UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------
FORM 10-Q
--------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 1996
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 20153
---------------------------------------
(Address of principal executive offices)
(Zip Code)
(703) 478-5800
----------------------------------------------------
(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 September 29, 1996
- ----- ------------------
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
September 29, 1996 (Unaudited) and June
30, 1996 3
Consolidated Statements of Earnings for
the Three Months Ended September 29, 1996
and October 1, 1995 (Unaudited) 5
Condensed Consolidated Statements of Cash
Flows for the Three Months Ended September 29,
1996 and October 1, 1995 (Unaudited) 6
Notes to Condensed Consolidated Financial
Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
*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
(In thousands)
<CAPTION>
September 29, June 30,
ASSETS 1995 1996
- ------ ------------ ------------
(Unaudited) (*)
<S> <C> <C>
Current Assets:
Cash and cash equivalents, $5,379 and $6,761
restricted................................. $115,368 $ 36,112
Short-term investments....................... 9,759 10,427
Accounts receivable-trade, less allowances
of $6,117 and $6,071....................... 97,389 96,488
Notes Receivable............................. -- 170,384
Inventories:
Finished goods............................ 253,278 235,859
Work-in-process........................... 16,744 16,294
Raw materials............................. 14,054 18,586
------- ---------
284,076 270,739
Prepaid expenses and other current assets.... 22,755 20,248
------- ---------
Total Current Assets......................... 529,347 604,398
Property, plant and equipment net of
accumulated depreciation of $79,121 and
$76,183.................................... 86,083 87,281
Net assets held for sale..................... 45,034 43,609
Cost in excess of net assets acquired,
(Goodwill) less accumulated amortization of
$32,199 and $31,119........................ 134,352 135,241
Investments and advances, affiliated
companies.................................. 125,553 120,890
Prepaid pension assets....................... 56,518 57,660
Other assets................................. 12,491 12,449
------- ---------
Total Assets................................. $989,378 $1,061,528
======= =========
*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
(In thousands)
<CAPTIONI>
September 29, June 30,
LIABILITIES AND STOCKHOLDER'S EQUITY 1996 1996
- ------------------------------------ ------------- ------------
(Unaudited) (*)
<S> <C> <C>
Current Liabilities:
Bank notes payable and current maturities
of long-term debt........................... $ 11,243 $ 84,678
Accounts payable............................. 50,275 64,486
Other accrued liabilities.................... 67,364 74,987
Income taxes................................. 17,199 60,012
------- ---------
Total Current Liabilities.................... 146,081 284,163
Long-term debt, less current maturities...... 223,597 194,233
Other long-term liabilities.................. 16,104 17,692
Retiree health care liabilities.............. 44,128 44,452
Noncurrent income taxes...................... 73,488 33,569
Minority interest in subsidiaries............ 59,433 58,647
------- ---------
Total Liabilities............................ 562,831 632,756
Stockholder's Equity:
Common Stock................................. 100 100
Preferred Stock.............................. 100 100
Paid-in capital.............................. 229,260 229,260
Retained earnings............................ 176,675 183,355
Cumulative translation adjustment............ 3,311 2,751
Net unrealized holding gain on available-for-
sale securities............................. 17,101 13,206
------- ---------
Total Stockholder's Equity................... 426,547 428,772
------- ---------
Total Liabilities and Stockholder's Equity... $989,378 $1,061,528
======= =========
* 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)
(In thousands)
<CAPTION>
Three Months Ended
September 29, October 1,
1996 1995
------------- ----------
(*)
<S> <C> <C>
Revenue:
Net sales of products..................... $145,894 $ 87,692
Revenues from services.................... -- 19,911
Other income, net......................... 209 318
------- -------
146,103 107,921
Costs and Expenses:
Cost of goods sold........................ 106,306 70,573
Cost of services.......................... -- 13,773
Selling, general & administrative......... 34,933 19,378
Research and development.................. 23 21
Amortization of goodwill.................. 1,080 1,173
------- -------
142,342 104,918
Operating income............................ 3,761 3,003
Interest expense............................ 8,705 11,468
Interest income............................. (2,308) (1,385)
------- -------
Net interest expense........................ 6,397 10,083
Investment income (loss), net............... (375) 1,995
Equity in earnings of affiliates............ 1,994 1,915
Minority interest........................... (785) (541)
------- -------
Loss from continuing operations before taxes (1,802) (3,711)
Income tax benefit.......................... 122 1,503
------- -------
Loss from continuing operations............. (1,680) (2,208)
Earnings from discontinued operations, net.. -- 3,870
Loss on disposal of discontinued
operations, net........................... -- (13)
------- -------
Net loss.................................... $ (1,680) $ 1,649
======= =======
(*) Restated for discontinued operations. (See Note 3).
