FAIRCHILD CORP, 10-K, 1994-09-21

FAIRCHILD CORP
10-K, 1994-09-21
MACHINERY, EQUIPMENT & SUPPLIES

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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

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

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

For the year ended June 30, 1994 Commission File Number: 1-6560
------------- ------

THE FAIRCHILD CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)

Delaware 34-0728587
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

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

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

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

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

Class A Common Stock, par value
$.10 per share New York and Pacific Stock Exchange
- ------------------------------- -----------------------------------
12 1/4% Senior Subordinated
Notes due 1996 New York Stock Exchange
- ------------------------------- -----------------------------------
13 1/8% Subordinated Debentures
due 2006 New York Stock Exchange
- ------------------------------- -----------------------------------
12% Intermediate Subordinated
Debentures due 2001 New York Stock Exchange
- ------------------------------- -----------------------------------
13% Junior Subordinated
Debentures due 2007 New York Stock Exchange
- ------------------------------- -----------------------------------

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

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

Yes X No
---- ----

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K [ ].

As of September 2, 1994, the aggregate market value of the common shares
(based upon the closing price of these shares on the New York Stock Exchange)
of the Registrant held by nonaffiliates was $29.9 million (excluding shares
deemed beneficially owned by affiliates of the Registrant under Commission
Rules).

As of September 2, 1994, the number of shares outstanding of each of the
Registrant's classes of common stock were as follows:

Class A common stock, $.10 par value 13,406,109
------------
Class B common stock, $.10 par value 2,696,886
------------

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrant's definitive proxy statement for the 1994
Annual Meeting of Stockholders' to be held on November 17, 1994 (the "1994
Proxy Statement"), which the Registrant intends to file within 120 days after
June 30, 1994, are incorporated by reference into Parts III and IV.
<PAGE>
THE FAIRCHILD CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED JUNE 30, 1994

PART I Page

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

Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . 13

Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . 14

Item 4. Submission of Matters to
a Vote of Stockholders . . . . . . . . . . . . . . . . 16

PART II

Item 5. Market for the Company's
Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . 17

Item 6. Selected Financial Data . . . . . . . . . . . . . . . 18

Item 7. Management's Discussion and Analysis
of Results of Operations and
Financial Condition . . . . . . . . . . . . . . . . . 18

Item 8. Financial Statements and
Supplementary Data . . . . . . . . . . . . . . . . . . 30

Item 9. Disagreements on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . 72

PART III

Item 10. Directors and Executive Officers
of the Company . . . . . . . . . . . . . . . . . . . . 72

Item 11. Executive Compensation . . . . . . . . . . . . . . . . 72

Item 12. Security Ownership of Certain
Beneficial Owners and Management . . . . . . . . . . . 72

Item 13. Certain Relationships and
Related Transactions . . . . . . . . . . . . . . . . . 72

PART IV

Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K . . . . . . . . . . 73
<PAGE>
PART I
------

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

(a) General Development of Business

The Fairchild Corporation (the "Company") was incorporated under the
laws of the State of Delaware in October 1969. The Company changed its name
from Banner Industries, Inc. to The Fairchild Corporation on November 15,
1990. The Company is a holding company which owns all of the issued and
outstanding stock of RHI Holdings, Inc. ("RHI"), and through RHI all of the
issued and outstanding common stock of Fairchild Industries, Inc. ("FII").

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

Through RHI, the Company is the largest stockholder of Banner Aerospace,
Inc. ("Banner"), which is a leading international distributor to the
aerospace industry. On December 23, 1993, the Company, through RHI,
completed a sale of its 43.9% stock interest in Rexnord Corporation, a
manufacturer of mechanical power transmission components and related
products.

Fiscal 1994 Developments
- ------------------------

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

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

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

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

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

(b) Financial Information about Business Segments

Financial information regarding the Company's business segments are
hereby incorporated by reference from Note 20 of the Company's consolidated
financial statements included in Item 8 Financial Statements and
Supplementary Data.

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

The Company, through its Aerospace Fasteners segment, is a leading
worldwide manufacturer and supplier of fastening systems used in the
construction and maintenance of commercial and military aircraft. The
Aerospace Fasteners segment accounted for 45.8% of total Company sales for
the year ended June 30, 1994.

Products
--------

In general, aerospace fasteners produced by the Company are used to join
materials in applications which are not critical to flight. Products range
from standard aerospace screws to more complex systems that fasten airframe
structures, and sophisticated latching or quick disconnect mechanisms that
allow efficient access to internal parts that need to be serviced regularly
or monitored. The Aerospace Fasteners segment also manufactures and supplies
fastening systems used in non-aerospace industrial and electronic niche
applications. The Aerospace Fasteners segment produces and sells products
under various trade names and trademarks including Voi-Shan (fasteners for
aerospace structures), Screwcorp (standard externally threaded products for
aerospace applications), RAM (custom designed mechanisms for aerospace
applications), Camloc (components for the industrial, electronic, automotive
and aerospace markets), Tridair and Rosan (fastening systems for highly-
engineered aerospace, military and industrial applications). In addition to
these manufacturing operations, the Aerospace Fasteners segment includes
HARCO, which is a leading stocking distributor of self-locking nuts in the
aerospace fasteners industry.

