75,000 in revolving loans, 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 Credit Agreements provide RHI with a $4,250 revolving credit facility (the "RHI Credit Agreement") which (i) generally bears a base interest rate of 1/2% over the prime rate, (ii) requires a commitment fee of 1/2%, and (iii) matures on August 12, 1998. RHI's Credit Agreement requires RHI to comply with specified covenants and maintain a consolidated net worth of $175,000. Additionally, RHI's capital expenditures are restricted, except for certain leasehold improvements, to $2,000 per annum plus the selling price of fixed assets for such Fiscal Year. The Company was in compliance with all the covenants under RHI's Credit Agreement at June 30, 1997. RHI may pay dividends to the Company if the purpose of such dividends is to provide the Company with funds necessary to meet its debt service requirements under specified notes and debentures. However, all other dividends are subject to certain limitations, which was $10,000 in Fiscal 1997. Banner has a credit agreement (the "Banner Credit Agreement") which provides Banner and its subsidiaries with funds for working capital and potential acquisitions. The facilities under the Banner Credit Agreement consist of (i) a $55,000 six-year term loan (the "Banner Term Loan"), (ii) a $30,000 seven- year term loan (the "Tranche B Loan"), (iii) a $40,000 six-year term loan (the "Tranche C Loan"), and (iv) a $71,500 revolving credit facility (the "Banner Revolver"). The Banner Credit Agreement requires certain semiannual term loan payments. The Banner Term Loan and the Banner Revolver bear interest at prime plus 1 1/4% or LIBOR plus 2 1/2% and may increase by 1/4% or decrease by up to 1% based upon certain performance criteria. As a result of Banner's performance level through March 31, 1997, borrowings under the Banner Term Loan and the Banner Revolver bore an interest rate of prime plus 3/4% and LIBOR plus 2% for the quarter ending June 30, 1997. The Tranche B Loan bears interest at prime plus 1 3/4% or LIBOR plus 3%. The Tranche C Loan initially bears interest at prime plus 1 1/2% or LIBOR plus 2 3/4% and may decrease by 1/4% based upon certain performance criteria. The Banner Credit Agreement requires that loans made to Banner may not exceed a defined borrowing base, which is based upon a percentage of eligible inventories and accounts receivable. Banner's revolving credit facility is subject to a non-use fee of 55 basis points of the unused availability. The Banner Credit Agreement requires quarterly compliance with various financial and non-financial loan covenants, including maintenance of minimum net worth, and minimum ratios of interest coverage, fixed charge coverage, and debt to earnings before interest, taxes, depreciation and amortization. Banner also has certain limitations on the incurrence of additional debt. As of June 30, 1997, Banner was in compliance with all covenants under the Banner Credit Agreement. Substantially all of Banner's assets are pledged as collateral under the Banner Credit Agreement. The Banner Credit Agreement substantially limits the amount of dividends which can be paid to its shareholders, including the Company. Banner's current policy is to retain earnings to support the growth of its present operations and to reduce its outstanding debt. F-18 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) In September 1995, Banner entered into several interest rate hedge agreements ("Hedge Agreements") to manage its exposure to increases in interest rates on its variable rate debt. The Hedge Agreements provide interest rate protection on $60,000 of debt through September 2000, by providing an interest rate cap of 7% if the 90-day LIBOR rate exceeds 7%. If the 90-day LIBOR rate drops below 5%, Banner will be required to pay interest at a floor rate of approximately 6%. In November 1996, Banner entered into an additional hedge agreement ("Additional Hedge Agreement") with one of its major lenders to provide interest rate protection on $20,000 of debt for a period of three years. Effectively, the Additional Hedge Agreement provides for a cap of 7 1/4% if the 90-day LIBOR exceeds 7 1/4%. If the 90-day LIBOR drops below 5%, Banner will be required to pay interest at a floor rate of approximately 6%. No cash outlay was required to obtain the Additional Hedge Agreement as the cost of the cap was offset by the sale of the floor. The Company recognizes interest expense under the provisions of the Hedge Agreements and the Additional Hedge Agreement based on the fixed rate. The Company is exposed to credit loss in the event of non-performance by the lenders; however, such non-performance is not anticipated. The following table summarizes the Credit Facilities under the Credit Agreements at June 30, 1997:
REVOLVING TERM TOTAL CREDIT LOAN AVAILABLE FACILITIES FACILITIES FACILITIES RHI Holdings, Inc. Revolving credit facility................. $ 100 $ -- $ 4,250 Fairchild Holding Corp. Revolving credit facility................. 30,900 -- 52,000 Banner Aerospace, Inc. Revolving credit facility................. 32,000 -- 71,500 Term Loan................................. -- 44,500 44,500 Tranche B Loan............................ -- 29,850 29,850 Tranche C Loan............................ -- 40,000 40,000 ------- -------- -------- Total....................................... $63,000 $114,350 $242,100 ======= ======== ========
At June 30, 1997, the Company had outstanding letters of credit of $10,811, which were supported by the Credit Agreement and other bank facilities on an unsecured basis. At June 30, 1997, the Company had unused bank lines of credit aggregating $53,939, at interest rates slightly higher than the prime rate. The Company also has short-term lines of credit relating to foreign operations, aggregating $9,350, against which the Company owed $5,967 at June 30, 1997. F-19 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Summarized below are certain items and other information relating to the debt outstanding at June 30, 1997:
12% 13% 11 7/8% 13 1/8% INTERMEDIATE JUNIOR RHI SENIOR SUBORDINATED SUBORDINATED SUBORDINATED SUBORDINATED DEBENTURES DEBENTURES DEBENTURES DEBENTURES Date Issued................ March 1986 Oct. 1986 March 1987 March 1987 Face Value................. $75,000 $160,000 $102,000 $126,000 Balance June 30, 1997...... $35,188 $115,359 $ 24,834 $ 85,852 Percent Issued at.......... 95.769 93.470 98.230 99.214 Bond Discount.............. $ 3,173 $ 10,448 $ 1,805 $ 990 Amortization 1995.......... $ 103 $ 687 $ 27 $ 94 1996................. $ 118 $ 761 $ 30 $ 82 1997................. $ 127 $ 864 $ 34 $ 82 Yield to Maturity.......... 13.80% 13.06% 13.27% 12.01% Interest Payments.......... Semi-Annual Semi-Annual Semi-Annual Semi-Annual Sinking Fund Start Date.... 3/15/97 10/15/97 3/1/98 3/1/97 Sinking Fund Installments.. $ 7,500 $ 32,000 $ 10,200 $ 31,500 Fiscal Year Maturity....... 2006 2002 2007 1999 Callable Option on......... 3/15/89 10/15/89 3/1/92 3/1/92
Under the most restrictive covenants of the above indentures, the Company's consolidated net worth, as defined, must not be less than $35,000. RHI's consolidated net worth must not be less than $125,000. At June 30, 1997, consolidated net worth was $229,625 at the Company and $438,830 at RHI. At the present time, none of the Company's consolidated retained earnings are available for capital distributions due to a cumulative earnings restriction. The indentures also provide restrictions on the amount of additional borrowings by the Company. The annual maturity of long-term debt obligations (exclusive of capital lease obligations) for each of the five years following June 30, 1997, are as follows: $31,207 for 1998, $93,544 for 1999, $42,288 for 2000, $77,407 for 2001, and $77,772 for 2002. 11. PENSIONS AND POSTRETIREMENT BENEFITS PENSIONS The Company and its subsidiaries have defined benefit pension plans covering most of its employees. Employees in foreign subsidiaries may participate in local pension plans, which are in the aggregate insignificant. The Company's funding policy is to make the minimum annual contribution required by applicable regulations. The following table provides a summary of the components of net periodic pension expense (income) for the plans:
1995 1996 1997 Service cost (current period attribution)....... $ 3,917 $ 3,513 $ 2,521 Interest cost of projected benefit obligation... 14,860 14,499 15,791 Actual return on plan assets.................... (14,526) (39,430) (31,400) Amortization of prior service cost.............. 81 81 (180) Net amortization and deferral................... (4,341) 21,495 11,157 -------- -------- -------- (9) 158 (2,111) Net periodic pension expense (income) for other plans including foreign plans.................. 78 (118) 142 -------- -------- -------- Net periodic pension expense (income)........... $ 69 $ 40 $ (1,969) ======== ======== ========
F-20 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Assumptions used in accounting for the plans were:
1995 1996 1997 Discount rate.............................................. 8.5% 8.5% 7.75% Expected rate of increase in salaries...................... 4.5% 4.5% 4.5% Expected long-term rate of return on plan assets........... 9.0% 9.0% 9.0%
In Fiscal 1996, the Company recognized one-time charges of $857 from the divestiture of subsidiaries, which resulted in a recognition of prior service costs, and $84 from the early retirement window program at the Company's corporate office. The reduction in liabilities due from the cessation of future salary increases is not immediately recognizable in income, but will be used as an offset against existing unrecognized losses. The Company will have a future savings benefit from a lower net periodic pension cost, due to the amortization of a smaller unrecognized loss. The following table sets forth the funded status and amounts recognized in the Company's consolidated balance sheets at June 30, 1996, and 1997, for the plans:
JUNE 30, JUNE 30, 1996 1997 Actuarial present value of benefit obligations: Vested................................................... $164,819 $183,646 Nonvested................................................ 6,169 7,461 -------- -------- Accumulated benefit obligation........................... 170,988 191,107 Effect of projected future compensation increases........ 905 683 -------- -------- Projected benefit obligation............................... 171,893 191,790 Plan assets at fair value.................................. 224,692 237,480 -------- -------- Plan assets in excess of projected benefit obligations..... 52,799 45,690 Unrecognized net loss...................................... 20,471 29,592 Unrecognized prior service cost............................ (354) (571) Unrecognized net transition assets......................... (608) (315) -------- -------- Prepaid pension cost prior to SFAS 109 implementation...... 72,308 74,396 Effect of SFAS 109 implementation.......................... (14,648) (14,654) -------- -------- Prepaid pension cost....................................... $ 57,660 $ 59,742 ======== ========
Plan assets include Class A Common Stock of the Company valued at a fair market value of $11,094 and $26,287 at June 30, 1996 and 1997, respectively. Substantially all of the plan assets are invested in listed stocks and bonds. F-21 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) POSTRETIREMENT HEALTH CARE BENEFITS The Company provides health care benefits for most retired employees. Postretirement health care expense from continuing operations totaled $701, $779, and $642 for 1995, 1996 and 1997, respectively. The Company has accrued approximately $36,995 and 34,965 as of June 30, 1996 and 1997, respectively, for postretirement health care benefits related to discontinued operations. This represents the cumulative discounted value of the long-term obligation and includes interest expense of $3,872, $3,877, and $3,349 for the years ended June 30, 1995, 1996 and 1997, respectively. The components of expense in Fiscal 1995, 1996 and 1997 are as follows:
1995 1996 1997 Service cost of benefits earned...................... $ 321 $ 281 $ 140 Interest cost on liabilities......................... 4,385 4,377 3,940 Net amortization and deferral........................ (133) (2) (89) ------ ------ ------ Net periodic postretirement benefit cost............. $4,573 $4,656 $3,991 ====== ====== ======
A one-time credit of $3,938, resulting from the divestitures of subsidiaries, was offset by $4,361 from DME's accumulated postretirement benefit obligation for active employees, which was transferred to CMI as part of the sale. The Company recognized the net effect of $423 as an expense in 1996. The following table sets forth the funded status for the Company's postretirement health care benefit plans at June 30,:
1996 1997 Accumulated postretirement benefit obligations: Retirees.................................................. $46,846 $48,145 Fully eligible active participants........................ 347 390 Other active participants................................. 1,887 2,335 ------- ------- Accumulated postretirement benefit obligation............... 49,080 50,870 Unrecognized net loss....................................... 2,086 6,173 ------- ------- Accrued postretirement benefit liability.................... $46,994 $44,697 ======= =======
The accumulated postretirement benefit obligation was determined using a discount rate of 7.75%, and a health care cost trend rate of 7.0% for pre-age- 65 and post-age-65 employees, respectively, gradually decreasing to 5.5% in the year 2003 and thereafter. Increasing the assumed health care cost trend rates by 1% would increase the accumulated postretirement benefit obligation as of June 30, 1997, by approximately $1,871, and increase the net periodic postretirement benefit cost by approximately $132 for Fiscal 1997. F-22 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) 12. INCOME TAXES The provision (benefit) for income taxes from continuing operations is summarized as follows:
1995 1996 1997 Current: Federal...................................... $ (8,315) $(41,595) $ 6,143 State........................................ 424 1,203 1,197 Foreign...................................... 1,191 669 (45) -------- -------- -------- (6,700) (39,723) 7,295 Deferred: Federal...................................... (24,754) 17,060 (15,939) State........................................ (2,052) (3,657) 3,444 -------- -------- -------- (26,806) 13,403 (12,495) -------- -------- -------- Net tax benefit................................ $(33,506) $(26,320) $ (5,200) ======== ======== ========
The income tax provision (benefit) for continuing operations differs from that computed using the statutory Federal income tax rate of 35%, in Fiscal 1995, 1996 and 1997, for the following reasons:
1995 1996 1997 Computed statutory amount..................... $(31,944) $(20,993) $(2,456) State income taxes, net of applicable federal tax benefit.................................. (1,794) 782 778 Nondeductible acquisition valuation items..... 1,420 1,329 1,064 Tax on foreign earnings, net of tax credits... 2,965 1,711 (1,938) Difference between book and tax basis of assets acquired and liabilities assumed...... 1,366 1,040 (1,102) Nontaxable gain related to the Merger......... -- -- -- Revision of estimate for tax accruals......... (5,000) (3,500) (5,335) Other......................................... (519) (6,689) 3,789 -------- -------- ------- Net tax benefit............................... $(33,506) $(26,320) $(5,200) ======== ======== =======
F-23 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table is a summary of the significant components of the Company's deferred tax assets and liabilities, and deferred provision or benefit for the following periods:
1995 1996 1997 DEFERRED DEFERRED DEFERRED (PROVISION) (PROVISION) JUNE 30, (PROVISION) JUNE 30, BENEFIT BENEFIT 1996 BENEFIT 1997 Deferred tax assets: Accrued expenses...... $(2,218) $ (1,643) $ 5,936 $ 504 $ 6,440 Asset basis differ- ences................ (7,292) 1,787 2,064 (1,492) 572 Inventory............. -- -- -- 2,198 2,198 Employee compensation and benefits......... 106 (26) 5,408 (267) 5,141 Environmental re- serves............... (1,202) (737) 4,512 (1,253) 3,259 Loss and credit carryforward......... 17,991 (23,229) 8,796 (8,796) -- Postretirement bene- fits................. 514 (1,273) 19,334 138 19,472 Other................. 1,530 2,186 5,519 2,079 7,598 ------- -------- -------- ------- -------- 9,429 (22,935) 51,569 (6,889) 44,680 Deferred tax liabili- ties: Asset basis differ- ences................ 4,129 16,602 (22,565) (3,855) (26,420) Inventory............. 3,176 4,684 (2,010) 2,010 -- Pensions.............. 1,074 1,516 (18,243) (1,038) (19,281) Other................. 3,694 (17,525) (29,507) 22,267 (7,240) ------- -------- -------- ------- -------- 12,073 5,277 (72,325) 19,384 (52,941) ------- -------- -------- ------- -------- Net deferred tax liabil- ity.................... $21,502 $(17,658) $(20,756) $12,495 $ (8,261) ======= ======== ======== ======= ========
The amounts included in the balance sheet are as follows:
JUNE 30, JUNE 30, 1996 1997 Prepaid expenses and other current assets: Current deferred........................................ $ 8,012 $11,307 ======= ======= Income taxes payable: Current deferred........................................ $20,797 $(2,735) Other current........................................... 3,838 8,616 ------- ------- $24,635 $ 5,881 ======= ======= Noncurrent income tax liabilities: Noncurrent deferred..................................... $ 7,971 $22,303 Other noncurrent........................................ 23,766 19,710 ------- ------- $31,737 $42,013 ======= =======
The 1995, 1996 and 1997 net tax benefits include the results of reversing $5,000, $3,500 and $5,335, respectively, of federal income taxes previously provided for due to a change in the estimate of required tax accruals. Domestic income taxes, less available credits, are provided on the unremitted income of foreign subsidiaries and affiliated companies, to the extent that such earnings are intended to be repatriated. No domestic income taxes or foreign withholding taxes are provided on the undistributed earnings of foreign subsidiaries and F-24 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) affiliates, which are considered permanently invested, or which would be offset by allowable foreign tax credits. At June 30, 1997, the amount of domestic taxes payable upon distribution of such earnings was not significant. In the opinion of management, adequate provision has been made for all income taxes and interest, and any liability that may arise for prior periods will not have a material effect on the financial condition or results of operations of the Company. 13. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES Included in the Company's $68,309 of minority interest at June 30, 1997, is $67,649, representing approximately 40.7% of Banner's common stock effectively outstanding on a consolidated basis. 14. EQUITY SECURITIES The Company had 13,992,283 shares of Class A common stock and 2,632,516 shares of Class B common stock outstanding at June 30, 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. In Fiscal 1997, 234,935 shares of Class A common stock were issued as a result of the exercise of stock options, and shareholders converted 1,188 shares of Class B common stock into Class A common stock. RHI holds an investment of 4,319,423 shares of the Company's Class A common stock. At June 30, 1997, RHI's market value was approximately $78,649. The Company accounts for the Class A common stock held by RHI as Treasury Stock. 15. STOCK OPTIONS AND WARRANTS STOCK OPTIONS The Company's 1986 Non-Qualified and Incentive Stock Option Plan (the "1986 Plan"), authorizes the issuance of 4,320,000 shares of Class A Common Stock upon the exercise of stock options issued under the 1986 Plan. The purpose of the 1986 Plan is to encourage continued employment and ownership of Class A Common Stock by officers and key employees of the Company and its subsidiaries, and provide additional incentive to promote the success of the Company. At the Company's 1996 annual meeting, the Company's stockholders approved an extension of the expiration date of the 1986 Plan from April 9, 1996 to April 9, 2006. The 1986 Plan authorizes the granting of options at not less than the market value of the common stock at the time of the grant. The option price is payable in cash or, with the approval of the the Company's Compensation and Stock Option Committee of the Board of Directors, in shares of common stock, valued at fair market value at the time of exercise. The options normally terminate five years from the date of grant, subject to extension of up to 10 years or for a stipulated period of time after an employee's death or termination of employment. At the Company's 1996 annual meeting, the Company's stockholders approved the 1996 Non-Employee Directors Stock Option Plan (the "1996 NED Plan"). The ten-year 1996 NED Plan authorizes the issuance of 250,000 shares of Class A Common Stock upon the exercise of stock options issued under the 1996 NED Plan. The 1996 NED Plan authorizes the granting of options at the market value of the common stock on the date of grant. An initial stock option grant for 30,000 shares of Class A Common Stock will be made to each person F-25 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) who becomes a new non-employee Director, on such date, with the options to vest 25% each year from the date of grant. On the date of each annual meeting, each person elected as a non-employee Director at such meeting will be granted an option for 1,000 shares of Class A Common Stock, which will vest immediately. The exercise price is payable in cash or, with the approval of the Stock Option Committee, in shares of Class A or Class B Common Stock, valued at fair market value at the date of exercise. All options issued under the 1996 NED Plan will terminate five years from the date of grant or a stipulated period of time after a Non-Employee Director ceases to be a member of the Board. The 1996 NED Plan is designed to maintain the Company's ability to attract and retain highly qualified and competent persons to serve as outside directors of the Company. On November 17, 1994, the Company's stockholders approved the grant of stock options of 190,000 shares to outside Directors of the Company to replace expired stock options. These stock options expire five years from the date of the grant. Summaries of stock option transactions under the 1986 Plan, the 1996 NED Plan, and prior plans are presented in the following tables:
WEIGHTED AVERAGE EXERCISE SHARES PRICE Outstanding at July 1, 1994.............................. 1,520,706 $5.57 Granted................................................ 356,600 3.78 Expired................................................ (116,875) 5.44 Forfeited.............................................. (60,650) 5.94 --------- ----- Outstanding at June 30, 1995............................. 1,699,781 5.14 Granted................................................ 540,078 4.33 Exercised.............................................. (286,869) 5.26 Expired................................................ (659,850) 6.06 Forfeited.............................................. (19,653) 4.30 --------- ----- Outstanding at June 30, 1996............................. 1,273,487 4.27 Granted................................................ 457,350 14.88 Exercised.............................................. (234,935) 4.79 Expired................................................ (1,050) 4.59 Forfeited.............................................. (9,412) 3.59 --------- ----- Outstanding at June 30, 1997............................. 1,485,440 $7.46 ========= ===== Exercisable at June 30, 1995............................. 1,159,306 $5.68 Exercisable at June 30, 1996............................. 399,022 $4.59 Exercisable at June 30, 1997............................. 486,855 $4.95
A summary of options outstanding at June 30, 1997 is presented as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------- ----------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE REMAINING AVERAGE RANGE OF NUMBER EXERCISE CONTRACT NUMBER EXERCISE EXERCISE PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE $ 3.50 -- 8.625 1,022,700 $ 4.10 2.6 years 452,509 $ 4.10 $13.625--16.25 462,740 $14.89 4.4 years 34,346 $16.19 - --------------- --------- ------ --------- ------- ------ $ 3.50 --16.25 1,485,440 $ 7.46 3.2 years 486,855 $ 4.95 =============== ========= ====== ========= ======= ======
F-26 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) The weighted average grant date fair value of options granted during 1996 and 1997 was $1.95 and $6.90, respectively. The fair value of each option granted is estimated on the grant date using the Black-Scholes option pricing model. The following significant assumptions were made in estimating fair value:
ASSUMPTION 1996 1997 Risk-free interest rate................................ 5.5%--6.6% 6.0%--6.7% Expected life in years................................. 4.27 4.65 Expected volatility.................................... 46%--47% 43%--45% Expected dividends..................................... none none
The Company applies APB Opinion 25 in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for the stock option plans in 1996 or 1997. If stock options granted in 1996 and 1997 were accounted for based on their fair value as determined under SFAS 123, pro forma earnings would be as follows:
1996 1997 Net earnings: As reported............................................... $189,706 $1,331 Pro forma................................................. 189,460 283 Primary earnings per share: As reported............................................... $ 11.43 $ .08 Pro forma................................................. 11.41 .02 Fully diluted earnings per share: As reported............................................... $ 11.09 $ .08 Pro forma................................................. 11.08 .02
The pro forma effects of applying SFAS 123 are not representative of the effects on reported net earnings for future years. SFAS 123 does not apply to awards made prior to 1996, and additional awards in future years are expected. STOCK WARRANTS On April 25, 1997, the Company issued warrants to purchase 100,000 shares of Class A Common Stock, at $12.25 per share, to Dunstan Ltd. as incentive remuneration for the performance of certain investment banking services. The warrants may be earned on a pro-rata basis over a six-month period ending October 31, 1997. The warrants become exercisable on November 1, 1997 and expire on November 8, 2000. The Company recorded a selling, general & administrative expense of $191 in 1997, for stock warrants earned in 1997, based on a grant-date fair value of $5.46. Effective as of February 21, 1997, the Company approved the continuation of an existing warrant to Stinbes Limited (an affiliate of Jeffrey Steiner) to purchase 375,000 shares of the Company's Class A or Class B Common Stock at $7.67 per share. The warrant was modified to extend the exercise period from March 13, 1997, to March 13, 2002, and to increase the exercise price per share by $.002 for each day subsequent to March 13, 1997, but fixed at $7.80 per share after June 30, 1997. In addition, the warrant was modified to provide that the warrant may not be exercised except within the following window periods: (i) within 365 days after the merger of STFI with AT&T Corporation, MCI Communications, Worldcom Inc., Tel-Save Holdings, Inc., or Teleport Communications Group, Inc.; (ii) within 365 days after a change of control of the Company, as defined in the FHC Credit Agreement; or (iii) within 365 days after a change of control of Banner, as defined in the Banner Credit Agreement. In no event may the warrant be exercised after March 13, 2002. F-27 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) On November 9, 1995, the Company issued warrants to purchase 500,000 shares of Class A Common Stock, at $9.00 per share, to Peregrine Direct Investments Limited ("Peregrine"), in exchange for a standby commitment it received on November 8, 1995, from Peregrine. The Company elected not to exercise its rights under the Peregrine commitment. The warrants are immediately exercisable and will expire on November 8, 2000. On February 21, 1996, the Company issued warrants to purchase 25,000 shares of Class A Common Stock, at $9.00 per share, to a non-employee for services provided in connection with the Company's various dealings with Peregrine. The warrants issued are immediately exercisable and will expire on November 8, 2000. The Company recorded nonrecurring expenses of $1,148 for the grant date fair value of the stock warrants issued in 1996. The warrants issued in 1996 were outstanding at June 30, 1997. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, ("SFAS 107") "Disclosures about Fair Value of Financial Instruments", requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all non- financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: The carrying amount reported in the balance sheet approximates the fair value for cash and cash equivalents, short-term borrowings, current maturities of long-term debt, and all other variable rate debt (including borrowings under the Credit Agreements). Fair values for equity securities, and long-term public debt issued by the Company are based on quoted market prices, where available. For equity securities not actively traded, fair values are estimated by using quoted market prices of comparable instruments or, if there are no relevant comparable instruments, on pricing models or formulas using current assumptions. The fair value of limited partnerships, other investments, and notes receivable are estimated by discounting expected future cash flows using a current market rate applicable to the yield, considering the credit quality and maturity of the investment. The fair value for the Company's other fixed rate long-term debt is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Fair values for the Company's off-balance-sheet instruments (letters of credit, commitments to extend credit, and lease guaranties) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counter parties' credit standing. The fair value of the Company's off-balance-sheet instruments at June 30, 1997, was not material. F-28 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) The carrying amounts and fair values of the Company's financial instruments at June 30, 1996 and 1997, are as follows:
JUNE 30, 1996 JUNE 30, 1997 ----------------- ----------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE Cash and cash equivalents.................. $ 39,649 $ 39,649 $ 19,420 $ 19,420 Investment securities: Short-term equity securities............. 10,362 10,362 16,094 16,122 Short-term other investments............. 136 167 9,553 9,592 Long-term other investments.............. 585 1,451 4,120 4,617 Notes receivable: Current.................................. 170,384 170,384 -- -- Long-term................................ 3,702 3,702 1,300 1,300 Short-term debt............................ 76,535 76,535 15,629 15,629 Long-term debt: Bank credit agreement.................... 112,500 112,500 177,250 177,250 Senior notes and subordinated deben- tures................................... 260,125 264,759 261,233 270,995 Industrial revenue bonds................. 1,500 1,500 1,500 1,500 Capitalized leases....................... 65 65 1,897 1,897 Other.................................... 2,756 2,756 6,835 6,835
17. RESTRUCTURING CHARGES In Fiscal 1996, the Company recorded restructuring charges in the Aerospace Fasteners segment in the categories shown below. All costs classified as restructuring were the direct result of formal plans to close plants, to terminate employees, or to exit product lines. Substantially all of these plans have been executed. Other than a reduction in the Company's existing cost structure and manufacturing capacity, none of the restructuring charges resulted in future increases in earnings or represented an accrual of future costs. The costs included in restructuring were predominately nonrecurring in nature and consisted of the following significant components: Write down of inventory to net realizable value related to discontinued product lines (a).................................... $ 156 Write down of fixed assets related to discontinued product lines... 270 Severance benefits for terminated employees (substantially all paid within twelve months)............................................. 1,368 Plant closings facility costs (b).................................. 389 Contract termination claims........................................ 136 ------ $2,319 ======
- --------------------- (a) Write down was required because product line was discontinued. (b) Includes lease settlements, write-off of leasehold improvements, maintenance, restoration and clean up costs. 18. RELATED PARTY TRANSACTIONS Corporate office administrative expense recorded by FHC and its predecessors was billed to the Company on a monthly basis during 1995, 1996 and 1997. These costs represent the cost of services incurred on behalf of affiliated companies. Each of these affiliated companies has reimbursed FHC for such services. F-29 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) The Company and its wholly-owned subsidiaries are all parties to a tax sharing agreement whereby the Company files a consolidated federal income tax return. Each subsidiary makes payments to the Company based on the amount of federal income taxes, if any, the subsidiary would have paid if it had filed a separate tax return. Prior to the consolidation of Banner on February 25, 1996, the Aerospace Fasteners segment had sales to Banner of $5,494 and $3,663 in Fiscal 1995, and 1996, respectively. 19. LEASES The Company holds certain of its facilities and equipment under long-term leases. The minimum rental commitments under non-cancelable operating leases with lease-terms in excess of one year, for each of the five years following June 30, 1997, are as follows: $5,182 for 1998, $4,127 for 1999, $2,937 for 2000, $2,271 for 2001, and $1,732 for 2002. Rental expense on operating leases from continuing operations for Fiscal 1995, 1996 and 1997 was $6,695, $6,197, and $4,928, respectively. Minimum commitments under capital leases for each of the five years following June 30, 1997, was $651 for 1998, $693 for 1999, $262 for 2000, $210 for 2001, and $137 for 2002, respectively. At June 30, 1997, the present value of capital lease obligations was $1,897. At June 30, 1997, capital assets leased, included in property, plant, and equipment consisted of: Buildings and improvements....................................... $ 1,396 Machinery and equipment.......................................... 8,017 Furniture and fixtures........................................... 114 Less: Accumulated depreciation................................... (7,700) ------- $ 1,827 =======
20. CONTINGENCIES CL MOTOR FREIGHT ("CL") LITIGATION The Workers Compensation Bureau of the State of Ohio is seeking reimbursement from the Company for up to $5,400 for CL workers compensation claims which were insured under a self-insured program of CL. The Company has contested a significant portion of this claim and believes that the ultimate disposition of this claim will not be material. 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 FII did not comply with Federal Acquisition Regulations and Cost Accounting Standards in accounting for (i) the 1985 reversion to FII of certain assets of terminated defined benefit pension plans, and (ii) pension costs upon the closing of segments of FII's business. The ACO has directed FII to prepare cost impact proposals relating to such plan terminations and segment closings and, following receipt of such cost impact proposals, may seek adjustments to contract prices. The ACO alleges that substantial amounts will be due if such adjustments are made, however an estimate of the possible loss or range of loss from the ACO's assertion cannot be made. The Company believes it has properly accounted for the asset reversions in accordance with applicable accounting standards. The Company has held discussions with the government to attempt to resolve these pension accounting issues. ENVIRONMENTAL MATTERS The Company's operations are subject to stringent Federal, state and local environmental laws and regulations concerning, among other things, the discharge of materials into the environment and the generation, F-30 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) 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 June 30, 1997, the consolidated total recorded liabilities of the Company for environmental matters approximated $8,420, 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 $13,200 on an undiscounted basis. OTHER MATTERS The Company is involved in various other claims and lawsuits incidental to its business, some of which involve substantial amounts. The Company, either on its own or through its insurance carriers, is contesting these matters. In the opinion of management, the ultimate resolution of the legal proceedings, including those aforementioned, will not have a material adverse effect on the financial condition, or future results of operations or net cash flows of the Company. F-31 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) 21. BUSINESS SEGMENT INFORMATION The Company reports in two principal business segments. The Aerospace Fasteners segment includes the manufacture of high performance specialty fasteners and fastening systems. The Aerospace Distribution segment distributes a wide range of aircraft parts and related support services to the aerospace industry. The results of Fairchild Technologies, which is primarily engaged in the designing and manufacturing of capital equipment and systems for recordable compact disc and advance semiconductor manufacturing, are reported under Corporate and Other, along with results two smaller operations. The Company's financial data by business segment is as follows:
1995 1996 1997 Sales: Aerospace Fasteners......................... $215,364 $ 218,059 $ 269,026 Aerospace Distribution (a).................. -- 129,973 411,765 Corporate and Other......................... 41,476 67,330 66,382 Eliminations (b)............................ -- (5,842) (15,213) -------- ---------- ---------- Total Sales................................... $256,840 $ 409,520 $ 731,960 ======== ========== ========== Operating Income (Loss): Aerospace Fasteners (c)..................... $(11,497) $ 135 $ 17,390 Aerospace Distribution (a).................. -- 5,625 30,891 Corporate and Other......................... (20,420) (14,875) (17,764) -------- ---------- ---------- Operating Income (Loss)....................... $(31,917) $ (9,115) $ 30,517 ======== ========== ========== Capital Expenditures: Aerospace Fasteners......................... $ 4,974 $ 3,841 $ 8,964 Aerospace Distribution...................... -- 1,556 4,787 Corporate and Other......................... 937 1,225 8,365 -------- ---------- ---------- Total Capital Expenditures.................... $ 5,911 $ 6,622 $ 22,116 ======== ========== ========== Depreciation and Amortization: Aerospace Fasteners......................... $ 15,619 $ 14,916 $ 16,112 Aerospace Distribution...................... -- 1,341 5,138 Corporate and Other......................... 5,260 5,396 4,685 -------- ---------- ---------- Total Depreciation and Amortization........... $ 20,879 $ 21,653 $ 25,935 ======== ========== ========== Identifiable Assets at June 30: Aerospace Fasteners......................... $290,465 $ 252,200 $ 346,533 Aerospace Distribution...................... -- 329,477 428,436 Corporate and Other......................... 559,829 428,261 292,364 -------- ---------- ---------- Total Identifiable Assets..................... $850,294 $1,009,938 $1,067,333 ======== ========== ==========
- --------------------- (a) Effective February 25, 1996, the Company became the majority shareholder of Banner Aerospace, Inc. and, accordingly, began consolidating their results. (b) Represents intersegment sales from the Aerospace Fasteners segment to the Aerospace Distribution segment. (c) Includes restructuring charges of $2.3 million in Fiscal 1996. F-32 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) 22. FOREIGN OPERATIONS AND EXPORT SALES The Company's operations are located primarily in the United States and Europe. Inter-area sales are not significant to the total sales of any geographic area. The Company's financial data by geographic area is as follows:
1995 1996 1997 Sales by Geographic Area: United States.............................. $175,101 $ 301,957 $ 595,334 Europe..................................... 80,945 107,186 136,626 Other...................................... 794 377 -- -------- ---------- ---------- Total Sales.................................. $256,840 $ 409,520 $ 731,960 ======== ========== ========== Operating Income by Geographic Area: United States.............................. $(31,522) $ (14,903) $ 24,299 Europe..................................... (432) 5,936 6,218 Other...................................... 37 (148) -- -------- ---------- ---------- Total Operating Income....................... $(31,917) $ (9,115) $ 30,517 ======== ========== ========== Identifiable Assets by Geographic Area at June 30: United States.............................. $763,734 $ 932,311 $ 857,943 Europe..................................... 85,668 77,627 209,390 Other...................................... 892 -- -- -------- ---------- ---------- Total Identifiable Assets.................... $850,294 $1,009,938 $1,067,333 ======== ========== ========== Export sales are defined as sales to customers in foreign countries by the Company's domestic operations. Export sales amounted to the following: 1995 1996 1997 Export Sales Europe..................................... $ 13,329 $ 27,330 $ 48,490 Asia (excluding Japan)..................... 1,526 8,920 29,145 Japan...................................... 4,140 11,958 19,819 Canada..................................... 2,810 8,878 17,955 Other...................................... 911 8,565 15,907 -------- ---------- ---------- Total Export Sales........................... $ 22,716 $ 65,651 $ 131,316 ======== ========== ==========
F-33 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) 23. QUARTERLY FINANCIAL DATA (UNAUDITED) The following table of quarterly financial data has been prepared from the financial records of the Company without audit, and reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim periods presented:
FISCAL 1996 QUARTERS ENDED OCT. 1 DEC. 31 MARCH 31 JUNE 30 Net sales................................. $74,929 $71,419 $109,189 $153,983 Gross profit.............................. 15,502 15,134 23,856 40,418 Earnings (loss) from continuing opera- tions.................................... (13,219) (12,818) 151,222 577 per share............................... (.82) (.80) 9.04 .03 Earnings from discontinued operations, net...................................... 3,870 3,420 1,769 127 per share............................... .24 .21 .11 .01 Gain (loss) from disposal of discontinued operations, net.......................... (20) (7) 61,286 (7,673) per share............................... -- -- 3.66 (.45) Extraordinary items, net.................. -- -- (10,436) -- per share............................... -- -- (.62) -- Net earnings (loss)....................... (9,369) (9,405) 203,841 (6,969) per share............................... (.58) (.58) 12.19 (.41) Market price range of Class A Stock High.................................... 6 8 3/4 9 7/8 15 7/8 Low..................................... 2 7/8 4 3/4 8 9 1/4 Close................................... 5 1/8 8 1/2 9 3/8 14 5/8
FISCAL 1997 QUARTERS ENDED SEPT. 29 DEC. 29 MAR. 30 JUNE 30 Net sales................................. $146,090 $159,912 $190,782 $235,176 Gross profit.............................. 39,810 38,775 52,788 73,750 Earnings (loss) from continuing opera- tions.................................... (5,052) (3,638) 435 7,227 per share............................... (.31) (.22) .03 .42 Earnings from discontinued operations, net...................................... 434 661 395 1,659 per share............................... .03 .04 .02 .10 Net earnings (loss)....................... (5,052) (3,638) 435 7,227 per share............................... (.31) (.22) .03 .42 Market price of Class A Stock: High.................................... 17 17 3/4 15 3/8 18 Low..................................... 12 1/4 14 3/8 12 7/8 11 5/8 Close................................... 16 14 5/8 13 3/8 18
Included in earnings (loss) from continuing operations are (i) a $2,528 nonrecurring gain from the sale of SBC in the fourth quarter of Fiscal 1997, (ii) charges to reflect the cost of restructuring the Company's Aerospace Fasteners segment, of $285, $959 and $1,075 in the second, third and fourth quarters of Fiscal 1996, respectively, and (iii) nonrecurring income of $161,406 resulting primarily from the gain on the merger of FCSC into STI in the third quarter of Fiscal 1996. Earnings from discontinued operations, net, includes the results of DME and Data in each Fiscal 1996 quarter as well as the disposition of the Company's investment in STFI in each Fiscal 1996 and 1997 quarter. Extraordinary items relate to the early extinguishment of debt by the Company. (See Note 7). F-34 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) 24. SUBSEQUENT EVENTS On November 20, 1997, Shared Technologies Fairchild Inc. ("STFI"), a corporation of which the Company owns approximately 42% of the outstanding common stock, entered into a merger agreement with Intermedia Communications Inc. ("Intermedia") pursuant to which holders of STFI common stock will receive $15.00 per share in cash, (the "STFI Sale"). In connection with the STFI Sale, the Company has received approximately $85 million in cash (before tax) in exchange for certain preferred stock of STFI and expects to receive an additional $93 million in cash (before tax) in the first three months of 1998 in exchange for the 6,225,000 shares of common stock of STFI owned by the Company. The Intermedia transaction replaces an earlier merger agreement with the Tel-Save Holdings, Inc. under which the Company would have received consideration primarily in common stock of Tel-Save Holdings, Inc. The results of STFI have been accounted for as discontinued operations. The net sales of STFI totaled $108,710, $91,290, and $0 in 1995, 1996, and 1997, respectively. Net earnings from discontinued operations was $9,849, $7,901, and $3,149 in 1995, 1996, and 1997, respectively. On December 8, 1997, Banner and eight of its subsidiaries entered into an Asset Purchase Agreement pursuant to which such subsidiaries have agreed to transfer substantially all of their assets to AlliedSignal Inc. ("Allied") for approximately $345 million of common stock of Allied (the "Disposition"). The assets transferred to Allied consists primarily of Banner's hardware group, which includes the distribution of bearings, nuts, bolts, screws, rivets and other type of fasteners. Approximately $170 million of the common stock received from Allied will be used to repay outstanding term loans of Banner's subsidiaries and related fees. F-35 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 1997 AND SEPTEMBER 28, 1997 (UNAUDITED) (IN THOUSANDS)
JUNE 30, SEPTEMBER 28, ASSETS 1997(*) 1997 Current Assets: Cash and cash equivalents, $4,839 and $4,725 restricted........................................... $ 19,420 $ 9,049 Short-term investments................................ 25,647 18,403 Accounts receivable-trade, less allowances of $8,103 and $9,157........................................... 168,163 172,239 Inventories: Finished goods...................................... 297,223 305,048 Work-in-progress.................................... 26,887 29,812 Raw materials....................................... 18,626 24,807 ---------- ---------- 342,736 359,667 Prepaid expenses and other current assets............. 33,631 39,595 ---------- ---------- Total Current Assets.................................. 589,597 598,953 Property, plant and equipment, net of accumulated depreciation of $134,032 and $127,538......................................... 128,712 132,195 Net assets held for sale.............................. 26,147 26,262 Cost in excess of net assets acquired, (Goodwill) less accumulated amortization of $36,672 and $37,895............................... 154,808 154,233 Investments and advances, affiliated companies........ 55,678 55,337 Prepaid pension assets................................ 59,742 59,512 Deferred loan costs................................... 9,252 11,489 Other assets.......................................... 43,397 45,135 ---------- ---------- Total Assets.......................................... $1,067,333 $1,083,116 ========== ==========
- ------------------ * Condensed from audited financial statements The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-36 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 1997 AND SEPTEMBER 28, 1997 (UNAUDITED) (IN THOUSANDS)
JUNE 30, SEPTEMBER 28, LIABILITIES AND STOCKHOLDERS' EQUITY 1997(*) 1997 Current Liabilities: Bank notes payable and current maturities of long-term debt................................................. $ 47,422 $ 79,781 Accounts payable...................................... 84,953 84,797 Other accrued liabilities............................. 105,199 91,289 Income taxes.......................................... 5,881 -- ---------- ---------- Total Current Liabilities............................. 243,455 255,867 ---------- ---------- Long-Term Liabilities: Long-term debt, less current maturities............... 416,922 412,261 Other long-term liabilities........................... 23,622 22,381 Retiree health care liabilities....................... 43,387 43,284 Noncurrent income taxes............................... 42,013 48,939 Minority interest in subsidiaries..................... 68,309 69,178 ---------- ---------- Total Liabilities..................................... 837,708 851,910 ---------- ---------- Stockholders' Equity: Class A common stock, $0.10 par value; authorized 40,000 shares, 20,272 shares issued (20,234 in June) and 14,031 shares outstanding (13,992 in June).................. 2,023 2,027 Class B common stock, $0.10 par value; authorized 20,000 shares, 2,626 shares issued and outstanding (2,633 in June)................................................ 263 263 Paid-in capital....................................... 71,015 71,105 Retained earnings..................................... 209,949 210,441 Cumulative translation adjustment..................... (1,860) (865) Net unrealized holding loss on available-for-sale securities........................................... (46) (46) Treasury Stock, at cost, 6,242 shares of Class A common stock......................................... (51,719) (51,719) ---------- ---------- Total Stockholders' Equity............................ 229,625 231,206 ---------- ---------- Total Liabilities and Stockholders' Equity............ $1,067,333 $1,083,116 ========== ==========
- ------------------ *Condensed from audited financial statements The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-37 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED STATEMENTS OF EARNINGS (UNAUDITED) FOR THE THREE (3) MONTHS ENDED SEPTEMBER 29, 1996 AND SEPTEMBER 28, 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED --------------------------- SEPTEMBER 29, SEPTEMBER 28, 1996 1997 Revenue: Net sales.................................... $146,090 $213,761 Other income, net............................ 223 5,357 -------- -------- 146,313 219,118 Costs and expenses: Cost of goods sold........................... 106,280 161,699 Selling, general & administrative............ 35,846 45,479 Research and development..................... 23 605 Amortization of goodwill..................... 1,116 1,223 -------- -------- 143,265 209,006 Operating income.............................. 3,048 10,112 Interest expense.............................. 14,672 12,988 Interest income............................... (2,192) (398) -------- -------- Net interest expense.......................... 12,480 12,590 Investment income (loss), net................. (375) 1,897 Equity in earnings of affiliates.............. 1,877 1,692 Minority interest............................. (785) (788) -------- -------- Earnings (loss) from continuing operations be- fore taxes................................... (8,715) 323 Income tax benefit............................ 3,663 110 -------- -------- Earnings (loss) from continuing operations be- fore discontinued operations................. (5,052) 433 Earnings from discontinued operations......... 434 59 -------- -------- Net earnings (loss)........................... $ (4,618) $ 492 ======== ======== Primary earnings (loss) per share............. $ (.28) $ .03 Fully diluted earnings (loss) per share....... (.28) .03 Weighted average number of shares used in com- puting earnings per share: Primary..................................... 16,425 17,457 Fully diluted............................... 16,425 17,588
The accompanying notes to summarized financial information are an integral part of these statements. F-38 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE (3) MONTHS ENDED SEPTEMBER 29, 1996 AND SEPTEMBER 28, 1997 (IN THOUSANDS)
THREE MONTHS ENDED --------------------------- SEPTEMBER 29, SEPTEMBER 28, 1996 1997 Cash flows provided by (used for) Operations: Operations: Net earnings (loss).............................. $ (4,618) $ 492 Depreciation and amortization.................... 5,268 6,857 Accretion of discount on long-term liabilities... 1,100 34 Distributed earnings of affiliates, net.......... 1,499 715 Minority interest................................ 785 788 Changes in assets and liabilities................ (49,923) (45,729) -------- -------- Net cash used for operations..................... (45,889) (36,843) Investments: Net proceeds from the sale of discontinued opera- tions........................................... 173,719 -- Purchase of property, plant and equipment........ (2,131) (10,206) Net proceeds received from investments........... 15 7,815 Changes in net assets held for sale.............. (1,230) (139) Other, net....................................... 5 45 -------- -------- Net cash provided by (used for) investments...... 170,378 (2,485) Financing: Proceeds from issuance of debt................... 33,627 95,109 Debt repayments and repurchase of debentures, net............................................. (77,783) (67,698) Issuance of Class A common stock................. 522 149 -------- -------- Net cash provided by (used for) financing........ (43,634) 27,560 Effects of exchange rate changes on cash........... 594 1,397 Net increase (decrease) in cash and cash equiva- lents............................................. 81,449 (10,371) Cash and cash equivalents, beginning of period..... 39,649 19,420 -------- -------- Cash and cash equivalents, end of period........... $121,098 $ 9,049 ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-39 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 29, 1996 and September 28, 1997 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 $4,839 and $4,725 of restricted cash on June 30, 1997 and September 28, 1997, respectively, all of which is maintained as collateral for certain debt facilities. F-40 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) 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 29, SEPTEMBER 28, 1996 1997 Net sales........................................ $80,037 $82,025 Gross profit..................................... 34,997 35,686 Earnings from continuing operations.............. 4,052 2,501 Net earnings..................................... 4,052 2,501
The Company owns approximately 31.9% of Nacanco Paketleme common stock. The Company recorded equity earnings of $1,877 and $1,692 from this investment for the three months ended September 29, 1996 and September 28, 1997, 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 $434 and $59 from these investments during the three months ended September 29, 1996 and September 28, 1997, respectively. On November 20, 1997, Shared Technologies Fairchild Inc. ("STFI"), a corporation of which the Company owns approximately 42% of the outstanding common stock, entered into a merger agreement with Intermedia Communications Inc. ("Intermedia") pursuant to which holders of STFI common stock will receive $15.00 per share in cash, (the "STFI Sale"). In connection with the STFI Sale, the Company has received approximately $85 million in cash (before tax) in exchange for certain preferred stock of STFI and expects to receive an additional $93 million in cash (before tax) in the first three months of 1998 in exchange for the 6,225,000 shares of common stock of STFI owned by the Company. The Intermedia transaction replaces an earlier merger agreement with the Tel-Save Holdings, Inc. under which the Company would have received consideration primarily in common stock of Tel-Save Holdings, Inc. On December 8, 1997, Banner and eight of its subsidiaries entered into an Asset Purchase Agreement pursuant to which such subsidiaries have agreed to transfer substantially all of their assets to AlliedSignal Inc. ("Allied") for approximately $345 million of common stock of Allied (the "Disposition"). The assets transferred to Allied consists primarily of Banner's hardware group, which includes the distribution of bearings, nuts, bolts, screws, rivets and other type of fasteners. Approximately $170 million of the common stock received from Allied will be used to repay outstanding term loans of Banner's subsidiaries and pay related fees. 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 F-41 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) 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. 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. 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 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 F-42 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) 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. F-43 SCHEDULE I THE FAIRCHILD CORPORATION CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANY BALANCE SHEETS (NOT CONSOLIDATED) (IN THOUSANDS)
JUNE 30, JUNE 30, 1996 1997 ASSETS Current assets: Cash and cash equivalents.................................. $ 1,887 $ 234 Accounts receivable........................................ 179 384 Prepaid expenses and other current assets.................. 192 250 -------- -------- Total current assets........................................ 2,258 868 Property, plant and equipment, less accumulated depreciation............................................... 628 486 Investments in subsidiaries................................. 391,958 390,355 Investments and advances, affiliated companies.............. 3,047 1,435 Goodwill.................................................... 4,263 4,133 Noncurrent tax assets....................................... 14,548 29,624 Other assets................................................ 3,510 2,403 -------- -------- Total assets................................................ $420,212 $429,304 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses...................... $ 7,735 $ 8,315 -------- -------- Total current liabilities................................... 7,735 8,315 Long-term debt.............................................. 180,141 190,567 Other long-term liabilities................................. 1,168 797 -------- -------- Total liabilities........................................... 189,044 199,679 Stockholders' equity: Class A common stock........................................ 2,000 2,023 Class B common stock........................................ 263 263 Retained earnings and other equity.......................... 228,905 227,339 -------- -------- Total stockholders' equity.................................. 231,168 229,625 -------- -------- Total liabilities and stockholders' equity.................. $420,212 $429,304 ======== ========
The accompanying Notes are an integral part of these Condensed Financial Statements. F-44 SCHEDULE I THE FAIRCHILD CORPORATION CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANY STATEMENT OF EARNINGS (NOT CONSOLIDATED) (IN THOUSANDS)
FOR THE YEARS ENDED JUNE 30, ------------------------------- 1995 1996 1997 Costs and Expenses: Selling, general & administrative........... $ 3,920 $ 5,148 $ 3,925 Amortization of goodwill.................... 130 130 130 --------- --------- --------- 4,050 5,278 4,055 Operating income............................. (4,050) (5,278) (4,055) Net interest expense......................... 29,027 28,387 25,252 Investment income, net....................... 434 1 16 Equity in earnings of affiliates............. (409) 269 480 Nonrecurring expense......................... -- (1,064) -- --------- --------- --------- Loss from continuing operations before taxes....................................... (33,920) (34,459) (28,811) Income tax provision (benefit)............... (18,838) (12,509) (15,076) --------- --------- --------- Loss from continuing operations before equity in earnings of subsidiaries................. (15,082) (21,950) (13,735) Equity in earnings of subsidiaries........... (42,940) 204,915 11,917 Earnings from discontinued operations, net... 3,149 17,087 23,843 Extraordinary items, net..................... -- (10,346) 355 --------- --------- --------- Net earnings (loss).......................... $ (33,824) $ 189,706 $ 1,331 ========= ========= =========
The accompanying notes are an integral part of these condensed financial statements. F-45 SCHEDULE I THE FAIRCHILD CORPORATION CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANY STATEMENT OF CASH FLOWS (NOT CONSOLIDATED) (IN THOUSANDS)
FOR THE YEARS ENDED JUNE 30, ------------------------------ 1995 1996 1997 Cash provided by (used for) operations.......... $(9,607) $ 36,916 $(14,271) Investing activities: Equity investments in affiliates............... 1,356 (21) 2,092 -------- --------- --------- 1,356 (21) 2,092 Financing activities: Proceeds from issuance of intercompany debt.... 7,400 -- 9,400 Debt repayments................................ -- (42,265) -- Issuance of common stock....................... -- 1,509 1,126 -------- --------- --------- 7,400 (40,756) 10,526 -------- --------- --------- Net decrease in cash............................ $ (851) $ (3,861) $ (1,653) ======== ========= =========
The accompanying Notes are an integral part of these Condensed Financial Statements. F-46 SCHEDULE I THE FAIRCHILD CORPORATION CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANY NOTES TO FINANCIAL STATEMENTS (NOT CONSOLIDATED) (IN THOUSANDS) 1. BASIS OF PRESENTATION In accordance with the requirements of Regulation S-X of the Securities and Exchange Commission, the financial statements of the Company are condensed and omit many disclosures presented in the consolidated financial statements and the notes thereto. 2. LONG-TERM DEBT
JUNE 30, JUNE 30, 1996 1997 12% Inter. Debentures Due 2001............................... 120,280 125,544 13 1/8% Sub. Debentures Due 2006............................. 35,061 35,189 13% Jr. Sub. Debenture Due 2007.............................. 24,800 29,834 -------- -------- $180,141 $190,567 ======== ========
Maturities of long-term debt for the next five years are as follows: no maturities in 1998, $30,335 in 1999, $31,520 in 2000, $31,713 in 2001, and $37,320 in 2002. 3. DIVIDENDS FROM SUBSIDIARIES Cash dividends paid to The Fairchild Corporation by its consolidated subsidiaries were $10,000, $42,100, and $10,000 in Fiscal 1997, 1996, and 1995, respectively. 4. CONTINGENCIES The Company is involved in various other claims and lawsuits incidental to its business, some of which involve substantial amounts. The Company, either on its own or through its insurance carriers, is contesting these matters. In the opinion of management, the ultimate resolution of the legal proceedings will not have a material adverse effect on the financial condition, or future results of operations or net cash flows for the Company. F-47 THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS Changes in the allowance for doubtful accounts are as follows:
FOR THE YEARS ENDED JUNE 30, ----------------------- 1997 1996 1995 ------ ------- ------ (IN THOUSANDS) Beginning balance...................................... $6,327 $ 3,971 $2,284 Charged to cost and expenses........................... 1,999 2,099 1,868 Charges to other accounts (a).......................... 491 1,970 (86) Amounts written off.................................... (714) (1,713) (95) ------ ------- ------ Ending balance......................................... $8,103 $ 6,327 $3,971 ====== ======= ======
- --------------------- (a) Recoveries of amounts written off in prior periods, foreign currency translation and the change in related noncurrent taxes. F-48 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN- FORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO- RIZED BY THE COMPANY, ANY SELLING STOCKHOLDER, ANY UNDERWRITER OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES, OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, TO ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHO- RIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALI- FIED TO DO SO, OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SO- LICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUN- DER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE IN- FORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------ TABLE OF CONTENTS
PAGE Available Information.................................................... 2 Incorporation of Certain Information by Reference........................ 2 Prospectus Summary....................................................... 3 The Company.............................................................. 3 Risk Factors............................................................. 9 Use of Proceeds.......................................................... 12 Dividend Policy.......................................................... 12 Price Range of Class A Common Stock...................................... 12 Capitalization........................................................... 13 Selected Consolidated Financial Data..................................... 14 Pro Forma Consolidated Financial Statements.............................. 15 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 21 Business................................................................. 30 Management............................................................... 39 Principal and Selling Stockholders....................................... 42 The Disposition.......................................................... 45 Description of Capital Stock............................................. 46 Description of the New Credit Facility................................... 48 Underwriting............................................................. 49 Shares Eligible for Future Sale.......................................... 51 Legal Matters............................................................ 51 Experts.................................................................. 51 Index to Financial Statements............................................ F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 3,700,000 SHARES THE FAIRCHILD CORPORATION CLASS A COMMON STOCK ---------------- PROSPECTUS ---------------- DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION BT ALEX. BROWN SBC WARBURG DILLON READ INC. , 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than underwriting discounts and commissions, incurred in connection with the sale of Common Stock being registered (all amounts are estimated except the SEC registration fee, the NASD filing fee and the New York Stock Exchange listing fee). The Company will bear all expenses incurred in connection with the sale of the Common Stock being registered hereby. SEC Registration Fee................................................ $53,360 NASD Filing Fee..................................................... 18,109 New York Stock Exchange Listing Fee................................. 17,500 Pacific Exchange Listing Fee........................................ 7,500 Printing............................................................ * Legal Fees and Expenses............................................. * Accounting Fees and Expenses........................................ * Stock Certificates and Transfer Agent Fees.......................... * Miscellaneous....................................................... * ------- Total............................................................. $ * =======
- --------------------- * To be completed by amendment. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law (the "DGCL") makes provision for the indemnification of officers and directors of corporations in terms sufficiently broad to indemnify the officers and directors of the registrant under certain circumstances for liabilities (including reimbursement of expenses incurred) arising under the Securities Act of 1933, as amended (the "Act"). The registrant's Bylaws (the "Bylaws") provide that the registrant may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the registrant), by reason of the fact that he is or was a director, officer, employee or agent of the registrant or is or was serving at the request of the registrant as a director, officer, employee or agent of another corporation or enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding. ITEM 16. EXHIBITS. (a) Exhibits
EXHIBIT NO. DESCRIPTION *1.1 Form of Underwriting Agreement. 3.1 Registrant's Restated Certificate of Incorporation (incorporated by reference to Exhibit "C" of Registrant's Proxy Statement dated October 27, 1989). 3.2 Registrant's Amended and Restated By-Laws (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996). 4.1 Specimen of Class A Common Stock certificate (incorporated by reference to Registration Statement No. 33-15359 on Form S-2).
