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 December 29, 1996
Commission File Number: 1-373
RHI HOLDINGS, INC.
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(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
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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 December 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
December 29, 1996 (Unaudited) and June
30, 1996 3
Consolidated Statements of Earnings for
the Three and Six Months Ended
December 29, 1996 and December 31, 1995
(Unaudited) 5
Condensed Consolidated Statements of Cash
Flows for the Six Months Ended December 29,
1996 and December 31, 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 5. Other Information 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>
December 29, June 30,
ASSETS 1996 1996
- ------ ------------ ------------
(Unaudited) (*)
<S> <C> <C>
Current Assets:
Cash and cash equivalents, $5,803 and $6,761
restricted................................. $ 95,089 $ 36,112
Short-term investments....................... 11,123 10,427
Accounts receivable-trade, less allowances
of $6,367 and $6,071....................... 96,241 96,488
Notes Receivable............................. -- 170,384
Inventories:
Finished goods............................ 254,361 235,859
Work-in-process........................... 21,118 16,294
Raw materials............................. 15,169 18,586
--------- ---------
290,648 270,739
Prepaid expenses and other current assets.... 24,882 20,248
--------- ---------
Total Current Assets......................... 517,983 604,398
Property, plant and equipment net of
accumulated depreciation of $82,188 and
$76,183.................................... 85,617 87,281
Net assets held for sale..................... 45,721 43,609
Cost in excess of net assets acquired,
(Goodwill) less accumulated amortization of
$33,274 and $31,119........................ 132,693 135,241
Investments and advances, affiliated
companies.................................. 124,647 120,890
Prepaid pension assets....................... 57,774 57,660
Deferred loan costs.......................... 6,643 3,822
Other assets................................. 8,788 8,627
--------- ---------
Total Assets................................. $ 979,866 $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)
<CAPTION>
December 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........................... $ 9,408 $ 84,678
Accounts payable............................. 51,956 64,486
Other accrued liabilities.................... 71,579 74,987
Income taxes................................. 15,342 60,012
-------- --------
Total Current Liabilities.................... 148,285 284,163
Long-term debt, less current maturities...... 215,995 194,233
Other long-term liabilities.................. 18,910 17,692
Retiree health care liabilities.............. 42,432 44,452
Noncurrent income taxes...................... 71,203 33,569
Minority interest in subsidiaries............ 60,268 58,647
-------- ---------
Total Liabilities............................ 557,093 632,756
Stockholder's Equity:
Common Stock................................. 100 100
Preferred Stock.............................. 100 100
Paid-in capital.............................. 229,260 229,260
Retained earnings............................ 177,164 183,355
Cumulative translation adjustment............ 2,966 2,751
Net unrealized holding gain on available-for-
sale securities............................. 13,183 13,206
-------- ---------
Total Stockholder's Equity................... 422,773 428,772
-------- ---------
Total Liabilities and Stockholder's Equity... $ 979,866 $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 Six Months Ended
December 29, December 31, December 29, December 31,
1996 1995 1996 1995
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Net sales of products............. $159,591 $ 76,284 $305,485 $156,780
Revenues from services............ -- 26,636 -- 53,743
Other income, net................. 473 16 682 334
------- ------- ------- -------
160,064 102,936 306,167 210,857
Costs and Expenses:
Cost of goods sold................ 121,034 60,794 227,340 125,202
Cost of services.................. -- 19,239 -- 39,177
Selling, general & administrative. 35,174 18,752 70,107 38,130
Research and development.......... 22 23 45 44
Amortization of goodwill.......... 1,075 1,129 2,155 2,302
Restructuring..................... -- 285 -- 285
------- ------- ------- -------
157,305 100,222 299,647 205,140
Operating income.................... 2,759 2,714 6,520 5,717
Interest expense.................... 5,468 10,874 16,573 22,342
Interest income..................... (1,833) (1,151) (4,141) (2,536)
------- ------- ------- -------
Net interest expense................ 3,635 9,723 10,032 19,806
Investment income (loss), net....... 1,836 (83) 1,461 1,912
Equity in earnings of affiliates.... 393 8 2,387 1,923
Minority interest................... (776) (544) (1,561) (1,085)
------- ------- ------- -------
Earnings (loss) from continuing
operations before taxes............ 577 (7,628) (1,225) (11,339)
Income tax provision (benefit)...... 88 (1,676) (34) (3,179)
