UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 1994
Commission File Number: 1-373
RHI HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 34-1545939
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(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
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(Address of principal executive offices)
(Zip Code)
(703) 478-5800
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(Registrant's telephone number, including area code)
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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class April 3, 1994
- ----- ------------------
Common Stock, $1.00 par value 100,000
Registrant meets the conditions set forth in general instructions H(1)(a) and
(b) of Form 10-Q and is therefore filing this form with reduced disclosure
format.
<PAGE>
RHI HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES*
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
April 3, 1994 (Unaudited)
and June 30, 1993 3
Consolidated Statements of Earnings for
the Three and Nine Months Ended April 3,
1994 and March 28, 1993(Unaudited) 5
Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended April 3,
1994 and March 28, 1993 (Unaudited) 6
Notes to Consolidated Financial
Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23
*For purposes of Part I of this Form 10-Q, the term "Company" means RHI
Holdings, Inc., and its subsidiaries, unless otherwise indicated. For
purposes of Part II, the term "Company" means RHI Holdings, Inc. unless
otherwise indicated.
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
RHI HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
(In thousands) April 3, June 30,
ASSETS 1994 1993
- ------ ------------ ------------
(Unaudited) (*)
<S> <C> <C>
Current Assets:
Cash and cash equivalents, $545 and $0
restricted................................. $113,046 $ 42,838
Short-term investments....................... 7,772 5,114
Accounts receivable-trade, less allowances
of $1,952 and $1,746....................... 69,759 63,891
Due from The Fairchild Corporation........... 1,305 --
Inventories:
Finished goods............................ 45,612 51,776
Work-in-process........................... 27,037 30,766
Raw materials............................. 9,260 8,987
------- -------
81,909 91,529
Prepaid expenses and other current assets.... 10,762 28,545
------- -------
Total Current Assets......................... 284,553 231,917
Property, plant and equipment net of
accumulated depreciation of $83,148 and
$63,131.................................... 177,768 189,119
Net assets held for sale..................... 29,021 28,492
Cost in excess of net assets acquired,
(Goodwill) less accumulated amortization of
$28,294 and $24,318........................ 203,333 211,713
Investments and advances - affiliated
companies.................................. 82,356 140,007
Prepaid pension assets....................... 63,294 54,316
Other assets................................. 65,399 75,156
------- -------
Total Assets................................. $905,724 $930,720
======= =======
*Condensed from audited financial statements.
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<TABLE>
RHI HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
(In thousands)
April 3, June 30,
LIABILITIES AND STOCKHOLDER'S EQUITY 1994 1993
- ------------------------------------ ------------- ------------
(Unaudited) (*)
<S> <C> <C>
Current Liabilities:
Bank notes payable and current maturities
of long-term debt........................... $ 14,046 $ 66,137
Accounts payable............................. 29,274 29,028
Due to The Fairchild Corporation............. -- 1,804
Accrued interest............................. 3,985 11,990
Other accrued liabilities.................... 61,175 59,416
Income tax payable........................... 20,441 --
------- -------
Total Current Liabilities.................... 128,921 168,375
Long-term debt, less current maturities...... 329,870 355,537
Other long-term liabilities.................. 21,749 17,468
Retiree health care liabilities.............. 51,305 50,797
Noncurrent income taxes...................... 28,666 33,711
Minority interest in subsidiaries............ 24,353 25,080
Redeemable preferred stock of subsidiary..... 19,013 19,112
------- -------
Total Liabilities............................ 603,877 670,080
Stockholder's Equity:
Common Stock................................. 100 100
Preferred Stock.............................. 100 100
Paid-in capital.............................. 229,279 225,879
Retained earnings............................ 88,629 50,881
Cumulative translation adjustment............ 1,283 2,666
Unrealized loss on noncurrent marketable
equity securities......................... (17,544) (18,986)
------- -------
Total Stockholder's Equity................... 301,847 260,640
------- -------
Total Liabilities and Stockholder's Equity... $905,724 $930,720
======= =======
* Condensed from audited financial statements.