II-1
EXHIBIT NO. DESCRIPTION 4.2 Specimen of Class B Common Stock certificate (incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1989 (the "1989 10-K")). 4.3 Form of Indenture between Registrant and J. Henry Schroder Bank & Trust Company, pursuant to which Registrant's 13 1/8% Subordinated Debentures due 2006 (the "Senior Debentures") were issued (the "Debenture Indenture"), and specimen of Senior Debenture (incorporated by reference to Registration Statement No. 33-3521 on Form S-2). 4.4 First Supplemental Indenture dated as of November 26, 1986, to the Debenture Indenture (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1986 (the "December 1986 10-Q")). 4.5 Form of Indenture between Registrant and Manufacturers Hanover Trust Company pursuant to which Registrant's 12 1/4% Senior Subordinated Notes due 1996 (the "Senior Notes") were issued (the "Note Indenture"), and specimen of Senior Note (incorporated by reference to Registration Statement No. 33-03521 on Form S-2). 4.6 First Supplemental Indenture dated as of November 26, 1986, to the Note Indenture (incorporated by reference to the December 1986 10- Q). 4.7 Indenture between Registrant and Connecticut National Bank (as successor to National Westminster Bank) dated as of October 15, 1986, pursuant to which Registrant's Intermediate Subordinated Debentures due 2001 (the "Intermediate Debentures") were issued, and specimen of Intermediate Debenture (incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1986 (the "September 1986 10-Q")). 4.8 Indenture between Rexnord Acquisition Corp. ("RAC") and Bank of New York (as successor to Irving Trust Company) dated as of March 2, 1987, pursuant to which RAC's Senior Subordinated Debentures due 1999 (the "Rexnord Senior Debentures") were issued (the "Rexnord Senior Indenture"), and specimen of Rexnord Senior Debenture incorporated by reference to Registrant's Annual Report on Form 10-K for fiscal year ended June 30, 1987 (the "1987 10- K"). 4.9 First Supplemental Indenture between Rexnord Inc. ("Rexnord") (as successor to RAC) and Irving Trust Company dated as of July 1, 1987, to the Rexnord Senior Indenture (incorporated by reference to Registration Statement No. 33-15359 on Form S-2). 4.10 Second Supplemental Indenture between Rexnord Holdings Inc., now known as RHI Holdings, Inc. ("RHI") (as successor to Rexnord) and Irving Trust Company dated as of August 16, 1988, to the Rexnord Senior Indenture (incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1988 (the "1988 10-K")). 4.11 Indenture between Registrant and Norwest Bank Minneapolis, N.A. dated as of March 2, 1987, pursuant to which Registrant's Junior Subordinated Debentures due 2007 (the "Junior Debentures") were issued, and specimen of Junior Debenture (incorporated by reference to Final Amendment to Tender Offer Statement on Schedule 14D-1 of Banner Acquisition Corp. ("BAC") dated March 9, 1987). 4.12 First Supplemental Indenture between Registrant and Norwest Bank, Minnesota Bank, N.A., dated as of February 28, 1991, to Indenture dated as of March 2, 1987, relating to the Junior Debentures (incorporated by reference to the 1991 10-K). 4.13 Securities Purchase Agreement dated as of October 15, 1986, by and among Registrant and each of the Purchasers of the Intermediate Debentures (incorporated by reference to the September 1986 10-Q). 4.14 Securities Purchase Agreement dated as of March 2, 1987, by and among Registrant, RAC and each of the Purchasers of the Junior Debentures, the Rexnord Senior Debentures and other securities (incorporated by reference to the 1987 10-K).
II-2
EXHIBIT NO. DESCRIPTION 4.15 Registration Rights Agreement dated as of October 15, 1986, by and among Registrant and each of the purchasers of the Intermediate Debentures (incorporated by reference to the September 1986 10-Q). 4.16 Registration Rights Agreement dated as of March 2, 1987, by and among Registrant, RAC and each of the purchasers of the Junior Debentures, the Rexnord Senior Debentures and other securities (incorporated by reference to Registrant's Report on Form 8-K dated March 17, 1987). *5.1 Opinion of Cahill Gordon & Reindel as to the legality of the Common Stock. 10.1 Asset Purchase Agreement by and among Banner Aerospace, Inc., PB Herndon Aerospace, Inc., Banner Aerospace Services, Inc. and Allied Signal Inc. and AS BAR Herndon LLC dated as of December 8, 1997. 10.2 Asset Purchase Agreement by and among Banner Aerospace, Inc., the Sellers listed on Annex A, AlliedSignal Inc. and AS BAR LLC dated as of December 8, 1997. 23.1 Consent of Arthur Andersen LLP, independent public accountants. *23.2 Consent of Cahill Gordon & Reindel (included in Exhibit 5.1). 24.1 Powers of Attorney (set forth on the signature page of the Registration Statement). 99 Financial statements, related notes thereto and Auditors' Report of RHI Holdings, Inc. for the fiscal year ended June 30, 1997 (incorporated by reference from RHI Holdings, Inc. Form 10-K for the fiscal year ended June 30, 1997).
- --------------------- * To be filed by amendment. ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) For the purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of II-3 the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (4) To deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where interim financial information required to be presented by Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in The City of New York, State of New York on December 9, 1997. /s/ Donald E. Miller By: _________________________________ Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacity indicated on December 9, 1997. SIGNATURE TITLE /s/ Jeffrey J. Steiner* Chairman of the Board, Chief - ------------------------------------- Executive Officer and President JEFFREY J. STEINER (Principal Chief Executive Officer) /s/ Michael T. Alcox* Director - ------------------------------------- MICHAEL T. ALCOX /s/ Melville R. Barlow* Director - ------------------------------------- MELVILLE R. BARLOW /s/ Mortimer M. Caplin* Director - ------------------------------------- MORTIMER M. CAPLIN /s/ Colin M. Cohen* Senior Vice President, Chief - ------------------------------------- Financial Officer, Controller and COLIN M. COHEN Director (Principal Accounting Officer) (Principal Financial Officer) /s/ Philip David* Director - ------------------------------------- PHILIP DAVID /s/ Harold J. Harris* Director - ------------------------------------- HAROLD J. HARRIS II-5 SIGNATURE TITLE /s/ Samuel J. Krasney* Vice Chairman and Director - ------------------------------------- SAMUEL J. KRASNEY /s/ Daniel Lebard* Director - ------------------------------------- DANIEL LEBARD /s/ Jacques S. Moskovic* Director - ------------------------------------- JACQUES S. MOSKOVIC /s/ Herbert S. Richey* Director - ------------------------------------- HERBERT S. RICHEY /s/ Moshe Sanbar* Director - ------------------------------------- MOSHE SANBAR /s/ Robert A. Sharpe, II* Director - ------------------------------------- ROBERT A. SHARPE, II /s/ Eric I. Steiner* Director - ------------------------------------- ERIC I. STEINER /s/ Donald E. Miller Attorney-in-Fact - ------------------------------------- - ---------------- * By Attorney-in-Fact II-6 INDEX TO EXHIBITS
SEQUENTIALLY NUMBERED EXHIBIT NO. DESCRIPTION PAGE NUMBER *1.1 Form of Underwriting Agreement. 3.1 Registrant's Restated Certificate of Incorporation (incorporated by reference to Exhibit "C" of Registrant's Proxy Statement dated October 27, 1989). 3.2 Registrant's Amended and Restated By-Laws (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996). 4.1 Specimen of Class A Common Stock certificate (incorporated by reference to Registration Statement No. 33-15359 on Form S-2). 4.2 Specimen of Class B Common Stock certificate (incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1989 (the "1989 10-K")). 4.3 Form of Indenture between Registrant and J. Henry Schroder Bank & Trust Company, pursuant to which Registrant's 13 1/8% Subordinated Debentures due 2006 (the "Senior Debentures") were issued (the "Debenture Indenture"), and specimen of Senior Debenture (incorporated by reference to Registration Statement No. 33-3521 on Form S-2). 4.4 First Supplemental Indenture dated as of November 26, 1986, to the Debenture Indenture (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1986 (the "December 1986 10-Q")). 4.5 Form of Indenture between Registrant and Manufacturers Hanover Trust Company pursuant to which Registrant's 12 1/4% Senior Subordinated Notes due 1996 (the "Senior Notes") were issued (the "Note Indenture"), and specimen of Senior Note (incorporated by reference to Registration Statement No. 33-03521 on Form S-2). 4.6 First Supplemental Indenture dated as of November 26, 1986, to the Note Indenture (incorporated by reference to the December 1986 10-Q). 4.7 Indenture between Registrant and Connecticut National Bank (as successor to National Westminster Bank) dated as of October 15, 1986, pursuant to which Registrant's Intermediate Subordinated Debentures due 2001 (the "Intermediate Debentures") were issued, and specimen of Intermediate Debenture (incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1986 (the "September 1986 10-Q")). 4.8 Indenture between Rexnord Acquisition Corp. ("RAC") and Bank of New York (as successor to Irving Trust Company) dated as of March 2, 1987, pursuant to which RAC's Senior Subordinated Debentures due 1999 (the "Rexnord Senior Debentures") were issued (the "Rexnord Senior Indenture"), and specimen of Rexnord Senior Debenture incorporated by reference to Registrant's Annual Report on Form 10-K for fiscal year ended June 30, 1987 (the "1987 10-K"). 4.9 First Supplemental Indenture between Rexnord Inc. ("Rexnord") (as successor to RAC) and Irving Trust Company dated as of July 1, 1987, to the Rexnord Senior Indenture (incorporated by reference to Registration Statement No. 33-15359 on Form S-2).
SEQUENTIALLY NUMBERED EXHIBIT NO. DESCRIPTION PAGE NUMBER 4.10 Second Supplemental Indenture between Rexnord Holdings Inc., now known as RHI Holdings, Inc. ("RHI") (as successor to Rexnord) and Irving Trust Company dated as of August 16, 1988, to the Rexnord Senior Indenture (incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1988 (the "1988 10-K")). 4.11 Indenture between Registrant and Norwest Bank Minneapolis, N.A. dated as of March 2, 1987, pursuant to which Registrant's Junior Subordinated Debentures due 2007 (the "Junior Debentures") were issued, and specimen of Junior Debenture (incorporated by reference to Final Amendment to Tender Offer Statement on Schedule 14D-1 of Banner Acquisition Corp. ("BAC") dated March 9, 1987). 4.12 First Supplemental Indenture between Registrant and Norwest Bank, Minnesota Bank, N.A., dated as of February 28, 1991, to Indenture dated as of March 2, 1987, relating to the Junior Debentures (incorporated by reference to the 1991 10-K). 4.13 Securities Purchase Agreement dated as of October 15, 1986, by and among Registrant and each of the Purchasers of the Intermediate Debentures (incorporated by reference to the September 1986 10-Q). 4.14 Securities Purchase Agreement dated as of March 2, 1987, by and among Registrant, RAC and each of the Purchasers of the Junior Debentures, the Rexnord Senior Debentures and other securities (incorporated by reference to the 1987 10-K). 4.15 Registration Rights Agreement dated as of October 15, 1986, by and among Registrant and each of the purchasers of the Intermediate Debentures (incorporated by reference to the September 1986 10-Q). 4.16 Registration Rights Agreement dated as of March 2, 1987, by and among Registrant, RAC and each of the purchasers of the Junior Debentures, the Rexnord Senior Debentures and other securities (incorporated by reference to Registrant's Report on Form 8-K dated March 17, 1987). *5.1 Opinion of Cahill Gordon & Reindel as to the legality of the Common Stock. 10.1 Asset Purchase Agreement by and among Banner Aerospace, Inc., PB Herndon Aerospace, Services, Inc., Banner Aerospace Services, Inc. and Allied Signal Inc. and AS Bar Herndon LLC dated as of December 8, 1997. 10.2 Asset Purchase Agreement by and among Banner Aerospace, Inc., the sellers listed on Annex A, Allied Signal Inc. and AS BAR LLC dated as of December 8, 1997. 23.1 Consent of Arthur Andersen LLP, independent public accountants. *23.2 Consent of Cahill Gordon & Reindel (included in Exhibit 5.1). Powers of Attorney (set forth on the signature page 24.1 of the Registration Statement). 99 Financial statements, related notes thereto and Auditors' Report of RHI Holdings, Inc. for the fiscal year ended June 30, 1997 (incorporated by reference from RHI Holdings, Inc. Form 10-K for the fiscal year ended June 30, 1997).
- --------------------- * To be filed by amendment. EX-10.1 2 ASSET PURCH. ARG. BET. BANNER AND ALLIED EXHIBIT 10.1 _______________________________________________ ASSET PURCHASE AGREEMENT by and among Banner Aerospace, Inc., PB Herndon Aerospace, Inc., Banner Aerospace Services, Inc. and AlliedSignal Inc. and AS BAR PBH LLC dated as of December 8, 1997 _______________________________________________ TABLE OF CONTENTS Page ---- ARTICLE I The Transaction 1.1 Purchase and Sale.................................................. 1 1.2 Acquisition of Assets.............................................. 1 1.3 Assumption of Assumed Liabilities.................................. 5 1.4 Initial Purchase Price............................................. 8 1.5 Escrow of Shares................................................... 8 1.6 Closing............................................................ 9 1.7 Deliveries and Proceedings at the Closing.......................... 9 1.8 Stock Legend....................................................... 10 ARTICLE II Representations And Warranties Of Parent And Sellers 2.1 Qualification...................................................... 11 2.2 Ownership of the Sellers........................................... 11 2.3 Authorization and Enforceability................................... 12 2.4 No Violation of Laws or Agreements................................. 12 2.5 Consents........................................................... 12 2.6 Financial Statements............................................... 13 2.7 No Changes......................................................... 13 2.8 Contracts.......................................................... 14 2.9 Permits and Compliance With Laws Generally......................... 16 2.10 Environmental Matters.............................................. 17 2.11 Transactions with Affiliates....................................... 18 2.12 Title.............................................................. 18 2.13 Acquired Real Property............................................. 18 2.14 Taxes.............................................................. 20 2.15 Intellectual Property and Technology............................... 21 2.16 Brokerage.......................................................... 22 2.17 Product Warranties and Guarantees.................................. 22 2.18 Products Liability................................................. 22 -i- TABLE OF CONTENTS (continued) Page ---- 2.19 Labor Matters...................................................... 22 2.20 Employee Benefits.................................................. 23 2.21 No Pending Litigation or Proceedings............................... 25 2.22 Insurance.......................................................... 25 2.23 Customers; Suppliers............................................... 26 2.24 Condition of Assets................................................ 26 2.25 All Assets......................................................... 26 2.26 [Intentionally omitted.]........................................... 26 2.27 Securities Matters................................................. 26 2.28 SEC Filings........................................................ 27 2.29 [Intentionally omitted.]........................................... 27 2.30 Business Conduct................................................... 27 ARTICLE III Representations And Warranties Of AlliedSignal and Buyer 3.1 Organization and Good Standing..................................... 27 3.2 Authorization and Enforceability................................... 28 3.3 No Violation of Laws or Agreements................................. 28 3.4 Consents........................................................... 28 3.5 AlliedSignal Common Stock.......................................... 28 3.6 SEC Filings........................................................ 29 3.7 Financial Statements............................................... 29 3.8 Brokerage.......................................................... 29 ARTICLE IV Additional Covenants 4.1 Conduct of Business................................................ 29 4.2 Mutual Covenants................................................... 32 4.3 Filings and Authorizations......................................... 32 4.4 Public Announcement................................................ 33 4.5 Investigation...................................................... 33 4.6 Taxes.............................................................. 34 4.7 Certain Deliveries................................................. 36 -ii- TABLE OF CONTENTS (continued) Page ---- 4.8 Consents........................................................... 36 4.9 Releases........................................................... 36 4.10 Real Property...................................................... 36 4.11 Environmental...................................................... 37 4.12 Ancillary Agreements............................................... 37 4.13 Reasonable Best Efforts............................................ 37 4.14 Negotiations....................................................... 37 4.15 U.S. Government Contracts.......................................... 37 4.16 NYSE Listing....................................................... 38 4.17 [Intentionally omitted.]........................................... 38 4.18 Seller Debt........................................................ 38 4.19 [Intentionally omitted.]........................................... 38 4.20 Product Liability Insurance........................................ 38 4.21 United Kingdom Assets.............................................. 38 ARTICLE V Conditions Precedent 5.1 Conditions Precedent to Obligations of AlliedSignal and Buyer...... 38 5.2 Conditions Precedent to Obligations of Parent and Sellers.......... 40 ARTICLE VI Certain Additional Covenants 6.1 Expenses........................................................... 42 6.2 Maintenance of Books and Records................................... 42 6.3 [Intentionally omitted.]........................................... 42 6.4 Non-Competition/Non-Solicitation................................... 42 6.5 Confidential Information........................................... 44 ARTICLE VII Survival 7.1 Survival........................................................... 44 -iii- TABLE OF CONTENTS (continued) Page ---- ARTICLE VIII Employees And Employee Benefits 8.1 Scope of Article................................................... 45 8.2 U.S. Employees..................................................... 45 ARTICLE IX Termination; Miscellaneous 9.1 Termination........................................................ 47 9.2 Further Assurances................................................. 48 9.3 Entire Agreement; Amendments; Waivers.............................. 48 9.4 Benefit; Assignment................................................ 48 9.5 No Presumption..................................................... 48 9.6 Notices............................................................ 49 9.7 Terms Generally.................................................... 49 9.8 Counterparts; Headings............................................. 50 9.9 Severability....................................................... 50 9.10 No Reliance........................................................ 50 9.11 Governing Law...................................................... 50 9.12 Submission to Jurisdiction; Waivers................................ 50 9.13 Bulk Transfer...................................................... 50 9.14 Use of Names....................................................... 51 9.15 Relationship with Aerospace Agreement.............................. 51 9.16 Schedules.......................................................... 51 -iv- ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT, dated as of December 8, 1997, by and among Banner Aerospace, Inc., a Delaware corporation ("Parent"), PB Herndon Aerospace, ------ Inc., a Missouri corporation ("Herndon"), Banner Aerospace Services, Inc., an Ohio corporation ("BAS") (Herndon and BAS each individually, a "Seller" and, ------ collectively, "Sellers"), AlliedSignal Inc., a Delaware corporation ------- ("AlliedSignal") and AS BAR PBH LLC, a Delaware limited liability company - -------------- ("Buyer"). - ------- Herndon is engaged in, among other things, the business of supplying to the aerospace industry (i) aircraft hardware (including bearings, nuts, bolts, screws, rivets and other types of fasteners) and (ii) related support services (including Inventory management services) and the BTG of BAS is engaged in, among other things, the business of management information systems (collectively, the "Business"). Buyer desires to purchase, and AlliedSignal desires to cause the purchase of, substantially all of the Assets of Herndon and all of the Assets of the BTG of BAS described on Schedule 2.6(a) (the "BTG Assets") relating to the Business, and Sellers desire to sell and transfer, and Parent desires to cause the sale and transfer of, such Assets to Buyer, all on the terms and subject to the conditions set forth in this Agreement. Except as otherwise expressly provided herein, capitalized terms used herein without definition shall have the meanings assigned to them in Annex A ------- hereto, which is hereby incorporated into this Agreement as if set forth in full herein. NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements contained herein and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I THE TRANSACTION 1.1 Purchase and Sale. Upon the terms and subject to the ----------------- conditions set forth in this Agreement, at the Closing, (i) Sellers shall, and Parent shall cause Sellers to, sell, transfer, convey, assign and deliver to Buyer, and Buyer shall purchase, acquire and accept from the Sellers, all of Sellers' right, title and interest in and to the Purchased Assets, and (ii) Buyer shall pay to Sellers the Initial Purchase Price and Buyer shall assume, and agree to thereafter pay, perform and discharge when due, the Assumed Liabilities. 1.2 Acquisition of Assets. ----------------------- (a) Subject to Section 1.2(b), "Purchased Assets" means all of the ---------------- Assets of Sellers owned, used or held for use in connection with, or that are otherwise related to or required for the conduct of, the Business, including, without limitation, all of the Assets set forth below: 2 (i) all Owned Real Property; (ii) all Equipment; (iii) all Inventory; (iv) all Accounts Receivable; (v) all credits, prepaid expenses, deferred charges, advance payments, security deposits and deposits owned, used or held for use by either Seller with respect to the Business ("Prepaid Expenses") to the extent that such items will accrue to the benefit of Buyer immediately following the Closing; (vi) all Intellectual Property; (vii) all Technology; (viii) all Contracts; (ix) all Permits; (x) all books, records, ledgers, files, documents (including originally executed copies of written Contracts, customer and supplier lists (past, present or future), correspondence, memoranda, forms, lists, plats, architectural plans, drawings and specifications, copies of documents evidencing Intellectual Property or Technology, new product development materials, creative materials, advertising and promotional materials, studies, reports, sales and purchase correspondence, books of account and records relating to the employees of the Business, photographs, records of plant operations and materials used, quality control records and procedures, equipment maintenance records, manuals and warranty information, research and development files, data and laboratory books, inspection processes, in each case, whether in hard copy or magnetic format, in each instance, to the extent used or held for use with respect to the Business or the employees of the Business; (xi) all rights or choses in action arising out of occurrences before or after the Closing Date and related to any portion of the Business, including third party warranties and guarantees and all related claims, credits, rights of recovery and set-off and other similar contractual rights, as to third parties held by or in favor of Sellers and arising out of, resulting from or relating to the Business or the Purchased Assets (collectively, "Third Party Rights"); ------------------ (xii) all rights to insurance and condemnation proceeds relating to the damage, destruction, taking or other impairment of the Purchased Assets which damage, destruction, taking or other impairment occurs on or prior to the Closing Date, except to the extent Buyer receives a credit against the Initial Purchase Price pursuant to Section 1.2(d)(i)(y) or 1.2(d)(ii)(y); 3 (xiii) all Assets that (A) are reflected on the Balance Sheet (other than Assets reflected on the Balance Sheet that are disposed of prior to the Closing Date in accordance with this Agreement) or (B) have been or are acquired by the Sellers after the date of the Balance Sheet and would be reflected on a balance sheet for the Business prepared on a basis consistent with that on which the Balance Sheet was prepared (other than any such Assets that are disposed of prior to the Closing Date in accordance with this Agreement); and (xiv) the Business and the goodwill thereof. (b) Notwithstanding anything to the contrary contained herein, Purchased Assets shall not include any Excluded Assets. "Excluded Assets" --------------- means: (i) cash and cash equivalents on hand or in bank accounts; (ii) all accounts owing between and among each Seller and its Affiliates (including the Sellers under the Aerospace Agreement) other than trade receivables; (iii) except as otherwise set forth herein, Assets attributable or related to any Plan; (iv) all rights of Parent and each Seller under this Agreement; (v) all stock and minute books and similar records of the Sellers; (vi) all Third Party Rights arising out of Non-Assumed Liabilities or Excluded Assets; (vii) all Prepaid Expenses to the extent that such items will not accrue to the benefit of Buyer immediately following the Closing; (viii) all Contracts pursuant to which any business included in the Business or either Seller was purchased (other than the DA Agreement); (ix) all Plans of Sellers (including, without limitation, those referenced on Schedule 2.20(a)(ii)); (x) all Contracts referenced on Schedule 2.8(a)(i) other than (i) the purchase orders described thereon and (ii) distribution agreements with Fairchild Fasteners that are terminable by the Sellers on not more than 60 days notice without any penalty; (xi) the Note for $226,000 payable to Herndon listed on Schedule 2.11(b); and 4 (xii) all rights of any Seller under the Second Amended and Restated Credit Agreement dated as of December 12, 1996, among Parent, Burbank Aircraft Supply, Inc. and other Subsidiaries of Parent, Citicorp USA, Inc. (as Administrative Agent and Arranger), NationsBank, N.A. (as Co- Arranger) and the Institution as Lenders and Issuing Banks thereunder. (c) Nonassignable Rights. Anything in this Agreement to the contrary -------------------- notwithstanding, but subject to AlliedSignal's and Buyer's rights under Section 7.2 of the Aerospace Agreement, this Agreement shall not constitute an agreement to assign any of the Contracts, Intellectual Property, Technology or Permits or any claim or right or any benefit arising thereunder or resulting therefrom if an attempted assignment thereof, without the consent of a third Person thereto, would constitute a breach or other contravention thereof or in any way adversely affect the rights of Buyer thereunder. (Any Asset that, but for this Section 1.2(c) would be sold and assigned at the Closing shall remain a "Purchased Asset" for purposes of this Agreement.) Parent and Sellers will use all reasonable best efforts to obtain the consent of the other parties to any such Contract or Permit for the assignment thereof to Buyer and Buyer shall reasonably cooperate with such efforts. If such consent is not obtained prior to the Closing, or if an attempted assignment thereof would be ineffective or would adversely affect the rights of Parent and Sellers thereunder so that Buyer would not in fact receive all such rights, subject to Section 5.1(d), the Closing shall nevertheless take place and, thereafter, Parent, Sellers and Buyer will cooperate in a mutually agreeable arrangement under which Buyer would obtain the benefits and assume the obligations thereunder (but only to the extent such obligations would have constituted Assumed Liabilities if such assignment occurred on the Closing Date) from and after the Closing Date in accordance with this Agreement, including subcontracting, sublicensing or subleasing to Buyer, or under which Parent and each Seller would enforce for the benefit of Buyer, with Buyer assuming each Seller's obligations to the same extent as if it would have constituted an Assumed Liability and any and all rights of Parent or any Seller against a third Person thereto. Parent and each Seller will pay promptly to Buyer when received all monies received by Parent or any Seller after the Closing Date under any of the Contracts or any claim or right or any benefit arising thereunder to the extent that Buyer would be entitled thereto pursuant hereto. The provisions of this Section 1.2 shall in no way limit the Closing condition set forth in Section 5.1(d). (d) Damage; Condemnation. -------------------- (i) If, prior to the Closing, any Acquired Real Property is damaged by fire, vandalism, acts of God, or other casualty or cause (and such damage is not repaired by the Closing), Buyer shall have the option of (x) accepting such property as it is together with the insurance proceeds, if any, and the right to receive the same, in which case no adjustment shall be made in respect of the decreased value of such Asset pursuant to Section 1.4(b), or (y) excluding such Acquired Real Property from the Purchased Assets and receiving a credit against the Initial Purchase Price equal to the fair market value thereof, in which case no adjustment shall be made in respect of the decreased value of such Asset pursuant to Section 1.4(b) other than such credit against the Initial Purchase Price. If Buyer elects option (x) above, Parent hereby agrees to cooperate with 5 Buyer in any loss adjustment negotiations, legal actions and agreements with the insurance company, and to assign (pursuant to a writing in form satisfactory to Buyer,) to Buyer at Closing its rights to such insurance proceeds (and pay over to Buyer any such proceeds already received), and Parent will not settle any insurance claims or legal actions relating thereto without Buyer's prior written consent. (ii) If, prior to the Closing, all or any portion of any Acquired Real Property is taken by eminent domain, Buyer shall have the option of (x) proceeding with the Closing and accepting the property as affected by such taking, together with all compensation and damages awarded, if any, and the right to receive the same, in which case, no adjustment shall be made in respect of the decreased value of such Asset pursuant to Section 1.4(b), or (y) excluding such Acquired Real Property from the Purchased Assets and receiving credit against the Initial Purchase Price equal to the fair market value thereof, in which case no adjustment shall be made in respect of the decreased value of such Asset pursuant to Section 1.4(b) other than such credit against the Initial Purchase Price. If Buyer elects option (x) above, Parent hereby agrees to assign to Buyer at Closing its rights to such compensation and damages (and pay over to Buyer any such compensation and damages already received), and will not settle any proceedings relating to such taking without Buyer's prior written consent. (iii) Parent shall promptly notify AlliedSignal of any material casualty or any actual or threatened condemnation affecting all or any portion of any Acquired Real Property. Any such notice relating to casualty shall be accompanied by Parent's selection of an architect or engineer to determine the cost of repair and/or replacement. (iv) Nothing in this Section 1.2(d) limits the condition to Closing set forth in Section 5.1(a). 1.3 Assumption of Assumed Liabilities. --------------------------------- (a) "Assumed Liabilities" shall mean (i) all Liabilities of the ------------------- Business (including bank overdrafts, if any) to the extent included on the Closing Date Balance Sheet, (ii) Liabilities under the Contracts, Permits, Intellectual Property or Technology to the extent (but not only to the extent) arising from, and accruing with respect to, the operation of the Business after the Closing, (iii) Liabilities relating to the employees of the Business expressly assumed pursuant to Article VIII and (iv) Liabilities under the DA Agreement. (b) Notwithstanding anything to the contrary contained herein, neither Buyer nor AlliedSignal shall assume or be bound by, or be obligated or responsible for, any Non-Assumed Liabilities. "Non-Assumed Liabilities" shall ----------------------- mean (x) all Liabilities of Sellers relating to the Purchased Assets or the Business and any claims in respect thereof, other than the Assumed Liabilities, and (y) any Liabilities or claims which may be asserted against or imposed upon Buyer by reason of its being a successor or transferee of Sellers or as an acquiror of the Purchased Assets or the Business or otherwise as a matter of law. Without limitation of the foregoing, all of the following shall be Non- Assumed Liabilities for the purposes of this Agreement: 6 (i) any product Liability, or Liability relating to any toxic tort or similar claim for injury to person or property, regardless of when made or asserted that arises out of or is based upon any express or implied representation, warranty, agreement or guarantee made by either Seller or any of its Affiliates, or alleged to have been made by any of such Persons, or that it is imposed or asserted to be imposed by operation of law, in connection with any service performed or product manufactured, distributed or sold by or on behalf of either Seller or any of its Affiliates or which arises out of any condition existing as of the Closing, including any claim relating to any product delivered, manufactured or distributed by either Seller or any of its Affiliates and any claim seeking recovery for consequential damages, lost revenue or income; (ii) except for Assumed Tax Liabilities, any Liability of Parent, DA or either Seller (including under any Contract) for Taxes, including without limitation, any (1) Tax payable (A) with respect to the Business, Assets or operations of Parent or Sellers, (B) by any member of any consolidated, affiliated or unitary group of which Parent or either Seller is a member, or (C) by any other person for whose Tax Parent or either Seller may be liable under Contract or otherwise, and (2) Tax incident to or arising as a consequence of the negotiation or consummation by Parent or any Seller or any member of any affiliate group of which Parent or Sellers is a member of this Agreement and the transactions contemplated hereby; (iii) except as expressly provided in clause (iii) of the definition of Assumed Liabilities, any Liability with respect to compensation or employee benefits of any nature owed to any employees, agents or independent contractors of either Seller or any of its Affiliates, whether or not employed by Buyer after the Closing, or any of their beneficiaries, heirs or assigns, that arises out of or relates to events or conditions to the extent occurring before the Closing, including, but not limited to, Liabilities for supplemental unemployment benefits, vacation pay, sick pay, severance benefits, Liabilities under any Plan whether arising prior to, on or after the Closing Date, Liabilities to provide any retiree benefits to former hourly and/or salaried employees of the Business or any retiree benefits to be provided to current hourly and/or salaried employees of the Business, and any other benefits, withholding tax Liabilities, workers compensation or unemployment compensation premiums, hospitalization or medical claims, occupational injury, disease or disability claims or claims for discrimination, unfair labor practices, violations of the collective bargaining agreements or wrongful discharge; (iv) Liabilities relating to the operation of the Business prior to the Closing arising by operation of law under any common law or statutory doctrine (including successor Liability or de facto merger); (v) any Liability with respect to or arising out of any Contract (A) that is not capable of being assigned to Buyer at the Closing (except to the extent provided in Section 1.2(c)) (B) to the extent arising out of any breach or default thereof by Parent or either Seller on or prior to the Closing Date (including any event occurring on or prior to 7 the Closing Date that, with the passing of time or the giving of notice, or both, would become a breach or default) under any Contract, or (C) required by the terms thereof to be discharged on or prior to the Closing Date; (vi) any Liability of Parent or any of the Sellers or any of their predecessors (including under any Contract) with respect to any claim, action, suit or proceeding made or threatened (whether prior to, at or after the Closing Date) which asserts Losses arising from (x) the presence, at any time prior to the Closing Date, of asbestos at the Acquired Real Property, any other real property owned or leased at any time by Parent, Sellers or any of their past, present or future Subsidiaries or any other third-party location or (y) the presence of asbestos in any product at any time prior to the Closing Date manufactured, used, sold or serviced by Parent, Sellers or any of their past, present or future Subsidiaries, or which otherwise asserts any asbestos-related personal injury or property damage. (vii) any Liability to the extent the existence of such Liability constitutes a breach of any representation or warranty of Parent or any Seller contained in or made pursuant to this Agreement; (viii) any Environmental Liability, including, without limitation, any Environmental Claim that relates to or arises in connection with the Business, the Purchased Assets, or any other Assets (including, but not limited to facilities used for the off-site disposal of waste) formerly owned, leased, operated or used by any of the Sellers or any predecessors-in-interest to any of the Sellers, if the Environmental Claim is based on any act or omission of the Business or any of the Sellers on or prior to the Closing Date; (ix) any Liability in respect of the Excluded Assets; (x) any Debt or other amounts (except to the extent reflected on the Closing Date Balance Sheet) owing by the Sellers to Parent or any of Parent's Affiliates (other than the Sellers) including, without limitation, any negative balances in intercompany accounts, but excluding any trade payables incurred in the ordinary course of business consistent with past practice; (xi) any Liability that arises out of or relates to the employment or termination of employment of any employees, agents or independent contractors by Parent, Sellers or any of their Affiliates, except any such Liability caused by Buyer's failure to perform its obligations under Article VIII; (xii) any Liability to past, present or future stockholders of Parent or Sellers; (xiii) any Liability that arises out of or relates to any claim, action, suit, proceeding or investigation, whether civil or criminal, pending or threatened as of the 8 Closing Date, relating to the conduct or activities of the Business, or the ownership, use or possession of the Acquired Assets, on or prior to the Closing Date; (xiv) any Liability relating to any broker's or finder's fee or commission incurred by Parent, either Seller or any of their Affiliates as a result of the transactions contemplated hereunder; (xv) any Liability arising under, resulting from or relating to the matters referred to on Schedule 2.20(a)(iii), including, without limitation, the Plans described thereon; (xvi) any Liability arising under, resulting from, or relating to matters set forth on Schedule 2.8(a)(i) (other than with respect to the purchase orders described thereon and distributorship agreements with Fairchild Fasteners that are terminable on not more than 60 days notice without any penalty) including, without limitation, the agreement with Shared Technologies Fairchild, Inc. and the tax sharing agreement described thereon, except to the extent reflected on the Closing Date Balance Sheet; and (xvii) except for the Assumed Liabilities, any Liability arising out of or relating to the conduct or activities of the Business (including any predecessor operations) or the ownership, use or possession of the Purchased Assets on or prior to the Closing Date, any Liabilities or claims arising out of or relating to events, circumstances or conditions occurring on or before the Closing Date, and any Liability associated with any other business of Parent, Sellers and their Affiliates. Parent and each Seller hereby irrevocably waives and releases, and has caused the Parent Subsidiaries to waive and release, AlliedSignal and Buyer from all Non-Assumed Liabilities, including any Liabilities created or which arise by statute or common law. 1.4 Initial Purchase Price. The initial purchase price for the ------------------------ Purchased Assets to be paid at the Closing (the "Initial Purchase Price") shall ---------------------- consist of a number of shares of AlliedSignal Common Stock (the "Closing Date ------------ Shares") equal to the number (rounded to the nearest whole share) (the - ------ "Estimated Share Number") obtained by dividing (A) an amount equal to Twenty Two - ----------------------- Million Seven Hundred Seventy-Four Thousand Dollars ($22,774,000) plus (x) the ---- Herndon Adjustment Amount if the Herndon Adjustment Amount is a positive number and minus (y) the Herndon Adjustment Amount if the Herndon Adjustment Amount is ----- a negative number, by (B) the Average Trading Price as of the Closing Date, to be issued by Buyer to Sellers in the proportions set forth on Annex 1.4 hereto. ------ The Initial Purchase Price shall be adjusted as provided in Section 1.6(f) and Section 9.15 of the Aerospace Agreement. 1.5 Escrow of Shares. At the Closing, AlliedSignal shall issue and ---------------- deliver to the Escrow Agent (i) the Purchase Price Escrow Shares, to be held in an escrow account pursuant to the terms of the Escrow Agreement until released from escrow pursuant to the terms of Section 1.6(f) of the Aerospace Agreement, and (ii) the Indemnification Escrow Shares, to be held in an escrow account pursuant to the terms of the Escrow Agreement until released as set forth in Section 1.5(b) or (d) of the Aerospace Agreement. 9 1.6 Closing. ------- (a) Closing Date. The closing of the transactions contemplated under ------------ this Agreement (the "Closing") shall take place at 10:00 a.m. Eastern Time at ------- the offices of Hughes Hubbard & Reed LLP, One Battery Park Plaza, New York, New York, on the fifth Business Day after all conditions to the obligations of the parties under Article V and under Article V of the Aerospace Agreement shall have been satisfied or waived (other than those requiring a delivery of a certificate or other document, or the taking of other action, at the Closing and the conditions set forth in Sections 5.1(g) and 5.2 (g) and in Sections 5.1(j) and 5.2(g) of the Aerospace Agreement), or at such other place and on such other date as the parties may mutually agree in writing (such date on which the Closing occurs hereinafter is referred to as the "Closing Date"). Each of the ------------ parties acknowledges that, with respect to the Closing Date, time is of the essence. (b) Effectiveness. The consummation of the transactions contemplated ------------- by this Agreement and the Closing shall be deemed to take place at 11:59 p.m., Eastern Time, on the Closing Date and no transaction shall be deemed to have been completed and no document or certificate shall be deemed to have been delivered until all transactions are completed and all documents are delivered. 1.7 Deliveries and Proceedings at the Closing. Subject to the ------------------------------------------- terms and conditions of this Agreement, at the Closing: (a) Deliveries to AlliedSignal and Buyer. Parent and Sellers shall ------------------------------------ deliver to AlliedSignal and Buyer: (i) bills of sale and instruments of assignment, in forms reasonably satisfactory to Buyer, to evidence the transfer to Buyer of the Purchased Assets (other than the Owned Real Property) in accordance herewith, duly executed by Sellers; (ii) any consents to transfer of all transferable or assignable Contracts and Permits obtained by Parent and the Sellers as of Closing and all consents referred to in Section 5.1(d); (iii) title certificates to any motor vehicles included in the Purchased Assets, duly executed by each Seller with any interest therein (together with any other transfer forms necessary to transfer title to such vehicles); (iv) one or more deeds of conveyance to Buyer of the Owned Real Property, in forms reasonably satisfactory to Buyer, sufficient to transfer to Buyer good and marketable, and insurable, fee simple title to the Owned Real Property included in the Purchased Assets in accordance herewith, duly executed and acknowledged by each Seller with any interest therein and in recordable form; (v) one or more title insurance policies, in form, substance and amount, and issued by title insurance Sellers reasonably acceptable to Buyer, and containing such endorsements and affirmative coverage as Buyer shall reasonably 10 request, insuring Buyer's fee simple title to the Owned Real Property subject only to the Permitted Liens, the cost of which shall be paid 50% by Parent and Sellers and 50% by AlliedSignal and Buyer; (vi) U.C.C. termination statements in recordable form and other appropriate releases, in form and substance reasonably satisfactory to Buyer, with respect to all recorded Liens in the Purchased Assets; (vii) the Foreign Investment in Real Property Tax Act Certification and Affidavit for each parcel of Owned Real Property, in form reasonably satisfactory to Buyer, duly executed by each Seller transferring Owned Real Property (the "FIRPTA Affidavit"); ---------------- (viii) the certificates and other documents required to be delivered by Parent and Sellers pursuant to Section 5.1 and certified resolutions evidencing the authority of Parent and Sellers as set forth in Section 2.3; (ix) all such other documents and instruments of conveyance as shall, in the reasonable opinion of Buyer, be necessary to transfer to Buyer the Purchased Assets in accordance herewith and, where necessary or desirable, in recordable form. (b) Deliveries to Parent and Sellers. AlliedSignal and Buyer will -------------------------------- deliver to Parent and Sellers, as applicable: (i) the Closing Date Shares, issued and delivered to Sellers in the proportions set forth in Annex 1.4 hereto; (ii) an assumption agreement, in form reasonably satisfactory to Parent, to evidence the assumption by Buyer of the Assumed Liabilities in accordance with Section 1.3, duly executed by Buyer; (iii) the certificates and other documents required to be delivered by AlliedSignal and Buyer pursuant to Section 5.2 and certified resolutions evidencing the authority of AlliedSignal and Buyer as set forth in Section 3.2; and (iv) all such other documents and instruments of assumption as shall, in the reasonable opinion of Parent, be necessary for Buyer to assume the Assumed Liabilities in accordance herewith. 1.8 Stock Legend. Each certificate representing the shares of ------------ AlliedSignal Common Stock issued to Sellers at the Closing shall be endorsed with a legend in substantially the following form: THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY 11 NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE TRANSFER IS MADE IN COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT OR THE CORPORATION RECEIVES AN OPINION OF COUNSEL FOR THE HOLDERS OF THESE SECURITIES REASONABLY SATISFACTORY TO THE CORPORATION STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENT OF SUCH ACT. ARTICLE II REPRESENTATIONS AND WARRANTIES OF PARENT AND SELLERS Parent and each Seller hereby jointly and severally represent and warrant to AlliedSignal and Buyer as follows: 2.1 Qualification. Parent is a corporation duly organized, validly ------------- existing and in good standing under the laws of the State of Delaware. Each Seller is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction set forth next to such Seller's name on Annex ----- B, and has all requisite corporate power and authority to own and lease its - - Assets and to conduct its Business as presently being conducted. Each Seller is qualified to do business and is in good standing as a foreign corporation in all jurisdictions wherein the nature of its Business or such Seller's ownership or use of its Assets make such qualification necessary, except such failures to be qualified or to be in good standing, if any, which when taken together with all such other failures of such Seller would not have a Material Adverse Effect on such Seller. Neither of the Sellers is currently insolvent, has suspended payments, is subject to any judicial receivership or liquidation proceedings or is in bankruptcy, nor has any such similar proceedings been commenced with respect to either of them. 2.2 Ownership of the Sellers. ------------------------ (a) All of the outstanding shares of capital stock of (or other ownership interests in) Herndon are owned of record and beneficially solely by DA and all of the outstanding shares of capital stock of (or other ownership interests in) BAS are owned of record and beneficially solely by Parent, in each case, free and clear of any Liens. There are no options, warrants, calls, rights or agreements to which Parent, DA or either Seller is a party obligating any of them to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock of (or other ownership interests in) either Seller or obligating Parent, DA or either Seller to grant, extend or enter into any such option, warrant, call, right or agreement. 12 (b) Except as set forth on Schedule 2.2, neither of the Sellers owns any shares of capital stock of (or other ownership interests in) any other Person, including any joint venture. 2.3 Authorization and Enforceability. With respect to each of -------------------------------- Parent and the Sellers: (a) such entity has full corporate power and authority to execute, deliver and perform this Agreement and all other agreements, instruments and documents to be executed in connection herewith (such other agreements and instruments being hereinafter referred to collectively as the "Transaction Documents") to which such entity is a party, (b) the execution, - ---------------------- delivery and performance by such entity of this Agreement and the Transaction Documents to which such entity is a party have been duly authorized by all necessary corporate action on the part of such entity and no approval by the holders of any security issued by Parent is required in connection therewith, (c) this Agreement has been duly executed and delivered by such entity, and, as of the Closing Date, the other Transaction Documents to which any such entity is a party will be duly executed and delivered by such entity, (d) this Agreement is a legal, valid and binding obligation of such entity, enforceable against such entity in accordance with its terms, and (e) as of the Closing Date, each of the other Transaction Documents to which such entity is a party will constitute the legal, valid and binding obligations of such entity, enforceable against such entity in accordance with its terms. 2.4 No Violation of Laws or Agreements. The execution, delivery, ---------------------------------- and performance by Parent and each Seller of this Agreement and the Transaction Documents to which such entities (as applicable) are parties do not, and the consummation by Parent and each Seller (as applicable) of the transactions contemplated hereby and thereby, will not, (a) contravene any provision of the charter, bylaws or any other organizational documents of Parent or either Seller, or (b) except as set forth on Schedule 2.4 and subject, in the case of ------------ clause (i) below, to such exceptions as would not in the aggregate have a Material Adverse Effect, violate, conflict with, result in a breach of, or constitute a default (or an event which would, with the passage of time or the giving of notice or both, constitute a default) under, or result in or permit the termination, modification, acceleration, or cancellation of, or result in the creation or imposition of any Lien of any nature whatsoever upon any of the Purchased Assets or give to others any interests or rights therein under, (i) any personal property lease with payments in excess of $50,000 per year, lease of Real Property, indenture, mortgage, loan or credit agreement, license, instrument, contract, plan, permit or other agreement or commitment, oral or written, to which Parent or either Seller is a party, other than such agreements or commitments involving any customer or supplier of the Business (including any supplier of Intellectual Property), or by which the Business or any of the Purchased Assets may be bound or affected (including without limitation any agreement or instrument pertaining to Debt), or (ii) any judgment, injunction, writ, award, decree, restriction, ruling, or order of any arbitrator or Governmental Entity or any applicable Law to which Parent, either Seller or the Purchased Assets is subject. 2.5 Consents. Except (i) as set forth on Schedule 2.5 or (ii) for -------- ------------ agreements or commitments involving any customer or supplier of the Business (including any supplier of Intellectual Property), no consent, approval or authorization of, or registration or filing with, any Person (governmental or private) is required in connection with the execution, delivery and 13 performance by Parent or either Seller of this Agreement, the other Transaction Documents to which Parent or either Seller is a party, or the consummation by Parent and each Seller (as applicable) of the transactions contemplated hereby or thereby, including without limitation in connection with the assignment of the Contracts and Permits contemplated hereby, except as required by the HSR Act and except for any required consent, approval or authorization of, or registration or filing with a foreign governmental authority. 2.6 Financial Statements. -------------------- (a) Schedule 2.6(a) sets forth (i) an unaudited combined pro forma --------------- balance sheet of the Combined Business as of September 30, 1997 (the "Balance ------- Sheet") and related unaudited combined pro forma statement of income of the - ----- Combined Business for the six months ended September 30, 1997 (together with the Balance Sheet, the "Financial Statements"). The Excluded Assets, the Aerospace -------------------- Excluded Assets, the Non-Assumed Liabilities and the Aerospace Non-Assumed Liabilities are excluded from the Balance Sheet. The Financial Statements are in accordance with the books and records of the Sellers and the Sellers under the Aerospace Agreement and except for the Excluded Assets, the Aerospace Excluded Assets, the Non-Assumed Liabilities, the Aerospace Non-Assumed Liabilities and as set forth in Schedule 2.6(a) fairly present the financial position and results of operations of the Combined Business on a stand-alone basis as of the date and for the period indicated, in conformity with GAAP throughout the period specified and in accordance with the procedures and criteria set forth on Schedule 1.6(a), except as expressly set forth therein and --------------- except that the Financial Statements may omit notes and are subject to normal year-end adjustments which are not, in the aggregate, material. Except as described on Schedule 2.6(a), all fees, charges, costs and expenses associated with the ownership, leasing, operation, maintenance and management of the Combined Business and the Assets owned, used or held for use by the Combined Business have been fully and properly reflected and charged on the Financial Statements in accordance with GAAP (to the extent such items are required to be so reflected and charged in accordance with GAAP). All Purchased Assets, Assumed Liabilities, Aerospace Acquired Assets and Aerospace Assumed Liabilities are disclosed on or reflected in the Balance Sheet except (i) as disclosed on Schedule 2.6(a), and (ii) as disposed of or transferred between September 30, 1997 and the Closing Date in the ordinary course of business consistent with past practice and in accordance with this Agreement. (b) The future tax benefits set forth in the Balance Sheet as of the date hereof represent future tax benefits as of March 31, 1997. No later than 30 days after the date hereof, Parent shall deliver written notice to AlliedSignal of the amount of future tax benefits as of September 30, 1997, and the Balance Sheet shall be adjusted accordingly. 2.7 No Changes. Since September 30, 1997, the Sellers have ------------ conducted the Business only in the ordinary course of business consistent with past practice and, except as set forth on Schedule 2.7, there has not been: ------------ (a) any Material Adverse Effect; 14 (b) any change in the salaries or other compensation payable or to become payable to, or any advance (excluding advances for ordinary business expenses) or loan to, any employee of the Business, or material change or material addition to, or material modification of, other benefits (including any bonus, profit-sharing, pension or other plan in which any of the employees of the Business participate) to which any of the employees of the Business may be entitled, other than in the ordinary course of the Business consistent with past practice; (c) any material change or modification in any manner of the Sellers' existing Inventory management and collection and payment policies, procedures and practices with respect to Inventory and accounts receivable and accounts payable, respectively, of the Business, acceleration of payment of payables or failure to pay or delay in payment of payables and any change in the Sellers' existing policies, procedures and practices, with respect to the provision of discounts, rebates or allowances insofar as they relate to the Business; (d) any cancellation or waiver by either Seller of any right material to the Business or any cancellation or waiver of any material Debts of or claims of the Business against Parent or any other Affiliate of any Seller or any disposition of or failure to keep in effect any rights in, to or for the use of any Permit material to the Business; (e) any damage, destruction or loss, or eminent domain or other condemnation proceeding affecting the Business which individually or in the aggregate has had a Material Adverse Effect, whether or not covered by insurance; (f) any change by either Seller in its method of accounting or keeping its books of account or accounting practices with respect to the Business except as required by GAAP; (g) any acquisition, sale, transfer or other disposition of any material Assets of the Business other than the disposition of (i) Inventory in the ordinary course of the Business consistent with past practice or (ii) Assets not used or useful in the Business; (h) any commencement or termination of any line of business; (i) any action that would be prohibited to be taken after the date of this Agreement under Section 4.1(c); or (j) any agreement in writing or otherwise to take any of the foregoing actions. 2.8 Contracts. --------- (a) As of the date of this Agreement, Schedule 2.8(a) contains a true, --------------- correct and complete list of (i) all Contracts (other than any guarantee of either Seller that does not directly or indirectly support or benefit the Business) to which Parent or any of its Affiliates 15 (other than the Sellers) is a party or which benefit Parent or any of its Affiliates (other than the Sellers); (ii) all Contracts under which either Seller is a licensee or licensor of Intellectual Property or Technology which are material to the Business; (iii) all Contracts under which either Seller is a lessee or lessor of (or has an obligation to lease) Real Property; (iv) all Contracts providing for the formation or operation of a partnership or other joint venture; (v) all material Contracts which afford customers any right to return Inventories at the option of the customer; (vi) all Government Contracts with a backlog in excess of $100,000; (vii) all Contracts requiring forward stocking locations; and (viii) except for agreements or commitments involving any customer or supplier of the Business (including any supplier of Intellectual Property), all other Contracts (other than with respect to which the Business' total annual Liability or expense is less than $1,000,000 per such non-listed Contract). Parent and Sellers have made available to AlliedSignal a correct and complete copy of each written agreement. (b) Except as set forth on Part A of Schedule 2.8(b), with respect to --------------- each Contract described in Schedule 2.8(a), neither Seller nor, to the best of Parent's and each Seller's knowledge, any other party thereto, is in material breach or default and no event has occurred which with notice or lapse of time would constitute a material breach or default, or permit termination, modification, or acceleration, under such Contract. Except as set forth on Part B of Schedule 2.8(b), there are no disputes pending or, to the best of Parent's and each Seller's knowledge, threatened, under or in respect of any of the Contracts described in Schedule 2.8(a) and no counterparty to any such Contract has given notice to either Seller or any Affiliate thereof with respect to any material breach or default hereunder. Each of the Contracts described in Schedule 2.8(a) is in full force and effect and constitutes the legal and binding obligation of, and is legally enforceable against, such Seller as the Contracts relate, and, to the best of Parent's and each Seller's knowledge, any other party thereto, in accordance with its terms. (c) Except as identified with an asterisk on Schedule 2.8(a), each of --------------- the Contracts listed thereon is fully assignable to Buyer without the consent, approval or waiver of any other Person. None of such Contracts contains any provision which, after the Closing, will restrict Buyer from conducting any portion of the Business in any jurisdiction, except such Contracts which may be terminated by Buyer without penalty or Liability on no more than 30 days' notice. With respect to those Contracts that were assigned, novated or subleased to either Seller by a third party, all necessary consents to such assignments, novations or subleases have been obtained. (d) Subject to such exceptions as would not in the aggregate have a Material Adverse Effect, with respect to each and every Government Contract that has a backlog in excess of $100,000 or binding or non-binding bid for such a Government Contract ("Bid") to which either Seller is a party: (i) such Seller has fully complied with all material terms and conditions of such Government Contract or Bid, including all clauses, provisions and requirements incorporated expressly, by reference or by operation of law therein; (ii) such Seller has fully complied with all requirements of Law applicable to such Government Contract or Bid and no Government Contract is subject to any adjustment in price as a result of a claim by the U.S. Government or U.S. Government prime contractor or subcontractor on the basis of (w) defective pricing pursuant to FAR 52.215-22, FAR 52.215-23, FAR 52.215-24, FAR 52.215-25, (x) CAS 16 violations pursuant to FAR 52.230-2, (y) any submission for progress payments of invoices or (z) any claims arising out of or related to the Government Contracts occurring on or before the Closing Date; (iii) all representations and certifications executed, acknowledged or set forth in or pertaining to such Government Contract or bid for a Government Contract were current, accurate and complete as of their effective date, and such Seller has fully complied with all such representations and certifications; (iv) neither the U.S. Government nor any prime contractor, subcontractor or other Person has notified such Seller, either orally or in writing, that such Seller has breached or violated any Law, certification, representation, clause, provision or requirement, (v) no termination for convenience, termination for default, cure notice or show cause notice has been issued; (vi) no cost incurred by such Seller has been questioned or disallowed; and (vii) no money due to such Seller has been (or has attempted to be) withheld or set off. 2.9 Permits and Compliance With Laws Generally__. -------------------------------------------- (a) Subject to such exceptions as would not in the aggregate have a Material Adverse Effect, (i) except as set forth on Part A of Schedule 2.9(a), --------------- the Sellers possess and are in compliance with all Permits required to operate the Business as presently operated and to own, lease or otherwise hold the Purchased Assets under all applicable Laws and (ii) except as set forth on Part B of Schedule 2.9(a), to the best of Parent's and each Seller's knowledge, the Business is conducted by the Sellers in compliance with, and the use, construction and operation of all Real Property constituting any part of the Purchased Assets conforms to, all applicable Laws (including the Occupational Safety and Health Act and the rules and regulations thereunder ("OSHA") and ---- other similar Laws, and zoning, building and other similar Laws) and all restrictions and conditions affecting title. All material Permits of the Sellers are in full force and effect. There are no proceedings pending or, to the best of Parent's and each Seller's knowledge, threatened that seek the revocation, cancellation, suspension or any adverse modification of any material Permits presently possessed by the Sellers. Parent and Sellers are aware of no facts, conditions or circumstances reasonably likely to result in the revocation, cancellation, suspension, or adverse modification of any material Permit. Except as set forth on Part C of Schedule 2.9(a), all material Permits of the Sellers are assignable to and at the Closing will be assigned to Buyer and no approvals or consents are required for such assignment (or continued possession) and the sale of the Business or Purchased Assets hereunder will not result in a default under or termination of any such material Permit. (b) Except as set forth on Schedule 2.9(b), no outstanding notice, --------------- citation, summons or order has been issued, no outstanding complaint has been filed, no outstanding penalty has been assessed and no investigation or review is pending or, to the best of Parent's and each Seller's knowledge, threatened, by any Governmental Entity or other Person with respect to any alleged (i) violation by either Seller relating to the Business or the Purchased Assets of any Law or (ii) failure by either Seller to have any Permit required in connection with the conduct of the Business or otherwise applicable to the Business (including the Purchased Assets) except in such cases as would not in the aggregate have a Material Adverse Effect. 