------- ------- ------- -------
Earnings (loss) from continuing
operations........................ 489 (5,952) (1,191) (8,160)
Earnings from discontinued
operations, net................... -- 3,420 -- 7,290
Loss on disposal of discontinued
operations, net................... -- (14) -- (27)
------- ------- ------- -------
Net earnings (loss)................. $ 489 $ (2,546) $ (1,191) $ (897)
======= ======= ======= =======
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>
Six Months Ended
December 29, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows provided by (used for)
Operations:
Net loss................................ $ (1,191) $ (897)
Depreciation and amortization........... 9,674 15,448
Accretion of discount on long-term
liabilities........................... 1,699 1,772
Distributed (undistributed) earnings of
affiliates, net....................... 1,610 (1,140)
Minority interest....................... 1,561 1,085
Changes in assets and liabilities....... (55,029) (16,806)
Non-cash charges and working capital
charges of discontinued operations.... -- 5,115
------- -------
Net cash provided by(used for)operations. (41,676) 4,577
Investments:
Collections on notes receivable from
operations sold....................... 173,719 --
Purchase of property, plant and
equipment............................. (5,212) (6,867)
Changes in investments.................. (7,911) (4,897)
Changes in net assets held for sale..... (1,651) (913)
Other, net.............................. 21 9
Investing activities of discontinued
operations............................ -- (875)
------- -------
Net cash provided by (used for)
investments........................... 158,966 (13,543)
Financing:
Proceeds from issuance of debt.......... 40,473 17,441
Debt repayments and repurchase of
debentures, net....................... (94,026) (22,610)
Payment of dividends.................... (5,000) (10,000)
------- -------
Net cash used for financing............. (58,553) (15,169)
Effect of exchange rate changes on cash..... 240 (525)
Net increase (decrease) in cash............. 58,977 (24,660)
Cash and cash equivalents, beginning of
period.................................. 36,112 64,174
------- -------
Cash and cash equivalents, end of period.... $ 95,089 $ 39,514
======= =======
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 December 29, 1996 and the
consolidated statements of earnings and cash flows for the six months ended
December 29, 1996 and December 31, 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 December 29, 1996 and for
all periods presented, have been made. 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 December 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 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 Holding Corp. ("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.
Note 3 - Discontinued Operations
On February 22, 1996, pursuant to an Asset Purchase Agreement dated
January 26, 1996, the Company, through one of its subsidiaries, completed the
sale of certain assets, liabilities and the business of the D-M-E Company
("DME") to Cincinnati Milacron Inc. ("CMI"), for a sales price of
approximately $244,331, as adjusted. The sales price consisted of $74,000 in
cash, and two 8% promissory notes in the aggregate principal amount of
$170,331 (together, the "8% CMI Notes"). On July 29, 1996, CMI paid in full
the 8% CMI Notes.
On January 27, 1996, FII completed the sale of Fairchild Data
Corporation ("Data") to SSE Telecom, Inc. ("SSE") for book value of
approximately $4,400 and 100,000 shares of SSE's common stock valued at $9.06
per share, or $906, at January 26, 1996, and warrants to purchase an
additional 50,000 shares of SSE's common stock at $11.09 per share. 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. The combined net sales of DME and Data totaled $45,475 and
$91,342 for the second quarter and first six months of Fiscal 1996,
respectively. Net earnings from discontinued operations was $3,420 in the
second quarter of Fiscal 1996 and $7,290 for the six months ended December
31, 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 six months ended
December 31, 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
to exclude Series C Preferred Stock of FII 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>
Six Months Ended
December 31, 1995
------------------
<S> <C>
Sales................................... $284,007
Earnings from continuing operations..... (1,189)
Net earnings............................ (1,189)
</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>
Six Months Ended
---------------------------
December 29, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Net sales................................. $147,657 $189,684
Gross profit.............................. 64,487 55,232
Earnings from continuing operations....... 3,199 7,228
Net earnings.............................. 3,199 7,228
</TABLE>
The Company owns approximately 26.7% of Nacanco common stock. The
Company recorded equity earnings of $1,291 and $1,684 from this investment
for the six months ended December 29, 1996 and December 31, 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 $1,095 during the six months ended
December 29, 1996.