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 EARNINGS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
(In thousands) April 3, March 28, April 3, March 28,
1994 1993 1994 1993
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue:
Sales...................................... $112,836 $114,399 $332,157 $349,047
Other income - net......................... 486 1,242 2,387 5,682
------- ------- ------- -------
113,322 115,641 334,544 354,729
Costs and Expenses:
Cost of sales.............................. 85,698 86,790 256,182 259,868
Selling, general & administrative.......... 19,276 18,683 56,664 57,728
Research and development................... 886 825 2,923 2,650
Amortization of goodwill................... 1,458 1,487 4,469 4,432
Restructuring.............................. -- 932 9,903 2,432
Unusual items.............................. 3,200 -- 3,200 --
------- ------- ------- -------
110,518 108,717 333,341 327,110
Operating income............................. 2,804 6,924 1,203 27,619
Interest expense............................. 10,982 12,258 33,112 34,088
Interest income.............................. (1,246) (467) (1,626) (1,271)
------- ------- ------- -------
Net interest expense......................... 9,736 11,791 31,486 32,817
Investment income - net...................... 43 225 6,668 650
Equity in earnings of affiliates............. 535 2,807 1,103 7,558
Minority interest............................ (575) (609) (1,764) (1,771)
Non-recurring income......................... (23) -- 129,084 --
------- ------- ------- -------
Earnings (loss) from continuing operations
before taxes............................... (6,952) (2,444) 104,808 1,239
Income tax provision (benefit)............... (1,793) 989 40,048 2,253
------- ------- ------- -------
Earnings (loss) from continuing operations... (5,159) (3,433) 64,760 (1,014)
Extraordinary items - net.................... (147) 4 (147) (12,197)
Cumulative effect of change in accounting for
postretirement benefits.................... -- -- (8,015) --
Cumulative effect of change in accounting for
income taxes............................... -- -- (7,999) --
------- ------- ------- -------
Net earnings (loss).......................... $ (5,306) $ (3,429) $ 48,599 $(13,211)
======= ======= ======= =======
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<TABLE>
RHI HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPITON>
(In thousands)
Nine Months Ended
April 3, March 28,
1994 1993
------------ ------------
<S> <C> <C>
Cash provided by (used for)
Operations:
Net earnings (loss)..................... $ 48,599 $(13,211)
Depreciation and amortization........... 25,084 21,985
Accretion of discount on long-term
liabilities........................... 2,740 3,428
Adjustments for other non-cash charges.. 25,548 13,847
Adjustments for non-cash credits........ (1,103) (7,558)
Gain on sale of Rexnord investment...... (129,084) --
Loss on sale of fixed assets............ 169 138
Changes in assets and liabilities....... 17,455 (15,991)
------- -------
Cash provided by (used for) operations.. (10,592) 2,638
Investments:
Capital expenditures.................... (9,401) (9,175)
Proceeds from sale of Rexnord
investment............................ 178,091 --
Purchase of Rex-PT option............... -- (18,655)
Business acquisitions................... -- (7,283)
Investment securities................... (1,182) 28,304
Changes in net assets held for sale..... (650) 1,193
Other - net............................. 427 933
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Cash provided by (used for) investments. 167,285 (4,683)
Financing:
Issuance of debt........................ 57,335 146,685
Debt repayments - net................... (145,891) (121,981)
Dividends............................... (1,007) (10,000)
Capital contribution from TFC........... 3,382 --
------- -------
Cash provided by (used for) financing... (86,181) 14,704
Effect of exchange rate changes on cash..... (304) (1,398)
Net increase in cash........................ 70,208 11,261
Cash, beginning of period................... 42,838 13,139
------- -------
Cash, end of period......................... $113,046 $ 24,400
======= =======
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
RHI HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Financial Statements
The consolidated balance sheet as of April 3, 1994 and the consolidated
statements of earnings and cash flows for the nine months ended April 3, 1994
and March 28, 1993 have been prepared by the Company, without audit. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows at April 3, 1994 and for all periods presented have
been made. The balance sheet at June 30, 1993 was condensed from audited
financial statements as of that date.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's June 30, 1993 Form
10-K. The results of operations for the period ended April 3, 1994 are not
necessarily indicative of the operating results for the full year. Certain
amounts in prior years' quarterly financial statements have been reclassified
to conform to the current presentation.
Note 2 - Sale of Rexnord Corporation
On December 23, 1993, the Company completed a sale of its 43.9% stock
interest in Rexnord Corporation ("Rexnord") to BTR Dunlop Holdings, Inc.