Principal product lines of the Aerospace Fasteners segment include:

Standard Aerospace Airframe Fasteners - These fasteners consist of
standard externally threaded fasteners used in non-critical airframe
applications on a wide variety of aircraft. These fasteners include Hi-
Torque Speed Drive, Tri-Wing, Torq-Set, Phillips and Hex Heads.

Commercial Aerospace Structural and Engine Fasteners - These fasteners
consist of more highly engineered, permanent or semi-permanent fasteners used
in non-critical but more sophisticated airframe and engine applications which
could involve joining more than two materials. These fasteners are generally
engineered to specific customer requirements or manufactured to specific
customer specifications for special applications, often involving exacting
standards. These fasteners include Hi-Lok, Veri-Lite, Eddie-Bolt2 and
customer proprietary engine nuts.

Proprietary Products and Fastening Systems - These very highly
engineered, proprietary fasteners are designed by the Company for specific
customer applications and include high performance structural latches and
hold down mechanisms. These fasteners are usually proprietary in nature and
are primarily used in either commercial aerospace or military applications.
These fasteners include Visu-Lok, Composi-Lok, Keen-serts, Mark IV, Flatbeam
and Ringlock.

Highly Engineered Fastening Systems for Industrial Applications - These
highly engineered fasteners are designed by the Company for specific niche
applications in the electronic, automotive and durable goods markets and are
sold under the Camloc trade name.

Gas Springs for Automotive and Industrial/Commercial Applications -
These are designed to assist in the raising, lowering or moving of heavy
loads such as the tailgate of a vehicle, sunbeds, printer canopies, acoustic
hoods and like items.

Sales and Markets
-----------------

The products of the Aerospace Fasteners segment are sold primarily to
domestic and foreign original equipment manufacturers, the maintenance and
repair market through distributors and the United States government. 78.9%
of its sales are domestic. The products of the Aerospace Fasteners segment
are marketed by a direct sales force and technical engineering support
personnel who are responsible for identifying new product applications,
obtaining the approval of new products and maintaining ongoing relationships
with customers in order to meet their requirements. Major customers include
Boeing, McDonnell Douglas, Airbus, Lockheed and Northrop and their
subcontractors as well as major distributors such as Burbank Aircraft. No
single customer accounts for more than 10% of consolidated sales.

The Company anticipates that non-aerospace and commercial aerospace
applications as a percentage of sales will increase over time as the Company
brings to market new products and military spending declines.

Research and Development
------------------------

Research and development and its engineering related support functions
are an important part of the Company's strategy of providing its customers
quality products, prompt service and overall value. Company sponsored
research and development expense in the Aerospace Fasteners segment for the
years ended June 30, 1994, 1993 and 1992 amounted to $1,435,000, $2,204,000
and $3,197,000, respectively.

Manufacturing and Production
----------------------------

The Aerospace Fasteners segment has seven major manufacturing
facilities, of which four are located in the United States and three are
located in Europe. Each facility has virtually complete production
capability, and subcontracts only those orders which exceed capacity. Each
plant is oriented to produce a specified product or group of products,
depending on the production process involved.

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

The Company is continuing to extensively re-engineer the way it produces
fasteners, shifting from a process orientation to a product orientation by
forming focused discrete work groups with each having broader
responsibilities.

Competition
-----------

The Aerospace Fasteners segment's major competitors include Hi-Shear,
Inc., Monogram, Inc., Air Industries, Inc., SPS, Inc., Kaynar, Valley Todeco,
and Huck International, with regard to aerospace fasteners, and Southco,
Inc., with regard to specialized industrial applications. In addition,
competition comes from stocking distributors who may offer reduced lead times
to customers as a result of their inventory investment.

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

The Industrial Products segment operates under the trade name D-M-E
Company ("DME"), Fairchild Data Corporation ("Data") and recently added
Convac GmbH ("Convac"). DME is a leading manufacturer and supplier of
tooling and electronic control products for the plastic injection molding
industry worldwide. The principal end-users of DME's products are the
transportation, packaging, communications, housewares, commercial and
industrial products, medical products, toy, appliance, furniture and building
industries. 77.5% of DME's sales for the year ended June 30, 1994, were in
North America and 22.5% were attributable to sales outside North America.

Data is a supplier of modems for use in high-speed digitized voice and
data communications. No single customer accounts for more than 10% of the
Company's consolidated sales.

In June 1994, as part of the Company's strategy of diversifying into
new, high growth industries, the Company, through RHI, acquired 100% of the
outstanding common stock of Convac, a German corporation. Convac is a
leading designer and manufacturer of wet processing tools, equipment and
systems in multiple modular design, required for the manufacture of
semiconductor chips and related products, and for compact and optical storage
discs and liquid crystal displays. See Note 3 of the Company's consolidated
financial statements included in Item 8 Financial Statements and
Supplementary Data.

The Industrial Products segment accounted for 37.5% of total Company
sales for the year ended June 30, 1994.