On December 29, 1996, the Company's investments in STFI consisted of (i)
$21,174 carrying value for the $25,000 face value 6% cumulative Convertible
Preferred Stock, (ii) $10,136 carrying value for the $20,000 face value
Special Preferred Stock, and (iii) $(406) carrying value for 6,200,000 shares
of common stock of STFI. At the close of trading on December 27, 1996,
STFI's common stock was quoted at $9.125 per share. Based on this price, the
Company's investment in STFI common stock had an approximate market value of
$56,575.
Effective February 25, 1996, the Company increased its percentage of
ownership of Banner Common Stock from 47.2% to approximately 59.3%. Since
February 25, 1996, the Company has consolidated Banner's results. Prior to
February 25, 1996, the Company accounted for its investment in Banner using
the equity method and held its investment in Banner as part of investments
and advances-affiliated companies. The Company recorded equity earnings of
$375 from this investment for the six months ended December 31, 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, 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 December 29, 1996, the carrying value of the Company's investment in
4,369,400 shares of TFC common stock was $63,902 and included an increase of
$19,297, before tax, to market value (the same market value as of June 30,
1996). The Company recorded a gross unrealized gain of $22,393 from its
investment in TFC common stock in the first six months of Fiscal 1996.
Note 7 - Restricted Cash
The Company had approximately $5,803 and $6,761 of restricted cash on
December 29, 1996 and June 30, 1996, respectively, all of which is maintained
as collateral for certain debt facilities.
Note 8 - Credit Agreements
Prior to July 29, 1996, the Company through its subsidiary Fairchild
Holding Corp. ("FHC"), borrowed under an Interim Credit Agreement (the
"Interim Credit Agreement") with a consortium of banks. 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 and non-financial loan covenants, including maintaining a minimum
net worth of $150,000 and maintaining certain interest and fixed charge
coverage ratios at the end of each Fiscal Quarter. Additionally, the
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 December 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 December 31, 1996,
Banner's performance level resulted in borrowings under the Banner Credit
Agreement being at an interest rate of prime plus 1% and LIBOR plus 2 1/4%
for the quarter ending March 31, 1997. 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 maintenance of 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 December 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%.
In November 1996, Banner entered into an additional hedge agreement
("Additional Hedge Agreement") with one of its major lenders to provide
interest rate protection on $20,000 of debt for a period of three years.
Effectively, the Additional Hedge Agreement provides for a cap of 7 1/4% if
the 90 day LIBOR exceeds 7 1/4%. If the 90 day LIBOR drops below 5%, Banner
will be required to pay interest at a floor rate of approximately 6%. No
cash outlay was required to obtain the Additional Hedge Agreement as the cost
of the cap was offset by the sale of the floor.
Note 9 - Minority Interests in Consolidated Subsidiaries
Included in the Company's $60,268 of minority interest at December 29,
1996, is $59,975 representing approximately 40.7% of Banner's common stock
effectively outstanding on a consolidated basis.
Note 10 - Dividends Paid to Parent
During the six months ended December 29, 1996 and December 31, 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 December 29, 1996, the consolidated total recorded liabilities of
the Company for environmental matters approximated $9,655, 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 $17,486.
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.
