RHI HOLDINGS INC, 10-K, 1994-09-21

RHI HOLDINGS INC
10-K, 1994-09-21
BOLTS, NUTS, SCREWS, RIVETS & WASHERS

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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

--------------------
FORM 10-K
--------------------

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the year ended June 30, 1994 Commission File Number: 1-373
------------- -----

RHI HOLDINGS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)

Delaware 34-1545939
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

Washington Dulles International Airport
300 West Service Road, P.O. Box 10803
Chantilly, Virginia 22021-9998
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)

(703) 478-5800
- ----------------------------------------------------
(Registrant's Telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange
Title of each class on which registered
- ----------------------------------------------- ---------------------

12 3/4% Notes Due 1994 New York Stock Exchange
- ----------------------------------------------- -----------------------

11 7/8% Senior Subordinated Debentures Due 1999 New York Stock Exchange
- ----------------------------------------------- -----------------------

Securities registered pursuant to Section 12(g) of the Act: None
----

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

Yes X No
---- ----
<PAGE>
OMISSION OF CERTAIN INFORMATION
- -------------------------------

Registrant meets the conditions set forth in General Instructions
J(1)(a) and (b) of Form 10-K and is therefore filing this Form with the
reduced disclosure format.

DOCUMENTS INCORPORATED BY REFERENCE: None
----
The Exhibit index is located on page 59.

<PAGE>
RHI HOLDINGS, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED JUNE 30, 1994

PART I Page

Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . 4

Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . 8

Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . 9

Item 4. Submission of Matters to a Vote of Stockholders . . . 11

PART II

Item 5. Market for the Company's Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . 12

Item 6.* Selected Financial Data . . . . . . . . . . . . . . . 12

Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition . . . . . . . . . . 12

Item 8. Financial Statements and Supplementary Data . . . . . 21

Item 9. Disagreements on Accounting and Financial Disclosure . 58

PART III

Item 10.* Directors and Executive Officers of the Registrant . . 58

Item 11.* Executive Compensation . . . . . . . . . . . . . . . . 58

Item 12.* Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . 58

Item 13.* Certain Relationships and Related Transactions . . . . 58

PART IV

Item 14. Exhibits, Financial Statements Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . 59

*Item of Form 10-K is omitted in accordance with General Instruction J,
Omission of Information by Certain Wholly-Owned Subsidiaries.

<PAGE>
PART I
------

ITEM 1. BUSINESS
- -----------------

Item 1 of Form 10-K is omitted in accordance with General Instruction
J(2)(d), Omission of Information by Certain Wholly-Owned Subsidiaries. A
brief description of the business done by RHI Holdings, Inc. and its
subsidiaries is furnished in lieu thereof:

(a) Brief Description
-----------------

RHI Holdings, Inc. (the "Company"), formerly known as Rexnord Holdings
Inc., is primarily a holding company incorporated in Delaware. It has two
subsidiaries, Fairchild Industries, Inc. ("FII") and Convac GmbH ("Convac").
As used herein, the term "Company" refers to RHI Holdings, Inc. and its
subsidiaries, unless otherwise indicated. The Company is a wholly-owned
subsidiary of The Fairchild Corporation ("TFC"). The Company also holds a
significant equity interest in Banner Aerospace, Inc. ("Banner"), which is a
leading international distributor to the aerospace industry.

The Company conducts its operations primarily through a wholly-owned
subsidiary of FII, VSI Corporation ("VSI"), in three business segments:
Aerospace Fasteners, Industrial Products and Communications Services. The
Aerospace Fasteners segment designs, manufactures and markets high
performance, specialty fastening systems, primarily for aerospace
applications. The Industrial Products segment designs, manufactures and
markets tooling and electronic control systems for the plastic injection
molding and die casting industries. The Communications Services segment
furnishes telecommunications services and equipment to tenants of commercial
office buildings. For a comparison of the sales of each of the Company's
three business segments for each of the last three fiscal years, see
"Management Discussion and Analysis of Results of Operations and Financial
Condition".

Operations are also conducted by Convac, a subsidiary acquired in June
1994, which is a leading designer and manufacturer of wet processing tools,
equipment and systems required for the manufacture of semiconductor chips and
related products and for compact and optical storage disks and flat panel
displays. Convac's balance sheet as of June 30, 1994 is included with the
Industrial Products segment.

On December 23, 1993, the Company completed a sale of its 43.9% stock
interest in Rexnord Corporation, a manufacturer of mechanical power
transmission components and related products.

<PAGE>
Fiscal 1994 Developments
- ------------------------

Aerospace Fasteners Restructuring
---------------------------------

In recent years, the Company has undertaken measures designed to reduce
costs and improve operating efficiencies, increase earnings, and maintain its
market position in the Aerospace Fasteners segment. These measures have
included closing and consolidating certain of the Aerospace Fasteners
segment's facilities.

As a result of the sustained soft worldwide demand for aircraft, and the
resulting decline in new order rates and prices for aerospace fasteners, in
Fiscal 1994, the Company has undertaken further restructuring actions to
downsize, reduce costs, reduce cycle times and improve margins. These
restructuring efforts have included discontinuance of certain aircraft engine
bolt product lines, increased cellularization of manufacturing processes,
relocation of its New Jersey operations to California and re-engineering of
certain manufacturing processes and methods to meet increased customer
quality standards. In connection with these moves, in Fiscal 1994, the
Company recorded restructuring charges of $18.9 million. The Company
believes the reduction of the capacity of the Aerospace Fasteners segment,
and the reorganization of its remaining manufacturing operations, will
continue to improve operating efficiencies and reduce operating costs.

The foregoing measures represent a continuation of actions commenced in
Fiscal 1992 and continued in Fiscal 1993, which included the consolidation of
a major manufacturing facility, the elimination of over 410 manufacturing
personnel and 100 other personnel of the Aerospace Fasteners segment, a wage
and salary freeze and certain other actions to improve manufacturing
efficiencies and streamline operations.

The Company also continues to examine its manufacturing, selling,
general and administrative costs and expenses and intends to further reduce
such costs and expenses in Fiscal 1995 and, to this end may incur additional
restructuring costs related to the elimination of product lines and further
personnel reductions.

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 45.8% of total Company sales for
the year ended June 30, 1994.

<PAGE>
Industrial Products
- -------------------

The Industrial Products segment operates under the trade name D-M-E
Company ("DME"), and Fairchild Data Corporation ("Data"). DME is a leading
manufacturer and supplier of tooling and electronic control products for the
plastics injection molding industry worldwide. Data is a supplier of modems
for use in high-speed digitized voice and data communications. The
Industrial Products segment accounted for 37.5% of total Company sales for
the year ended June 30, 1994.

In June 1994, the Company acquired 100% of the outstanding stock of
Convac. Convac is a leading designer and manufacturer of wet processing
tools, equipment and systems required for the manufacture of semiconductor
chips and related products and for compact and optical storage discs and flat
panel displays. See Note 3 of the Company's consolidated financial
statements included in Item 8, Financial Statements and Supplementary Data.

Communications Services
- -----------------------

Fairchild Communications Services Company provides telecommunications
equipment and services to tenants of commercial office buildings, under the
trade name Telecom 2000 Services. The Company believes it is the largest
provider of comprehensive telecommunications services exclusively to multi-
tenant office buildings in the United States. Fairchild Communications was
founded as a start-up venture in 1985 and has grown rapidly through
expansions and acquisitions. Sales have grown from $1.4 million in Fiscal
1986 to $74.2 million in Fiscal 1994. Approximately $48.0 million of such
increase was attributable to acquisitions (determined on an annualized basis
at the date of acquisition), primarily the acquisition of the
telecommunication assets of Amerisystems. The Communications Services
segment accounted for 16.7% of total Company sales for the year ended June
30, 1994.

Foreign Operations
- ------------------

The Company's operations are located primarily in the United States and
Europe. Inter-area sales are not significant to the total revenue of any
geographic area. Export sales are made by U.S. subsidiaries and divisions to
customers in non-U.S. countries, whereas foreign sales are made by the
Company's non-U.S. subsidiaries. For the Company's sales results by
geographic area and export sales, see Note 19 of the Company's consolidated
financial statements included in Item 8, Financial Statements and
Supplementary Data.

Major Customers
- ---------------

No single customer accounted for more than 10% of consolidated sales in
any of the Company's business segments for the year ended June 30, 1994.

Backlog of Orders
- -----------------

Backlog is significant in the Company's Aerospace Fasteners segment due
to long-term production requirements of its customers. Backlog of unfilled
orders is not material in the Industrial Products segment, where most orders
for products are placed and filled within a few weeks. Backlog is not
applicable to the Communications Services segment.

The Company's backlog of orders as of June 30, 1994 in the Aerospace
Fasteners and Industrial Products segments amounted to $113.4 million and
$5.6 million, respectively. The Company anticipates that approximately 87.8%
of the aggregate backlog at June 30, 1994 will be delivered by June 30, 1995.

Suppliers
- ---------

The Company does not consider itself to be materially dependent upon any
one supplier, but is dependent upon a wide range of subcontractors, vendors
and suppliers of materials to meet its commitments to its customers.

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 $3,940,000, $3,262,000 and $4,140,000
for the years ended June 30, 1994, 1993 and 1992, respectively. 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 or upon the rights and licenses it
possesses under any single patent owned by others.

Personnel
- ---------

As of June 30, 1994, the Company had approximately 3,500 employees.
Approximately 4% of these employees were covered by collective bargaining
agreements. The Company believes that its relations with its employees are
good.

Environmental Matters
- ---------------------

See discussion of Environmental Matter under Item 3 "Legal Proceedings"
below.

ITEM 2. PROPERTIES
- --------------------

As of June 30, 1994, the Company owned or leased properties totaling
approximately 1,805,000 square feet, approximately 1,210,000 square feet of
which was owned and 595,000 square feet of which was leased. The Aerospace
Fasteners segment's properties consisted of approximately 697,000 square
feet, with principal operating facilities of approximately 454,000 square
feet concentrated in southern California. The Industrial Products segment's
properties consisted of approximately 828,000 square feet, with principal
operating facilities of approximately 393,000 square feet located in Arizona,
Michigan, Pennsylvania and Belgium.

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: (i) an 88 acre parcel located in Farmingdale,
New York, (ii) a 12 acre parcel located in City of Commerce, California,
(iii) a 6 acre parcel in Temple City, California, and (iv) an 8 acre parcel
in Chatsworth, California. In addition to the above, certain other
properties of the Company are being marketed.

On January 17, 1994, the Aerospace Fasteners' Chatsworth, California
manufacturing facility suffered extensive damage from the Southern California
earthquake. As a result, the Company relocated the Chatsworth manufacturing
operations to its other Southern California facilities. See Note 15 of the
Company's consolidated financial statements included in Item 8 Financial
Statements and Supplementary Data.

The following table sets forth the location of the larger physical
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 these properties owned or leased by the Company is, in management's
opinion, generally well maintained, is suitable to support the Company's
business and is adequate for the Company's present needs. All of the
Company's occupied properties are maintained and updated on a regular basis.
<TABLE>
<CAPTION>
Owned or Square Business Segment/
Location Leased Footage Group Use
- -------- -------- ------- ------------------- -------------
<S> <C> <C> <C> <C>
Torrance, California Owned 284,000 Aerospace Fasteners Manufacturing
Youngwood, Pennsylvania Owned 135,000 Industrial Products Manufacturing
Chantilly, Virginia Owned 125,000 Corporate Office
City of Industry, California Owned 120,000 Aerospace Fasteners Manufacturing
Madison Hts, Michigan Owned 69,000 Industrial Products Manufacturing
Industriepark Noord, Belgium Owned 69,000 Industrial Products Manufacturing
Santa Ana, California Owned 50,000 Aerospace Fasteners Manufacturing
Scottsdale, Arizona Leased 120,000 Industrial Products Manufacturing
</TABLE>
Information concerning long-term rental obligations of the Company at
June 30, 1994 is set forth in Note 17 to the Company's consolidated financial
statements included in Item 8 Financial Statements and Supplementary Data.

ITEM 3. LEGAL PROCEEDINGS
- ---------------------------

Government Claims
- -----------------

In 1989, the Company learned through its own quality assurance
procedures, and voluntarily disclosed to its customers and the Department of
Defense, that certain units of VSI had not performed certain production lot
tests mentioned in the military specifications for some limited product
lines. The Company does not believe that VSI's level of testing resulted in
shipment of unsafe products or that purchasers were otherwise damaged, and
the government subsequently reduced certain test requirements. In May 1994,
VSI settled this matter with the government by payment of $330,000.

Following an investigation by the Inspector General of NASA, the civil
division of the United States Department of Justice alleged improprieties in
years 1982 and 1984 through 1986, in indirect costs rates and labor charging
practices of a former subsidiary of the Company. The Company entered into
settlement discussions with the Department of Justice to attempt to resolve
these claims and has reached an agreement in principle with the government to
settle this matter for $5,000,000, payable in six equal semi-annual
installments, with interest at 6% per year. The unpaid balance will likely
be collateralized by certain excess real estate. If the settlement is not
consummated, the government may initiate suit under the False Claims Act,
seeking treble damages and penalties, and under the Truth in Negotiation Act,
seeking a price reduction on certain contracts and subcontracts.

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 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 a cost
impact proposal 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 entered into discussions with the government to attempt to
resolve these pension accounting issues.

Civil Litigation
- ----------------

Maurice Bidermann Litigation
----------------------------

The Company commenced an action in the United States District for the
Southern District of New York, following the breach by Maurice Bidermann
("Bidermann") of an agreement under which Bidermann was to have paid the
Company an aggregate sum of approximately $22,500,000, of which Bidermann
paid $10,000,000. Additional installments, of $5,000,000 each, were due from
Bidermann on December 31, 1992, and June 30, 1993, both of which Bidermann
failed to pay. On July 7, 1993, the United States District Court ordered
Bidermann to pay the Company the full amount of its claim, $12,947,000, plus
interest. Following receipt of the Court's order, Bidermann filed for
protection under Chapter 11 of the United States Bankruptcy Code; however,
subsequent to the 1994 fiscal year, on motion of the Company, the Bankruptcy
Court dismissed Bidermann's Chapter 11 proceedings. Prior to Bidermann's
filing for protection under Chapter 11, and continuing subsequent to the
Bankruptcy Court's dismissal of those proceedings, the Company attached
substantially all assets of Bidermann. In addition, the Company holds shares
and warrants of Bidermann Industries, USA, Inc., all of which shares and
warrants Bidermann had originally agreed to purchase from the Company for
$22,500,000. The collectibility of this judgement, which has been affirmed
by the United States Court of Appeals, will depend in part upon the Company's
ability to realize sufficient amounts from its attachments, and the value of
the shares and warrants held.

Environmental Matters
- ---------------------

The Company and other aerospace fastener and industrial product
manufacturers 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 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.

<PAGE>
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 discussed above, will not have a material
adverse effect on the financial condition or the future operating results of
the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
- --------------------------------------------------------

None

<PAGE>
PART II
-------

ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
- ----------------------------------------------------------
STOCKHOLDER MATTERS
-------------------

All of the Company's outstanding common stock is held by TFC. There is
no established public trading market and no dividends have been declared for
this class of common stock.

ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------

Item 6 of Form 10-K is omitted in accordance with General Instructions
J(2)(a), Omission of Information by Certain Wholly-Owned Subsidiaries.

ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF
- ----------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------

Item 7 of Form 10-K is omitted in accordance with General Instruction
J(2)(a), Omission of Information by Certain Wholly-Owned Subsidiaries.
Management's narrative analysis of the results of operations is furnished in
lieu thereof:

MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
- ------------------------------------------------------------

RHI Holdings, Inc. (the "Company"), formerly known as Rexnord Holdings
Inc., is essentially a holding company incorporated in the State of Delaware.
It has two subsidiaries, Fairchild Industries, Inc. ("FII") and Convac GmbH
("Convac"). The Company's operations are conducted through Convac and VSI
Corporation ("VSI"), which is a wholly-owned subsidiary of FII. The Company
is a wholly-owned subsidiary of The Fairchild Corporation ("TFC"). The
Company also holds a significant equity interest in Banner Aerospace, Inc.
("Banner").

RECENT DEVELOPMENTS

On December 23, 1993, the Company consummated the sale of its 43.9%
stock interest in Rexnord Corporation ("Rexnord"), consisting of 8,083,248
shares, for $22.50 per share, to BTR Dunlop Holdings, Inc. The Company
received $181.9 million in proceeds and realized a pre-tax gain of $129.1
million, net of expenses, in the second quarter of Fiscal 1994.

During the first quarter of Fiscal 1994, the Company adopted Statements
of Financial Accounting Standards No. 106 "Employers' Accounting For
Postretirement Benefits Other Than Pensions" and No. 109, "Accounting For
Income Taxes" and elected to take one-time non-cash charges totaling $16.0
million, of which $8.0 million was for postretirement benefits and $8.0
million for the change in accounting for income taxes. These charges are
reflected in Fiscal 1994, and represent cumulative effects on prior years of
the accounting changes, net of related tax benefits, including the Company's
43.9% share of Rexnord's accounting changes, net of tax. For Fiscal 1994,
the effect of the changes on pretax income from continuing operations was not
material.

On June 10, 1994, the Company acquired 100% of the Common Stock of
Convac GmbH for approximately $4,700,000. Convac GmbH ("Convac") is a
leading designer and manufacturer of high precision state-of-the-art wet
processing tools, equipment and systems required for the manufacture of
semiconductor chips and related products and for compact and optical storage
discs and liquid crystal displays. The results of operations will be
reported as part of the Industrial Products segment in the future and were
immaterial in Fiscal 1994.

RESULTS OF OPERATIONS

The Company currently operates in three principal business segments:
Aerospace Fasteners, Industrial Products and Communications Services. Set
forth below is a comparison of the results of the operations of the Company
for the fiscal years ended June 30, 1994 ("Fiscal 1994") and June 30, 1993
("Fiscal 1993"). This comparison relates solely to the continuing portions
of the Company's business.
<TABLE>
<CAPTION>
(In thousands) For the years ended June 30,
----------------------------
1994 1993
--------- ----------
<S> <C> <C>
Sales by Business Segment:

Aerospace fasteners............... $203,456 $247,080
Industrial products............... 166,499 148,449
Communications services........... 74,190 68,038
------- -------
Total $444,145 $463,567
======= =======
Operating Income (Loss) by
Business Segment:

Aerospace fasteners*.............. $(32,208) $(15,398)
Industrial products............... 21,024 19,081
Communications services........... 16,483 14,688
------- -------
Total 5,299 18,371

Corporate administrative expense.. (8,023) (6,310)
Other corporate income............ 3,194 5,409
------- -------
Operating income.................. $ 470 $ 17,470
======= =======

*Includes restructuring charges of $18.9 million and $15.5 million in
Fiscal 1994 and Fiscal 1993, respectively, and an unusual loss from
earthquake damage and related business interruption of $4.0 million in Fiscal
1994.
</TABLE>
FISCAL 1994 VERSUS FISCAL 1993

General
- -------

Overall sales declined by 4.2% for Fiscal 1994, compared to Fiscal 1993,
primarily caused by price erosion due to excess capacity in the aerospace
fasteners industry, reduced order rates from commercial and military
aerospace customers in the Aerospace Fasteners segment and lower revenues due
to the disruption caused by the earthquake. Reduced order rates were
principally due to reductions in defense spending and reduced build rates of
commercial airplane original equipment manufacturers, due to conditions in
the airline industry. The decline in sales at the Aerospace Fasteners
segment was partially offset by significant sales increases at the Industrial
Products and Communication Services segments in the Fiscal 1994 period. The
Industrial Products segment included sales in the current period by Fairchild
Data Corporation which had been classified as a discontinued operation in the
prior periods.