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)
(In thousands)
<CAPTION>
Three Months Ended
September 29, October 1,
1996 1995
------------ ------------
(*)
<S> <C> <C>
Cash flows provided by (used for)
Operations:
Net earnings (loss)..................... $ (1,680) $ 1,649
Depreciation and amortization........... 4,931 7,612
Accretion of discount on long-term
liabilities........................... 839 862
Minority interest....................... 785 598
Distributed (undistributed) earnings of
affiliates, net....................... 1,290 (1,915)
Changes in assets and liabilities....... (48,782) (16,738)
Non-cash charges and working capital
charges of discontinued operations.... -- 539
------- -------
Net cash used for operations............ (42,617) (7,393)
Investments:
Collections on notes receivable from
operations sold....................... 173,719 --
Purchase of property, plant and
equipment............................. (2,131) (3,477)
Changes in net assets held for sale..... (1,230) (677)
Other, net.............................. 20 (200)
Investing activities of discontinued
operations............................ -- (349)
------- -------
Net cash provided by (used for)
investments........................... 170,378 (4,703)
Financing:
Proceeds from issuance of debt.......... 33,473 2,618
Debt repayments and repurchase of
debentures, net....................... (77,566) (2,916)
Payment of dividends.................... (5,000) (10,000)
------- -------
Net cash used for financing............. (49,093) (10,298)
Effect of exchange rate changes on cash..... 588 (310)
Net increase (decrease) in cash............. 79,256 (22,704)
Cash and cash equivalents, beginning of
period.................................. 36,112 64,174
------- -------
Cash and cash equivalents, end of period.... $115,368 $ 41,470
======= =======
(*) Restated for discontinued operations. (See Note 3).
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
RHI HOLDINGS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except per share information)
Note 1 - Financial Statements
The consolidated balance sheet as of September 29, 1996 and the
consolidated statements of earnings and cash flows for the three months ended
September 29, 1996 and October 1, 1995 have been prepared by the Company,
without audit. In the opinion of management, all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at September 29, 1996 and for
all periods presented, have been made. Prior period financial information
has been restated for discontinued operations, which includes the D-M-E
Company ("DME") and Fairchild Data Corporation ("Data"). The balance sheet
at June 30, 1996 was also condensed from the audited financial statements as
of that date.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's June 30, 1996 Form
10-K and Banner Aerospace, Inc.'s March 31, 1996 Form 10-K. The results of
operations for the period ended September 29, 1996 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 - Merger Agreement
The Company, The Fairchild Corporation("TFC", the Company's parent) and
Fairchild Industries, Inc. ("FII", the Company's subsidiary), entered into an
Agreement and Plan of Merger dated as of November 9, 1995 (as amended, the
"Merger Agreement") with Shared Technologies Inc. ("STI"). On March 13,
1996, in accordance with the Merger Agreement, STI has succeeded to the
telecommunications systems and services business operated by the Company's
Fairchild Communications Services Company ("FCSC").
The transaction was effected by a Merger of FII with and into STI (the
"Merger") with the surviving company renamed Shared Technologies Fairchild
Inc. ("STFI"). Prior to the Merger, FII transferred all of its assets to,
and all of its liabilities were assumed by Fairchild Holdings Corporation
("FHC"), a wholly owned subsidiary of the Company, except for the assets and
liabilities of FCSC, and $223,500 of the FII's existing debt and preferred
stock. As a result of the Merger, the Company received shares of Common
Stock and Preferred Stock of STFI representing approximately a 41% ownership
interest in STFI.
<PAGE>
Note 3 - Discontinued Operations
On February 22, 1996, pursuant to the Asset Purchase Agreement dated
January 26, 1996, the Company, through one of its subsidiaries, completed the
sale of certain assets, liabilities and the business of DME to Cincinnati
Milacron Inc. ("CMI"), for a sales price of approximately $244,331, as
adjusted. The sales price consisted of $74,000 in cash, and two 8%
promissory notes in the aggregate principal amount of $170,331 (together, the
"8% CMI Notes"). On July 29, 1996, CMI paid in full the 8% CMI Notes.
On January 27, 1996, FII completed the sale of Data to SSE Telecom, Inc.
("SSE") for book value of approximately $4,400 and 100,000 shares of SSE's
common stock valued at $9.06 per share, or $906, at January 26, 1996, and
warrants to purchase an additional 50,000 shares of SSE's common stock at
$11.09 per share. In addition, the Company has an opportunity to earn an
additional 100,000 shares based on the future performance of SSE during the
twelve months following the date of sale.
Accordingly, DME and Data have been accounted for as discontinued
operations and the prior period financial statements have been restated to
reflect the discontinuance of these companies. The combined net sales of
DME and Data totaled $45,867 for the first quarter of Fiscal 1996. Net
earnings from discontinued operations was $3,870 in the quarter ended October
1, 1995.