Note 12 - Subsequent Events
On January 16, 1997, Banner, through its subsidiary, Dallas Aerospace,
Inc., consummated the acquisition of 100% of the outstanding stock of PB
Herndon Company ("PB Herndon") for approximately $14,700. In addition,
Banner paid approximately $1,300 to repay certain loans of PB Herndon.
Banner recorded approximately $3,451 of goodwill as a result of this
acquisition. Banner financed this transaction by borrowing $16,000 from RHI.
PB Herndon is a distributor of a specialty fastener lines and other aerospace
related components.
On January 23, 1997, the Company's Aerospace Fasteners Segment acquired
an exclusive call option to purchase a majority interest in Simmonds, SA
("Simmonds") for approximately $21,000 and the assumption of approximately
$35,500 in debt. The transaction, which is contingent upon receipt of
necessary approvals, gives the Company the right to purchase common shares
and convertible notes representing approximately 84.2% of Simmonds on a fully
diluted basis. The Company is in the process of completing due diligence
prior to exercise of its call option. Simmonds is one of Europe's leading
manufacturers and distributors of aerospace and automotive fasteners.
<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.
Accordingly, DME and Data have been accounted for as discontinued
operations. The combined net sales of DME and Data totaled $45.5 million and
$91.3 million for the second quarter and first six months of Fiscal 1996,
respectively. Net earnings from discontinued operations was $3.4 million in
the second quarter of Fiscal 1996 and $7.3 million for the six months ended
December 31, 1995.
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) and Technology Products
(formerly Industrial Products). For the six months ended December 31, 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 six month periods ended December
29, 1996 and December 31, 1995.
<PAGE>
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Six Months Ended
December 29, December 31, December 29, December 31,
1996 1995 1996 1995
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Sales by Business Segment:
Aerospace Fasteners................ $ 56,494 $ 55,794 $111,541 $107,990
Aerospace Distribution (a)......... 96,985 -- 181,092 --
Technology Products................ 9,969 15,095 19,427 37,505
Communications Services (b)........ -- 32,031 -- 65,028
Eliminations (c)................... (3,857) -- (6,575) --
------- ------- ------- -------
Total................................. $159,951 $102,920 $305,485 $210,523
======= ======= ======= =======
Operating Income (Loss) by Business
Segment:
Aerospace Fasteners................ $ 2,156 $ 639 $ 4,264 $ (916)
Aerospace Distribution (a)......... 6,072 -- 12,053 --
Technology Products ............... (2,248) (89) (4,298) 2,221
Communications Services (b)........ -- 4,862 -- 9,771
------- ------- ------- -------
Total................................. 5,980 5,412 12,019 11,076
Corporate administrative expense... (3,093) (2,437) (5,409) (5,156)
Other corporate income............. (128) (261) (90) (203)
------- ------- ------- -------
Operating income...................... 2,759 2,714 6,520 5,717
Net interest expense.................. (3,635) (9,723) (12,432) (19,806)
Investment income (loss), net......... 1,836 (83) 1,461 1,912
Equity in earnings of affiliates...... 393 8 2,387 1,923
Minority interest..................... (776) (544) (1,561) (1,085)
------- ------- ------- -------
Earnings (loss) from continuing
operations before income taxes...... 577 (7,628) (1,225) (11,339)
Income tax provision (benefit)........ 88 (1,676) (34) (3,179)
------- ------- ------- -------
Earnings (loss) from continuing
operations.......................... $ 489 $ (5,952) $ (1,191) $ (8,160)
======= ======= ======= =======
(a) The Company became the majority shareholder of Banner Aerospace, Inc. in
February, 1996 and accordingly, began consolidating their results as of then.
(b) Effective March 13, 1996, the Company's investment in the Communications
Services segment was recorded using the equity method.
(c) Intersegment eliminations includes $6.5 million sales from the Aerospace
Fasteners segment to the Aerospace Distribution segment for the six months
ended December 29, 1996.