Operating income decreased by $17.0 million in Fiscal 1994, compared to
Fiscal 1993. A restructuring charge of $18.9 million was recorded in Fiscal
1994 to further implement the Aerospace Fasteners segment restructuring plan.
A $4.0 million charge for earthquake damage and related business interruption
also affected this segment in Fiscal 1994. Operating income was up in the
Industrial Products and Communications Services business segments for Fiscal
1994, however, in the Aerospace Fasteners segment operating income declined
$16.8 million for Fiscal 1994, compared to the prior year. Other corporate
income also decreased in Fiscal 1994. (See discussion below).

Aerospace Fasteners
- -------------------

Sales in the Aerospace Fasteners segment decreased 17.7% in Fiscal 1994,
compared to Fiscal 1993, primarily due to the reduced order rates. Ordering
activity remained at low levels at original equipment manufacturers, and in
the replacement markets. In addition, customers are rescheduling orders to
take later delivery in line with reduced aircraft build rates.

The operating loss in the Aerospace Fasteners segment increased by $16.8
million in Fiscal 1994, compared to the Fiscal 1993 period. During the
Fiscal 1994 period, as a result of the sustained soft worldwide demand for
aircraft, aircraft engines and the resulting decline in new order rates and
prices for aerospace fasteners, the Company has continued to undertake
further restructuring actions to further downsize, reduce costs, reduce cycle
times and improve margins. These restructuring efforts include
discontinuance of certain aircraft engine bolt and other product lines,
increased cellularization of manufacturing processes, relocation of its New
Jersey operations into California and re-engineering certain manufacturing
processes and methods to meet increased customer quality standards.

The Company recorded a pretax restructuring charge of $18.9 million in
Fiscal 1994 to cover the cost of the above mentioned restructuring
activities, including the write down of goodwill and surplus assets related
to certain product lines, severance benefits and the nonrecurring costs
associated with the cellularization and reengineering of manufacturing
processes and methods. Depending on future demand and prices of aerospace
fasteners, the Company may take further restructuring actions in the future
and may record additional restructuring charges to cover the cost of these
activities. The Fiscal 1993 period included a restructuring charge of $15.5
million relating to further downsizing fastener operations in Europe and
California, and severance and early retirement benefits for terminated
employees.

On January 17, 1994, the Company's Chatsworth, California Aerospace
Fasteners manufacturing facility suffered extensive damage from the Southern
California earthquake. As a result, the Company has relocated the Chatsworth
manufacturing operations to its other Southern California facilities. This
disruption has caused increased costs and reduced revenues in Fiscal 1994 and
will likely negatively affect Fiscal 1995 as well. While the Company carries
insurance for both business interruption and property damage caused by
earthquakes, the policy has a 5% deductible. The Company has recorded an
unusual pretax loss in Fiscal 1994 of $4.0 million to cover the currently
estimated net cost of the damages and business interruption caused by the
earthquake. Included in prepaids and other current assets is an insurance
claim receivable of $5.9 million for recoverability of costs related to
business interruption and property damage.

Operating income in Fiscal 1994 was also affected by (1) reduced demand
and price erosion; and (2) higher quality control costs resulting from
customers' intensified quality requirements. A large customer's disapproval
in the third quarter of Fiscal 1993, of the quality system at one of the
Aerospace Fasteners segment's plants negatively affected sales and operating
income in Fiscal 1994. The disapproval resulted in the plant being
ineligible to receive new orders, delayed shipments due to on-site customer
inspection of finished product, and increased quality costs. The segment has
implemented a program to comply with the customer's quality requirements and
the plant's quality system was requalified by the customer during the first
quarter of Fiscal 1994. The quality improvement program requires that the
plant reinspect its inventories and modify certain manufacturing processes
and quality procedures at all major facilities. This program has resulted in
one time start-up costs and increased recurring quality costs, each of which
negatively affected the Fiscal 1994 operating results, and will likely
negatively affect the future profit margins of this segment.

Industrial Products
- -------------------

Sales in the Industrial Products segment increased 12.2% in Fiscal 1994
compared to Fiscal 1993. The inclusion of Fairchild Data Corporation sales
in Fiscal 1994 accounted for 76.5% of the increased sales in this segment.
The increase in sales in the current period reflects customer response to
D-M-E Company's ("DME") fast delivery programs, new products, and growth of
the domestic economy. Domestic demand for tooling for plastics has been
strong while foreign demand has been sluggish in certain countries,
reflecting the economic conditions abroad. However, expansion into selected
foreign markets is being pursued and appears to have potential.

Operating income in the Industrial Products segment increased 10.2% in
Fiscal 1994, compared to Fiscal 1993. The inclusion of Fairchild Data
Corporation operating income in Fiscal 1994 accounted for 48.9% of the
increase in operating income in this segment. The improved results in the
current period resulted from a higher sales volume and improved operating
margins. In recent years the Industrial Products segment has implemented
several cost savings steps, including overhead reduction and improved
inventory management programs, which have contributed to the higher operating
margins. The improvements in inventory management and delivery systems
resulted in faster deliveries, reduction in inventory, and higher inventory
turnover. In addition, DME has continued to implement improved manufacturing
methods that have reduced cycle times and costs.

Communications Services
- -----------------------

Sales in the Communications Services segment increased 9.0% in Fiscal
1994, compared to Fiscal 1993, primarily due to the inclusion of sales from
acquisitions, the addition of telecommunications franchises in new office
buildings, and growth at existing sites.

Operating income in the Communications Services segment increased 12.2%
in Fiscal 1994 compared to Fiscal 1993, primarily due to increased sales
resulting from the reasons given above and related economies of scale.
Operating income as a percent of sales in Fiscal 1994 was slightly higher
than Fiscal 1993.

Other Expenses/Income
- ---------------------

Corporate Administrative Expense - FII's corporate staff performs work
for several corporate entities including TFC, VSI and the Company. Corporate
administrative expense incurred by FII is invoiced on a monthly basis and
represents the estimated cost of services performed on behalf of such
companies by FII. Management believes that the corporate administrative
expense of the Company would be higher if it operated as a separate
independent entity. Corporate administrative expense increased by 27.1% in
Fiscal 1994, as compared to Fiscal 1993, due to allocating a portion of TFC's
administrative expense to the Company. This increase was due to increased
TFC staff involvement on behalf of the Company. TFC expense was not
allocated to the Company in the prior year periods.

Other Corporate Income - Other corporate income includes royalty income,
rental income, gain on the sale of a trademark and the reversal of excess
reserves no longer deemed necessary. Other corporate income decreased $2.2
million in Fiscal 1994 compared to Fiscal 1993, primarily due to the absence
of amortization of over accrued retiree health care expense in Fiscal 1994
and the write down of corporate real estate held for sale.

Net Interest Expense - Net interest expense decreased 12.3% in Fiscal
1994, compared to Fiscal 1993, primarily due to lower borrowings in Fiscal
1994 and significantly higher cash and cash equivalents in Fiscal 1994.

Investment Income - Investment income increased $3.2 million in Fiscal
1994 compared to Fiscal 1993, primarily as a result of gains realized on the
liquidation of investments in Fiscal 1994. Also included in Fiscal 1994 were
$2.8 million of dividends realized on participating pension annuity
contracts, compared to $.9 million in Fiscal 1993.

Equity in Earnings of Affiliates - Equity in earnings of affiliates
decreased $15.5 million in Fiscal 1994, primarily due to lower earnings of
Banner and of Rexnord prior to the Company selling its interest in Rexnord.
Consequently, the current year period includes no earnings for Rexnord
subsequent to the sale date.

Minority Interest expense includes dividend expense on FII's Series C
Preferred Stock.

Non-Recurring Income - Non-recurring income in Fiscal 1994 includes the
net pre-tax gain of $129.1 million on the Company's 43.9% stock interest in
Rexnord which was sold to BTR Dunlop Holdings, Inc. for $22.50 per share on
December 23, 1993.

Income Taxes - For Fiscal 1994, the Company provided an income tax
provision at a rate of 42.0%. The provision tax rate was higher than the
statutory rate, largely due to the write off and amortization of goodwill,
which is not deductible for tax purposes.

Accounting Changes:

1) Postretirement Benefits - Using the immediate recognition method,
the after-tax charge to earnings representing the cumulative effect of the
accounting change was $.5 million. The unamortized portion of an overstated
liability of $10.4 million for discontinued operations substantially offset
the transition obligation of $10.9 million for active employees and retirees
of continuing operations. In addition, a $7.5 million charge, net of the
Company's related tax benefit, was recorded for the Company's share of
Rexnord's cumulative charge resulting from this change in accounting.

2) Accounting for Income Taxes - The Company elected the immediate
recognition method and recorded a $7.5 million charge representing the
cumulative effect on prior years. This charge represents deferred taxes
related primarily to differences between the tax basis and book basis of
fixed assets, prepaid pension expense, and inventory. In addition, a $.5
million charge was recorded for the Company's share of Rexnord's cumulative
charge resulting from this accounting change.

Extraordinary items - net included in Fiscal 1993 is an extraordinary
charge of $11.8 million, net of tax, which is 42% of the Rexnord Corporation
extraordinary charge related to premiums paid to repurchase debt and the
write off of deferred loan costs. In addition, FII recorded a charge of $.8
million, net of tax, for deferred loan fees written off from the portion of
the term loan prepaid.

Net Earnings - Net earnings increased $61.7 million in Fiscal 1994
compared to Fiscal 1993, primarily due to the $129.1 million pretax gain
realized from the sale of shares of Rexnord, offset by a $17.0 million drop
in operating income, decreased equity earnings of $15.5 million, a $16.0
million charge, net of tax, for the cumulative effect of changes in
accounting principles, and increased taxes on the higher level of income.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Working capital at June 30, 1994 was $77.5 million higher than at June
30, 1993. The primary reasons for this increase were an increase in cash of
$51.4 million, resulting from the sale of shares of Rexnord, a decrease in
current debt of $51.2 million, offset partially by a $9.8 million decrease in
prepaids and other current assets, primarily from lower net tax assets as a
result of the adoption of SFAS No. 109, and an increase of $17.3 million in
the income tax payable account reflecting taxes recorded on the sale of
shares of Rexnord. An increase in accounts receivable of $9.5 million was
substantially offset by an increase in accounts payable and other accrued
expenses and was largely due to the acquisition of Convac in June 1994.

The Company's principal sources of liquidity are cash generated from
operations and borrowings under the Credit Agreement. As a result of certain
amendments to its Credit Agreement and the issuance of FII's Senior Secured
Notes due 1999, $50 million of VSI's revolving credit facility has been
extended from 1994 to 1997.

The Company also expects to generate cash from the sale of certain
assets and liquidation of investments. Net assets held for sale at June 30,
1994 had a book value of $35.1 million and included several parcels of real
estate in California and an 88 acre parcel of real estate located in
Farmingdale, New York, which the Company plans to sell, lease or develop,
subject to the resolution of environmental matters and market conditions.
Included in long-term investments at June 30, 1994 is a contractual
obligation for the Company to receive $12.9 million from an individual which
has a net carrying amount of $9.3 million. The obligation in part, may be
satisfied by 7.1% of the outstanding common stock of Bidermann Industries
USA, Inc., a closely held company, held by the Company. In addition, the
Company has attached substantially all of the individual's property. The
individual filed for protection under Chapter 11 of the U.S. Bankruptcy Code
on July 7, 1993. However, subsequent to the 1994 fiscal year end, on a
motion by the Company, the Bankruptcy Court dismissed the Chapter 11
proceedings. The Company believes that liquidation of assets held or
attached by the Company will be sufficient to recover the carrying amount of
this investment. (See Item 8, Note 17 to the Company's consolidate financial
statements.)

The Company's principal cash requirements include debt service, capital
expenditures, acquisitions, payment of other liabilities and mandatory
redemption of, and payment of dividends on, preferred stock.

The level of the Company's capital expenditures varies from year to
year, depending upon the timing of capital spending for new production
equipment, periodic plant and facility expansion, as well as cost reduction
and labor efficiency programs. For Fiscal 1994, capital expenditures
including the cost of acquisitions were $18.1 million. Capital expenditures
for Fiscal 1993 and Fiscal 1992 were $22.9 million and $35.0 million,
respectively. The Company anticipates that capital expenditures in Fiscal
1995 will approximate $19.6 million.

During Fiscal 1994, goodwill was reduced by $7.0 million as a result of
the restructuring charge which included a write down of goodwill related to
certain aerospace fasteners product lines which are in the process of being
discontinued.

Investments and advances - affiliated companies decreased $62.4 million,
primarily due to the sale of the Company's stock interest in Rexnord in the
second quarter of Fiscal 1994, combined with accounting changes and
restructuring charges recorded in the first quarter of Fiscal 1994, at
Rexnord and charges for discontinued operations recorded at Banner in the
fourth quarter of Fiscal 1994.

Other liabilities that require the use of cash include post-employment
benefits for retirees, environmental investigation and remediation
obligations, litigation settlements and related costs.

The Company expects that cash on hand, cash generated from operations,
borrowings and asset sales, and the ability to refinance portions of its
debt, will be adequate to satisfy cash requirements.

The Company's Credit Agreement requires the Company to comply with
certain financial covenants, including achieving cumulative earnings before
interest, taxes, depreciation and amortization ("EBITDA Covenant"), and
maintaining certain coverage ratios. The Company was in compliance with the
Credit Agreement as of the end of Fiscal 1994. The Company has negotiated an
amendment to the Credit Agreement (i) to accommodate the unusual loss from
the January 17, 1994 Southern California earthquake, and (ii) to reduce by
$5.0 million the Company's minimum requirement under the EBITDA Covenant for
the duration of the Credit Agreement. To comply with the minimum EBITDA
Covenant requirements (as amended), the Company's subsidiary, VSI, must earn
for the cumulative total of the trailing four quarters, EBITDA as follows:
$68.6 million for the first quarter of Fiscal 1995, $70.4 million for the
second quarter of Fiscal 1995, $72.1 million for the third quarter of Fiscal
1995 and $75.0 million for the fourth quarter of Fiscal 1995. VSI's ability
to meet the minimum requirement under the EBITDA Covenant in Fiscal 1995 is
uncertain, and there can be no assurance that the Company will be able in the
future to comply with the minimum requirements under the EBITDA Covenant and
other financial covenants under the Credit Agreement. Noncompliance with any
of the financial covenants, without cure, or waiver would constitute an event
of default under the Credit Agreement. An event of default resulting from a
breach of a financial covenant may result, at the option of lenders holding
a majority of the loans, in acceleration of the principal and interest
outstanding, and termination of the revolving credit line. If necessary,
management believes a waiver can be obtained.

FII may transfer available cash as dividends to RHI if the purpose of
such dividends is to provide TFC with funds necessary to meet its debt
service requirements under specified notes and debentures. All other
dividends from FII to the Company are subject to certain limitations under
the Credit Agreement. As of June 30, 1994, FII was unable to provide
dividends to the Company. The Credit Agreement also restricts FII from
additional borrowings under the Credit Facilities for the payment of any
dividends.

IMPACT OF FUTURE ACCOUNTING CHANGES

Accounting by Creditors for Impairment of a Loan
- ------------------------------------------------

On July 1, 1994 the Company implemented SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS No. 114"). SFAS No. 114 is a
change in accounting principle that requires the Company, as a creditor, to
evaluate for impairment (i) the collectibility of the contractual principal
and interest of accounts receivable and notes receivable with terms longer
than one year, and (ii) all loans restructured in a troubled debt
restructuring. Accordingly, any loan impairment shall be recognized in the
financial statements. The effect of implementing SFAS No. 114, by the
Company, was not material.

Accounting for Certain Investments and Debt and Equity Securities
- -----------------------------------------------------------------

On July 1, 1994 the Company adopted SFAS 115 "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS No. 115"). SFAS No. 115
provides new rules on accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments
in debt securities. The effect of implementing SFAS No. 115, by the Company,
was not material.

<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------------------------------------------------------

The following consolidated financial statements of the Company and the
report of the Company's independent public accountants with respect thereto,
are set forth below.
Page
----

Consolidated Balance Sheets as of June 30, 1994 and 1993.... 22

Consolidated Statements of Earnings - The three years ended
June 30, 1994, 1993 and 1992............................. 24

Consolidated Statements of Stockholder's Equity - The three
years ended June 30, 1994, 1993 and 1992.................. 25

Consolidated Statements of Cash Flows - The three years
ended June 30, 1994, 1993 and 1992........................ 26

Notes to Consolidated Financial Statements.................. 28

Report of Independent Public Accountants.................... 57

Supplementary data regarding "Quarterly Financial Information (Unaudited)" is
set forth under this Item 8 in Note 20 to Consolidated Financial Statements.