("BTR"), for $22.50 per share. Accordingly, the Company received
$181,873,000 in gross proceeds and realized for the nine months ended April
3, 1994, a $129,084,000 pre-tax gain on the sale. In connection with the
sale of its interest in Rexnord, the Company agreed to place shares of Banner
Aerospace, Inc. ("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 sale. (See Note 6).
Note 3 - Acquisitions
Within the last few years, Fairchild Communications Services Company
("Fairchild Communications"), a partnership whose partners are indirect
subsidiaries of the Company, has completed the acquisition of several small
companies involved in the sale of telecommunications services and equipment
to tenants in commercial office buildings. In the third quarter of Fiscal
1993, Fairchild Communications acquired all the telecommunications assets of
Office Networks, Inc., for approximately $7,300,000.
Note 4 - Restricted Cash
On April 3, 1994, the Company had approximately $545,000 of restricted
cash, all of which is maintained as collateral for certain debt facilities.
No cash was restricted at June 30, 1993.
Note 5 - Net Assets Held for Sale
The Company has decided not to sell a division which previously was
included in net assets held for sale. Accordingly, the Company is recording
the current period's results from this division with the Company's Industrial
Products Segment. Sales from the division formerly included in net assets
held for sale, and not included in results of operations, were $11,487,000
for the nine months ended March 28, 1993. The impact of this division's
earnings on the prior year periods was immaterial.
Net assets held for sale at April 3, 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 or develop, subject to
the resolution of certain environmental matters and market conditions.
Note 6 - Summarized Statement of Earnings Information
The following table presents summarized statement of earnings
information on a 100% basis of Banner, the Company's principal investment,
which is accounted for using the equity method.
<TABLE>
<CAPTION>
Nine Months Ended
(In thousands) ----------------------------
April 3, March 28,
1994 1993
------------ -------------
<S> <C> <C>
Net sales................................. $166,525 $195,624
Gross profit.............................. 55,509 50,297
Earnings (loss) from continuing operations 2,769 (4,341)
Net earnings (loss)....................... 2,769 (4,341)
</TABLE>
On April 3, 1994, the Company owned approximately 47.2% of Banner common
stock, which is included in investments and advances-affiliated companies.
The Company recorded equity earnings of $1,307,000 and $106,000 for the nine
months ended April 3, 1994 and March 28, 1993, respectively, from this
investment. At the close of trading on April 1, 1994, Banner stock was
quoted at $5.875 per share. Based on this price the Company's equity
investment in Banner had an approximate market value of $49,868,000 versus a
carrying value of $59,743,000. 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) and $6,470,000 on this investment for
the nine month periods ended April 3, 1994 and March 28, 1993, respectively.
For the nine months ended April 3, 1994, equity loss included an after-tax
charge of $2,938,000 for restructuring of operations, which represents 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 the nine
months ended April 3, 1994, was decreased by recording the Company's 43.9%
share of the cumulative charge which resulted from the adoption of FASB 106
and FASB 109 at Rexnord. (See Note 8 and Note 9).
Note 7 - Credit Agreement Amendment
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 the third quarter 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 $5,000,000 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 Corporation ("VSI"), must earn for the
cumulative total of the trailing four quarters, EBITDA as follows:
$62,000,000 for the fourth quarter of Fiscal 1994, $68,600,000 for the first
quarter of Fiscal 1995, $70,360,000 for the second quarter of Fiscal 1995,
and $72,200,000 for the third quarter of Fiscal 1995. VSI's ability to meet
the minimum requirement under the EBITDA Covenant in Fiscal 1994 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.
Note 8 - Post Retirement Benefits
Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106 ("FASB 106"), "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 FASB
106. The unamortized portion of the overstated liability for discontinued
operations substantially offset the transition obligation for active
employees and retirees of continuing operations, and the charge to net
earnings as the cumulative effect of this accounting change was $534,000. As
a result of the reduction in the liability for discontinued operations,
interest expense accrued on this liability will be lower in future years by
approximately $1,500,000 compared to prior years. However, the adoption of
FASB 106 will cause the postretirement medical expense for continuing
operations to increase by approximately $1,100,000 per year.
As a result of Rexnord's adoption of FASB 106, effective July 1, 1993,
the Company recorded an after-tax charge of $7,481,000 to net earnings, which
represents the Company's share of Rexnord's cumulative effect of this change
in accounting, net of the related tax benefits from the charge.