Products
--------

DME provides an extensive line of standardized and special order
products as well as electronic control systems. Principal product lines
include:

Mold Bases - Mold bases are used to retain the cavity and core of
a plastic mold. These products are individually stacked high alloy,
precision-machined steel plates available either as a standard dimensioned
catalog product or as a specially machined mold base made to customer
specifications.

Mold Components - Mold components are utilized within a mold base
to facilitate the mechanical action of the individual steel plates. These
products include such items as leader pins and bushings to guide and align
the plates, ejector pins and sleeves to eject the finished plastics product
from the mold, and other specialized products such as collapsible cores to
mold complex geometries involving difficult under-cuts and threads.

Moldmaking Tools/Supplies - Tooling and miscellaneous supplies
allow the moldmaker to manufacture and "finish" the actual cavity and core of
a plastic mold. These products range from ultrasonic polishing equipment and
abrasives to specialized tooling for the milling and drilling of steel.

Runnerless Molding/Process Control - DME's internally and
externally heated runnerless molding systems with thermal and/or mechanical
gate shut-off devices produce high quality plastic products while minimizing
labor content and reducing scrap in the manufacturing process. DME's
trademark runnerless molding systems are called The Hot One and The Cool
One. DME also provides sensor and computer technology, allowing processors
Statistical Process Control (SPC) of their entire molding cycle.

CAD/CAM - DME offers a unique line of Computer Aided Design (CAD)
and Computer Aided Manufacturing (CAM) hardware and software for the plastics
industry. DME sells computer hardware as a value-added reseller for some of
the industry's best known computer suppliers. Additionally, DME has
developed copyrighted software programs which are specific to the plastics
industry. These systems enable mold designers to design mold bases utilizing
a combination of most of the popular products offered by DME, including
runnerless systems.

Data is a supplier of modems for use in high-speed digitized voice and
data communications.

The four primary product groups of Convac include wafer track
systems/cluster, photomask processing equipment, liquid crystal display
process equipment and compact disc coating equipment.

Sales and Markets
-----------------

DME's sales efforts in North America are led by direct field sales
representatives and regional managers, who call directly on key mold makers,
molders and designers. In addition, a telemarketing group supplements the
sales representatives' efforts and reaches the smaller or low activity
accounts. Additionally, DME utilizes distributors in key product market
segments to focus on sales of items such as temperature controls. Sales of
highly technical products, such as complete runnerless manifold systems, are
aided by technical service people located in the sales regions.

Internationally, sales are handled by direct sales representatives in
England, France, Belgium and Germany. In a number of countries in Europe and
Asia, joint venture partners sell DME products through both full-time sales
people and secondary distribution outlets. DME utilizes stocking
distributors to serve the rest of the world.

Manufacturing and Production
----------------------------

Local production facilities are a strategic advantage to sales in the
custom mold base markets DME serves. Accordingly, DME maintains regional
production facilities in North America and Europe to service customers of its
custom-manufactured products. DME owns ten manufacturing facilities in the
United States, Canada, Mexico, Belgium and Germany and licenses four other
companies to manufacture products in Brazil, Hungary, Japan and Korea.

Competition
-----------

DME competes with different companies with respect to each of its major
product categories. DME's competition principally consists of small
privately-held manufacturers operating primarily in local markets.

The Company believes it is the leading manufacturer of mold bases. DME
is one of six major competitors in North America and one of four major
competitors in Europe in the runnerless molding/process controls market. The
Company believes the runnerless molding/process controls market is a growth
market with competition based primarily on product technology and service.
A significant portion of DME's research and development is aimed at this
market. DME faces competition from various companies with respect to each of
the individual products in the other resale products category. Competition
in this category is based primarily on price and delivery time.

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

Fairchild Communications Services Company provides telecommunications
equipment and services to tenants of commercial office buildings, under the
trade name Telecom 2000 Services. The Company believes it is the largest
provider of comprehensive telecommunications services exclusively to multi-
tenant office buildings in the United States. Fairchild Communications was
founded as a start-up venture in 1985 and has grown rapidly through
expansions and acquisitions. Sales have grown from $1.4 million in Fiscal
1986 to $74.2 million in Fiscal 1994. Approximately $48 million of such
increase was attributable to acquisitions (determined on an annualized basis
at the date of acquisition), primarily the acquisition of the
telecommunication assets of Amerisystems. The Communications Services
segment accounted for 16.7% of total Company sales for the year ended June
30, 1994.

Services
--------

Fairchild Communications negotiates long-term telecommunications
franchises with owners or developers of office buildings, typically during
the latter stages of building construction. Under these arrangements,
Fairchild Communications installs switching equipment, cable and telephone
equipment. Fairchild Communications then contracts directly with individual
tenants in the buildings to provide multi-year, single point-of-contact
telecommunications services. The services provided by Fairchild
Communications include access to services provided by regulated
communications companies, including local, long distance, international and
"800" telephone services. In addition, Fairchild Communications provides
telecommunications equipment as well as voice mail, telephone calling cards,
local area networks and voice and data cable installation. Fairchild
Communications also provides customized billing services to assist customers
in controlling their telecommunications expense. Fairchild Communications
typically provides telecommunications services at rates equal to or below
those which a customer could otherwise obtain, in part due to discounts
Fairchild Communications commands as a high volume purchaser of telephone
services.