<PAGE>
<TABLE>
RHI HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
June 30, June 30,
ASSETS 1994 1993
- ------ ------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents, $545 and $0
restricted................................ $ 94,220 $ 42,838
Short-term investments....................... 6,578 5,114
Accounts receivable-trade, less allowances
of $3,314 and $1,746....................... 73,376 63,891
Due from The Fairchild Corporation........... 1,305 --
Inventories:
Finished goods............................ 47,120 51,776
Work-in-process........................... 30,907 30,766
Raw materials............................. 11,988 8,987
--------- ---------
90,015 91,529

Prepaid expenses and other current assets.... 18,723 28,545
--------- ---------
Total Current Assets......................... 284,217 231,917

Property, plant and equipment - net.......... 171,245 189,119

Net assets held for sale..................... 35,134 28,492
Cost in excess of net assets acquired,
(Goodwill) less accumulated amortization of
$29,116 and $24,318........................ 200,873 211,713
Investments and advances - affiliated
companies.................................. 77,581 140,007
Deferred loan costs.......................... 9,938 13,212
Prepaid pension assets....................... 61,628 54,316
Long-term investments........................ 14,716 17,514
Notes receivable and other assets............ 34,856 44,430
--------- ---------
Total Assets................................. $ 890,188 $ 930,720
========= =========

The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<TABLE>
RHI HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
June 30, June 30,
LIABILITIES AND STOCKHOLDER'S EQUITY 1994 1993
- ------------------------------------ ------------ ------------
<S> <C> <C>
Current Liabilities:
Bank notes payable and current maturities
of long-term debt........................... $ 14,978 $ 66,137
Accounts payable............................. 35,169 29,028
Due to The Fairchild Corporation............. -- 1,804
Accrued liabilities:
Salaries, wages and commissions........... 14,667 13,621
Employee benefit plan costs............... 2,120 1,321
Insurance................................. 14,942 15,439
Interest.................................. 10,236 11,990
Other..................................... 33,813 29,035
Income tax payable........................ 17,264 --
--------- ---------
93,042 71,406

Total Current Liabilities.................... 143,189 168,375

Long-term debt............................... 312,481 355,537
Other long-term liabilities.................. 23,676 17,468
Retiree health care liabilities.............. 51,189 50,797
Noncurrent income taxes...................... 28,821 33,711
Minority interest in subsidiaries............ 24,595 25,080
Redeemable preferred stock of subsidiary..... 18,932 19,112

Stockholder's Equity:

Common Stock................................. 100 100
Preferred Stock.............................. 100 100
Paid-in capital.............................. 229,297 225,879
Retained earnings............................ 74,132 50,881
Cumulative translation adjustment............ 3,346 2,666
Unrealized loss on noncurrent marketable
securities, net of tax..................... (18,265) (18,986)
Additional minimum liability for pensions,
net of tax................................. (1,405) --
--------- ---------
Total Stockholder's Equity................... 287,305 260,640
--------- ---------
Total Liabilities and Stockholder's Equity... $ 890,188 $ 930,720
========= =========

Operating income................... 470 17,470 41,256

Interest expense................... 43,637 47,528 43,110
Interest income.................... (3,042) (1,233) (4,824)
------- ------- -------
Net interest expense............... 40,595 46,295 38,286

Investment income, net............. 6,004 2,776 9,419
Equity in earnings (loss) of
affiliates....................... (5,591) 9,876 2,691
Minority interest.................. (2,552) (2,289) (210)
Non-recurring income............... 129,082 -- --
------- ------- -------
Earnings (loss) from Continuing
Operations before Income Taxes... 86,818 (18,462) 14,870

Income Tax Provision (benefit)..... 36,459 (3,528) 8,400
------- ------- -------
Earnings (loss) from Continuing
Operations........................ 50,359 (14,934) 6,470

Loss on Disposal of Discontinued
Operations, net................... -- -- (1,399)
------- ------- -------
Earnings (loss) before extraordinary
items and accounting changes....... 50,359 (14,934) 5,071
Extraordinary items, net............ (243) (12,614) 201
Cumulative effect of change in
accounting for postretirement
benefits, net.................... (8,015) -- --
Cumulative effect of change in
accounting for income taxes, net. (7,999) -- --
------- ------- -------
Net Earnings (loss)................ $ 34,102 $(27,548) $ 5,272
======= ======= =======

The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>

<TABLE>
RHI HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(In thousands)

<CAPTION>
Unrealized Additional
Loss On Minimum
Cumulative Noncurrent Liability
Common Pref. Paid-in Retained Translation Marketable For
Total Stock Stock Capital Earnings Adjustment Securities Pensions
------- ------ ------ ------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, July 1, 1991 $320,768 $ 100 $ 100 $224,800 $93,157 $ 2,611 $ - $ -
- ----------------------
Net earnings.......... 5,272 - - - 5,272 - - -
Cumulative translation
adjustment........... 3,558 - - - - 3,558 - -
Dividends............. (10,000) - - - (10,000) - - -
------- ----- ----- ------- ------- ------ ------- ------
BALANCE, June 30, 1992 319,598 100 100 224,800 88,429 6,169 - -
- ----------------------
Net loss.............. (27,548) - - - (27,548) - - -
Cumulative translation
adjustment........... (3,503) - - - - (3,503) - -
Unrealized valuation
loss on noncurrent
marketable
securities........... (18,986) - - - - - (18,986) -
Dividends............. (10,000) - - - (10,000) - - -
Gain on Initial Public
Offering of Rexnord
Corporation.......... 1,079 - - 1,079 - - - -
------- ----- ----- ------- ------ ------ ------- ------
BALANCE, June 30, 1993 260,640 100 100 225,879 50,881 2,666 (18,986) -
- ----------------------
Net earnings.......... 34,102 - - - 34,102 - - -
Cumulative translation
adjustment........... 680 - - - - 680 - -
Dividends............. (10,000) - - - (10,000) - - -
Unrealized valuation
gain on noncurrent
marketable
securities........... 721 - - - - - 721 -
Additional minimum
liability for
pensions............. (1,405) - - - - - - (1,405)
Transfer of subsidiary
from parent.......... (851) - - - (851) - - -
Capital contribution
from parent.......... 3,381 - - 3,381 - - - -
Gain on outside
purchase of
preferred stock of
subsidiary........... 37 - - 37 - - - -

------- ----- ----- ------- ------ ------ ------- ------
BALANCE, June 30, 1994 $287,305 $ 100 $ 100 $229,297 $74,132 $ 3,346 $(18,265) $(1,405)
======= ===== ===== ======= ====== ====== ======= ======

The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<TABLE>
RHI HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
For the Years Ended June 30,
----------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)....................... $ 34,102 $(27,548) $ 5,272
Adjustments to reconcile net earnings
(loss) to net cash used for operating
activities:
Cumulative effect of change in
accounting for postretirement
benefits, net......................... 8,015 -- --
Cumulative effect of change in
accounting for income taxes, net...... 7,999 -- --
Extraordinary loss on recapitalization
of Rexnord Corporation................ -- 11,808 --
Depreciation and amortization........... 33,575 31,527 26,545
Accretion of discount on long-term
liabilities........................... 4,718 2,252 5,365
Provision for restructuring and unusual
items (excluding cash payments of
$6,020 in 1994 and $7,896 in 1993).... 18,840 7,573 --
Net gain on sale of Rexnord investment.. (129,082) -- --
Loss (gain) on sale of property, plant
and equipment......................... 411 2,297 (197)
Equity loss (earnings) of affiliates.... 5,591 (9,876) (2,691)
Minority interest....................... 2,552 2,289 210
Change in accounts receivable........... (2,515) 7,268 3,529
Change in inventories................... 4,246 9,444 (1,184)
Change in other current assets.......... 10,561 (999) (2,410)
Change in non-current assets............ (1,672) (12,948) (7,160)
Change in accounts payable, accrued
and other liabilities................. (2,553) (31,418) (28,924)
-------- -------- --------
Net cash used for operating activities...... (5,212) (8,331) (1,645)

Cash flows from investing activities:
Net proceeds from sale of Rexnord
investment............................... 178,089 -- --
Purchase of Rex-PT stock.................. -- -- (4,000)
Purchase of Rex-PT option................. -- (18,635) (1,913)
Change in TFC and other investments....... 1,334 31,798 (15,272)
Equity investments in affiliates.......... (2,918) -- (823)
Acquisition of subsidiary, net of cash
acquired................................ (1,905) (7,313) --
Collections on notes and other receivables
related to operations sold.............. 1,183 218 147
Purchase of property, plant and equipment. (16,218) (15,544) (35,032)
Proceeds from sale of property, plant and
equipment............................... 1,351 1,287 2,640
-------- -------- --------
Net cash provided by (used for) investing
activities................................ 160,916 (8,189) (54,253)

Cash and cash equivalents, beginning of
year...................................... 42,838 13,139 66,806
-------- -------- --------
Cash and cash equivalents, end of year...... $ 94,220 $ 42,838 $ 13,139
======== ======== ========

The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABEL>
<PAGE>
RHI HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------

Corporate Structure: RHI Holdings, Inc. (the "Company"), formerly known
as Rexnord Holdings Inc., is a holding company incorporated in the State of
Delaware. It has two subsidiaries, Fairchild Industries, Inc. ("FII") and
Convac GmbH ("Convac"). The Company's operations are conducted through
Convac and VSI Corporation ("VSI"), which is a wholly-owned subsidiary of
FII. The Company is a wholly-owned subsidiary of The Fairchild Corporation
("TFC"). The Company also holds a significant equity interest in Banner
Aerospace, Inc. ("Banner").

Fiscal Year: The fiscal year ("Fiscal") of the Company ends June 30.
All references herein to "1994", "1993", and "1992" mean the fiscal years
ended June 30, 1994, 1993, and 1992, respectively.

Principles of Consolidation: The consolidated financial statements are
prepared in accordance with generally accepted accounting principles and
include the accounts of the Company and its majority-owned subsidiaries.
Investments in companies owned between 20 percent and 50 percent are recorded
at cost, adjusted for equity in undistributed earnings or losses since the
date of acquisition (see Note 7). All significant intercompany accounts and
transactions have been eliminated in consolidation.

Statements of Cash Flows: For purposes of these statements, the Company
considers all temporary investments with original maturity dates of three
months or less as cash equivalents. Total net cash disbursements made by the
Company for income taxes and interest were as follows:

</TABLE>
<TABLE>
<CAPTION>
(In thousands) 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Interest....................... $ 38,562 $ 37,758 $ 43,465
Income taxes................... (931) 2,679 3,426
</TABLE>
Restricted Cash: On June 30, 1994, the Company had restricted cash of
$545,000, all of which is maintained as collateral for certain debt
facilities. Cash investments are in high grade, short-term certificate of
deposits.

Inventories: Inventories are valued at the lower of cost or market,
with cost determined primarily on the last-in, first-out (LIFO) basis.
Inventories from continuing operations are valued as follows:
<TABLE>
<CAPTION>
June 30, June 30,
(In thousands) 1994 1993
-------- --------
<S> <C> <C>
Last-in, first-out (LIFO)................... $ 69,829 $ 78,068
First-in, first-out (FIFO).................. 20,186 13,461
------- -------
Total inventories........................... $ 90,015 $ 91,529
======= =======
</TABLE>
For inventories valued on the LIFO method, the excess of current FIFO
over stated LIFO value was approximately $7,924,000 and $8,981,000 at June
30, 1994 and 1993. The LIFO decrement was immaterial for Fiscal 1994.

Properties and Depreciation: Properties are stated at cost and
depreciated over estimated useful lives, generally on a straight-line basis.
For Federal income tax purposes, accelerated depreciation methods are used.
No interest costs were capitalized in any of the years presented. Property,
plant, and equipment consisted of the following:
<TABLE>
<CAPTION>
June 30, June 30,
(In thousands) 1994 1993
-------- --------
<S> <C> <C>
Land...................................... $ 16,227 $ 21,195
Buildings and improvements................ 44,818 49,294
Machinery and equipment................... 184,147 171,515
Transportation vehicles................... 618 536
Furniture and fixtures.................... 5,632 4,501
Construction in progress.................. 6,358 5,209
------- -------
257,800 252,250
Less: Accumulated depreciation........... (86,555) (63,131)
------- -------
Net property, plant, and equipment........ $171,245 $189,119
======= =======
</TABLE>
Amortization of Goodwill: The excess of the cost of purchased
businesses over the fair value of their net assets at acquisition dates
(goodwill) 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 debt outstanding, using the effective interest method.
Amortization expense for these loan costs for Fiscal 1994, 1993 and 1992 was
$2,948,000, $2,493,000 and $1,653,000, respectively.

Impairment of Long Lived Assets: 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 recoverable. To determine
recoverability of its long lived assets the Company evaluates the probability
that undiscounted future net cash flows, without interest charges, will be
less than the carrying amount of the assets.

Despite two consecutive years of operating losses in the Company's
Aerospace Fasteners segment, the Company believes that future net cash flows
from this segment will be sufficient to permit recovery of the segment's long
lived assets, including the remaining goodwill, after a $7,000,000 reduction
of goodwill in Fiscal 1994 relating to certain aerospace product lines which
are in the process of being discontinued.

Foreign Currency Translation: All balance sheet accounts of foreign
subsidiaries are translated at the current exchange rate as of the end of the
accounting period. Income statement items are translated at average currency
exchange rates. The resulting translation adjustment is recorded as a
separate component of stockholder's equity. Transaction gains and losses
included in other income were not significant.

Extraordinary items: The Company recognized extraordinary gains and
losses, net of write-offs of deferred debt issue costs and debt discounts,
from the early extinguishment of debt resulting from the repurchases of its
debentures on the open market or in negotiated transactions. Total
repurchases made by the Company were $11,023,000 face value purchased for
$11,387,000 in Fiscal 1994, $559,000 face value purchased for $495,000 in
Fiscal 1993, $3,000,000 face value purchased for $2,629,000 in Fiscal 1992.
The Company recorded extraordinary income (loss), net of taxes, of
$(243,000), $18,000, and $201,000 relating to these repurchases in Fiscal
1994, 1993 and 1992, respectively.

The Company also recognized an extraordinary loss in Fiscal 1993
relating to the recapitalization of Rexnord Corporation ("Rexnord"), in which
the Company held a significant equity ownership (see Note 4).

Non-recurring Items: Non-recurring income for Fiscal 1994 consists of
the gain realized from the sale of the Company's equity investment in Rexnord
(see Note 2).

Research and Development: Company-sponsored research and development
expenditures are expensed as incurred.

Reclassifications: Certain amounts in prior years' financial statements
have been reclassified to conform with the 1994 presentation.

2. SALE OF REXNORD CORPORATION
---------------------------

On December 23, 1993, the Company completed a sale of its 43.9% stock
interest in Rexnord to BTR Dunlop Holdings, Inc. ("BTR"), for $22.50 per
share. The Company received $181,873,000 in gross proceeds and realized for
Fiscal 1994, a $129,082,000 net pre-tax gain on the sale. In connection with
the sale of its interest in Rexnord, the Company agreed to place shares of
Banner, with a fair market value of $25,000,000, in escrow to secure the
Company's indemnification of BTR against a contingent liability. Once the
contingent liability is resolved, the escrow will be released. The financial
statements include the Company's equity earnings from Rexnord, until the date
of the sale. (See Note 7).

3. ACQUISITIONS
------------

On June 10, 1994, the Company acquired 100% of the Common Stock of
Convac GmbH for approximately $4,700,000. Convac GmbH is a leading designer
and manufacturer of high precision state-of-the-art wet processing tools,
equipment and systems required for the manufacture of semiconductor chips and
related products, for compact and optical storage discs and liquid crystal
displays.

Fairchild Communications Services Company ("Fairchild Communications"),
a partnership whose partners are indirect subsidiaries of the Company, has,
within the last few years, completed the acquisition of several small
companies involved in the building telecommunications business. In Fiscal
1993, Fairchild Communications acquired all the telecommunication assets of
Office Networks, Inc. for approximately $7,300,000.

The cost of Fiscal 1992 acquisitions by Fairchild Communications totaled
approximately $4,960,000. These purchases included: Bramtel, Inc. purchased
August 1991 for $1,800,000; Hansen Communications purchased September 1991
for $160,000; certain assets of Telshare Associates Limited Partnership
purchased April 1992 for approximately $1,100,000; and the stock of Teletech
Resources Corporation purchased May 1992 for approximately $1,900,000,
subject to certain adjustments.

4. REXNORD RECAPITALIZATION
------------------------

On July 9, 1992, Rex-PT Holdings, Inc. and its wholly-owned subsidiary,
Rexnord Corporation, completed a recapitalization (the "Rexnord
Recapitalization"). The Rexnord Recapitalization included (i) a Public
Offering of $172,500,000 of new Senior Notes due 2002, (ii) an increase in
the amount of borrowing available under its credit agreement, and (iii) an
Initial Public Offering (the "Rexnord IPO") of 9,200,000 shares of Rexnord
Corporation Common Stock $0.01 par value, at $17 per share. Immediately
prior to the Rexnord IPO, Rexnord Corporation (i) redeemed 4,878,582 shares
of its Series A Preferred Stock and paid $5,093,000 as the redemption price,
and (ii) merged with and into Rex-PT Holdings, Inc., which was the surviving
corporation. Pursuant to the merger, Rex-PT Holdings,Inc. changed its name
to Rexnord Corporation.

In conjunction with the Rexnord IPO, the Company exercised an option to
purchase 1,794,530 shares of Rexnord common stock from Zaria Inc. for
approximately $18,600,000, and converted all classes of Rexnord's Preferred
Stock held by the Company into Common Shares of Rexnord at a conversion price
of $22 per share. Subsequent to the completion of the Rexnord IPO, the
Company owned approximately 44.7% of Rexnord's common stock. As a result of
the Rexnord Recapitalization, in the first quarter of Fiscal 1993, the
Company recorded an extraordinary charge of $11,804,000, 42.0% (its previous
ownership percentage share) of the Rexnord's extraordinary charge related to
premiums paid to repurchase debt and the writing off of deferred loan costs.

<PAGE>
5. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
------------------------------------------------

During Fiscal 1992, the Company recorded additional write downs on two
previously sold businesses and recognized a $1,399,000 loss on disposal of
discontinued operations, net of a $720,000 tax benefit.

The Company has decided not to sell Fairchild Data Corporation ("Data")
which previously was included in net assets held for sale. The Company is
recording the current period's results from Data with the Company's
Industrial Products Segment. Sales from Data formerly included in net assets
held for sale, and not included in results of operations, were $15,432,000
and $13,624,000 for the twelve months ended June 30, 1993 and 1992,
respectively. The impact of Data's earnings on the prior year periods was
immaterial.

Net assets held for sale at June 30, 1994 includes several parcels of
real estate in California and an 88 acre parcel of real estate located in
Farmingdale, New York, which the Company plans to sell, lease or develop,
subject to the resolution of certain environmental matters and market
conditions.

Net assets held for sale are recorded at estimated net realizable
values, 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.

6. INVESTMENTS
-----------

Short-term investments consist of corporate and individual obligations,
common stock and equivalents, dividends, interest receivable, and current
maturities of limited partnerships. Long-term investments consist of limited
partnership interest and certain preferred and common stocks. Investments
are stated at the lower of cost or market. The following table presents a
summary of investments held by the Company at June 30, 1994 and 1993:

<PAGE>
<TABLE>
<CAPTION>
(In thousands) 1994 1993
------------------ ------------------
Name of Issuer or Market Market
Title of Each Issue Value Cost Value Cost
- ------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Short-term
----------

SC-BI Partners (a)............. $ 2,899 $ 2,899 $ 4,335 $ 4,335
Common Stock................... 2,969 4,053 -- --
Other Investments.............. 710 710 796 779
------ ------ ------ ------
$ 6,578 $ 7,662 $ 5,131 $ 5,114
====== ====== ====== ======
Long-term
---------

SC-BI Partners (a)............. $ -- $ -- $ 2,000 $ 2,000
Bidermann Industries USA, Inc.(b) 9,314 9,314 9,700 9,700
Real Estate Development Joint
Venture (c).................. 3,396 3,396 3,808 3,808
Preferred Stock................ 2,006 2,006 2,006 2,006
------ ------ ------ ------
$14,716 $14,716 $17,514 $17,514
====== ====== ====== ======

(a) SC-BI Partners is an investment company partnership which invests in
merger arbitrage and may involve significant risks. Pursuant to an agreement
among the partners, effective March 31, 1992, the general partner agreed to
liquidate or distribute the assets of the Partnership no later than March 31,
1994, which period could be and was extended for one additional year as a
defined minimum distribution was achieved. Furthermore, the general partner
has the option to purchase the then remaining interest of the limited partner
(the Company) or the assets of the partnership at a specified purchase price.

(b) The Company is a judgement creditor of Maurice Bidermann ("Bidermann").
On July 7, 1993, Bidermann filed for reorganization under Chapter 11 of the
Bankruptcy Code. However, subsequent to the 1994 fiscal year end, on a
motion by the Company, the Bankruptcy Court dismissed Bidermann's Chapter 11
proceedings. The Company believes that between its ownership of shares of
Bidermann Industries USA, Inc., and the value of assets of Bidermann which
have been attached by the Company, that the book value will be recovered.
The Company has classified this investment as long-term since the timing of
recovery is uncertain.

(c) Represents a former plant site in Redondo Beach, California, which was
contributed to a joint venture with a developer that has built and partially
leased a retail center.
</TABLE>
In determining realized gains and losses, the cost of the securities
sold was based on specific identification of the security. Interest on
corporate obligations, as well as dividends on preferred and common stock,
are accrued at the balance sheet date.

Investment income is summarized as follows:
<TABLE>
<CAPTION>
For the years ended June 30,
------------------------------
(In thousands) 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Dividend income....................... $ 1 $ 66 $ 544
Net realized gains.................... 7,087 2,422 4,874
Temporary valuation adjustments....... (1,084) 288 4,001
------- ------- -------
Investment income - net............... $ 6,004 $ 2,776 $ 9,419
======= ======= =======
</TABLE>

7. INVESTMENTS AND ADVANCES - AFFILIATED COMPANIES
-----------------------------------------------

The following table presents summarized financial statement information
on a combined 100% basis of Banner, the Company's principal investment which
is accounted for using the equity method.