17 2.10 Environmental Matters. As of the Closing Date, except as set ----------------------- forth on Schedule 2.10, ------------- (a) There are no reports in Parent's, the Sellers' or any of their respective Affiliates' possession or control of environmental site assessments or audits of the Business, the Purchased Assets or any other Assets (including but not limited to facilities used for the off-site disposal of waste) formerly owned, leased, operated or used by the Sellers, or any predecessor-in-interest to the Sellers. (b) The Sellers possess and are in compliance with all Environmental Permits required to operate the Business as presently operated and to own, lease or otherwise hold the Purchased Assets under all Environmental Laws. The operations of the Business and Purchased Assets (including the use, construction and operation of all Real Property constituting any part of the Purchased Assets) are in compliance with all Environmental Laws and are conducted in a manner that does not pose a risk to the safety or health of workers or other individuals or to the environment. All Environmental Permits of the Sellers relating to the operation of the Business are in full force and effect. There are no proceedings pending or, to the best of Parent's and each Seller's knowledge, threatened that seek the revocation, cancellation, suspension or any adverse modification of any such Environmental Permits presently possessed by the Sellers. Parent and Sellers are aware of no facts, conditions or circumstances reasonably likely to result in the revocation, cancellation, suspension or adverse modification of any Environmental Permits. (c) There are no environmental conditions with respect to the Business, Purchased Assets or any other Assets (including but not limited to facilities used for the off-site disposal of waste) formerly owned, leased, operated or used by either of the Sellers, or any predecessor-in-interest to either of the Sellers that (i) pose a risk to human health or the environment, or (ii) are otherwise required to be remediated under applicable Environmental Laws due to evidence of soil or groundwater contamination on, under or migrating onto or from the Business, Purchased Assets or any such other Assets. (d) There are no Environmental Claims currently pending nor has Parent, either of the Sellers or any of their respective Affiliates received any notice of an Environmental Claim with respect to the Business, the Purchased Assets, or any other Assets (including, but not limited to, facilities used for the off-site disposal of waste) formerly owned, leased, operated or used by the Sellers or any predecessors-in-interest to the Sellers that a Hazardous Material has been (i) disposed, released, or discharged or (ii) produced, stored, handled, used or emitted onto, under, or from the Business, Purchased Assets or any such other Assets. (e) Neither the Business nor the Purchased Assets are subject to the requirements of any Laws that condition, restrict, prohibit or require notification or disclosure upon the transfer, sale, lease or closure of certain property for environmental reasons. (f) No outstanding notice, citation, summons or order has been issued, no outstanding complaint has been filed, no outstanding penalty has been assessed and no investigation or review is pending or, to the best of Parent's and each Seller's knowledge, threatened, by any Governmental Entity or other Person with respect to any alleged (i) violation 18 by either of the Sellers or any of its Affiliates relating to the Business or the Purchased Assets of any Environmental Law or (ii) failure by either of the Sellers or any of its Affiliates to have any Environmental Permit required in connection with the conduct of the Business or otherwise applicable to the Business (including the Purchased Assets). 2.11 Transactions with Affiliates. ---------------------------- (a) Set forth on Schedule 2.11(a) is a true, correct and complete list ---------------- and description of (a) all services and other support provided to the Business by Parent and its Affiliates (other than the Sellers) since April 1, 1996, (b) all other overhead charges allocated to the Sellers since April 1, 1996, and (c) all other transactions between one or more Sellers, on the one hand, and Parent or any of its Affiliates (other than the Sellers), on the other hand, since April 1, 1996 (other than payment of compensation or other benefits to employees). (b) To the best of Parent's and each Seller's knowledge, except as set forth on Schedule 2.11(b), (i) as of the Closing, no employee, officer or ---------------- director (or any member of his or her immediate family) of Parent or of either Seller or any of their Affiliates will be indebted to either Seller, nor is either Seller indebted (or committed to make loans or extend or guarantee credit) to any of such individuals, (ii) no such individual, except Eric Steiner and Jeffrey Steiner and any such individual whose position is with Fairchild or any of its Affiliates (other than Parent or either of the Sellers) has any direct or indirect ownership interest in any Person with which either Seller has a business relationship, or any Person that competes with either Seller and (iii) no member of the immediate family of any officer or director of either Seller is an interested party with respect to any Contract. 2.12 Title. The Sellers have, and at the Closing will transfer to ------- the Buyer, good and marketable title to all personal property owned by them respectively, good and marketable title to all Owned Real Property, valid and enforceable leasehold interests in Leased Real Property and personal property leased by them, and good and valid title to or rights to use, all intangible properties and rights used by them, in each case free and clear of all Liens, except Permitted Liens. 2.13 Acquired Real Property. ---------------------- (a) Part A of Schedule 2.13(a) sets forth a true, correct and complete ---------------- list and legal descriptions of all Real Property owned (beneficially or of record) by either of the Sellers in the conduct of the Business, and Part B of Schedule 2.13(a) sets forth a true, correct and complete list of all Real Property leased by either of the Sellers in the conduct of the Business, and in each case identifies the street address thereof. (b) Except in such cases as would not in the aggregate have a Material Adverse Effect, all structures and other improvements on such properties are within the lot lines and do not encroach on the properties of any other Person (and improvements on adjacent Real Property do not encroach on any of the Real Property constituting any part of the Purchased Assets), and the use, construction and operation of all Real Property constituting any part of the Purchased Assets or otherwise owned or leased by the Sellers in the conduct of the Business 19 conform to all applicable building, zoning, safety, environmental and other Laws, permits, licenses and certificates and all restrictions and conditions affecting title. (c) Other than as set forth on of Schedule 2.13(c), there are no ---------------- leases, subleases, options or other agreements, written or oral, granting to any Person (other than the Sellers) the right to purchase, use or occupy the Acquired Real Property or any portion thereof. None of Parent, the Sellers and any of their respective Affiliates has received any written or oral notice or order by any Governmental Entity, any insurance company which has issued a policy with respect to any of such properties or any board of fire underwriters or other body exercising similar functions which (i) relates to violations of building, safety, fire or other ordinances or regulations, (ii) claims any defect or deficiency with respect to any of such properties or (iii) requests the performance of any repairs, alterations or other work to or in any of such properties or in the streets bounding the same, except such as would not individually or in the aggregate have a Material Adverse Effect. Parent and Sellers have made available to Buyer true, correct and complete copies of all leases and financing documents affecting all or any portion of the Acquired Real Property. (d) None of Parent, the Sellers and any of their respective Affiliates has received any written or oral notice for assessments for public improvements against the Acquired Real Property which remains unpaid, and, to the best of Parent's and each Seller's knowledge, no such assessment has been proposed. Except as set forth on Schedule 2.13(d), there is no pending condemnation, ---------------- expropriation, eminent domain or similar proceeding affecting all or any portion of any of the Acquired Real Property and, to the best of Parent's and each Seller's knowledge, no such proceeding is threatened. (e) Except as set forth on Schedule 2.13(e), no Person other than a ---------------- Seller is in possession of (or has any right, absolute or contingent, to possess which is superior to such Seller's right to possess) all or any portion of the Acquired Real Property. (f) Except as set forth on Schedule 2.13(f), all Acquired Real ---------------- Property has direct and unrestricted access over currently utilized facilities and land to such public roads, owned roads and driveways presently in use, and such utilities and other services, as are necessary for the uses thereof and the conduct of the Business, and neither Seller nor any other Person has applied for any change in the zoning or land use classification of any such Real Property. (g) Except as set forth on Part A of Schedule 2.13(g), the Acquired ---------------- Real Property has adequate arrangements for supplies of water, electricity, gas and/or oil for all operations at the 1996 or current operating levels, whichever is greater. Except as set forth on Part B of Schedule 2.13(g), there are no actions or proceedings pending or, to the best of Parent's and each Seller's knowledge, threatened that would adversely affect the supply of water, electricity, gas and/or oil to the Acquired Real Property except for those which individually and in the aggregate would not have a Material Adverse Effect. 20 2.14 Taxes. ----- (a) Parent and each Seller has (i) timely filed all returns and reports for Taxes, including information returns, that are required to have been filed in connection with, relating to, or arising out of the Business or the Purchased Assets, (ii) paid to the appropriate Tax Authority all Taxes that are shown to have come due pursuant to such returns or reports and (iii) paid to the appropriate Tax Authority all other Taxes not required to be reported on returns in connection with, relating to, or arising out of, or imposed on the property of the Business for which a notice of assessment or demand for payment has been received or which have otherwise become due except for Taxes being properly contested in good faith. (b) All such returns or reports were complete and accurate in all material respects at the time of filing and such returns which have not been audited do not contain a disclosure statement under Code Section 6662 (or any predecessor provision or comparable provision of any Law). (c) There are no unpaid Taxes with respect to any period ending on or before the Closing Date which are or could give rise to a lien on the Purchased Assets or the Business, except for current Taxes not yet due and payable. (d) Except as set forth on Schedule 2.14(d), (i) there are no pending ---------------- audits or, to the best of Parent's and each Seller's knowledge, threatened audits or assessments relating to Taxes with respect to the Business or the Purchased Assets and (ii) there is no unassessed Tax deficiency proposed or to the best of Parent and each Seller's knowledge threatened against Parent or any Seller relating to or affecting the Purchased Assets or the Business, nor is any action or proceeding pending, or to the best of Parent's and each Seller's knowledge, threatened by any Governmental Entity for assessment, reassessment or collection of Taxes. (e) Except as set forth on Schedule 2.14(e), none of the Purchased ---------------- Assets (i) is property that is required to be treated as owned by another Person pursuant to the "safe harbor lease" provisions of former Section 168(f)(8) of the Code, (ii) is "tax-exempt use property" within the meaning of Code Section 168(h) or (iii) directly or indirectly secures any Debt the interest on which is tax-exempt under Code Section 103(a). (f) Except as set forth on Schedule 2.14(f), neither Seller has agreed ---------------- to make, or is required to make, any adjustment under Code Section 263A or 481(a) or any comparable provision of state or foreign Tax Laws by reason of a change in accounting method or otherwise and neither Seller has changed a method of accounting or Inventory method, made or changed a tax election, or otherwise taken any action which is not in accordance with past practice that could accelerate a tax deduction from a period after the Closing Date to a period before the Closing Date or defer income from a period before the Closing Date to a period after the Closing Date. (g) Except as set forth on Schedule 2.14(g), neither Seller is a party ---------------- to any agreement, contract, arrangement or plan that has resulted or would or could result, separately or 21 in the aggregate, in connection with this Agreement or any change of control of the Seller, in the payment of any "excess parachute payment" within the meaning of Code Section 280G. (h) The amount of the reserves for value-added Taxes, real property Taxes, property Taxes and payroll Taxes reflected on the Closing Date Balance Sheet will be adequate to pay all Assumed Tax Liabilities. 2.15 Intellectual Property and Technology. ------------------------------------ (a) Schedule 2.15(a) contains a true, correct and complete list of all ---------------- patents, trademarks, trade names, service marks and applications for the foregoing owned, used or held for use by either Seller with respect to the Business, except for matters listed on Schedule 2.15(b). ---------------- (b) Schedule 2.15(b) contains a true, correct and complete list of all ---------------- Intellectual Property which has been registered in, filed in or issued by the PTO, the United States Copyright Office, any state trademark offices and the patent, trademark, copyright and other corresponding offices of foreign jurisdictions. All such registrations have been duly filed, registered and issued and are in full force and effect. (c) Except as set forth on Schedule 2.15(c), Section 8 and 15 ---------------- declarations and applications for renewal with respect to all U.S. registered trademarks and service marks listed in Schedule 2.15(b) were timely filed in and accepted by the PTO. No trademarks or service marks listed in Schedule 2.15(b) have been abandoned. (d) Schedule 2.15(d) sets forth all licenses or other agreements from ---------------- or with third Persons under which either Seller uses or exercises any rights with respect to any of the Intellectual Property or Technology other than such licenses or other agreements that involve payments of no more than $25,000 per year ("Small Licenses"). At the Closing, Sellers will transfer to Buyer all -------------- Intellectual Property and Technology without payment of royalties, free and clear of any Liens. (e) Except (i) as set forth on Schedule 2.15(e) or (ii) with respect ---------------- to Small Licenses, the Sellers (as applicable) are the sole and exclusive owners of the Intellectual Property and Technology, free and clear of any Liens. (f) Except as set forth on Schedule 2.15(f), neither Seller has ---------------- received (and Parent and Sellers have no knowledge of) any written notice from any other Person pertaining to or challenging the right of either Seller (or any other Person) to use any of the Intellectual Property or any Technology, and there is no interference, opposition, cancellation, reexamination or other contest proceeding, administrative or judicial, pending or threatened with respect to any Intellectual Property or Technology. (g) Except as set forth on Schedule 2.15(g), no licenses have been ---------------- granted by either Seller and neither Seller has any obligation to grant licenses with respect to any Intellectual Property or Technology. No written claims have been made by either Seller of any 22 violation or infringement by others of rights with respect to any Intellectual Property or Technology, and neither Parent nor Sellers know of any basis for the making of any such claim. Except in such cases as would not in the aggregate have a Material Adverse Effect, the use by each Seller of the Intellectual Property and Technology (past and present) has not violated or infringed any rights of other Persons, or constituted a breach of any Contract (or other agreement or commitment). (h) The Intellectual Property and Technology includes all such rights necessary to conduct the Business as now conducted and, except (i) as set forth on Schedule 2.15(d) or (ii) with respect to Small Licenses, such rights will not ---------------- be adversely affected by the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. (i) There are no licenses or service, maintenance or other agreements or obligations of any nature whatsoever regarding the Intellectual Property or Technology between or among a Seller, on the one hand, and any Affiliate(s) of such Seller, on the other hand. All statements and representations made by each Seller or any of its Affiliates in any pending patent, copyright and trademark applications with respect to the Intellectual Property were true in all material respects as of the time they were made. 2.16 Brokerage. Neither Parent nor either Seller nor any of their ----------- respective Affiliates has made any agreement or taken any other action which might cause AlliedSignal or Buyer to become liable for a broker's or finder's fee or commission as a result of the transactions contemplated hereunder. 2.17 Product Warranties and Guarantees. Parent and each Seller has ----------------------------------- provided Buyer with true and correct copies of all written product and service warranties and guarantees in connection with Contracts listed on Schedule 2.8(a). 2.18 Products Liability. There are no Liabilities of either -------------------- Seller, fixed or contingent, asserted or, to the best of Parent's and each Seller's knowledge, unasserted, (a) with respect to any product Liability or any similar claim that relates to any product sold by either of the Sellers to others prior to the Closing, or (b) with respect to any claim for the breach of any express or implied product warranty or any other similar claim with respect to any product sold by either of the Sellers to others prior to the Closing, other than standard warranty obligations (to replace, repair or refund) made by a Seller in the ordinary course of the conduct of the Business to buyers of the respective products, and except in the case of the preceding clauses (a) and (b) where such Liabilities would not exceed $500,000 in the aggregate for the Combined Business. 2.19 Labor Matters. ------------- (a) To the best of Parent's and each Seller's knowledge, there have been no union organizing efforts with respect to either Seller conducted within the last three years and there are none now being conducted with respect to either Seller. The Sellers have not at any time during the three years prior to the date of this Agreement had, nor, to the best of Parent's and each Seller's knowledge, is there now threatened, a strike, work stoppage, work slowdown or 23 other material labor dispute with respect to or affecting the Business. Except as set forth on Schedule 2.19, (i) no employee of either Seller is represented ------------- by any union or other labor organization; (ii) there is no charge or complaint, including any unfair labor practice charge or any claim of discrimination, which is pending with any Governmental Entity or, to the best of Parent's and each Seller's knowledge, threatened against either Seller relating to any of its employees; and (iii) there is no commitment or agreement to increase wages or modify the terms and conditions of employment of employees of either Seller other than ordinary course of the Business consistent with past practice. Parent and Sellers have provided Buyer with copies of any collective bargaining agreement or other agreement with any union or other labor organization representing employees of either Seller. (b) Within six months prior to the date hereof, (i) neither Seller has effectuated (x) a "plant closing" (as defined in the WARN Act) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of the Business or (y) a "mass layoff" (as defined in the WARN Act) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of the Business, (ii) neither Seller has been affected by any transaction or engaged in layoffs or employment terminations with respect to the Business sufficient in number to trigger application of any similar foreign, state or local law, and (iii) neither of the Sellers' employees has suffered an "employment loss" (as defined in the WARN Act). 2.20 Employee Benefits. ----------------- (a) Set forth on Schedule 2.20(a) is a true, correct and complete list ---------------- of the following: (i) Separately by location, the names, job titles and current salary or wage rates of all employees of each Seller and their hourly or yearly salary, together with a summary of all bonus, incentive compensation or other additional compensation or similar benefits paid to such persons for the 1997 fiscal year and estimated for the 1998 fiscal year; (ii) Separately by location, the names, job titles and current salary or wage rates of all independent contractors, including any consultants, and leased employees who perform services for a Seller; and (iii) All of (x) the employee benefit plans, arrangements or policies (whether or not written, whether U.S. or foreign, and whether or not subject to ERISA), including, without limitation, any stock option, stock purchase, stock award, retirement, pension, deferred compensation, profit sharing, savings, incentive, bonus, health, dental, hearing, vision, drug, life insurance, cafeteria, flexible spending, dependent care, fringe benefit, vacation pay, holiday pay, disability, sick pay, workers compensation, unemployment, severance pay, employee loan, educational assistance plan, policy or arrangement, and (y) any employment, indemnification, consulting or severance agreement, under which any employee or former employee of a Seller has any present or future right to benefits or under which a Seller has any present or future Liability 24 (collectively, the "Plans"). Schedule 2.20(a) indicates which Plans are ----- ---------------- maintained for employees employed in the United States (collectively, "U.S. ---- Plans") and which Plans are maintained for employees employed outside of ----- the United States (collectively, "Foreign Plans"). ------------- (b) Parent or Sellers have made available to Buyer a complete and correct copy of each Plan document or a written description of any unwritten plan; the most recent summary plan description or similar booklet for any Plan; and any employee handbook applicable to employees of a Seller. (c) Except (i) as set forth on Schedule 2.20(c) or (ii) in such cases ---------------- as would not in the aggregate have a Material Adverse Effect: (i) Neither Parent nor either Seller nor any of their Affiliates has communicated to present or former employees of a Seller, or formally adopted or authorized, any additional Plan or any change in or termination of any existing Plan. (ii) Each Plan has been operated and administered in accordance with its terms, the terms of any applicable collective bargaining agreement, and all applicable Laws. (iii) Each U.S. Plan which is a "group health plan" subject to the continuation coverage requirements of Section 4980B of the Code and Part 6 of Title I of ERISA ("COBRA") which is maintained by a Seller or any ----- of its Affiliates has been operated and administered, in all material respects, in accordance with such requirements. (d) Schedule 2.20(d) identifies each U.S. Plan which provides health, ---------------- life insurance or other welfare benefits to retired or other terminated employees of a Seller other than continuation coverage required by COBRA and the Sellers have the ability to amend or terminate any such Plan. (e) Except in such cases as would not in the aggregate have a Material Adverse Effect, with respect to any Plan, no actions, suits, claims or proceedings (other than routine claims for benefits) are pending or, to the best of Parent's and each Seller's knowledge, threatened, and no facts or circumstances exist which could be reasonably expected to give rise to any such actions, suits, claims or proceedings. (f) Except in such cases as would not in the aggregate have a Material Adverse Effect, no Plan is currently under governmental investigation or audit, and to the best of Parent's and each Seller's knowledge, no such investigation or audit is contemplated or under consideration. (g) Except in such cases as would not in the aggregate have a Material Adverse Effect, no event has occurred and no condition exists that could be reasonably expected to subject AlliedSignal or Buyer, directly or indirectly, to any tax, fine, penalty or other Liability arising under, or with respect to, any employee benefit plan currently or previously maintained 25 by either Seller or any Person that is or was a member of a controlled group with, under common control with, or otherwise required to be aggregated with, either Seller under Section 414(b), (c), (m) or (o) of the Code. (h) No lien has arisen or is expected to arise under the Code or ERISA on the Purchased Assets. (i) No U.S. Plan is a "multiemployer plan" within the meaning of Section 3(37)(A) of ERISA, and neither Seller has any outstanding Liability with respect to any such plan (contingent or otherwise). (j) Except (i) as set forth on Schedule 2.20(j) or (ii) in such cases ---------------- as would not in the aggregate have a Material Adverse Effect, neither the execution of this Agreement nor the consummation of the transactions contemplated by this Agreement, will (x) increase the amounts of benefits otherwise payable under any Plan, (y) result in the acceleration of the time of payment, exercisability, funding or vesting of any such benefits, or (z) result in any payment (whether severance pay or otherwise) becoming due to, or with respect to, any employee or director of a Seller. (k) No employee of any Seller is employed outside of the United States and Sellers have no Foreign Plans. 2.21 No Pending Litigation or Proceedings. Except as set forth on -------------------------------------- Part A of Schedule 2.21, there are no actions, suits, investigations or ------------- proceedings pending against or affecting, or, to the best of Parent's and each Seller's knowledge, threatened against, Parent, either Seller, the Business or any of the Purchased Assets before any arbitrator or Governmental Entity (including the United States Environmental Protection Agency, the United States Equal Employment Opportunity Commission or any similar Governmental Entity) that would materially and adversely affect their ability to perform their obligations under this Agreement. Except as set forth on Part B of Schedule 2.21, there are no outstanding judgments, decrees, writs, injunctions or orders of any arbitrator or Governmental Entity against Parent or either Seller which relate to or arise out of the conduct of the Business or the ownership, condition or operation of the Business or the Purchased Assets except in such cases as would not in the aggregate have a Material Adverse Effect. 2.22 Insurance. Schedule 2.22 lists each Seller's policies and --------- ------------- contracts in effect as of the date hereof for insurance covering the Purchased Assets or Assumed Liabilities and the operation of the facilities constituting the Business owned or held by the Sellers, together with the risks insured against, coverage limits and deductible amounts. Sellers have made available to Buyer complete and correct copies of all such policies together with all riders and amendments thereto. Such policies are in full force and effect and all premiums due thereon have been paid. Each of the Sellers has complied in all material respects with the terms and conditions of such policies. The Sellers have made available to Buyer all books and records relating to workers compensation claims and all claims made by the Sellers under any policy of insurance during the five years prior to the date hereof with respect to the Business other than employee claims under health or medical insurance policies or coverage. 26 2.23 Customers; Suppliers. As of the date of this Agreement, Part ---------------------- A of Schedule 2.23 contains a true, correct and complete list of (i) all ------------- Contracts to which any Major Customer is a party and (ii) all Major Suppliers, together with an estimate of all purchases from each Major Supplier for the last 12 months. Except as identified with an asterisk on Part A of Schedule 2.23, each of the Contracts listed thereon is fully assignable to Buyer without the consent, approval or waiver of any other Person. Except as set forth on Part B of Schedule 2.23, as of the date of this Agreement, neither Parent nor either Seller has received written notice within the preceding 12 months of any development (a) which could reasonably be expected to result in a Material Adverse Effect or (b) which indicates that a Major Customer will not purchase products of the Combined Business from Buyer during the 1998 fiscal year in amounts substantially equivalent (on a pro rata basis) to such purchases from --- ---- such Seller in the 1997 fiscal year. Except as set forth on Part C of Schedule 2.23, as of the date hereof, no supplier of the Business (including any supplier of Intellectual Property) has threatened to refuse to sell its products or services to the Business except in such cases as would not in the aggregate have a Material Adverse Effect. 2.24 Condition of Assets. Except as set forth on Schedule 2.24, ------------------- ------------- the buildings, machinery, equipment, tools, furniture, improvements, sewers, pipes, transportation equipment and other fixed tangible Assets of the Business (a) included in the Purchased Assets or (b) subject to any Contract included in the Purchased Assets are in sufficiently good operating condition and repair to conduct the Business as presently conducted, reasonable wear and tear excepted. 2.25 All Assets. Except as set forth on Schedule 2.25 and for the ------------ ------------- Excluded Assets, the Purchased Assets (including any Assets, properties and rights subject to any Contract included in the Purchased Assets) constitute all the assets, properties and rights owned, used, or held for use in connection with, or that are otherwise related to or required for the conduct of, the Business as currently conducted by the Sellers on the date of this Agreement. Except as set forth on Schedule 2.25, none of the Purchased Assets are owned, in whole or in part, by any Person other than the Sellers. 2.26 [Intentionally omitted.]. 2.27 Securities Matters. Except as set forth on Schedule 2.27, ------------------ ------------- Sellers are acquiring the AlliedSignal Common Stock for their own account and without a present view to any distribution thereof or any present intention of distributing or selling the AlliedSignal Common Stock in violation of the federal securities laws. Each Seller is an "accredited investor" as such term is defined in Regulation D promulgated under the Securities Act. In evaluating the suitability of an investment in the AlliedSignal Common Stock, each Seller has relied solely upon the representations, warranties, covenants and agreements made by AlliedSignal herein and has not relied upon any other representations or other information (whether oral or written and including any estimates, projections or supplemental data) made or supplied by or on behalf of AlliedSignal or any Affiliate, employee, agent or other representative of AlliedSignal. Each Seller understands and agrees that it may not sell or dispose of any of the AlliedSignal Common 27 Stock other than pursuant to a registered offering or in a transaction exempt from the registration requirements of the Securities Act. 2.28 SEC Filings. Parent has heretofore delivered to Buyer, and ----------- Buyer acknowledges receipt of, the following documents (the "Parent Reports"): -------------- (a) Parent's Annual Report on Form 10-K for the fiscal year ended March 31, 1997, (b) Parent's Quarterly Reports on Form 10-Q for the fiscal quarters ended June 30, and September 30, 1997, (c) Parent's proxy statement relating to its 1997 Annual Meeting of Stockholders, (d) Parent's Annual Report to Stockholders for 1997, and (e) any other report filed during 1997, and prior to the date of this Agreement, with the Securities and Exchange Commission under the Securities Act or the Exchange Act. Each Parent Report, as of its filing date, insofar as it relates to the Business, did not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of circumstances under which they were made, not misleading. 2.29 [Intentionally omitted.]. 2.30 Business Conduct. Except as discussed between Parent and ---------------- Buyer on December 7, 1997, to the best of Parent's and each Seller's knowledge, during the past three years neither Seller, nor any director, officer, employee or third party acting on behalf thereof, has, in violation of any Law: (i) made any bribes, kickbacks or other payments, directly or indirectly, to any Person or any representative thereof, to obtain favorable treatment in securing business or otherwise to obtain special concessions for either Seller; (ii) made any bribes, kickbacks or other payments, directly or indirectly, to or for the benefit of any Governmental Entity or any official, employee or agent thereof, for the purpose of affecting his or her action or the action of the Governmental Entity that he or she represents to obtain favorable treatment in securing business or to obtain special concessions for the Seller; (iii) made any unlawful political contributions on behalf of either Seller; or (iv) otherwise used corporate funds of either Seller for any illegal purpose, including without limitation, any violation of the Foreign Corrupt Practices Act. ARTICLE III REPRESENTATIONS AND WARRANTIES OF ALLIEDSIGNAL AND BUYER AlliedSignal and Buyer hereby jointly and severally represent and warrant to Parent and Sellers as follows: 3.1 Organization and Good Standing. (a) AlliedSignal is a ------------------------------ corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. (b) Buyer is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware. AlliedSignal is the sole member of Buyer. AlliedSignal owns all of the outstanding equity and profit interests in Buyer, free and clear of all Liens. Buyer is disregarded as an entity separate from AlliedSignal for federal tax purposes. 28 3.2 Authorization and Enforceability. With respect to each of -------------------------------- AlliedSignal and Buyer: (a) such entity has full power and authority to execute, deliver and perform this Agreement and the Transaction Documents to which such entity is a party, (b) the execution, delivery and performance by such entity of this Agreement and the Transaction Documents to which such entity is a party have been duly authorized by all necessary action on the part of such entity, (c) this Agreement has been duly executed and delivered by such entity, and, as of the Closing Date, the other Transaction Documents to which either entity is a party will be duly executed and delivered by such entity, (d) this Agreement is a legal, valid and binding obligation of such entity, enforceable against such entity in accordance with its terms, and (e) as of the Closing Date, each of the other Transaction Documents to which such entity is a party will constitute the legal, valid and binding obligations of such entity, enforceable against such entity in accordance with its terms. 3.3 No Violation of Laws or Agreements. The execution, delivery, ------------------------------------ and performance by AlliedSignal and Buyer of this Agreement and the Transaction Documents to which such entities (as applicable) are parties do not, and the consummation by AlliedSignal and Buyer (as applicable) of the transactions contemplated hereby and thereby, will not, (a) contravene any provision of the Certificate of Incorporation or Bylaws of AlliedSignal nor the Certificate of Formation or Limited Liability Company Agreement of Buyer, or (b) except as set forth on Schedule 3.3, violate, conflict with, result in a breach of, or ------------ constitute a default (or an event which would, with the passage of time or the giving of notice or both, constitute a default) under, or result in or permit the termination, modification, acceleration, or cancellation of, (i) any indenture, mortgage, loan or credit agreement, license, instrument, lease, contract, plan, permit or other agreement or commitment, oral or written, to which either AlliedSignal or Buyer is a party, or by which any of either entity's Assets may be bound or affected, or (ii) any judgment, injunction, writ, award, decree, restriction, ruling, or order of any arbitrator or Governmental Entity or any applicable Law to which AlliedSignal or Buyer is subject. 3.4 Consents. No consent, approval or authorization of, or -------- registration or filing with, any Person (governmental or private) is required in connection with the execution, delivery and performance by AlliedSignal or Buyer of this Agreement, the other Transaction Documents to which AlliedSignal or Buyer is a party, or the consummation by AlliedSignal or Buyer of the transactions contemplated hereby or thereby except (a) as required by the HSR Act, (b) as required by the NYSE to list AlliedSignal Common Stock and (c) any required consent, approval or authorization of, or registration or filing with, any foreign governmental authority. 3.5 AlliedSignal Common Stock. As of the date hereof, ------------------------- 1,000,000,000 shares of AlliedSignal Common Stock are authorized for issuance. As of November 30, 1997, 562,554,971 shares of AlliedSignal Common Stock were issued and outstanding and 153,902,513 shares of AlliedSignal Common Stock were held in the treasury of AlliedSignal or owned by any Subsidiary of AlliedSignal. AlliedSignal has a sufficient number of unreserved shares of AlliedSignal Common Stock to perform the transactions contemplated hereby. All shares of AlliedSignal Common Stock to be issued at the Closing, when so issued, will be duly authorized, validly issued, fully paid and non-assessable, free of preemptive rights and all Liens and will be issued in compliance with all applicable Laws. Parent acknowledges that 29 AlliedSignal has disclosed to Parent that AlliedSignal will be making open market and/or block purchases of AlliedSignal Common Stock during the period between the date hereof and the Closing Date. All such purchases shall comply with Rule 10b-18 under the Exchange Act. 3.6 SEC Filings. AlliedSignal has heretofore delivered to Parent, ----------- and Parent acknowledges receipt of, the following documents (the "AlliedSignal ------------ Reports"): (a) AlliedSignal's Annual Report on Form 10-K for the fiscal year - ------- ended December 31, 1996, (b) AlliedSignal's Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 1997, June 30, 1997 and September 30, 1997, (c) AlliedSignal's proxy statement relating to its 1997 Annual Meeting of Stockholders, (d) AlliedSignal's Annual Report to Stockholders for 1996, and (e) any other report filed during 1997, and prior to the date of this Agreement, with the Securities and Exchange Commission under the Securities Act or the Exchange Act. As of their respective dates, each of the AlliedSignal Reports complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and none contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Since January 1, 1996, AlliedSignal has timely filed all reports, registration statements and made all filings required to be filed with the SEC under the rules and regulations of the SEC. 3.7 Financial Statements. The audited consolidated financial -------------------- statements and unaudited consolidated interim financial statements of AlliedSignal and its consolidated Subsidiaries included in or incorporated by reference into the AlliedSignal Reports (including any related notes and schedules) have been prepared in accordance with GAAP (except as may be indicated in the notes thereto or as permitted by the Securities Act or the Exchange Act in the case of unaudited financial statements included in or incorporated by reference into the AlliedSignal Reports) and fairly present the consolidated financial position of AlliedSignal and its consolidated Subsidiaries as of the dates thereof and the consolidated results of their operations for the periods then ended, subject, in the case of the unaudited consolidated interim financial statements, to normal year-end adjustments and any other adjustments described therein. 3.8 Brokerage. Neither AlliedSignal, Buyer nor any of their --------- respective Affiliates has made any agreement or taken any other action which might cause Parent or either Seller to become liable for a broker's or finder's fee or commission as a result of the transactions contemplated hereunder. ARTICLE IV ADDITIONAL COVENANTS 4.1 Conduct of Business. Except (i) as otherwise specifically ------------------- permitted by this Agreement or (ii) with the prior written consent of Buyer, from and after the date of this Agreement and until the Closing Date, Parent and Sellers agree that: (a) Sellers shall: 30 (i) conduct the Business as presently conducted and only in the ordinary course of business consistent with past practice; and (ii) use their reasonable best efforts to preserve the business organization of the Business substantially intact, to keep available to Buyer the services of their respective employees, and to preserve for Buyer the goodwill of the suppliers, distributors, customers and others having business relationships with the Business. (b) Parent and Sellers shall promptly inform AlliedSignal in writing of any specific event or circumstance (including, without limitation, any consecutive two week period in which any Major Customer fails to place orders with the Seller or Sellers with which it transacts business) of which any of them is aware, or of which any of them receives written or oral notice, that (i) has or is likely to have, individually or in the aggregate, taken together with other events or circumstances, a Material Adverse Effect, (ii) indicates that any Major Customer is terminating or intends to terminate any Contract (excluding termination upon expiration of the term of any Contract so long as such customer continues to purchase goods from the Combined Business) and/or indicates that any such customer intends to reduce its purchases from either Seller or (iii) indicates that any Major Supplier is terminating or intends to terminate any Contract (excluding termination upon expiration of the term of any Contract so long as such supplier continues to sell goods to the Combined Business) and/or indicates that any such Major Supplier intends to reduce its sales to either Seller, provided that any such oral notice reportable under this Section 4.1(b) shall be directed to a responsible Person at Parent or either Seller; and (c) Sellers shall not: (i) change or modify in any material respect existing Inventory management or credit and collection policies, procedures and practices with respect to accounts receivable in any case relating to the Business; (ii) enter into any Contracts, waive any rights or enter into any other transactions which individually or in the aggregate would have a Material Adverse Effect; (iii) mortgage, pledge or subject to any Lien (other than Permitted Liens) any of the Purchased Assets; (iv) change any compensation or benefits or grant any material new compensation or benefits payable to or in respect of any employee of the Business (except, for regularly scheduled merit increases in the ordinary course of business consistent with past practice); 31 (v) sell, lease or otherwise transfer any Assets, except Inventory in the ordinary course of the Business, necessary, or otherwise material to the conduct of, the Business which would constitute Purchased Assets; (vi) change either Seller's method of accounting or keeping its books of account or accounting practices with respect to the Business, except as required by GAAP; (vii) take or omit to take any action which if taken or omitted prior to the date hereof would constitute or result in a breach of any representations or warranties of Parent or Sellers set forth herein; (viii) enter into any Contract (except sales contracts with customers in the ordinary course of the Business and except for such Contracts which may be terminated by Buyer without penalty or Liability on no more than 30 days' notice) that would create a Liability for the Business in excess of $200,000 per year without obtaining AlliedSignal's prior written consent, such consent not to be unreasonably withheld; (ix) create, incur or assume any Debt not currently outstanding, other than current Liabilities incurred in the ordinary course of business; (x) amend their charters, bylaws or other organizational documents; (xi) authorize, issue, sell or otherwise dispose of any capital stock of either Seller or amend the terms thereof; (xii) declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of the capital stock of either of the Sellers, or redeem or otherwise acquire any of the capital stock of either of the Sellers; (xiii) make any loans, advances or capital contributions to, or investments in, any Person; (xiv) acquire, sell, lease or dispose of any Assets used or held for use in the Business, other than (x) sales of Inventory in the ordinary and usual course of business consistent with past practice or (y) purchases of goods for use in the Business in the ordinary and usual course of business consistent with past practice; (xv) with respect to the Business, pay, discharge or satisfy any claims, Liabilities (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business of Liabilities reflected or reserved against in, or contemplated 32 by, the Balance Sheet or incurred in the ordinary course of business consistent with past practice; (xvi) disclose to any third party or enter into any Technology license or agreement to disclose to any third party any Intellectual Property, except in the ordinary and usual course of business and pursuant to written confidentiality agreements; (xvii) enter into any labor agreement; (xviii) sell or dispose of any significant amount of old or obsolete Inventory; or (xix) make capital expenditures in excess of $50,000 individually or $250,000 in the aggregate for the Combined Business; (xx) agree in writing or otherwise to take any of the foregoing actions. 4.2 Mutual Covenants. The parties hereto mutually covenant from ---------------- the date of this Agreement to the Closing Date (and subject to the other terms of this Agreement): (a) to cooperate with each other in determining whether filings are required to be made or consents required to be obtained in any jurisdiction in connection with the consummation of the transactions contemplated by this Agreement and in making or causing to be made any such filings promptly and in seeking to obtain timely any such consents (each party hereto shall furnish to the other and to the other's counsel all such information as may be reasonably required in order to effectuate the foregoing action); and (b) to advise the other parties promptly if such party determines that any condition precedent to its obligations hereunder will not be satisfied in a timely manner. 4.3 Filings and Authorizations. The parties hereto will, as -------------------------- promptly as practicable, and in the case of filings under the HSR Act no later than five Business Days after the date of this Agreement, make or cause to be made all such filings and submissions under Laws applicable to them or their Affiliates as may be required to consummate the terms of this Agreement, including all notifications and information to be filed or supplied pursuant to the HSR Act. The parties hereto shall also provide as promptly as possible full responses to any requests for additional information made of them under the HSR Act. Any such filings, including any supplemental information and requests for additional information under the HSR Act, will be in substantial compliance with the requirements of the applicable Law. Each of AlliedSignal and Buyer, on the one hand, and Parent and Sellers, on the other hand, shall furnish to the other such necessary information and reasonable assistance as the other may request in connection with its preparation of any filing or submission which is necessary under the HSR 33 Act. Parent, Sellers, AlliedSignal and Buyer shall keep each other apprised of the status of any communications with, and inquiries or requests for additional information from, any Governmental Entity, including the FTC and the Antitrust Division, and shall comply promptly with any such inquiry or request. Each of Parent and AlliedSignal shall use its reasonable efforts to obtain any clearance required under the HSR Act for the purchase and sale of the Purchased Assets in accordance with the terms and conditions hereof. Nothing contained in this Agreement, including under this Section 4.3 and Sections 4.8 and 4.13, will require or obligate (a) Parent, the Sellers, AlliedSignal, Buyer or their respective Affiliates to initiate, pursue or defend any litigation to which any Governmental Entity (including the Antitrust Division and the FTC) is a party or (b) AlliedSignal, Buyer or their respective Affiliates (i) to agree or otherwise become subject to any limitations on (x) the right of AlliedSignal, Buyer or their respective Affiliates effectively to control or operate the Business, (y) the right of AlliedSignal, Buyer or their respective Affiliates to acquire or hold the Business, or (z) the right of AlliedSignal or Buyer to exercise full rights of ownership of the Business or all or any portion of the Purchased Assets, or (ii) to agree or otherwise be required to sell or otherwise dispose of, hold separate (through the establishment of a trust or otherwise), or divest itself of all or any portion of the business, Assets or operations of AlliedSignal, Buyer, any Affiliate of AlliedSignal or Buyer or the Business. The parties agree that no representation, warranty or covenant of Parent, Sellers, AlliedSignal or Buyer contained in this Agreement shall be breached or deemed breached as a result of the failure by any party hereto or any of its Affiliates to take any of the actions specified in the preceding sentence. 4.4 Public Announcement. No party hereto shall make or issue, or ------------------- cause to be made or issued, any public announcement or written statement concerning this Agreement or the transactions contemplated hereby without the prior written consent of the other party hereto (which will not be unreasonably withheld or delayed), unless counsel to such party advises that such announcement or statement is required by law or the rules of any securities exchange on which securities of any Affiliate of Parent are traded (in which case the parties hereto shall make reasonable efforts to consult with each other prior to such required announcement). 4.5 Investigation. Sellers shall give AlliedSignal and its ------------- representatives (including AlliedSignal's accountants, consultants, counsel and employees), upon reasonable notice and during normal business hours, reasonable access to the properties (including any Equipment and any Acquired Real Property), Contracts, employees, books, records and affairs of the Sellers to the extent relating to the Business and the Purchased Assets (provided that such access does not unreasonably disrupt the conduct of the Business), and shall cause their respective officers, employees, agents and representatives to furnish to AlliedSignal all documents, records and information (and copies thereof), to the extent relating to the Business and the Purchased Assets, as AlliedSignal may reasonably request. Parent and Sellers may reasonably limit the number of representatives of AlliedSignal provided access hereby. No investigation or receipt of information by AlliedSignal pursuant to, or in connection with, this Agreement, shall diminish or obviate any of the representations, warranties, covenants or agreements of Parent or Sellers under this Agreement or the conditions to the obligations of Buyer under this Agreement. All information provided to AlliedSignal or Buyer under this Agreement shall be held subject to the terms and conditions of the Confidentiality Agreement. 34 4.6 Taxes. ----- (a) Parent and each Seller shall jointly and severally be responsible for and shall pay any and all Taxes arising or resulting from the conduct of the Business or the ownership of the Purchased Assets on or prior to the Closing Date, which Liability shall be a Non-Assumed Liability (including, without limitation, the sale of the Business and the Purchased Assets on the Closing Date pursuant to this Agreement). (b) Buyer shall be responsible for and shall pay any and all Taxes arising or resulting from the conduct of the Business or the ownership of the Purchased Assets after the Closing Date (excluding without limitation, the sale of the Business and the Purchased Assets or the Closing Date pursuant to this Agreement), which Liability shall be an Assumed Liability. (c) Each Seller hereby acknowledges that for FICA and FUTA purposes, Buyer qualifies as a successor employer with respect to the retained employees. In connection with the foregoing, the parties agree to follow the "Alternative Procedures" set forth in Section 5 of the Revenue Procedure 96-60, 1996- 2C.B.399. Each affected Seller and Buyer understands that Buyer shall assume the affected Seller's entire obligation to furnish a Form W-2, Wage and Tax Statement to the employees of the Business for calendar year ending December 31, 1998. (d) In addition to all personnel files and records relating to employees of the Business that each Seller shall deliver to the Buyer when their employment commences with Buyer as otherwise required by this Agreement, each Seller shall timely provide Buyer with any and all other information it needs to properly comply with the requirements of the final sentence of Section 4.6(c). (e) Each Seller acknowledges that for state unemployment Tax purposes, each Seller will permit Buyer to apply for a transfer of such Seller's rating account with respect to its Business. Each Seller shall deliver to Buyer within a reasonable time after request therefor, with respect to its Business, copies of such Seller's (i) Form 940, Employer's Annual Federal Unemployment Tax Returns for 1995 and 1996, (ii) state unemployment tax rate notices for 1995 and 1996, and (iii) benefit change statements that itemize claims charged against the state account of such Seller in each state in which the Business is operated for the four most recent calendar quarters. (f) Parent, Sellers and Buyer shall each, and Parent shall cause DA to (i) provide the other with such assistance as may reasonably be requested by any of them in connection with the preparation of any Tax return, any audit or other examination by any Taxing Authority or any judicial or administrative proceeding with respect to Taxes, (ii) retain and provide to the other any records or other information which may be relevant to such return, audit examination or proceeding, and (iii) provide to the other any final determination of any such audit or examination, proceeding or determination that affects any amount required to be shown on any Tax return of the other for any period (which shall be maintained confidentially). Without limiting the generality of the foregoing, Buyer, Sellers and Parent shall, and Parent shall cause DA to, retain, until the applicable statutes of limitations (including all extensions) have expired, copies of all Tax returns, supporting workpapers, and other books and records or 35 information which may be relevant to such returns for all Tax periods or portions thereof ending before or including the Closing Date, and shall not destroy or dispose of such records or information without first providing the other party with a reasonable opportunity to review and copy the same. (g) Parent agrees that neither Seller will be liquidated and that Sellers in the aggregate will retain assets of at least $1,000,000. Buyer, Parent and each Seller intend that Buyer's acquisition of the Business and Purchased Assets from the Sellers pursuant to this Agreement shall be a taxable transaction and, assuming compliance by Parent with the covenant set forth in the immediately preceding sentence, each of the parties agrees to treat such acquisition in such manner for all tax purposes, including, without limitation, for all purposes on any federal or state income or franchise tax return filed by any party after the Closing Date. Parent, Sellers and Buyer mutually agree to the allocation of the Initial Purchase Price among such Purchased Assets, in accordance with Code Section 1060. In the event of an adjustment to the Initial Purchase Price as provided in Section 1.6(f) and Section 9.15 of the Aerospace Agreement, any such adjustment due to a change in a particular class of Purchased Assets shall be allocated on a dollar for dollar basis to the applicable class. The parties shall mutually agree to the allocation of the adjustment within thirty (30) days after the determination of such adjusted Initial Purchase Price. Each of the parties agrees to report this transaction for tax purposes in accordance with such allocation of the Initial Purchase Price or the adjusted Initial Purchase Price, including, without limitation, for all purposes on any federal or state income or franchise tax return filed by any party after the Closing Date. (h) Neither Parent nor either Seller shall, and Parent shall cause DA not to, make a new or change any existing Tax election, change a method of accounting or Inventory method, file any amended Tax return, enter into any closing agreement, settle any Tax claim or assessment, or take or omit to take any other action not consistent with past practice, if any such action or omission would have the effect of increasing the Tax Liability of AlliedSignal or Buyer with respect to the Business and Purchased Assets for any period after the Closing Date. (i) AlliedSignal and Buyer, on the one hand, and Parent and Sellers, on the other hand, shall equally bear all Transfer Taxes. Parent, Sellers and Buyer shall, and Parent shall cause DA to, cooperate in timely making and filing all Tax Returns as may be required to comply with the provisions of any Transfer Tax laws. To the extent legally able to do so, Buyer shall deliver to Parent and Sellers exemption certificates satisfactory in form and substance to Parent and Sellers with respect to Transfer Taxes if such delivery would reduce the amount of Transfer Taxes that would otherwise be imposed. (j) [Intentionally omitted.] (k) [Intentionally omitted.] (l) [Intentionally omitted.] 36 4.7 Certain Deliveries. ------------------ (a) Within thirty (30) days after the end of each month ending after the date of this Agreement and prior to the Closing Date, Parent and Sellers shall prepare and furnish to or cause to be furnished to AlliedSignal a copy of the monthly financial reports for the Combined Business prepared after September 30, 1997 (including unaudited balance sheet and income statements) for each such month and the fiscal year to the end of such month). All of the foregoing financial statements shall comply with the requirements concerning unaudited financial statements set forth in Section 2.6. In addition, Parent and Sellers shall furnish AlliedSignal, upon request, with copies of regular management reports, if any, concerning the operation of the Business within ten (10) days after such reports are prepared. (b) Each Seller shall provide AlliedSignal, within five days of the execution or the date of receipt thereof, a copy of each Contract entered into by either Seller after the date hereof and prior to the Closing Date which, if entered into prior to the date hereof would have been required to be disclosed on Part A of Schedule 2.8(a). (c) Within five days after the date of filing thereof, AlliedSignal or Parent, as the case may be, shall furnish to the other a copy of each report filed by AlliedSignal or Parent, as the case may be, after the date of this Agreement and prior to the Closing Date under the Securities Act or the Exchange Act. 4.8 Consents. Prior to the Closing, Parent and Sellers shall give ---------- any notices and obtain all waivers, licenses, agreements, permits, consents, approvals or authorizations of any Governmental Authority that are required to be obtained by either Seller pursuant to any Contract or Permit or otherwise in order to consummate the transactions contemplated hereunder, and all of such shall be in a written form agreeable to AlliedSignal and in full force and effect and without conditions or limitations that restrict the ability of the parties hereto to carry out the transactions contemplated hereby. 4.9 Releases. At the Closing, all intercompany Debt (other than ---------- receivables and payables arising from ordinary course commercial transactions) between the Sellers, on the one hand, and the Parent and its Subsidiaries other than the Sellers, on the other hand, shall be canceled and all such amounts shall be deemed to be capital contributions to the entity owing such Debt. 4.10 Real Property. Within thirty (30) days after the date hereof, --------------- Parent and Sellers shall deliver or cause to be delivered to Buyer current, as- built ALTA surveys of the Owned Real Property (the cost of which shall be borne 50% by Parent and 50% by Buyer); such surveys to be dated within thirty (30) days of the date hereof and to be reasonably acceptable to Buyer. Such surveys shall be performed by licensed surveyors designated by Buyer and shall be certified to Buyer, Buyer's title insurance companies and others as Buyer shall request. The surveys shall be in form sufficient to cause Buyer's title insurance companies to insure such surveys, and shall be an ALTA/ACSM Land Title Survey, prepared in accordance with the "Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys as adopted by American Land Title Association and American Congress on Surveying & Mapping", and shall 37 meet the currently effective Accuracy Standards for an Urban Survey adopted by said organizations and shall include such optional survey responsibilities and specifications as Buyer reasonably shall select. 4.11 Environmental. At or prior to Closing, Parent and Sellers ------------- shall deliver or cause to be delivered all such necessary applications, approvals or consents required to transfer all Permits required for the continued operation of the Business and the Purchased Assets after the Closing Date in compliance with Environmental Laws. Within thirty (30) days after execution of this Agreement, Sellers shall identify to Buyer any of the Purchased Assets that are subject to the requirements of any Laws that condition, restrict, prohibit or require notification or disclosure for environmental reasons upon the transfer, sale, lease or closure of certain property; and Sellers shall deliver on or prior to the Closing Date, all necessary applications, approvals, or consents required by such Laws. 4.12 Ancillary Agreements. At or prior to the Closing, the -------------------- applicable parties shall enter into each of the Ancillary Agreements. 