Customers
---------

Customers typically consist of small to medium size businesses and
branches of larger organizations. As of June 30, 1994, Fairchild
Communications served approximately 4,500 customers at 275 buildings located
in 23 major metropolitan areas, providing approximately 62,000 full service
lines and 9,000 long distances only lines. Contract terms typically provide
for a lease of three to five years with an automatic renewal provision.

Competition
-----------

Fairchild Communications competes with regulated major carriers that may
provide a portion of the services that Fairchild Communications provides, but
are typically not structured to provide all of a customer's
telecommunications requirements. Fairchild Communications also competes with
small independent operators serving local markets. In some cases Fairchild
Communications competes with other communications services providers in order
to secure franchises with office building owners for the provision of
telecommunications services within their buildings. Principal competitors
include Realcom and Shared Technologies, as well as smaller, more localized,
companies. Once a franchise has been obtained, Fairchild Communications
competes with equipment manufacturers and distributors for the provision of
telephone and other telecommunications equipment and services to the
building's tenants. Principal equipment competitors include manufacturers
such as NEC, Intecom, AT&T and some of the local Bell operating companies
acting as manufacturer's distributors, as well as numerous smaller equipment
distributors.

Growth
------

Management believes that future growth in the Communications Services
segment will come primarily from four sources: acquisitions of smaller
companies operating in the same or related businesses; new customers as a
result of increased occupancy of space currently vacant in office buildings
already under franchise; additional franchise agreements with newly
constructed office buildings; and additional services to the existing
customer base.

<PAGE>
Foreign Operations
- ------------------

The Company's operations are located primarily in the United States and
Europe. Inter-area sales are not significant to the total revenue of any
geographic area. Export sales are made by U.S. subsidiaries and divisions to
customers in non-U.S. countries, whereas foreign sales are made by the
Company's non-U.S. subsidiaries. For the Company's sales results by
geographic area and export sales, see Note 21 of the Company's consolidated
financial statements included in Item 8, Financial Statements and
Supplementary Data.

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

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

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

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

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

Suppliers
- ---------

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

Research and Patents
- --------------------

The Company's research and development activities have included:
applied research; development of new products; testing and evaluation of, and
improvements to, existing products; improvements in manufacturing techniques
and processes; development of product innovations designed to meet government
safety and environmental requirements; and development of technical services
for manufacturing and marketing. The Company's sponsored research and
development expenditures amounted to $3,940,000, $3,262,000 and $4,140,000
for the years ended June 30, 1994, 1993 and 1992, respectively. The Company
owns patents relating to the design and manufacture of certain of its
products and is a licensee of technology covered by the patents of other
companies. The Company does not believe that any of its business segments
are dependent upon any single patent or upon the rights and licenses it
possesses under any single patent owned by others.

Personnel
- ---------

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

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

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

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

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

The Company owns its corporate headquarters at Washington-Dulles
International Airport.

The Company has several parcels of property which it is attempting to
market, lease and/or develop: (i) an 88 acre parcel located in Farmingdale,
New York, (ii) a 12 acre parcel located in City of Commerce, California,
(iii) a 6 acre parcel in Temple City, California, and (iv) an 8 acre parcel
in Chatsworth, California. In addition to the above, certain other
properties of the Company are being marketed.

The following table sets forth the location of the larger physical
properties used in the continuing operations of the Company, their square
footage, the business segment or groups they serve and their primary use.
Each of the properties owned or leased by the Company is, in management's
opinion, generally well maintained, is suitable to support the Company's
business and is adequate for the Company's present needs. All of the
Company's occupied properties are maintained and updated on a regular basis.
<TABLE>
<CAPTION>
Owned or Square Business Segment/
Location Leased Footage Group Use
- -------- -------- ------- ----------------- -------------
<S> <C> <C> <C> <C>
Torrance, California Owned 284,000 Aerospace Fasteners Manufacturing
Youngwood, Pennsylvania Owned 135,000 Industrial Products Manufacturing
Chantilly, Virginia Owned 125,000 Corporate Office
City of Industry, California Owned 120,000 Aerospace Fasteners Manufacturing
Madison Hts, Michigan Owned 69,000 Industrial Products Manufacturing
Industriepark Noord, Belgium Owned 69,000 Industrial Products Manufacturing
Santa Ana, California Owned 50,000 Aerospace Fasteners Manufacturing
Scottsdale, Arizona Leased 120,000 Industrial Products Manufacturing
</TABLE>
Information concerning long-term rental obligations of the Company at
June 30, 1994 is set forth in Note 19 to the Company's consolidated financial
statements included in Item 8 Financial Statements and Supplementary Data.

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

CL Motor Freight Litigation
- ---------------------------

The Workers Compensation Bureau of the State of Ohio is seeking
reimbursement from the Company for approximately $5,400,000 for CL workers
compensation claims which were insured under a self-insured workers
compensation program of CL. The Company has contested a significant portion
of this claim.