<TABLE>
<CAPTION>
(In thousands) For the years ended June 30,
--------------------------------
Statement of Earnings: 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Net sales................... $198,517 $218,474 $219,917
Gross profit................ 66,111 62,571 73,955
Earnings (loss) from
continuing operations..... 5,511 (2,228) 5,852
Discontinued operations, net (17,581) (695) (1,817)
Net earnings (loss)......... (12,070) (2,923) 4,036

June 30, June 30,
Balance Sheet: 1994 1993
-------- --------
Current assets.............. $248,191 $258,767
Noncurrent assets........... 25,802 45,055
Total assets................ 273,993 303,822
Current liabilities......... 39,175 32,389
Noncurrent liabilities...... 126,745 151,301
</TABLE>
On June 30, 1994, the Company owned approximately 47.2% of Banner common
stock, which is included in investments and advances - affiliated companies.
The Company recorded an equity loss of $5,697,000, $1,380,000 and $671,000 on
its investment in Banner for Fiscal 1994, 1993 and for the four months, March
through June, of Fiscal 1992, respectively. At the close of trading on
August 26, 1994, Banner stock was quoted at $5.75 per share. Based on this
price the Company's equity investment in Banner had an approximate market
value of $48,807,000 versus a carrying value of $53,210,000. The Company
believes this decline in market value is temporary.

On December 23, 1993 the Company completed the sale of its 43.9% stock
interest in Rexnord. Prior to the sale of Rexnord, the Company recorded
equity earnings (loss) of $(905,000), $10,828,000 and $4,732,000 on this
investment for Fiscal 1994, 1993 and 1992, respectively. For Fiscal 1994,
the equity loss included an after-tax charge of $2,938,000 for restructuring
of operations, which represented 43.9% of Rexnord's restructuring charge for
the rationalization of manufacturing capacity, the movement of certain
product lines, and other costs related to company-wide employment reductions
and the consolidation of certain manufacturing and administrative functions.
The net earnings for Fiscal 1994, was decreased by recording the Company's
43.9% share of the cumulative charge which resulted from the adoption of SFAS
No. 106 and SFAS No. 109 at Rexnord. (See Notes 9 and 10).

The Company is accounting for its investments in TFC at the lower of
cost or market. As of June 30, 1994, the investment in TFC common stock had
been written down by $27,674,000 , before tax, to market value. The carrying
value of investments and advances - affiliated companies consists of the
following:

<TABLE>
<CAPTION>
(In thousands) June 30, June 30,
1994 1993
-------- --------
<S> <C> <C>
Investment in TFC:

TFC stock and warrants........ $ 16,931 $ 15,839
TFC senior subordinated notes. 2,918 --
-------- --------
$ 19,849 $ 15,839

Investment in Affiliated Companies:

Banner Aerospace, Inc......... $ 53,210 58,436
Rexnord Corporation........... -- 61,452
Others........................ 4,522 4,280
-------- --------
57,732 124,168
-------- --------
$ 77,581 $ 140,007
======= ========
</TABLE>

8. NOTES PAYABLE AND LONG-TERM DEBT
--------------------------------

At June 30, 1994 and 1993, notes payable and long-term debt consisted of
the following:

<PAGE>
<TABLE>
<CAPTION>
June 30, June 30,
(In thousands) 1994 1993
-------- --------
<S> <C> <C>
Short-term notes payable................ $ 3,974 $ 56,492
======= =======

Bank credit agreement................... $ 97,315 $102,700
9.75% Subordinated Debentures, due
annually 1995 through 1998, effective
rate 10.5%............................ 3,998 4,524
12.25% Senior secured notes due 1999.... 125,000 125,000
11.875% Senior Subordinated Debentures
due 1997 through 1999 (net of
discounts)............................ 85,593 109,708
12.75% Debentures due in 1995........... 500 12,900
10.65% Industrial revenue bonds......... 1,500 1,500
Capital lease obligations interest from
5.85% to 12.50% (see Note 17)......... 3,302 6,588
Other notes payable, collateralized
by property or equipment, interest
from 5.5% to 11.5%.................... 6,277 2,262
------- -------
323,485 365,182
Less: Current maturities............... (11,004) (9,645)
------- -------
Net long-term debt...................... $312,481 $355,537
======= =======
</TABLE>
The Company and its subsidiaries maintain a credit agreement (the "Credit
Agreement") with a consortium of banks, which provides a revolving credit
facility and two term loans to FII and a revolving credit facility to the
Company (collectively the "Credit Facilities"). The revolving credit
facility provided to the Company generally bears interest at 2.0% over the
London Interbank Offered Rate ("LIBOR"), and matures February 28, 1995. The
revolving credit facility and Term Loan VII, provided to FII, generally bear
interest at 2.75% over LIBOR and Term Loan VIII, provided to FII, at 3.75%
over LIBOR, respectively. The commitment fee on the unused portion of the
revolving credit facilities was 0.5% at June 30, 1994. The Credit Facilities
provided to FII mature on March 31, 1997. The Credit Facilities are secured
by substantially all of FII's assets.

The following table summarizes the Credit Facilities under the Credit
Agreement at June 30, 1994:

<PAGE>
<TABLE>
<CAPTION>
(In thousands) Outstanding Total
as of Available
June 30, 1994 Facilities
------------- ----------
<S> <C> <C>
RHI Holdings, Inc.
Revolving credit facility (1)...... $ 100 $ 5,000
======= =======
Fairchild Industries, Inc.
Revolving credit facility (2)...... $ -- $ 59,500
Term Loan VII...................... 55,315 55,315
Term Loan VIII..................... 42,000 42,000
------- -------
$ 97,315 156,815
======= =======
Total
Revolving credit facilities........ $ 100 $ 64,500
Term loans......................... 97,315 97,315
------- -------
$ 97,415 $161,815
======= =======

(1) This amount is included in short-term notes payable.

(2) Subsequent to June 30, 1994, the revolving credit facility at FII was
modified by $9,250,000 to $50,250,000. In addition, the borrowing rate
increased to generally bear interest at 3.75% over LIBOR and the
commitment fee increased to 1.0%.
</TABLE>
At June 30, 1994, the Company had unused bank lines of credit
aggregating $52,561,000 at interest rates approximating the prime rate. The
Company also has short-term lines of credit relating to foreign operations
aggregating $12,147,000, against which the Company owed $3,592,000 at June
30, 1994.

At June 30, 1994, the Company had outstanding letters of credit of
$11,839,000, which were supported by the Credit Agreement and other bank
facilities on an unsecured basis.

On August 5, 1992, FII completed a public offering and issued at par
$125,000,000 of 12.25% Senior Secured Notes (the "Notes") due 1999. The
Notes are redeemable, in whole or in part, at FII's option on or after August
1, 1997, at 102% of their aggregate principal amount, and thereafter,
beginning August 1, 1998, at 100% of their aggregate principal amount plus
accrued interest. The Notes are senior secured obligations of FII ranking
"pari passu" with FII's existing and future senior indebtedness. The
proceeds from the sale of the notes were used to (i) repay $55,000,000 of
FII's term loans under the Credit Agreement, (ii) repay $50,000,000 of loans
under VSI's revolving credit facility under the Credit Agreement (which
amounts will be available for future borrowings), including $30,000,000 which
FII paid as a portion of dividends (the "Dividends") to its parent, the
Company, and (iii) as part of the Dividends, repay $20,000,000 of loans under
the Company's revolving credit facility under the Credit Agreement.

As a result of the issuance of the Notes, certain amendments to FII's
bank credit agreement (the "Bank Amendments") became effective on August 5,
1992. As part of the Bank Amendments, (i) the lenders have extended to 1997
the maturity of $42,000,000 of term loans to FII, (ii) the lenders have
extended from 1994 to 1997 $50,250,000 of loans under VSI's revolving credit
facility, (iii) FII has repaid $55,000,000 of term loans from the proceeds of
the Notes, (iv) VSI has repaid $50,000,000 of loans under its revolving
credit facility, (v) the interest rate on loans outstanding to FII and VSI
under the Credit Agreement has been increased, and (vi) the Credit Agreement
was amended in certain other respects to permit greater operating flexibility
and to permit the payment of the Dividends under specified conditions.

Summarized below are certain items and other information with regard to
the debt issuances:

<TABLE>
<CAPTION>
(In thousands) 11.875%
Senior FII FII 9.75%
Subordinated 12.75% 12.25% Senior Subordinated
Debentures Debentures Notes Debentures
------------ ---------- ------------- ----------------
<S> <C> <C> <C> <C>
Date Issued........... March 1987 Oct. 1984 Aug. 1992 Jan. 1978
Face Value............ $126,000 $ 36,000 $125,000 $ 16,082
Balance, June 30,
1994................ $ 85,593 $ 500 $125,000 $ 3,998
Percent Issued at..... 99.214 99.680 100.0 95.784
Bond Discount......... $ 990 $ 115 N/A $ 678
Amortization 1994..... $ 80 $ - $ - $ 6
1993..... $ 43 $ - $ - $ 11
1992..... $ 36 $ - $ - $ 11
Yield to Maturity..... 12.01% 12.75% 12.25% 9.75%
Interest Payments..... Semi-Annual Semi-Annual Semi-Annual Annual
Sinking Fund Start
Date................ 3/1/97 N/A N/A 4/1/83
Sinking Fund
Installments........ $ 31,500 none none $1,005
Fiscal Year Maturity.. 1999 1995 1999 1998
Redeemable by Company
after............... 3/1/92 N/A 7/31/97 1/1/98
</TABLE>
Under the most restrictive covenants of the above indentures, the
Company's consolidated net worth must not be less than $125,000,000. The
indentures also provide restrictions on the amount of additional borrowings
by the Company.

The Company has negotiated an amendment to the Credit Agreement (i) to
accommodate the unusual loss from the January 17, 1994 Southern California
earthquake, and (ii) to reduce by $5,000,000 the Company's minimum
requirement under the EBITDA Covenant for the duration of the Credit
Agreement. To comply with the minimum EBITDA Covenant requirement (as
amended), the Company's subsidiary, VSI, must earn for the cumulative total
of the trailing four quarters, EBITDA as follows: $68,600,000 for the first
quarter of Fiscal 1995, $70,360,000 for the second quarter of Fiscal 1995,
$72,120,000 for the third quarter of Fiscal 1995, and $75,000,000 for the
fourth quarter of Fiscal 1995. VSI's ability to meet the minimum requirement
under the EBITDA Covenant in Fiscal 1995 is uncertain, and there can be no
assurance that the Company will be able in the future to comply with the
minimum requirement under the EBITDA Covenant and other financial covenants
under the Credit Agreement. Noncompliance with any of the financial
covenants, without cure, or waiver would constitute an event of default under
the Credit Agreement. An event of default resulting from a breach of a
financial covenant may result, at the option of lenders holding a majority of
the loans, in an acceleration of the principal and interest outstanding, and
a termination of the revolving credit line. If necessary, management
believes a waiver can be obtained.

FII may transfer available cash as dividends to the Company at any such
time that TFC is unable to meet its debt service requirements under specified
notes and debentures. All other dividends from FII to the Company are
subject to certain limitations under the Credit Agreement. As of June 30,
1994, FII was unable to provide dividends to the Company. The Credit
Agreement also restricts FII from additional borrowings under the Credit
Facilities for payment of any dividends.

In addition, the Credit Agreement permits the Company to pay dividends
(i) up to $10,000,000 per year, and (ii) in amounts in excess of $10,000,000
if needed by TFC to service its indebtedness; provided, however, that
dividends pursuant to clause (ii) of this sentence are permitted only if and
to the extent TFC does not have cash, cash equivalents or marketable
securities readily available to service its indebtedness and maintain
reasonable working capital.

For FII's operating subsidiary, VSI, capital expenditures are limited
during the remaining term of the Credit Agreement to the lower of (i) an
annual ceiling of $25,200,000 to $26,500,000 per year, or (ii) 30% of the
prior fiscal year's earnings before interest, taxes, depreciation and
amortization. Capital expenditure reductions can be offset by cash
contributions from the Company. Capital expenditures can also be increased
if cash proceeds are received from the sale of other property, subject to
approval by the senior lenders under the Credit Agreement. FII's sale of
property, plant, and equipment is limited during the remaining term of the
Credit Agreement. VSI is subject to maximum sales for a fair market value of
$2,000,000 per fiscal year and $5,000,000 over the life of the Credit
Agreement. FII (other than its subsidiary, VSI) is subject to maximum sales
for a fair market value of $1,000,000 per fiscal year. However, certain
specified assets can be sold and are not subject to these limitations.

Annual maturities of long-term debt obligations (exclusive of capital
lease obligations) for each of the five years following June 30, 1994, are as
follows: $8,818,000 for 1995, $9,999,000 for 1996, $87,648,000 for 1997,
$23,627,000 for 1998 and $188,037,000 for 1999.

9. PENSIONS AND POSTRETIREMENT BENEFITS
------------------------------------

Pensions
--------

The Company and its subsidiaries have defined benefit pension plans
covering substantially all employees. Employees in foreign subsidiaries may
participate in local pension plans which are in the aggregate insignificant
and are not included in the following disclosures. The Company's funding
policy is to make the minimum annual contribution required by applicable
regulations.

The tables which follow present net pension expense (income) and a
reconciliation of the funded status of the plans for continuing operations
and certain discontinued operations.

The following table provides a summary of the components of net periodic
pension expense for the plans:
<TABLE>
<CAPTION>
(In thousands)
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Service cost of benefits earned
during the period...................... $ 3,827 $ 4,184 $ 4,243
Interest cost of projected benefit
obligation............................. 14,552 14,166 14,863
Return on plan assets.................... (5,051) (31,490) (17,358)
Amortization of prior service cost....... 126 111 113
Net amortization and deferral............ (15,007) 13,488 (2,875)
------- ------- -------
(1,553) 459 (1,014)
Net periodic pension income from other
plans including foreign plans.......... (745) (1,654) (1,446)
------- ------- -------
Net periodic pension income.............. $ (2,298) $ (1,195) $ (2,460)
======= ======= =======
</TABLE>
Assumptions used in accounting for the plans were:

<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Discount Rate............................ 8.5% 8.5% 8.5%
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%
</TABLE>
The following table sets forth the funded status and amounts recognized
in the Company's statement of financial position at June 30, 1994, and 1993
for the plans:
<TABLE>
<CAPTION>
(In thousands) June 30, June 30,
1994 1993
-------- --------
<S> <C> <C>
Projected benefit obligatoin:
Vested benefit obligation................. $183,120 $172,349
Non-vested benefits....................... 10,684 11,110
------- -------
Accumulated benefit obligation............ 193,804 183,459
Effect on projected future compensation
levels.................................. 4,418 4,042
------- -------
198,222 187,501

Plan assets at fair value................... 239,756 252,298
------- -------
Plan assets in excess of projected benefit
obligations............................... 41,534 64,797

Unrecognized net loss....................... 35,843 14,782
Unrecognized prior service cost............. 411 639
Unrecognized net transition assets.......... (594) (3,039)
Additional minimum liability for one defined
plan...................................... (2,166) --
------- -------
Prepaid pension cost prior to SFAS 109
implementation............................ 75,028 77,179
Effect of SFAS 109 implementation........... (13,400) --
------- -------
Prepaid pension cost........................ $ 61,628 $ 77,179
======= =======
Prepaid pension cost, net of tax............ $ 54,316
=======
</TABLE>
Plan assets include Class A Common Stock of TFC valued at $3,172,000 and
$2,968,000 at June 30, 1994 and 1993, respectively. Substantially all of the
plan assets are invested in listed stocks and bonds.

Postretirement Health Care Benefits
-----------------------------------

Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106 ("SFAS 106"), "Employers' Accounting for
Postretirement Benefits Other than Pensions". The new standard requires that
the expected cost of postretirement benefits be accrued and charged to
expense during the years the employees render the service. This is a
significant change from the Company's previous policy of expensing these
costs for active employees when paid.

The Company elected the immediate recognition method of adoption of SFAS
106. The unamortized portion of the overstated liability for discontinued
operations was $10,370,000, net of tax, which substantially offset a
$10,904,000, net of tax, charge relating to the transition obligation for
active employees and retirees of continuing operations. The charge to net
earnings as the cumulative effect of this accounting change was $534,000, net
of tax. For the Fiscal year ended June 30, 1994, the effect of the changes
on pretax income from continuing operations was not material.

As a result of Rexnord's adoption of SFAS 106, effective July 1, 1993,
the Company recorded an after-tax charge of $7,481,000 to net earnings, which
represented the Company's share of Rexnord's cumulative effect of this change
in accounting, net of the related tax benefits from the charge.

The Company provides health care benefits for most retired employees.
Postretirement health care expense from continuing operations totaled
$1,948,000, $1,366,000 and $840,000 for the years ended June 30, 1994, 1993
and 1992, respectively. The Company has accrued approximately $35,386,000 as
of June 30, 1994, 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 $3,011,000,
$4,866,000 and $5,099,000 for the years ended June 30, 1994, 1993 and 1992,
respectively. The components of expense in 1994 are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Service cost of benefits earned...................$ 437
Interest cost on liabilities...................... 4,526
Net amortization and deferral..................... (4)
-------
Net periodic postretirement benefit cost..........$ 4,959
=======
</TABLE>
The following table sets forth the funded status for the Company's
postretirement health care benefit plans:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Accumulated postretirement benefit obligations:
Retirees........................................$ 48,556
Fully eligible active participants.............. 497
Other active participants....................... 4,962
-------
Accumulated postretirement benefit obligation..... 54,015
Unrecognized net loss............................. 113
-------
Accrued postretirement benefit liability..........$ 53,902
=======
</TABLE>
The accumulated postretirement benefit obligation was determined using
a discount rate of 8.5%, and a health care cost trend rate of 9.5% and 6.5%
for pre-age-65 and post-age-65 employees, respectively, gradually decreasing
to 4.5% and 5.0%, respectively, 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, 1994, by
approximately $2,122,000, and increase the net periodic postretirement
benefit cost by approximately $245,000 for Fiscal 1994.

10. INCOME TAXES
------------

Effective July 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by
Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting
for Income Taxes".

Under the liability method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities, and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Prior
to the adoption of SFAS 109, income tax expense was determined using the
deferred method. Deferred tax expense was based on items of income and
expense that were reported in different years in the financial statements and
tax returns and were measured at the tax rate in effect in the year the
difference originated.

As permitted under SFAS 109, prior years' financial statements have not
been restated. The Company elected the immediate recognition method and
recorded a $7,476,000 charge representing the prior years' cumulative effect.
This charge represents deferred taxes that had to be recorded related
primarily to fixed assets, prepaid pension expenses, and inventory basis
differences.

As a result of Rexnord's adoption of SFAS 109 effective July 1, 1993,
the Company recorded an after-tax charge to net earnings of $523,000, which
represented the Company's share of Rexnord's cumulative effect for this
change in accounting.