4.13 Reasonable Best Efforts. Without limiting the specific ----------------------- obligations of any party hereto under any covenant or agreement hereunder, each party hereto shall use reasonable best efforts to take all action and do all things necessary in order to promptly consummate the transactions contemplated hereby, including, without limitation, satisfaction, but not waiver, of the Closing conditions set forth in Article V. 4.14 Negotiations. From the date hereof until the termination of ------------ this Agreement in accordance with its terms, Parent and Sellers, on behalf of themselves and their Affiliates, agree that, except as permitted under the Aerospace Agreement, Parent, Sellers and their Affiliates will deal exclusively and in good faith with AlliedSignal and Buyer with respect to any transaction involving the sale, transfer or other disposition of the Purchased Assets or the Business; and neither Parent, Sellers, their Affiliates nor any of their officers, directors, employees, lenders, investment banking firms, advisors or other agents, or any Person acting on their behalf, will solicit any inquiries or proposals by, or engage in any discussions or negotiations with, or furnish any nonpublic information to or enter into any agreement with, any Person other than AlliedSignal or Buyer concerning the sale or other disposition of the Purchased Assets or the Business or the merger, consolidation, sale of securities or other transaction involving Parent or either of the Sellers, if such merger, consolidation, sale or other transaction would be inconsistent, in any respect, with the transactions contemplated by this Agreement, and will promptly notify AlliedSignal of the substance of any inquiry or proposal concerning any such transaction that may be received by Parent, Sellers or their Affiliates. 4.15 U.S. Government Contracts. As soon as practicable following ------------------------- the date of this Agreement and only after Buyer's written request, with respect to each Government Contract, AlliedSignal and Buyer shall assist Parent and Sellers to either obtain written confirmation reasonably satisfactory in form and substance to Buyer that novation of such Government Contract is not required, or, if not received prior to the Closing Date, submit to the cognizant responsible contracting officer, as soon as practicable after the Closing Date (i) a 38 written request that the U.S. Government enter into a novation agreement contemplated by FAR 42.1204 (a "Novation Agreement") with Buyer with respect to ------------------ each Government Contract and (ii) a Novation Agreement executed by the Seller party thereto for each Government Contract. Parent, Sellers, AlliedSignal and Buyer shall coordinate their efforts to facilitate the actions required by this Section 4.15 and Parent agrees to take all necessary action to assist Sellers prior to and after the Closing in connection therewith, including without limitation, upon Buyer's written request, obtaining such consents after the Closing, informing the appropriate governmental personnel of the pending transaction and of the planned novation. 4.16 NYSE Listing. AlliedSignal shall take all reasonable action ------------ required to obtain from the NYSE, prior to the Closing Date to have duly approved for listing, subject to official notice of issuance, the shares of AlliedSignal Common Stock to be issued hereunder at the Closing. 4.17 [Intentionally omitted.] 4.18 Seller Debt. Prior to the Closing, Parent shall cause all ----------- remaining payments on all capitalized leases to be paid and use its reasonable best efforts to cause all cash accounts of the Sellers to be reduced to zero with no negative or positive balances. Buyer acknowledges that the funding of negative balances will increase Closing Date Net Worth. 4.19 [Intentionally omitted.] 4.20 Product Liability Insurance. At Parent's request, --------------------------- AlliedSignal shall use reasonable commercial efforts to procure, to the extent available, at Parent's expense, product liability insurance covering products manufactured or distributed by the Sellers prior to the Closing Date. Upon receipt of any premium notice relating to such insurance, AlliedSignal shall notify Parent and Parent shall promptly pay to AlliedSignal the amount of the premium due. Parent acknowledges and agrees that AlliedSignal is free to ascribe any adverse claim experience, to the extent reasonably identifiable to products manufactured or distributed by the Sellers prior to the Closing Date, to such policy, so that (to such extent) such adverse claim experience does not adversely affect other product liability premiums being paid by AlliedSignal. 4.21 United Kingdom Assets. Parent shall cause the transfer to --------------------- Buyer or its designee of the Assets located in the United Kingdom related to the Combined Business. ARTICLE V CONDITIONS PRECEDENT 5.1 Conditions Precedent to Obligations of AlliedSignal and Buyer. ------------------------------------------------------------- The obligations of Buyer to purchase (and of AlliedSignal to cause Buyer to purchase) the Purchased Assets and assume (and of AlliedSignal to cause Buyer to assume) the Assumed Liabilities and to consummate the other transactions contemplated hereby are subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions (any one or more of which may be waived in writing in whole or in part by Buyer in its sole discretion): 39 (a) Representations, Warranties and Covenants. Each of the ----------------------------------------- representations and warranties of Parent and Sellers contained in this Agreement or in any Transaction Document delivered in connection herewith shall be true and correct in all material respects on and as of the date of this Agreement and at and as of the Closing with the same effect as though such representations and warranties had been made at and as of the Closing, except for representations and warranties that speak as of a specific date or time other than the Closing (which need only be true and correct in all material respects as of such date or time); provided, however, that if any such representation or warranty is already -------- ------- qualified by materiality, for purposes of determining whether this condition has been satisfied, such representation or warranty as so qualified shall be true and correct in all respects. Parent and Sellers shall have performed and complied in all material respects with each covenant and agreement required by this Agreement to be performed or complied with by them at or prior to the Closing. Parent and each Seller shall furnish AlliedSignal and Buyer with a certificate of such company dated the Closing Date and signed by a senior executive officer of Parent or such Seller, as the case may be, to the effect that the conditions set forth in this Section 5.1(a) have been satisfied. (b) HSR Act. The applicable waiting period under the HSR Act ------- (including any extensions thereof) with respect to the transactions contemplated hereby shall have expired or been terminated. (c) Stock Exchange Listing. The NYSE shall have duly approved for ---------------------- listing, subject to official notice of issuance, the shares of AlliedSignal Common Stock to be issued hereunder at the Closing. (d) Required Consents. Parent and the Sellers shall have obtained all ----------------- statutory and regulatory consents and approvals which are required under any applicable Laws in order to consummate the transactions contemplated hereby and to permit Buyer to conduct the Business as conducted as of the date of this Agreement and all other necessary consents and approvals of third parties (other than any customer or supplier of the Business) to the transactions contemplated hereby, other than those the failure of which to obtain, individually and in the aggregate, would not have a Material Adverse Effect. (e) Injunction; Litigation; Legislation. (i) Parent, the Sellers, ----------------------------------- AlliedSignal and Buyer shall not be subject to any order or injunction by any Governmental Entity restraining or prohibiting the consummation of the transactions contemplated hereby, (ii) no action or proceeding shall have been instituted before any Governmental Entity to restrain or prohibit, or to obtain substantial damages in respect of, the consummation of the transactions contemplated hereby, (iii) none of the parties hereto shall have received written notice from any Governmental Entity of (x) its intention to institute any action or proceeding to restrain, enjoin or nullify this Agreement or the transactions contemplated hereby, or to commence any investigation (other than a routine letter of inquiry, including a routine civil investigative demand) into the consummation of the transactions contemplated hereby or (y) the actual commencement of such investigation, (iv) there shall not be any pending or threatened litigation, suit, action or proceeding by any party which would reasonably be expected to limit or materially adversely affect Buyer's ownership of the Purchased Assets or the Buyer under the Aerospace Agreement's 40 ownership of the Aerospace Purchased Assets and (v) no Law shall have been promulgated or enacted by any Governmental Entity, which would prevent or make illegal the consummation of the transactions contemplated hereby. (f) Documents. Parent and the Sellers shall have delivered to Buyer --------- at the Closing such other documents and instruments as shall be reasonably necessary to transfer to Buyer the Purchased Assets as contemplated by this Agreement. Parent and Sellers shall have delivered all the certificates, instruments, contracts and other documents specified to be delivered by each of them hereunder. (g) Aerospace Closing. (i) All conditions to the Closing (as defined ----------------- in the Aerospace Agreement) shall have been satisfied or waived and (ii) the Closing (as defined in the Aerospace Agreement) shall be consummated simultaneously with the consummation of the Closing hereunder. (h) Escrow Agreement. Parent and the Escrow Agent shall have executed ---------------- and delivered to AlliedSignal the Escrow Agreement. 5.2 Conditions Precedent to Obligations of Parent and Sellers. The --------------------------------------------------------- obligations of Sellers to sell, and Parent to cause to be sold, the Purchased Assets and to consummate the other transactions contemplated hereby are subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions (any one or more of which may be waived in writing in whole or in part by Parent (acting on its own behalf and on behalf of Sellers) in its sole discretion): (a) Representations, Warranties and Covenants. Each of the ----------------------------------------- representations and warranties of AlliedSignal and Buyer contained in this Agreement and in any Transaction Document delivered in connection herewith shall be true and correct in all material respects on and as of the date of this Agreement and at and as of the Closing with the same effect as though such representations and warranties had been made at and as of the Closing, except for representations and warranties that speak as of a specific date or time other than the Closing (which need only be true and correct in all material respects as of such date or time); provided, however, that if any such -------- ------- representation or warranty is already qualified by materiality, for purposes of determining whether this condition has been satisfied, such representation or warranty as so qualified shall be true and correct in all respects. AlliedSignal and Buyer shall have performed or complied in all material respects with each covenant and agreement required by this Agreement to be performed or complied with by it at or prior to the Closing. AlliedSignal or Buyer, as the case may be, shall furnish Sellers with a certificate dated the Closing Date and signed by a senior executive officer of Buyer to the effect that the conditions set forth in this Section 5.2(a) have been satisfied. (b) HSR Act. The applicable waiting period under the HSR Act ------- (including any extensions thereof) with respect to the transactions contemplated hereby shall have expired or been terminated. 41 (c) Stock Exchange Listing. The NYSE shall have duly approved for ---------------------- listing, subject to official notice of issuance, the shares of AlliedSignal Common Stock to be issued hereunder at the Closing. (d) Injunction; Litigation; Legislation. (i) Parent, the Sellers, ----------------------------------- AlliedSignal and Buyer shall not be subject to any order or injunction by any Governmental Entity restraining or prohibiting the consummation of the transactions contemplated hereby, (ii) no action or proceeding shall have been instituted before any Governmental Entity to restrain or prohibit, or to obtain substantial damages in respect of, the consummation of the transactions contemplated hereby, (iii) none of the parties hereto shall have received written notice from any Governmental Entity of (x) its intention to institute any action or proceeding to restrain, enjoin or nullify this Agreement or the transactions contemplated hereby, or to commence any investigation (other than a routine letter of inquiry, including a routine civil investigative demand) into the consummation of the transactions contemplated hereby or (y) the actual commencement of such investigation and (iv) no Law shall have been promulgated or enacted by any Governmental Entity, which would prevent or make illegal the consummation of the transactions contemplated hereby. (f) Documents. AlliedSignal and Buyer shall have delivered to Sellers --------- at the Closing such other documents and instruments as shall be reasonably necessary for the assumption by Buyer of the Assumed Liabilities as contemplated by this Agreement. AlliedSignal and Buyer shall have delivered all the certificates, instruments, contracts and other documents specified to be delivered by it hereunder. (g) Aerospace Closing. (i) All conditions to the Closing (as defined ----------------- in the Aerospace Agreement) shall have been satisfied or waived and (ii) the Closing (as defined in the Aerospace Agreement) shall be consummated simultaneously with the consummation of the Closing hereunder. (h) Registration Rights Agreement. AlliedSignal shall have executed ----------------------------- and delivered to Parent a registration rights agreement substantially in the form of Exhibit 1.9(b)(vi) of the Aerospace Agreement with such changes as may ------------------ reasonably be requested by Citicorp USA, Inc. provided that such changes shall not provide for (i) more than a single demand registration right, (ii) a period of longer than 180 days during which the Registration Statement must be kept in effect or (iii) the payment of expenses by a party other than Citicorp USA, Inc. or Parent. (i) Escrow Agreement. AlliedSignal and the Escrow Agent shall have ---------------- executed and delivered to Parent the Escrow Agreement. 42 ARTICLE VI CERTAIN ADDITIONAL COVENANTS 6.1 Expenses. Except as otherwise expressly provided in this -------- Agreement, each of the parties hereto shall each bear its respective accounting, legal and other expenses incurred in connection with the transactions contemplated by this Agreement. 6.2 Maintenance of Books and Records. Parent, Sellers and Buyer -------------------------------- shall cooperate fully with each other after the Closing so that (subject to any limitations that are reasonably required to preserve any applicable attorney- client privilege) each party hereto has access to the business records, contracts and other information existing at the Closing Date and relating in any manner to the Purchased Assets, the Assumed Liabilities or the conduct of the Business (whether in the possession of Parent, Sellers or Buyer). No files, books or records existing at the Closing Date and relating in any manner to the Purchased Assets or the conduct of the Business prior to the Closing Date shall be destroyed by any party hereto for a period of six years after the Closing Date without giving the other party at least 30 days' prior written notice, during which time such other party shall have the right (subject to the provisions hereof) to examine and to remove any such files, books and records prior to their destruction. The access to files, books and records contemplated by this Section 6.2 shall be during normal business hours and upon not less than two business days' prior written request, shall be subject to such reasonable limitations as the party having custody or control thereof may impose to preserve the confidentiality of information contained therein, and shall not extend to material subject to a claim of privilege unless expressly waived by the party entitled to claim the same. 6.3 [Intentionally omitted.] 6.4 Non-Competition/Non-Solicitation. -------------------------------- (a) Parent and each Seller covenants and agrees that, if the Closing is consummated, for a period of three years after the Closing Date, it will not, and will cause Parent Subsidiaries not to, engage in the business of supplying to the aerospace industry aircraft hardware, chemicals or related support services (or any portion thereof) anywhere in the world (the "Competitive Activities"), except for (i) the sale of any Inventory of such hardware or chemicals owned by such Person or consigned to such Person as of the date hereof, the value of which Inventory is estimated to be approximately $5,000,000 or (ii) the sale of any Inventory of such hardware or chemicals hereafter acquired by such Person as part of a bulk purchase or hereafter consigned to such person as part of a bulk consignment, but only after such Person has offered to sell such hardware or chemicals to Buyer at commercially reasonable prices for such quantities as would be charged to distributors of such products; provided, however, that nothing herein shall be construed to prevent Parent, - -------- ------- Sellers, and/or any of their respective Affiliates from owning, in the aggregate, up to 10% of the stock or equity interest in any Person that engages in such business or any portion thereof. It is the desire and intent of the parties hereto that the provisions of this Section 6.4 shall be enforced to the fullest extent permitted under the laws and public policies of each jurisdiction in which enforcement is sought. If any court determines that any provision of this Section 6.4 is unenforceable, such court shall have the power to reduce the 43 duration or scope of such provision, as the case may be, or terminate such provision and, in reduced form, such provision shall be enforceable; it is the intention of the parties that the foregoing restrictions shall not be terminated, unless so terminated by a court, but shall be deemed amended to the extent required to render them valid and enforceable, such amendment to only apply with respect to the operation of this Section 6.4 in the jurisdiction of the court that has made the adjudication. Notwithstanding the foregoing, nothing in this Section 6.4(a) shall prohibit Parent, any Seller or any of their respective Affiliates from acquiring any Person or business that engages in Competitive Activities provided that (x) such activities do not constitute the principal activities of the Person or business to be acquired (based on the sales of such business during the preceding four (4) full calendar quarters) and (y) if Competitive Activities constitute in excess of fifteen percent (15%) of the revenues of the Person or business acquired, Sellers use their reasonable efforts to divest that portion of such Person or business that engages in Competitive Activities within twelve (12) months after the acquisition thereof. (b) Each of Parent and each Seller covenants and agrees that, if the Closing is consummated, for a period of one year after the Closing Date, it will not, and will cause Parent Subsidiaries not to, directly or indirectly, solicit for employment, either as an employee or a consultant, any employee or independent contractor of AlliedSignal, Buyer or any of their respective Affiliates who is engaged in the Business and was an employee or independent contractor of either Seller engaged in the Business as of the Closing Date to become an employee or consultant or otherwise provide services to Parent, such Seller or any Parent Subsidiary, except for persons whose employment is solicited or procured through general media advertisements. (c) The parties acknowledge and agree that the restrictions contained in Sections 6.4(a) and 6.4(b) are a reasonable and necessary protection of the immediate interests of AlliedSignal and Buyer, and any violation of these restrictions would cause substantial injury to AlliedSignal or Buyer, as the case may be and that AlliedSignal and Buyer would not have entered into this Agreement without receiving the additional consideration offered by Parent and each Seller in binding itself to these restrictions. In the event of a breach or a threatened breach by Parent, any Seller or any Parent Subsidiary of these restrictions, AlliedSignal and Buyer shall be entitled to apply to any court of competent jurisdiction for an injunction restraining such Person from such breach or threatened breach (without the necessity of proving the inadequacy of money damages as a remedy); provided, however, that the right to apply for -------- ------- injunctive relief shall not be construed as prohibiting AlliedSignal or Buyer, as the case may be, from pursuing any other available remedies for such breach or threatened breach. (d) Each of AlliedSignal and Buyer covenant and agree that, if the Closing is consummated, for a period of one year after the Closing Date, and if not consummated for a period of one year from the date of termination of this Agreement, it will not, and will cause its Affiliates not to, directly or indirectly, solicit for employment, either as an employee or a consultant, any employee or independent contractor of Parent or any Parent Subsidiary (other than any employee or independent contractor of any of the Sellers) to become an employee or consultant or otherwise provide services to AlliedSignal, Buyer or any of their respective 44 Affiliates, except for persons whose employment is solicited or procured through general media advertisements. (e) The parties acknowledge and agree that the restrictions contained in Section 6.4(d) are a reasonable and necessary protection of the immediate interests of Parent and Sellers, and any violation of these restrictions would cause substantial injury to Parent or Sellers, as the case may be, and that Parent and Sellers would not have entered into this Agreement without receiving the additional consideration offered by AlliedSignal and Buyer in binding itself to these restrictions. In the event of a breach or a threatened breach by AlliedSignal, Buyer or any of their respective Affiliates of these restrictions, Parent and any such Seller shall be entitled to apply to any court of competent jurisdiction for an injunction restraining such Person from such breach or threatened breach (without the necessity of proving inadequacy of money damages as a remedy); provided, however, that the right to apply for injunctive relief -------- ------- shall not be construed as prohibiting Parent or such Seller from pursuing any other available remedies for such breach or threatened breach. 6.5 Confidential Information. Parent and Sellers shall, and shall ------------------------ cause Parent Subsidiaries to, maintain the confidentiality of, and shall not use, and shall cause Parent Subsidiaries not to use, for the benefit of itself or others, any confidential information concerning the Business or the Purchased Assets, including any information with respect to the Intellectual Property or Technology (the "Confidential Information"); provided, however, that this ------------------------ -------- ------- Section 6.5 shall not restrict (a) any disclosure by any such Person of any Confidential Information required by applicable Law, securities exchange or any court of competent jurisdiction; provided, that AlliedSignal and Buyer are given -------- notice and an adequate opportunity to contest such disclosure, (b) any disclosure on a confidential basis to any such Person's attorneys, accountants, lenders and investment bankers and (c) any disclosure of information (i) which is available publicly as of the date of this Agreement, (ii) which, after the date of this Agreement, becomes available publicly through no fault of the disclosing party or any of its Affiliates or (iii) which is received by such Person from a third party not, to the best of such Person's knowledge, subject to any obligation of confidentiality with respect thereto. ARTICLE VII SURVIVAL 7.1 Survival. All representations, warranties, covenants and -------- agreements contained in this Agreement or the Transaction Documents shall survive (and not be affected in any respect by) the Closing, any investigation conducted by any party hereto and any information which any party may receive. Notwithstanding the foregoing, the representations and warranties contained in or made pursuant to this Agreement and the related indemnity obligations set forth in Sections 7.2(a)(i) and 7.3(a)(i) of the Aerospace Agreement shall terminate on, and no claim or action with respect thereto may be brought after, the date three years after the Closing Date, except that (a) the representations and warranties contained in Sections 2.3 and 2.12 and the related indemnity obligations contained in Section 7.2 of the Aerospace Agreement shall survive indefinitely and (b) the representations and warranties contained in Sections 2.10, 2.14 and 2.20 45 and the related indemnity obligations contained in Section 7.2 of the Aerospace Agreement shall survive until 30 days after the expiration of the applicable statute of limitations (or extensions or waivers thereof). The representations and warranties which terminate on the date three years after the Closing Date and the representations and warranties referred to in the foregoing clause (b), and the Liability of any party hereto with respect thereto pursuant to Article VII of the Aerospace Agreement, shall not terminate with respect to any claim, whether or not fixed as to Liability or liquidated as to amount, with respect to which the Indemnifying Party has been given written notice prior to the date three years after the Closing Date or such 30th day after the expiration of the applicable statute of limitations (or extensions or waivers thereof), as the case may be. Sellers hereby confirm their joint and several obligations under Section 7.2 of the Aerospace Agreement. ARTICLE VIII EMPLOYEES AND EMPLOYEE BENEFITS 8.1 Scope of Article. This Article VIII contains the covenants and ---------------- agreements of the parties with respect to (a) the status of employment of the employees of Sellers employed in the Business ("Employees") upon the sale of the --------- Business to Buyer, and (b) the employee benefits and employee benefit plans provided or covering such Employees and former employees of Sellers who terminated employment with the Sellers while employed in the Business or who retired from the Business ("Former Employees"). Nothing herein expressed or ---------------- implied confers upon any Employee or Former Employee of Sellers any rights or remedies of any nature or kind whatsoever. 8.2 U.S. Employees. This Section 8.2 applies only to Employees and -------------- Former Employees employed or previously employed by Sellers in the United States. (a) Employment. Buyer shall offer employment effective as of the ---------- Closing Date to each Employee of a Seller who is employed in the United States (a "U.S. Employee") and is actively at work immediately prior to the Closing ------------- Date or is not actively at work immediately prior to the Closing Date due solely to vacation, holiday or jury duty. Such initial offer of employment shall be for a position and for base salary or wages which are comparable to that which such Employee had with Sellers immediately prior to the Closing and shall include employee benefits which are comparable in the aggregate to that which such Employee had with Sellers immediately prior to the Closing; provided, -------- however, that no such employment shall be offered to Tucker E. Nason, Frank - ------- Saltzman and James Fairchild. Buyer shall offer employment to each other U.S. Employee who is not actively at work immediately prior to the Closing Date (including, but not limited to, any such employee who is not actively at work due to medical leave, sick leave, short-term disability, long-term disability, layoff or leave of absence) (an "Inactive Employee") who is willing and able to ----------------- return to work within 90 days after the Closing Date or such later date as may be required by law, with such employment with Buyer to commence on the date the Inactive Employee first commences active employment with Buyer. Sellers shall be responsible for any obligation to provide employee benefits to an Inactive Employee prior to such employee's date of hire by Buyer. U.S. Employees who accept Buyer's 46 offer of employment and become employees of Buyer shall be referred to herein as "U.S. Transferred Employees." Notwithstanding the foregoing, nothing herein -------------------------- shall be construed to limit Buyer's ability thereafter to terminate the employment of any Employee or to amend or terminate any employee benefit plan or to otherwise change the terms and conditions of employment of any Employee. (b) Past Service Credit. Buyer shall credit the service of all U.S. ------------------- Transferred Employees with Sellers and their Affiliates prior to the Closing Date for purposes of eligibility and vesting under all employee benefit plans provided by Buyer for U.S. Transferred Employees (but not for purposes of benefit accrual). Buyer shall also: (i) cause to be waived any pre-existing condition limitation under any Buyer medical plans applicable to U.S. Transferred Employees or their dependents (except to the extent that any such pre-existing condition limitation would not have been waived under Sellers' medical plans), and (ii) recognize (or cause to be recognized) the dollar amount of all covered expenses incurred by U.S. Transferred Employees and their dependents under Sellers' applicable medical plans during the calendar year in which the Closing Date occurs for purposes of satisfying such calendar year's deductibles and co-payment limitations under any applicable Buyer medical plans; provided, that the U.S. Transferred Employee enrolls in the applicable Buyer - -------- medical plan at such time and in such manner as is reasonably specified by Buyer. (c) Severance; WARN Act. Sellers shall pay and be solely liable for, ------------------- and shall indemnify and hold AlliedSignal and Buyer harmless against, any obligation, cost or expense for (i) severance pay, termination indemnity pay, salary continuation, special bonuses or like compensation under Sellers' plans, policies or arrangements and (ii) liability under the WARN Act, or any similar state or local law, arising from, relating to or claimed by reason of the Closing or the transactions contemplated by this Agreement or which result from or relate to actions taken by Sellers on or before the Closing Date. (d) Vacation. Buyer shall adopt and assume Sellers' liability for -------- accrued, unused vacation entitlement of U.S. Transferred Employees as of the Closing to the extent listed on the Balance Sheet. (e) Workers Compensation. Sellers shall be responsible for all -------------------- workers compensation claims filed by or on behalf of a U.S. Transferred Employee to the extent attributable to events, occurrences or exposures prior to the Closing. Buyer shall be responsible for all workers compensation claims filed by or on behalf of a U.S. Transferred Employee to the extent attributable to events, occurrences or exposures following the Closing. (f) Employment and Plan Liabilities. It is understood and agreed that ------------------------------- neither AlliedSignal nor Buyer is assuming any obligations or liabilities arising under any Plan (except to the extent provided in Section 8.2(d) above 8.2(g) below) or as a result of any Employee's or Former Employee's employment with, or termination of employment, from Sellers, and Sellers shall remain responsible for any such obligations and liabilities. (g) Employment Agreements. Buyer shall reimburse Sellers any --------------------- Liabilities incurred after the Closing Date under the employee agreements listed under "Employee 47 Agreement" on Schedule 2.20(a), other than the agreement relating to the employment of Tucker E. Nason. (h) Post-Closing Liability. AlliedSignal and Buyer shall pay and be ---------------------- solely liable for, and shall indemnify and hold Parent and Sellers harmless against, any obligation, cost or expense for severance pay, termination pay, salary continuation, special bonuses or like compensation under any Buyer plan, policy or arrangement which result from, or relate to, actions taken by AlliedSignal or Buyer or any Affiliate thereof after the Closing Date. (i) Cooperation. The parties agree to furnish each other with such ----------- information concerning employees and employee benefit plans, and to take all such other action, as is necessary or appropriate to effect the transactions contemplated by this Article VIII. ARTICLE IX TERMINATION; MISCELLANEOUS 9.1 Termination. ----------- (a) This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing Date, as follows: (i) by the mutual written agreement of Buyer and Parent; (ii) by Buyer or Parent if the Closing has not occurred on or before September 30, 1998; provided, however, that the right to terminate this -------- ------- Agreement pursuant to this Section 9.1(a)(ii) shall be suspended as to any party whose failure to fulfill any material obligation under this Agreement shall have been the cause of, or shall have resulted in, the failure of the Closing to occur prior to such date until the fifth Business Day after such failure has been cured; or (iii) by Buyer or Parent in the event of the issuance by any Governmental Entity of a final, nonappealable order or injunction restraining or prohibiting the consummation of the transactions contemplated hereby. (b) This Agreement shall terminate automatically upon any termination of the Aerospace Agreement. (c) Except for the obligations contained in Section 6.1, the last sentence of Section 4.5 and this Article IX (other than Sections 9.2, 9.13 and 9.14) and the representations and warranties contained in Sections 2.16 and 3.8 (and the related indemnity obligations under Sections 7.2(a)(i) and 7.3(a)(i) of the Aerospace Agreement, respectively), all of which shall survive any termination of this Agreement, upon the termination of this Agreement pursuant to Sections 9.1(a) or (b), this Agreement shall forthwith become null and void, and no party hereto or any of its officers, directors, employees, agents, consultants, stockholders or principals shall have any rights or Liabilities hereunder or with respect hereto, including without limitation for 48 any breach of warranty or representation; provided, however, that nothing -------- ------- contained herein shall relieve any party hereto from Liability for any willful failure to comply with any covenant or agreement contained herein. 9.2 Further Assurances. From time to time after the Closing, ------------------ AlliedSignal, Buyer, Parent and Sellers shall execute and deliver or cause to be executed and delivered such further documents, certificates, instruments of conveyance, assignment and transfer and take such further action as AlliedSignal, Buyer, Parent or Sellers may reasonably request in order to more effectively to sell, assign, convey, transfer, reduce to possession and record title to any of the Purchased Assets to Buyer or to better enable Buyer to complete, perform and discharge any of the Assumed Liabilities. AlliedSignal, Buyer, Parent and Sellers agree to cooperate with each other in all reasonable respects to assure to Buyer the continued title to and possession of the Purchased Assets in the condition and manner contemplated by this Agreement. Each party hereto shall cooperate and deliver such instruments and take such action as may be reasonably requested by any other party hereto in order to carry out the provisions and purposes of this Agreement and the transactions contemplated hereby. AlliedSignal, Buyer, Parent and Sellers shall cooperate and shall cause their respective Affiliates, officers, employees, agents and representatives to cooperate to ensure the orderly transition of the Business from Sellers to Buyer and to minimize the disruption to the Business resulting from the transactions contemplated hereby . 9.3 Entire Agreement; Amendments; Waivers. This Agreement, the ------------------------------------- Confidentiality Agreement, and the documents referred to herein and to be delivered pursuant hereto constitute the entire agreement between the parties hereto pertaining to the subject matter hereof, and supersede all prior and contemporaneous agreements, understandings, negotiations and discussions of the parties, whether oral or written. No amendment, supplement, modification, waiver or termination of this Agreement shall be binding unless executed in writing by the party to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision or breach of this Agreement, whether or not similar, unless otherwise expressly provided. 9.4 Benefit; Assignment. This Agreement shall be binding upon and ------------------- inure to the benefit of and shall be enforceable by the parties hereto and their respective successors and permitted assigns. This Agreement shall not be assigned by any party hereto without the prior written consent of the other party hereto; provided, however, that AlliedSignal or Buyer may assign any or all of their respective rights hereunder to one or more Affiliates of AlliedSignal or Buyer, as the case may be, without the consent of Parent or Sellers provided that AlliedSignal or Buyer, as the case may be, shall continue to be obligated to perform all of its obligations hereunder. 9.5 No Presumption. AlliedSignal, Buyer, Parent and Sellers have -------------- participated jointly in the negotiation and drafting of this Agreement. In the event any ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by AlliedSignal, Buyer, Parent and Sellers, and no presumption or burden of proof shall 49 arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. 9.6 Notices. Notices and other communications provided for herein ------- shall be in writing and shall be deemed given only if delivered to the party personally or sent to the party by telecopy, by registered or certified mail (return receipt requested) with postage and registration or certification fees thereon prepaid, or by any nationally recognized overnight courier, addressed to the party at its address set forth below: If to Parent or Sellers: Banner Aerospace P.O. Box 20260 Washington, DC 20041 Attention: Chief Financial Officer Telecopy No.: 703-478-5795 with copy to: Donald E. Miller 10704 Riverwood Drive Potomac, MD 20854 If to AlliedSignal or Buyer: AlliedSignal Inc. P.O. Box 2245 101 Columbia Road Morristown, NJ 07962-2245 Attention: General Counsel Telecopy No.: 973-455-4413 or to such other address as a party may from time to time designate in writing in accordance with this section. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. 9.7 Terms Generally. --------------- (a)(i) Words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other genders as the context requires, (ii) the terms "hereof," "herein," and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole (including all of the Annexes, Schedules and Exhibits hereto) and not to any particular provision of this Agreement, and Article, Section, paragraph, Exhibit and Schedule references are to the Articles, Sections, paragraphs, Exhibits and Schedules to this Agreement unless otherwise specified, (iii) the word "including" and words of similar import when used in this Agreement shall mean "including, without limitation," unless otherwise specified, (iv) the word "or" shall not be exclusive, and (v) provisions shall apply, when appropriate, to successive events and transactions. 50 (b) Each reference in this Agreement (or in any other document or instrument furnished to AlliedSignal or Buyer by Parent or any Seller pursuant to this Agreement) to "the best of Parent's and each Seller's knowledge", or words of similar import referring to Parent and Sellers (including Parent and Sellers not being aware of a particular event or other matter), means the actual knowledge, after due inquiry, of each executive officer of Parent and each of the Sellers. 9.8 Counterparts; Headings. This Agreement may be executed in ---------------------- several counterparts, each of which shall be deemed an original, but such counterparts shall together constitute but one and the same Agreement. The Article and Section headings in this Agreement are inserted for convenience of reference only and shall not constitute a part hereof. 9.9 Severability. If any provision, clause or part of this ------------ Agreement or the application thereof under certain circumstances is held invalid or unenforceable, the remainder of this Agreement, or the application of such provision, clause or part under other circumstances, shall not be affected thereby. 9.10 No Reliance. Except for any assignees permitted by Section ----------- 9.4 of this Agreement and the indemnified persons pursuant to Sections 7.2 and 7.3 of the Aerospace Agreement: (i) no third party is entitled to rely on any of the representations, warranties or agreements of the parties hereto contained in this Agreement; and (ii) the parties hereto assume no Liability to any third party because of any reliance on the representations, warranties or agreements of such parties contained in this Agreement. 9.11 Governing Law. This Agreement shall be construed and ------------- interpreted according to the laws of the State of New York, without regard to the conflict of law principles thereof. 9.12 Submission to Jurisdiction; Waivers. The parties hereto ----------------------------------- hereby irrevocably and unconditionally agree that: (a) All actions and proceedings arising out of or relating to this Agreement shall be heard and determined in a New York state or federal court sitting in the City of New York, and the parties hereto hereby irrevocably submit to the exclusive jurisdiction of such courts in any such action or proceedings and irrevocably waive the defense of an inconvenient forum to the maintenance of any such action or proceeding. (b) Service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to such party at its address as provided in Section 9.6. 9.13 Bulk Transfer. The parties hereto hereby waive compliance ------------- with the provisions of any applicable bulk sales law of any jurisdiction in connection with the transactions contemplated hereby and no representation, warranty or covenant contained in this Agreement shall be deemed to have been breached as a result of such non-compliance. Parent and Sellers hereby agree, jointly and severally, to indemnify, defend and hold AlliedSignal and Buyer 51 harmless from and against any and all Losses arising out of or relating to claims which may be asserted by third Persons, including Governmental Entities, against the Purchased Assets or any Buyer Indemnified Parties (as defined in the Aerospace Agreement) as a result of non-compliance with any applicable bulk sales law. Nothing in this Agreement shall be construed as an admission by any party as to the applicability of any bulk sales laws. 9.14 Use of Names. During the first 180 days after the Closing ------------ Date, Buyer shall have the right to use all of the logos, trademarks and trade identification of Parent as are located at the Acquired Real Property or on the Purchased Assets (collectively, the "Trademarks"). Buyer's use of the ---------- Trademarks shall be in accordance with such reasonable quality control standards as shall be promulgated by Parent and provided to Buyer. If Parent shall notify Buyer in writing of Buyer's material failure to comply with such reasonable quality control standards and Buyer continues to not comply with such reasonable quality control standards for more than 20 days after receipt of such notice, Parent shall have the right to terminate Buyer's right under this Section 9.14 to use the Trademarks. 9.15 Relationship with Aerospace Agreement. The parties ------------------------------------- acknowledge and agree that it is the intent of the parties that, notwithstanding any other provision of this Agreement or the Aerospace Agreement, the representations, warranties and covenants contained in this Agreement and in the Aerospace Agreement that (i) have substantially the same language (without regard to the identity of the parties making such representation and warranty or covenant) and (ii) contain either the language "in the aggregate" or a similar combining concept or a reference to a Material Adverse Effect (a "Collective Representation" or a "Collective Covenant", as the case may be) shall be deemed to be a single representation and warranty to be a single covenant, as the case may be, for purposes of determining whether such representation and warranty has been breached or such covenant has been complied with and all relevant facts relating to such Collective Representation or Collective Covenant in both agreements shall be considered. As examples, if there should be an issue regarding whether a Collective Representation contained in this Agreement has been breached, the parties would consider inaccuracies in such Collective Representation as well as inaccuracies in the corresponding Collective Representation in the Aerospace Agreement in determining whether a breach of such Collective Representation had occurred and in determining the materiality of any breach of a Collective Representation relating to the Business, reference shall be made to the Combined Business. 9.16 Schedules. All references herein to any Schedule shall refer --------- to the Schedule of the same title attached to the Aerospace Agreement, and such Schedule shall be considered a part of this Agreement as though attached hereto. 52 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. ALLIEDSIGNAL INC. BANNER AEROSPACE, INC. By:______________________________ By:___________________________ Name: Joe Leonard Name: Warren D. Persavich Title: Senior Vice President Title: Senior Vice President AS BAR PBH LLC PB HERNDON AEROSPACE, INC. By: ALLIEDSIGNAL INC. By:___________________________ Name: Warren D. Persavich Title: Vice President By:______________________________ Name: Joe Leonard Title: Senior Vice President BANNER AEROSPACE SERVICES, INC. By:___________________________ Name: Warren D. Persavich Title: Vice President ANNEX A DEFINITIONS The following terms shall have the respective meanings ascribed to them in this Annex A. References to Sections constitute references to Sections of the Agreement. "Accounts Receivable" means all billed and unbilled accounts receivable and ------------------- all trade notes receivable relating to the Combined Business whether recorded or unrecorded, including, without limitation, all trade receivable from other divisions or Affiliates of Parent and the Sellers. "Acquired Real Property" means, collectively, the Leased Real Property and ---------------------- Owned Real Property. "Affiliate" of any Person means any Person directly or indirectly --------- controlling, controlled by or under common control with such Person. "Aerospace Agreement" means the Asset Purchase Agreement, dated as of the ------------------- date of this Agreement, by and among Parent, Sellers listed in Annex A thereto, AlliedSignal and Buyer, together with the Annexes, Schedules and Exhibits attached thereto, as the same may be amended from time to time in accordance with the terms thereof. "Aerospace Acquired Assets" means the Acquired Assets as defined in the ------------------------- Aerospace Agreement. "Aerospace Assumed Liabilities" means the Assumed Liabilities as defined in ----------------------------- the Aerospace Agreement. "Aerospace Excluded Assets" means the Excluded Assets as defined in the ------------------------- Aerospace Agreement. "Aerospace Non-Assumed Liabilities" means the Non-Assumed Liabilities as --------------------------------- defined in the Aerospace Agreement. "Aerospace Purchased Assets" means the Purchased Assets as defined in the -------------------------- Aerospace Agreement. "Agreement" means the Asset Purchase Agreement, dated as of December __, --------- 1997, by and among Parent, BAS, Herndon, AlliedSignal and Buyer, together with the Annexes, Schedules and Exhibits attached thereto, as the same may be amended from time to time in accordance with the terms thereof. "AlliedSignal" had the meaning set forth in the Preamble of the Agreement. ------------ 2 "AlliedSignal Common Stock" means the common stock, par value $1 per share, ------------------------- of AlliedSignal. "AlliedSignal Reports" has the meaning set forth in Section 3.6. -------------------- "Antitrust Division" means the Antitrust Division of the United States ------------------ Department of Justice. "Assets" means businesses, properties, assets, goodwill, rights, interests ------ and privileges of every kind, nature or description, wherever located, whether real, personal or mixed, tangible or intangible, and without regard to whether they have value for accounting purposes or are carried on or reflected in relevant books and records or financial statements. "Assumed Liabilities" has the meaning set forth in Section 1.3(a). ------------------- "Assumed Tax Liabilities" means Tax liabilities for value-added Taxes, real ----------------------- property Taxes, personal and intangible property Taxes and payroll Taxes, in each case only to the extent included on the Closing Balance Sheet. "Average Trading Price" means, as of a specified date, the average of the --------------------- daily high and low closing prices of AlliedSignal Common Stock as reported on the NYSE Composite Tape on each of the twenty (20) consecutive trading days immediately preceding (and not including) such date. "BAS" has the meaning set forth in the Preamble to the Agreement. --- "Balance Sheet" has the meaning set forth in Section 2.6. ------------- "Bid" has the meaning set forth in Section 2.8(d). --- "BTG" means the Banner Technology Group. --- "BTG Assets" has the meaning set forth in the Preamble to the Agreement. ---------- "Business" has the meaning set forth in the Recitals of the Agreement. -------- "Business Day" or "business day" means any day other than a Saturday, ------------ ------------ Sunday, or a day on which banking institutions in the City of New York are authorized or obligated by law or executive order to close. "Buyer" has the meaning set forth in the Preamble of the Agreement. ----- "Closing" has the meaning set forth in Section 1.6(a). ------- "Closing Date" has the meaning set forth in Section 1.6(a). ------------ 3 "Closing Date Balance Sheet" means the Closing Date Balance Sheet as -------------------------- defined in the Aerospace Agreement. "Closing Date Net Worth" means the Closing Date Net Worth as defined in the ---------------------- Aerospace Agreement. "Closing Date Shares" has the meaning set forth in Section 1.4. ------------------- "COBRA" has the meaning set forth in Section 2.20(c)(iii). ----- "Code" means the Internal Revenue Code of 1986, as amended. ---- "Combined Purchased Assets" means, collectively, the Purchased Assets and ------------------------- the Purchased Assets as defined in the Aerospace Agreement. "Combined Business" means the Business and Business as defined in the ----------------- Aerospace Agreement. "Competitive Activities" has the meaning set forth in Section 6.4(a). ---------------------- "Confidentiality Agreement" means that certain confidentiality agreement ------------------------- dated June 27, 1997 between AlliedSignal and Parent. "Confidential Information" has the meaning set forth in Section 6.5. ------------------------ "Contracts" means (a) all written and oral contracts, licenses, --------- commitments, agreements and instruments, including all customer contracts, operating contracts and distribution contracts relating to the Business, (b) all sales and purchase orders and supply agreements and other agreements relating to the Business, (c) all leases of Equipment and Real Property relating to the Business and (d) all other contracts, licenses, agreements and instruments relating to the Business; provided, however, that the term "Contract" shall not -------- ------- -------- include any collective bargaining agreement or any employment agreement or other Plan. "DA" means Dallas Aerospace, Inc., a Texas corporation and a wholly-owned -- Subsidiary of Parent. "DA Agreement" shall mean the rights and obligations arising under the ------------ contingent payment provisions set forth in the Agreement dated January 16, 1997 relating to the acquisition of Herndon. "Debt" means, with respect to any Person, the following Liabilities, ---- whether incurred by such Person, directly or indirectly, without duplication: (i) its Liabilities for borrowed money; (ii) its Liabilities for the deferred purchase price of property acquired by it (excluding accounts payable arising in the ordinary course of business but 4 including, without limitation, all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property); (iii) the amount of the obligation of such Person as the lessee under any Capital Lease that would, in accordance with GAAP, appear as a Liability on a balance sheet of such Person ("Capital Lease" meaning, at any time, a lease with respect to which such Person, as lessee, is required concurrently to recognize the acquisition of an asset and the incurrence of a Liability in accordance with GAAP); (iv) amounts secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such amounts); (v) all of its Liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money); (vi) any Guarantee of such Person with respect to Liabilities of any Person of the character described in any of the clauses described in (i) through (vi) above ("Guarantee" meaning, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any indebtedness, dividend or other Debt or obligation of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person); (vii) all Liabilities of any Subsidiary of such Person of the character described in clauses (i) through (vii) above; and (viii) all Liabilities of the character described in clauses (i) through (vii) above with respect to which, and to the extent that, such Person remains legally liable, notwithstanding that such Liability or obligation is deemed extinguished under GAAP. "Employees" has the meaning set forth in Section 8.1. --------- "Environmental Claim" shall mean any third party or governmental written ------------------- claim, notice, request for information, demand, investigation, lawsuit, proceeding, judgment, award, penalty, order or other action that could expose Parent, the Sellers, AlliedSignal or Buyer to Losses under any Environmental Law or to Losses for personal injuries (including death) or property damage relating to or arising from the presence of, or exposure to, Hazardous Materials. 5 "Environmental Law" means all applicable Laws relating to the protection of ----------------- the environment (including, but not limited to, natural resources) and human health and safety, including, without limitation (a) all requirements pertaining to reporting, licensing, permitting, investigation and remediation of emissions, discharges, releases or threatened releases of Hazardous Materials or other environmental conditions into the air, surface water, groundwater or land or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, and (b) all requirements pertaining to the protection of the health and safety of employees and other workers, and the protection of or compensation to individuals from or related to exposures to Hazardous Materials. "Environmental Liability" means any Liability (existing at, or arising ----------------------- after, the Closing) under Environmental Law, or any remedial action (at or after the Closing), in connection with the Purchased Assets or the Business to the extent arising from any condition (including any Hazardous Materials condition) existing, or any act or omission the Sellers or any of their predecessors or any of their past, present or future Subsidiaries, at or prior to the Closing Date, including claims, demands, assessments, judgments, orders, causes of action (including toxic tort suits), notices of actual or alleged violations or Liability (including such notices regarding the disposal or release of Hazardous Materials on the Acquired Real Property or elsewhere), proceedings and any associated Losses. "Environmental Permit" means any Permit issued under any Environmental Law -------------------- or issued by any Governmental Entity responsible for environmental matters. "Equipment" means all tangible assets and properties, except Real Property, --------- owned, used or held for use by either Seller, including cars, trucks and other transportation equipment, machinery and equipment, tools, spare parts, furniture, office equipment, furnishings and fixtures and machinery and equipment under order or construction. "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended. "Escrow Agent" means the escrow agent under the Escrow Agreement. ------------ "Escrow Agreement" means the Escrow Agreement as defined in the Aerospace ---------------- Agreement. "Estimated Share Number" has the meaning set forth in Section 1.4. ---------------------- "Exchange Act" means the Securities Exchange Act of 1934, as amended. ------------ "Excluded Assets" has the meaning set forth in Section 1.2(b). --------------- "Fairchild" means The Fairchild Corporation, a Delaware corporation. --------- "FAA" means the Federal Aviation Administration. --- "Financial Statements" has the meaning set forth in Section 2.6. -------------------- 6 "FIRPTA Affidavit" has the meaning set forth in Section 1.7(a)(vii). ---------------- "Former Employees" has the meaning set forth in Section 8.1. ---------------- "FTC" means the United States Federal Trade Commission. --- "GAAP" means United States generally accepted accounting principles, ---- consistently applied. "Government Contract" shall mean any written prime contract, subcontract, ------------------- grant or cooperative agreement with (i) the US Government, (ii) any prime contractor of the US Government or (iii) any subcontractor with respect to any contract described in clauses (i) or (ii) above. "Governmental Entity" means (a) any multinational, federal, provincial, ------------------- state, municipal, local or other governmental or public department, court, commission, board, bureau, agency, legislative or quasi-legislative body or instrumentality, domestic or foreign; (b) any subdivision, agent, commission, board, or department, authority, or similar body or instrumentality of any of the foregoing; or (c) any quasi-governmental or private body exercising any regulatory, expropriation or taxing governmental authority under or for the account of any of the foregoing. "Hazardous Material" means any substance, material or waste (a) the ------------------ presence of which requires investigation or remediation under any Environmental Law, (b) which is regulated by an applicable Governmental Entity, which substance, material or waste includes, without limitation, petroleum and its by- products, friable asbestos, and any material or substance which is defined as a "hazardous waste," "hazardous substance," "hazardous material," "restricted hazardous waste," "industrial waste," "solid waste," "contaminant," "pollutant," "toxic waste" or "toxic substance" under any provision of Environmental Law, (c) which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous, or (d) the presence of which causes or threatens to cause a nuisance or trespass to any property or poses or threatens to pose a hazard to the health or safety of individuals on or about any such property. "Herndon" has the meaning set forth in the Preamble to this Agreement. ------- "Herndon Adjustment Amount" means the amount determined in accordance with ------------------------- Section 1.4(b) of the Aerospace Agreement as allocated to the Initial Purchase Price pursuant to Section 9.15 of the Aerospace Agreement. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, ------- as amended. "Inactive Employee" has the meaning set forth in Section 8.2(a). ----------------- "Indemnification Escrow Shares" means (i) as of the Closing Date, a number ----------------------------- of shares of AlliedSignal Common Stock equal to five percent (5%) of the Estimated Share Number and (ii) thereafter, the initial number of Indemnification Escrow Shares less any Indemnification Escrow 7 Shares from time to time released from escrow pursuant to Section 1.5(b) or (d) of the Aerospace Agreement. "Indemnifying Party" means the Indemnifying Party as defined in the ------------------ Aerospace Agreement. "Initial Purchase Price" has the meaning set forth in Section 1.4. ---------------------- "Intellectual Property" means all foreign and domestic patents (including --------------------- all reissues, divisions, continuations and extensions thereof), patent rights, service marks, trademarks and tradenames, trade dress, all product names, all assumed or fictitious names and the logos associated therewith, copyrights, applications for the foregoing, licenses and other contractual rights with respect to the foregoing and other such property and intangible rights owned, used or held for use by either Seller, including financial and marketing business data, pricing and cost information, business and marketing plans and customer and suppliers lists, together with the goodwill of the Business in connection with which such trademarks, tradenames, product names and service marks are used. "Inventory" means all inventory of the Combined Business, including --------- finished goods, work-in-progress, raw materials, operating chemical and catalysts, parts, accessories, packaging, manufacturing, administrative and other supplies on hand, goods held for sale or lease or to be furnished under Assumed Contracts, and other inventory owned, used or held for use by either Seller. "IRS" means the United States Internal Revenue Service. --- "Laws" means all laws, constitutions, statutes, codes, ordinances, decrees, ---- rules, regulations, municipal by-laws, judicial or arbitral or administrative or ministerial or departmental or regulatory judgments, orders, decisions, rulings or awards, consent orders, consent decrees, policies, voluntary restraints, guidelines, or any provisions or interpretations of the foregoing, including general principles of common and civil law and equity, binding on or affecting the Person referred to in the context in which such word is used. "Leased Real Property" means all leased Real Property relating to the -------------------- Business including, without limitation, all Real Property listed on Part B of Schedule 2.13(a). "Liabilities" means, as to any Person, all debts, liabilities, obligations ----------- and responsibilities of any kind or nature whatsoever of such Person, whether direct or indirect, fixed or contingent, known or unknown, accrued, vested or otherwise, whether in contract, tort, strict Liability or otherwise, and whether or not actually reflected, or required by GAAP to be reflected, in such Person's balance sheets or other books and records. "Lien" means any lien, charge, claim, pledge, security interest, ---- conditional sale agreement or other title retention agreement, lease, mortgage, security agreement, right of first refusal, option, restriction, tenancy, license, covenant, right of way, easement or other 8 encumbrance (including the filing of, or agreement to give, any financing statement under the Uniform Commercial Code or statute or law of any jurisdiction). "Major Customer" means any customer of the Combined Business that accounted -------------- for $500,000 or more in revenues of the Combined Business in the 1997 fiscal year or could reasonably be expected to account for more than $500,000 or more in revenues of the Combined Business in the 1998 fiscal year. "Major Supplier" means any supplier of the Combined Business (including any -------------- supplier of Intellectual Property) that accounted for $1,000,000 or more in sales to the Combined Business in the 1997 fiscal year or could reasonably be expected to account for more than $1,000,000 or more in sales to the Combined Business in the 1998 fiscal year. "Material Adverse Effect" means (i) a material adverse effect upon, or ----------------------- material adverse change in, the operations, Assets, Liabilities, condition (financial or otherwise), or results of operations of the Combined Business, taken as a whole (ii) any event, condition, circumstance or change that is reasonably likely to have a Material Adverse Effect referred to in preceding clause (i), or (iii) a significant risk that Buyer and the Buyer under the Aerospace Agreement, in any material respect, will not be able after the Closing to operate the Combined Business substantially as operated by, or to own, possess and use the Purchased Assets and the Aerospace Acquired Assets substantially as owned, possessed and used by, the Sellers and the Sellers under the Aerospace Agreement, taken as a whole, as of the date hereof; provided, -------- however, that the loss of business from customers and suppliers of the Combined - ------- Business (including through termination of contracts or reduction of purchases) shall not be deemed a Material Adverse Effect unless the condition in Section 5.1(e) of the Aerospace Agreement has not been satisfied. "Non-Assumed Liabilities" has the meaning set forth in Section 1.3(b). ----------------------- "Novation Agreement" has the meaning set forth in Section 4.15. ------------------ "NYSE" means the New York Stock Exchange, Inc. ---- "OSHA" has the meaning set forth in Section 2.9(a) hereof. ---- "Owned Real Property" means all Real Property owned by Sellers, including, ------------------- without limitation, all Real Property listed on Part A of Schedule 2.13(a). "Parent" has the meaning set forth in the Preamble of the Agreement. ------ "Parent Subsidiaries" means the direct or indirect Subsidiaries of Parent ------------------- or any other corporation or entity in which Parent owns a majority of the capital stock or other equity interest. "Parent Reports" has the meaning set forth in Section 2.28. -------------- "PBGC" means the Pension Benefit Guaranty Corporation. ---- 9 "Permits" means all franchises, approvals, permits, authorizations, ------- licenses, orders, registrations, certificates, variances, exemptions and other similar permits or rights obtained from any Governmental Entity relating to the conduct of the Business or the Acquired Real Properties and all pending applications therefor. "Permitted Liens" means (a) Liens securing Taxes, assessments, governmental --------------- charges or levies, all of which are not yet due and payable, (b) Liens (other than any Lien imposed by ERISA) incurred or deposits made in the ordinary course of the Business and on a basis consistent with past practice in connection with worker's compensation, unemployment insurance or other types of social security, (c) mechanics, materialman's, carrier's, warehousemen's, landlords and other similar Liens under state or common law or (d) such other Liens which, individually and in the aggregate, do not and would not detract from the value of or impair the use of any Purchased Asset; it being understood that to the extent a Permitted Lien relates to or arises from a Non-Assumed Liability, the applicable Seller shall still be liable for such Non-Assumed Liability to the extent set forth herein. "Person" means an individual, a corporation, a partnership, a limited ------ liability company, an association, a firm, a Governmental Entity, a trust or other entity or organization. "Plans" has the meaning set forth in Section 2.20(a)(iii). ----- "PTO" means the United States Patent and Trademark Office. --- "Purchase Price Escrow Shares" means a number of shares of AlliedSignal ---------------------------- Common Stock equal to one percent (1%) of the Estimated Share Number. "Purchased Assets" has the meaning set forth in Section 1.2(a). ---------------- "Real Property" means all real property, together with all fixtures, ------------- fittings, buildings, structures and other improvements erected thereon, and easements, rights of way, water lines, rights of use, licenses, hereditaments, tenements, privileges and other appurtenances thereto (such as appurtenant rights in and to public streets). "SEC" means the Securities and Exchange Commission. --- "Securities Act" means the Securities Act of 1933, as amended. -------------- "Seller" and "Sellers" have the respective meanings set forth in the ------ ------- Preamble of the Agreement. "Small Licenses" has the meaning set forth in Section 2.15(d). -------------- "Subsidiary" of any Person means any corporation, partnership, joint ---------- venture, limited liability company, trust or other entity with respect to which such Person directly or indirectly owns or controls more than 50% of (i) the issued and outstanding capital stock having ordinary voting power to elect a majority of the board of directors or other governing body of such corporation (irrespective of whether at the time capital stock of any other class or classes of such 10 corporation shall or might have voting power upon the occurrence of any contingency), (ii) the interest in the capital or profits of such partnership, joint venture or limited liability company or (iii) the beneficial interest in such trust. "Tax" means any tax imposed under Subtitle A of the Code and any net --- income, alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad valorem, value added, transfer, franchise, profits, license, lease, service, service use, withholding on amounts paid to or by either Seller, payroll, employment, excise, severance, stamp, capital stock, occupation, property, environmental or windfall profits tax, premium, custom duty or other tax, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest, penalty, addition to tax or additional amount imposed by any Governmental Entity responsible for the imposition of any such tax (domestic or foreign) (a "Tax Authority"). ------------- "Tax Authority" has the meaning set forth in the definition of "Tax". ------------- --- "Technology" means all formulae, processes, procedures, designs, ideas, ---------- research records, inventions (whether or not patentable), records of inventions, test information, technical information, engineering data, marketing know-how, proprietary information, manufacturing information, know-how, and trade secrets (and all related manuals, books, files, journals, models, instructions, patterns, drawings, blueprints, plans, designs specifications, equipment lists, parts lists, descriptions, data, art work, software, computer programs and source code data related thereto including all current and historical data bases) owned, used or held for use by either Seller ( it being understood that, to the extent any such technology is licensed to a Seller, "Technology" shall ---------- mean any and all rights of such Seller under such license). "Third Party Rights" has the meaning set forth in Section 1.2(a)(xi). ------------------ "Trademarks" has the meaning set forth in Section 9.14. ---------- "Transaction Documents" has the meaning set forth in Section 2.3. --------------------- "Transfer Taxes" means all state, local and foreign sales, use, transfer, -------------- real property transfer, documentary stamp, recording and other similar taxes arising from and with respect to the sale and purchase of the Purchased Assets. "U.S. Employee" has the meaning set forth in Section 8.2(a). ------------- "US Government" shall mean the United States Government and any agencies, ------------- instrumentalities and departments thereof. "U.S. Transferred Employees" has the meaning set forth in Section 8.2(a). -------------------------- "WARN Act" means the Worker Adjustment and Retraining Notification Act, as -------- codified at 29 U.S.C. (S)(S) 2101 - 2109, as amended. ANNEX B JURISDICTIONS OF ORGANIZATION Name of Entity Jurisdiction of Organization - -------------- ---------------------------- PB Herndon Aerospace, Inc. Missouri Banner Aerospace Services, Inc. Ohio EX-10.2 3 ASSET PURCH. AMONG BANNER AND AS BAR LLC EXHIBIT 10.2 _______________________________________________ ASSET PURCHASE AGREEMENT by and among Banner Aerospace, Inc., the Sellers listed on Annex A, AlliedSignal Inc. and AS BAR LLC dated as of December 8, 1997 _______________________________________________ TABLE OF CONTENTS Page ---- ARTICLE I The Transaction 1.1 Purchase and Transfer............................................... 1 1.2 Acquisition of Assets............................................... 2 1.3 Assumption of Assumed Liabilities................................... 5 1.4 Initial Purchase Price.............................................. 9 1.5 Escrow of Shares.................................................... 9 1.6 Purchase Price Adjustment........................................... 10 1.7 Accounts Receivable................................................. 13 1.8 Closing............................................................. 14 1.9 Deliveries and Proceedings at the Closing........................... 15 1.10 Stock Legend........................................................ 17 1.11 Prorations.......................................................... 17 ARTICLE II Representations And Warranties Of Parent And Sellers 2.1 Qualification....................................................... 18 2.2 Ownership of the Companies.......................................... 18 2.3 Authorization and Enforceability.................................... 19 2.4 No Violation of Laws or Agreements.................................. 19 2.5 Consents............................................................ 20 2.6 Financial Statements................................................ 20 2.7 No Changes.......................................................... 21 2.8 Contracts........................................................... 22 2.9 Permits and Compliance With Laws Generally.......................... 23 2.10 Environmental Matters............................................... 24 2.11 Transactions with Affiliates........................................ 25 2.12 Title............................................................... 25 2.13 Acquired Real Property.............................................. 26 2.14 Taxes............................................................... 27 2.15 Intellectual Property and Technology................................ 28 2.16 Brokerage........................................................... 29 -i- TABLE OF CONTENTS (continued) Page ---- 2.17 Product Warranties and Guarantees................................... 29 2.18 Products Liability.................................................. 30 2.19 Labor Matters....................................................... 30 2.20 Employee Benefits................................................... 30 2.21 No Pending Litigation or Proceedings................................ 33 2.22 Insurance........................................................... 33 2.23 Customers; Suppliers................................................ 33 2.24 Condition of Assets................................................. 34 2.25 All Assets.......................................................... 34 2.26 Undisclosed Liabilities............................................. 34 2.27 Securities Matters.................................................. 34 2.28 SEC Filings......................................................... 35 2.29 Bank Accounts....................................................... 35 2.30 Business Conduct.................................................... 35 ARTICLE III Representations And Warranties Of AlliedSignal and Buyer 3.1 Organization and Good Standing...................................... 35 3.2 Authorization and Enforceability.................................... 36 3.3 No Violation of Laws or Agreements.................................. 36 3.4 Consents............................................................ 36 3.5 AlliedSignal Common Stock........................................... 36 3.6 SEC Filings......................................................... 37 3.7 Financial Statements................................................ 37 3.8 Brokerage........................................................... 37 ARTICLE IV Additional Covenants 4.1 Conduct of Business................................................. 37 4.2 Mutual Covenants.................................................... 40 4.3 Filings and Authorizations.......................................... 40 4.4 Public Announcement................................................. 41 4.5 Investigation....................................................... 41 4.6 Taxes............................................................... 42 4.7 Certain Deliveries.................................................. 44 4.8 Consents............................................................ 44 -ii- TABLE OF CONTENTS (continued) Page ---- 4.9 Releases............................................................ 44 4.10 Real Property....................................................... 44 4.11 Environmental....................................................... 45 4.12 Ancillary Agreements................................................ 45 4.13 Reasonable Best Efforts............................................. 45 4.14 Negotiations........................................................ 45 4.15 U.S. Government Contracts........................................... 46 4.16 NYSE Listing........................................................ 47 4.17 Continued Existence................................................. 47 4.18 Company Debt........................................................ 47 4.19 Side Letters........................................................ 47 4.20 Product Liability Insurance......................................... 47 4.21 Harco Northern Ireland, Ltd......................................... 48 ARTICLE V Conditions Precedent 5.1 Conditions Precedent to Obligations of Allied Signal and Buyer...... 48 5.2 Conditions Precedent to Obligations of Parent and Sellers........... 50 ARTICLE VI Certain Additional Covenants 6.1 Expenses............................................................ 51 6.2 Maintenance of Books and Records.................................... 52 6.3 Financial Statements................................................ 52 6.4 Non-Competition/Non-Solicitation.................................... 52 6.5 Confidential Information............................................ 54 ARTICLE VII Survival; Indemnification 7.1 Survival............................................................ 54 7.2 Indemnification by Parent, Sellers and Herndon Sellers.............. 55 7.3 Indemnification by AlliedSignal and Buyer........................... 56 7.4 Notification of Claims.............................................. 57 -iii- TABLE OF CONTENTS (continued) Page ---- ARTICLE VIII Employees And Employee Benefits 8.1 Scope of Article.................................................... 59 8.2 U.S. Employees...................................................... 59 8.3 Foreign Employees................................................... 61 ARTICLE IX Termination; Miscellaneous 9.1 Termination......................................................... 62 9.2 Further Assurances.................................................. 63 9.3 Entire Agreement; Amendments; Waivers............................... 63 9.4 Benefit; Assignment................................................. 63 9.5 No Presumption...................................................... 63 9.6 Notices............................................................. 64 9.7 Terms Generally..................................................... 64 9.8 Counterparts; Headings.............................................. 65 9.9 Severability........................................................ 65 9.10 No Reliance......................................................... 65 9.11 Governing Law....................................................... 65 9.12 Submission to Jurisdiction; Waivers................................. 65 9.13 Bulk Transfer....................................................... 65 9.14 Use of Names........................................................ 66 9.15 Herndon Price Allocation............................................ 66 9.16 Relationship with Herndon Agreement................................. 66 -iv- ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT, dated as of December 8, 1997, by and among Banner Aerospace, Inc., a Delaware corporation ("Parent"), the seven companies ------ listed on Annex A hereto (individually, a "Seller" and, collectively, ------- ------ "Sellers"), AlliedSignal Inc., a Delaware corporation ("AlliedSignal") and AS ------- BAR LLC, a Delaware limited liability company ("Buyer"). Sellers and the ----- Subsidiaries of Sellers listed on Annex B hereto (the "Seller Subsidiaries") are ------- ------------------- referred to herein collectively as the "Companies". --------- The Companies are engaged in, among other things, the businesses of supplying to the aerospace industry (i) aircraft hardware (including bearings, nuts, bolts, screws, rivets and other types of fasteners), (ii) chemical products (including adhesives, sealants, lubricants, cleaners and paint) and (iii) related support services (including Inventory management services). The term "Business", as used herein, shall mean the compilation of all the -------- businesses of all of the Companies, except that when this Agreement refers to a single Company and the Business, it refers to that portion of the Business which is conducted by that particular Company. Buyer desires to purchase, and AlliedSignal desires to cause the purchase of, substantially all of the Assets of Sellers (including all of the Subsidiary Shares (as hereinafter defined)), and Sellers desire to transfer, and Parent desires to cause the transfer of, such Assets to Buyer, all on the terms and subject to the conditions set forth in this Agreement. Capitalized terms used herein without definition shall have the meanings assigned to them in Annex C hereto, which is hereby incorporated into ------- this Agreement as if set forth in full herein. NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements contained herein and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I THE TRANSACTION 1.1 Purchase and Transfer. Upon the terms and subject to the --------------------- conditions set forth in this Agreement, at the Closing, (i) Sellers shall, and Parent shall cause Sellers to, transfer, convey, assign and deliver to Buyer, and Buyer shall purchase, acquire and accept from the Sellers, all of Sellers' right, title and interest in and to the Purchased Assets, and (ii) Buyer shall pay to Sellers the Initial Purchase Price and shall assume, and agree to thereafter pay, perform and discharge when due, the Assumed Liabilities. 2 1.2 Acquisition of Assets. --------------------- (a) Subject to Section 1.2(b), "Purchased Assets" means all of the ---------------- Assets of Sellers owned, used or held for use in connection with, or that are otherwise related to or required for the conduct of, the Business including, without limitation, all of the Assets set forth below: (i) all Subsidiary Shares; (ii) all Owned Real Property; (iii) all Equipment; (iv) all Inventory; (v) all Accounts Receivable; (vi) all credits, prepaid expenses, deferred charges, advance payments, security deposits and deposits owned, used or held for use by any Company with respect to the Business ("Prepaid Expenses") to the extent that such items will accrue to the benefit of Buyer immediately following the Closing; (vii) all Intellectual Property; (viii) all Technology; (ix) all Contracts; (x) all Permits; (xi) all books, records, ledgers, files, documents (including originally executed copies of written Contracts, customer and supplier lists (past, present or future), correspondence, memoranda, forms, lists, plats, architectural plans, drawings and specifications, copies of documents evidencing Intellectual Property or Technology, new product development materials, creative materials, advertising and promotional materials, studies, reports, sales and purchase correspondence, books of account and records relating to the employees of the Business, photographs, records of plant operations and materials used, quality control records and procedures, equipment maintenance records, manuals and warranty information, research and development files, data and laboratory books, inspection processes, in each case, whether in hard copy or magnetic format, in each instance, to the extent used or held for use with respect to the Business or the employees of the Business; (xii) all rights or choses in action arising out of occurrences before or after the Closing Date and related to any portion of the Business, including third party warranties and guarantees and all related claims, credits, rights of recovery and set-off and other similar contractual rights, as to third parties held by or in favor of Sellers and arising out of, resulting from or relating to the Business or the Acquired Assets, other 3 than as a result of the allegations of James Fairchild of wrongful termination by Burbank Aircraft Supply, Inc. (collectively, "Third ----- Party Rights"); ------------ (xiii) all rights to insurance and condemnation proceeds relating to the damage, destruction, taking or other impairment of the Acquired Assets which damage, destruction, taking or other impairment occurs on or prior to the Closing Date, except to the extent Buyer receives a credit against the Initial Purchase Price pursuant to Section 1.2(d)(i)(y) or 1.2(d)(ii)(y); (xiv) all Assets (other than Subsidiary Assets) that (A) are reflected on the Balance Sheet (other than Assets reflected on the Balance Sheet that are disposed of prior to the Closing Date in accordance with this Agreement) or (B) have been or are acquired by the Companies after the date of the Balance Sheet and would be reflected on a balance sheet for the Business prepared on a basis consistent with that on which the Balance Sheet was prepared (other than any such Assets that are disposed of prior to the Closing Date in accordance with this Agreement); and (xv) the Business and the goodwill thereof. (b) Notwithstanding anything to the contrary contained herein, Purchased Assets shall not include any Excluded Assets. "Excluded Assets" --------------- means: (i) cash and cash equivalents on hand or in bank accounts; (ii) all accounts owing between and among each Company and its Affiliates, other than trade receivables; (iii) except as otherwise set forth herein, Assets attributable or related to any Plan; (iv) all rights of Parent and each Seller under this Agreement; (v) all stock and minute books and similar records of the Sellers; (vi) all Third Party Rights arising out of Non-Assumed Liabilities or Excluded Assets; (vii) all shares of capital stock of (or other ownership interests in) Burbank Aircraft International, Inc., Banner Aero (Australia) Pty, Ltd. and TriFast S.a.r.l; (viii) all Prepaid Expenses to the extent that such items will not accrue to the benefit of Buyer immediately following the Closing; (ix) all Plans of Sellers (including, without limitation, the deferred compensation agreement with Charles Lovin (the "Lovin Agreement"), --------------- the two non-competition agreements with Lee Brenner (the "Brenner Agreements") and those referenced on Schedule 2.20(a)(iii)); 4 (x) all Contracts referenced on Schedule 2.8(a)(i) other than (i) the purchase orders described thereon and (ii) distributorship agreements with Fairchild Fasteners that are terminable by the Companies on not more than 60 days notice without any penalty; (xi) all Contracts pursuant to which any business included in the Business or any Company was purchased; and (xii) all rights of any Seller under the Second Amended and Restated Credit Agreement, dated as of December 12, 1996, among Parent, Burbank Aircraft Supply, Inc. and other Subsidiaries of Parent, Citicorp USA, Inc. (as Administrative Agent and Arranger), NationsBank, N.A. (as Co- Arranger) and the Institutions as Lenders and Issuing Banks thereunder. (c) Nonassignable Rights. Anything in this Agreement to the contrary -------------------- notwithstanding, but subject to AS's and Buyer's rights under Section 7.2, this Agreement shall not constitute an agreement to assign any of the Contracts, Intellectual Property, Technology or Permits or any claim or right or any benefit arising thereunder or resulting therefrom if an attempted assignment thereof, without the consent of a third Person thereto, would constitute a breach or other contravention thereof or in any way adversely affect the rights of Buyer thereunder. (Any Asset that, but for this Section 1.2(c) would be sold and assigned at the Closing shall remain a "Purchased Asset" for purposes of this Agreement.) Parent and Sellers will use all reasonable best efforts to obtain the consent of the other parties to any such Contract or Permit for the assignment thereof to Buyer and Buyer shall reasonably cooperate with such efforts. If such consent is not obtained prior to the Closing, or if an attempted assignment thereof would be ineffective or would adversely affect the rights of Parent and Sellers thereunder so that Buyer would not in fact receive all such rights, subject to Section 5.1(d), the Closing shall nevertheless take place and, thereafter, Parent, Sellers and Buyer will cooperate in a mutually agreeable arrangement under which Buyer would obtain the benefits and assume the obligations thereunder (but only to the extent such obligations would have constituted Assumed Liabilities if such assignment occurred on the Closing Date) from and after the Closing Date in accordance with this Agreement, including subcontracting, sublicensing or subleasing to Buyer, or under which Parent and each Seller would enforce for the benefit of Buyer, with Buyer assuming each Seller's obligations to the same extent as if it would have constituted an Assumed Liability and any and all rights of Parent or any Seller against a third Person thereto. Parent and each Seller will pay promptly to Buyer when received all monies received by Parent or any Seller after the Closing Date under any of the Contracts or any claim or right or any benefit arising thereunder to the extent that Buyer would be entitled thereto pursuant hereto. The provisions of this Section 1.2 shall in no way limit the Closing condition set forth in Section 5.1(d). (d) Damage; Condemnation. -------------------- (i) If, prior to the Closing, any Acquired Real Property is damaged by fire, vandalism, acts of God, or other casualty or cause (and such damage is not repaired by the Closing), Buyer shall have the option of (x) accepting such property as it is 5 together with the insurance proceeds, if any, and the right to receive the same, in which case no adjustment shall be made in respect of the decreased value of such Asset pursuant to Section 1.4(b), or (y) excluding such Acquired Real Property from the Acquired Assets and receiving a credit against the Initial Purchase Price equal to the fair market value thereof, in which case no adjustment shall be made in respect of the decreased value of such Asset pursuant to Section 1.4(b) other than such credit against the Initial Purchase Price. If Buyer elects option (x) above, Parent hereby agrees to cooperate with Buyer in any loss adjustment negotiations, legal actions and agreements with the insurance company, and to assign (pursuant to a writing in form satisfactory to Buyer,) to Buyer at Closing its rights to such insurance proceeds (and pay over to Buyer any such proceeds already received), and Parent will not settle any insurance claims or legal actions relating thereto without Buyer's prior written consent. (ii) If, prior to the Closing, all or any portion of any Acquired Real Property is taken by eminent domain, Buyer shall have the option of (x) proceeding with the Closing and accepting the property as affected by such taking, together with all compensation and damages awarded, if any, and the right to receive the same, in which case, no adjustment shall be made in respect of the decreased value of such Asset pursuant to Section 1.4(b), or (y) excluding such Acquired Real Property from the Acquired Assets and receiving credit against the Initial Purchase Price equal to the fair market value thereof, in which case no adjustment shall be made in respect of the decreased value of such Asset pursuant to Section 1.4(b) other than such credit against the Initial Purchase Price. If Buyer elects option (x) above, Parent hereby agrees to assign to Buyer at Closing its rights to such compensation and damages (and pay over to Buyer any such compensation and damages already received), and will not settle any proceedings relating to such taking without Buyer's prior written consent. (iii) Parent shall promptly notify AlliedSignal of any material casualty or any actual or threatened condemnation affecting all or any portion of any Acquired Real Property. Any such notice relating to casualty shall be accompanied by Parent's selection of an architect or engineer to determine the cost of repair and/or replacement. (iv) Nothing in this Section 1.2(d) limits the condition to Closing set forth in Section 5.1(a). 1.3 Assumption of Assumed Liabilities. --------------------------------- (a) "Assumed Liabilities" shall mean (i) all Liabilities of the ------------------- Business (including bank overdrafts, if any) to the extent included on the Closing Date Balance Sheet, (ii) Liabilities under the Contracts, Permits, Intellectual Property or Technology to the extent (but not only to the extent) arising from, and accruing with respect to, the operation of the Business after the Closing, and (iii) Liabilities relating to the employees of the Business expressly assumed pursuant to Article VIII. (b) Notwithstanding anything to the contrary contained herein, neither Buyer nor AlliedSignal shall assume or be bound by, or be obligated or responsible for, any Non- 6 Assumed Liabilities. "Non-Assumed Liabilities" shall mean (x) all Liabilities of ----------------------- Sellers relating to the Purchased Assets or the Business and any claims in respect thereof, other than the Assumed Liabilities, and (y) any Liabilities or claims which may be asserted against or imposed upon Buyer by reason of its being a successor or transferee of Sellers or as an acquiror of the Purchased Assets or the Business or otherwise as a matter of law. Without limitation of the foregoing, all of the following shall be Non-Assumed Liabilities for the purposes of this Agreement: (i) any product Liability, or Liability relating to any toxic tort or similar claim for injury to person or property, regardless of when made or asserted that arises out of or is based upon any express or implied representation, warranty, agreement or guarantee made by any Company or any of its Affiliates, or alleged to have been made by any of such Persons, or that it is imposed or asserted to be imposed by operation of law, in connection with any service performed or product manufactured, distributed or sold by or on behalf of any Company or any of its Affiliates (in the case of the Seller Subsidiaries prior to the Closing) or which arises out of any condition existing as of the Closing, including any claim relating to any product delivered, manufactured or distributed by any Company or any of its Affiliates (in the case of the Seller Subsidiaries prior to the Closing) and any claim seeking recovery for consequential damages, lost revenue or income; (ii) except for Assumed Tax Liabilities, any Liability of Parent or any Company (including under any Contract) for Taxes, including without limitation, any (1) Tax payable (A) with respect to the Business, Assets or operations of Parent or Sellers, (B) by any member of any consolidated, affiliated or unitary group of which Parent or any Company is a member, or (C) by any other person for whose Tax Parent or any Company may be liable under Contract or otherwise, and (2) Tax incident to or arising as a consequence of the negotiation or consummation by Parent or any Seller or any member of any affiliate group of which Parent or Sellers is a member of this Agreement and the transactions contemplated hereby; (iii) except as expressly provided in clause (iii) of the definition of Assumed Liabilities, any Liability with respect to compensation or employee benefits of any nature owed to any employees, agents or independent contractors of any Company or any of its Affiliates, whether or not employed by Buyer after the Closing, or any of their beneficiaries, heirs or assigns, that arises out of or relates to events or conditions to the extent occurring before the Closing, including, but not limited to, Liabilities for supplemental unemployment benefits, vacation pay, sick pay, severance benefits, Liabilities under any Plan whether arising prior to, on or after the Closing Date, Liabilities to provide any retiree benefits to former hourly and/or salaried employees of the Business or any retiree benefits to be provided to current hourly and/or salaried employees of the Business, and any other benefits, withholding tax Liabilities, workers compensation or unemployment compensation premiums, hospitalization or medical claims, occupational injury, disease or disability claims or claims for discrimination, 7 unfair labor practices, violations of the collective bargaining agreements or wrongful discharge; (iv) Liabilities relating to the operation of the Business prior to the Closing arising by operation of law under any common law or statutory doctrine (including successor Liability or de facto merger); (v) any Liability with respect to or arising out of any Contract (A) that is not capable of being assigned to Buyer at the Closing (except to the extent provided in Section 1.2(c)) (B) to the extent arising out of any breach or default thereof by Parent or any Company on or prior to the Closing Date (including any event occurring on or prior to the Closing Date that, with the passing of time or the giving of notice, or both, would become a breach or default) under any Contract, or (C) required by the terms thereof to be discharged on or prior to the Closing Date; (vi) any Liability of Parent or any of the Companies or any of their predecessors (including under any Contract) with respect to any claim, action, suit or proceeding made or threatened (whether prior to, at or after the Closing Date) which asserts Losses arising from (x) the presence, at any time prior to the Closing Date, of asbestos at the Acquired Real Property, any other real property owned or leased at any time by Parent, Sellers or any of their past, present or future Subsidiaries or any other third-party location or (y) the presence of asbestos in any product at any time prior to the Closing Date manufactured, used, sold or serviced by Parent, Sellers or any of their past, present or future Subsidiaries, or which otherwise asserts any asbestos-related personal injury or property damage. (vii) any Liability to the extent the existence of such Liability constitutes a breach of any representation or warranty of Parent or any Seller contained in or made pursuant to this Agreement; (viii) any Environmental Liability, including, without limitation, any Environmental Claim that relates to or arises in connection with the Business, the Acquired Assets, or any other Assets (including, but not limited to facilities used for the off-site disposal of waste) formerly owned, leased, operated or used by any of the Companies or any predecessors-in-interest to any of the Companies, if the Environmental Claim is based on any act or omission of the Business or any of the Companies on or prior to the Closing Date; (ix) any Liability in respect of the Excluded Assets; (x) any Debt or other amounts (except to the extent reflected on the Closing Date Balance Sheet) owing by the Companies to Parent or any of Parent's Affiliates (other than the Companies) including, without limitation, any negative balances in intercompany accounts, but excluding any trade payables incurred in the ordinary course of business consistent with past practice; 8 (xi) any Liability that arises out of or relates to the employment or termination of employment of any employees, agents or independent contractors by Parent, Sellers or any of their Affiliates, except any such Liability caused by Buyer's failure to perform its obligations under Article VIII; (xii) any Liability to past, present or future stockholders of Parent or Sellers; (xiii) any Liability arising out of the Lovin Agreement or the Brenner Agreements; (xiv) any Liability that arises out of or relates to any claim, action, suit, proceeding or investigation, whether civil or criminal, pending or threatened as of the Closing Date, relating to the conduct or activities of the Business, or the ownership, use or possession of the Acquired Assets, on or prior to the Closing Date; (xv) any Liability relating to any broker's or finder's fee or commission incurred by Parent, any of the Companies or any of their Affiliates as a result of the transactions contemplated hereunder; (xvi) any Liability arising under, resulting from or relating to the matters referred to on Schedule 2.20(a)(iii), including, without limitation, the Plans described thereon; (xvii) any Liability arising under, resulting from, or relating to matters set forth on Schedule 2.8(a)(i) (other than with respect to the purchase orders described thereon and distributorship agreements with Fairchild Fasteners that are terminable by the Companies on not more than 60 days notice without any penalty) including, without limitation, the agreement with Shared Technologies Fairchild, Inc. and the tax sharing agreement described thereon, except to the extent reflected on the Closing Date Balance Sheet; and (xviii) except for the Assumed Liabilities, any Liability arising out of or relating to the conduct or activities of the Business (including any predecessor operations) or the ownership, use or possession of the Acquired Assets on or prior to the Closing Date, any Liabilities or claims arising out of or relating to events, circumstances or conditions occurring on or before the Closing Date, and any Liability associated with any other business of Parent, Sellers and their Affiliates. Parent and each Seller hereby irrevocably waives and releases, and has caused the Parent Subsidiaries to waive and release, AlliedSignal and Buyer from all Non-Assumed Liabilities, including any Liabilities created or which arise by statute or common law. 9 1.4 Initial Purchase Price. ---------------------- (a) No later than the third Business Day prior to the Closing Date, Parent shall deliver to AlliedSignal a written notice setting forth Parent's good faith estimate of the Closing Date Net Worth (without giving effect to the proviso in the second sentence of Section 1.6(a)) (the "Estimated Closing Date ---------------------- Net Worth") and the basis for the calculation thereof. - --------- (b) The initial purchase price for the Purchased Assets to be paid at the Closing (the "Initial Purchase Price") shall consist of a number of shares ---------------------- of AlliedSignal Common Stock (the "Closing Date Shares") equal to (1) the number ------------------- (rounded to the nearest whole share) (the "Estimated Share Number") obtained by ---------------------- dividing (A) an amount equal to Three Hundred Twenty-Two Million Dollars ($322,000,000) plus (x) the Adjustment Amount if Estimated Closing Date Net Worth exceeds Target Net Worth and minus (y) the Adjustment Amount if Estimated ----- Closing Date Net Worth is less than Target Net Worth, by (B) the Average Trading Price as of the Closing Date, minus (2) the sum of the Purchase Price Escrow ----- Shares and the Indemnification Escrow Shares, to be delivered by Buyer to Sellers in the proportions set forth on Annex 1.6(f) hereto. ------------ 1.5 Escrow of Shares. ---------------- (a) At the Closing, Buyer shall deliver to the Escrow Agent (i) the Purchase Price Escrow Shares, to be held in an escrow account pursuant to the terms of the Escrow Agreement until released from escrow pursuant to the terms of Section 1.6(f), and (ii) the Indemnification Escrow Shares, to be held in an escrow account pursuant to the terms of the Escrow Agreement until released as set forth in Section 1.5(b) or (d). (b) At any time on or after the Closing Date, Parent shall have the right, upon not less than 10 Business Days' written notice to Buyer and the Escrow Agent, to deliver Escrow Cash to the Escrow Agent to be held pursuant to the terms of the Escrow Agreement in lieu of the Indemnification Escrow Shares. Upon delivery by Parent of Escrow Cash to the Escrow Agent, the Escrow Agent shall release to Parent the number of Indemnification Escrow Shares (rounded to the nearest whole share) obtained by dividing (i) the face amount of the Escrow Cash by (ii) the Average Trading Price as of the date the shares are released. Any notice delivered pursuant to this Section 1.5(b) shall set forth either the face amount of the Escrow Cash to be delivered by Parent or the number of Indemnification Escrow Shares to be released by the Escrow Agent. (c) If, on or prior to the first anniversary of the Closing Date (the "Escrow Release Date"), a Buyer Indemnified Party has given notice of a claim ------------------- for indemnification for Losses in accordance with Section 7.4 (all such claims, the "Buyer Escrow Claims"), Buyer shall give written notice thereof to Parent on ------------------- or prior to such date setting forth Buyer's good faith estimate of the aggregate amount of such Losses in reasonable detail for which Buyer has not been reimbursed (the "Buyer Escrow Claim Loss Estimate"); provided, however, Buyer's -------------------------------- -------- ------- failure to deliver a notice pursuant to this Section 1.5(c) shall not relieve any party from any liability that it may have to such Buyer Indemnified Party in respect of any matter under Section 7.2(a); 10 (d) The Indemnification Escrow Shares shall be released from escrow as follows: (i) On the Escrow Release Date a number of shares of AlliedSignal Common Stock (rounded to the nearest whole share) equal to (1) the number of Indemnification Escrow Shares minus (2) a number (which shall ----- not be less than zero) equal to the quotient of (A) an amount equal to (x) the Buyer Escrow Claim Loss Estimate for which AlliedSignal or Buyer has not been reimbursed minus (y) the amount of the Basket (to the extent ----- not previously applied), divided by (B) the Average Trading Price as of ---------- the Escrow Release Date, shall be released from escrow and delivered to Parent; (ii) Upon resolution of a Buyer Escrow Claim following the Escrow Release Date, to the extent it is determined pursuant to Article VII that such Losses are payable by Parent or Sellers to a Buyer Indemnified Party with respect to such claim, a number of shares of AlliedSignal Common Stock (rounded to the nearest whole share) equal to the lesser of (1) the quotient of (x) the amount of Losses for which Parent and Sellers must indemnify Buyer Indemnified Parties in respect of such claim, divided by ---------- (y) the Average Trading Price as of the date of the release of such shares, and (2) the number of Indemnification Escrow Shares that remain in escrow, shall be released to Buyer; and (iii) Upon resolution of all Buyer Escrow Claims and release to Buyer of all Indemnification Escrow Shares to which it is entitled pursuant to clause (ii) above, all remaining Indemnification Escrow Shares shall be released to Parent. (e) Notwithstanding anything to the contrary contained herein, any party entitled to have Indemnification Escrow Shares released and delivered to it in accordance with Section 1.5(d) may elect, by written notice to the Escrow Agent not less than two Business Days prior to the release, to receive the value (or any portion thereof) of the Indemnification Escrow Shares to which the party is entitled (based on the Average Trading Price as of the date the collateral is to be released) in Escrow Cash to the extent Escrow Cash is being held as collateral pursuant to the Escrow Agreement. 1.6 Purchase Price Adjustment. ------------------------- (a) Within sixty (60) days after the Closing Date, Buyer shall prepare and deliver to Parent a proposed Closing Date Balance Sheet conforming to the requirements set forth in this Section 1.6 (the "Proposed Closing Date ------------------------- Balance Sheet"). The Proposed Closing Date Balance Sheet shall be a pro forma - ------------- unaudited consolidated balance sheet of the Combined Business as of the Closing Date reflecting only Acquired Assets, Assumed Liabilities, Herndon Purchased Assets and Herndon Assumed Liabilities, prepared in accordance with GAAP on a basis consistent with the Balance Sheet (including, without limitation, accounting for Inventory in accordance with the procedures and criteria set forth on Schedule 1.6(a)) and presenting fairly the -------- financial condition of the Combined Business as of the Closing Date; provided, -------- however, that the Proposed Closing Date Balancee Sheet shall not include (i) as - ------- an asset any future tax benefits 11 that relate to the allowance for doubtful accounts or (ii) as a Liability any allowance for doubtful accounts (which is $2,263,000 on Schedule 2.6). During the period following the Closing Date and prior to the delivery of the Closing Date Balance Sheet, Parent shall make available to Buyer the appropriate personnel and the books and records of the Companies to assist in the preparation of the Closing Date Balance Sheet. The Proposed Closing Date Balance Sheet shall include appropriate adjustments as if it were prepared for a fiscal year-end and will set forth and designate the net worth, on a combined basis, of the Combined Business as of the Closing Date ("Closing Date Net Worth"). ---------------------- (b) In connection with the preparation of the Proposed Closing Date Balance Sheet, Sellers, the Herndon Sellers, Parent and Buyer shall, at Buyer's option upon notice to Parent as provided in Schedule 1.6(b), cooperate with each other in the taking of a physical count of the Inventory in accordance with the procedures set forth in Schedule 1.6(b). Parent and Sellers shall be entitled to have a representative present to observe the taking of the physical count of the inventory described in this Section 1.6(b). (c) Following the Closing, Buyer shall provide to Parent and Sellers, and their respective employees, agents and advisers, upon not less than two business days prior written request, reasonable access during regular business hours to the financial books and records, personnel and facilities relating to the Combined Business necessary for the review and analysis of the Proposed Closing Date Balance Sheet. If Parent fails to give written notice of its disagreement with any item on such Proposed Closing Date Balance Sheet within sixty (60) days after receipt of such Proposed Closing Date Balance Sheet (the "Review Period"), such Proposed Closing Date Balance Sheet shall be deemed - -------------- accepted and shall become the Closing Date Balance Sheet and be final and binding upon the parties hereto. If, before the expiration of the Review Period, Parent provides Buyer with a written notice setting forth in reasonable detail its disagreement with one or more items on the Proposed Closing Date Balance Sheet (a "Dispute Notice"), Buyer and Parent shall negotiate in good -------------- faith to resolve all matters set forth in the Dispute Notice ("Disputes") during -------- the sixty (60) day period following receipt of the Dispute Notice by Parent (the "Resolution Period"). Items on the Proposed Closing Date Balance Sheet shall be ----------------- deemed final to the extent they are not referenced in the Dispute Notice. To the extent Disputes are resolved to the mutual satisfaction of Buyer and Parent during the Resolution Period, such resolutions shall be reflected on the Proposed Closing Date Balance Sheet and deemed final, and if all Disputes are so resolved, the Proposed Closing Date Balance Sheet, as modified to reflect the resolution of such Disputes shall be deemed final and become the Closing Date Balance Sheet. (d) If all Disputes cannot be resolved within the Resolution Period, then within fifteen (15) days of the end of the Resolution Period, Parent and Buyer (i) shall set forth in writing their respective positions on the Disputes still at issue and (ii) shall submit the unresolved Disputes to a Big Six accounting firm (other than the principal outside accountants for either Parent or Buyer or any of their Affiliates) mutually acceptable to Parent and Buyer (the "Firm"). ---- (e) The Firm shall make a determination with respect to the Disputes so submitted as well as such modifications, if any, to be made to the Proposed Closing Date 12 Balance Sheet in accordance with such determination within thirty (30) days after the engagement of the Firm and the Proposed Closing Date Balance Sheet as so modified shall be deemed final and shall become the Closing Date Balance Sheet; provided, however, that in no event shall the Firm determine, with -------- ------- respect to any Dispute submitted to it, an amount that is outside of the range of the amounts submitted by Parent and Buyer nor shall it address or consider any issue other than the issues involved in the Disputes. Such determinations by the Firm shall be conclusive and binding upon, and shall not be appealable by the parties hereto. The fees and expenses of the Firm shall be shared equally by Parent and Buyer. (f) Promptly, and in any event within five Business Days, after the Closing Date Balance Sheet becomes final and binding on the parties hereto: (i) If Closing Date Net Worth is equal to the Estimated Closing Date Net Worth, Buyer shall take all steps reasonably practical (including, without limitation, giving notice to the Escrow Agent), to cause the release and delivery to Sellers, in the proportions set forth on Annex A to the Escrow Agreement, of all the Purchase Price Escrow Shares. (ii) If Closing Date Net Worth is more than Estimated Closing Date Net Worth, (A) Buyer shall take all steps reasonably practical (including, without limitation, giving notice to the Escrow Agent), to cause the release and delivery to Sellers, in the proportions set forth on Annex A to the Escrow Agreement, of all the Purchase Price Escrow Shares and (B) AlliedSignal shall issue and Buyer shall deliver to Sellers, in the proportions set forth on Annex A to the Escrow Agreement, an additional number of shares of AlliedSignal Common Stock having a value (based on the Average Trading Price as of the Closing Date) (rounded to the nearest whole share) equal to the excess of Closing Date Net Worth over Estimated Closing Date Net Worth. (iii) If Estimated Closing Date Net Worth is more than Closing Date Net Worth, (A) a number of Purchase Price Escrow Shares having a value (based on the Average Trading Price) (rounded to the nearest whole share) equal to the excess of Estimated Closing Date Net Worth over Closing Date Net Worth (the "Shortfall Amount") shall be released from escrow and ---------------- returned to AlliedSignal, and Buyer shall take all steps reasonably practical (including, without limitation, giving notice to the Escrow Agent), to cause the release and delivery to the Sellers, in the proportions set forth on Annex A to the Escrow Agreement, of the balance, if any, of the Purchase Price Escrow Shares and (B) if the value (based on the Average Trading Price as of the Closing Date) of all of the Purchase Price Escrow Shares is less than the Shortfall Amount, (x) all of the Purchase Price Escrow Shares shall be released from escrow and returned to AlliedSignal and (y) Parent shall indemnify AlliedSignal for, and shall promptly pay to AlliedSignal in cash, an amount equal to the excess of the Shortfall Amount over the value (based on the Average Trading Price as of the Closing Date) of the Purchase Price Escrow Shares. Such payment shall be made by wire transfer of immediately available funds to a bank account designated by AlliedSignal to Parent within five Business Days 13 after the Closing Date Balance Sheet has become final and binding upon the parties hereto. 1.7 Accounts Receivable. ------------------- (a) After the Closing, Buyer shall have full right and authority to collect for its own account all Accounts Receivable reflected on in the Closing Date Balance Sheet without any allowance for doubtful accounts ("Closing ------- Accounts Receivable"). Each Seller and each Herndon Seller shall immediately - ------------------- pay to Buyer any amount received by such Seller after the Closing attributable to payment of any Closing Accounts Receivable, except with respect to Assigned Receivables after assignment thereof to Parent as provided below. In the event that as of the date that is 180 days after the Closing Date (the "Adjustment ---------- Date") Buyer shall not have been paid in full in respect of Closing Accounts - ---- Receivable an amount equal to the Closing Accounts Receivable, Buyer shall give Parent written notice (the "Receivables Notice") specifying the sum of (i) the ------------------ aggregate amount of Closing Accounts Receivable collected by Buyer during the period from the Closing Date through the Adjustment Date and (ii) the aggregate amount of Inventory (valued at original cost) that (x) is the subject of a Closing Accounts Receivable, (y) has been returned to Buyer during the period from the Closing Date through the Adjustment Date and (z) is not Defective Inventory (the "Collected Amount"). If the face amount of the Closing Accounts ---------------- Receivable exceeds the Collected Amount, (i) such excess (the "Receivables Deficiency"), plus interest accrued on the amount thereof from and including the Closing Date to but excluding the date of payment at a rate per annum equal to the Prime Rate in effect from time to time, shall be paid by Parent to Buyer within five Business Days after the date that the Receivables Notice is given in immediately available funds and (ii) upon receipt of such payment, Buyer shall assign to Parent any Closing Accounts Receivable that were not collected during the period from the Closing Date through the Adjustment Date (the "Assigned Receivables"). Upon an assignment to Parent of Assigned Receivables - --------- ----------- pursuant to this Section, Buyer shall have no further responsibility with respect to any such Assigned Receivables and shall not be entitled to receive any portion of any amounts collected by Parent with respect thereto, and Parent shall be entitled to undertake any and all collection efforts with respect to any such Assigned Receivables. Buyer shall promptly pay to Seller any amount received by Buyer after the Adjustment Date attributable to payment of any Assigned Receivables. In calculating the amount, if any, which Parent must pay to Buyer pursuant to this Section 1.7, payments received by Buyer on account of receivables from a particular customer shall be credited first to the oldest account receivable of that customer until all accounts receivable with respect to that customer are paid in full; provided, however, that no such payment shall -------- ------- be so credited to any pre-Closing account receivable with respect to a Disputed Account Receivable of such customer (as defined below) unless such customer shall have specifically advised Buyer to credit such payment to such Closing Account Receivable. For purposes of this Agreement, "Disputed Account ---------------- Receivable" means any Closing Account Receivable owed: - ---------- (i) by a customer who is bankrupt; (ii) by a customer who has asserted in writing a bona fide claim that the products or services sold and which are the subject matter of the Closing Account 14 Receivable were defective or that the cost of the products or services received from Seller were less than the amount invoiced; (iii) by a customer who, in the reasonable opinion of Buyer, has a bona fide claim that an error has been made on the invoice to such customer; or (iv) by a customer who has asserted that the invoice and shipping documentation did not comply with the customer's requirement In connection with such acquisition of Closing Accounts Receivable by Parent, Buyer agrees to execute assignments, in form and substance reasonably satisfactory to Buyer, as are reasonably requested by Parent in order to effectively transfer to Parent such Closing Accounts Receivable. (b) From and after the Closing, Buyer shall use reasonable efforts to collect all of the Closing Accounts Receivable at their full face value and shall be prompt, and shall exercise reasonable diligence, in such efforts, but in no event shall Buyer be required to resort to litigation to try to collect any such Closing Accounts Receivable. Parent and each Seller shall provide reasonable assistance to Buyer with respect to the collection of the Closing Accounts Receivable. Buyer shall provide to Parent and each Seller reasonable access during regular business hours to all books and records relating to the Closing Accounts Receivable and any payments made with respect thereto. Prior to the Adjustment Date, neither Parent nor any Seller shall contact directly or indirectly any customer from which a Closing Accounts Receivable is due with respect to any matters contemplated by this Agreement, including any outstanding Closing Account Receivable, without Buyer's prior consent in each case. (c) Commencing 60 days after the Closing Date, and continuing not less frequently than monthly during the 120 days thereafter, Buyer shall deliver written reports to Parent setting forth in reasonable detail the status of the collection of the Closing Accounts Receivable, on a customer by customer basis, the collection efforts made by Buyer relating thereto and the status of the payment of any other receivables from such customers to Buyer. Buyer shall in all respects, including its collection efforts, treat the Closing Accounts Receivable in the same manner as it treats its other accounts receivable. 1.8 Closing. ------- (a) Closing Date. The closing of the transactions contemplated under ------------ this Agreement (the "Closing") shall take place at 10:00 a.m. Eastern Time at ------- the offices of Hughes Hubbard & Reed LLP, One Battery Park Plaza, New York, New York, on the fifth Business Day after all conditions to the obligations of the parties under Article V and under Article V of the Herndon Agreement shall have been satisfied or waived (other than those requiring a delivery of a certificate or other document, or the taking of other action, at the Closing and the conditions set forth in Sections 5.1(j) and 5.2(g) and in Sections 5.1(g) and 5.2(g) of the Herndon Agreement), or at such other place and on such other date as the parties may mutually agree in writing (such date on which the Closing occurs hereinafter is referred to as the "Closing Date"). Each of the parties ------------ acknowledges that, with respect to the Closing Date, time is of the essence. 15 (b) Effectiveness. The consummation of the transactions contemplated ------------- by this Agreement and the Closing shall be deemed to take place at 11:59 p.m., Eastern Time, on the Closing Date and no transaction shall be deemed to have been completed and no document or certificate shall be deemed to have been delivered until all transactions are completed and all documents are delivered. 1.9 Deliveries and Proceedings at the Closing. Subject to the ----------------------------------------- terms and conditions of this Agreement, at the Closing: (a) Deliveries to AlliedSignal and Buyer. Parent and Sellers shall ------------------------------------ deliver to AlliedSignal and Buyer: (i) bills of sale and instruments of assignment, in forms reasonably satisfactory to Buyer, to evidence the transfer to Buyer of the Purchased Assets (other than the Owned Real Property) in accordance herewith, duly executed by Sellers; (ii) certificates (or other appropriate evidence of transfer) representing all of the Subsidiary Shares accompanied, except with respect to the certificates representing shares of Banner Aircraft International, GmbH and Harco Northern Ireland, Ltd., by stock powers duly executed in blank with all necessary stock transfer and other documentary stamps attached; (iii) any consents to transfer of all transferable or assignable Contracts and Permits obtained by Parent and the Companies as of Closing and all consents referred to in Section 5.1(d); (iv) title certificates to any motor vehicles included in the Purchased Assets, duly executed by each Seller with any interest therein (together with any other transfer forms necessary to transfer title to such vehicles); (v) one or more deeds of conveyance to Buyer of the Owned Real Property, in forms customarily delivered for similar Real Property conveyances and reasonably satisfactory to Buyer, sufficient to transfer to Buyer good and marketable, and insurable, fee simple title to the Owned Real Property included in the Purchased Assets in accordance herewith, duly executed and acknowledged by each Seller with any interest therein and in recordable form; (vi) one or more title insurance policies, in form, substance and amount, and issued by title insurance companies reasonably acceptable to Buyer, and containing such endorsements and affirmative coverage as Buyer shall reasonably request (including, with respect to Owned Real Property that is a Purchased Asset, nonimputation endorsements), insuring Buyer's fee simple title to the Owned Real Property subject only to the Permitted Liens, the cost of which shall be paid 50% by Parent and Sellers and 50% by AlliedSignal and Buyer; 16 (vii) U.C.C. termination statements in recordable form and other appropriate releases, in form and substance reasonably satisfactory to Buyer, with respect to all recorded Liens in the Purchased Assets; (viii) the Foreign Investment in Real Property Tax Act Certification and Affidavit for each parcel of Owned Real Property, in form reasonably satisfactory to Buyer, duly executed by each Seller transferring Owned Real Property (the "FIRPTA Affidavit"); ---------------- (ix) the certificates and other documents required to be delivered by Parent and Sellers pursuant to Section 5.1 hereof and certified resolutions evidencing the authority of Parent and Sellers as set forth in Section 2.3 hereof; (x) the Release contemplated by Section 4.9; (xi) an opinion of Potter Andersen & Corroon, Delaware counsel, substantially in the form of Exhibit 1.9(a)(xi), to the effect ------------------ that no approval of the holders of Parent Common Stock is required in connection with the execution, delivery and performance of this Agreement by Parent and Sellers; (xii) the Escrow Agreement, duly executed by Parent; (xiii) the letters of Jeffrey Steiner and Fairchild, dated as of the Closing Date, substantially in the form of Exhibit 1.9(a)(xiii)(A-C) ------------------------- (the "Side Letters"); and ------------ (xiv) all such other documents and instruments as shall, in the reasonable opinion of Buyer or its title insurance company (including affidavits and indemnities in connection with nonimputation endorsements), be necessary in connection with the transfer to Buyer of the Purchased Assets in accordance herewith and, where necessary or desirable, in recordable form. (b) Deliveries to Parent and Sellers. AlliedSignal and Buyer will -------------------------------- deliver to Parent and Sellers, as applicable: (i) the Closing Date Shares, issued by AlliedSignal and delivered by Buyer to Sellers in the proportions set forth in Annex 1.6(f) hereto; (ii) an assumption agreement, in form reasonably satisfactory to Parent, to evidence the assumption by Buyer of the Assumed Liabilities in accordance with Section 1.3, duly executed by Buyer; (iii) the certificates and other documents required to be delivered by AlliedSignal and Buyer pursuant to Section 5.2 hereof and certified resolutions evidencing the authority of AlliedSignal and Buyer as set forth in Section 3.2 hereof; (iv) the Escrow Agreement duly executed by Buyer; 17 (v) all such other documents and instruments of assumption as shall, in the reasonable opinion of Parent, be necessary for Buyer to assume the Assumed Liabilities in accordance herewith; and (vi) the Registration Rights Agreement, in the form attached as Exhibit 1.9(b)(vi), duly executed by AlliedSignal. ------- ---------- (c) Escrow Agreement. Parent and Buyer shall use their reasonable ---------------- best efforts to cause the Escrow Agent to execute and deliver an escrow agreement substantially in the form of Exhibit 1.9(c) at the Closing (the -------------- "Escrow Agreement"). - ----------------- 1.10 Stock Legend. ------------ (a) Each certificate representing the shares of AlliedSignal Common Stock issued to Sellers at the Closing shall be endorsed with a legend in substantially the following form: THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE TRANSFER IS MADE IN COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT OR THE CORPORATION RECEIVES AN OPINION OF COUNSEL FOR THE HOLDERS OF THESE SECURITIES REASONABLY SATISFACTORY TO THE CORPORATION STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENT OF SUCH ACT. 1.11 Prorations. The parties hereto agree that the following ---------- expenses shall be calculated and pro rated as of the Closing Date, with Parent and Sellers jointly responsible for such expenses for the period up to the Closing Date (it being understood that any such expense not paid prior to the Closing shall be reflected as a liability on the Closing Date Balance Sheet), and Buyer to be responsible for the period on and after the Closing Date: (a) personal property, real property and payroll taxes (on the basis on which the same were assessed and paid), in each case to the extent relating to the Combined Business and except as otherwise provided in Section 4.6(i); (b) electric, fuel, gas, telephone, sewer and utility charges, in each case to the extent relating to the Combined Business; 18 (c) rentals and other charges under Combined Contracts to be assumed by Buyer pursuant hereto; and (d) charges under maintenance and service contracts and other Combined Contracts, and fees under Permits to be transferred to Buyer as part of the Purchased Assets or the Herndon Purchased Assets. ARTICLE II REPRESENTATIONS AND WARRANTIES OF PARENT AND SELLERS Parent and each Seller hereby jointly and severally represent and warrant to AlliedSignal and Buyer as follows: 2.1 Qualification. Parent is a corporation duly organized, validly ------------- existing and in good standing under the laws of the State of Delaware. Each Company is a legal entity of the type described on Annex A or Annex B, as the case may be, duly organized, validly existing and in good standing under the laws of the jurisdiction set forth next to such Company's name on such Annex, and has all requisite corporate power and authority to own and lease its Assets and to conduct its Business as presently being conducted. Each Company is qualified to do business and is in good standing as a foreign corporation in all jurisdictions wherein the nature of its Business or such Company's ownership or use of its Assets make such qualification necessary, except such failures to be qualified or to be in good standing, if any, which when taken together with all such other failures of such Company would not have a Material Adverse Effect on such Company. None of the Companies is currently insolvent, has suspended payments, is subject to any judicial receivership or liquidation proceedings or is in bankruptcy, nor has any such similar proceedings been commenced with respect to any of them. 2.2 Ownership of the Companies. -------------------------- (a) Except as set forth on Schedule 2.2, all of the outstanding ------------ shares of capital stock of (or other ownership interests in) each of the Sellers are owned of record and beneficially solely by Parent free and clear of any Liens. The ownership of the Subsidiary Shares is described on Schedule 2.2. All of the Subsidiary Shares are (i) duly authorized, validly issued, fully paid and nonassessable and free of preemptive rights and were issued in compliance with all applicable Laws and (ii) except for nominal or qualifying shares identified on Schedule 2.2, owned of record and beneficially solely by one or more Sellers and/or other Seller Subsidiaries, free and clear of any Liens. There are no options, warrants, calls, rights or agreements to which Parent or any of the Companies is a party obligating any of them to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock of (or other ownership interests in) any of the Companies or obligating Parent or any of the Companies to grant, extend or enter into any such option, warrant, call, right or agreement. There are no agreements, voting trusts or proxies with respect to the voting of the Subsidiary Shares. The transfer of the nominal or qualifying shares of the Seller Subsidiaries not owned by any of the Companies to Persons designated by Buyer (i) shall be accomplished at or prior to the Closing and (ii) shall not require 19 any payment by AlliedSignal or Buyer to any Person or result in the creation of any Liability of AlliedSignal or Buyer to any Person. (b) Except for the Subsidiary Shares and except as set forth on Schedule 2.2, none of the Companies owns any shares of capital stock of (or other ownership interests in) any other Person, including any joint venture. 