<PAGE>
Note 9 - 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 ("FASB 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 FASB 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 FASB 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 FASB 109 effective July 1, 1993,
the Company recorded an after-tax charge to net earnings of $523,000, which
represents the Company's share of Rexnord's cumulative effect for this change
in accounting.
Note 10 - Unusual Items
On January 17, 1994, the Company's Chatsworth, California Aerospace
Fasteners manufacturing facility suffered 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 quarter
and will likely negatively impact the fourth quarter 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 the Fiscal 1994 third quarter for the
Aerospace Fasteners segment of $3,200,000 to cover the estimated net cost of
the damages and business interruption caused by the earthquake. In addition,
an insurance claim of $3,500,000 has been recorded for recoverability of
costs related to business interruption and property damage.
Note 11 - Early Extinguishment of Debt
The Company purchased $9,000,000 of its debentures during the nine
months ended April 3, 1994. As a result of these repurchases, the Company
recognized an extraordinary loss on the early extinguishment of debt and
wrote off certain deferred costs associated with the issuance of the
securities repurchased. The after-tax loss from these repurchases amounted
to $147,000 for the nine months ended April 3, 1994.
<PAGE>
Note 12 - Minority Interest in Consolidated Subsidiaries
The Company is carrying $24,006,000 and $24,015,000 of minority interest
represented by the Series C Preferred Stock of Fairchild Industries, Inc.,
("FII") a majority owned subsidiary, in its balance sheet at April 3, 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.
Note 13 - Redeemable Preferred Stock of Subsidiary
The Company has classified the outstanding shares of Series A Preferred
Stock of FII as a long-term liability. The Series A Preferred Stock has a
mandatory redemption value of $45.00 per share and an annual dividend
requirement of $3.60 per share. During the nine months ended April 3, 1994,
the Company repurchased 2,200 shares of FII's Series A Preferred Stock.
There were 422,501 and 424,701 shares authorized, issued and outstanding at
April 3, 1994 and June 30, 1993, respectively.
Note 14 - Dividend Paid to Parent
During the nine months ended April 3, 1994 and March 28, 1993, the
Company paid dividends of $10,000,000 in each period to The Fairchild
Corporation ("TFC"), the parent of the Company. The Fiscal 1994 dividend was
paid primarily in the Company's debentures in lieu of cash. The Fiscal 1993
dividends were paid in cash.
Note 15 - Commitments and Contingencies
Lease Guaranties
- ----------------
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 1994, and
approximately $12,260,000 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
- -----------------
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 of the test requirements. The
government and the Company have reached an agreement in principle to settle
this matter for $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 cost rates and labor charging
practices for 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 6.0% 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 Negotiations
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 proposal, may seek adjustments to
contract prices, in amounts which the Company cannot determine. 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. Prior to
Bidermann's filing for protection under Chapter 11, the Company attached
certain assets of Bidermann, primarily located in France. 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
now been affirmed by the United States Court of Appeals, will depend in part
upon the Company's ability to defend its attachments, the value of the shares
and warrants held, or Bidermann's ability to reorganize.
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 to and 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.
Other Matters
- -------------
The Company is involved in 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 its 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.
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF
- -------------------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
Item 2 of Form 10-Q is omitted in accordance with General Instruction
H(i)(a) and (b), 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 major subsidiaries, Fairchild Industries, Inc. ("FII") and Banner
Investments, Inc. ("BII"). The Company's operations are conducted through
VSI Corporation ("VSI"), which is a wholly-owned subsidiary of FII. The
Company is a wholly-owned subsidiary of The Fairchild Corporation ("TFC").
RESULTS OF OPERATIONS
On December 23, 1993 the Company consummated the sale of its 43.9% stock
interest in Rexnord Corporation, consisting of 8,083,248 shares, for $22.50
per share to BTR Dunlop Holdings, Inc. Accordingly, 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 recorded 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
the nine month period ended April 3, 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 Corporation's accounting
changes, net of tax. For the nine months ended April 3, 1994, the effect of
the changes on pretax income from continuing operations was not material.
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 from continuing operations of the
Company for the three and nine month periods ended April 3, 1994 and March
28, 1993.