The provision for income taxes from continuing operations is summarized
as follows:

<TABLE>
<CAPTION>
(In thousands)
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.................... $ 13,842 $ (6,969) $ (5,282)
State...................... 635 1,002 944
Foreign.................... 204 1,453 3,951
------- ------- -------
14,681 (4,514) (387)
Deferred:
Federal.................... 21,535 960 8,421
State...................... 243 26 366
------- ------- -------
21,778 986 8,787
------- ------- -------
Net tax provision (benefit)... $ 36,459 $ (3,528) $ 8,400
======= ======= =======
</TABLE>
The income tax provision for continuing operations differs from that
computed using the statutory Federal income tax rate of 35% in 1994 and 34%
in the 1993 and 1992 periods for the following reasons:
<TABLE>
<CAPTION>
(In thousands)
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Computed statutory amount............ $ 30,386 $ (6,277) $ 5,055
State income taxes, net of
applicable Federal tax benefit..... 655 678 865
Foreign Sales Corporation benefits... (350) (340) (468)
Nondeductible acquisition valuation
items.............................. 4,386 2,004 932
Equity income and dividends.......... -- (2,531) (54)
Tax on foreign earnings, net of tax
credits............................ 141 3,361 2,091
Difference between book and tax
basis of assets acquired and
liabilities assumed................ 1,366 582 636
Other................................ (125) (1,005) (657)
------- ------- -------
Net tax provision (benefit).......... $ 36,459 $ (3,528) $ 8,400
======= ======= =======
</TABLE>
The following table is a summary of the significant components of the
Company's deferred tax assets and liabilities as of June 30, 1994:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>

Deferred tax assets:
Accrued expenses................... $ 8,939
Asset basis differences............ 6,769
Employee compensation and benefits. 5,198
Environmental reserves............. 6,451
Credit carryforwards............... 2,891
Postretirement benefits............ 20,078
Other.............................. 1,719
-------
52,045
Deferred tax liabilities:
Asset basis differences............ (43,781)
Inventory.......................... (9,870)
Pensions........................... (20,833)
Other.............................. (11,401)
-------
(85,885)
-------
Net deferred tax liability........... $(33,840)
=======
</TABLE>
For Fiscal years prior to its change in its method of accounting for
taxes, the deferred income tax component of the income tax provision for
continuing operations consists of the effect of timing differences related
to:
<TABLE>
<CAPTION>
(In thousands)
1993 1992
-------- --------
<S> <C> <C>
Compensation and other wage
related............................ $ 813 $ 401
Pension expense and reversion........ 201 643
Depreciation......................... 2,839 3,049
Investment earnings.................. -- 2,005
Other................................ (2,867) 2,689
------- -------
$ 986 $ 8,787
======= =======
</TABLE>

Domestic income taxes, less allowable credits, are provided on the
unremitted income of foreign subsidiaries and affiliated companies, to the
extent that such earnings are intended to be repatriated. No domestic income
taxes or foreign withholding taxes are provided on the undistributed earnings
of foreign subsidiaries and affiliates that are considered permanently
invested, or which would be offset by allowable foreign tax credits. At June
30, 1994, the amount of domestic taxes payable upon distribution of such
earnings was not significant.

On July 19, 1993, the Internal Revenue Service ("Service") completed an
examination of the Company's Federal income tax returns for fiscal years
ending October 31, 1985 and 1986, and February 28, 1987, and proposed certain
adjustments. Federal income tax on the adjustments originally proposed by
the Service amounted to $15,600,000, excluding interest. In February, 1994,
the Service reduced the adjustments and now proposes tax of approximately
$10,700,000, excluding interest. The most significant adjustments involve
treatment of professional fees incurred by the Company with respect to a
proposed recapitalization of the Company. The Company has protested the
adjustments through the appeals process of the Service. The Company believes
these adjustments will be reduced through the appeals process.

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, as a result of the proposed adjustments, will not have a material
effect on the financial condition or results of operations of the Company.

11. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
----------------------------------------------

The Company is carrying $23,981,000 and $24,015,000 of minority interest
represented by the Series C Preferred Stock of FII in its balance sheet at
June 30, 1994 and June 30, 1993, respectively. The Series C Preferred Stock
has an annual dividend requirement of $4.25 per share through July 21, 1999,
and $7.00 per share thereafter.

The Company purchased 800 shares of FII's Series C Preferred Stock in
Fiscal 1994. There were 557,560 and 558,360 shares outstanding at June 30,
1994 and 1993, respectively.

12. REDEEMABLE PREFERRED STOCK OF SUBSIDIARY
-----------------------------------------

The Company has classified the outstanding shares of Series A Preferred
Stock of FII as a long-term liability. In January 1989, annual mandatory
redemptions of 165,564 shares began at $45.00 per share plus any dividend in
arrears. FII has the option of redeeming any or all of its shares, at $45.00
per share. Due to the merger of FII in August 1989 with the Company, holders
of the Series A Preferred Stock are entitled, at their option, but subject to
compliance with certain covenants under FII's Credit Agreement, to redeem
their shares for $27.18 in cash.

On August 21, 1992, FII closed on an offer to exchange (the "Exchange
Offer") on a one-for-one basis, up to 90% of the outstanding shares of Series
A Convertible Preferred Stock of FII for shares of Series C Cumulative
Preferred Stock of FII. The Exchange Offer resulted in an increase in FII's
stockholders' equity of $25,126,000 (prior to fees and expenses) due to the
Series C Preferred Stock not being mandatorily redeemable or convertible to
cash. Approximately 56.8% of the outstanding shares of the Series A
Preferred Stock were exchanged for shares of the Series C Preferred Stock.
The Series C Preferred Stock has an annual dividend requirement of $4.25 per
share through July 21, 1999, and $7.00 per share thereafter. FII's
requirement to redeem annually shares of Series A Preferred Stock has been
reduced by the number of shares of Series A Preferred Stock exchanged for
Series C Preferred Stock, i.e., by 558,360 shares. Both the Series A
Preferred Stock and the Series C Preferred Stock are listed on the New York
Stock Exchange.

The Company purchased 4,000 shares of FII's Series A Preferred Stock in
Fiscal 1994. The Company did not purchase any shares in Fiscal 1993. There
were 420,701 and 424,701 shares outstanding at June 30, 1994 and June 30,
1993, respectively.

Annual maturity redemption requirements for redeemable preferred stock
as of June 30, 1994, are as follows: $0 for 1995, $4,031,000 for 1996,
$7,450,000 for 1997, and $7,450,000 for 1998.

13. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------

Statement of Financial Accounting Standards No. 107, ("SFAS No. 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 No. 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:

Cash and Cash Equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates the fair value.

Investment Securities: Fair values for equity securities and
investments in affiliates (including investments in affiliates accounted for
under the equity method and not required to be presented under Statement 107)
are based on quoted market prices, where available. For equity securities
and investments in affiliates not actively traded, fair values are estimated
by using quoted market prices of comparable instruments or, if there are no
relevant comparables, on pricing models or formulas using current
assumptions. The fair value of limited partnerships and other investments
are estimated by discounting expected future cash flows using a current
market rate applicable to the yield, credit quality, and maturity of the
investment.

Notes Receivable: Fair values of notes receivable are estimated by
using discounted cash flow analyses, using a current market rate applicable
to the yield, credit quality, and maturity of the investment.

Short-term Borrowings: The carrying amounts of the Company's short-term
borrowings approximate their fair values.

Long-term Borrowings and Notes Payable: The carrying amounts of
borrowings under the Company's bank Credit Agreement and current maturities
of long-term debt approximate their fair value. The fair value of the
Company's subordinated debentures and senior notes are based on quoted market
prices, where available. For subordinated debentures not actively traded,
fair values are estimated by using quoted market prices of comparable
instruments. The fair value for the Company's other 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.

Minority Interest: The fair value for preferred stock of a subsidiary
is based on the quoted market price.

Redeemable Preferred Stock: The fair value for redeemable preferred
stock of a subsidiary is based on the quoted market price.

Off-balance-sheet Instruments: Fair values for the Company's off-
balance-sheet instruments (letters of credit, commitments to extend credit,
and lease guarantees) 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 current period's fair value of
the Company's off-balance-sheet instruments is not material.

The carrying amounts and fair values of the Company's financial
instruments at June 30, 1994 and June 30, 1993 are as follows:
<TABLE>
<CAPTION>
June 30, 1994 June 30, 1993
------------------ ------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Cash.................................... $ 94,220 $ 94,220 $ 42,838 $ 42,838
Investment Securities:
Short-term equity securities.......... 3,277 3,372 192 2,935
Short-term limited partnerships....... 2,899 2,899 4,520 4,732
Short-term other investments.......... 402 400 402 400
Long-term equity securities........... 2,006 2,006 2,006 2,006
Long-term limited partnerships........ 3,396 3,508 5,808 7,141
Long-term Bidermann investment........ 9,314 9,314 9,700 9,700
Notes Receivable:
Current............................... 1,275 1,229 4,081 4,415
Long-term............................. 5,671 6,077 7,336 7,487
Short-term debt......................... 3,974 3,974 56,492 56,492
Long-term debt:
Bank credit agreement................. 97,315 97,315 102,700 102,700
Subordinated debentures and senior
notes............................... 215,091 212,307 252,132 256,625
Industrial revenue bonds.............. 1,500 1,500 1,500 1,500
Capitalized leases.................... 3,302 3,302 6,588 6,588
Other................................. 6,278 6,278 2,262 2,262
Minority interest....................... 23,981 21,675 24,015 18,426
Redeemable preferred stock of subsidiary 18,932 15,461 19,112 13,378
</TABLE>

14. RESTRUCTURING CHARGES
---------------------

During the Fiscal 1994 period, as a result of the sustained soft
worldwide demand for aircraft, aircraft engines and the resulting decline in
new order rates and prices for aerospace fasteners, the Company has continued
to undertake additional restructuring actions to further downsize, reduce
costs, reduce cycle times and improve margins. These restructuring efforts
include discontinuance of certain aircraft engine bolt and other product
lines, increased cellularization of manufacturing processes, relocation of
its New Jersey operations into California and re-engineering certain
manufacturing processes and methods to meet increased customer quality
standards.

The Company recorded a pretax restructuring charge of $18,860,000 in
Fiscal 1994 to cover the cost of the above mentioned restructuring
activities, including the write down of goodwill and surplus assets related
to certain product lines, severance benefits and the nonrecurring costs
associated with the cellularization and reengineering of manufacturing
processes and methods. Depending on future demand and prices of aerospace
fasteners, the Company may take further restructuring actions in the future
and may record additional restructuring charges for the cost of these
activities.

The Company recorded restructuring charges of $15,469,000 and $2,500,000
in Fiscal 1993 and 1992, respectively, relating to the downsizing of fastener
operations in Europe and California, and severance and early retirement
benefits for terminated employees.

15. UNUSUAL ITEMS
-------------

On January 17, 1994, the Company's Chatsworth, California Aerospace
Fasteners manufacturing facility suffered extensive damage from the Southern
California earthquake. As a result, the Company relocated the Chatsworth
manufacturing operations to its other Southern California facilities. This
disruption has caused increased costs and reduced revenues in the Fiscal 1994
third and fourth quarters. While the Company carries insurance for both
business interruption and property damage caused by earthquakes, the policy
has a 5% deductible. The Company has recorded an unusual pretax loss of
$4,000,000 in Fiscal 1994 in the Aerospace Fasteners segment to cover the
estimated net cost of the damages and related business interruption caused by
the earthquake. An insurance claim of $5,900,000 has been recorded for
recoverability of costs related to business interruption and property damage.
In addition, the Company recorded a write down of $2,000,000 relating to this
real estate which is now included in net assets held for sale.

16. RELATED PARTY TRANSACTIONS
--------------------------

Corporate office administrative expense recorded by FII was billed to
the Company on a monthly basis during 1994, 1993 and 1992. These costs
represent the cost of services incurred on behalf of the Company. The
Company has reimbursed FII for these services.

The Company has entered into a tax sharing agreement with TFC whereby
the Company is included in the consolidated federal income tax return of TFC.
The Company makes payments to TFC based on the amount of federal income
taxes, if any, it would have paid had it filed a separate federal income tax
return.

The Aerospace Fasteners segment had sales to Banner Aerospace, Inc. a
47.2% affiliate of the Company, of $5,680,000, $8,750,000 and $10,941,000 in
1994, 1993 and 1992, respectively.

17. COMMITMENTS AND CONTINGENCIES
-----------------------------

Leases
------

The Company leases certain of its facilities and equipment under capital
and operating leases. The following is an analysis of the assets under
capital leases included in property, plant and equipment:
<TABLE>
<CAPTION>
(In thousands)
June 30,
Description 1994
----------- --------
<S> <C>
Machinery and equipment........... $ 13,376
Less: Accumulated depreciation... (5,665)
-------
$ 7,711
=======
</TABLE>
Future minimum lease payments:
<TABLE>
<CAPTION>
Operating Capital
(In thousands) Leases Leases
------ ------
<S> <C> <C>
1995............................. $ 7,812 $ 2,428
1996............................. 6,740 994
1997............................. 5,858 256
1998............................. 5,207 8
1999............................. 4,868 --
Thereafter....................... 4,378 --
------ ------
$34,863 3,686
======
Less: Amount representing interest... (384)
------
Present value of capital lease
obligations......................... $ 3,302
======
</TABLE>
Rental expense under all leases amounted to $7,193,000, $9,575,000 and
$10,410,000 for the years ended June 30, 1994, 1993, and 1992, respectively.

In connection with the sale of Metro Credit Corporation, the Company
remained contingently liable as a guarantor of the payment and performance of
obligations of third party lessees under aircraft leases, which call for
aggregate annual base lease payments of approximately $3,454,000 in 1995, and
approximately $11,397,000 over the remaining 5-year guaranty period. In each
case, the Company has been indemnified by the purchasers and lessors from any
losses related to such guaranties.

Government Claims
- -----------------

Civil Litigation
- ----------------

Maurice Bidermann Litigation
----------------------------

Environmental Matters
- ---------------------

Other Matters
- -------------

18. BUSINESS SEGMENTS
-----------------

The Company's operations are conducted in three principal business
segments. The Aerospace Fasteners segment includes the manufacture of high
performance specialty fasteners and fastening systems. The Industrial
Products segment is engaged in (i) the manufacture of tooling and injection
control systems for the plastic injection molding and die casting industries,
(ii) the supply of modems for use in high speed digitized voice and data
communications, and (iii) a designer and manufacturer of wet processing
tools, equipment and systems. The Communications Services segment which
provides telecommunication services to office buildings. Intersegment sales
are insignificant to the sales of any segment.

Identifiable assets represent assets that are used in the Company's
operations in each segment at year end. Corporate assets are principally in
cash, marketable securities, prepaid pension costs, assets held for sale, and
property maintained for general corporate purposes.

The Company's financial data by business segment is as follows:
<TABLE>
<CAPTION>
(In thousands)
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Sales by Business Segment:
Aerospace Fasteners.............. $ 203,456 $ 247,080 $ 299,270
Industrial Products (1).......... 166,499 148,449 132,238
Communications Services.......... 74,190 68,038 58,272
--------- --------- ---------
Total Segment Sales................ $ 444,145 $ 463,567 $ 489,780
========= ========= =========
Operating Income by Segment:
Aerospace Fasteners (2).......... $ (32,208) $ (15,398) $ 15,654
Industrial Products (1).......... 21,024 19,081 15,250
Communications Services.......... 16,483 14,688 13,399
--------- --------- ---------
Total Segment Operating Income..... 5,299 18,371 44,303

Corporate Administrative Expense. (8,023) (6,310) (6,708)
Other Corporate Income........... 3,194 5,409 3,661
--------- --------- ---------
Total Consolidated Operating Income $ 470 $ 17,470 $ 41,256
========= ========= =========
Capital Expenditures:
Aerospace Fasteners.............. $ 4,320 $ 5,711 $ 11,471
Industrial Products.............. 3,997 4,002 5,041
Communications Services.......... 7,775 5,792 10,040
Corporate and Other.............. 126 39 8,480
--------- --------- ---------
Total Capital Expenditures......... $ 16,218 $ 15,544 $ 35,032
========= ========= =========
Depreciation and Amortization:
Aerospace Fasteners.............. $ 14,373 $ 14,280 $ 12,525
Industrial Products.............. 6,765 6,154 5,791
Communications Services.......... 8,948 7,936 6,192
Corporate and Other.............. 3,489 3,157 2,037
--------- --------- ---------
Total Depreciation and Amortization $ 33,575 $ 31,527 $ 26,545
========= ========= =========

(1) - Included in Fiscal 1994 are the results of Fairchild Data Corporation.
Sales from this division, formerly included in net assets held for sale, and
not included in the results of operations, were $15,432,000 and $13,624,000
for Fiscal 1993 and 1992, respectively. The impact of this division's
earnings on the prior periods was immaterial.

(2) - Includes charges to reflect the cost of restructuring of $18,860,000,
$15,469,000 and $2,500,000 in Fiscal 1994, 1993 and 1992, respectively, and
an unusual loss from earthquake damage and business interruption of
$4,000,000 in Fiscal 1994.
</TABLE>
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Identifiable Assets:
Aerospace Fasteners.............. $ 306,008 $ 337,185 $ 373,651
Industrial Products.............. 164,632 146,754 148,053
Communications Services.......... 79,087 78,752 72,528
Corporate and Other.............. 340,461 368,029 372,562
--------- --------- ---------
Total Identifiable Assets.......... $ 890,188 $ 930,720 $ 966,794
========= ========= =========
</TABLE>
19. 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:
<TABLE>
<CAPTION>
(In thousands)
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Sales by Geographic Area:
United States.................... $ 358,614 $ 369,343 $ 394,148
Europe........................... 76,366 85,479 88,479
Other............................ 9,165 8,745 7,153
--------- --------- ---------
Total Sales $ 444,145 $ 463,567 $ 489,780
========= ========= =========
Operating Income by Geographic Area:
United States.................... $ (1,011) $ 15,390 $ 34,285
Europe........................... 5,847 2,034 8,940
Other............................ 463 947 1,078
--------- --------- ---------
Total Segment Operating Income..... $ 5,299 $ 18,371 $ 44,303
========= ========= =========

June 30, June 30, June 30,
1994 1993 1992
Identifiable Assets by Geographic --------- --------- ---------
Area:
United States.................... $ 458,621 $ 479,751 $ 509,922
Europe........................... 86,545 78,176 81,080
Other............................ 4,561 4,764 3,230
Corporate and other assets....... 340,461 368,029 372,562
--------- --------- ---------
Total Identifiable Assets.......... $ 890,188 $ 930,720 $ 966,794
========= ========= =========
</TABLE>
Export sales are defined as sales to customers in foreign countries by
the Company's domestic operations. Export sales amounted to the following:
<TABLE>
<CAPTION>
(In thousands)
1994 1993 1992
--------- --------- ---------

<S> <C> <C> <C>
Export Sales
Europe........................... $ 12,692 $ 15,297 $ 20,661
Other............................ 16,593 13,546 16,545
--------- --------- ---------
Total Export Sales................. $ 29,285 $ 28,843 $ 37,206
========= ========= =========
</TABLE>

20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
-------------------------------------------
<TABLE>
<CAPTION>
First Second Third Fourth
(In thousands) Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1994:
Sales........................... $110,491 $108,830 $112,836 $111,988
Gross profit.................... 22,962 25,875 27,138 30,289
Earnings (loss) from continuing
operations.................... (6,761) 76,680 (5,159) (14,401)
Extraordinary items, net........ -- -- (147) (96)
Cumulative effect of change in
accounting for postretirement
benefits, net................. (8,015) -- -- --
Cumulative effect of change in
accounting for income taxes,
net........................... (7,999) -- -- --
------- ------- ------- -------
Net earnings (loss)............. $(22,775) $ 76,680 $ (5,306) $(14,497)
======= ======= ======= =======

1993:
Sales........................... $118,100 $116,548 $114,399 $114,520
Gross profit.................... 31,917 29,653 27,609 23,314
Earnings (loss) before extra-
ordinary items................ 3,237 (818) (3,433) (13,920)
Extraordinary items - net....... (12,224) 23 4 (417)
------- ------- ------- -------
Net loss........................ $ (8,987) $ (795) $ (3,429) $(14,337)
======= ======= ======= =======
</TABLE>
Earnings (loss) from continuing operations includes charges to reflect
the cost of restructuring the Company's Aerospace Fasteners Segment, of
$9,903,000 and $8,957,000 in the second and fourth quarters of Fiscal 1994,
respectively, and $1,500,000, $932,000 and $13,037,000 in the second, third
and fourth quarters of Fiscal 1993, respectively. The Company recorded an
unusual loss in the third and fourth quarter of Fiscal 1994 of $3,200,000 and
$2,800,000, respectively, to cover the estimated net cost of the damages and
related business interruption caused by an earthquake and the write down of
real estate.