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

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

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

The Corporate Administrative Contracting Officer (the "ACO"), based upon
the advice of the United States Defense Contract Audit Agency, has made a
determination that FII did not comply with Cost Accounting Standards in
accounting for (i) the 1985 reversion to FII of certain assets of terminated
defined benefit pension plans, and (ii) pension costs upon the closing of
segments of FII's business. The ACO has directed FII to prepare a cost
impact proposal relating to such plan terminations and segment closings and,
following receipt of such cost impact proposals, may seek adjustments to
contract prices. The ACO alleges that substantial amounts will be due if
such adjustments are made. The Company believes it has properly accounted
for the asset reversions in accordance with applicable accounting standards.
The Company has entered into discussions with the government to attempt to
resolve these pension accounting issues.

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

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

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

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

The Company and other aerospace fastener and industrial product
manufacturers are subject to stringent Federal, state and local environmental
laws and regulations concerning, among other things, the discharge of
materials into the environment and the generation, handling, storage,
transportation and disposal of waste and hazardous materials. To date, such
laws and regulations have not had a material effect on the financial
condition of the Company, although the Company has expended, and can be
expected to expend in the future, significant amounts for investigation of
environmental conditions and installation of environmental control
facilities, remediation of environmental conditions and other similar
matters, particularly in the Aerospace Fasteners segment.

In connection with its plans to dispose of certain real estate, the
Company must investigate environmental conditions and may be required to take
certain corrective action prior or pursuant to any such disposition. In
addition, management has identified several areas of potential contamination
at or from other facilities owned, or previously owned, by the Company, that
may require the Company either to take corrective action or to contribute to
a clean-up. The Company is also a defendant in certain lawsuits and
proceedings seeking to require the Company to pay for investigation or
remediation of environmental matters and has been alleged to be a potentially
responsible party at various "Superfund" sites. Management of the Company
believes that it has recorded adequate reserves in its financial statements
to complete such investigation and take any necessary corrective actions or
make any necessary contributions. No amounts have been recorded as due from
third parties, including insurers, or set off against, any liability of the
Company, unless such parties are contractually obligated to contribute and
are not disputing such liability.

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

The Company is involved in various other claims and lawsuits incidental
to its business, some of which involve substantial amounts. The Company,
either on its own or through its insurance carriers, is contesting these
matters.

In the opinion of management, the ultimate resolution of the legal
proceedings, including those discussed above, will not have a material
adverse effect on the financial condition or the future operating results of
the Company.

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

None.
<PAGE>
PART II
-------

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

(a) Market Information

The Company's Class A Common Stock is traded on the New York Stock
Exchange and Pacific Stock Exchange under the symbol FA. The Company's Class
B Common Stock is not listed on any exchange and is not publicly traded.
Class B Common Stock can be converted to Class A Common Stock at any time.

The table below presents the price range of the Company's Class A stock
in each quarter of Fiscal 1994 and 1993.
<TABLE>
<CAPTION>
Market Price of Class A
Common Stock
---------------------------------
Fiscal 1994 Fiscal 1993
--------------- ---------------
High Low High Low
Quarter Ended ------ ------ ------ ------
<S> <C> <C> <C> <C>
September 30................... 4.125 3.125 5.000 3.875
December 31.................... 4.125 2.750 5.250 3.500
March 31....................... 4.750 3.875 5.250 4.125
June 30........................ 4.625 3.375 5.375 3.250
</TABLE>
(b) Holders

The Company had approximately 1,594 and 64 record holders of its Class
A and Class B Common Stock, respectively, at September 2, 1994.

The Company suspended its regular dividend payments in Fiscal 1988. The
Company's present intention is to resume regular dividend payments when
deemed prudent by its Board of Directors.

<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
<TABLE>
Five-Year Financial Summary
(In thousands, except per share data)
<CAPTION>
Year Ended June 30 1994 1993 1992 1991 1990
- ------------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Net sales........................ $ 444,145 $ 463,567 $ 489,780 $ 515,652 $ 689,639
Earnings (loss) from continuing
operations..................... 27,783 (43,465) (20,168) 22,447 (3,904)
Earnings (loss) per share from
continuing operations:
Primary...................... 1.72 (2.70) (1.24) 1.31 (.30)
Fully diluted................ 1.72 (2.70) (1.24) 1.30 (.30)
Cash dividends per common share:
Class A........................ -- -- .20 -- --
Class B........................ -- -- .10 -- --
Balance Sheet Data:
Total assets..................... $ 913,529 $ 960,882 $1,009,376 $1,068,818 $1,157,710
Long-term debt................... 522,406 566,491 533,820 527,228 576,821
Redeemable preferred stock of
subsidiary..................... 17,552 17,732 42,858 49,468 57,345
Stockholders' equity............. 71,968 56,865 115,605 142,795 114,009
per outstanding common share... 4.47 3.53 7.15 8.46 7.01
</TABLE>
Fiscal 1994 includes the gain on the sale of Rexnord Corporation stock.
Fiscal 1990 includes the results of Banner Aerospace in which the Company
sold 52.8% of its interest through an initial public offering during Fiscal
1991. These transactions materially affect the comparability of the
information reflected in the selected financial data.