<PAGE>
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Nine Months Ended
April 3, March 28, April 3, March 28,
1994 1993 1994 1993
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Sales by Business Segment:
Aerospace Fasteners................ $ 50,619 $ 60,002 $152,643 $190,071
Industrial Products................ 43,208 37,325 123,922 109,413
Communications Services............ 19,009 17,072 55,592 49,563
------- ------- ------- -------
Total................................. $112,836 $114,399 $332,157 $349,047
======= ======= ======= =======
Operating Income (loss) by
Business Segment:
Aerospace Fasteners................ $ (5,177) $ (1,394) $(23,208) $ 3,492
Industrial Products................ 6,086 5,051 15,983 13,779
Communications Services............ 4,153 3,728 12,198 10,851
------- ------- ------- -------
Total................................. 5,062 7,385 4,973 28,122
Corporate administrative expense... (2,507) (1,588) (5,582) (5,018)
Other corporate income (expense)... 249 1,127 1,812 4,515
------- ------- ------- -------
Operating income (loss)............... 2,804 6,924 1,203 27,619
Net interest expense.................. (9,736) (11,791) (31,486) (32,817)
Investment income - net............... 43 225 6,668 650
Equity in earnings of affiliates...... 535 2,807 1,103 7,558
Minority interest..................... (575) (609) (1,764) (1,771)
Non-recurring income.................. (23) -- 129,084 --
------- ------- ------- -------
Earnings (loss) from continuing
operations before income taxes..... (6,952) (2,444) 104,808 1,239
Income tax provision (benefit)........ (1,793) 989 40,048 2,253
------- ------- ------- -------
Earnings (loss) from continuing
operations......................... $ (5,159) $ (3,433) $ 64,760 $ (1,014)
======= ======= ======= =======
</TABLE>
General
- -------
Overall sales declined by 1.4% in the third quarter and 4.8% for the
nine month period compared to sales for the same periods in 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 sales increases at the Industrial Products and
Communication Services segments in the third quarter and nine month periods.
The Industrial Products segment included sales in the current periods by
Fairchild Data Corporation which had been classified as a discontinued
operation in the prior year periods.
Operating income decreased $4.1 million in the third quarter and $26.4
million for the nine month period compared to operating income for the same
periods in Fiscal 1993 and included a $3.2 million charge for earthquake
damage and related business interruption in the Company's Aerospace Fasteners
segment during the third quarter of Fiscal 1994. A restructuring charge of
$9.9 million was recorded in the Fiscal 1994 nine month period to further
implement the Aerospace Fasteners segment's restructuring plan. The Fiscal
1993 third quarter and nine month periods included restructuring charges of
$0.9 million and $2.4 million, respectively. Operating income in the
Industrial Products and Communications Services segments was up for both
periods of Fiscal 1994. The Industrial Products segment included operating
income by Fairchild Data Corporation in the current periods which had been
classified as a discontinued operation in the prior year periods. However,
in the Aerospace Fasteners segment, operating income declined $3.8 million
for the quarter and $26.7 million for the nine month period compared to the
prior year periods. Other corporate income also decreased (see discussion
below).
Aerospace Fasteners
- -------------------
Sales in the Aerospace Fasteners segment decreased 15.6% in the third
quarter and 19.7% for the nine month period ended April 3, 1994, compared to
the Fiscal 1993 periods, primarily due to reduced order rates. Ordering
activity remained at low levels both at original equipment manufacturers and
in the replacement market.
The operating income in the Aerospace Fasteners segment decreased by
$3.8 million in the third quarter and $26.7 million for the nine month period
ended April 3, 1994 in relation to the comparable Fiscal 1993 periods. 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 undertaken further restructuring actions to
further downsize, reduce costs, increase quality, reduce cycle times and
improve margins. These restructuring efforts include discontinuance of
certain aircraft engine bolt product lines, increased cellularization of
manufacturing processes, including extensive retraining of the workforce,
relocation of its New Jersey operations to California and reengineering
certain manufacturing processes and methods to meet increased customer
quality standards.
The Company recorded a pretax restructuring charge of $9.9 million in
the second quarter of Fiscal 1994 to cover the cost of the above mentioned
restructuring activities, including the write down of goodwill and surplus
assets related to certain aircraft engine bolt 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.
On January 17, 1994, the Company's Chatsworth, California Aerospace
Fasteners manufacturing facility suffered 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 the Fiscal 1994
third quarter and will likely negatively affect the fourth quarter 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 the Fiscal 1994 third quarter
of $3.2 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 of $3.5 million for recoverability
of costs related to business interruption and property damage.