The second quarter of Fiscal 1994 includes non-recurring income of
$129,094,000, net pre-tax, from the gain on the sale of the Company's 43.9%
stock interest in Rexnord.

Extraordinary items includes an extraordinary charge of $11,804,000, net
of tax, in the first quarter of Fiscal 1993 relating to the Company's share
of Rexnord's extraordinary charge associated with the Rexnord
Recapitalization. Other extraordinary items relate to the early
extinguishment of debt by the Company.

The fiscal 1994 first and second quarter data presented vary from the
amounts previously reported in Form 10-Q due to the Company's decision not to
sell a division which was included in net assets held for sale, and not
included in the results of operations. Sales from the division were
$4,141,000 and $3,438,000 in the first and second quarters, respectively, of
Fiscal 1994. Earnings from the division had no material effect during these
periods.

<PAGE>
Report of Independent Public Accountants
----------------------------------------

To RHI Holdings, Inc.:

We have audited the accompanying consolidated balance sheets of RHI Holdings,
Inc. (a Delaware corporation and wholly-owned subsidiary of The Fairchild
Corporation and formerly known as Rexnord Holdings Inc.) and subsidiaries as
of June 30, 1994 and 1993, and the related consolidated statements of
earnings, stockholder's equity, and cash flows for the years ended June 30,
1994, 1993 and 1992. 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 RHI Holdings, Inc. and
subsidiaries as of June 30, 1994 and 1993, and the results of their
operations and their cash flows for the years ended June 30, 1994, 1993 and
1992, in conformity with generally accepted accounting principles.

As discussed in Notes 9 and 10 to the Consolidated Financial Statements,
effective July 1, 1993, the Company changed its methods of accounting for
postretirement benefits other than pensions, and income taxes.

Arthur Andersen LLP

Washington, D.C.
August 26, 1994

<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- -------------------------------------------------------------

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------

Item 10 of Form 10-K is omitted in accordance with General Instruction
J(2)(c), Omission of Information by Certain Wholly-owned Subsidiaries.

ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------

Item 11 of Form 10-K is omitted in accordance with General Instruction
J(2)(c), Omission of Information by Certain Wholly-owned Subsidiaries.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------

Item 12 of Form 10-K is omitted in accordance with General Instruction
J(2)(c), Omission of Information by Certain Wholly-owned Subsidiaries.

ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
- -------------------------------------------------------

Item 10 of Form 10-K is omitted in accordance with General Instruction
J(2)(c), Omission of Information by Certain Wholly-owned Subsidiaries.

<PAGE>
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ---------------------------------------------------------------------------

The following documents are filed as a part of this Form 10-K:

(a)(1) Financial Statements

All financial statements of the registrant as set forth under Item 8
of this report on Form 10-K.

(a)(2) Financial Statement Schedules and Independent Auditors' Report

Schedule Number Description Page Number
--------------- ----------- -----------

VIII Valuation and Qualifying Accounts 68

IX Short Term Borrowings 69

X Supplementary Income Statement
Information 69

All other schedules are omitted because they are not required, are
inapplicable, or the information is included in the consolidated financial
statements or notes thereto.

<PAGE>
Report of Independent Public Accountants
----------------------------------------

To RHI Holdings, Inc.:

We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of RHI Holdings, Inc. (formerly known as
Rexnord Holdings Inc.) and subsidiaries included in this Form 10-K and have
issued our report thereon dated August 26, 1994. Our audits were made for
the purpose of forming an opinion on the basic financial statements taken as
a whole. The schedules listed in the index on page 59 are the responsibility
of the Company's management and are presented for purposes 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.
August 26, 1994
<PAGE>
(a)(3) Exhibits. (The following references to Registrant are The
Fairchild Corporation, formerly Banner Industries, Inc., the
parent of RHI Holdings).

3. Articles of Incorporation and By-Laws, as amended.

4(a) Indenture between Rexnord Acquisition Corp ("RAC") and Irving
Trust Company dated as of March 2, 1987, pursuant to which RAC's
Senior Subordinated Debentures due 1990 (the "Rexnord Senior
Debentures") were issued (the "Rexnord Senior Indenture"), and
specimen of Rexnord Senior Debenture (incorporated by reference
from the 1987 10-K).

4(b) 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(c) Second Supplemental Indenture between RHI Holdings, Inc.
("Rexnord Holdings") (as successor to Rexnord) and Irving Trust
Company dated as of August 16, 1988, to the Rexnord Senior
Indenture (incorporated by reference to the 1988 10-K).

4(d) Securities Purchase Agreement dated as of March 2, 1987, by and
among Registrant, RAC and each of the Purchasers of the Senior
Subordinated Debentures and other securities (incorporated by
reference from Exhibit 4(k) of the Registration Statement on Form
S-2 of Banner Industries, Inc. filed with the Securities and
Exchange Commission on June 26, 1987 (No. 33-15359)).

4(e) Registration Rights Agreement dated as of March 2, 1987 by and
among Registrant, RAC and each of the Purchasers of the Senior
Subordinated Debentures and other securities (incorporated by
reference to Exhibit 4(d) of Report on Form 8-K of Banner
Industries, Inc., filed with the Securities and Exchange
Commission on March 17, 1987).

4(f) Indenture between Rex-PT, Inc. ("Rex-PT") and Irving Trust
Company dated as of August 15, 1988, pursuant to which Rex-PT
Senior Subordinated Notes due 1988 ("Rex-PT Notes") were issued,
and specimen of Rex-PT Note (incorporated by reference from
Registrant's Report on Form 8-K dated August 16, 1988).

4(g) Indenture between Rexnord and First Wisconsin Trust Company
dated as of June 1, 1983 (The "Rexnord Indenture"), First
Supplemental Indenture between Rexnord and First Wisconsin
Trust Company dated as of October 1, 1984, to the Rexnord
Indenture, pursuant to which Rexnord's Debentures due 1994
(the "Rexnord Debentures") were issued, and specimen of
Rexnord Debenture (incorporated by reference to Form 8-A of
Rexnord dated October 3, 1984).

4(h) Second Supplemental Indenture among Rexnord, Rexnord Holdings
and First Wisconsin Trust Company dated as of August 16, 1988, to
the Rexnord Indenture (incorporated by reference to the 1988
10-K).

4(i) Indenture dated as of November 1, 1982, between Fairchild
Industries, Inc. ("Fairchild") and Continental Illinois National
Bank and Trust Company of Chicago, pursuant to which certain debt
securities of Fairchild were issued (incorporated by reference to
Registration Statement No. 2-80009 on Form S-3).

4(j) Indenture dated as of January 1, 1978, between Fairchild and
Bankers Trust Company, pursuant to which Fairchild's 9-3/4%
Subordinated Debentures due April 1, 1988 were issued
(incorporated by reference to Registration Statement No. 2-60451
on Form S-7).

10(a) Restated and Amended Credit Agreement dated as of July 27, 1993
(incorporated by reference in the 1993 10-K).

10(a)(i) Amendment No. 1 dated as of June 30, 1994 to Restated and
Amended Credit Agreement dated as of July 27, 1993.

*10(a)(ii) Amendment No. 2, dated as of October 1, 1993, to Restated and
Amended Credit Agreement dated as of July 27, 1992.

*10(a)(iii)Amendment No. 3, dated as of December 23, 1993, to Restated
and Amended Credit Agreement dated as of July 27, 1992.

*10(a)(iv) Amendment No. 4, dated as of March 31, 1994, to Restated
and Amended Credit Agreement dated as of July 27, 1992.

10(b) Share Purchase Agreement dated January 13, 1989, between
Textron, Inc. and Registrant regarding sale to Textron Inc. of
all shares of Avdel PLC held by Registrant or Rexnord Holdings
(U.K.) PLC (incorporated by reference to the 1989 10-K).

10(c) Form of Agreement among Registrant, Transcontinental Services
Group, N.V., Jeffrey J. Steiner, Nathaniel de Rothschild, Robert
P. Burrow and Daniel Lebard (incorporated by reference to
Schedule 13D of Transcontinental Services Group N.V. dated
January 28, 1988).

10(d) Securities Purchase Agreement dated as of August 15, 1988, by
and among Registrant, Rex-PT, Inc. ("Rex-PT"), Rex-PT Holdings
Inc. ("Rex-PT Holdings") and certain Purchasers, including (i) as
Exhibit 2, Debt Registration Rights Agreement dated as of August
15, 1988, by and among Rex-PT and certain Purchasers, (ii) as
Exhibit 3, Common Stock Registration Rights Agreement dated as of
August 16, 1988, by and among Rex-PT Holdings and certain
Purchasers, and (iii) as Exhibit 4, Stockholders' Agreement dated
as of August 16, 1988, by and among Registrant, Rex-PT Holdings,
Rexnord Holdings and certain holders of Rex-PT Holdings common
stock (incorporated by reference to the August 16, 1988 8-K).

10(e) Form of Securities Purchase Agreement among Rex-PT Holdings,
Rex-PT, Registrant and Rex-PT Investors Inc. ("Rex-PT Investors")
(incorporated by reference to Registrant's Current Report on Form
8-K dated September 29, 1988 (the "September 29, 1988 8-K")).

10(f) Form of Agreement of Merger between Rex-PT Holdings and Rex-PT
Investors (incorporated by reference to the September 29, 1988
8-K).

10(g) Form of Securities Purchase Agreement among Rex-PT Investors,
Rex-PT Holdings, Rex-PT, Registrant and certain purchasers
(incorporated by reference to the September 29, 1988 8-K).

10(h) Form of Stockholders' Agreement among Rex-PT Holdings,
Registrant, Rexnord Holdings and Rex-PT Investors (incorporated
by reference to the September 29, 1988 8-K).

10(i) Form of Voting Trust Agreement among certain holders of Rex-PT
Holdings common stock (incorporated by reference to the September
29, 1988 8-K).

10(j) Form of Amended and Restated Common Stock Registration Rights
Agreement among Rex-PT Holdings and certain purchasers
(incorporated by reference to the September 29, 1988 8-K).

10(k) Form of Common Stock Registration Rights Agreement between
Rex-PT Holdings and Rex-PT Investors (incorporated by reference
to the September 29, 1988 8-K).

10(l) Form of Common Stock Registration Rights Agreement between
Rex-PT Holdings and Rexnord Holdings (incorporated by reference
to the September 29, 1988 8-K).

10(m) Form of Registration Rights Agreement between Rex-PT Holdings,
Rexnord Holdings and certain purchasers (incorporated by reference
to the September 29, 1988 8-K).

10(n) Form of Registration Rights Agreement between Rex-PT Holdings,
Rexnord Holdings and certain purchasers (incorporated by reference
to the September 29, 1988 8-K).

10(o) Form of Amended and Restated Stockholders' Agreement between
Rex-PT Holdings, Registrant, Rexnord Holdings and certain
investors (incorporated by reference to the September 29, 1988
8-K).

10(p) Share Purchase Agreement dated October 4, 1988, by and between
Rexnord Holdings, Registrant, ChemRex Inc. and SKW Alloys, Inc.,
ABM Investments Ltd., SKW Bauchemie GmbH and SKW Trostberg Ag
(incorporated by reference to Registrant's Current Report on Form
8-K dated November 15, 1988 (the "November 15, 1988 8-K")).

10(q) Asset Purchase Agreement dated November 15, 1988, by and among
Rexnord Holdings, ChemRex Inc. and J.W. Brett, Inc. (incorporated
by reference to the September 29, 1988 8-K).

10(r) Asset Purchase Agreement dated as of December 16, 1988, between
Rexnord Holdings and Ilium Industries, Inc. (the "Ilium
Agreement"); Amendment to the Ilium Agreement dated as of
February 21, 1989; and Second Amendment to the Ilium Agreement
dated as of March 15, 1989) (incorporated by reference to
Registrant's Current Report on Form 8-K dated March 17, 1989).

10(s) Agreement and Plan of Merger dated as of May 7, 1989, among
Registrant, Specialty Fastener Holdings, Inc. and Fairchild, and
Amendment thereto dated May 12, 1989 (incorporated by reference
to Registrant's Current Report on Form 8-K dated June 19, 1989).

10(t) Assets Purchase Agreement dated May 31, 1989, among Matra S.A.,
AERO Acquisition Corp., Registrant and Fairchild Acquisition
Corp. ("FAC") (incorporated by reference to Exhibit (a)(10) to
Amendment No. 2 to Tender Offer Statement on schedule 14D-1 and
Schedule 13D of Registrant and FAC, dated May 31, 1989).

10(u) Agreement dated as of June 28, 1992, between Banner Investments,
Inc. and Registrant (incorporated by reference to 1992 10-K).

10(v) Agreement dated as of June 26, 1993, between Banner Investments,
Inc. and Registrant (incorporated by reference to 1993 10-K).

10(w) Exchange and Standstill Agreement dated July 19, 1993, among The
Fairchild Corporation, Registrant, Rexnord Holdings Inc. and
Rex-PT Holdings, Inc. (incorporated by reference to 1993 10-K).

10(x) Registration Rights Agreement dated July 9, 1993 between
Rexnord Corporation and Rexnord Holdings Inc.

10(y) Allocation Agreement dated April 13, 1993 by and among The
Fairchild Corporation, RHI Holdings, Inc. Rex-PT Holdings,
Rexnord Corporation, Rexnord Puerto Rico, Inc. and Rexnord
Canada Limited (incorporated by reference to 1993 10-K).

10(z) Trademark Purchase Agreement dated April 13, 1993 by and
between Rexnord Corporation and RHI Holdings, Inc.
(incorporated by reference to 1993 10-K).

10(a)(a) Purchase Agreement by and between BTR Dunlop Holdings, Inc., The
Fairchild Corporation and Registrant dated as of December 2, 1993
(incorporated by reference to Registrant's Current Report on
Form 8-K dated December 23, 1993).

11 Computation of earnings per share (found as Note to
Registrant's Consolidated Financial Statements for the fiscal
year ended June 30, 1994).

*22 Subsidiaries of RHI Holdings, Inc.

28(a) Form 11-K Annual Report of the Rexnord Savings and Investment
Plan for the year ended December 31, 1987 (incorporated by
reference to 1988 Form 10-K).

28(b) Financial statements, related notes thereto, financial
statement schedules, and Auditors' Reports of Banner Aerospace,
Inc. for the fiscal year ended March 31, 1994 (incorporated by
reference to Banner Aerospace, Inc.'s Form 10-K for fiscal year
ended March 31, 1994).

99(a) Registrant's press release, dated December 23, 1993
(incorporated by reference to Registrant's Current Report on
Form 8-K dated December 23, 1993).

* Filed herewith

(b) Reports on Form 8-K

There were no reports on Form 8-K filed during the last quarter
of 1994 fiscal year.

<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

RHI HOLDINGS, INC.

Registrant

By: Michael T. Alcox
-----------------------
Vice President and
Chief Financial Officer

Date: September 21, 1994
<PAGE>
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons in the capacities and on the dates
indicated:

Name, Title, Capacity Date
--------------------- ----

Jeffrey J. Steiner September 21, 1994
-------------------------------
Chairman, Chief Executive
Officer, President and Director

Michael T. Alcox September 21, 1994
-------------------------------
Senior Vice President, Chief
Financial Officer and Director

Frederick W. McCarthy September 21, 1994
-------------------------------
Director

Irving Levine September 21, 1994
-------------------------------
Director

<PAGE>
<TABLE>
RHI HOLDINGS, INC.
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended June 30, 1994, 1993 and 1992
(In thousands)
<CAPTION>

Allowance for
Description Doubtful Accounts
- ----------- -----------------
<S> <C>
Balance, July 1, 1991 $ 1,900

Charged to costs and expenses 785
Charged to other accounts (1) 200
Amounts written off (1,183)
-----
Balance, June 30, 1992 1,702

Charged to costs and expenses 820
Charged to other accounts (1) 149
Amounts written off (925)
-----
Balance, June 30, 1993 1,746

Charged to costs and expenses 1,124
Charged to other accounts (1) 1,410
Amounts written off (966)
-----
Balance, June 30, 1994 $ 3,314
=====
(1) Recoveries of amounts written off in prior periods, foreign currency
translation and the change in related noncurrent taxes. Included in
Fiscal 1994 is $1,179,000 relating to the acquisition of a subsidiary.
/TABLE
<PAGE>
<TABLE>
RHI HOLDINGS, INC.
SCHEDULE IX - SHORT TERM BORROWINGS
(In thousands)
<CAPTION>
Weighted Amounts Outstanding
Balance Average During the Period Weighted Average
at end Interest ------------------- Interest Rate
Category of Period Rate Maximum Average During the Period
- -------- --------- -------- ------- ------- -----------------
<S> <C> <C> <C> <C> <C>
June 30, 1994
Notes Payable $ 3,974 10.47% $77,313 $12,304 8.88%

June 30, 1993
Notes Payable $56,492 7.38% $56,492 $10,698 9.00%

June 30, 1992
Notes Payable $20,718 7.01% $23,075 $10,988 9.79%
</TABLE>

The average borrowings were determined based upon the amounts outstanding at
each month end.

The weighted average interest rate during the year was calculated by dividing
actual interest expense by average borrowings in each year.

<TABLE>
RHI HOLDINGS, INC.
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
(In thousands)
<CAPTION>

Charged to Costs and Expenses
-----------------------------
Description 1994 1993 1992
- ----------- ---- ---- ----
<S> <C> <C> <C>
Maintenance and Repairs $7,470 $7,063 $6,965
</TABLE>

Amendment No. 2
Dated as of October 1, 1993
to
RESTATED AND AMENDED CREDIT AGREEMENT
Dated as of July 27, 1992

THIS Amendment No. 2 ("Amendment No. 2") dated as of
October 1, 1993, is entered into among VSI Corporation, a
Delaware corporation ("VSI"), the "Senior Lenders" (as defined in
the Credit Agreement referred to below) a party hereto, Citicorp
North America, Inc., a Delaware corporation ("Citicorp"), The
Bank of Nova Scotia, a Canadian chartered bank ("Scotiabank"),
and Nationsbank of Virginia, N.A., a national banking association
("NationsBank") as agents for the Senior Lenders (Citicorp,
Scotiabank and NationsBank being sometimes hereinafter
collectively referred to as the "Agents"), and Citicorp, as
administrative agent for the Senior Lenders (the "Administrative
Agent").

PRELIMINARY STATEMENT. RHI Holdings, Inc., a Delaware
corporation, Fairchild Industries, Inc., a Delaware corporation,
VSI, the Senior Lenders, the Agents and the Administrative Agent
are parties to that certain Restated and Amended Credit Agreement
dated as of July 27, 1992 (as amended by Amendment No. 1 thereto
dated as of June 30, 1993, the "Credit Agreement"). Subject to
the terms and conditions stated herein, VSI and its Senior
Lenders have agreed to further amend the Credit Agreement as
hereinafter set forth. Capitalized terms used herein without
definition are used herein as defined in the Credit Agreement.

SECTION 1. Amendments to the Credit Agreement.