Note 4 - Majority Interest Business Combination
Effective February 25, 1996, the Company completed a transfer of the
Company's Harco Division ("Harco") to Banner Aerospace, Inc. ("Banner") in
exchange for 5,386,477 shares of Banner common stock. The exchange has
increased the Company's ownership of Banner common stock from approximately
47.2% to 59.3%, resulting in the Company becoming the majority shareholder of
Banner. Accordingly, the Company consolidated Banner on February 25, 1996.
Banner is a leading international supplier to the aerospace industry as a
distributor, providing a wide range of aircraft parts and related support
services. Harco is a distributor of precision fasteners to the aerospace
industry.
Note 5 - Pro forma Financial Statements
The Following unaudited pro forma information for the three months ended
October 1, 1995, provides the results of the Company's operations as though
(i) the disposition of DME and Data, (ii) the Merger of FCSC, and (iii) the
transfer of Harco to Banner, resulting in the consolidation of Banner, had
been in effect since the beginning of the period. The pro forma information
is based on the historical financial statements of the Company, DME, Data,
FCSC and Banner, giving effect to the aforementioned transactions. In
preparing the pro forma data, certain assumptions and adjustments have been
made which (i) reduce interest expense for revised debt structures, (ii)
increase interest income for notes receivable, (iii) reduce minority interest
from Series C Preferred Stock of FII being redeemed, and (iv) adjust equity
in earnings of affiliates to include the estimated results of STFI.
The following unaudited pro forma financial information is not
necessarily indicative of the results of operations that actually would have
occurred if the transactions had been in effect since the beginning of the
Fiscal 1996 period, nor is it necessarily indicative of future results of the
Company.
<TABLE>
<CAPTION>
Three Months Ended
October 1, 1995
------------------
<S> <C>
Sales................................... $141,097
Earnings from continuing operations..... 1,270
Net earnings............................ 1,257
</TABLE>
The pro forma financial information has not been adjusted for non-
recurring income or expense and gains from disposal of discontinued
operations that have been or are expected to be incurred from these
transactions within the ensuing year.
Note 6 - Summarized Statement of Earnings Information
The following table presents summarized historical financial information
on a combined 100% basis of the Company's principal investments, which are
accounted for using the equity method.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
September 29, October 1,
1996 1995
------------ ------------
<S> <C> <C>
Net sales................................. $ 80,037 $ 98,654
Gross profit.............................. 34,997 29,982
Earnings from continuing operations....... 4,052 6,511
Net earnings.............................. 4,052 6,511
</TABLE>
The Company owns approximately 26.7% of Nacanco common stock. The
Company recorded equity earnings of $1,560 and $1,525 from this investment
for the three months ended September 29, 1996 and October 1, 1995,
respectively.
Since March 13, 1996, as a result of the Merger in which the Company
received a 41% interest in STFI, the Company has accounted for its investment
in STFI using the equity method. Prior to March 13, 1996, the Company
consolidated the results of FCSC, which was merged into STFI (see Note 2).
The Company recorded equity earnings of $434 during the three months ended
September 29, 1996.
On September 29, 1996, the Company's investments in STFI consisted of
(i) $21,081 carrying value for the $25,000 face value 6% cumulative
Convertible Preferred Stock, (ii) 9,626 carrying value for the $20,000 face
value Special Preferred Stock, and (iii) $(89) carrying value for 6,200,000
shares of common stock of STFI. At the close of trading on September 29,
1996, STFI's common stock was quoted at $7.50 per share. Based on this
price, the Company's investment in STFI common stock had an approximate
market value of $46,500.
Effective February 25, 1996, the Company increased its percentage of
ownership of Banner Common Stock from 47.2% to approximately 59.3%. Since
February 25, 1996, the Company is consolidating Banner's results. Prior to
February 25, 1996, the Company accounted for its investment in Banner using
the equity method and held its investment in Banner as part of investments
and advances-affiliated companies. The Company recorded equity earnings of
$346 from this investment for the three months ended October 1, 1995.
In connection with the Company's December 23, 1993 sale of its interest
in Rexnord Corporation to BTR Dunlop Holdings, Inc. ("BTR"), the Company
placed shares of Banner, with a fair market value of $5,000,000, in escrow to
secure the Company's remaining indemnification of BTR against a contingent
liability. Once the contingent liability is resolved, the escrow will be
released.
The company is accounting for its investments in TFC at market value.
As of September 29, 1996, the carrying value of the Company's investment in
4,369,400 shares of TFC common stock was $69,910 and included an increase of
$25,304, before tax, to market value. The Company recorded a gross
unrealized gain of $6,008 and $7,646 from its investment in TFC common stock
in the first quarter of Fiscal 1997 and 1996, respectively.