2.3 Authorization and Enforceability. With respect to each of -------------------------------- Parent and the Sellers: (a) such entity has full corporate power and authority to execute, deliver and perform this Agreement and all other agreements, instruments and documents to be executed in connection herewith (such other agreements and instruments being hereinafter referred to collectively as the "Transaction Documents") to which such entity is a party, (b) the execution, - ---------------------- delivery and performance by such entity of this Agreement and the Transaction Documents to which such entity is a party have been duly authorized by all necessary corporate action on the part of such entity and no approval by the holders of any security issued by Parent is required in connection therewith, (c) this Agreement has been duly executed and delivered by such entity, and, as of the Closing Date, the other Transaction Documents to which any such entity is a party will be duly executed and delivered by such entity, (d) this Agreement is a legal, valid and binding obligation of such entity, enforceable against such entity in accordance with its terms, and (e) as of the Closing Date, each of the other Transaction Documents to which such entity is a party will constitute the legal, valid and binding obligations of such entity, enforceable against such entity in accordance with its terms. 2.4 No Violation of Laws or Agreements. The execution, delivery, ---------------------------------- and performance by Parent and each Seller of this Agreement and the Transaction Documents to which such entities (as applicable) are parties do not, and the consummation by Parent and each Seller (as applicable) of the transactions contemplated hereby and thereby, will not, (a) contravene any provision of the charter, bylaws or any other organizational documents of Parent or any Company, or (b) except as set forth on Schedule 2.4 and subject, in the case of clause ------------ (i) below, to such exceptions as would not in the aggregate have a Material Adverse Effect, violate, conflict with, result in a breach of, or constitute a default (or an event which would, with the passage of time or the giving of notice or both, constitute a default) under, or result in or permit the termination, modification, acceleration, or cancellation of, or result in the creation or imposition of any Lien of any nature whatsoever upon any of the Acquired Assets or give to others any interests or rights therein under, (i) any personal property lease with payments in excess of $50,000 per year, lease of Real Property, indenture, mortgage, loan or credit agreement, license, instrument, contract, plan, permit or other agreement or commitment, oral or written, to which Parent or any Company is a party, other than such agreements or commitments involving any customer or supplier of the Business (including any supplier of Intellectual Property), or by which the Business or any of the Acquired Assets may be bound or affected (including without limitation any agreement or instrument pertaining to Debt), or (ii) any judgment, injunction, writ, award, decree, restriction, ruling, or order of any arbitrator or Governmental Entity or any applicable Law to which Parent, any Company or the Acquired Assets is subject. 20 2.5 Consents. Except (i) as set forth on Schedule 2.5 or (ii) for -------- ------------ agreements or commitments involving any customer or supplier of the Business (including any supplier of Intellectual Property), no consent, approval or authorization of, or registration or filing with, any Person (governmental or private) is required in connection with the execution, delivery and performance by Parent or any Seller of this Agreement, the other Transaction Documents to which Parent or any Seller is a party, or the consummation by Parent and each Seller (as applicable) of the transactions contemplated hereby or thereby, including without limitation in connection with the assignment of the Contracts and Permits contemplated hereby, except as required by the HSR Act and except for any required, consent, approval or authorization of, or registration or filing with, any foreign governmental authority. 2.6 Financial Statements. -------------------- (a) Schedule 2.6(a) sets forth (i) an unaudited combined pro forma ------------ balance sheet of the Combined Business as of September 30, 1997 (the "Balance ------- Sheet") and related unaudited combined pro forma statement of income of the - ----- Combined Business for the six months ended September 30, 1997 (together with the Balance Sheet, the "Financial Statements"). The Excluded Assets, the Herndon -------------------- Excluded Assets, the Non-Assumed Liabilities, and the Herndon Non-Assumed Liabilities are excluded from the Balance Sheet. The Financial Statements are in accordance with the books and records of the Companies and the Herndon Sellers and except for the Excluded Assets, the Herndon Excluded Assets, the Non-Assumed Liabilities, the Herndon Non-Assumed Liabilities, and as set forth in Schedule 2.6(a), fairly present the financial position and results of operations of the Combined Business on a stand-alone basis as of the date and for the period indicated, in conformity with GAAP throughout the period specified and in accordance with the procedures and criteria set forth on Schedule 1.6(a), except as expressly set forth therein and except that the - --------------- Financial Statements may omit notes and are subject to normal year-end adjustments which are not, in the aggregate, material. Except as described on Schedule 2.6(a), all fees, charges, costs and expenses associated with the ownership, leasing, operation, maintenance and management of the Combined Business and the Assets owned, used or held for use by the Combined Business have been fully and properly reflected and charged on the Financial Statements in accordance with GAAP (to the extent such items are required to be so reflected and charged in accordance with GAAP). All Acquired Assets, Assumed Liabilities, Herndon Purchased Assets and Herndon Assumed Liabilities are disclosed on or reflected in the Balance Sheet except (i) as disclosed on Schedule 2.6(a), and (ii) as disposed of or transferred between September 30, 1997 and the Closing Date in the ordinary course of business consistent with past practice and in accordance with this Agreement. (b) The future tax benefits set forth in the Balance Sheet as of the date hereof ("Preliminary Future Tax Benefits") represent future tax benefits as of March 31, 1997. No later than 30 days after the date hereof, Parent shall deliver written notice to AlliedSignal of the amount of future tax benefits as of September 30, 1997 ("Final Future Tax Benefits"), and the Balance Sheet shall be adjusted accordingly. 21 2.7 No Changes. Since September 30, 1997, the Companies have ---------- conducted the Business only in the ordinary course of business consistent with past practice and, except as set forth on Schedule 2.7, there has not been: ------------ (a) any Material Adverse Effect; (b) any change in the salaries or other compensation payable or to become payable to, or any advance (excluding advances for ordinary business expenses) or loan to, any employee of the Business, or material change or material addition to, or material modification of, other benefits (including any bonus, profit-sharing, pension or other plan in which any of the employees of the Business participate) to which any of the employees of the Business may be entitled, other than in the ordinary course of the Business consistent with past practice; (c) any material change or modification in any manner of the Companies' existing Inventory management and collection and payment policies, procedures and practices with respect to Inventory and accounts receivable and accounts payable, respectively, of the Business, acceleration of payment of payables or failure to pay or delay in payment of payables and any change in the Companies' existing policies, procedures and practices, with respect to the provision of discounts, rebates or allowances insofar as they relate to the Business; (d) any cancellation or waiver by any Company of any right material to the Business or any cancellation or waiver of any material Debts of or claims of the Business against Parent or any other Affiliate of any Company or any disposition of or failure to keep in effect any rights in, to or for the use of any Permit material to the Business; (e) any damage, destruction or loss, or eminent domain or other condemnation proceeding affecting the distribution center located in Salt Lake City, Utah, or the Business which individually or in the aggregate has had a Material Adverse Effect, whether or not covered by insurance; (f) any change by any Company in its method of accounting or keeping its books of account or accounting practices with respect to the Business except as required by GAAP; (g) any acquisition, sale, transfer or other disposition of any material Assets of the Business other than the disposition of (i) Inventory in the ordinary course of the Business consistent with past practice or (ii) Assets not used or useful in the Business; (h) any commencement or termination of any line of business; (i) any action that would be prohibited to be taken after the date of this Agreement under Section 4.1(c); or 22 (j) any agreement in writing or otherwise to take any of the foregoing actions. 2.8 Contracts. --------- (a) As of the date of this Agreement, Schedule 2.8(a) contains a --------------- true, correct and complete list of (i) all Contracts (other than any guarantee of any Seller that does not directly or indirectly support or benefit the Business) to which Parent or any of its Affiliates (other than the Companies) is a party or which benefit Parent or any of its Affiliates (other than the Companies); (ii) all Contracts under which any Company is a licensee or licensor of Intellectual Property or Technology which are material to the Business; (iii) all Contracts under which any Company is a lessee or lessor of (or has an obligation to lease) Real Property; (iv) all Contracts providing for the formation or operation of a partnership or other joint venture; (v) all material Contracts which afford customers any right to return Inventories at the option of the customer; (vi) all Government Contracts with a backlog in excess of $100,000; (vii) all Contracts requiring forward stocking locations; and (viii) except for agreements or commitments involving any customer or supplier of the Business (including any supplier of Intellectual Property), all other Contracts (other than with respect to which the Business' total annual Liability or expense is less than $1,000,000 per such non-listed Contract). Parent and Sellers have made available to AlliedSignal a correct and complete copy of each written agreement. (b) Except as set forth on Part A of Schedule 2.8(b), with respect to --------------- each Contract described in Schedule 2.8(a), neither any Company nor, to the best of Parent's and each Seller's knowledge, any other party thereto, is in material breach or default and no event has occurred which with notice or lapse of time would constitute a material breach or default, or permit termination, modification, or acceleration, under such Contract. Except as set forth on Part B of Schedule 2.8(b), there are no disputes pending or, to the best of Parent's and each Seller's knowledge, threatened, under or in respect of any of the Contracts described in Schedule 2.8(a) and no counterparty to any such Contract has given notice to any Company or Affiliate thereof with respect to any material breach or default hereunder. Each of the Contracts described in Schedule 2.8(a) is in full force and effect and constitutes the legal and binding obligation of, and is legally enforceable against, such Company as the Contracts relate, and, to the best of Parent's and each Seller's knowledge, any other party thereto, in accordance with its terms. (c) Except as identified with an asterisk on Schedule 2.8(a), each of --------------- the Contracts listed thereon is fully assignable to Buyer (or, in the case of Contracts of the Seller Subsidiaries, will remain in full force and effect upon the sale of the Subsidiary Shares to Buyer) without the consent, approval or waiver of any other Person. None of such Contracts contains any provision which, after the Closing, will restrict Buyer or any of the Seller Subsidiaries from conducting any portion of the Business in any jurisdiction, except such Contracts which may be terminated by Buyer or the applicable Seller Subsidiary without penalty or Liability on no more than 30 days' notice. With respect to those Contracts that were assigned, novated or subleased to any Company by a third party, all necessary consents to such assignments, novations or subleases have been obtained. 23 (d) Subject to such exceptions as would not in the aggregate have a Material Adverse Effect, with respect to each and every Government Contract that has a backlog in excess of $100,000 or binding or non-binding bid for such a Government Contract ("Bid") to which any Company is a party: (i) such Company has fully complied with all material terms and conditions of such Government Contract or Bid, including all clauses, provisions and requirements incorporated expressly, by reference or by operation of law therein; (ii) such Company has fully complied with all requirements of Law applicable to such Government Contract or Bid and no Government Contract is subject to any adjustment in price as a result of a claim by the U.S. Government or U.S. Government prime contractor or subcontractor on the basis of (w) defective pricing pursuant to FAR 52.215-22, FAR 52.215-23, FAR 52.215-24, FAR 52.215-25, (x) CAS violations pursuant to FAR 52.230-2, (y) any submission for progress payments of invoices or (z) any claims arising out of or related to the Government Contracts occurring on or before the Closing Date; (iii) all representations and certifications executed, acknowledged or set forth in or pertaining to such Government Contract or bid for a Government Contract were current, accurate and complete as of their effective date, and such Company has fully complied with all such representations and certifications; (iv) neither the U.S. Government nor any prime contractor, subcontractor or other Person has notified such Company, either orally or in writing, that such Company has breached or violated any Law, certification, representation, clause, provision or requirement, (v) no termination for convenience, termination for default, cure notice or show cause notice has been issued; (vi) no cost incurred by such Company has been questioned or disallowed; and (vii) no money due to such Company has been (or has attempted to be) withheld or set off. 2.9 Permits and Compliance With Laws Generally. ------------------------------------------ (a) Subject to such exceptions as would not in the aggregate have a Material Adverse Effect, (i) except as set forth on Part A of Schedule 2.9(a), --------------- the Companies possess and are in compliance with all Permits required to operate the Business as presently operated and to own, lease or otherwise hold the Acquired Assets under all applicable Laws and (ii) except as set forth on Part B of Schedule 2.9(a), to the best of Parent's and each Seller's knowledge, the Business is conducted by the Companies in compliance with, and the use, construction and operation of all Real Property constituting any part of the Acquired Assets conforms to, all applicable Laws (including the Occupational Safety and Health Act and the rules and regulations thereunder ("OSHA") and ---- other similar Laws, and zoning, building and other similar Laws) and all restrictions and conditions affecting title. All material Permits of the Companies are in full force and effect. There are no proceedings pending or, to the best of Parent's and each Seller's knowledge, threatened that seek the revocation, cancellation, suspension or any adverse modification of any material Permits presently possessed by the Companies. Parent and Sellers are aware of no facts, conditions or circumstances reasonably likely to result in the revocation, cancellation, suspension, or adverse modification of any material Permit. Except as set forth on Part C of Schedule 2.9(a), all material Permits of the Companies are assignable to and at the Closing will be assigned to Buyer (or, in the case of Permits of the Seller Subsidiaries, will continue to be possessed by the Seller Subsidiaries upon the sale of the Subsidiary Shares to Buyer) and no approvals or consents are required for such assignment (or continued possession) 24 and the sale of the Business or Acquired Assets hereunder will not result in a default under or termination of any such material Permit. (b) Except as set forth on Schedule 2.9(b), no outstanding notice, --------------- citation, summons or order has been issued, no outstanding complaint has been filed, no outstanding penalty has been assessed and no investigation or review is pending or, to the best of Parent's and each Seller's knowledge, threatened, by any Governmental Entity or other Person with respect to any alleged (i) violation by any Company relating to the Business or the Acquired Assets of any Law or (ii) failure by any Company to have any Permit required in connection with the conduct of the Business or otherwise applicable to the Business (including the Acquired Assets) except in such cases as would not in the aggregate have a Material Adverse Effect. 2.10 Environmental Matters. As of the Closing Date, except as set --------------------- forth on Schedule 2.10, ------------- (a) There are no reports in Parent's, the Companies' or any of their respective Affiliates' possession or control of environmental site assessments or audits of the Business, the Acquired Assets or any other Assets (including but not limited to facilities used for the off-site disposal of waste) formerly owned, leased, operated or used by the Companies, or any predecessor-in-interest to the Companies. (b) The Companies possess and are in compliance with all Environmental Permits required to operate the Business as presently operated and to own, lease or otherwise hold the Acquired Assets under all Environmental Laws. The operations of the Business and Acquired Assets (including the use, construction and operation of all Real Property constituting any part of the Acquired Assets) are in compliance with all Environmental Laws and are conducted in a manner that does not pose a risk to the safety or health of workers or other individuals or to the environment. All Environmental Permits of the Companies relating to the operation of the Business are in full force and effect. There are no proceedings pending or, to the best of Parent's and each Seller's knowledge, threatened that seek the revocation, cancellation, suspension or any adverse modification of any such Environmental Permits presently possessed by the Companies. Parent and Sellers are aware of no facts, conditions or circumstances reasonably likely to result in the revocation, cancellation, suspension or adverse modification of any Environmental Permits. (c) There are no environmental conditions with respect to the Business, Acquired Assets or any other Assets (including but not limited to facilities used for the off-site disposal of waste) formerly owned, leased, operated or used by any of the Companies, or any predecessor-in-interest to any of the Companies that (i) pose a risk to human health or the environment, or (ii) are otherwise required to be remediated under applicable Environmental Laws due to evidence of soil or groundwater contamination on, under or migrating onto or from the Business, Acquired Assets or any such other Assets. (d) There are no Environmental Claims currently pending nor has Parent, any of the Companies or any of their respective Affiliates received any notice of an Environmental Claim with respect to the Business, the Acquired Assets, or any other Assets (including, but not 25 limited to, facilities used for the off-site disposal of waste) formerly owned, leased, operated or used by the Companies or any predecessors-in-interest to the Companies that a Hazardous Material has been (i) disposed, released, or discharged or (ii) produced, stored, handled, used or emitted onto, under, or from the Business, Acquired Assets or any such other Assets. (e) Neither the Business nor the Acquired Assets are subject to the requirements of any Laws that condition, restrict, prohibit or require notification or disclosure upon the transfer, sale, lease or closure of certain property for environmental reasons. (f) No outstanding notice, citation, summons or order has been issued, no outstanding complaint has been filed, no outstanding penalty has been assessed and no investigation or review is pending or, to the best of Parent's and each Seller's knowledge, threatened, by any Governmental Entity or other Person with respect to any alleged (i) violation by any Company or any of its Affiliates relating to the Business or the Acquired Assets of any Environmental Law or (ii) failure by any Company or any of its Affiliates to have any Environmental Permit required in connection with the conduct of the Business or otherwise applicable to the Business (including the Acquired Assets). 2.11 Transactions with Affiliates. ---------------------------- (a) Set forth on Schedule 2.11(a) is a true, correct and complete ---------------- list and description of (a) all services and other support provided to the Business by Parent and its Affiliates (other than the Companies) since April 1, 1996, (b) all other overhead charges allocated to the Companies since April 1, 1996, and (c) all other transactions between one or more Companies, on the one hand, and Parent or any of its Affiliates (other than the Companies), on the other hand, since April 1, 1996 (other than payment of compensation or other benefits to employees). (b) To the best of Parent's and each Seller's knowledge, except as set forth on Schedule 2.11(b), (i) as of the Closing, no employee, officer or ---------------- director (or any member of his or her immediate family) of Parent or of any Company or any of their Affiliates will be indebted to any Company, nor is any Company indebted (or committed to make loans or extend or guarantee credit) to any of such individuals, (ii) no such individual, except Eric Steiner and Jeffrey Steiner and any such individual whose position is with Fairchild or any of its Affiliates (other than Parent or any of the Companies) has any direct or indirect ownership interest in any Person with which any Company has a business relationship, or any Person that competes with any Company and (iii) no member of the immediate family of any officer or director of any Company is an interested party with respect to any Contract. 2.12 Title. The Sellers have, and at the Closing will transfer to ----- the Buyer, good and marketable title to all personal property owned by them respectively, good and marketable title to all Owned Real Property, valid and enforceable leasehold interests in Leased Real Property and personal property leased by them, and good and valid title to or rights to use, all intangible properties and rights used by them, in each case free and clear of all Liens, except Permitted Liens. The Seller Subsidiaries have good and marketable title to all Subsidiary Assets free and clear of all Liens, except Permitted Liens. 26 2.13 Acquired Real Property. ----------------------- (a) Part A of Schedule 2.13(a) sets forth a true, correct and ---------------- complete list and legal descriptions of all Real Property owned (beneficially or of record) by any of the Companies in the conduct of the Business, and Part B of Schedule 2.13(a) sets forth a true, correct and complete list of all Real Property leased by any of the Companies in the conduct of the Business, and in each case identifies the street address thereof. (b) Except in such cases as would not in the aggregate have a Material Adverse Effect, all structures and other improvements on such properties are within the lot lines and do not encroach on the properties of any other Person (and improvements on adjacent Real Property do not encroach on any of the Real Property constituting any part of the Acquired Assets), and the use, construction and operation of all Real Property constituting any part of the Acquired Assets or otherwise owned or leased by the Companies in the conduct of the Business conform to all applicable building, zoning, safety, environmental and other Laws, permits, licenses and certificates and all restrictions and conditions affecting title. (c) Other than as set forth on of Schedule 2.13(c), there are no ---------------- leases, subleases, options or other agreements, written or oral, granting to any Person (other than the Companies) the right to purchase, use or occupy the Acquired Real Property or any portion thereof. None of Parent, the Companies and any of their respective Affiliates has received any written or oral notice or order by any Governmental Entity, any insurance company which has issued a policy with respect to any of such properties or any board of fire underwriters or other body exercising similar functions which (i) relates to violations of building, safety, fire or other ordinances or regulations, (ii) claims any defect or deficiency with respect to any of such properties or (iii) requests the performance of any repairs, alterations or other work to or in any of such properties or in the streets bounding the same, except such as would not individually or in the aggregate have a Material Adverse Effect. Parent and Sellers have made available to Buyer true, correct and complete copies of all leases and financing documents affecting all or any portion of the Acquired Real Property. (d) None of Parent, the Companies and any of their respective Affiliates has received any written or oral notice for assessments for public improvements against the Acquired Real Property which remains unpaid, and, to the best of Parent's and each Seller's knowledge, no such assessment has been proposed. Except as set forth on Schedule 2.13(d), there is no pending ---------------- condemnation, expropriation, eminent domain or similar proceeding affecting all or any portion of any of the Acquired Real Property and, to the best of Parent's and each Seller's knowledge, no such proceeding is threatened. (e) Except as set forth on Schedule 2.13(e), no Person other than the ---------------- Companies is in possession of (or has any right, absolute or contingent, to possess which is superior to any Company's right to possess) all or any portion of the Acquired Real Property. (f) Except as set forth on Schedule 2.13(f), all Acquired Real ---------------- Property has direct and unrestricted access over currently utilized facilities and land to such public roads, owned roads and driveways presently in use, and such utilities and other services, as are 27 necessary for the uses thereof and the conduct of the Business, and neither any Company nor any other Person has applied for any change in the zoning or land use classification of any such Real Property. (g) Except as set forth on Part A of Schedule 2.13(g), the Acquired ---------------- Real Property has adequate arrangements for supplies of water, electricity, gas and/or oil for all operations at the 1996 or current operating levels, whichever is greater. Except as set forth on Part B of Schedule 2.13(g), there are no actions or proceedings pending or, to the best of Parent's and each Seller's knowledge, threatened that would adversely affect the supply of water, electricity, gas and/or oil to the Acquired Real Property except for those which individually and in the aggregate would not have a Material Adverse Effect. 2.14 Taxes. ----- (a) Parent and each Company has (i) timely filed all returns and reports for Taxes, including information returns, that are required to have been filed in connection with, relating to, or arising out of the Business or the Acquired Assets, (ii) paid to the appropriate Tax Authority all Taxes that are shown to have come due pursuant to such returns or reports and (iii) paid to the appropriate Tax Authority all other Taxes not required to be reported on returns in connection with, relating to, or arising out of, or imposed on the property of the Business for which a notice of assessment or demand for payment has been received or which have otherwise become due except for Taxes being properly contested in good faith. (b) All such returns or reports were complete and accurate in all material respects at the time of filing and such returns which have not been audited do not contain a disclosure statement under Code Section 6662 (or any predecessor provision or comparable provision of any Law). (c) There are no unpaid Taxes with respect to any period ending on or before the Closing Date which are or could give rise to a lien on the Acquired Assets or the Business, except for current Taxes not yet due and payable. (d) Except as set forth on Schedule 2.14(d), (i) there are no pending ---------------- audits or, to the best of Parent's and each Seller's knowledge, threatened audits or assessments relating to Taxes with respect to the Business or the Acquired Assets and (ii) there is no unassessed Tax deficiency proposed or to the best of Parent and each Seller's knowledge threatened against Parent or any Company relating to or affecting the Acquired Assets or the Business, nor is any action or proceeding pending, or to the best of Parent's and each Seller's knowledge, threatened by any Governmental Entity for assessment, reassessment or collection of Taxes. (e) Except as set forth on Schedule 2.14(e), none of the Acquired ---------------- Assets (i) is property that is required to be treated as owned by another Person pursuant to the "safe harbor lease" provisions of former Section 168(f)(8) of the Code, (ii) is "tax-exempt use property" within the meaning of Code Section 168(h) or (iii) directly or indirectly secures any Debt the interest on which is tax-exempt under Code Section 103(a). 28 (f) Except as set forth on Schedule 2.14(f), no Company has agreed to ---------------- make, or is required to make, any adjustment under Code Section 263A or 481(a) or any comparable provision of state or foreign Tax Laws by reason of a change in accounting method or otherwise and no Company has changed a method of accounting or Inventory method, made or changed a tax election, or otherwise taken any action which is not in accordance with past practice that could accelerate a tax deduction from a period after the Closing Date to a period before the Closing Date or defer income from a period before the Closing Date to a period after the Closing Date. (g) Except as set forth on Schedule 2.14(g), no Company is a party to ---------------- any agreement, contract, arrangement or plan that has resulted or would or could result, separately or in the aggregate, in connection with this Agreement or any change of control of the Company, in the payment of any "excess parachute payment" within the meaning of Code Section 280G. (h) The aggregate adjusted tax basis in the Inventory, the accounts receivable and the property, plant and equipment that constitute the Purchased Assets for federal Tax purposes as of March 31, 1997, was at least $150,000,000, $29,000,000 and $8,000,000, respectively. (i) The amount of the reserves for value-added Taxes, real property Taxes, property Taxes and payroll Taxes reflected on the Closing Date Balance Sheet will be adequate to pay all Assumed Tax Liabilities. 2.15 Intellectual Property and Technology. ------------------------------------ (a) Schedule 2.15(a) contains a true, correct and complete list of ---------------- all patents, trademarks, trade names, service marks and applications for the foregoing owned, used or held for use by any Company with respect to the Business, except for matters listed on Schedule 2.15(b). ---------------- (b) Schedule 2.15(b) contains a true, correct and complete list of ---------------- all Intellectual Property which has been registered in, filed in or issued by the PTO, the United States Copyright Office, any state trademark offices and the patent, trademark, copyright and other corresponding offices of foreign jurisdictions. All such registrations have been duly filed, registered and issued and are in full force and effect. (c) Except as set forth on Schedule 2.15(c), Section 8 and 15 ---------------- declarations and applications for renewal with respect to all U.S. registered trademarks and service marks listed in Schedule 2.15(b) were timely filed in and accepted by the PTO. No trademarks or service marks listed in Schedule 2.15(b) have been abandoned. (d) Schedule 2.15(d) sets forth all licenses or other agreements from ---------------- or with third Persons under which any Company uses or exercises any rights with respect to any of the Intellectual Property or Technology, other than such licenses and other agreements that involve payments of no more than $25,000 per year ("Small Licenses"). At the Closing, Sellers will -------------- 29 transfer to Buyer all Intellectual Property and Technology without payment of royalties, free and clear of any Liens. (e) Except (i) as set forth on Schedule 2.15(e) or (ii) with respect ---------------- to Small Licenses, the Companies (as applicable) are the sole and exclusive owners of the Intellectual Property and Technology, free and clear of any Liens. (f) Except as set forth on Schedule 2.15(f), no Company has received ---------------- (and Parent and Sellers have no knowledge of) any written notice from any other Person pertaining to or challenging the right of any Company (or any other Person) to use any of the Intellectual Property or any Technology, and there is no interference, opposition, cancellation, reexamination or other contest proceeding, administrative or judicial, pending or threatened with respect to any Intellectual Property or Technology. (g) Except as set forth on Schedule 2.15(g), no licenses have been ---------------- granted by any Company and no Company has any obligation to grant licenses with respect to any Intellectual Property or Technology. No written claims have been made by any Company of any violation or infringement by others of rights with respect to any Intellectual Property or Technology, and neither Parent nor Sellers know of any basis for the making of any such claim. Except in such cases as would not in the aggregate have a Material Adverse Effect, the use by each Company of the Intellectual Property and Technology (past and present) has not violated or infringed any rights of other Persons, or constituted a breach of any Contract (or other agreement or commitment). (h) The Intellectual Property and Technology includes all such rights necessary to conduct the Business as now conducted and, except (i) as set forth on Schedule 2.15(d) or (ii) with respect to Small Licenses, such rights will not ---------------- be adversely affected by the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. (i) There are no licenses or service, maintenance or other agreements or obligations of any nature whatsoever regarding the Intellectual Property or Technology between or among any such Company, on the one hand, and any Affiliate(s) of such Company, on the other hand. All statements and representations made by each Company or any of its Affiliates in any pending patent, copyright and trademark applications with respect to the Intellectual Property were true in all material respects as of the time they were made. 2.16 Brokerage. Neither Parent nor any Company nor any of their --------- respective Affiliates has made any agreement or taken any other action which might cause AlliedSignal or Buyer to become liable for a broker's or finder's fee or commission as a result of the transactions contemplated hereunder. 2.17 Product Warranties and Guarantees. Parent and each Company --------------------------------- has provided Buyer with true and correct copies of all written product and service warranties and guarantees in connection with Contracts listed on Schedule 2.8(a). 30 2.18 Products Liability. There are no Liabilities of any Company, ------------------ fixed or contingent, asserted or, to the best of Parent's and each Seller's knowledge, unasserted, (a) with respect to any product Liability or any similar claim that relates to any product sold by any of the Companies to others prior to the Closing, or (b) with respect to any claim for the breach of any express or implied product warranty or any other similar claim with respect to any product sold by any of the Companies to others prior to the Closing, other than standard warranty obligations (to replace, repair or refund) made by any Company in the ordinary course of the conduct of the Business to buyers of the respective products, and except in the case of the preceding clauses (a) and (b) where such Liabilities would not exceed $500,000 in the aggregate for the Combined Business. 2.19 Labor Matters. ------------- (a) To the best of Parent's and each Seller's knowledge, there have been no union organizing efforts with respect to any Company conducted within the last three years and there are none now being conducted with respect to any Company. The Companies have not at any time during the three years prior to the date of this Agreement had, nor, to the best of Parent's and each Seller's knowledge, is there now threatened, a strike, work stoppage, work slowdown or other material labor dispute with respect to or affecting the Business. Except as set forth on Schedule 2.19, (i) no employee of any Company is represented by ------------- any union or other labor organization; (ii) there is no charge or complaint, including any unfair labor practice charge or any claim of discrimination, which is pending with any Governmental Entity or, to the best of Parent's and each Seller's knowledge, threatened against any Company relating to any of its employees; and (iii) there is no commitment or agreement to increase wages or modify the terms and conditions of employment of employees of any Company other than ordinary course of the Business consistent with past practice. Parent and Sellers have provided Buyer with copies of any collective bargaining agreement or other agreement with any union or other labor organization representing employees of any Company. (b) Within six months prior to the date hereof, (i) no Company has effectuated (x) a "plant closing" (as defined in the WARN Act) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of the Business or (y) a "mass layoff" (as defined in the WARN Act) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of the Business, (ii) no Company has been affected by any transaction or engaged in layoffs or employment terminations with respect to the Business sufficient in number to trigger application of any similar foreign, state or local law, and (iii) none of the Companies' employees has suffered an "employment loss" (as defined in the WARN Act). 2.20 Employee Benefits. ----------------- (a) Set forth on Schedule 2.20(a) is a true, correct and complete ---------------- list of the following: (i) Separately by location, the names, job titles and current salary or wage rates of all employees of each Company and their hourly or yearly salary, together 31 with a summary of all bonus, incentive compensation or other additional compensation or similar benefits paid to such persons for the 1997 fiscal year and estimated for the 1998 fiscal year; (ii) Separately by location, the names, job titles and current salary or wage rates of all independent contractors, including any consultants, and leased employees who perform services for a Company; and (iii) All of (x) the employee benefit plans, arrangements or policies (whether or not written, whether U.S. or foreign, and whether or not subject to ERISA), including, without limitation, any stock option, stock purchase, stock award, retirement, pension, deferred compensation, profit sharing, savings, incentive, bonus, health, dental, hearing, vision, drug, life insurance, cafeteria, flexible spending, dependent care, fringe benefit, vacation pay, holiday pay, disability, sick pay, workers compensation, unemployment, severance pay, employee loan, educational assistance plan, policy or arrangement, and (y) any employment, indemnification, consulting or severance agreement, under which any employee or former employee of a Company has any present or future right to benefits or under which a Company has any present or future Liability (collectively, the "Plans"). Schedule 2.20(a) indicates which Plans are ----- ---------------- maintained for employees employed in the United States (collectively, "U.S. ---- Plans"); which Plans are maintained for employees employed outside of the ----- United States (collectively, "Foreign Plans"); and which Plans cover only ------------- employees of one or more Seller Subsidiaries (collectively, "Free-Standing ------------- Plans"). ----- (b) Parent or Sellers have made available to Buyer a complete and correct copy of each Plan document or a written description of any unwritten plan; the most recent summary plan description or similar booklet for any Plan; any employee handbook applicable to employees of a Company; and with respect to any Free-Standing Plan, any related trust agreement or insurance contract, the most recent actuarial valuation report, and the most recent financial statements. (c) Except (i) as set forth on Schedule 2.20(c) or (ii) in such cases ---------------- as would not in the aggregate have a Material Adverse Effect: (i) Neither Parent nor any Company nor any of their Affiliates has communicated to present or former employees of a Company, or formally adopted or authorized, any additional Plan or any change in or termination of any existing Plan. (ii) Each Plan has been operated and administered in accordance with its terms, the terms of any applicable collective bargaining agreement, and all applicable Laws. (iii) Each U.S. Plan which is a "group health plan" subject to the continuation coverage requirements of Section 4980B of the Code and Part 6 of Title I of ERISA ("COBRA") which is maintained by a Company or ----- any of its Affiliates has been operated and administered, in all material respects, in accordance with such requirements. 32 (d) Schedule 2.20(d) identifies each U.S. Plan which provides health, ---------------- life insurance or other welfare benefits to retired or other terminated employees of a Company other than continuation coverage required by COBRA and the Companies have the ability to amend or terminate any such Plan. (e) Except in such cases as would not in the aggregate have a Material Adverse Effect, with respect to any Plan, no actions, suits, claims or proceedings (other than routine claims for benefits) are pending or, to the best of Parent's and each Seller's knowledge, threatened, and no facts or circumstances exist which could be reasonably expected to give rise to any such actions, suits, claims or proceedings. (f) Except in such cases as would not in the aggregate have a Material Adverse Effect, no Plan is currently under governmental investigation or audit, and to the best of Parent's and each Seller's knowledge, no such investigation or audit is contemplated or under consideration. (g) Except (i) for benefits payable under the terms of any Free- Standing Plan or (ii) in such cases as would not in the aggregate have a Material Adverse Effect, no event has occurred and no condition exists that could be reasonably expected to subject AlliedSignal, Buyer or any Seller Subsidiary, directly or indirectly, to any tax, fine, penalty or other Liability arising under, or with respect to, any employee benefit plan currently or previously maintained by any Company or any Person that is or was a member of a controlled group with, under common control with, or otherwise required to be aggregated with, any Company under Section 414(b), (c), (m) or (o) of the Code. (h) No lien has arisen or is expected to arise under the Code or ERISA on the Purchased Assets. (i) No U.S. Plan is a "multiemployer plan" within the meaning of Section 3(37)(A) of ERISA, and no Company has any outstanding Liability with respect to any such plan (contingent or otherwise). (j) Except (i) as set forth on Schedule 2.20(j) or (ii) in such cases ---------------- as would not in the aggregate have a Material Adverse Effect, neither the execution of this Agreement nor the consummation of the transactions contemplated by this Agreement, will (x) increase the amounts of benefits otherwise payable under any Plan, (y) result in the acceleration of the time of payment, exercisability, funding or vesting of any such benefits, or (z) result in any payment (whether severance pay or otherwise) becoming due to, or with respect to, any employee or director of a Company. (k) Except in such cases as would not in the aggregate have a Material Adverse Effect, with respect to each Foreign Plan: (i) All contributions and premium payments required to have been made under or with respect to each Foreign Plan have been timely paid; and 33 (ii) Each Foreign Plan is either fully funded (or fully insured) based upon generally accepted local actuarial and accounting practice and procedure. (l) No employee benefits are provided to any employee of a Company who is employed outside of the United States except to the extent required by law. (m) Each Foreign Plan has been operated, in all material respects, in compliance with all applicable Laws with such exceptions as would not individually or in the aggregate result in a Material Adverse Effect. (n) Each Foreign Plan is a Free-Standing Plan. 2.21 No Pending Litigation or Proceedings. Except as set forth on ------------------------------------ Part A of Schedule 2.21, there are no actions, suits, investigations or ------------- proceedings pending against or affecting, or, to the best of Parent's and each Seller's knowledge, threatened against, Parent, any Company, the Business or any of the Acquired Assets before any arbitrator or Governmental Entity (including the United States Environmental Protection Agency, the United States Equal Employment Opportunity Commission or any similar Governmental Entity) that would materially and adversely affect their ability to perform their obligations under this Agreement. Except as set forth on Part B of Schedule 2.21, there are no outstanding judgments, decrees, writs, injunctions or orders of any arbitrator or Governmental Entity against Parent or any Company which relate to or arise out of the conduct of the Business or the ownership, condition or operation of the Business or the Acquired Assets except in such cases as would not in the aggregate have a Material Adverse Effect. 2.22 Insurance. Schedule 2.22 lists each Company's policies and --------- ------------- contracts in effect as of the date hereof for insurance covering the Acquired Assets or Assumed Liabilities and the operation of the facilities constituting the Business owned or held by the Companies, together with the risks insured against, coverage limits and deductible amounts. Sellers have made available to Buyer complete and correct copies of all such policies together with all riders and amendments thereto. Such policies are in full force and effect and all premiums due thereon have been paid. Each of the Companies has complied in all material respects with the terms and conditions of such policies. The Companies have made available to Buyer all books and records relating to workers compensation claims and all claims made by the Companies under any policy of insurance during the five years prior to the date hereof with respect to the Business other than employee claims under health or medical insurance policies or coverage. 2.23 Customers; Suppliers. As of the date of this Agreement, Part -------------------- A of Schedule 2.23 contains a true, correct and complete list of (i) all ------------- Contracts to which any Major Customer is a party and (ii) all Major Suppliers, together with an estimate of all purchases from each Major Supplier for the last 12 months. Except as identified with an asterisk on Part A of Schedule 2.23, each of the Contracts listed thereon is fully assignable to Buyer (or, in the case of Contracts of the Seller Subsidiaries, will remain in full force and effect upon the sale of the Subsidiary Shares to Buyer) without the consent, approval or waiver of any other Person. Except as set forth on Part B of Schedule 2.23, as of the date of this Agreement, neither Parent nor any Company has received written notice within the preceding 12 months of any development 34 (a) which could reasonably be expected to result in a Material Adverse Effect or (b) which indicates that a Major Customer will not purchase products of the Combined Business from Buyer during the 1998 fiscal year in amounts substantially equivalent (on a pro rata basis) to such purchases from such Company in the 1997 fiscal year. Except as set forth on Part C of Schedule 2.23, as of the date hereof, no supplier of the Business (including any supplier of Intellectual Property) has threatened to refuse to sell its products or services to the Business except in such cases as would not in the aggregate have a Material Adverse Effect. 2.24 Condition of Assets. Except as set forth on Schedule 2.24, ------------------- ------------- the buildings, machinery, equipment, tools, furniture, improvements, sewers, pipes, transportation equipment and other fixed tangible Assets of the Business (a) included in the Acquired Assets or (b) subject to any Contract included in the Acquired Assets are in sufficiently good operating condition and repair to conduct the Business as presently conducted, reasonable wear and tear excepted. 2.25 All Assets. Except as set forth on Schedule 2.25 and for the ---------- ------------- Excluded Assets, the Acquired Assets (including any Assets, properties and rights subject to any Contract included in the Acquired Assets) constitute all the assets, properties and rights owned, used, or held for use in connection with, or that are otherwise related to or required for the conduct of, the Business as currently conducted by the Companies on the date of this Agreement. Except as set forth on Schedule 2.25, none of the Acquired Assets are owned, in whole or in part, by any Person other than the Companies. 2.26 Undisclosed Liabilities. None of the Seller Subsidiaries has ----------------------- any Liability of any nature, mixed, contingent or otherwise, liquidated or unliquidated and whether due or to become due, except for Non-Assumed Liabilities and except for (i) Liabilities reflected on the Balance Sheet, other than those discharged since September 30, 1997, (ii) Liabilities under Contracts, (iii) Liabilities disclosed on Schedule 2.26 and (iv) Liabilities ------------- incurred in the ordinary course of business since the date of the Balance Sheet, none of which would constitute a violation of any covenant herein or give rise to the failure of any condition herein. None of the Seller Subsidiaries has any Liability of any nature, mixed, contingent or otherwise, liquidated or unliquidated and whether due or to become due, which does not relate to the Business. 2.27 Securities Matters. Except as set forth on Schedule 2.27, ------------------ ------------- Sellers are acquiring the AlliedSignal Common Stock for their own account and without a present view to any distribution thereof or any present intention of distributing or selling the AlliedSignal Common Stock in violation of the federal securities laws. Each Seller is an "accredited investor" as such term is defined in Regulation D promulgated under the Securities Act. In evaluating the suitability of an investment in the AlliedSignal Common Stock, each Seller has relied solely upon the representations, warranties, covenants and agreements made by AlliedSignal herein and has not relied upon any other representations or other information (whether oral or written and including any estimates, projections or supplemental data) made or supplied by or on behalf of AlliedSignal or any Affiliate, employee, agent or other representative of AlliedSignal. Each Seller understands and agrees that it may not sell or dispose of any of the AlliedSignal Common Stock other than pursuant to a registered offering or in a transaction exempt from the registration requirements of the Securities Act. 35 2.28 SEC Filings. Parent has heretofore delivered to Buyer and ----------- Buyer acknowledges receipt of the following documents (the "Parent Reports"): -------------- (a) Parent's Annual Report on Form 10-K for the fiscal year ended March 31, 1997, (b) Parent's Quarterly Reports on Form 10-Q for the fiscal quarters ended June 30, and September 30, 1997, (c) Parent's proxy statement relating to its 1997 Annual Meeting of Stockholders, (d) Parent's Annual Report to Stockholders for 1997, and (e) any other report filed during 1997, and prior to the date of this Agreement, with the Securities and Exchange Commission under the Securities Act or the Exchange Act. Each Parent Report, as of its filing date, insofar as it relates to the Business, did not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of circumstances under which they were made, not misleading. 2.29 Bank Accounts. Schedule 2.29 contains a true, correct and ------------- ------------- complete list of all bank accounts used or held for use by the Seller Subsidiaries and the authorized signatures associated therewith. 2.30 Business Conduct. Except as discussed between Parent and ---------------- Buyer on December 7, 1997, to the best of Parent's and each Seller's knowledge, during the past three years neither any Company, nor any director, officer, employee or third party acting on behalf thereof, has, in violation of any Law: (i) made any bribes, kickbacks or other payments, directly or indirectly, to any Person or any representative thereof, to obtain favorable treatment in securing business or otherwise to obtain special concessions for any Company; (ii) made any bribes, kickbacks or other payments, directly or indirectly, to or for the benefit of any Governmental Entity or any official, employee or agent thereof, for the purpose of affecting his or her action or the action of the Governmental Entity that he or she represents to obtain favorable treatment in securing business or to obtain special concessions for the Company or any Subsidiary; (iii) made any unlawful political contributions on behalf of any Company; or (iv) otherwise used corporate funds of any Company for any illegal purpose, including without limitation, any violation of the Foreign Corrupt Practices Act. ARTICLE III REPRESENTATIONS AND WARRANTIES OF ALLIEDSIGNAL AND BUYER AlliedSignal and Buyer hereby jointly and severally represent and warrant to Parent and Sellers as follows: 3.1 Organization and Good Standing. (a) AlliedSignal is a ------------------------------ corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. (b) Buyer is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware. AlliedSignal is the sole member of Buyer. AlliedSignal owns all of the outstanding equity and profit interests in Buyer, free and clear of all Liens. Buyer is disregarded as an entity separate from AlliedSignal for federal tax purposes. 36 3.2 Authorization and Enforceability. With respect to each of -------------------------------- AlliedSignal and Buyer: (a) such entity has full power and authority to execute, deliver and perform this Agreement and Transaction Documents to which such entity is a party, (b) the execution, delivery and performance by such entity of this Agreement and the Transaction Documents to which such entity is a party have been duly authorized by all necessary action on the part of such entity, (c) this Agreement has been duly executed and delivered by such entity, and, as of the Closing Date, the other Transaction Documents to which either entity is a party will be duly executed and delivered by such entity, (d) this Agreement is a legal, valid and binding obligation of such entity, enforceable against such entity in accordance with its terms, and (e) as of the Closing Date, each of the other Transaction Documents to which such entity is a party will constitute the legal, valid and binding obligations of such entity, enforceable against such entity in accordance with its terms. 3.3 No Violation of Laws or Agreements. The execution, delivery, ---------------------------------- and performance by AlliedSignal and Buyer of this Agreement and the Transaction Documents to which such entities (as applicable) are parties do not, and the consummation by AlliedSignal and Buyer (as applicable) of the transactions contemplated hereby and thereby, will not, (a) contravene any provision of the Certificate of Incorporation or Bylaws of AlliedSignal nor the Certificate of Formation or Limited Liability Company Agreement of Buyer, or (b) violate, conflict with, result in a breach of, or constitute a default (or an event which would, with the passage of time or the giving of notice or both, constitute a default) under, or result in or permit the termination, modification, acceleration, or cancellation of, (i) any indenture, mortgage, loan or credit agreement, license, instrument, lease, contract, plan, permit or other agreement or commitment, oral or written, to which either AlliedSignal or Buyer is a party, or by which any of either entity's Assets may be bound or affected, or (ii) any judgment, injunction, writ, award, decree, restriction, ruling, or order of any arbitrator or Governmental Entity or any applicable Law to which AlliedSignal or Buyer is subject. 3.4 Consents. No consent, approval or authorization of, or -------- registration or filing with, any Person (governmental or private) is required in connection with the execution, delivery and performance by AlliedSignal or Buyer of this Agreement, the other Transaction Documents to which AlliedSignal or Buyer is a party, or the consummation by AlliedSignal or Buyer of the transactions contemplated hereby or thereby except (a) as required by the HSR Act, (b) as required by the NYSE to list AlliedSignal Common Stock and (c) any required consent, approval of, or authorization of, or registration or filing with, any foreign governmental authority. 3.5 AlliedSignal Common Stock. As of the date hereof, ------------------------- 1,000,000,000 shares of AlliedSignal Common Stock are authorized for issuance. As of November 30, 1997, 562,554,971 shares of AlliedSignal Common Stock were issued and outstanding and 153,902,513 shares of AlliedSignal Common Stock were held in the treasury of AlliedSignal or owned by any Subsidiary of AlliedSignal. AlliedSignal has a sufficient number of unreserved shares of AlliedSignal Common Stock to perform the transactions contemplated hereby. All shares of AlliedSignal Common Stock to be issued at the Closing, when so issued, will be duly authorized, validly issued, fully paid and non-assessable, free of preemptive rights and all Liens 37 and will be issued in compliance with all applicable Laws. Parent acknowledges that AlliedSignal has disclosed to Parent that AlliedSignal will be making open market and/or block purchases of AlliedSignal Common Stock during the period between the date hereof and the Closing Date. All such purchases shall comply with Rule 10b-18 under Exchange Act. 3.6 SEC Filings. AlliedSignal has heretofore delivered to Parent, ----------- and Parent acknowledges receipt of, the following documents (the "AlliedSignal ------------ Reports"): (a) AS's Annual Report on Form 10-K for the fiscal year ended - ------- December 31, 1996, (b) AS's Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 1997, June 30, 1997 and September 30, 1997, (c) AS's proxy statement relating to its 1997 Annual Meeting of Stockholders, (d) AS's Annual Report to Stockholders for 1996, and (e) any other report filed during 1997, and prior to the date of this Agreement, with the Securities and Exchange Commission under the Securities Act or the Exchange Act. As of their respective dates, each of the AlliedSignal Reports complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and none contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Since January 1, 1996, AlliedSignal has timely filed all reports, registration statements and made all filings required to be filed with the SEC under the rules and regulations of the SEC. 3.7 Financial Statements. The audited consolidated financial -------------------- statements and unaudited consolidated interim financial statements of AlliedSignal and its consolidated Subsidiaries included in or incorporated by reference into the AlliedSignal Reports (including any related notes and schedules) have been prepared in accordance with GAAP (except as may be indicated in the notes thereto or as permitted by the Securities Act or the Exchange Act in the case of unaudited financial statements included in or incorporated by reference into the AlliedSignal Reports) and fairly present the consolidated financial position of AlliedSignal and its consolidated Subsidiaries as of the dates thereof and the consolidated results of their operations for the periods then ended, subject, in the case of the unaudited consolidated interim financial statements, to normal year-end adjustments and any other adjustments described therein. 