Effective as of the date of this Amendment No. 2 and
subject to the satisfaction of the conditions precedent set forth
in Section 2 below, the Credit Agreement is hereby amended as
follows:

1.1 The definition of "Consolidated EBITDA" set forth
in Section 1.01 is hereby amended to delete clause (xi) thereof
in its entirety and to substitute the following provision
therefor: "(xi) with respect to Fiscal Years ending June 30,
1993 and June 30, 1994, $10,000,000 in the aggregate of non-cash
inventory writeoffs for both such Fiscal Years".

1.2 Section 12.07 is hereby amended to delete the
table headed "Date" and "Minimum EBITDA" in its entirety and to
substitute the following table therefor:

<PAGE>
Date Minimum EBITDA
---- --------------
First Quarter, 1994 $62,000,000
Second Quarter, 1994 $62,000,000
Third Quarter, 1994 $62,000,000
Fourth Quarter, 1994 $67,000,000
First Quarter, 1995 $73,600,000
Second Quarter, 1995 $75,360,000
Third Quarter, 1995 $77,120,000
Fourth Quarter, 1995 $80,000,000
First Quarter, 1996 $81,600,000
Second Quarter, 1996 $83,360,000
Third Quarter, 1996 $85,120,000
Fourth Quarter, 1996 $88,000,000
First Quarter, 1997 $89,600,000
Second Quarter, 1997 $91,360,000

SECTION 2. Conditions Precedent to Amendment No. 2;
Effectiveness. This Amendment No. 2 shall become effective and
be deemed effective as of the date hereof, if, and only if, the
Administrative Agent shall have received on or before October 1,
1993 twenty-five (25) execution copies of this Amendment executed
by VSI and a minimum of those Senior Lenders representing the
Requisite Senior Lenders of VSI.

SECTION 3. Representations and Warranties. VSI hereby
represents and warrants as follows:

(a) This Amendment No. 2 and the Credit Agreement as
previously executed and amended and as amended hereby, constitute
legal, valid and binding obligations of VSI and are enforceable
against VSI in accordance with their terms.

(b) No Event of Default or Potential Event of Default
exists or would result from any of the transactions contemplated
by this Amendment No. 2.

(c) Upon the effectiveness of this Amendment No. 2,
VSI hereby reaffirms all covenants, representations and
warranties made in the Credit Agreement to the extent the same
are not amended hereby, and agrees that all such covenants,
representations and warranties shall be deemed to have been
remade as of the date this Amendment No. 2 becomes effective
(unless a representation and warranty is stated to be given on
and as of a specific date, in which case such representation and
warranty shall be true, correct and complete as of such date).

SECTION 4. Reference to and Effect on the Credit
Agreement.

4.01 Upon the effectiveness of this Amendment No. 2,
each reference in the Credit Agreement to "this Agreement",
"hereunder", "hereof", "herein" or words of like import shall
mean and be a reference to the Credit Agreement, as amended
hereby, and each reference to the Credit Agreement in any other
document, instrument or agreement executed and/or delivered in
connection with the Credit Agreement shall mean and be a
reference to the Credit Agreement as amended hereby.

4.02 Except as specifically amended above, the Credit
Agreement, the Notes and all other Loan Documents shall remain in
full force and effect and are hereby ratified and confirmed.

4.03 The execution, delivery and effectiveness of this
Amendment No. 2 shall not operate as a waiver of any right, power
or remedy of any Senior Lender or Agent or the Administrative
Agent under the Credit Agreement, the Notes or any of the other
Loan Documents, nor constitute a waiver of any provision
contained therein, except as specifically set forth herein.

SECTION 5. Execution in Counterparts. This Amendment
No. 2 may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which
when so executed and delivered shall be deemed to be an original
and all of which taken together shall constitute but one and the
same instrument. Delivery of an executed counterpart of this
Amendment No. 2 by telecopier shall be effective as delivery of a
manually executed counterpart of this Amendment No. 2.

SECTION 6. Governing Law. This Amendment No. 2 shall
be governed by and construed in accordance with the laws of the
State of New York.

SECTION 7. Headings. Section headings in this
Amendment No. 2 are included herein for convenience of reference
only and shall not constitute a part of this Amendment No. 2 for
any other purpose.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment No. 2 to be executed by their respective officers
thereunto duly authorized as of the date first above written.

VSI CORPORATION

By Karen L. Schneckenburger
--------------------------------
Title: Treasurer

CITICORP NORTH AMERICA, INC.,
individually as a Senior Lender,
as one of the Agents for the Senior
Lenders and as Administrative Agent
for the Senior Lenders

By Colin M. Cohen
--------------------------------
Title: Vice President

THE BANK OF NOVA SCOTIA,
individually as a Senior Lender
and as one of the Agents for
the Senior Lenders

By Amanda Norsworthy
--------------------------------
Title: Assistant Agent

NATIONSBANK OF VIRGINIA, N.A.,
individually as a Senior Lender
and as one of the Agents for the
Senior Lenders

By Robert A. Sharpe, II
--------------------------------
Title: Senior Vice President

GENERALE BANK,
as a Senior Lender

By E. Matthews & Hans Neukomm
--------------------------------
Title: Senior Vice President
THE LONG-TERM CREDIT BANK OF JAPAN, LTD.,
as a Senior Lender

By Brady Sadek
--------------------------------
Title: Vice President & Deputy General Manager

CAISSE NATIONALE DE CREDIT AGRICOLE,
as a Senior Lender

By
--------------------------------
Title:

MITSUBISHI BANK, LTD.,
as a Senior Lender

By Minoru Akimoto
--------------------------------
Title: Senior Vice President and
Manager

CANADIAN IMPERIAL BANK OF COMMERCE,
as a Senior Lender

By Julie Wochos
--------------------------------
Title: Authorized Signatory

PILGRIM PRIME RATE TRUST,
as a Senior Lender

By Kathleen Lenarcic
--------------------------------
Title: Senior Credit Analyst

UNION BANK,
as a Senior Lender

By Patrick M. Cassidy
--------------------------------
Title: Vice President

WELLS FARGO BANK, N.A.,
as a Senior Lender

By
--------------------------------
Title:

EATON VANCE PRIME RATE RESERVES,
as a Senior Lender

By Jeffrey S. Garner
--------------------------------
Title: Vice President

CONSENT AND AMENDMENT NO. 4
Dated as of March 31, 1994 to
RESTATED AND AMENDED CREDIT AGREEMENT
Dated as of July 27, 1992

This Consent and Amendment No. 4 ("Amendment") dated as
of March 31, 1994 is entered into among VSI Corporation, a
Delaware corporation, Fairchild Industries, Inc., a Delaware
corporation, and the undersigned "Senior Lenders" (as defined in
the Credit Agreement identified below). Capitalized terms used
herein without definition are used herein as defined in the
Credit Agreement.

PRELIMINARY STATEMENT. VSI Corporation, a Delaware
corporation, Fairchild Industries, Inc., a Delaware corporation,
RHI Holdings, Inc., a Delaware corporation, the Senior Lenders,
the Agents, and the Administrative Agent are parties to that
certain Restated and Amended Credit Agreement dated as of July
27, 1992, as amended (the "Credit Agreement"). VSI has requested
the amendment of the Credit Agreement in certain respects as more
particularly described in the letter dated March 4, 1994, a copy
of which is attached hereto as Exhibit 1 and made a part hereof
(the "Amendment Request") and FII and VSI have requested the
consent of the Requisite Senior Lenders of FII and VSI,
respectively, to the transfer of the capital stock of Fairchild
Data Corporation by FII to VSI as more particularly described in
the Amendment Request.

Subject to the terms and conditions stated herein, the
undersigned Senior Lenders of VSI comprising at least the
Requisite Senior Lenders of VSI and VSI have agreed to further
amend the Credit Agreement as set forth in Section 1 hereof and
the Senior Lenders of VSI comprising at least the Requisite
Senior Lenders of VSI and the Senior Lenders of FII comprising at
least the Requisite Senior Lenders of FII have agreed to consent
to certain matters as described in Section 2 hereof.

SECTION 1. Amendments to the Credit Agreement.
Effective as of March 31, 1994, subject to the satisfaction of
the conditions precedent set forth in Section 3 hereof, the
Credit Agreement is hereby amended as follows:

1.1 Section 1.01 is amended to (i) delete the
definition of "Consolidated EBITDA" in its entirety and
substitute the following therefor:

"Consolidated EBITDA" shall mean, with respect to any
Borrower, for any period, such Borrower's Consolidated
Net Income for such period, plus without duplication,
the sum of the amounts for such period (to the extent
deducted in the determination of such Consolidated Net
Income) of such Borrower's (i) Consolidated Cash
Interest Expense, (ii) accreted interest on retiree
medical benefit obligations, (iii) charges against
income for federal, state and local income taxes, (iv)
depreciation expense, (v) amortization expense, (vi)
other non-recurring non-cash charges and expenses not
now or hereafter requiring the use of Cash, (vii) any
losses arising other than in the ordinary course of
business which have been included in the determination
of Consolidated Net Income, (viii) any increases in the
LIFO reserve, (ix) if such Borrower is VSI, charges and
expenses allocated to such Borrower in accordance with
the Allocation Memorandum in an amount not exceeding
the fair market value of the related services so
allocated, (x) with respect to Fiscal Years ending June
30, 1993 and June 30, 1994, an aggregate amount of
$10,000,000 in cash restructuring expenses, and (xi)
with respect to Fiscal Years ending June 30, 1993 and
June 30, 1994, $10,000,000 in the aggregate of non-cash
inventory writeoffs for both such Fiscal Years, minus
(in each case, to the extent included in the
determination of such Consolidated Net Income) (A) any
gains arising other than in the ordinary course of
business, (B) any decreases in the LIFO reserve, and
(C) other non-recurring credits and income not now or
hereafter generating Cash, all as determined on a
consolidated basis for such Borrower and its
Subsidiaries in conformity with GAAP; provided,
however, that for purposes of determining compliance
with Article XII the amount of losses (whether cash or
non-cash) with respect to application of insurance
deductibles and incurrence of non-reimbursable expenses
incurred as a result of earthquake not to exceed
$4,000,000 in the aggregate shall not be included in
the calculation of the covenants set forth therein with
respect to fiscal quarters designated Third Quarter,
1994, Fourth Quarter, 1994, First Quarter, 1995, and
Second Quarter, 1995."

and (ii) delete clause (ii) of the definition of "Excluded
Dispositions" in its entirety and substitute the following
therefor:

"(ii) the sale, transfer, or other disposition by FII
or VSI of all or any part of the capital stock or of
the assets of Fairchild Data Corporation,".

1.2 Section 11.14 is amended to add the word
"Consolidated" immediately preceding "EBITDA" in the proviso at
the end of such provision.

1.3 Section 12.03 is amended to add the following
proviso at the end thereof:

"provided, however, that the amount of losses (whether
cash or non-cash) with respect to application of
insurance deductibles and incurrence of nonreimbursable
expenses incurred as a result of earthquake not to
exceed $4,000,000 in the aggregate shall not be
included in the calculation of Consolidated Net Worth
of VSI."

1.4 Section 12.07 is amended to delete that portion of
the schedule of covenant test dates commencing with Fourth
Quarter, 1994 and ending with Second Quarter, 1997 in its
entirety and substitute the following therefor:

Fourth Quarter, 1994 62,000,000
First Quarter, 1995 68,600,000
Second Quarter, 1995 70,360,000
Third Quarter, 1995 72,120,000
Fourth Quarter, 1995 75,000,000
First Quarter, 1996 76,600,000
Second Quarter, 1996 78,360,000
Third Quarter, 1996 80,120,000
Fourth Quarter, 1996 83,000,000
First Quarter, 1997 84,600,000
Second Quarter, 1997 86,360,000

SECTION 2. Consent. The undersigned Senior Lenders of
VSI and the undersigned Senior Lenders of FII hereby consent to
the transfer of the capital stock of Fairchild Data Corporation
by FII to VSI to be credited as paid-in capital or in exchange
for common stock of VSI, it being understood that any common
stock of VSI issued to FII in exchange for such capital stock of
Fairchild Data Corporation will be subject to a Lien in favor of
the holders of the FII Senior Notes.

SECTION 3. Conditions Precedent to Effectiveness of
this Amendment. This Amendment shall become effective as of
March 31, 1994 if, and only if, (i) the Administrative Agent
shall have received on or before March 31, 1994 a facsimile or
original executed copy of this Amendment executed by FII, VSI,
and Senior Lenders comprising at least the Requisite Senior
Lenders of each of FII and VSI and (ii) the Administrative Agent
shall have received on March 31, 1994, for the benefit of each
Senior Lender executing and delivering this Amendment on or
before such date, payment of a fee in the amount of one-quarter
of one percent (0.25%) of the sum of (a) the Facility G
Commitment of such Senior Lender plus (b) the outstanding
principal balance as of March 31, 1994 of the Series VII Loans
payable to such Senior Lender plus (c) the outstanding principal
balance as of March 31, 1994 of the Series VIII Term Loans
payable to such Senior Lender.

SECTION 4. Representations and Warranties. FII and
VSI hereby represent and warrant as follows:

4.1 This Amendment and the Credit Agreement as
previously executed and amended and as amended hereby constitute
legal, valid and binding obligations of FII and VSI and are
enforceable against FII and VSI in accordance with their terms.

4.2 No Event of Default or Potential Event of Default
exists or would result from any of the transactions contemplated
by this Amendment.

4.3 Upon the effectiveness of this Amendment, FII and
VSI each hereby reaffirms all covenants, representations and
warranties made in the Credit Agreement to the extent the same
are not amended hereby and agrees that all such covenants,
representations and warranties shall be deemed to have been
remade as of the date this Amendment becomes effective (unless a
representation and warranty is stated to be given on and as of a
specific date, in which case such representation and warranty
shall be true, correct and complete as of such date).

SECTION 5. Reference to and Effect on the Credit
Agreement.

5.1 Upon the effectiveness of this Amendment, each
reference in the Credit Agreement to "this Agreement",
"hereunder", "hereof", "herein" or words of like import shall
mean and be a reference to the Credit Agreement, as amended
hereby, and each reference to the Credit Agreement in any other
document, instrument or agreement executed and/or delivered in
connection with the Credit Agreement shall mean and be a
reference to the Credit Agreement as amended hereby.

5.2 Except as specifically amended above, the Credit
Agreement, the Notes and all other Loan Documents shall remain in
full force and effect and are hereby ratified and confirmed.

5.3 The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver of any right, power or
remedy of any Senior Lender or Agent or the Administrative Agent
under the Credit Agreement, the Notes or any of the other Loan
Documents, nor constitute a waiver of any provision contained
therein, except as specifically set forth herein.

SECTION 6. Execution in Counterparts. This Amendment
may be executed in any number of counterparts and by different
parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed to be an original and all
of which taken together shall constitute but one and the same
instrument. Delivery of an executed counterpart of this Amendment
by telecopier shall be effective as delivery of a manually
executed counterpart of this Amendment.

SECTION 7. Governing Law. This Amendment shall be
governed by and construed in accordance with the laws of the
State of New York.

SECTION 8. Headings. Section headings in this
Amendment are included herein for convenience of reference only
and shall not constitute a part of this Amendment for any other
purpose.

IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto
duly authorized as of the date first above written.

FAIRCHILD INDUSTRIES, INC.

By: Karen L. Schneckenburger
---------------------------
Title: Treasurer

VSI CORPORATION

By: Karen L. Schneckenburger
---------------------------
Title: Treasurer

CITICORP NORTH AMERICA, INC.,
as a Senior Lender

By: Colin M. Cohen
---------------------------
Vice President

THE BANK OF NOVA SCOTIA, as a
Senior Lender

By: F.C.H. Ashby
---------------------------
Title: Senior Manager Loan
Operations

NATIONSBANK OF VIRGINIA, N.A., as
a Senior Lender

By: Robert A. Sharpe, II
---------------------------
Title: Senior Vice President<PAGE>
GENERALE BANK, as a Senior Lender

By: Eddie Matthews & Hans Neukomm
-------------------------------
Title: Senior Vice President

THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED, as a Senior Lender

By: Brady S. Sadek
---------------------------
Title: Vice President &
Deputy General Manager

MITSUBISHI BANK, LTD., as a Senior
Lender

By: Minoru Akimoto
---------------------------
Title: Senior Vice President
& Manager

CANADIAN IMPERIAL BANK OF COMMERCE,
as a Senior Lender

By: Julie Wochos
---------------------------
Title: Authorized Signatory

PILGRIM PRIME RATE TRUST, as a
Senior Lender

By: Kathleen Lenarcic
---------------------------
Title: Senior Credit Analyst

UNION BANK, as a Senior Lender

By: Patrick M. Cassidy
---------------------------
Title: Vice President

WELLS FARGO BANK, N.A., as a Senior
Lender

By: Daniel Pallares
---------------------------
Title: Vice President

EATON VANCE PRIME RATE RESERVES, as
a Senior Lender

By: Jeffrey S. Garner
---------------------------
Title: Vice President

CAISSE NATIONALE DE CREDIT AGRICOLE
as a Senior Lender

By: David Bouhl, F.V.P
---------------------------
Title: Head of Corporate Banking
Chicago<PAGE>
EXHIBIT 1
to Consent and Amendment No. 4
Dated as of March 31, 1994

Attached<PAGE>

March 4, 1994

Mr. Colin M. Cohen
Vice President
Citicorp North America, Inc.
200 South Wacker Drive
31st Floor
Chicago, IL 60606

Re: Amendment and Waiver for VSI Corporation ("VSI")

Dear Colin,

Pursuant to the Restated and Amended Credit Agreement dated
as of July 27, 1992, as amended, we request the following
covenant changes for VSI:

(i) EBITDA covenant for the quarter ending June 30, 1994
and each of the remaining quarters to be reduced by
$5.0 million.

(ii) Earthquake related losses (insurance deductible and
non-reimbursable expenses) up to $4.0 million in
aggregate to be excluded from EBITDA (whether cash or
non-cash) for covenant calculation purposes for the
1994 Third Fiscal Quarter requirement and each of the
next three quarters; and the same amount to also be
excluded from the net worth covenant calculation.

(iii) Fairchild Data Corporation, a direct subsidiary of
Fairchild Industries, Inc. ("FII"), is to be
contributed to VSI and consolidated from July 1,
1993 for covenant purposes. It has been included as
a discontinued operation at FII but will now be
classified as continuing. Either the transfer of
Fairchild Data Corporation will be credited to paid-
in capital or common stock of VSI will be issued and
transferred to the Collateral Trustee as security for
the FII 12-1/4% Senior Secured Notes. The January 30,
1994 financial statements for Fairchild Data
Corporation are enclosed for your information.

Given the historically volatile earnings of the Aerospace
Fastener Division, we are requesting the $5.0 million adjustment
through the remaining Credit Agreement term. The detailed
projections for fiscal years 1994-1997 will be furnished next
week. They show that the EBITDA covenant will be met comfortably
in fiscal years 1996-1997; however, we believe our request is
still reasonble because, despite all current evidence of
improving AFD earnings, they have been volatile. In our opinion,
this is a conservative approach.

We agree to pay the approving banks a 1/4% upon the
remaining revolver commitment and term loan outstandings
applicable to each bank when the amendment is approved by the
Requisite Senior Lenders.

We request that the waiver be effective on or before April
1, 1994 for the third fiscal quarter of 1994.

Please call me regarding any questions.