Note 7 - Restricted Cash
The Company had approximately $5,379 and $6,761 of restricted cash on
September 29, 1996 and June 30, 1996, respectively, all of which is
maintained as collateral for certain debt facilities.
Note 8 - Credit Agreements
The Interim Credit Agreement at FHC matured on July 29, 1996, at which
time the Company repaid in full the loans made under the Interim Credit
Agreement. On July 26, 1996, the Company amended and restated the terms and
provisions of the Interim Credit Agreement, in their entirety (the "Restated
Credit Agreement"). The Restated Credit Agreement extends to July 28, 2000,
the maturity of FHC's revolving credit facility (the "FHC Revolver"). The
FHC Revolver has a borrowing limit of $52,000 and requires a borrowing base
to determine availability under the limit. The borrowing base is determined
monthly based upon specified percentages of FHC's accounts receivable,
inventories and the appraised value of equipment and real property. The FHC
Revolver consists of up to $40,000 available in the United States and $12,000
available in Europe. The FHC Revolver generally bears interest at a base
rate of 1 1/2% over the greater of (i) Citibank New York's base rate, or (ii)
the Federal Funds Rate plus 1/2% for domestic borrowings and at 2 1/2% over
Citibank London's base rate for foreign borrowings. FHC's Revolver is
subject to a non-use commitment fee of 1/2% on the average unused
availability; and outstanding letters of credit are subject to fees of 2 3/4%
per annum.
The Restated Credit Agreement requires FHC to comply with certain
financial loan covenants, including maintaining a minimum net worth of
$150,000 and maintaining certain interest and fixed charge coverage ratios at
the end of each Fiscal Quarter. Additionally, the Restated Credit Agreement
restricts the FHC's annual capital expenditures to $12,000. Substantially
all of FHC's assets are pledged as collateral under the Restated Credit
Agreement. At September 29, 1996, FHC was in compliance with all the
Covenants under the Restated Credit Agreement.
FHC may transfer available cash as dividends to the Company.
On July 1, 1996, Banner amended its credit agreement (the "Banner Credit
Agreement") which provides Banner and its subsidiaries with funds for working
capital and potential acquisitions. The Banner Credit Agreement consists of
a $55,000 term loan and a $71,500 revolving credit facility, both of which
initially bear interest at prime plus 1 1/4% or LIBOR plus 2 1/2%, and a
$30,000 seven-year term loan ("Tranche B Loan"), and requires that loans made
to Banner do not exceed a defined borrowing base, which is based upon a
percentage of inventories and accounts receivable. The Tranche B Loan bears
interest at Prime plus 1 3/4% or LIBOR plus 3%. Banner's term loans require
certain semiannual loan payments. Interest rates on Banner's borrowings
whether computed at the prime rate or LIBOR may increase by 1/4% or decrease
by up to 1% based upon certain performance criteria. On June 30, 1996,
Banner's performance level resulted in borrowings under the Banner Credit
Agreement being at the initial interest rates for the quarter ending
September 30, 1996. Banner's revolving credit facility is subject to a non-
use fee of 1/2% of the unused availability. Substantially all of Banner's
assets are pledged as collateral under the Banner Credit Agreement.
The Banner Credit Agreement requires quarterly compliance with various
financial and non-financial loan covenants, including maintaining a minimum
net worth, and minimum ratios of interest coverage, fixed charge coverage,
and debt to earnings before interest, taxes, depreciation and amortization.
Banner also has certain limitations on the incurrence of additional debt. As
of September 29, 1996, Banner was in compliance with all covenants under the
Banner Credit Agreement.
Banner has several interest rate hedge agreements ("Hedge Agreements")
to manage its exposure to increases in interest rates on its variable rate
debt. The Hedge Agreements provide interest rate protection on $60,000 of
debt through September 2000, by providing a cap of 7% if the 90-day LIBOR
rate exceeds 7%. If the 90-day LIBOR rate drops below 5%, Banner will be
required to pay a floor rate of approximately 6%.
Note 9 - Minority Interests in Consolidated Subsidiaries
The Company is including $59,260 of minority interest in its balance
sheet at September 29, 1996, representing approximately 40.7% of Banner's
common stock effectively outstanding on a consolidated basis.
Note 10 - Dividends Paid to Parent
During the three months ended September 29, 1996 and October 1, 1995,
the Company paid cash dividends of $5,000 and $10,000, respectively, to TFC.