3.8 Brokerage. Neither AlliedSignal, Buyer nor any of their --------- respective Affiliates has made any agreement or taken any other action which might cause Parent or any Seller to become liable for a broker's or finder's fee or commission as a result of the transactions contemplated hereunder. ARTICLE IV ADDITIONAL COVENANTS 4.1 Conduct of Business. Except (i) as otherwise specifically ------------------- permitted by this Agreement or (ii) with the prior written consent of Buyer, from and after the date of this Agreement and until the Closing Date, Parent and Sellers agree that: 38 (a) Sellers shall, and Parent and Sellers shall cause the Seller Subsidiaries to: (i) conduct the Business as presently conducted and only in the ordinary course of business consistent with past practice; and (ii) use their reasonable best efforts to preserve the business organization of the Business substantially intact, to keep available to Buyer the services of their respective employees, and to preserve for Buyer the goodwill of the suppliers, distributors, customers and others having business relationships with the Business. (b) Parent and Sellers shall promptly inform AlliedSignal in writing of any specific event or circumstance (including, without limitation, any consecutive two week period in which any Major Customer fails to place orders with the Company or Companies with which it transacts business) of which any of them (or any Seller Subsidiary) is aware, or of which any of them (or any Seller Subsidiary) receives written or oral notice, that (i) has or is likely to have, individually or in the aggregate, taken together with other events or circumstances, a Material Adverse Effect, (ii) indicates that any Major Customer is terminating or intends to terminate any Contract (excluding termination upon expiration of the term of any Contract so long as such customer continues to purchase goods from the Combined Business) and/or indicates that any such customer intends to reduce its purchases from any Company or (iii) indicates that any Major Supplier is terminating or intends to terminate any Contract (excluding termination upon expiration of the term of any Contract so long as such supplier continues to sell goods to the Combined Business) and/or indicates that any such Major Supplier intends to reduce its sales to any Company, provided that any such oral notice reportable under this Section 4.1(b) shall be directed to a responsible management Person at Parent or any Company; and (c) Sellers shall not, and Parent and Sellers shall cause the Seller Subsidiaries not to: (i) change or modify in any material respect existing Inventory management or credit and collection policies, procedures and practices with respect to accounts receivable in any case relating to the Business; (ii) enter into any Contracts, waive any rights or enter into any other transactions which individually or in the aggregate would have a Material Adverse Effect; (iii) mortgage, pledge or subject to any Lien (other than Permitted Liens) any of the Acquired Assets; (iv) change any compensation or benefits or grant any material new compensation or benefits payable to or in respect of any employee of the 39 Business (except, for regularly scheduled merit increases in the ordinary course of business consistent with past practice); (v) sell, lease or otherwise transfer any Assets, except Inventory in the ordinary course of the Business, necessary, or otherwise material to the conduct of, the Business which would constitute Acquired Assets; (vi) change any Company's method of accounting or keeping its books of account or accounting practices with respect to the Business, except as required by GAAP; (vii) take or omit to take any action which if taken or omitted prior to the date hereof would constitute or result in a breach of any representations or warranties of Parent or Sellers set forth herein; (viii) enter into any Contract (except sales contracts with customers in the ordinary course of the Business and except for such Contracts which may be terminated by Buyer or the applicable Seller Subsidiary without penalty or Liability on no more than 30 days' notice) that would create a Liability for the Business in excess of $200,000 per year without obtaining AS's prior written consent, such consent not to be unreasonably withheld; (ix) create, incur or assume any Debt not currently outstanding, other than current Liabilities incurred in the ordinary course of business; (x) amend their charters, bylaws or other organizational documents; (xi) authorize, issue, sell or otherwise dispose of any capital stock of any Company or amend the terms thereof; (xii) split, combine or reclassify any shares of capital stock of any of the Seller Subsidiaries, declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of the capital stock of any of the Companies, or redeem or otherwise acquire any of the capital stock of any of the Companies; (xiii) make any loans, advances or capital contributions to, or investments in, any Person; (xiv) acquire, sell, lease or dispose of any Assets used or held for use in the Business, other than (x) sales of Inventory in the ordinary and usual course of business consistent with past practice or (y) purchases of goods for use in the Business in the ordinary and usual course of business consistent with past practice; 40 (xv) with respect to the Business, pay, discharge or satisfy any claims, Liabilities (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business of Liabilities reflected or reserved against in, or contemplated by, the Balance Sheet or incurred in the ordinary course of business consistent with past practice; (xvi) disclose to any third party or enter into any Technology license or agreement to disclose to any third party any Intellectual Property, except in the ordinary and usual course of business and pursuant to written confidentiality agreements; (xvii) enter into any labor agreement; (xviii) sell or dispose of any significant amount of old or obsolete Inventory; or (xix) make capital expenditures in excess of $50,000 individually or $250,000 in the aggregate for the Combined Business; (xx) agree in writing or otherwise to take any of the foregoing actions. 4.2 Mutual Covenants. The parties hereto mutually covenant from ---------------- the date of this Agreement to the Closing Date (and subject to the other terms of this Agreement): (a) to cooperate with each other in determining whether filings are required to be made or consents required to be obtained in any jurisdiction in connection with the consummation of the transactions contemplated by this Agreement and in making or causing to be made any such filings promptly and in seeking to obtain timely any such consents (each party hereto shall furnish to the other and to the other's counsel all such information as may be reasonably required in order to effectuate the foregoing action); and (b) to advise the other parties promptly if such party determines that any condition precedent to its obligations hereunder will not be satisfied in a timely manner. 4.3 Filings and Authorizations. The parties hereto will, as -------------------------- promptly as practicable, and in the case of filings under the HSR Act no later than five Business Days after the date of this Agreement, make or cause to be made all such filings and submissions under Laws applicable to them or their Affiliates as may be required to consummate the terms of this Agreement, including all notifications and information to be filed or supplied pursuant to the HSR Act. The parties hereto shall also provide as promptly as possible full responses to any requests for additional information made of them under the HSR Act. Any such filings, including any supplemental information and requests for additional information under the HSR 41 Act, will be in substantial compliance with the requirements of the applicable Law. Each of AlliedSignal and Buyer, on the one hand, and Parent and Sellers, on the other hand, shall furnish to the other such necessary information and reasonable assistance as the other may request in connection with its preparation of any filing or submission which is necessary under the HSR Act. Parent, Sellers, AlliedSignal and Buyer shall keep each other apprised of the status of any communications with, and inquiries or requests for additional information from, any Governmental Entity, including the FTC and the Antitrust Division, and shall comply promptly with any such inquiry or request. Each of Parent and AlliedSignal shall use its reasonable efforts to obtain any clearance required under the HSR Act for the purchase and sale of the Purchased Assets in accordance with the terms and conditions hereof. Nothing contained in this Agreement, including under this Section 4.3 and Sections 4.8 and 4.13, will require or obligate (a) Parent, the Companies, AlliedSignal, Buyer or their respective Affiliates to initiate, pursue or defend any litigation to which any Governmental Entity (including the Antitrust Division and the FTC) is a party or (b) AlliedSignal, Buyer or their respective Affiliates (i) to agree or otherwise become subject to any limitations on (x) the right of AlliedSignal, Buyer or their respective Affiliates effectively to control or operate the Business, (y) the right of AlliedSignal, Buyer or their respective Affiliates to acquire or hold the Business, or (z) the right of AlliedSignal or Buyer to exercise full rights of ownership of the Business or all or any portion of the Acquired Assets, or (ii) to agree or otherwise be required to sell or otherwise dispose of, hold separate (through the establishment of a trust or otherwise), or divest itself of all or any portion of the business, Assets or operations of AlliedSignal, Buyer, any Affiliate of AlliedSignal or Buyer or the Business. The parties agree that no representation, warranty or covenant of Parent, Sellers, AlliedSignal or Buyer contained in this Agreement shall be breached or deemed breached as a result of the failure by any party hereto or any of its Affiliates to take any of the actions specified in the preceding sentence. 4.4 Public Announcement. No party hereto shall make or issue, or ------------------- cause to be made or issued, any public announcement or written statement concerning this Agreement or the transactions contemplated hereby without the prior written consent of the other party hereto (which will not be unreasonably withheld or delayed), unless counsel to such party advises that such announcement or statement is required by law or the rules of any securities exchange on which securities of any Affiliate of Parent are traded (in which case the parties hereto shall make reasonable efforts to consult with each other prior to such required announcement). 4.5 Investigation. Sellers shall, and Parent and Sellers shall ------------- cause the Seller Subsidiaries to, give AlliedSignal and its representatives (including AS's accountants, consultants, counsel and employees), upon reasonable notice and during normal business hours, reasonable access to the properties (including any Equipment and any Acquired Real Property), Contracts, employees, books, records and affairs of the Companies to the extent relating to the Business and the Acquired Assets (provided that such access does not unreasonably disrupt the conduct of the Business), and shall cause their respective officers, employees, agents and representatives to furnish to AlliedSignal all documents, records and information (and copies thereof), to the extent relating to the Business and the Acquired Assets, as AlliedSignal may reasonably request. Parent and Sellers may reasonably limit the number of representatives of AlliedSignal provided access hereby. No investigation or receipt of information by AlliedSignal 42 pursuant to, or in connection with, this Agreement, shall diminish or obviate any of the representations, warranties, covenants or agreements of Parent or Sellers under this Agreement or the conditions to the obligations of Buyer under this Agreement. All information provided to AlliedSignal or Buyer under this Agreement shall be held subject to the terms and conditions of the Confidentiality Agreement. 4.6 Taxes. ----- (a) Parent and each Seller shall jointly and severally be responsible for and shall pay any and all Taxes arising or resulting from the conduct of the Business or the ownership of the Acquired Assets on or prior to the Closing Date, which Liability shall be a Non-Assumed Liability (including, without limitation, the sale of the Business and the Purchased Assets on the Closing Date pursuant to this Agreement). (b) Buyer shall be responsible for and shall pay any and all Taxes arising or resulting from the conduct of the Business or the ownership of the Acquired Assets after the Closing Date (excluding without limitation, the sale of the Business and the Purchased Assets or the Closing Date pursuant to this Agreement), which Liability shall be an Assumed Liability. (c) Each Seller hereby acknowledges that for FICA and FUTA purposes, Buyer qualifies as a successor employer with respect to the retained employees. In connection with the foregoing, the parties agree to follow the "Alternative Procedures" set forth in Section 5 of the Revenue Procedure 96-60, 1996- 2C.B.399. Each affected Seller and Buyer understands that Buyer shall assume the affected Seller's entire obligation to furnish a Form W-2, Wage and Tax Statement to the employees of the Business for calendar year ending December 31, 1998. (d) In addition to all personnel files and records relating to employees of the Business that each Seller shall deliver to the Buyer when their employment commences with Buyer as otherwise required by this Agreement, each Seller shall timely provide Buyer with any and all other information it needs to properly comply with the requirements of the final sentence of Section 4.6(c). (e) Each Seller acknowledges that for state unemployment Tax purposes, each Seller will permit Buyer to apply for a transfer of such Seller's rating account with respect to its Business. Each Seller shall deliver to Buyer within a reasonable time after request therefor, with respect to its Business, copies of such Seller's (i) Form 940, Employer's Annual Federal Unemployment Tax Returns for 1995 and 1996, (ii) state unemployment tax rate notices for 1995 and 1996, and (iii) benefit change statements that itemize claims charged against the state account of such Seller in each state in which the Business is operated for the four most recent calendar quarters. (f) Parent, Sellers and Buyer shall (i) each provide the other with such assistance as may reasonably be requested by any of them in connection with the preparation of any Tax return, any audit or other examination by any Taxing Authority or any judicial or administrative proceeding with respect to Taxes, (ii) each retain and provide to the other any records or other information which may be relevant to such return, audit examination or 43 proceeding, and (iii) each provide to the other any final determination of any such audit or examination, proceeding or determination that affects any amount required to be shown on any Tax return of the other for any period (which shall be maintained confidentially). Without limiting the generality of the foregoing, Buyer, Sellers and Parent shall retain, until the applicable statutes of limitations (including all extensions) have expired, copies of all Tax returns, supporting workpapers, and other books and records or information which may be relevant to such returns for all Tax periods or portions thereof ending before or including the Closing Date, and shall not destroy or dispose of such records or information without first providing the other party with a reasonable opportunity to review and copy the same. (g) AlliedSignal, Buyer, Parent and Sellers intend that Buyer's acquisition of the Business and Purchased Assets from each Seller pursuant to this Agreement shall qualify as and constitute a reorganization under Code Section 368 (a)(1)(C) and each of the parties agrees to treat such acquisitions in such manner for all tax purposes, including, without limitation, for all purposes on any federal or state income or franchise tax return filed by any party after the Closing Date. (h) Neither Parent nor any Company shall make a new or change any existing Tax election, change a method of accounting or Inventory method, file any amended Tax return, enter into any closing agreement, settle any Tax claim or assessment, or take or omit to take any other action not consistent with past practice, if any such action or omission would have the effect of increasing the Tax Liability of AlliedSignal or Buyer with respect to the Business and Acquired Assets for any period after the Closing Date. (i) AlliedSignal and Buyer, on the one hand, and Parent and Sellers, on the other hand, shall equally bear all Transfer Taxes. Parent, Sellers and Buyer shall cooperate in timely making and filing all Tax Returns as may be required to comply with the provisions of any Transfer Tax laws. To the extent legally able to do so, Buyer shall deliver to Parent and Sellers exemption certificates satisfactory in form and substance to Parent and Sellers with respect to Transfer Taxes if such delivery would reduce the amount of Transfer Taxes that would otherwise be imposed. (j) AlliedSignal, Buyer, Parent and each Seller acknowledge that no affirmative election under Code Section 338 can be made with respect to any Subsidiary Shares. (k) No later than 10 days prior to the due date for filing, Buyer shall provide to Parent copies of Tax Returns for taxable periods that include but do not end on the Closing Date to be filed by any Seller Subsidiary and shall provide Parent the opportunity to comment on such Tax Returns. (l) Buyer shall cause Harco Aerospace Fasteners Ltd. and Burbank Aircraft International, GmbH not to make any distribution of property during the period beginning on the Closing Date and ending March 31, 1998 that would result in a diminution of the earnings and profits of such entity for Federal income tax purposes. 44 4.7 Certain Deliveries. ------------------ (a) Within thirty (30) days after the end of each month ending after the date of this Agreement and prior to the Closing Date, Parent and Sellers shall prepare and furnish to or cause to be furnished to AlliedSignal a copy of the monthly financial reports for the Combined Business after September 30, 1997 (including unaudited balance sheet and income statements) for each such month and the fiscal year to the end of such month). All of the foregoing financial statements shall comply with the requirements concerning unaudited financial statements set forth in Section 2.6. In addition, Parent and Sellers shall furnish AlliedSignal, upon request, with copies of regular management reports, if any, concerning the operation of the Business within ten (10) days after such reports are prepared. (b) Each Seller shall, and Parent and Sellers shall cause the Seller Subsidiaries to, provide AlliedSignal, within five days of the execution or the date of receipt thereof, a copy of each Contract entered into by any Company after the date hereof and prior to the Closing Date which, if entered into prior to the date hereof would have been required to be disclosed on Part A of Schedule 2.8(a). (c) Within five days after the date of filing thereof, AlliedSignal or Parent, as the case may be, shall furnish to the other a copy of each report filed by AlliedSignal or Parent, as the case may be, after the date of this Agreement and prior to the Closing Date under the Securities Act or the Exchange Act. 4.8 Consents. Prior to the Closing, Parent and Sellers shall give -------- any notices and obtain all waivers, licenses, agreements, permits, consents, approvals or authorizations of any Governmental Authority that are required to be obtained by any Company pursuant to any Contract or Permit or otherwise in order to consummate the transactions contemplated hereunder, and all of such shall be in a written form agreeable to AlliedSignal and in full force and effect and without conditions or limitations that restrict the ability of the parties hereto to carry out the transactions contemplated hereby. Concurrently with or immediately prior to the Closing, Parent and Sellers shall cause the Seller Subsidiaries to be released from any guarantees made by any Seller Subsidiary of any indebtedness or other Liabilities of Parents, Sellers or any of their Affiliates. 4.9 Releases. At the Closing, all intercompany Debt (other than -------- receivables and payables arising from ordinary course commercial transactions) between the Companies, on the one hand, and the Parent and its Subsidiaries other than the Companies, on the other hand, shall be canceled and all such amounts shall be deemed to be capital contributions to the entity owing such Debt. Parent, Sellers and their Affiliates shall release any and all claims, causes of action, demands of any kind, Liabilities, Debts, damages, suits, or offsets, whether known or unknown, suspected or unsuspected, that any of them have or may have against any Seller Subsidiary (other than receivables and payables arising from ordinary course commercial transactions). 4.10 Real Property. Within thirty (30) days after the date hereof, ------------- Parent and Sellers shall deliver or cause to be delivered to Buyer current, as- built ALTA surveys of the 45 Owned Real Property (the cost of which shall be borne 50% by Parent and 50% by Buyer); such surveys to be dated within thirty (30) days of the date hereof and to be reasonably acceptable to Buyer. Such surveys shall be performed by licensed surveyors designated by Buyer and shall be certified to Buyer, Buyer's title insurance companies and others as Buyer shall request. The surveys shall be in form sufficient to cause Buyer's title insurance companies to insure such surveys, and shall be an ALTA/ACSM Land Title Survey, prepared in accordance with the "Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys as adopted by American Land Title Association and American Congress on Surveying & Mapping", and shall meet the currently effective Accuracy Standards for an Urban Survey adopted by said organizations and shall include such optional survey responsibilities and specifications as Buyer reasonably shall select. 4.11 Environmental. At or prior to Closing, Parent and Sellers ------------- shall deliver or cause to be delivered all such necessary applications, approvals or consents required to transfer (or, in the case of the Seller Subsidiaries, required to permit the Seller Subsidiaries to continue to hold) all Permits required for the continued operation of the Business and the Acquired Assets after the Closing Date in compliance with Environmental Laws. Within thirty (30) days after execution of this Agreement, Sellers shall identify to Buyer any of the Acquired Assets that are subject to the requirements of any Laws that condition, restrict, prohibit or require notification or disclosure for environmental reasons upon the transfer, sale, lease or closure of certain property; and Sellers shall deliver on or prior to the Closing Date, all necessary applications, approvals, or consents required by such Laws. 4.12 Ancillary Agreements. At or prior to the Closing, the -------------------- applicable parties shall enter into each of the Ancillary Agreements. 4.13 Reasonable Best Efforts. Without limiting the specific ----------------------- obligations of any party hereto under any covenant or agreement hereunder, each party hereto shall use reasonable best efforts to take all action and do all things necessary in order to promptly consummate the transactions contemplated hereby, including, without limitation, satisfaction, but not waiver, of the Closing conditions set forth in Article V. 4.14 Negotiations. From the date hereof until the termination of ------------ this Agreement in accordance with its terms, Parent and Sellers, on behalf of themselves and their Affiliates, agree that Parent, Sellers and their Affiliates will deal exclusively and in good faith with AlliedSignal and Buyer with respect to any transaction involving the sale, transfer or other disposition of the Acquired Assets or the Business; and neither Parent, Sellers, their Affiliates nor any of their officers, directors, employees, lenders, investment banking firms, advisors or other agents, or any Person acting on their behalf, will solicit any inquiries or proposals by, or engage in any discussions or negotiations with, or furnish any nonpublic information to or enter into any agreement with, any Person other than AlliedSignal or Buyer concerning the sale or other disposition of the Acquired Assets or the Business or the merger, consolidation, sale of securities or other transaction involving Parent or any of the Companies, if such merger, consolidation, sale or other transaction would be inconsistent, in any respect, with the transactions contemplated by this Agreement, and will promptly notify AlliedSignal of the 46 substance of any inquiry or proposal concerning any such transaction that may be received by Parent, Sellers or their Affiliates; provided, however, that -------- ------- notwithstanding any other provision hereof, Parent may (i) engage in discussions or negotiations with a third party who (without any solicitation, initiation, encouragement, discussion or negotiation, directly or indirectly, by or with Parent or Sellers after the date hereof) seeks to initiate such discussions or negotiations and may furnish such third party information concerning the Combined Business, the Acquired Assets and the Herndon Purchased Assets if, and only to the extent that, (A)(x) the third party has first made an Acquisition Proposal that is financially superior to the transactions contemplated by this Agreement and has demonstrated that the funds necessary for the Acquisition Proposal are reasonably likely to be available (as determined in good faith in each case by Parent's Board of Directors after consultation with its financial advisors) and (y) Parent's Board of Directors shall conclude in good faith, after considering applicable provisions of state law, on the basis of advice of outside counsel, that such action is necessary for the Board of Directors to act in a manner consistent with its fiduciary duties under applicable law and (B) prior to furnishing such information to or entering into discussions or negotiations with such Person, Parent (x) provides prompt notice to AlliedSignal to the effect that it is furnishing information to or entering into discussions or negotiations with such Person and (y) receives from such Person an executed confidentiality agreement in reasonably customary form and (ii) provided Parent terminates this Agreement pursuant to Section 9.1(a)(iv), accept an Acquisition Proposal from a third party. Parent shall notify AlliedSignal in writing of any such inquiries, offers or proposals (including, without limitation, the terms and conditions of any such proposal and the identity of the Person making it), within 24 hours of the receipt thereof, shall keep AlliedSignal informed of the status and details of any such inquiry, offer or proposal, and shall give AlliedSignal five days' advance notice of any agreement to be entered into with, or any information to be supplied to, any Person making such inquiry, offer or proposal. As used herein, "Acquisition ----------- Proposal" shall mean a proposal or offer (other than by AlliedSignal) for a - --------- purchase of Assets, merger or other business combination involving Sellers and the Herndon Sellers, or any proposal to acquire in any manner a substantial equity interest in, or all or substantially all of the Assets of, Sellers and the Herndon Sellers or otherwise relating to the Combined Business. 4.15 U.S. Government Contracts. As soon as practicable following ------------------------- the date of this Agreement and only after Buyer's written request, with respect to each Government Contract, AlliedSignal and Buyer shall assist Parent and Sellers to either obtain written confirmation reasonably satisfactory in form and substance to Buyer that novation of such Government Contract is not required, or, if not received prior to the Closing Date, submit to the cognizant responsible contracting officer, as soon as practicable after the Closing Date (i) a written request that the U.S. Government enter into a novation agreement contemplated by FAR 42.1204 (a "Novation Agreement") with Buyer with respect to ------------------ each Government Contract and (ii) a Novation Agreement executed by the Company or any Subsidiary party thereto for each Government Contract. Parent, Sellers, AlliedSignal and Buyer shall coordinate their efforts to facilitate the actions required by this Section 4.15 and Parent agrees to take all necessary action to assist Sellers prior to and after the Closing in connection therewith, including without limitation, upon Buyer's written request, obtaining such consents after the Closing, informing the appropriate governmental personnel of the pending transaction and of the planned novation. 47 4.16 NYSE Listing. AlliedSignal shall take all reasonable action ------------ required to obtain from the NYSE, prior to the Closing Date to have duly approved for listing, subject to official notice of issuance, the shares of AlliedSignal Common Stock to be issued hereunder at the Closing. 4.17 Continued Existence. Unless Parent makes other provisions for ------------------- its obligations under Article VII that are reasonably satisfactory to AlliedSignal, (A) for a period of three years after the Closing Date, Parent shall (i) maintain its corporate existence, (ii) not authorize or take any other action to implement a dissolution of Parent, and (iii) maintain a minimum net worth of Fifty Million Dollars ($50,000,000) and (B) following such three year period, for so long as any claim by a Buyer Indemnified Party for indemnification pursuant to Article VII remains unresolved, Parent shall (i) maintain its corporate existence, (ii) not authorize or take any other action to implement a dissolution of Parent, and (iii) maintain a minimum net worth equal to the lesser of (x) Fifty Million Dollars ($50,000,000) or (y) the amount of such unresolved claims then outstanding; provided, however, that nothing in this -------- ------- Section 4.17 shall (i) prevent Parent from engaging in a merger, sale of substantially all its assets or other business combination after the Closing Date if (x) prior to the consummation of such transaction, the successor in interest to Parent (or the purchaser of such assets, as the case may be) in such transaction agrees in writing (for the benefit of the Buyer Indemnified Parties) to assume and become fully responsible for, pursuant to an agreement reasonably satisfactory in form and substance to AlliedSignal, all of Parent's obligations under this Agreement (including, without limitation, Parent's obligations under Article VII) and (y) immediately after consummation of such transaction, such successor in interest (or purchaser, as the case may be) has a net worth of not less than the net worth then required to be maintained by Parent pursuant to this Section 4.17 or (ii) limit the rights of the parties under Section 4.14. 4.18 Company Debt. Prior to the Closing, Parent shall (i) cause ------------ the Debt which is secured by a mortgage on the distribution center located in Salt Lake City, Utah, to be repaid, (ii) cause all remaining payments on all capitalized leases of the Companies to be paid and (iii) use its reasonable best efforts to cause all cash accounts of the Companies to be reduced to zero with no negative or positive balances. Buyer acknowledges that the funding of negative balances will increase Closing Date Net Worth. 4.19 Side Letters. At or prior to the Closing, Parent shall ------------ deliver or cause to be delivered, to AlliedSignal, the Side Letters. 4.20 Product Liability Insurance. At Parent's request, --------------------------- AlliedSignal shall use reasonable commercial efforts to procure, to the extent available, at Parent's expense, product liability insurance covering products manufactured or distributed by the Companies prior to the Closing Date. Upon receipt of any premium notice relating to such insurance, AlliedSignal shall notify Parent and Parent shall promptly pay to AlliedSignal the amount of the premium due. Parent acknowledges and agrees that AlliedSignal is free to ascribe any adverse claim experience, to the extent reasonably identifiable to products manufactured or distributed by the Companies prior to the Closing Date, to such policy, so that (to such extent) such adverse claim experience does not adversely affect other product liability premiums being paid by AlliedSignal. 48 4.21 Harco Northern Ireland, Ltd. At or prior to the Closing, --------------------------- Parent will cause Eric Steiner to convey to Buyer or Buyer's designee the share of capital stock of (or other equity interest in) Harco Northern Ireland, Ltd. owned by him, free and clear of all Liens. ARTICLE V CONDITIONS PRECEDENT 5.1 Conditions Precedent to Obligations of AlliedSignal and Buyer. ------------------------------------------------------------- The obligations of Buyer to purchase (and of AlliedSignal to cause Buyer to purchase) the Purchased Assets and assume (and of AlliedSignal to cause Buyer to assume) the Assumed Liabilities and to consummate the other transactions contemplated hereby are subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions (any one or more of which may be waived in writing in whole or in part by Buyer in its sole discretion): (a) Representations, Warranties and Covenants. Each of the ----------------------------------------- representations and warranties of Parent and Sellers contained in this Agreement or in any Transaction Document delivered in connection herewith shall be true and correct in all material respects on and as of the date of this Agreement and at and as of the Closing with the same effect as though such representations and warranties had been made at and as of the Closing, except for representations and warranties that speak as of a specific date or time other than the Closing (which need only be true and correct in all material respects as of such date or time); provided, however, that if any such representation or warranty is already -------- ------- qualified by materiality, for purposes of determining whether this condition has been satisfied, such representation or warranty as so qualified shall be true and correct in all respects. Parent and Sellers shall have performed and complied in all material respects with each covenant and agreement required by this Agreement to be performed or complied with by them at or prior to the Closing. Parent and each Seller shall furnish AlliedSignal and Buyer with a certificate of such company dated the Closing Date and signed by a senior executive officer of Parent or such Seller, as the case may be, to the effect that the conditions set forth in this Section 5.1(a) have been satisfied. (b) HSR Act. The applicable waiting period under the HSR Act ------- (including any extensions thereof) with respect to the transactions contemplated hereby shall have expired or been terminated. (c) Stock Exchange Listing. The NYSE shall have duly approved for ---------------------- listing, subject to official notice of issuance, the shares of AlliedSignal Common Stock to be issued hereunder at the Closing. (d) Required Consents. Parent and the Companies shall have obtained ----------------- all statutory and regulatory consents and approvals which are required under any applicable Laws in order to consummate the transactions contemplated hereby and to permit Buyer to conduct the Business as conducted as of the date of this Agreement and all other necessary consents and approvals of third parties (other than any customer or supplier of the Business) to the transactions contemplated hereby, other than those the failure of which to obtain, individually and in the aggregate, would not have a Material Adverse Effect. 49 (e) Customer/Supplier Concurrence. During the period from November 1, ----------------------------- 1997 through the date immediately preceding the Closing Date, Parent, Sellers, Herndon Sellers, AlliedSignal and/or Buyer shall not have received written notice from (i) customers indicating that such customers are terminating or intend to terminate Combined Contracts (excluding termination upon expiration of the term of any Combined Contract so long as such customer continues to purchase goods from the Combined Business) and/or indicating that any such customer intends to reduce its purchases from any Company or any Herndon Seller, which terminations and/or reductions in the aggregate would reasonably be expected to result in the revenues of the Combined Business for the 12 months immediately following the Closing Date being $40 million or more less than the revenues of the Combined Business for the 12 months immediately preceding the Closing Date or (ii) suppliers (including suppliers of Intellectual Property) indicating that such suppliers are terminating or intend to terminate Combined Contracts (excluding termination upon expiration of the term of any Combined Contract so long as such supplier continues to provide goods or Intellectual Property to the Combined Business) and/or indicating that any such supplier intends to reduce its sales to any Company or any Herndon Seller, which terminations and/or reductions in the aggregate would reasonably be expected to result in supplier sales to the Combined Business for the 12 months immediately following the Closing Date being $10 million or more less than supplier sales to the Combined Business for the 12 months immediately preceding the Closing Date. (f) Injunction; Litigation; Legislation. (i) Parent, the Companies, ----------------------------------- AlliedSignal and Buyer shall not be subject to any order or injunction by any Governmental Entity restraining or prohibiting the consummation of the transactions contemplated hereby, (ii) no action or proceeding shall have been instituted before any Governmental Entity to restrain or prohibit, or to obtain substantial damages in respect of, the consummation of the transactions contemplated hereby, (iii) none of the parties hereto or any Seller Subsidiary shall have received written notice from any Governmental Entity of (x) its intention to institute any action or proceeding to restrain, enjoin or nullify this Agreement or the transactions contemplated hereby, or to commence any investigation (other than a routine letter of inquiry, including a routine civil investigative demand) into the consummation of the transactions contemplated hereby or (y) the actual commencement of such investigation, (iv) there shall not be any pending or threatened litigation, suit, action or proceeding by any party which would reasonably be expected to limit or materially adversely affect Buyer's ownership of the Acquired Assets or the Buyer under the Herndon Agreement's ownership of and the Herndon Purchased Assets, and (v) no Law shall have been promulgated or enacted by any Governmental Entity, which would prevent or make illegal the consummation of the transactions contemplated hereby. (g) Transition Services Agreement. Parent, Sellers and Buyer shall ----------------------------- have entered into a mutually satisfactory transition services agreement provided that charges for services rendered shall be customary and reasonable. (h) Side Letters. Fairchild and Jeffrey Steiner, as appropriate, ------------ shall have executed and delivered to AlliedSignal the three Side Letters substantially in the form of Exhibits 1.9(xiii)(A-C). ----------------------- 50 (i) Documents. Parent and the Companies shall have delivered to Buyer --------- at the Closing such other documents and instruments as shall be reasonably necessary to transfer to Buyer the Purchased Assets as contemplated by this Agreement. Parent and Sellers shall have delivered all the certificates, instruments, contracts and other documents specified to be delivered by each of them hereunder. (j) Herndon Closing. (i) All conditions to the Closing (as defined in --------------- the Herndon Agreement) shall have been satisfied or waived and (ii) the Closing (as defined in the Herndon Agreement) shall be consummated simultaneously with the consummation of the Closing hereunder. (k) Harco Northern Ireland, Ltd. Eric Steiner shall have conveyed to --------------------------- Buyer or Buyer's designees the share of capital stock of (or other equity interest in) Harco Northern Ireland, Ltd. owned by him, free and clear of all Liens. (l) Escrow Agreement. Parent and the Escrow Agent shall have executed ---------------- and delivered to AlliedSignal the Escrow Agreement. 5.2 Conditions Precedent to Obligations of Parent and Sellers. The --------------------------------------------------------- obligations of Sellers to sell, and Parent to cause to be sold, the Purchased Assets and to consummate the other transactions contemplated hereby are subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions (any one or more of which may be waived in writing in whole or in part by Parent (acting on its own behalf and on behalf of Sellers) in its sole discretion): (a) Representations, Warranties and Covenants. Each of the ----------------------------------------- representations and warranties of AlliedSignal and Buyer contained in this Agreement and in any Transaction Document delivered in connection herewith shall be true and correct in all material respects on and as of the date of this Agreement and at and as of the Closing with the same effect as though such representations and warranties had been made at and as of the Closing, except for representations and warranties that speak as of a specific date or time other than the Closing (which need only be true and correct in all material respects as of such date or time); provided, however, that if any such -------- ------- representation or warranty is already qualified by materiality, for purposes of determining whether this condition has been satisfied, such representation or warranty as so qualified shall be true and correct in all respects. AlliedSignal and Buyer shall have performed or complied in all material respects with each covenant and agreement required by this Agreement to be performed or complied with by it at or prior to the Closing. AlliedSignal or Buyer, as the case may be, shall furnish Sellers with a certificate of such company dated the Closing Date and signed by a senior executive officer of Buyer to the effect that the conditions set forth in this Section 5.2(a) have been satisfied. (b) HSR Act. The applicable waiting period under the HSR Act ------- (including any extensions thereof) with respect to the transactions contemplated hereby shall have expired or been terminated. 51 (c) Stock Exchange Listing. The NYSE shall have duly approved for ---------------------- listing, subject to official notice of issuance, the shares of AlliedSignal Common Stock to be issued hereunder at the Closing. (d) Injunction; Litigation; Legislation. (i) Parent, the Companies, ----------------------------------- AlliedSignal and Buyer shall not be subject to any order or injunction by any Governmental Entity restraining or prohibiting the consummation of the transactions contemplated hereby, (ii) no action or proceeding shall have been instituted before any Governmental Entity to restrain or prohibit, or to obtain substantial damages in respect of, the consummation of the transactions contemplated hereby, (iii) none of the parties hereto or any Seller Subsidiary shall have received written notice from any Governmental Entity of (x) its intention to institute any action or proceeding to restrain, enjoin or nullify this Agreement or the transactions contemplated hereby, or to commence any investigation (other than a routine letter of inquiry, including a routine civil investigative demand) into the consummation of the transactions contemplated hereby or (y) the actual commencement of such investigation and (iv) no Law shall have been promulgated or enacted by any Governmental Entity, which would prevent or make illegal the consummation of the transactions contemplated hereby. (e) Registration Rights Agreement. AlliedSignal shall have executed ----------------------------- and delivered to Parent a registration rights agreement substantially in the form of Exhibit 1.9(b)(vi) with such changes as may reasonably be requested by ------------------ Citicorp USA, Inc. provided that such changes shall not provide for (i) more than a single demand registration right, (ii) a period of longer than 180 days during which the Registration Statement must be kept in effect or (iii) the payment of expenses by a party other than Citicorp USA, Inc. or Parent. (f) Documents. AlliedSignal and Buyer shall have delivered to Sellers --------- at the Closing such other documents and instruments as shall be reasonably necessary for the assumption by Buyer of the Assumed Liabilities as contemplated by this Agreement. AlliedSignal and Buyer shall have delivered all the certificates, instruments, contracts and other documents specified to be delivered by it hereunder. (g) Herndon Closing. (i) All conditions to the Closing (as defined in --------------- the Herndon Agreement) shall have been satisfied or waived and (ii) the Closing (as defined in the Herndon Agreement) shall be consummated simultaneously with the consummation of the Closing hereunder. (h) Escrow Agreement. AlliedSignal and the Escrow Agent shall have ---------------- executed and delivered to Parent the Escrow Agreement. ARTICLE VI CERTAIN ADDITIONAL COVENANTS 6.1 Expenses. Except as otherwise expressly provided in this -------- Agreement, each of the parties hereto shall each bear its respective accounting, legal and other expenses incurred in connection with the transactions contemplated by this Agreement. 52 6.2 Maintenance of Books and Records. Parent, Sellers and Buyer -------------------------------- shall cooperate fully with each other after the Closing so that (subject to any limitations that are reasonably required to preserve any applicable attorney- client privilege) each party hereto has access to the business records, contracts and other information existing at the Closing Date and relating in any manner to the Acquired Assets, the Assumed Liabilities or the conduct of the Business (whether in the possession of Parent, Sellers or Buyer). No files, books or records existing at the Closing Date and relating in any manner to the Acquired Assets or the conduct of the Business prior to the Closing Date shall be destroyed by any party hereto for a period of six years after the Closing Date without giving the other party at least 30 days' prior written notice, during which time such other party shall have the right (subject to the provisions hereof) to examine and to remove any such files, books and records prior to their destruction. The access to files, books and records contemplated by this Section 6.2 shall be during normal business hours and upon not less than two business days' prior written request, shall be subject to such reasonable limitations as the party having custody or control thereof may impose to preserve the confidentiality of information contained therein, and shall not extend to material subject to a claim of privilege unless expressly waived by the party entitled to claim the same. 6.3 Financial Statements. Upon the request of AlliedSignal, Parent -------------------- and Sellers shall, as promptly as practicable (but in no event later than 30 days after such request), provide AlliedSignal with such financial statements relating to the Combined Business as may be required under Rule 3-05, Article 11 of Regulation S-X or other rule or regulation promulgated under the Securities Act or the Exchange Act in connection with the preparation and filing of any registration statement or periodic report of AlliedSignal pursuant to such laws, including unqualified opinions thereon of independent public accountants and consents therefor as required by such laws and the rules and regulations thereunder. 6.4 Non-Competition/Non-Solicitation. -------------------------------- (a) Parent and each Seller covenants and agrees that, if the Closing is consummated, for a period of three years after the Closing Date, it will not, and will cause Parent Subsidiaries not to, engage in the business of supplying to the aerospace industry aircraft hardware, chemicals or related support services (or any portion thereof) anywhere in the world (the "Competitive Activities"), except for (i) the sale of any Inventory of such hardware or chemicals owned by such Person or consigned to such Person as of the date hereof, the value of which Inventory is estimated to be approximately $5,000,000 or (ii) the sale of any Inventory of such hardware or chemicals hereafter acquired by such Person as part of a bulk purchase or hereafter consigned to such person as part of a bulk consignment, but only after such Person has offered to sell such hardware or chemicals to Buyer at commercially reasonable prices for such quantities as would be charged to distributors of such products; provided, however, that nothing herein shall be construed to prevent Parent, - -------- ------- Sellers and/or any of their respective Affiliates from owning, in the aggregate, up to 10% of the stock or equity interest in any Person that engages in such business or any portion thereof. It is the desire and intent of the parties hereto that the provisions of this Section 6.4 shall be enforced to the fullest extent permitted under the laws and public policies of each jurisdiction in which enforcement is sought. If any court determines that any provision of this Section 6.4 is unenforceable, such court shall have the power to reduce the 53 duration or scope of such provision, as the case may be, or terminate such provision and, in reduced form, such provision shall be enforceable; it is the intention of the parties that the foregoing restrictions shall not be terminated, unless so terminated by a court, but shall be deemed amended to the extent required to render them valid and enforceable, such amendment to only apply with respect to the operation of this Section 6.4 in the jurisdiction of the court that has made the adjudication. Notwithstanding the foregoing, nothing in this Section 6.4(a) shall prohibit Parent, any Seller or any of their respective Affiliates from acquiring any Person or business that engages in Competitive Activities provided that (x) such activities do not constitute the principal activities of the Person or business to be acquired (based on the sales of such business during the preceding four (4) full calendar quarters) and (y) if Competitive Activities constitute in excess of fifteen percent (15%) of the revenues of the Person or business acquired, Sellers use their reasonable efforts to divest that portion of such Person or business that engages in Competitive Activities within twelve (12) months after the acquisition thereof. (b) Each of Parent and each Seller covenants and agrees that, if the Closing is consummated, for a period of one year after the Closing Date, it will not, and will cause Parent Subsidiaries not to, directly or indirectly, solicit for employment, either as an employee or a consultant, any employee or independent contractor of AlliedSignal, Buyer or any of their respective Affiliates who is engaged in the Business and was an employee or independent contractor of any Company engaged in the Business as of the Closing Date to become an employee or consultant or otherwise provide services to Parent, such Seller or any Parent Subsidiary, except for persons whose employment is solicited or procured through general media advertisements. (c) The parties acknowledge and agree that the restrictions contained in Sections 6.4(a) and 6.4(b) are a reasonable and necessary protection of the immediate interests of AlliedSignal and Buyer, and any violation of these restrictions would cause substantial injury to AlliedSignal or Buyer, as the case may be and that AlliedSignal and Buyer would not have entered into this Agreement without receiving the additional consideration offered by Parent and each Seller in binding itself to these restrictions. In the event of a breach or a threatened breach by Parent, any Seller or any Parent Subsidiary of these restrictions, AlliedSignal and Buyer shall be entitled to apply to any court of competent jurisdiction for an injunction restraining such Person from such breach or threatened breach (without the necessity of proving the inadequacy of money damages as a remedy); provided, however, that the right to apply for -------- ------- injunctive relief shall not be construed as prohibiting AlliedSignal or Buyer, as the case may be, from pursuing any other available remedies for such breach or threatened breach. (d) Each of AlliedSignal and Buyer covenant and agree that, if the Closing is consummated, for a period of one year after the Closing Date, and if not consummated for a period of one year from the date of termination of this Agreement, it will not, and will cause its Affiliates not to, directly or indirectly, solicit for employment, either as an employee or a consultant, any employee or independent contractor of Parent or any Parent Subsidiary (other than any employee or independent contractor of any of the Companies) to become an employee or consultant or otherwise provide services to AlliedSignal, Buyer or any of their respective 54 Affiliates, except for persons whose employment is solicited or procured through general media advertisements. (e) The parties acknowledge and agree that the restrictions contained in Section 6.4(d) are a reasonable and necessary protection of the immediate interests of Parent and Sellers, and any violation of these restrictions would cause substantial injury to Parent or Sellers, as the case may be, and that Parent and Sellers would not have entered into this Agreement without receiving the additional consideration offered by AlliedSignal and Buyer in binding itself to these restrictions. In the event of a breach or a threatened breach by AlliedSignal, Buyer or any of their respective Affiliates of these restrictions, Parent and any such Seller shall be entitled to apply to any court of competent jurisdiction for an injunction restraining such Person from such breach or threatened breach (without the necessity of proving inadequacy of money damages as a remedy); provided, however, that the right to apply for injunctive relief -------- ------- shall not be construed as prohibiting Parent or such Seller from pursuing any other available remedies for such breach or threatened breach. 6.5 Confidential Information. Parent and Sellers shall, and shall ------------------------ cause Parent Subsidiaries to, maintain the confidentiality of, and shall not use, and shall cause Parent Subsidiaries not to use, for the benefit of itself or others, any confidential information concerning the Business or the Acquired Assets, including any information with respect to the Intellectual Property or Technology (the "Confidential Information"); provided, however, that this ------------------------ -------- ------- Section 6.5 shall not restrict (a) any disclosure by any such Person of any Confidential Information required by applicable Law, securities exchange or any court of competent jurisdiction; provided, that AlliedSignal and Buyer are given -------- notice and an adequate opportunity to contest such disclosure, (b) any disclosure on a confidential basis to any such Person's attorneys, accountants, lenders and investment bankers and (c) any disclosure of information (i) which is available publicly as of the date of this Agreement, (ii) which, after the date of this Agreement, becomes available publicly through no fault of the disclosing party or any of its Affiliates or (iii) which is received by such Person from a third party not, to the best of such Person's knowledge, subject to any obligation of confidentiality with respect thereto. ARTICLE VII SURVIVAL; INDEMNIFICATION 7.1 Survival. All representations, warranties, covenants and -------- agreements contained in this Agreement or the Transaction Documents shall survive (and not be affected in any respect by) the Closing, any investigation conducted by any party hereto and any information which any party may receive. Notwithstanding the foregoing, the representations and warranties contained in or made pursuant to this Agreement and the related indemnity obligations set forth in Sections 7.2(a)(i) and 7.3(a)(i) shall terminate on, and no claim or action with respect thereto may be brought after, the date three years after the Closing Date, except that (a) the representations and warranties contained in Sections 2.3 and 2.12 and the related indemnity obligations 55 contained in Section 7.2 shall survive indefinitely and (b) the representations and warranties contained in Sections 2.10, 2.14 and 2.20 and the related indemnity obligations contained in Section 7.2 shall survive until 30 days after the expiration of the applicable statute of limitations (or extensions or waivers thereof). The representations and warranties which terminate on the date three years after the Closing Date and the representations and warranties referred to in the foregoing clause (b), and the Liability of any party hereto with respect thereto pursuant to this Article VII, shall not terminate with respect to any claim, whether or not fixed as to Liability or liquidated as to amount, with respect to which the Indemnifying Party has been given written notice prior to the date three years after the Closing Date or such 30th day after the expiration of the applicable statute of limitations (or extensions or waivers thereof), as the case may be. 7.2 Indemnification by Parent, Sellers and Herndon Sellers. ------------------------------------------------------ (a) Subject to Section 7.1 Parent, Sellers and Herndon Sellers shall jointly and severally indemnify and hold AlliedSignal, Buyer, Buyer as defined in the Herndon Agreement, and their respective employees, officers, directors, agents and Affiliates (collectively, the "Buyer Indemnified Parties") harmless ------------------------- from and against, and agree promptly to defend any Buyer Indemnified Party from and reimburse any Buyer Indemnified Party for, any and all Losses which any Buyer Indemnified Party may at any time suffer or incur, or become subject to, as a result of or in connection with: (i) any breach or inaccuracy as of the date of this Agreement, the date of the Herndon Agreement or the Closing Date of any of the representations and warranties made (w) by Parent or Sellers in or pursuant to this Agreement, (x) in any Transaction Document delivered by Parent or any Seller at the Closing in accordance herewith, (y) made by Parent or the Herndon Sellers in or pursuant to the Herndon Agreement or (z) in any Transaction Document delivered by Parent or any Herndon Seller at the Closing under the Herndon Agreement in accordance with the Herndon Agreement (it being understood and agreed that, notwithstanding anything to the contrary contained in this Agreement or the Herndon Agreement, to determine if there had been an inaccuracy or breach of a representation or warranty of Parent, any Seller or any Herndon Seller and the Losses arising from such inaccuracy or breach, such representation and warranty shall be read as if it were not qualified by materiality, including, without limitation, qualifications indicating accuracy in all material respects, or accuracy except to the extent the inaccuracy would not have a Material Adverse Effect); (ii) any failure by Parent, any Seller or any Herndon Seller to carry out, perform, satisfy and discharge any of their respective covenants, agreements, undertakings or Liabilities under (w) this Agreement, (x) any of the Transaction Documents delivered by Parent or any Seller pursuant to this Agreement, (y) the Herndon Agreement or (z) any of the Transaction Documents delivered by Parent or any Herndon Seller pursuant to the Herndon Agreement; (iii) the Non-Assumed Liabilities and the Herndon Non-Assumed Liabilities; and 56 (iv) the ownership, use and possession of the Excluded Assets or the Herndon Excluded Assets prior to, on or after the Closing Date. (b) Notwithstanding any other provision herein to the contrary, (i) neither Parent, Sellers nor the Herndon Sellers shall be required to indemnify and hold harmless any Buyer Indemnified Party pursuant to Section 7.2(a)(i) unless the applicable Buyer Indemnified Party has asserted a claim with respect to such matters within the applicable survival period set forth in Section 7.1 hereof, (ii) neither Parent, Sellers nor the Herndon Sellers shall have any Liability pursuant to Section 7.2(a)(i) until the cumulative aggregate amount of all Losses which are otherwise recoverable thereunder by Buyer Indemnified Parties exceed an amount equal to Six Million Nine Hundred Thousand Dollars ($6,900,000) (the "Basket"), and then only for the amount by which such Losses ------ exceed the Basket, (iii) the cumulative indemnification obligation of Parent, Sellers and the Herndon Sellers under Section 7.2(a)(i), except as it applies to a breach of the representations and warranties contained in Section 2.3, shall in no event exceed 50% of the Cash Equivalent Purchase Price, (iv) the cumulative indemnification obligation of Parent and Sellers under Section 7.2(a)(i) with respect to a breach of the representations and warranties contained in Section 2.3 shall in no event exceed the Cash Equivalent Purchase Price, (v) the amount of any Loss for which indemnification is provided under this Section 7.2 shall be net of any amount actually recovered by AlliedSignal or Buyer under insurance policies with respect to such Losses, and (vi) neither Parent, Sellers, nor the Herndon Sellers shall have any Liability for consequential damages, except that the provisions of this clause (vi) shall not ------ apply to the breach of the representations and warranties contained in Section 2.3 or the breach of any covenant contained in Section 4.19. Notwithstanding anything in this Agreement to the contrary, neither Parent, Sellers, nor the Herndon Sellers shall have any obligation to indemnify any Buyer Indemnified Party for any Special Claims (as defined in Section 7.4(b)) that are less than $20,000 per claim (a "Small Claim") and Losses in respect of Small Claims shall be disregarded for purposes of determining whether Losses pursuant to Sections 7.2(a)(i) and 7.2(a)(iv) exceed the Basket. 7.3 Indemnification by AlliedSignal and Buyer. ----------------------------------------- (a) Subject to Section 7.1 AlliedSignal and Buyer shall jointly and severally indemnify and hold Parent, Sellers, the Herndon Sellers and their respective employees, officers, directors, agents and Affiliates (collectively, the "Seller Indemnified Parties") harmless from and against, and agree promptly -------------------------- to defend any Seller Indemnified Party from and reimburse any Seller Indemnified Party for, any and all Losses which any Seller Indemnified Party may at any time suffer or incur, or become subject to, as a result of or in connection with: (i) any breach or inaccuracy as of the date of this Agreement, or the Herndon Agreement or the Closing Date of any of the representations and warranties made (w) by AlliedSignal or Buyer in or pursuant to this Agreement, (x) in any Transaction Document delivered by AlliedSignal or Buyer at the Closing in accordance herewith, (y) made by AlliedSignal or the Buyer under the Herndon Agreement in or pursuant to the Herndon Agreement or (z) in any Transaction Document delivered by AlliedSignal or the Buyer under the Herndon Agreement at the Closing under the 57 Herndon Agreement in accordance with the Herndon Agreement (it being understood and agreed that, notwithstanding anything to the contrary contained in this Agreement or the Herndon Agreement, to determine if there had been an inaccuracy or breach of a representation or warranty of AlliedSignal, Buyer or the Buyer under the Herndon Agreement and the Losses arising from such inaccuracy or breach, such representation and warranty shall be read as if it were not qualified by materiality, including, without limitation, qualifications indicating accuracy in all material respects, or accuracy except to the extent the inaccuracy will not have a material adverse effect on the ability of AlliedSignal or Buyer to perform its obligations under this Agreement and the other Transaction Documents to which it is a party); (ii) any failure by AlliedSignal, Buyer or the Buyer under the Herndon Agreement to carry out, perform, satisfy and discharge any of their respective covenants, agreements, undertakings, Liabilities under (w) this Agreement, (x) any of the Transaction Documents delivered by AlliedSignal or Buyer, as the case may be, pursuant to this Agreement, (y) the Herndon Agreement or (z) any of the Transaction Documents delivered by AlliedSignal or the Buyer under the Herndon Agreement, as the case may be, pursuant to the Herndon Agreement; (iii) the Assumed Liabilities and the Herndon Assumed Liabilities; and (iv) the operation of the Combined Business after the Closing. (b) Notwithstanding any other provision herein to the contrary, (i) neither AlliedSignal nor Buyer shall be required to indemnify and hold harmless any Seller Indemnified Party pursuant to Section 7.3(a)(i) unless the applicable Seller Indemnified Party has asserted a claim with respect to such matters within the applicable survival period set forth in Section 7.1 hereof, (ii) the cumulative indemnification obligation of AlliedSignal and Buyer under Section 7.3(a)(i) shall in no event exceed 50% of the Cash Equivalent Purchase Price, and (iii) neither AlliedSignal nor Buyer shall have any Liability for consequential damages. 7.4 Notification of Claims. ---------------------- (a) If any Buyer Indemnified Party, on the one hand, or Seller Indemnified Party, on the other hand (an "Indemnified Party"), has a claim or ----------------- potential claim or receives notice of any claim, potential claim or the commencement of any action or proceeding which could give rise to an obligation on the part of Parent or Sellers, on the one hand, or AlliedSignal or Buyer, on the other hand, to provide indemnification (the "Indemnifying Party") pursuant ------------------ to Section 7.2 or 7.3, respectively, the Indemnified Party shall promptly give the Indemnifying Party notice setting forth in reasonable detail the facts giving rise to the claim to the extent known (an "Indemnification Claim"); --------------------- provided, however, that the failure to give such prompt notice shall - -------- ------- not prevent any Indemnified Party from being indemnified hereunder for any Losses, except to the extent that the failure to so promptly notify the Indemnifying Party actually damages the Indemnifying Party or except to the extent such notice is not received during the applicable survival period set forth in Section 7.1. 