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

The Fairchild Corporation (the "Company") was incorporated under the
laws of the State of Delaware in October, 1969. The Company changed its name
from Banner Industries, Inc. to The Fairchild Corporation on November 15,
1990. RHI Holdings, Inc. ("RHI") is a direct subsidiary of the Company. RHI
is the owner of all of the common stock of Fairchild Industries, Inc. ("FII")
which, in turn, is the 100% owner of VSI Corporation ("VSI"). The Company's
operations are conducted primarily through VSI. RHI also holds a significant
equity interest in Banner Aerospace, Inc. ("Banner").

RECENT DEVELOPMENTS

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

During the first quarter of Fiscal 1994, the Company adopted Statements
of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions", and No. 109, "Accounting for
Income Taxes", and elected to take one-time non-cash charges totaling $10.9
million, of which $8.0 million was for postretirement benefits and $2.9
million for change in accounting for income taxes. These charges are
reflected in the fiscal year ended June 30, 1994, and represent cumulative
effects on prior years of the accounting changes. For the fiscal year ended
June 30, 1994, the effect of the changes on pretax income from continuing
operations was not material.

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

RESULTS OF OPERATIONS

The Company currently operates in three principal business segments:
Aerospace Fasteners, Industrial Products and Communications Services. The
following table illustrates the historical sales and operating income of the
Company's continuing operations for the past three years.
<TABLE>
<CAPTION>
For the years ended June 30,
(In thousands) --------------------------------
Reported Reported Reported
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Sales by Business Segment:

Aerospace Fasteners............... $203,456 $247,080 $299,270
Industrial Products............... 166,499 148,449 132,238
Communications Services........... 74,190 68,038 58,272
------- ------- -------
Total $444,145 $463,567 $489,780
======= ======= =======
Operating Income (Loss) by
Business Segment:

Aerospace Fasteners*.............. $(32,208) $(15,398) $ 15,654
Industrial Products............... 21,024 19,081 15,250
Communications Services........... 16,483 14,688 13,399
------- ------- -------
Total 5,299 18,371 44,303

Corporate administrative expense.. (16,868) (19,506) (21,979)
Other corporate income............ 2,231 5,309 3,662
------- ------- -------
Operating Income (Loss)............. $ (9,338) $ 4,174 $ 25,986
======= ======= =======

<PAGE>
*Includes restructuring charges of $18.9 million, $15.5 million and $2.5
million in Fiscal 1994, Fiscal 1993 and Fiscal 1992, respectively, and an
unusual loss from earthquake damage and related business interruption of $4.0
million in Fiscal 1994.
</TABLE>
FISCAL 1994 VERSUS FISCAL 1993

General
- -------

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

Operating income decreased by $13.5 million in Fiscal 1994, compared to
Fiscal 1993. A restructuring charge of $18.9 million was recorded in Fiscal
1994 to further implement the Aerospace Fasteners segment restructuring plan.
A $4.0 million charge for earthquake damage and related business interruption
also affected this segment in Fiscal 1994. Operating income was up in the
Industrial Products and Communications Services business segments for Fiscal
1994, however, in the Aerospace Fasteners segment operating income declined
$16.8 million for Fiscal 1994, compared to the prior year. Other corporate
income also decreased in Fiscal 1994. (See discussion below.)

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

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

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

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

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

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

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

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

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

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

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

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

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

Corporate Administrative Expense - Corporate administrative expense
decreased by 13.5% in Fiscal 1994, as compared to Fiscal 1993. This decline
resulted primarily from cost controls, including a reduction in work force
and wage and salary caps that were in effect for most corporate employees and
the sale of the Company airplane during Fiscal 1994. Excluding severance
payouts, corporate administrative expense declined over 15.9% in Fiscal 1994
compared to Fiscal 1993.

Other Corporate Income - Other corporate income decreased $3.1 million
in Fiscal 1994 compared to Fiscal 1993, primarily due to the absence of
amortization of over accrued retiree health care expense in Fiscal 1994 and
the write down of a corporate facility held for sale.

Net Interest Expense - Net interest expense decreased 1.0% in Fiscal
1994, compared to Fiscal 1993, primarily due to higher interest income in the
Fiscal 1994 period as a result of higher cash balances.

Investment Income - Investment income was higher by $3.5 million in
Fiscal 1994 compared to Fiscal 1993, primarily as a result of gains realized
on the liquidation of investments in Fiscal 1994. Also included in Fiscal
1994 were $2.8 million of dividends realized on participating pension annuity
contracts.

Equity in Earnings of Affiliates - Equity in earnings of affiliates
decreased $12.1 million in Fiscal 1994 compared to Fiscal 1993, due to the
lower earnings of Banner, after recording nonrecurring charges for
discontinued operations, and of Rexnord prior to the Company selling its
interest in Rexnord. Consequently, the current year period includes no
earnings for Rexnord subsequent to the sale date.