Note 11 - Commitments and Contingencies
Government Claims
- -----------------
The Corporate Administrative Contracting Officer (the "ACO"), based upon
the advice of the United States Defense Contract Audit Agency, has made a
determination that FII did not comply with Federal Acquisition Regulations
and Cost Accounting Standards in accounting for (i) the 1985 reversion to FII
of certain assets of terminated defined benefit pension plans, and (ii)
pension costs upon the closing of segments of FII's business. The ACO has
directed FII to prepare cost impact proposals relating to such plan
terminations and segment closings and, following receipt of such cost impact
proposals, may seek adjustments to contract prices. The ACO alleges that
substantial amounts will be due if such adjustments are made. The Company
believes it has properly accounted for the asset reversions in accordance
with applicable accounting standards. The Company has held discussions with
the government to attempt to resolve these pension accounting issues.
Environmental Matters
- ---------------------
The Company 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, results of operations, or net cash flows of the Company, although
the Company has expended, and can be expected to expend in the future,
significant amounts for investigation of environmental conditions and
installation of environmental control facilities, remediation of
environmental conditions and other similar matters, particularly in the
Aerospace Fasteners segment.
In connection with its plans to dispose of certain real estate, the
Company must investigate environmental conditions and may be required to take
certain corrective action prior or pursuant to any such disposition. In
addition, management has identified several areas of potential contamination
at or from other facilities owned, or previously owned, by the Company, that
may require the Company either to take corrective action or to contribute to
a clean-up. The Company is also a defendant in certain lawsuits and
proceedings seeking to require the Company to pay for investigation or
remediation of environmental matters and has been alleged to be a potentially
responsible party at various "Superfund" sites. Management of the Company
believes that it has recorded adequate reserves in its financial statements
to complete such investigation and take any necessary corrective actions or
make any necessary contributions. No amounts have been recorded as due from
third parties, including insurers, or set off against, any liability of the
Company, unless such parties are contractually obligated to contribute and
are not disputing such liability.
As of September 29, 1996, the consolidated total recorded liabilities of
the Company for environmental matters totalled $10,457, which represented the
estimated probable exposures for these matters. It is reasonably possible
that the Company's total exposure for these matters could be approximately
$18,288.
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 future results of operations or
net cash flows of the Company.
<PAGE>
ITEM 2. MANAGEMENT'S 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 operating subsidiaries, Fairchild Holding Corporation ("FHC") and
Banner Aerospace, Inc. ("Banner"). The Company is a wholly-owned subsidiary
of The Fairchild Corporation ("TFC"). The Company also holds a significant
equity interest in Shared Technologies Fairchild Inc., ("STFI") and Nacanco
Paketleme ("Nacanco").
FISCAL 1996 SIGNIFICANT TRANSACTIONS
- ------------------------------------
The Company, TFC and Fairchild Industries, Inc. ("FII," the company's
former subsidiary), entered into an Agreement and Plan of Merger dated as of
November 9, 1995 (as amended, the "Merger Agreement") with Shared
Technologies Inc. ("STI"). On March 13, 1996, in accordance with the Merger
Agreement, STI succeeded to the telecommunications systems and services
business operated by the Company's Fairchild Communications Services Company
("FCSC").
The transaction was effected by a Merger of FII with and into STI (the
"Merger") with the surviving company renamed STFI. Prior to the Merger, FII
transferred all of its assets to, and all of its liabilities were assumed by
FHC, except for the assets and liabilities of FCSC, and $223.5 million of the
FII's existing debt and preferred stock. As a result of the Merger, the
Company received shares of Common Stock and Preferred Stock of STFI,
representing approximately a 41% ownership interest in STFI.
On February 22, 1996, pursuant to the Asset Purchase Agreement dated
January 26, 1996, the Company, through its subsidiaries, completed the sale
of certain assets, liabilities and the business of the D-M-E Company
("DME") to Cincinnati Milacron Inc. ("CMI"), for a sales price of
approximately $244.3 million, as adjusted. The sales price consists of $74.0
million in cash, and two 8% promissory notes in the aggregate principal
amount of $170.3 million (together, the "8% CMI Notes"). On July 29, 1996,
CMI paid in full the 8% CMI Notes.
On January 27, 1996, FII completed the sale of Fairchild Data
Corporation ("Data") to SSE Telecom, Inc. ("SSE") for book value of
approximately $4.4 million and 100,000 shares of SSE's common stock valued at
$9.0625 per share, or $.9 million, at January 26, 1996, and warrants to
purchase an additional 50,000 shares of SSE's common stock at $11.09 per
share. In addition, the Company has an opportunity to earn an additional
100,000 shares based on the future performance of SSE during the twelve
months following the date of sale.
DME and Data have been accounted for as discontinued operations and the
prior periods financial statements have been restated to reflect the
discontinuance of these companies. The combined net sales of DME and Data
totaled $45.9 million for the first quarter of Fiscal 1996. Net earnings
from discontinued operations was $3.9 million for the first quarter of Fiscal
1996.