</TABLE>
General
- -------
Overall sales increased by $56.7 million in the second quarter and $95.0
million for the Fiscal 1997 six month period, which reflected strong sales
performances from the Aerospace Fasteners and Aerospace Distribution business
segments compared to sales for the same periods in Fiscal 1996. Operating
income increased 1.7% in the second quarter and 14.0% in the Fiscal 1997 six
month period, compared to operating income for the same periods in Fiscal
1996. The first six months of Fiscal 1997 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 unconsolidated effective March 13, 1996, as a result of the
Merger into STI. (See discussion above).
Aerospace Fasteners
- -------------------
Sales in the Aerospace Fasteners segment increased $.7 million in the
second quarter and $3.6 million in the Fiscal 1997 six month period, compared
to the corresponding Fiscal 1996 periods, 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 $14.7 million in
the prior year six months, sales increased 19.5% in the Fiscal 1997 six month
period.
Operating income in the Aerospace Fasteners segment increased $1.5
million in the second quarter and $5.2 million in the Fiscal 1997 six month
period, compared to the Fiscal 1996 periods. Excluding Harco's operating
income in the prior year period, operating income increased $7.1 million.
Management intends to continue to implement productivity improvements and
reduce costs.
Aerospace Distribution
- ----------------------
The Aerospace Distribution segment reported sales of $97.0 million in
the second quarter and $181.1 million for the six month period ended December
29, 1996. Operating income was $6.1 million in the second quarter and $12.1
million for the six month period ended December 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 and six months ended
December 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 $5.1 million in the second quarter and
$18.1 million in the first six months of Fiscal 1997, compared to the Fiscal
1996 periods. This differential resulted primarily from a lower level of
shipments during the first six months of Fiscal 1997, while sales during the
first six months of the prior year benefitted from the shipment of a major
order. During the first six months of Fiscal 1997, Fairchild Technologies
received new orders totaling approximately $55.1 million, including several
multimillion dollar orders recently received which are scheduled to be
shipped during the second half of Fiscal 1997.
An operating loss of $2.0 million in the second quarter and $3.8 million
for the six months ended December 29, 1996, was recorded at Fairchild
Technologies in the Technology Products segment in the current periods,
partially due to the low level of sales, but also due to expansion of the
sales staff into the Far East. The Scandinavian Bellyloading Company ("SBC")
had a six month operating loss of $.5 million, consistent with the prior year
loss while SBC continues to be in a start up mode. SBC recently announced
$15 million of orders which are scheduled to be shipped over the next twelve
months, at which time the operation should become profitable. The Technology
Products segment reported an operating loss of $.1 million in the Fiscal 1996
second quarter and operating income of $2.2 million in the Fiscal 1996 first
six months.
Communications Services
- -----------------------
As a result of the Merger of the Communications Services segment into
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 and six
months ended December 31, 1995, this segment reported sales of $32.0 million
and $65.0 million, respectively, and operating profit of $4.9 million and
$9.8 million, respectively.
Other Expenses/Income
- ---------------------
Corporate administrative expense increased 26.9% in the second quarter
and 4.9% in the first six month period of Fiscal 1997, compared to the same
periods in Fiscal 1996. The increase in the current year periods was
primarily due to higher litigation costs partially offset by a reduction in
staff.
Net interest expense decreased 62.6% in the second quarter and 49.3% in
the six month period ended December 29, 1996, compared to the prior year
periods, 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 first six months.
Investment income, net decreased $.5 million in the first six months of
Fiscal 1997, principally as a result of recording lower unrealized gains on
the fair market value adjustments of trading securities in the Fiscal 1997
period, compared to the Fiscal 1996 period.
Income taxes - The Company recorded a small tax benefit on the $1.2
million loss from continuing operations during the first six months of
Fiscal 1997.
Earnings from discontinued operations, net, of $3.4 million in the
Fiscal 1996 second quarter and $7.3 million for the six months ended
December 31, 1995, includes the earnings, net of tax, from DME and Data.