Operating income in the third quarter and nine months of 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 the first nine months of 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
first nine months of 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 15.8% in the third
quarter and 13.3% for the nine month period ended April 3, 1994, compared to
the same periods in Fiscal 1993. The inclusion of Fairchild Data Corporation
sales in Fiscal 1994 accounted for 51.1% and 73.0% of the increase in sales
in this segment in the third quarter and nine month current year periods,
respectively. The increase in sales in the current quarter and nine month
periods at D-M-E Company reflects customer response to the fast delivery
programs, new products, and the improving domestic economy. Domestic demand
for tooling for plastics has been strong while foreign demand has been weak,
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 20.5% in
the third quarter and 16.0% for the nine month period ended April 3, 1994,
compared to the same periods in Fiscal 1993. The inclusion of Fairchild Data
Corporation operating income in Fiscal 1994 accounted for 15.9% and 51.0% of
the increase in operating income in this segment in the third quarter and
nine month current year periods, respectively. The improved results at D-M-E
resulted from a higher sales volume and improved operating margins. 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, D-M-E
Company has continued to implement improved manufacturing methods that have
reduced cycle time and costs.
Communications Services
- -----------------------
Sales in the Communications Services segment increased 11.3% in the
third quarter and 12.2% for the nine month period ended April 3, 1994,
compared to the same periods in 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 11.4%
in the third quarter and 12.4% for the nine month period ended April 3, 1994,
compared to the same periods in 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 the first nine months of Fiscal
1994 approximated the return on sales in the comparable period of Fiscal
1993.
Other Expenses/Income
- ---------------------
Corporate Administrative Expense - FII's corporate staff performs work
for several corporate entities including TFC, FII and the Company. Corporate
administrative expense incurred by FII is invoiced to the Company and to TFC
on a monthly basis and represents the estimated cost of services performed on
behalf of such companies by FII. The estimated cost is based primarily on
estimated hours spent by corporate employees on functions related to the
Company and to TFC. Management believes that the corporate administrative
expense would be higher if it operated as a separate independent entity.
Corporate administrative expense increased 57.9% in the third quarter and
11.2% for the nine month period, compared to same periods in the prior year.
During the current year third quarter, 91.7% of the increase was due to
corporate administrative expense being allocated from TFC to the Company.
This increase was based on increased TFC staff involvement on behalf of the
Company. TFC expense was not allocated to the Company in the prior year
periods. Excluding severance payouts, corporate administrative expense
increased 3.7% for the nine month period, compared to the same periods in the
prior year.
Other Corporate Income - Other corporate income decreased $0.9 million
in the third quarter and $2.7 million for the nine month period ended April
3, 1994, compared to the same periods in the prior year, primarily due to the
absence of amortization of over accrued retiree health care expense in the
Fiscal 1994 periods and recording a favorable pension adjustment in the prior
year periods.
Net Interest Expense - Net interest expense decreased 17.4% in the third
quarter and 4.1% for the nine month period ended April 3, 1994, primarily due
to lower borrowings in Fiscal 1994 and significantly higher cash and cash
equivalents in the current third quarter period.
Investment income - net was higher in the first nine months, primarily
as a result of recording gains realized on the liquidation of investments in
Fiscal 1994 compared to Fiscal 1993. Also included in the Fiscal 1994 nine
month period were $2.8 million of dividends realized on participating annuity
contracts compared to none in the Fiscal 1993 nine month period.
Equity in earnings of affiliates decreased $2.3 million in the third
quarter and $6.5 million for the nine month period of Fiscal 1994, compared
to the Fiscal 1993 period. The nine month period included an after tax
restructuring charge of $2.9 million for Rexnord Corporation, prior to the
Company selling its interest in Rexnord Corporation. Consequently, the
current year periods include no earnings for Rexnord Corporation subsequent
to the sale date.
Minority interest expense includes dividend expense on the 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 Corporation, which was sold to BTR Dunlop Holdings, Inc. for $22.50
per share on December 23, 1993.
Income taxes - In the first nine months of Fiscal 1994, the Company
recorded a tax provision of 38.2%. The provision tax rate was higher than
the Federal statutory rate, largely due to the write off and amortization of
goodwill which is not deductible for tax purposes.
Accounting Changes and Extraordinary Items
- ------------------------------------------
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 overrated
liability for discontinued operations substantially offset the transition
obligation 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 Corporation's cumulative
charge resulting from this change in accounting.