Effective February 25, 1996, the Company completed the transfer of Harco
to Banner in exchange for 5,386,477 shares of Banner common stock. The
exchange has increased the Company's ownership of Banner common stock from
approximately 47.2% to 59.3%, resulting in the Company becoming the majority
shareholder of Banner. Accordingly, the Company consolidated Banner on
February 25, 1996. Banner is a leading international supplier to the
aerospace industry as a distributor, providing a wide range of aircraft parts
and related support services. Harco is a distributor of precision fasteners
to the aerospace industry.
RESULTS OF OPERATIONS
The Company currently operates in three principal business segments:
Aerospace Fasteners, Aerospace Distribution (Banner Aerospace) and Technology
Products (formerly Industrial Products). For the three months ended October
1, 1995, the Company consolidated operations in the Communications Services
segment and did not consolidate operations in the Aerospace Distribution
segment. The following table illustrates the historical sales and operating
income of the Company's continuing operations for the three month periods
ended September 29, 1996 and October 1, 1995.
<PAGE>
<TABLE>
<CAPTION>
(In thousands) Three Months Ended
September 29, October 1,
1996 1995
-------- --------
(*)
<S> <C> <C>
Sales by Business Segment:
Aerospace Fasteners....................... $ 55,047 $ 52,196
Aerospace Distribution (a)................ 84,107 --
Technology Products (b) .................. 9,458 22,410
Communications Services (c)............... -- 32,997
Eliminations (d).......................... (2,718) --
------- -------
Total........................................ $145,894 $107,603
======= =======
Operating Income (Loss) by Business Segment:
Aerospace Fasteners....................... $ 2,108 $ (1,555)
Aerospace Distribution (a)................ 5,981 --
Technology Products (b)................... (2,050) 2,310
Communications Services (c)............... -- 4,909
------- -------
Total........................................ 6,039 5,664
Corporate administrative expense.......... (2,316) (2,719)
Other corporate income.................... 38 58
------- -------
Operating income............................. 3,761 3,003
Net interest expense......................... (6,397) (10,083)
Investment income (loss), net................ (375) 1,995
Equity in earnings of affiliates............. 1,994 1,915
Minority interest............................ (785) (541)
------- -------
Loss from continuing operations before
income taxes.............................. (1,802) (3,711)
Income tax benefit........................... 122 1,503
------- -------
Loss from continuing operations.............. $ (1,680) $ (2,208)
======= =======
(a) The Company became the majority shareholder of Banner Aerospace, Inc. in
February, 1996 and accordingly, began consolidating their results as of then.
(b) The Technology Products (formerly Industrial Products) segment was also
restated for the sale of DME and Data, which are being reported as
discontinued operations.
(c) Effective March 13, 1996, the Company's investment in the Communications
Services segment was recorded using the equity method.
(d) Intersegment eliminations includes $2.7 million sales from the Aerospace
Fasteners segment to the Aerospace Distribution segment.
</TABLE>
General
- -------
Overall sales increased by 35.6% for the Fiscal 1997 three month period,
compared to sales for the same period in Fiscal 1996, which reflected strong
sales performances from the Aerospace Fasteners and Aerospace Distribution
business segments. Operating income increased $.8 million in the Fiscal 1997
three month period, compared to operating income for the same period in
Fiscal 1996. The current quarter includes sales and operating income from
the Aerospace Distribution segment, offset partially by the exclusion of
sales and operating income from the Communications Services segment which was
deconsolidated effective March 13, 1996, as a result of the Merger with STI.
(See discussion above).
Aerospace Fasteners
- -------------------
Sales in the Aerospace Fasteners segment increased $2.9 million or 5.5%
in the first quarter of Fiscal 1997, compared to the corresponding Fiscal
1996 period, reflecting the continued growth that was anticipated in this
industry. New orders have been strong in recent months. The Harco division
was transferred to the Aerospace Distribution segment on February 25, 1996.
Excluding Harco's sales of $6.9 million in the prior year quarter, sales
increased 21.6% in the Fiscal 1997 first quarter.
Operating income in the Aerospace Fasteners segment increased $3.7
million in the first quarter of Fiscal 1997 compared to the Fiscal 1996
period. Excluding Harco's operating income in the prior year quarter,
operating income increased $4.4 million. Management will continue to
implement productivity improvements and reduce costs.
Aerospace Distribution
- ----------------------
The Aerospace Distribution segment reported $84.1 million in sales and
$6.0 million in operating income for the three month period ended September
29, 1996.
As a result of the transfer of Harco to Banner, effective February 25,
1996, Harco's sales and operating income for the three months ended September
29, 1996, are now being reported as part of the Aerospace Distribution
segment.
Technology Products
- -------------------
Sales in the Technology Products segment, which primarily includes
Fairchild Technologies, decreased $13.0 million in the Fiscal 1997 first
quarter compared to the Fiscal 1996 first quarter period, primarily the
result of a low level of shipments during the first quarter of Fiscal 1997.