The net loss of $1.2 million in the first six months of Fiscal 1997,
increased by $.3 million, compared to the first six months of Fiscal 1996,
after recognizing: (i) a $.8 million increase in operating income, (ii) a
$9.8 million decrease in net interest expense, offset by (iii) a $3.1 million
decrease in the tax benefit, (iv) $7.3 million in earnings from discontinued
operations recorded in the prior period, and (v) a $.5 million increase in
minority interest.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 29, 1996, was $369.7 million, which was
$49.5 million higher than at June 30, 1996. The principal reasons for this
increase included a $59.0 million increase in cash, a $75.3 million reduction
in short-term notes payable, a $44.7 million decrease in current income
taxes, a decrease in accounts payable and other accrued liabilities of $15.9
million, and an increase in inventories of $19.9 million. Partially
offsetting the increase in working capital was a $170.4 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 December 29, 1996,
had a book value of $45.7 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 Banner (collectively the "Credit Facilities").
Prior to July 29, 1996, the Company through its subsidiary FHC, borrowed
under an Interim Credit Agreement (the "Interim Credit Agreement") with a
consortium of banks. 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 and non-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 December 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 Company's Credit Agreements provides 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. The RHI Credit Agreement requires the Company to comply
with specified covenants and maintain a consolidated net worth of $175.0
million. Additionally, the Company's capital expenditures are restricted,
except for certain leasehold improvements, to $2.0 million per Fiscal Year
plus the selling price of fixed assets for such Fiscal Year. At December 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 December
31, 1996, Banner's performance level resulted in borrowings under the Banner
Credit Agreement being at an interest rate of prime plus 1% and LIBOR plus 2
1/4% for the quarter ending March 31, 1997. 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 maintenance of 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 December 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%.
In November 1996, Banner entered into an additional hedge agreement
("Additional Hedge Agreement") with one of its major lenders to provide
interest rate protection on $20.0 million of debt for a period of three
years. Effectively, the Additional Hedge Agreement provides for a cap of
7 1/4% if the 90 day LIBOR exceeds 7 1/4%. If the 90 day LIBOR drops below
5%, Banner will be required to pay interest at a floor rate of approximately
6%. No cash outlay was required to obtain the Additional Hedge Agreement as
the cost of the cap was offset by the sale of the floor.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 11 of Notes to Consolidated Financial
Statements.
Item 5. Other Information
Articles have appeared in the French press reporting an investigation by
a French magistrate into certain allegedly improper business transactions
involving Elf Acquitaine, its former chairman and various third parties,
including Maurice Bidermann. In connection with this investigation, the
magistrate has made inquiry into allegedly improper transactions between
Jeffrey Steiner and that petroleum company. In response to the magistrate's
request that Mr. Steiner appear in France as a witness, Mr. Steiner submitted
a written statement concerning the transactions and has offered to appear in
person if certain arrangements were made. According to the French press, the
magistrate has also requested permission to investigate other
allegedly improper transactions involving another French petroleum company
and, if granted, inquiry into transactions between Mr. Steiner and such company
could ensue. The Board of Directors of the Company's parent, The Fairchild
Corporation, has formed a special committee of outside directors to advise
it with respect to these matters, and the special committee has
retained counsel.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
(i) Financial Data Schedules
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter.
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: February 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-29-1996
<CASH> 95,089
<SECURITIES> 11,123
<RECEIVABLES> 102,608
<ALLOWANCES> (6,367)
<INVENTORY> 290,648
<CURRENT-ASSETS> 517,983
<PP&E> 85,617
<DEPRECIATION> 82,188
<TOTAL-ASSETS> 979,866
<CURRENT-LIABILITIES> 148,285
<BONDS> 215,995
0
100
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<OTHER-SE> 422,573
<TOTAL-LIABILITY-AND-EQUITY> 979,866
<SALES> 305,485
<TOTAL-REVENUES> 306,167
<CGS> 227,340
<TOTAL-COSTS> 299,647
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<INCOME-PRETAX> (1,225)
<INCOME-TAX> (34)
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</TABLE>