Sincerely,

KLS/ss
Enclosure

cc: M. Alcox
M. Carroll
W. Hamilton
D. Huston
M. Smith

Consent and Amendment No. 3
Dated as of December 23, 1993
to
RESTATED AND AMENDED CREDIT AGREEMENT
Dated as of July 27, 1992

This Consent and Amendment No. 3 ("Amendment No. 3")
dated as of December 23, 1993, is entered into among RHI
Holdings, Inc., a Delaware corporation ("RHI"), the "Senior
Lenders" (as defined in the Credit Agreement referred to below)
of RHI, Citicorp North America, Inc., a Delaware corporation
("Citicorp") and The Bank of Nova Scotia, a Canadian chartered
bank ("Scotiabank") as agents for the Senior Lenders (Citicorp
and Scotiabank being sometimes hereinafter collectively referred
to as the "Agents"), and Citicorp, as administrative agent for
the Senior Lenders (the "Administrative Agent").

PRELIMINARY STATEMENT. VSI Corporation, a Delaware
corporation, Fairchild Industries, Inc., a Delaware corporation,
RHI, the Senior Lenders, the Agents, and the Administrative Agent
are parties to that certain Restated and Amended Credit Agreement
dated as of July 27, 1992, as amended, (the "Credit Agreement").
Capitalized terms used herein without definition are used herein
as defined in the Credit Agreement. RHI has entered into a
certain Purchase Agreement dated as of December 2, 1993 with The
Fairchild Corporation, a Delaware corporation ("TFC") and BTR
Dunlop Holdings, Inc., a Delaware corporation ("BTR Dunlop")
(such Purchase Agreement being herein referred to as the
"Purchase Agreement") pursuant to which, among other things, RHI
has agreed to sell all of the capital stock of Rexnord
Corporation owned by RHI (the "Rexnord Shares") to BTR Dunlop and
to indemnify BTR Dunlop and Rexnord Corporation with respect to
certain environmental liabilities.

In connection with the transactions contemplated by the
Purchase Agreement, TFC, RHI and Rexnord Corporation have entered
into a certain Tax Agreement dated as of December 2, 1993 with
BTR Dunlop (the "Tax Agreement"), pursuant to which, among other
things, (a) the Amendment to and Restatement of Tax Agreement
dated May 15, 1992, as amended on August 5, 1993, will be
terminated in its entirety and the Tax Agreement will supersede
the same in its entirety as of the time described therein and (b)
TFC and RHI will become obligated under certain indemnities
specified in the Tax Agreement with respect to certain tax
obligations of Rexnord Corporation.

In connection with the transactions contemplated by the
Purchase Agreement, TFC and RHI entered into an Escrow Agreement
dated as of December 2, 1993 with BTR Dunlop and Cahill Gordon &
Reindel, as "Escrow Agent", (the "Escrow Agreement") pursuant to
which, among other things, TFC and RHI are required (a) to
deposit, on the date the transactions described in the Purchase
Agreement close, into the escrow established pursuant to the
Escrow Agreement, for the benefit of BTR Dunlop, shares of common
stock of Aerospace having a market price of $25,000,000, as
calculated pursuant to the Escrow Agreement, as of the date of
such deposit and (b) to make or receive supplemental deposits or
withdrawals thereafter of cash and/or common stock of Aerospace
into such escrow under certain circumstances, such deposits to be
held by the Escrow Agent until the obligations of TFC and RHI
expire with respect to the indemnities for federal and state
taxes described in the Tax Agreement and the Escrow Agreement.
In connection with the establishment of such escrow arrangement,
RHI has requested that its Requisite Senior Lenders consent to
the release of certain of the stock of Aerospace pledged to the
Administrative Agent pursuant to the Special Increase II Pledge
Agreement in an amount sufficient to fund the escrow arrangement
on the date upon which the transactions described in the Purchase
Agreement are consummated.

It is contemplated that the transactions described in
the Purchase Agreement with respect to the sale of the Rexnord
Shares by RHI to BTR Dunlop will occur on the second Business Day
following the date on which all applicable waiting periods under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and under the law relating to filings with the German
Federal Cartel office referenced in the Purchase Agreement, shall
expire or be terminated.

It is further contemplated that the proceeds of the
sale of the Rexnord Shares by RHI to BTR Dunlop under the
Purchase Agreement will be used as follows:

(i) a portion thereof to repurchase or derease certain of
RHI's Subordinated Indebtedness (the "Subordinated Debt
Repayment");

(ii) a portion thereof to make dividends, distributions or
other advances to TFC to the extent permitted under the
terms and conditions of the Credit Agreement;

(iii) approximately $5,000,000 thereof to repay the
Rexnord/Holdings Mortgage Indebtedness; and

(iv) a portion thereof to repay the obligations of RHI
under Facility A in an amount sufficient to permanently
reduce the Facility Outstandings under Facility A to an
amount less than or equal to the "Facility Commitments" with
respect to "Facility A" (as each such term is hereinafter
defined in Section 1 of this Amendment No. 3).

Subject to the terms and conditions stated herein, RHI
and its Senior Lenders have agreed to further amend the Credit
Agreement as hereinafter set forth and to consent to the
transactions described in Section 2 hereof.

SECTION 1. Amendments to the Credit Agreement.

Effective as of the later to occur of (i) the
effectiveness of Amendment No. 3 pursuant to Section 3 hereof and
(ii) the Rexnord Sale Effective Date, and subject to the
satisfaction of the conditions precedent set forth in Section 3
below, the Credit Agreement is hereby amended as follows:

1.1 Section 1.01 of the Credit Agreement is hereby
amended to add the following definitions thereto in alphabetical
order:

"'Facility A Cash Collateral Amount' shall have the
meaning set forth in Section 4.2(d) hereof."

"'Facility A Collateral Loan Value' shall mean an
amount equal to the lesser of:

(i) as of any date of determination, an amount
equal to the sum of the remainder of (A) the product
of the price at which the last trade of Aerospace
common stock occurred on the immediately preceding
Business Day on the New York Stock Exchange, which
shall be the close quotation for such Business Day as
reported by The Wall Street Journal (or in the event
publication of The Wall Street Journal is permanently
or temporarily suspended, such other national domestic
daily business journal as may be designated by the
Administrative Agent) for the date of determination, or
if there is no such close quotation, the average
between the high and low quotations for such Business
Day, or if there are no such quotations for such
Business Day, the close quotation for the immediately
preceding Business Day, multiplied by the number of
Aerospace shares pledged as security under the Special
Increase II Pledge Agreement (the "Pledged Share
Value") minus (B) the sum of the amount equal to sixty
percent (60%) of the Pledged Share Value and $500,000;
and

(ii) the maximum amount permitted to be loaned
against the Aerospace shares pledged as security under
the Special Increase II Pledge Agreement under
Regulations G and U."

"'Rexnord Sale Effective Date' shall mean the date upon
which the sale of all of the Rexnord Shares owned by
RHI to BTR Dunlop Holdings, Inc., a Delaware
corporation (('BTR Dunlop') is consummated pursuant to
that certain Purchase Agreement dated as of December 2,
1993 by and among RHI, TFC and BTR Dunlop."

"'Rexnord Shares' shall mean all of the issued and
outstanding shares of Rexnord Corporation owned by
RHI."

1.2 For purposes of determining the Facility A
Commitment of each of the Facility A Lenders and the Facility A
Commitments, the definitions of "Facility Commitment" and
"Facility Commitments" set forth in Section 1.01 of the Credit
Agreement are hereby deleted in their entirety and the following
definitions are substituted therefor:

"'Facility Commitment' shall mean, (i) with respect to
Facility G and each Facility G Senior Lender the amount set
forth below such Facility G Senior Lender's name under the
heading 'Facility Commitment' on the signature pages of this
Agreement, or, as the case may be, on the signature pages of
the Assignment Agreement pursuant to which such Facility G
Senior Lender became a Facility G Senior Lender hereunder in
accordance with the provisions of Section 16.02, as such
amount may be reduced or increased (whether temporarily or
permanently) from time to time pursuant to the terms of this
Agreement, including any reduction resulting from the
assignment of all or a portion of such Facility G Senior
Lender's Facility G Commitment in accordance with Section
16.02 and (ii) with respect to Facility A and each Facility
A Lender, the amount set forth below such Facility A Senior
Lender's name under the heading 'Facility A Commitment' on
the signature pages of Consent and Amendment No. 3 to this
Agreement, or, as the case may be, on the signature pages of
the Assignment Agreement pursuant to which such Facility A
Senior Lender became a Facility A Senior Lender hereunder in
accordance with the provisions of Section 16.02, as such
amount may be reduced or increased (whether temporarily or
permanently) from time to time pursuant to the terms of this
Agreement, including any reduction resulting from the
assignment of all or a portion of such Facility A Senior
Lender's Facility A Commitment in accordance with Section
16.02. 'Facility Commitments' shall mean (i) prior to the
Facility G Extension Date, with respect to Facility G,
$59,500,000, (ii) on and after the Facility G Extension
Date, with respect to Facility G, $50,250,000 and (iii) at
any time, with respect to Facility A, the lesser of (a)
$5,000,000 and (b) the sum of (I) the Facility A Collateral
Loan Value at such time and (II) the Facility A Cash
Collateral Amount divided by one hundred and five percent
(105%).

1.3 The definition of "Facility Commitment Period" set
forth in Section 1.01 of the Credit Agreement is hereby amended
to delete clause (i) thereof in its entirety and to substitute
"(i) in the case of Facility A, on February 28, 1995" therefor.

1.4 The definition of "L/C Subfacility" set forth in
Section 1.01 of the Credit Agreement is hereby amended to delete
the amount "$15,000,000" appearing opposite the notation
"Facility A" in the column labeled "Maximum Amount as of the
Closing Date" and to substitute the amount "$5,000,000"
therefor.

1.5 Section 1.01 of the Credit Agreement is hereby amended
to delete the following definitions in their entirety: "Special
Facility II A Loans", "Special Increase II" and "Special Increase
II Termination Date".

1.6 Section 3.05(a) of the Credit Agreement is hereby
amended to delete the amount "$45,000,000" appearing at the end
thereof and to substitute the amount "$5,000,000" therefor.

1.7 Section 3.06 of the Credit Agreement is hereby amended
to delete the first sentence thereof in its entirety and to
substitute the following therefor:

"The Revolving Credit Loans made under Facility A are
evidenced by Amended and Restated Series A Revolving
Credit Notes in a maximum aggregate principal amount
of $5,000,000."

1.8 Section 3.07(a) of the Credit Agreement is hereby
amended to delete the last sentence thereof in its entirety.

1.9 Section 4.02(d) of the Credit Agreement is hereby
amended to delete the first sentence thereof in its entirety and
to substitute the following therefor:

"The Facility A Borrower shall make prepayments of its
Revolving Credit Loans and/or post cash collateral with
the Administrative Agent, in form and substance
reasonably acceptable to the Administrative Agent, such
that the amount of cash collateral on deposit with the
Administrative Agent pursuant to this Section 4.2(d) is
at all times equal to or greater than one hundred and
five percent (105%) of the difference between (a) the
Facility Outstandings for Facility A and (b) the
Facility A Collateral Loan Value (the "Facility A Cash
Collateral Amount").

1.10 Section 4.03 of the Credit Agreement is hereby
amended to delete subsection (c) thereof in its entirety.

1.11 Section 4.06(a) of the Credit Agreement is hereby
amended to delete the last sentence thereof in its entirety.

1.12 Section 9.03 of the Credit Agreement is hereby amended
to delete the phrase "(x) the cash flow projections delivered to
the Administrative Agent on June 10, 1992 and (y)" from the last
sentence thereof.

1.13 Section 11.04B of the Credit Agreement is hereby
amended to (i) delete the word "and" at the end of clause (e)
thereof, (ii) delete the period at the end of clause (f) thereof
and to substitute a semicolon and the word "and" therefor and
(iii) add the following clause (g) immediately following clause
(g) thereof:

"(g) as long as (i) no Event of Default or
Potential Event of Default exists with respect to RHI
or would result therefrom; (ii) Senior Subordinated
Debentures constituting more than fifty percent (50%)
of the aggregate outstanding principal balance thereof
on the Rexnord Sale Effective Date have been
repurchased by RHI and the Senior Subordinated
Debenture Indenture has been amended to remove any
dividend restrictions with respect to RHI; (iii) the
Rexnord 12-3/4 Debentures have been repurchased or
defeased in full, such defeasance to be in form and
substance satisfactory to the trustee under the Rexnord
12/3-4 Debenture Indenture; (iv) RHI has provided to
the Administrative Agent an Officers' Certificate
certifying as to the fulfillment of the conditions set
forth in clauses (ii) and (iii) above; and (v) the
Consolidated Net Worth of RHI is equal to greater than
$175,000,000 immediately prior to such transaction and
after giving effect thereto, the payment of dividends
or distributions on RHI's stock to TFC or the making of
other advances by RHI to TFC."

1.14 Section 12.01A of the Credit Agreement is hereby
amended to (i) delete the title thereof in its entirety and to
substitute the title "Consolidated Net Worth of RHI; Additional
Capital" therefor, (ii) delete subsection (a) thereof in its
entirety and (iii) substitute the following therefor:

"(a) the Consolidated Net Worth of RHI shall at all
times be equal to or greater than $175,000,000."

SECTION 2. Consents and Waiver. (A) Effective as of
the date of this Amendment No. 3 and subject to the satisfaction
of the conditions precedent set forth in Section 3 below, the
Senior Lenders of RHI hereby consent to the following:

(a) the sale of the Rexnord Shares by RHI to BTR Dunlop
pursuant to, and the performance by RHI of, the Purchase
Agreement;

(b) the release of the Lien of the Administrative Agent
under the Special Increase II Pledge Agreement with respect
to a sufficient number of shares of the stock of Aerospace
to satisfy the terms and conditions of the Escrow Agreement
as of the date the transactions described in the Purchase
Agreement are consummated;

(c) the release of the Lien of the Collateral Trustee
under the Rexnord Holdings Pledge Agreement with respect to
all of the Rexnord Shares pledged thereunder;
(d) the transfer by Banner Investments to RHI of all of
the issued and outstanding shares of Rexnord Corporation
owned by Banner Investments;

(e) the Subordinated Debt Repayment; and

(f) the use of a portion of the proceeds received by
RHI in connection with the sale of the Rexnord Shares to
repay a portion of the Obligations of RHI under Facility A
and the Rexnord/Holdings Mortgage Indebtedness.

(B) Effective as of the date of this Amendment No. 3
and subject to the satisfaction of the conditions precedent set
forth in Section 3 below, the Senior Lenders of RHI hereby waive
the requirement under Section 9.08 of the Credit Agreement that
RHI provide the Administrative Agent with ninety (90) days' prior
written notice of the making of a dividend or other distribution
by RHI with respect to its capital stock; provided that (i) this
waiver shall be limited to dividends made by RHI to TFC pursuant
to clause (g) of Section 11.04B of the Credit Agreement and (ii)
RHI shall provide one Business Days' prior written notice to the
Administrative Agent in connection with the making of any such
dividend or distribution."

SECTION 3. Conditions Precedent to Amendment No. 3;
Effectiveness. This Amendment No. 3 shall become effective and
be deemed effective as of the date hereof, if, and only if, (i)
the Administrative Agent shall have received on or before January
31, 1994 a facsimile or original executed copy of this Amendment
executed by RHI and each of the Senior Lenders of RHI and (ii)
the Administrative Agent shall have received on or before January
31, 1994, all of which shall be in form and substance
satisfactory to the Administrative Agent and the Senior Lenders,
(a) an amendment to the Special Increase II Pledge Agreement
executed by each of RHI and the Collateral Trustee pursuant to
which RHI agrees that the shares of Aerospace remaining subject
to the Special Increase II Pledge Agreement shall secure all of
the Obligations of RHI under Facility A and amending Exhibit A
thereto, (b) Amended and Restated Series A Revolving Credit Notes
in the maximum amount of each Facility A Lender's Facility A
Commitment executed by RHI and made payable to each of the
Facility A Lenders, (c) an amendment to the Rexnord Holdings
Pledge Agreement executed by RHI and the Collateral Trustee
deleting the references to the Rexnord Shares from Exhibit A
thereto and (d) a Pledge and Assignment Agreement executed by RHI
and the Administrative Agent with respect to the cash collateral
posted by RHI pursuant to Section 4.02(d) of the Credit
Agreement.

SECTION 4. Representations and Warranties. RHI hereby
represents and warrants as follows:

4.1 This Amendment No. 3 and the Credit Agreement as
previously executed and amended and as amended hereby, constitute
legal, valid and binding obligations of RHI and are enforceable
against RHI in accordance with their terms.

4.2 No Event of Default or Potential Event of Default
exists or would result from any of the transactions contemplated
by this Amendment No. 3.

4.3 Upon the effectiveness of this Amendment No. 3,
RHI hereby reaffirms all covenants, representations and
warranties made in the Credit Agreement to the extent the same
are not amended hereby, and agrees that all such covenants,
representations and warranties shall be deemed to have been
remade as of the date this Amendment No. 3 becomes effective
(unless a representation and warranty is stated to be given on
and as of a specific date, in which case such representation and
warranty shall be true, correct and complete as of such date).

SECTION 5. Reference to and Effect on the Credit
Agreement.

5.1 Upon the effectiveness of this Amendment No. 3,
each reference in the Credit Agreement to "this Agreement",
"hereunder", "hereof", "herein" or words of like import shall
mean and be a reference to the Credit Agreement, as amended
hereby, and each reference to the Credit Agreement in any other
document, instrument or agreement executed and/or delivered in
connection with the Credit Agreement shall mean and be a
reference to the Credit Agreement as amended hereby.

5.2 Except as specifically amended above, the Credit
Agreement, the Notes and all other Loan Documents shall remain in
full force and effect and are hereby ratified and confirmed.

5.3 The execution, delivery and effectiveness of this
Amendment No. 3 shall not operate as a waiver of any right, power
or remedy of any Senior Lender or Agent or the Administrative
Agent under the Credit Agreement, the Notes or any of the other
Loan Documents, nor constitute a waiver of any provision
contained therein, except as specifically set forth herein.

SECTION 6. Execution in Counterparts. This Amendment
No. 3 may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which
when so executed and delivered shall be deemed to be an original
and all of which taken together shall constitute but one and the
same instrument. Delivery of an executed counterpart of this
Amendment No. 3 by telecopier shall be effective as delivery of a
manually executed counterpart of this Amendment No. 3.

SECTION 7. Governing Law. This Amendment No. 3 shall
be governed by and construed in accordance with the laws of the
State of New York.

SECTION 8. Headings. Section headings in this
Amendment No. 3 are included herein for convenience of reference
only and shall not constitute a part of this Amendment No. 3 for
any other purpose.

IN WITNESS WHEREOF, the parties hereto have caused this
Amendment No. 3 to be executed by their respective officers
thereunto duly authorized as of the date first above written.

RHI HOLDINGS, INC.

By Karen L. Schneckenburger
--------------------------------
Title: Treasurer

CITICORP NORTH AMERICA, INC.,
individually as a Senior Lender, as
one of the Agents for the Senior
Lenders and as Administrative Agent
for the Senior Lenders

By Colin M. Cohen
--------------------------------
Title: Vice President

Facility A Commitment: $2,500,000

THE BANK OF NOVA SCOTIA,
individually as a Senior Lender and
as one of the Agents for the Senior
Lenders

By F.C.H. Asbhy
--------------------------------
Title: Senior Manager Loan Operations

Facility A Commitment: $2,500,000

List of Significant Subsidiaries of RHI Holdings, Inc.

Fairchild Communications Services, Inc.
Fairchild Communications Services Company [Partnership]
Fairchild Data Corporation
Fairchild Industries, Inc.
VSI Corporation

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<CIK> 0000083573
<NAME> RHI HOLDINGS, INC.
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