Sales during the first quarter of the prior year benefited from the shipment
of a major order, and the quarter's sales accounted for 33% of the total
prior year sales.
An operating loss of $1.7 million was recorded at Fairchild Technologies
in the Technology Products segment in the current year, partially due to the
low level of sales, but also due to expansion of the sales staff into the Far
East. Fairchild Technologies recently received an order for $27 million
which will begin shipment in Fiscal 1997. The Scandinavian Bellyloading
Company ("SBC") has a loss of $.3 million consistent with the prior year
losses while SBC continued to be in a start up mode. SBC recently announced
$15 million of orders which will begin shipment in the third quarter, at
which time the operation should become profitable. The Technology Products
segment reported operating profit of $2.3 million in the Fiscal 1996 first
quarter.
Communications Services
- -----------------------
As a result of the Merger of the Communications Services segment with
STI on March 13, 1996, the Company is accounting for its current investment
in STFI, the merged company, using the equity method. For the three months
ended October 1, 1995, this segment reported sales of $33.0 million and
operating profit of $4.9 million.
Other Expenses/Income
- ---------------------
Corporate administrative expense decreased 14.8% in the first quarter of
Fiscal 1997, compared to the same period in Fiscal 1996. The decrease in the
current year quarter was primarily due to a reduction in staff and lower
lititgation costs.
Net interest expense decreased 36.6% in the first quarter ended
September 29, 1996, compared to the prior year period, due primarily to lower
debt, as a result of the sale of DME and the Merger, and higher interest
income earned on higher cash and notes receivable balances during the Fiscal
1997 quarter.
Investment income, net decreased $2.4 million in the first quarter of
Fiscal 1997, principally as a result of recording unrealized gains on the
fair market value adjustments of trading securities in the Fiscal 1996 period
and recording unrealized losses in the Fiscal 1997 period.
Income taxes - The tax benefit from the continuing operations loss was
$.2 million for the first quarter of Fiscal 1997.
Earnings from discontinued operations, net, of $3.9 million includes the
earnings, net of tax from DME and Data for the three months ended October 1,
1995.
The net loss of $1.7 million in the first three months of Fiscal 1997
decreased by $.5 million, compared to the first three months of Fiscal 1996,
after recognizing: (i) a $.8 million increase in operating income, (ii) a $3.7
million decrease in net interest expense, offset by (iii) a $2.4 million
decrease in investment income, (iv) a $1.4 million decrease in the tax benefit,
and (v) $3.9 million in earnings from discontinued operations recorded in
the prior period.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 29, 1996, was $383.3 million, which was
$63.0 million higher than at June 30, 1996. The principal reasons for this
increase included a $79.3 million increase in cash, a $73.4 million reduction
in short-term notes payable, a $42.8 million decrease in current income
taxes, a decrease in accounts payable and other accrued liabilities of $21.8
million, and an increase in inventories of $13.3 million. Partially
offsetting the increase in working capital was a $170.3 million decrease in
notes receivable.
The Company's principal sources of liquidity are cash on hand, cash
generated from operations and borrowings under its credit agreement. The
Company also expects to generate cash from the sale of certain assets and
liquidation of investments. Net assets held for sale at September 29, 1996,
had a book value of $45.0 million and included two parcels of real estate in
California, a 68 acre parcel of real estate located in Farmingdale, New York,
two landfills in Pennsylvania, a real estate joint venture in California, and
several other parcels elsewhere, which the Company plans to sell, lease or
develop, subject to market conditions or, with respect to certain of the
parcels, the resolution of environmental matters.
The Company's principal cash requirements include debt service, capital
expenditures, acquisitions, and payment of other liabilities. Other
liabilities that require the use of cash include post-employment benefits for
retirees, environmental investigation and remediation obligations, litigation
settlements and related costs.
The Company maintains credit agreements (the "Credit Agreements") with
a consortium of banks, which provides revolving credit facilities to RHI, FHC
and Banner and term loans to FHC and Banner (collectively the "Credit
Facilities").
The Interim Credit Agreement at FHC matured on July 29, 1996, at which
time the Company repaid in full the loans made under the Interim Credit
Agreement. On July 26, 1996, the Company amended and restated the terms and
provisions of the Interim Credit Agreement in their entirety (the "Restated
Credit Agreement"). The Restated Credit Agreement extends to July 28, 2000,
the maturity of FHC's revolving credit facility (the "FHC Revolver"). The
FHC Revolver has a borrowing limit of $52.0 million and requires a borrowing
base to determine availability under the limit. The borrowing base is
determined monthly based upon specified percentages of FHC's accounts
receivable, inventories and the appraised value of equipment and real
property. The FHC Revolver consists of up to $40.0 million available for
domestic operations and $12.0 million available for European operations.