Minority Interest - Minority interest includes dividend expense on FII's
Series C Preferred Stock, issued August 22, 1992 by FII.

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

Income Taxes - For Fiscal 1994, the Company provided an income tax
provision at a rate of 47.4%. The provision tax rate was higher than the
statutory rate, largely due to the write off and amortization of goodwill,
which is not deductible for tax purposes.

Accounting Changes:

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

2) Accounting for Income Taxes - The Company elected the immediate
recognition method and recorded a $2.4 million charge representing the
cumulative effect on prior years. This charge represents deferred taxes
related primarily to differences between the tax basis and book basis of
fixed assets, prepaid pension expense, and inventory. In addition, a $.5
million charge was recorded for the Company's share of Rexnord's cumulative
charge resulting from this accounting change.

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

Net Earnings (Loss) - The $71.9 million increase in the Fiscal 1994 net
earnings compared to Fiscal 1993 was primarily due to the $129.1 million gain
on the sale of shares of Rexnord, offset partially by a $13.5 million drop in
operating income, decreased equity earnings of $12.0 million, an $11.0
million charge, net of tax, for the cumulative effect of changes in
accounting principles, and increased taxes on the higher level of income.

FISCAL 1993 VERSUS FISCAL 1992
- ------------------------------

General
- -------

Overall sales declined by 5.4% for Fiscal 1993, compared to Fiscal 1992,
primarily caused by price erosion due to excess capacity in the aerospace
fasteners industry and reduced order rates from commercial and military
aerospace customers in the Aerospace Fasteners segment. The decline in sales
at the Aerospace Fasteners segment was partially offset by significant sales
increases at the Industrial Products and Communication Services segments in
the Fiscal 1993 period. Operating income decreased 83.9% for Fiscal 1993,
compared to Fiscal 1992. Operating income was up in the Industrial Products
and Communications Services business segments for Fiscal 1993; however, in
the Aerospace Fasteners segment, operating income declined $31.1 million for
Fiscal 1993, compared to the prior year. Both twelve month periods ended
June 30, 1993, and June 30, 1992, included restructuring charges in the
Aerospace Fasteners segment. Corporate administrative expense declined and
other corporate income also improved in Fiscal 1993. (See discussion below.)

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

Sales in the Aerospace Fasteners segment decreased 17.4% in Fiscal 1993,
compared to Fiscal 1992, primarily due to the reduced order rates mentioned
above. Ordering activity remained at low levels at commercial airplane
original equipment manufacturers, engine manufacturers, in defense related
procurement, and in the replacement markets served by distributors. In
addition, customers rescheduled orders to take later delivery in line with
reduced aircraft build rates.

Operating income in the Aerospace Fasteners segment decreased $31.1
million in Fiscal 1993, in relation to the comparable Fiscal 1992 period.
During the Fiscal 1993 period, the Company continued to implement
restructuring plans and included restructuring charges of $15.5 million to
further downsize fastener operations in Europe and California and close and
consolidate its New Jersey operations into California. This resulted in
severance costs, plant closing and relocation costs, and the write off of
excess assets. The Fiscal 1992 period included restructuring charges of $2.5
million related to severance and early retirement benefits for terminated
employees. Operating income in Fiscal 1993 also was negatively affected by
(1) reduced demand and price erosion; (2) higher quality control costs
resulting from customers' intensified quality requirements; and (3) increased
provisions for excess and slow moving inventory, which amounted to $7.4
million in Fiscal 1993 versus $5.1 million in Fiscal 1992.

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

Sales in the Industrial Products segment increased 12.3% in Fiscal 1993
compared to Fiscal 1992. The increase in sales in Fiscal 1993 reflected
customer response to D-M-E's fast delivery programs, new products, and
moderation of the impact of the economic recession which adversely affected
results in Fiscal 1992. Domestic demand for tooling for plastics was strong
while foreign demand was weak.

Operating income in the Industrial Products segment increased 25.1% in
Fiscal 1993, compared to Fiscal 1992. The improved results in Fiscal 1993
resulted from a higher sales volume and improved operating margins. Early in
Fiscal 1992, the Industrial Products segment implemented several cost savings
steps, including overhead reduction and improved inventory management
programs, which have contributed to the higher operating margins.

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

Sales in the Communications Services segment increased 16.8% in Fiscal
1993, compared to Fiscal 1992, primarily due to the inclusion of sales from
acquisitions, the addition of telecommunications franchises in new office
buildings, and growth at existing sites.

Operating income in the Communications Services segment increased 9.6%
in Fiscal 1993 compared to Fiscal 1992, primarily due to increased sales.
Operating income as a percent of sales declined in Fiscal 1993 to 21.6% from
23.0% in Fiscal 1992. The decline was due to lower long distance margins
partially offset by lower selling general and administrative expenses as a
percent of sales.

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

Corporate Administrative Expense - Corporate administrative expense
decreased by 11.2% in Fiscal 1993 as compared to Fiscal 1992. This decline
resulted primarily from cost controls including salary reductions and wage
and salary freezes that were in effect for most corporate employees in Fiscal
1993.