58 (b) In the event of a claim, a potential claim or the commencement of any action or proceeding by a third party which could give rise to an obligation to provide indemnification pursuant to Section 7.2 or 7.3, the Indemnified Party shall give the Indemnifying Party prompt written notice thereof setting forth in reasonable detail the facts giving rise to the claim to the extent known (the "Third Party Indemnification Claim"); provided, however, that the failure of the - ---------------------------------- -------- ------- Indemnified Party to so promptly notify the Indemnifying Party shall not prevent any Indemnified Party from being indemnified for any Losses, except to the extent that the failure to so promptly notify actually damages the Indemnifying Party or except to the extent such notice is not received during the applicable survival period set forth in Section 7.1. If the Indemnifying Party confirms in writing (the "Confirmation of Indemnification") to the Indemnified Party within ------------------------------- fifteen (15) days after receipt of the Third Party Indemnification Claim the Indemnifying Party's responsibility to indemnify and hold harmless the Indemnified Party therefor in accordance herewith and within such fifteen (15) day period demonstrates to the Indemnified Party's reasonable satisfaction that as of such time (i) in the event the Indemnifying Party is Parent and Sellers, Parent is in compliance with the covenants set forth in Section 4.17 and the face value of the Third Party Indemnification Claim, when aggregated with the face value of all other outstanding claims of Buyer Indemnified Parties, does not exceed the net worth of Parent, or (ii) in the event the Indemnifying Party is AlliedSignal and Buyer, AlliedSignal and Buyer have sufficient financial resources in order to indemnify for the full amount of any potential Liability in connection with such claim, the Indemnifying Party may elect to compromise or defend, at such Indemnifying Party's own expense and by such Indemnifying Party's own counsel, which counsel shall be reasonably satisfactory to the Indemnified Party, any such matter involving the asserted Liability of the Indemnified Party. If the Indemnifying Party elects to compromise or defend any such asserted Liability, it shall within fifteen (15) days (or sooner, if the nature of the asserted Liability so requires) notify the Indemnified Party of its intent to do so, and the Indemnified Party shall cooperate, at the expense of the Indemnifying Party, in the compromise of, or defense against, any such asserted Liability; provided that (i) the Indemnified Party may, if it so ------------- desires, employ counsel at its own expense to assist in the handling of any such third party claim, (ii) the Indemnifying Party shall keep the Indemnified Party advised of all material events with respect to any such third party claim, (iii) the Indemnifying Party shall obtain the prior written approval of the Indemnified Party (which approval may not be unreasonably withheld) before ceasing to defend against such third party claim or entering into any settlement, adjustment or compromise of such third party claim involving injunctive or similar equitable relief being asserted against any Indemnified Party or any Affiliate thereof and (iv) no Indemnifying Party shall, without the prior written consent of each Indemnified Party, settle or compromise or consent to the entry of any judgment in any pending or threatened demand, claim, action or cause of action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not any such Indemnified Party is a party to such demand, claim, action or cause of action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of all such Indemnified Parties from all Liability arising out of such claim, action, suit or proceeding. With respect to claims for indemnification arising out of or relating to trade disputes, warranty claims, ordinary course returns and allowances disputes and similar contractual disputes (including late deliveries or delivery of non-conforming goods) ("Special Claims"), (i) if the Special Claim or Claims related to a single third party aggregates less than $1,000,000 on the face of such Special Claim 59 or Claims, AlliedSignal and Buyer shall control the defense and settlement of such claims with such third party, and (ii) if the Special Claim or Claims related to a single third party aggregates more than $1,000,000 on the face of such Special Claim or Claims, Parent and Sellers shall control the defense of such claims, provided that Parent shall have delivered a Confirmation of Indemnification and demonstrated that Parent has sufficient financial resources in accordance with clause (i) of the second sentence of this Section 7.4(b). Notwithstanding anything contained herein to the contrary, the Indemnifying Party shall not be entitled to have sole control over the defense, settlement, adjustment or compromise of any third party non-monetary claim that seeks an order, injunction or other equitable relief against any Indemnified Party or any Affiliate thereof, which, if successful, could materially interfere with the business, Assets, Liabilities, financial condition or results of operations of the Indemnified Party or any of its Affiliates. If the Indemnifying Party elects not to compromise or defend against the asserted Liability, or fails to notify the Indemnified Party of its election as herein provided, the Indemnified Party may, at the Indemnifying Party's expense, pay, compromise or defend against such asserted Liability. ARTICLE VIII EMPLOYEES AND EMPLOYEE BENEFITS 8.1 Scope of Article. This Article VIII contains the covenants and ---------------- agreements of the parties with respect to (a) the status of employment of the employees of Sellers and the Seller Subsidiaries employed in the Business ("Employees") upon the sale of the Business to Buyer, and (b) the employee - ----------- benefits and employee benefit plans provided or covering such Employees and former employees of Sellers and the Seller Subsidiaries who terminated employment with the Sellers or the Seller Subsidiaries while employed in the Business or who retired from the Business ("Former Employees"). Nothing herein ---------------- expressed or implied confers upon any Employee or Former Employee of Sellers or the Seller Subsidiaries any rights or remedies of any nature or kind whatsoever. 8.2 U.S. Employees. This Section 8.2 applies only to Employees and -------------- Former Employees employed or previously employed by Sellers in the United States. (a) Employment. Buyer shall offer employment effective as of the ---------- Closing Date to each Employee of a Seller who is employed in the United States (a "U.S. Employee") and is actively at work immediately prior to the Closing ------------- Date or is not actively at work immediately prior to the Closing Date due solely to vacation, holiday or jury duty. Such initial offer of employment shall be for a position and for base salary or wages which are comparable to that which Employee had with Sellers immediately prior to the Closing and shall include employee benefits which are comparable in the aggregate to that which such Employees had with Sellers immediately prior to the Closing; provided, however, that no such employment shall be offered to Tucker E. Nason, Frank Saltzman and James Fairchild. Buyer shall offer employment to each other U.S. Employee who is not actively at work immediately prior to the Closing Date (including, but not limited to, any such employee who is not actively at work due to medical leave, sick leave, short-term disability, long-term disability, layoff or leave of absence) (an "Inactive Employee") who is willing ----------------- and able to return to work within 90 days after the Closing 60 Date or such later date as may be required by law, with such employment with Buyer to commence on the date the Inactive Employee first commences active employment with Buyer. Sellers shall be responsible for any obligation to provide employee benefits to an Inactive Employee prior to such employee's date of hire by Buyer. U.S. Employees who accept Buyer's offer of employment and become employees of Buyer shall be referred to herein as "U.S. Transferred ---------------- Employees." Notwithstanding the foregoing, nothing herein shall be construed to - --------- limit Buyer's ability to thereafter terminate the employment of any Employee or to amend or terminate any employee benefit plan or to otherwise change the terms and conditions of employment of any Employee. (b) Past Service Credit. Buyer shall credit the service of all U.S. ------------------- Transferred Employees with Sellers and their Affiliates prior to the Closing Date for purposes of eligibility and vesting under all employee benefit plans provided by Buyer for U.S. Transferred Employees (but not for purposes of benefit accrual). Buyer shall also: (i) cause to be waived any pre-existing condition limitation under any Buyer medical plans applicable to U.S. Transferred Employees or their dependents (except to the extent that any such pre-existing condition limitation would not have been waived under Sellers' medical plans), and (ii) recognize (or cause to be recognized) the dollar amount of all covered expenses incurred by U.S. Transferred Employees and their dependents under Sellers' applicable medical plans during the calendar year in which the Closing Date occurs for purposes of satisfying such calendar year's deductibles and co-payment limitations under any applicable Buyer medical plans; provided, that the U.S. Transferred Employee enrolls in the applicable Buyer - -------- medical plan at such time and in such manner as is reasonably specified by Buyer. (c) Severance; WARN Act. Sellers shall pay and be solely liable for, ------------------- and shall indemnify and hold AlliedSignal and Buyer harmless against, any obligation, cost or expense for (i) severance pay, termination indemnity pay, salary continuation, special bonuses or like compensation under Sellers' plans, policies or arrangements and (ii) liability under the WARN Act, or any similar state or local law, arising from, relating to or claimed by reason of the Closing or the transactions contemplated by this Agreement or which result from or relate to actions taken by Sellers on or before the Closing Date. (d) Vacation. Buyer shall adopt and assume Sellers' liability for -------- accrued, unused vacation entitlement of U.S. Transferred Employees as of the Closing to the extent listed on the Balance Sheet. (e) Workers Compensation. Sellers shall be responsible for all -------------------- workers compensation claims filed by or on behalf of a U.S. Transferred Employee to the extent attributable to events, occurrences or exposures prior to the Closing. Buyer shall be responsible for all workers compensation claims filed by or on behalf of a U.S. Transferred Employee to the extent attributable to events, occurrences or exposures following the Closing. (f) Employment and Plan Liabilities. It is understood and agreed that ------------------------------- neither AlliedSignal nor Buyer is assuming any obligations or liabilities arising under any Plan (except to the extent provided in Sections 8.2(d) above and 8.2(g) below) or as a result of any 61 Employee's or Former Employee's employment with, or termination of employment, from Sellers, and Sellers shall remain responsible for any such obligations and liabilities. (g) Employment Agreements. Buyer shall reimburse Sellers for any --------------------- Liabilities incurred after the Closing Date under the employee agreements listed under "Employee Agreement" on Schedule 2.20(a), other than the agreement relating to the employment of Tucker E. Nason. (h) Post-Closing Liability. AlliedSignal and Buyer shall pay and be ---------------------- solely liable for, and shall indemnify and hold Parent and Sellers harmless against, any obligation, cost or expense for severance pay, termination pay, salary continuation, special bonuses or like compensation under any Buyer plan, policy or arrangement which result from, or relate to, actions taken by AlliedSignal or Buyer or any Affiliate thereof after the Closing Date. (i) Cooperation. The parties agree to furnish each other with such ----------- information concerning employees and employee benefit plans, and to take all such other action, as is necessary or appropriate to effect the transactions contemplated by this Article VIII. 8.3 Foreign Employees. This Section 8.3 applies only to Employees ----------------- and Former Employees employed or previously employed by Sellers or the Seller Subsidiaries outside of the United States. (a) Employment. Buyer shall continue the employment without changes ---------- in terms immediately after the Closing of each Employee of a Seller Subsidiary who is employed outside of the United States (a "Foreign Employee"). Nothing herein shall be construed to limit Buyer's ability to terminate the employment of any Foreign Employee or to amend or terminate any employee benefit plan applicable to Foreign Employees or to otherwise change the terms and conditions of employment. (b) Severance. Sellers shall pay and be solely liable for, and shall --------- indemnify and hold AlliedSignal and Buyer harmless against, any obligation, cost or expense for severance pay, termination indemnity pay, salary continuation, special bonuses or like compensation under (i) any Seller or Seller Subsidiary plan, policy or arrangement or (ii) any applicable Laws, which result from or relate to actions taken by any Seller or Seller Subsidiary on or before the Closing Date (other than the consummation of the Closing, which shall be the responsibility of Buyer and Allied Signal). (c) Cooperation. The parties agree to furnish each other with such ----------- information concerning employees and employee benefit plans, and to take all such other action, as is necessary or appropriate to effect the transactions contemplated by this Article VIII. 62 ARTICLE IX TERMINATION; MISCELLANEOUS 9.1 Termination. ----------- (a) This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing Date, as follows: (i) by the mutual written agreement of Buyer and Parent; (ii) by Buyer or Parent if the Closing has not occurred on or before September 30, 1998; provided, however, that the right to terminate -------- ------- this Agreement pursuant to this Section 9.1(a)(ii) shall be suspended as to any party whose failure to fulfill any material obligation under this Agreement shall have been the cause of, or shall have resulted in, the failure of the Closing to occur prior to such date until the fifth Business Day after such failure has been cured; (iii) by Buyer or Parent in the event of the issuance by any Governmental Entity of a final, nonappealable order or injunction restraining or prohibiting the consummation of the transactions contemplated hereby; or (iv) by Parent, upon five days' prior notice to AlliedSignal, if, as a result of an Acquisition Proposal received by Parent from a person other than a party to this Agreement or any of its Affiliates, the Board of Directors of Parent determines in good faith that their fiduciary obligations under applicable law require that such Acquisition Proposal be accepted; provided, however, that (x) the Board of Directors of Parent -------- ------- shall have concluded in good faith, after considering applicable provisions of state law and after giving effect to all concessions which may be offered by AlliedSignal pursuant to clause (y) below, on the basis of advice of outside counsel, that such action is necessary for the Board of Directors to act in a manner consistent with its fiduciary duties under applicable law and (y) prior to any such termination, Parent shall, and shall cause its respective financial and legal advisors to, negotiate with AlliedSignal to make such adjustments in the terms and conditions of this Agreement as would enable AlliedSignal to proceed with the transactions contemplated hereby; provided further, however, that no termination shall ---------------- ------- be effective pursuant to this clause (iv) unless concurrently with such termination a termination fee of Thirty-Four Million Five Hundred Thousand Dollars ($34,500,000) is paid in cash by Parent to AlliedSignal. (b) Except for the obligations contained in Section 6.1, the last sentence of Section 4.5 and this Article IX (other than Sections 9.2, 9.13 and 9.14) and the representations and warranties contained in Sections 2.16 and 3.8 (and the related indemnity obligations under Sections 7.2(a)(i) and 7.3(a)(i), respectively), all of which shall survive any termination of this Agreement, upon the termination of this Agreement pursuant to Section 9.1(a), this Agreement shall forthwith become null and void, and no party hereto or any of its officers, directors, employees, agents, consultants, stockholders or principals shall have any rights or Liabilities 63 hereunder or with respect hereto, including without limitation for any breach of warranty or representation; provided, however, that nothing contained herein -------- ------- shall relieve any party hereto from Liability for any willful failure to comply with any covenant or agreement contained herein. 9.2 Further Assurances. From time to time after the Closing, ------------------ AlliedSignal, Buyer, Parent and Sellers shall execute and deliver or cause to be executed and delivered such further documents, certificates, instruments of conveyance, assignment and transfer and take such further action as AlliedSignal, Buyer, Parent or Sellers may reasonably request in order to more effectively to sell, assign, convey, transfer, reduce to possession and record title to any of the Purchased Assets to Buyer or to better enable Buyer to complete, perform and discharge any of the Assumed Liabilities. AlliedSignal, Buyer, Parent and Sellers agree to cooperate with each other in all reasonable respects to assure to Buyer the continued title to and possession of the Purchased Assets in the condition and manner contemplated by this Agreement. Each party hereto shall cooperate and deliver such instruments and take such action as may be reasonably requested by any other party hereto in order to carry out the provisions and purposes of this Agreement and the transactions contemplated hereby. AlliedSignal, Buyer, Parent and Sellers shall cooperate and shall cause their respective Affiliates, officers, employees, agents and representatives to cooperate to ensure the orderly transition of the Business from Sellers to Buyer and to minimize the disruption to the Business resulting from the transactions contemplated hereby. 9.3 Entire Agreement; Amendments; Waivers. This Agreement, the ------------------------------------- Confidentiality Agreement, and the documents referred to herein and to be delivered pursuant hereto constitute the entire agreement between the parties hereto pertaining to the subject matter hereof, and supersede all prior and contemporaneous agreements, understandings, negotiations and discussions of the parties, whether oral or written. No amendment, supplement, modification, waiver or termination of this Agreement shall be binding unless executed in writing by the party to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision or breach of this Agreement, whether or not similar, unless otherwise expressly provided. 9.4 Benefit; Assignment. This Agreement shall be binding upon and ------------------- inure to the benefit of, and shall be enforceable by, the parties hereto and their respective successors and permitted assigns. This Agreement shall not be assigned by any party hereto without the prior written consent of the other party hereto; provided, however, that AlliedSignal or Buyer may assign any or -------- ------- all of their respective rights hereunder to one or more Affiliates of AlliedSignal or Buyer, as the case may be, without the consent of Parent or Sellers provided that AlliedSignal or Buyer, as the case may be, shall continue to be obligated to perform all of its obligations hereunder. 9.5 No Presumption. AlliedSignal, Buyer, Parent and Sellers have -------------- participated jointly in the negotiation and drafting of this Agreement. In the event any ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by AlliedSignal, Buyer, Parent and Sellers, and no presumption or burden of proof shall 64 arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. 9.6 Notices. Notices and other communications provided for herein --------- shall be in writing and shall be deemed given only if delivered to the party personally or sent to the party by telecopy, by registered or certified mail (return receipt requested) with postage and registration or certification fees thereon prepaid, or by any nationally recognized overnight courier, addressed to the party at its address set forth below: If to Parent or Sellers: Banner Aerospace P.O. Box 20260 Washington, DC 20041 Attention: Chief Financial Officer Telecopy No.: 703-478-5795 with copy to: Donald E. Miller 10704 Riverwood Drive Potomac, MD 20854 If to AlliedSignal or Buyer: AlliedSignal Inc. P.O. Box 2245 101 Columbia Road Morristown, NJ 07962-2245 Attention: General Counsel Telecopy No.: 973-455-4413 or to such other address as a party may from time to time designate in writing in accordance with this section. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. 9.7 Terms Generally. --------------- (a)(i) Words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other genders as the context requires, (ii) the terms "hereof," "herein," and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole (including all of the Annexes, Schedules and Exhibits hereto) and not to any particular provision of this Agreement, and Article, Section, paragraph, Exhibit and Schedule references are to the Articles, Sections, paragraphs, Exhibits and Schedules to this Agreement unless otherwise specified, (iii) the word "including" and words of similar import when used in this Agreement shall mean "including, without limitation," unless otherwise specified, (iv) the word "or" shall not be exclusive, and (v) provisions shall apply, when appropriate, to successive events and transactions. 65 (b) Each reference in this Agreement (or in any other document or instrument furnished to AlliedSignal or Buyer by Parent or any Seller pursuant to this Agreement) to "the best of Parent's and each Seller's knowledge", or words of similar import referring to Parent and Sellers (including Parent and Sellers not being aware of a particular event or other matter), means the actual knowledge, after due inquiry, of each executive officer of Parent and each of the Companies. 9.8 Counterparts; Headings. This Agreement may be executed in ---------------------- several counterparts, each of which shall be deemed an original, but such counterparts shall together constitute but one and the same Agreement. The Article and Section headings in this Agreement are inserted for convenience of reference only and shall not constitute a part hereof. 9.9 Severability. If any provision, clause or part of this ------------ Agreement or the application thereof under certain circumstances is held invalid or unenforceable, the remainder of this Agreement, or the application of such provision, clause or part under other circumstances, shall not be affected thereby. 9.10 No Reliance. Except for any assignees permitted by Section ----------- 9.4 of this Agreement and the indemnified persons pursuant to Sections 7.2 and 7.3: (i) no third party is entitled to rely on any of the representations, warranties or agreements of the parties hereto contained in this Agreement; and (ii) the parties hereto assume no Liability to any third party because of any reliance on the representations, warranties or agreements of such parties contained in this Agreement. 9.11 Governing Law. This Agreement shall be construed and ------------- interpreted according to the laws of the State of New York, without regard to the conflict of law principles thereof. 9.12 Submission to Jurisdiction; Waivers. The parties hereto ----------------------------------- hereby irrevocably and unconditionally agree that: (a) All actions and proceedings arising out of or relating to this Agreement shall be heard and determined in a New York state or federal court sitting in the City of New York, and the parties hereto hereby irrevocably submit to the exclusive jurisdiction of such courts in any such action or proceedings and irrevocably waive the defense of an inconvenient forum to the maintenance of any such action or proceeding. (b) Service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to such party at its address as provided in Section 9.6. 9.13 Bulk Transfer. The parties hereto hereby waive compliance ------------- with the provisions of any applicable bulk sales law of any jurisdiction in connection with the transactions contemplated hereby and no representation, warranty or covenant contained in this Agreement shall be deemed to have been breached as a result of such non-compliance. Parent and Sellers hereby agree, jointly and severally, to indemnify, defend and hold AlliedSignal and Buyer 66 harmless from and against any and all Losses arising out of or relating to claims which may be asserted by third Persons, including Governmental Entities, against the Acquired Assets or any Buyer Indemnified Parties as a result of non- compliance with any applicable bulk sales law. Nothing in this Agreement shall be construed as an admission by any party as to the applicability of any bulk sales laws. 9.14 Use of Names. During the first 180 days after the Closing ------------ Date, Buyer shall have the right to use all of the logos, trademarks and trade identification of Parent as are located at the Acquired Real Property or on the Acquired Assets (collectively, the "Trademarks"). Buyer's use of the Trademarks ---------- shall be in accordance with such reasonable quality control standards as shall be promulgated by Parent and provided to Buyer. If Parent shall notify Buyer in writing of Buyer's material failure to comply with such reasonable quality control standards and Buyer continues to not comply with such reasonable quality control standards for more than 20 days after receipt of such notice, Parent shall have the right to terminate Buyer's right under this Section 9.14 to use the Trademarks. 9.15 Herndon Price Allocation. In connection with the purchase ------------------------ price adjustment contemplated by Section 1.6, Parent and AlliedSignal shall agree on an appropriate allocation of the Adjustment Amount to the Initial Purchase Price under the Herndon Agreement (expressed as a positive or negative number) and the Initial Purchase Prices under this Agreement and the Herndon Agreement shall be adjusted accordingly. Similarly, Parent and AlliedSignal shall agree on an appropriate allocation of any post-Closing adjustments of the purchase price required under Section 1.6(f). 9.16 Relationship with Herndon Agreement. The parties acknowledge ----------------------------------- and agree that it is the intent of the parties that, notwithstanding any other provision of this Agreement or the Herndon Agreement, the representations, warranties and covenants contained in this Agreement and in the Herndon Agreement that (i) have substantially the same language (without regard to the identity of the parties making such representation or warranty or about whom such representation or warranty is made) and (ii) contain either the language "in the aggregate" or a similar combining concept or a reference to a Material Adverse Effect (a "Collective Representation" or a "Collective Covenant", as the case may be) shall be deemed to be a single representation and warranty or a single covenant, as the case may be, for purposes of determining whether such representation and warranty has been breached or such covenant has been complied with and all relevant facts relating to such Collective Representation or Collective Covenant in both agreements shall be considered. As examples, if there should be an issue regarding whether a Collective Representation contained in this Agreement has been breached, the parties would consider inaccuracies in such Collective Representation as well as inaccuracies in the corresponding Collective Representation in the Herndon Agreement in determining whether a breach of such Collective Representation had occurred and in determining the materiality of any breach of a Collective Representation relating to the Business, reference shall be made to the Combined Business. 67 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. BANNER AEROSPACE, INC. ALLIEDSIGNAL INC. By: /s/ Warren D. Persavich By: /s/ Joe Leonard ------------------------------ ------------------------------ Name: Warren D. Persavich Name: Joe Leonard Title: Senior Vice President Title: Senior Vice President ADAMS INDUSTRIES, INC. AS BAR LLC By: /s/ Warren D. Persavich By: ALLIED SIGNAL INC. ------------------------------ Name: Warren D. Persavich Title: Vice President AEROSPACE BEARING SUPPORT, INC. By: /s/ Joe Leonard ------------------------------ Name: Joe Leonard Title: Senior Vice President By: /s/ Warren D. Persavich ------------------------------ Name: Warren D. Persavich Title: Vice President AIRCRAFT BEARING SUPPORT, INC. By: /s/ Warren D. Persavich ------------------------------ Name: Warren D. Persavich Title: Vice President 68 BANNER DISTRIBUTION, INC. By: /s/ Warren D. Persavich ------------------------------ Name: Warren D. Persavich Title: Vice President BURBANK AIRCRAFT SUPPLY, INC. By: /s/ Warren D. Persavich ------------------------------ Name: Warren D. Persavich Title: Vice President HARCO, INC. By: /s/ Warren D. Persavich ------------------------------ Name: Warren D. Persavich Title: Vice President PACAERO By: /s/ Warren D. Persavich ------------------------------ Name: Warren D. Persavich Title: Vice President ANNEX A SELLERS Name of Entity Jurisdiction of Organization - -------------- ---------------------------- Adams Industries, Inc. Connecticut Aerospace Bearing Support, Inc. California Aircraft Bearing Corporation California Banner Distribution, Inc. Delaware Burbank Aircraft Supply, Inc. Delaware Harco, Inc. Delaware PacAero California ANNEX B SELLER SUBSIDIARIES Name of Entity Jurisdiction of Organization - -------------- ---------------------------- Burbank Aircraft International, GmbH Germany Harco Aerospace Fasteners, Ltd. Canada Harco Northern Ireland, Ltd. United Kingdom ANNEX C DEFINITIONS The following terms shall have the respective meanings ascribed to them in this Annex C. References to Sections constitute references to Sections of the Agreement. "Accounts Receivable" means all billed and unbilled accounts receivable and ------------------- all trade notes receivable relating to the Combined Business whether recorded or unrecorded, including, without limitation, all trade receivable from other divisions or Affiliates of Parent and the Companies. "Acquired Assets" means the Purchased Assets and the Subsidiary Assets. --------------- "Acquired Real Property" means, collectively, the Leased Real Property and ---------------------- Owned Real Property. "Acquisition Proposal" has the meaning set forth in Section 4.14. -------------------- "Adjustment Amount" means an amount equal to the difference between ----------------- Estimated Closing Date Net Worth and Target Net Worth expressed as a positive number, as adjusted pursuant to Section 9.15. "Adjustment Date" has the meaning set forth in Section 1.7(a). --------------- "Affiliate" of any Person means any Person directly or indirectly --------- controlling, controlled by or under common control with such Person. "Agreement" means the Asset Purchase Agreement, dated as of December ___, --------- 1997, by and among Parent, Sellers, AlliedSignal and Buyer, together with the Annexes, Schedules and Exhibits attached thereto, as the same may be amended from time to time in accordance with the terms thereof. "AlliedSignal" had the meaning set forth in the Preamble of the Agreement. ------------ "AlliedSignal Common Stock" means the common stock, par value $1 per share, ------------------------- of AlliedSignal. "AlliedSignal Reports" has the meaning set forth in Section 3.6. -------------------- "Ancillary Agreements" means the agreements to be delivered pursuant to -------------------- Sections 5.1 and 5.2. "Antitrust Division" means the Antitrust Division of the United States ------------------ Department of Justice. 2 "Assets" means businesses, properties, assets, goodwill, rights, interests ------ and privileges of every kind, nature or description, wherever located, whether real, personal or mixed, tangible or intangible, and without regard to whether they have value for accounting purposes or are carried on or reflected in relevant books and records or financial statements. "Assigned Receivables" has the meaning set forth in Section 1.7(a). -------------------- "Assumed Liabilities" has the meaning set forth in Section 1.3(a). ------------------- "Assumed Tax Liabilities" means Tax liabilities for value-added Taxes, real ----------------------- property Taxes, personal and intangible property Taxes and payroll Taxes, in each case only to the extent included on the Closing Balance Sheet. "Average Trading Price" means, as of a specified date, the average of the --------------------- daily high and low closing prices of AlliedSignal Common Stock as reported on the NYSE Composite Tape on each of the twenty (20) consecutive trading days immediately preceding (and not including) such date. "Balance Sheet" has the meaning set forth in Section 2.6. ------------- "Basket" has the meaning set forth in Section 7.2(b). ------ "Bid" has the meaning set forth in Section 2.8(d). --- "Business" has the meaning set forth in the Recitals of the Agreement. -------- "Business Day" or "business day" means any day other than a Saturday, ------------ ------------ Sunday, or a day on which banking institutions in the City of New York are authorized or obligated by law or executive order to close. "Buyer" has the meaning set forth in the Preamble of the Agreement. ----- "Buyer Escrow Claims" has the meaning set forth in Section 1.5(c). ------------------- "Buyer Escrow Claim Loss Estimate" has the meaning set forth in Section -------------------------------- 1.5(c). "Buyer Indemnified Parties" has the meaning set forth in Section 7.2(a). ------------------------- "Cash Equivalent Purchase Price" means an amount equal to Three Hundred ------------------------------ Forty-Four Million Seven Hundred Seventy-Four Thousand Dollars ($344,774,000) plus (x) the excess, if any, of the Closing Date Net Worth over the Target Net - ---- Worth and minus (y) the excess, if any, of the Target Net Worth over the Closing ----- Date Net Worth. "Closing" has the meaning set forth in Section 1.8(a). ------- "Closing Accounts Receivable" has the meaning set forth in Section 1.7(a). --------------------------- 3 "Closing Date" has the meaning set forth in Section 1.8(a). ------------ "Closing Date Balance Sheet" shall mean the Proposed Closing Date Balance -------------------------- Sheet as accepted or deemed final pursuant to Section 1.6(d) or (f), as the case may be. "Closing Date Net Worth" has the meaning set forth in Section 1.6(a). ---------------------- "Closing Date Shares" has the meaning set forth in Section 1.4(b). ------------------- "COBRA" has the meaning set forth in Section 2.20(c)(iii). ----- "Code" means the Internal Revenue Code of 1986, as amended. ---- "Collected Amount" has the meaning set forth in Section 1.7(a). ---------------- "Combined Business" means collectively the Business and the Business as ----------------- defined in the Herndon Agreement. "Combined Contracts" means, collectively, all Contracts and all Contracts ------------------ as defined in the Herndon Agreement. "Companies" has the meaning set forth in the Preamble of the Agreement, and --------- "Company" means any one of the Companies. ------- "Competitive Activities" has the meaning set forth in Section 6.4(a). ---------------------- "Confidentiality Agreement" means that certain confidentiality agreement ------------------------- dated June 27, 1997 between AlliedSignal and Parent. "Confidential Information" has the meaning set forth in Section 6.5. ------------------------ "Confirmation of Indemnification" has the meaning set forth in Section ------------------------------- 7.4(b). "Contracts" means (a) all written and oral contracts, licenses, --------- commitments, agreements and instruments, including all customer contracts, operating contracts and distribution contracts relating to the Business, (b) all sales and purchase orders and supply agreements and other agreements relating to the Business, (c) all leases of Equipment and Real Property relating to the Business and (d) all other contracts, licenses, agreements and instruments relating to the Business; provided, however, that the term "Contract" shall not include any collective bargaining agreement or any employment agreement or other Plan. "Debt" means, with respect to any Person, the following Liabilities, ---- whether incurred by such Person, directly or indirectly, without duplication: (i) its Liabilities for borrowed money; 4 (ii) its Liabilities for the deferred purchase price of property acquired by it (excluding accounts payable arising in the ordinary course of business but including, without limitation, all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property); (iii) the amount of the obligation of such Person as the lessee under any Capital Lease that would, in accordance with GAAP, appear as a Liability on a balance sheet of such Person ("Capital Lease" meaning, at any time, a lease with respect to which such Person, as lessee, is required concurrently to recognize the acquisition of an asset and the incurrence of a Liability in accordance with GAAP); (iv) amounts secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such amounts); (v) all of its Liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money); (vi) any Guarantee of such Person with respect to Liabilities of any Person of the character described in any of the clauses described in (i) through (vi) above ("Guarantee" meaning, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any indebtedness, dividend or other Debt or obligation of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person); (vii) all Liabilities of any Subsidiary of such Person of the character described in clauses (i) through (vii) above; and (viii) all Liabilities of the character described in clauses (i) through (vii) above with respect to which, and to the extent that, such Person remains legally liable, notwithstanding that such Liability or obligation is deemed extinguished under GAAP. "Defective Inventory" means the aggregate of all (i) excess Inventory, (ii) ------------------- obsolete or substandard Inventory, and (iii) Inventory that is not Traceable Inventory, in each case determined in accordance with the procedures and criteria set forth on Schedule 1.6(a). "Disputed Account Receivable" has the meaning set forth in Section 1.7(a). --------------------------- "Dispute Notice" has the meaning set forth in Section 1.6(c). -------------- 5 "Disputes" has the meaning set forth in Section 1.6(c). -------- "Employees" has the meaning set forth in Section 8.1. --------- "Environmental Claim" shall mean any third party or governmental written ------------------- claim, notice, request for information, demand, investigation, lawsuit, proceeding, judgment, award, penalty, order or other action that could expose Parent, the Companies, AlliedSignal or Buyer to Losses under any Environmental Law or to Losses for personal injuries (including death) or property damage relating to or arising from the presence of, or exposure to, Hazardous Materials. "Environmental Law" means all applicable Laws relating to the protection of ----------------- the environment (including, but not limited to, natural resources) and human health and safety, including, without limitation (a) all requirements pertaining to reporting, licensing, permitting, investigation and remediation of emissions, discharges, releases or threatened releases of Hazardous Materials or other environmental conditions into the air, surface water, groundwater or land or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, and (b) all requirements pertaining to the protection of the health and safety of employees and other workers, and the protection of or compensation to individuals from or related to exposures to Hazardous Materials. "Environmental Liability" means any Liability (existing at, or arising ----------------------- after, the Closing) under Environmental Law, or any remedial action (at or after the Closing), in connection with the Acquired Assets or the Business to the extent arising from any condition (including any Hazardous Materials condition) existing, or any act or omission the Companies or any of their predecessors or any of their past, present or future Subsidiaries, at or prior to the Closing Date, including claims, demands, assessments, judgments, orders, causes of action (including toxic tort suits), notices of actual or alleged violations or Liability (including such notices regarding the disposal or release of Hazardous Materials on the Acquired Real Property or elsewhere), proceedings and any associated Losses. "Environmental Permit" means any Permit issued under any Environmental Law -------------------- or issued by any Governmental Entity responsible for environmental matters. "Equipment" means all tangible assets and properties, except Real Property, --------- owned, used or held for use by any Company, including cars, trucks and other transportation equipment, machinery and equipment, tools, spare parts, furniture, office equipment, furnishings and fixtures and machinery and equipment under order or construction. "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended. "Escrow Agent" means the escrow agent under the Escrow Agreement. ------------ "Escrow Agreement" has the meaning set forth in Section 1.9(c). ---------------- "Escrow Cash" means any of the following: (i) any investment in Government ----------- Obligations; (ii) investments in time deposit accounts, certificates of deposit and money market 6 deposits maturing within 180 days of the date of acquisition issued by a bank or trust issuer which is organized under the laws of the United States of America, any state thereof or any foreign country recognized by the United States, and which bank or trust issuer has capital, surplus and undivided profits aggregating in excess of $50,000,000 (or the foreign currency equivalent thereof) and has outstanding debt which is rated "A" (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act) or any money market fund sponsored by a registered broker dealer or mutual fund distributor; (iii) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (ii) above; and (iv) investments in securities with maturities of six months or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by Standard & Poor's Ratings Group or "A" by Moody's Investors Service, Inc. "Escrow Release Date" has the meaning set forth in Section 1.5(c). ------------------- "Estimated Closing Date Net Worth" has the meaning set forth in Section -------------------------------- 1.4(a). "Estimated Share Number" has the meaning set forth in Section 1.4(b). ---------------------- "Exchange Act" means the Securities Exchange Act of 1934, as amended. ------------ "Excluded Assets" has the meaning set forth in Section 1.2(b). --------------- "FAA" means the Federal Aviation Administration. --- "Fairchild" means The Fairchild Corporation, a Delaware corporation. --------- "Final Future Tax Benefits" has the meaning set forth in Section 2.6(b). ------------------------- "Financial Statements" has the meaning set forth in Section 2.6. -------------------- "Firm" has the meaning set forth in Section 1.6(d). ---- "FIRPTA Affidavit" has the meaning set forth in Section 1.9(a)(viii). ---------------- "Foreign Employees" has the meaning set forth in Section 8.3(a). ----------------- "Foreign Plan" has the meaning set forth in Section 2.20(a)(iii). ------------ "Former Employees" has the meaning set forth in Section 8.1. ---------------- "Free-Standing Plan" has the meaning set forth in Section 2.20(a)(iii). ------------------ "FTC" means the United States Federal Trade Commission. --- 7 "GAAP" means United States generally accepted accounting principles, ---- consistently applied. "Government Contract" shall mean any written prime contract, subcontract, ------------------- grant or cooperative agreement with (i) the US Government, (ii) any prime contractor of the US Government or (iii) any subcontractor with respect to any contract described in clauses (i) or (ii) above. "Governmental Entity" means (a) any multinational, federal, provincial, ------------------- state, municipal, local or other governmental or public department, court, commission, board, bureau, agency, legislative or quasi-legislative body or instrumentality, domestic or foreign; (b) any subdivision, agent, commission, board, or department, authority, or similar body or instrumentality of any of the foregoing; or (c) any quasi-governmental or private body exercising any regulatory, expropriation or taxing governmental authority under or for the account of any of the foregoing. "Government Obligations" means direct obligations (or certificates ---------------------- representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged. "Hazardous Material" means any substance, material or waste (a) the ------------------ presence of which requires investigation or remediation under any Environmental Law, (b) which is regulated by an applicable Governmental Entity, which substance, material or waste includes, without limitation, petroleum and its by- products, friable asbestos, and any material or substance which is defined as a "hazardous waste," "hazardous substance," "hazardous material," "restricted hazardous waste," "industrial waste," "solid waste," "contaminant," "pollutant," "toxic waste" or "toxic substance" under any provision of Environmental Law, (c) which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous, or (d) the presence of which causes or threatens to cause a nuisance or trespass to any property or poses or threatens to pose a hazard to the health or safety of individuals on or about any such property. "Herndon" means PB Herndon Aerospace, Inc., a Missouri corporation. ------- "Herndon Agreement" means the Asset Purchase Agreement, dated as of the ----------------- date of this Agreement, by and among Parent, Herndon, Banner Aerospace Services, Inc., AlliedSignal and AS BAR PBH LLC, as the same may be amended form time to time in accordance with the terms thereof. "Herndon Assumed Liabilities" means Assumed Liabilities as defined in the --------------------------- Herndon Agreement. "Herndon Excluded Assets" means the Excluded Assets as defined in the ----------------------- Herndon Agreement. "Herndon Non-Assumed Liabilities" means the Non-Assumed Liabilities as ------------------------------- defined in the Herndon Agreement. 8 "Herndon Purchased Assets" means the Purchased Assets as defined in the ------------------------ Herndon Agreement. "Herndon Sellers" means the Sellers under the Herndon Agreement. --------------- "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, ------- as amended. "Inactive Employee" has the meaning set forth in Section 8.2(a). ----------------- "Indemnification Claim" has the meaning set forth in Section 7.4(a). --------------------- "Indemnification Escrow Shares" means (i) as of the Closing Date, a number ----------------------------- of shares of AlliedSignal Common Stock equal to five percent (5%) of the Estimated Share Number and (ii) thereafter, the initial number of Indemnification Escrow Shares less any Indemnification Escrow Shares from time to time released from escrow pursuant to Section 1.5(b) or (d). "Indemnified Party" has the meaning set forth in Section 7.4(a). ----------------- "Indemnifying Party" has the meaning set forth in Section 7.4(a). ------------------ "Initial Purchase Price" has the meaning set forth in Section 1.4(b). ---------------------- "Intellectual Property" means all foreign and domestic patents (including --------------------- all reissues, divisions, continuations and extensions thereof), patent rights, service marks, trademarks and tradenames, trade dress, all product names, all assumed or fictitious names and the logos associated therewith, copyrights, applications for the foregoing, licenses and other contractual rights with respect to the foregoing and other such property and intangible rights owned, used or held for use by any Company, including financial and marketing business data, pricing and cost information, business and marketing plans and customer and suppliers lists, together with the goodwill of the Business in connection with which such trademarks, tradenames, product names and service marks are used. "Inventory" means all inventory of the Combined Business, including --------- finished goods, work-in-progress, raw materials, operating chemical and catalysts, parts, accessories, packaging, manufacturing, administrative and other supplies on hand, goods held for sale or lease or to be furnished under Assumed Contracts, and other inventory owned, used or held for use by any Company. "IRS" means the United States Internal Revenue Service. --- "Laws" means all laws, constitutions, statutes, codes, ordinances, decrees, ---- rules, regulations, municipal by-laws, judicial or arbitral or administrative or ministerial or departmental or regulatory judgments, orders, decisions, rulings or awards, consent orders, consent decrees, policies, voluntary restraints, guidelines, or any provisions or interpretations of the foregoing, including general principles of common and civil law and equity, binding on or affecting the Person referred to in the context in which such word is used. 9 "Leased Real Property" means all leased Real Property relating to the -------------------- Business including, without limitation, all Real Property listed on Part B of Schedule 2.13(a). "Liabilities" means, as to any Person, all debts, liabilities, obligations ----------- and responsibilities of any kind or nature whatsoever of such Person, whether direct or indirect, fixed or contingent, known or unknown, accrued, vested or otherwise, whether in contract, tort, strict Liability or otherwise, and whether or not actually reflected, or required by GAAP to be reflected, in such Person's balance sheets or other books and records. "Lien" means any lien, charge, claim, pledge, security interest, ---- conditional sale agreement or other title retention agreement, lease, mortgage, security agreement, right of first refusal, option, restriction, tenancy, license, covenant, right of way, easement or other encumbrance (including the filing of, or agreement to give, any financing statement under the Uniform Commercial Code or statute or law of any jurisdiction). "Losses" means any losses, costs, expenses, damages including compensatory, ------ exemplary, or punitive damages, Taxes, penalties, fines, charges, demands, Liabilities and claims of any kind (including interest, penalties and reasonable attorneys' and consultants' fees, expenses and disbursements), except that Losses shall not include attorneys' fees of AlliedSignal or Buyer if Parent has delivered a Confirmation of Indemnification in respect of a Third Party arbitration claim and offered to assume the defense thereof which offer was not accepted because the amount of such indemnification claim exceeded Parent's net worth and Parent was in compliance with (S) 4.17 of the Agreement. "Major Customer" means any customer of the Combined Business that accounted -------------- for $500,000 or more in revenues of the Combined Business in the 1997 fiscal year or could reasonably be expected to account for more than $500,000 or more in revenues of the Combined Business in the 1998 fiscal year. "Major Supplier" means any supplier of the Combined Business (including any -------------- supplier of Intellectual Property) that accounted for $1,000,000 or more in sales to the Combined Business in the 1997 fiscal year or could reasonably be expected to account for more than $1,000,000 or more in sales to the Combined Business in the 1998 fiscal year. "Material Adverse Effect" means (i) a material adverse effect upon, or ----------------------- material adverse change in, the operations, Assets, Liabilities, condition (financial or otherwise), or results of operations of the Combined Business, taken as a whole (ii) any event, condition, circumstance or change that is reasonably likely to have a Material Adverse Effect referred to in preceding clause (i), or (iii) a significant risk that Buyer and the Buyer under the Herndon Agreement, in any material respect, will not be able after the Closing to operate the Combined Business substantially as operated by, or to own, possess and use the Acquired Assets and the Herndon Purchased Assets substantially as owned, possessed and used by, the Companies and the Herndon Sellers, taken as a whole, as of the date hereof; provided, however, that the -------- ------- loss of business from customers and suppliers of the Combined Business (including through termination of contracts or reduction of purchases) shall not be deemed a Material Adverse Effect unless the condition in Section 5.1(e) of the Agreement has not been satisfied. 10 "Non-Assumed Liabilities" has the meaning set forth in Section 1.3(b). ----------------------- "Novation Agreement" has the meaning set forth in Section 4.15. ------------------ "NYSE" means the New York Stock Exchange, Inc. ---- "OSHA" has the meaning set forth in Section 2.9(a) hereof. ---- "Owned Real Property" means all Real Property owned by Sellers or any ------------------- Seller Subsidiary, including, without limitation, all Real Property listed on Part A of Schedule 2.13(a). "Parent" has the meaning set forth in the Preamble of the Agreement. ------ "Parent Common Stock" means the common stock, par value $1 per share, of ------------------- Parent. "Parent Subsidiaries" means the direct or indirect Subsidiaries of Parent ------------------- or any other corporation or entity in which Parent owns a majority of the capital stock or other equity interest. "Parent Reports" has the meaning set forth in Section 2.28. -------------- "PBGC" means the Pension Benefit Guaranty Corporation. ---- "Permits" means all franchises, approvals, permits, authorizations, ------- licenses, orders, registrations, certificates, variances, exemptions and other similar permits or rights obtained from any Governmental Entity relating to the conduct of the Business or the Acquired Real Properties and all pending applications therefor. "Permitted Liens" means (a) Liens securing Taxes, assessments, governmental --------------- charges or levies, all of which are not yet due and payable, (b) Liens (other than any Lien imposed by ERISA) incurred or deposits made in the ordinary course of the Business and on a basis consistent with past practice in connection with worker's compensation, unemployment insurance or other types of social security, (c) mechanics, materialman's, carrier's, warehousemen's, landlords and other similar Liens under state or common law or (d) such other Liens which, individually and in the aggregate, do not and would not detract from the value of or impair the use of any Acquired Asset; it being understood that to the extent a Permitted Lien relates to or arises from a Non-Assumed Liability, the applicable Company shall still be liable for such Non-Assumed Liability to the extent set forth herein. "Person" means an individual, a corporation, a partnership, a limited ------ Liability company, an association, a firm, a Governmental Entity, a trust or other entity or organization. "Plans" has the meaning set forth in Section 2.20(a)(iii). ----- "Preliminary Future Tax Benefits" has the meaning set forth in Section ------------------------------- 2.6(b). "Prime Rate" means the rate of interest publicly announced by Citicorp USA, ---------- Inc. in New York, New York from time to time as its base rate. "Proposed Closing Date Balance Sheet" has the meaning set forth in Section ----------------------------------- 1.6(a) "PTO" means the United States Patent and Trademark Office. --- "Purchase Price Escrow Shares" means a number of shares of AlliedSignal ---------------------------- Common Stock equal to one percent (1%) of the Estimated Share Number. "Purchased Assets" has the meaning set forth in Section 1.2(a). ---------------- "Real Property" means all real property, together with all fixtures, ------------- fittings, buildings, structures and other improvements erected thereon, and easements, rights of way, water lines, rights of use, licenses, hereditaments, tenements, privileges and other appurtenances thereto (such as appurtenant rights in and to public streets). "Receivables Deficiency" has the meaning set forth in Section 1.7(a). ---------------------- "Receivables Excess" has the meaning set forth in Section 1.7(a). ------------------ "Receivables Notice" has the meaning set forth in Section 1.7(a). ------------------ "Receivables Reserve" has the meaning set forth in Section 1.7(a). ------------------- "Registration Rights Agreement" means an agreement substantially in the ----------------------------- form of Exhibit 1.9(b)(vi). "Resolution Period" has the meaning set forth in Section 1.6(c). ----------------- "Review Period" has the meaning set forth in Section 1.6(c). ------------- "SEC" means the Securities and Exchange Commission. --- "Securities Act" means the Securities Act of 1933, as amended. -------------- "Seller" and "Sellers" have the respective meanings set forth in the ------ ------- Preamble of the Agreement. "Seller Indemnified Parties" has the meaning set forth in Section 7.3(a). -------------------------- "Seller Subsidiaries" has the meaning set forth in the Preamble of the ------------------- Agreement, and "Seller Subsidiary" means any one of the Seller Subsidiaries. ----------------- "Shortfall Amount" has the meaning set forth in Section 1.6(f)(iii). ---------------- "Side Letters" has the meaning set forth in Section 1.9(a)(xiii). ------------ "Small Claim" has the meaning set forth in Section 7.2(b). ----------- "Small Licenses" has the meaning set forth in Section 2.15(d). -------------- 12 "Special Claim" has the meaning set forth in Section 7.4(b). ------------- "Subsidiary" of any Person means any corporation, partnership, joint ---------- venture, limited liability company, trust or other entity with respect to which such Person directly or indirectly owns or controls more than 50% of (i) the issued and outstanding capital stock having ordinary voting power to elect a majority of the board of directors or other governing body of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (ii) the interest in the capital or profits of such partnership, joint venture or limited liability company or (iii) the beneficial interest in such trust. "Subsidiary Assets" means all Assets of the Seller Subsidiaries. ----------------- "Subsidiary Shares" means all of the outstanding shares of capital stock of ----------------- (or other ownership interests in) the Seller Subsidiaries. "Target Net Worth" means Two Hundred Twenty Million Twenty Five Thousand ---------------- Dollars ($220,025,000) plus the amount, if any, by which Final Future Tax Benefits exceeds Preliminary Future Tax Benefits, but in any event not less than $220,025,000. "Tax" means any tax imposed under Subtitle A of the Code and any net --- income, alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad valorem, value added, transfer, franchise, profits, license, lease, service, service use, withholding on amounts paid to or by any Company, payroll, employment, excise, severance, stamp, capital stock, occupation, property, environmental or windfall profits tax, premium, custom duty or other tax, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest, penalty, addition to tax or additional amount imposed by any Governmental Entity responsible for the imposition of any such tax (domestic or foreign) (a "Tax Authority"). ------------- "Tax Authority" has the meaning set forth in the definition of "Tax". ------------- --- "Technology" means all formulae, processes, procedures, designs, ideas, ---------- research records, inventions (whether or not patentable), records of inventions, test information, technical information, engineering data, marketing know-how, proprietary information, manufacturing information, know-how, and trade secrets (and all related manuals, books, files, journals, models, instructions, patterns, drawings, blueprints, plans, designs specifications, equipment lists, parts lists, descriptions, data, art work, software, computer programs and source code data related thereto including all current and historical data bases) owned, used or held for use by any Company ( it being understood that, to the extent any such technology is licensed to a Company, "Technology" shall mean any and all rights of such Company under such license). "Third Party Indemnification Claim" has the meaning set forth in Section --------------------------------- 7.4(b). "Third Party Rights" has the meaning set forth in Section 1.2(a)(xiii). ------------------ 13 "Traceable Inventory" means Inventory held pursuant to good and valid parts ------------------- manufacturer approvals issued by the FAA, supplemental type certificates issued by the FAA or other certificates required by applicable Laws including, without limitation, those promulgated by the FAA. "Trademarks" has the meaning set forth in Section 9.14. ---------- "Transaction Documents" has the meaning set forth in Section 2.3. --------------------- "Transfer Taxes" means all state, local and foreign sales, use, transfer, -------------- real property transfer, documentary stamp, recording and other similar taxes arising from and with respect to the sale and purchase of the Purchased Assets. "U.S. Employee" has the meaning set forth in Section 8.2(a). ------------- "US Government" shall mean the United States Government and any agencies, ------------- instrumentalities and departments thereof. "U.S. Plans" has the meaning set forth in Section 2.20(a)(iii). ---------- "U.S. Transferred Employees" has the meaning set forth in Section 8.2(a). -------------------------- "WARN Act" means the Worker Adjustment and Retraining Notification Act, as -------- codified at 29 U.S.C. (S)(S) 2101 - 2109, as amended. EXHIBIT 1.9(xiii)(A) -------------------- [Closing Date] AlliedSignal Inc. AS BAR LLC AS BAR Herndon LLC 101 Columbia Road Morristown, NJ I refer to the Asset Purchase Agreement (the "Purchase Agreement") by and among AlliedSignal Inc. ("AlliedSignal"), AS BAR LLC ("Buyer"), Banner Aerospace, Inc. and the Sellers listed on Annex A thereto ("Sellers"), relating to the acquisition of all the assets of Sellers and the Business (as defined therein), and to the Herndon Agreement (as defined therein). This will confirm that, as of December 1, 1997 and at all times through and including the date hereof, I personally have not had and do not have any plan or intention of entering into the business of distributing aerospace hardware parts and will not do so through any entity which I control, other than The Fairchild Corporation and its subsidiaries and affiliates (other than Banner Aerospace, Inc. and its subsidiaries), during the thirty month period from today's date. I understand that you are relying upon the assurances provided in this letter as a material inducement to your consummating the transactions contemplated by the Purchase Agreement. Sincerely, Jeffrey J. Steiner EXHIBIT 1.9(xiii)(B) -------------------- [Closing Date] AlliedSignal Inc. AS BAR LLC AS BAR Herndon LLC 101 Columbia Road Morristown, NJ The undersigned, on behalf of The Fairchild Corporation ("Fairchild") confirms as follows: We refer to the Asset Purchase Agreement (the "Purchase Agreement") by and among AlliedSignal Inc. ("AlliedSignal"), AS BAR LLC ("Buyer"), Banner Aerospace, Inc. and the Sellers listed on Annex A thereto ("Sellers"), relating to the acquisition of all the assets of Sellers and the Business (as defined therein) and to the Herndon Agreement (as defined therein). This will confirm that, as of December 1, 1997 and at all times through and including the date hereof, neither Fairchild nor any subsidiary or controlled entity of Fairchild has had or has any plan or intention to acquire all or any substantial part of the stock, assets or business of Tri-Star Aerospace, Inc., M & M Aerospace Hardware, Inc. or WESCO Aircraft Hardware Corporation. We understand that you are relying upon the assurances provided in this letter as a material inducement to your consummating the transactions contemplated by the Purchase Agreement. THE FAIRCHILD CORPORATION By_________________________ EXHIBIT 1.9(xiii)(C) -------------------- THE FAIRCHILD CORPORATION [Closing Date] AlliedSignal Inc. AS BAR LLC AS BAR Herndon LLC 101 Columbia Road Morristown, NJ We refer to the Asset Purchase Agreement (the "Purchase Agreement") by and among AlliedSignal Inc. ("AlliedSignal"), AS BAR LLC ("Buyer"), Banner Aerospace, Inc. ("Banner") and the Sellers listed on Annex A thereto ("Sellers"), relating to the acquisition of all the assets of Sellers and the Business (as such terms are defined therein) and to the Herndon Agreement (as defined therein). In consideration of the benefits to be derived by The Fairchild Corporation ("Fairchild") from the transactions contemplated by the Purchase Agreement, this will confirm the agreement of Fairchild that, during the period Banner is required to maintain its corporate existence pursuant to Section 4.17 of the Purchase Agreement, Fairchild shall take no action to authorize or implement (including, without limitation, voting for) any dissolution of Banner or other termination of Banner's corporate existence; provided, however, that (i) -------- -------- Fairchild may take action to dissolve Banner or otherwise terminate its existence if, prior to the consummation of such transaction, Fairchild agrees in writing (for the benefit of the Buyer Indemnified Parties as defined in the Purchase Agreement) to assume and become fully responsible for, pursuant to an agreement reasonably satisfactory in form and substance to AlliedSignal, all obligations of Banner under Article VII of the Purchase Agreement and (ii) Fairchild may vote in favor of, or otherwise take action to implement a merger or other business combination of Banner or a sale of substantially all its assets if (x) upon the consummation of such transaction, the successor in interest to Banner (or the purchaser of such assets, as the case may be) in such transaction assumes in writing (for the benefit of the Buyer Indemnified Parties as defined in the Purchase Agreement) and becomes fully responsible for, pursuant to an agreement reasonably satisfactory in form and substance to AlliedSignal, all of Banner's obligations under the Agreement (including, without limitation, Banner's obligations under Article VII) and (y) immediately after consummation of such transaction, such successor in interest (or purchaser, as the case may be) has a net worth of not less than the net worth then required to be maintained by Banner pursuant to Section 4.17 of the Purchase Agreement. 2 We understand that you are relying upon the obligations set forth in this letter as a material inducement to your consummating the transactions contemplated by the Purchase Agreement. THE FAIRCHILD CORPORATION By_________________________ EX-23.1 4 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.1 CONSENT OF ARTHUR ANDERSEN LLP As independent public accountants, we hereby consent to the use of our report (and to all references to our firm) included in or made a part of this registration statement. /s/ Arthur Andersen LLP ------------------------------------- ARTHUR ANDERSEN LLP December 9, 1997 -----END PRIVACY-ENHANCED MESSAGE-----