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 fixed assets, prepaid pension expense, and inventory
differences. In addition, a $.5 million charge was recorded for the
Company's share of Rexnord Corporation's cumulative charge resulting from
this accounting change.
Extraordinary items - net included in Fiscal 1993 is an extraordinary
charge of $11.4 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.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Working capital at April 3, 1994, was $92.1 million higher than at June
30, 1993. The primary reasons for this increase were an increase in cash of
$70.2 million resulting from the sale of shares of Rexnord Corporation and a
decrease in current debt of $52.1 million and accrued interest of $8.0
million, offset partially by a $17.8 million decrease in prepaids and other
current assets, resulting primarily from lower net tax assets as a result of
the adoption of FASB 109, and an increase of $20.4 million in the income tax
payable account reflecting tax recorded on the Rexnord stock sale.
The Company's principal sources of liquidity are cash generated from
operations and borrowings under its credit agreement. As a result of certain
amendments to its credit agreement and the issuance of FII's new 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 April 3,
1994, had a book value of $29.0 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 or develop, subject to
the resolution of environmental matters and market conditions. Included in
long-term investments at April 3, 1994 is a contractual obligation from an
individual to pay the Company $12.9 million, which has a net carrying amount
of $9.3 million. The obligation is collateralized by 7.1% of the outstanding
common stock of Bidermann Industries USA, Inc., a closely held company. In
addition, the Company has attached certain of his property, primarily located
in France. The individual filed for protection under Chapter 11 of the U.S.
Bankruptcy Code on July 7, 1993. The Company believes that its claim in
bankruptcy and liquidation of the collateral will be sufficient to recover
the carrying amount of this investment. (See Note 15 to the Financial
Statements).
The Company's principal cash requirements include debt service, capital
expenditures, acquisitions, payment of other liabilities 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 the nine month period April 3, 1994,
capital expenditures were $9.4 million. The Company anticipates that total
capital expenditures for the fiscal year ending June 30, 1994 will be
approximately $16.0 million.
During Fiscal 1994, goodwill was reduced by $4.0 million as a result of
the restructuring charge which included a write down of goodwill related to
certain aircraft engine bolt lines which were discontinued.
Investments and advances - affiliated companies decreased $57.7 million
primarily due to the sale of the Company's stock interest in Rexnord
Corporation in the second quarter of Fiscal 1994 combined with restructuring
and accounting change charges recorded in the first quarter of Fiscal 1994,
at Rexnord Corporation.
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 the third quarter 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 Corporation ("VSI"), must earn for the
cumulative total of the trailing four quarters, EBITDA as follows: $62.0
million for the fourth quarter of Fiscal 1994, $68.6 million for the first
quarter of Fiscal 1995, $70.4 million for the second quarter of Fiscal 1995
and $72.2 million for the third quarter of Fiscal 1995. VSI's ability to
meet the minimum requirement under the EBITDA Covenant in Fiscal 1994 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 an acceleration of the principal and interest
outstanding, and a termination of the revolving credit line.
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 April 3, 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 for Certain Investments in Debt and Equity Securities
- ----------------------------------------------------------------
In May, 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 115 ("FASB 115"), "Accounting for
Certain Investments in Debt and Equity Securities". FASB 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 Company is required to implement FASB 115 as of the
beginning of Fiscal 1995 or as of the end of Fiscal 1994. The Company
believes the impact of implementing FASB 115 will be immaterial.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 15 of Notes to Consolidated Financial
Statements.
Item 6. Exhibits and Reports on Form 8-K
On January 7, 1994 the Company filed a Form 8-K to report on Item 2 and
Item 7. The Company reported the sale of approximately 8.1 million shares of
the Company's former 43.9% affiliate, Rexnord Corporation, to BTR Dunlop
Holdings, Inc. ("BTR") at a price of $22.50 per share. The Company filed the
following exhibits in conjunction with this Form 8-K:
Exhibits
--------
10(a)(a) Purchase Agreement by and between BTR, TFC
and the Company dated as of December 2, 1993.
99(a) The Company's press release, dated December
23, 1993.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
For RHI HOLDINGS, INC.
(Registrant) and as its Chief
Financial Officer:
By: Michael T. Alcox
Vice President and Chief Financial
Officer
Date: May 13, 1994