The FHC Revolver generally bears interest at a base rate of 1 1/2% over the
greater of (i) Citibank New York's base rate, or (ii) the Federal Funds Rate
plus 1/2% for domestic borrowings and at 2 1/2% over Citibank London's base
rate for foreign borrowings. FHC's Revolver is subject to a non-use
commitment fee of 1/2% on the average unused availability; and outstanding
letters of credit are subject to fees of 2 3/4% per annum.
The Restated Credit Agreement requires FHC to comply with certain
financial loan covenants, including maintaining a minimum net worth of $150.0
million and maintaining certain interest and fixed charge coverage ratios at
the end of each Fiscal Quarter. Additionally, the Restated Credit Agreement
restricts the FHC's annual capital expenditures to $12.0 million.
Substantially all of FHC's assets are pledged as collateral under the
Restated Credit Agreement. At September 29, 1996, FHC was in compliance with
all the Covenants under the Restated Credit Agreement.
FHC may transfer available cash as dividends to the Company.
The Credit Agreements provide RHI with a $4.3 million revolving credit
facility (the "RHI Credit Agreement") which generally bears a base interest
of 1/2% over the prime rate, requires a commitment fee of 1/2%, and matures
on May 26, 1998. RHI's Credit Agreement requires RHI to comply with
specified covenants and maintain a consolidated net worth of $175.0 million.
Additionally, RHI's capital expenditures are restricted, except for certain
leasehold improvements, to $2.0 million per annum plus the selling price of
fixed assets for such Fiscal Year. At September 29, 1996, the Company was in
compliance with all the covenants under RHI's Credit Agreement.
Banner has a credit agreement (the "Banner Credit Agreement") which
provides Banner and its subsidiaries with funds for working capital and
potential acquisitions. The Banner Credit Agreement consists of a $55.0
million term loan and a $71.5 million revolving credit facility, both of
which initially bear interest at prime plus 1 1/4% or LIBOR plus 2 1/2%, and
a $30.0 million seven-year term loan ("Tranche B Loan"), and requires that
loans made to Banner do not exceed a defined borrowing base, which is based
upon a percentage of inventories and accounts receivable. The Tranche B Loan
bears interest at Prime plus 1 3/4% or LIBOR plus 3%. Banner's term loans
require certain semiannual loan payments. Interest rates on Banner's
borrowings whether computed at the prime rate or LIBOR may increase by 1/4%
or decrease by up to 1% based upon certain performance criteria. On June 30,
1996, Banner's performance level resulted in borrowings under the Banner
Credit Agreement being at the initial interest rates for the quarter ending
September 30, 1996. Banner's revolving credit facility is subject to a non-
use fee of 1/2% of the unused availability. Substantially all of Banner's
assets are pledged as collateral under the Banner Credit Agreement. The
Banner Credit Agreement matures August 2001.
The Banner Credit Agreement requires quarterly compliance with various
financial and non-financial loan covenants, including maintaining a minimum
net worth, and minimum ratios of interest coverage, fixed charge coverage,
and debt to earnings before interest, taxes, depreciation and amortization.
Banner also has certain limitations on the incurrence of additional debt. As
of September 29, 1996, Banner was in compliance with all covenants under the
Banner Credit Agreement.
Banner has several interest rate hedge agreements ("Hedge Agreements")
to manage its exposure to increases in interest rates on its variable rate
debt. The Hedge Agreements provide interest rate protection on $60.0 million
of debt through September 2000, by providing a cap of 7% if the 90-day LIBOR
rate exceeds 7%. If the 90-day LIBOR rate drops below 5%, Banner will be
required to pay a floor rate of approximately 6%.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 11 of Notes to Consolidated Financial
Statements.
Item 6. Exhibits and Reports on Form 8-K
None.
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: Colin M. Cohen
Vice President and Chief Financial
Officer
By: William B. Hamilton
Controller
Date: November 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-29-1996
<CASH> 115,368
<SECURITIES> 9,759
<RECEIVABLES> 103,506
<ALLOWANCES> (6,117)
<INVENTORY> 284,076
<CURRENT-ASSETS> 529,347
<PP&E> 86,083
<DEPRECIATION> 79,121
<TOTAL-ASSETS> 989,378
<CURRENT-LIABILITIES> 146,081
<BONDS> 223,597
0
100
<COMMON> 100
<OTHER-SE> 426,347
<TOTAL-LIABILITY-AND-EQUITY> 989,378
<SALES> 145,894
<TOTAL-REVENUES> 146,103
<CGS> 106,306
<TOTAL-COSTS> 142,342
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,397
<INCOME-PRETAX> (1,802)
<INCOME-TAX> (122)
<INCOME-CONTINUING> (1,680)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,680)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