Other Corporate Income - Other corporate income includes royalty income,
rental income, and the reversal of excess reserves no longer deemed
necessary. Other corporate income increased $1.7 million in Fiscal 1993
compared to Fiscal 1992, primarily due to the adjustment of overstated health
care liabilities of $2.7 million no longer deemed necessary in Fiscal 1993.

Net Interest Expense - Net interest expense increased 1.2% in Fiscal
1993, compared to Fiscal 1992, primarily due to lower interest income in the
Fiscal 1993 as a result of lower cash balances. Interest expense was lower
in Fiscal 1993 as a result of lower interest rates.

Investment Income - Investment income was lower by $6.8 million in
Fiscal 1993 compared to Fiscal 1992, primarily as a result of reduced
dividends received on participating pension annuity contracts, and lower
gains on securities sold as a result of a smaller investment portfolio.

Equity in Earnings of Affiliates - Equity in earnings of affiliates
improved $3.9 million in Fiscal 1993, primarily due to better performance of
Rexnord in Fiscal 1993 compared to Fiscal 1992, partially offset by lower
earnings of Banner.

Minority Interest - Minority interest increased in Fiscal 1993 since it
included dividend expense on the Series C Preferred Stock issued by FII early
in Fiscal 1993.

Income Taxes - For Fiscal 1993, the Company recorded an income tax
benefit. This benefit represents the realizable portion of the tax effect of
the current years operating loss net of foreign and state tax provisions.
The benefit tax rate was lower than the statutory rate, largely due to
permanent differences between financial reporting and tax accounting, the
majority of which resulted from the acquisition of FII by the Company in
1989. The most significant differences were depreciation related to the
write-up to fair value of property, plant and equipment and amortization of
goodwill, neither of which is deductible for tax purposes. In addition, the
benefit also included a change in tax accruals of $4 million no longer
required.

Extraordinary Items - Net - Extraordinary items - net in Fiscal 1993
includes an extraordinary charge of $11.8 million net of tax which was the
Company's share of the Rexnord extraordinary charge related to premiums paid
to repurchase debt and the write off of deferred loan costs, plus $.8 million
for the write off of deferred loan costs at FII related to the portion of the
term loan repaid. In Fiscal 1992, after-tax gains were recognized on the
early extinguishment of RHI's Senior Subordinated Debentures.

Net Earnings (Loss) - The $33.3 million increase in the Fiscal 1993 net
loss compared to Fiscal 1992 was primarily due to the $21.8 million decline
in operating income, the $6.8 million drop in investment income, and the
$12.9 million increase in the extraordinary charges. However, reducing this
loss was an additional tax benefit of $4.3 million with no impact from
discontinued operations in Fiscal 1993 compared to $3.0 million from
discontinued operations in Fiscal 1992.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Working capital at June 30, 1994 was $145.8 million which was $78
million higher than at June 30, 1993. Cash increased $32.3 million resulting
from the sale of shares of Rexnord, and current debt decreased by $51.8
million. Offsetting this increase was an increase in the income tax payable
account reflecting taxes recorded on the sale of shares of Rexnord. An
increase in accounts receivable of $9.8 million was substantially offset by
an increase in accounts payable and other accrued liabilities, which was
largely due to the acquisition of Convac in June 1994.

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

The Company also expects to generate cash from the sale of certain
assets and liquidation of investments. Net assets held for sale at June 30,
1994 had a book value of $36.4 million and included several parcels of real
estate in California and an 88 acre parcel of real estate located in
Farmingdale, New York, which the Company plans to sell,lease or develop,
subject to the resolution of environmental matters and market conditions.
Included in long-term investments at June 30, 1994 is a contractual
obligation for the Company to receive $12.9 million from an individual which
has a net carrying amount of $9.3 million. The obligation in part, may be
satisfied by 7.1% of the outstanding common stock of Bidermann Industries
USA, Inc., a closely held company, held by the Company. In addition, the
Company has attached substantially all of the individual's property. The
individual filed for protection under Chapter 11 of the U.S. Bankruptcy code
on July 7, 1993. However, subsequent to the 1994 fiscal year end, on a
motion by the Company, the Bankruptcy Court dismissed the Chapter 11
proceedings. The Company believes that liquidation of assets held or
attached by the Company will be sufficient to recover the carrying amount of
this investment. (See Note 19 to the Financial Statements).

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

The level of the Company's capital expenditures varies from year to
year, depending upon the timing of capital spending for new production
equipment, periodic plant and facility expansion, acquisition of building
telecommunication assets, as well as cost reduction and labor efficiency
programs. For Fiscal 1994, capital expenditures including the cost of
acquisitions were $18.2 million. Capital expenditures for Fiscal 1993 and
Fiscal 1992 were $22.9 million and $35.9 million, respectively. The Company
anticipates that capital expenditures in Fiscal 1995 will approximate $19.6
million.

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

Investments and advances - affiliated companies decreased $58.4 million,
primarily due to the sale of the Company's stock interest in Rexnord,
combined with accounting changes and restructuring charges recorded by
Rexnord during the first half of Fiscal 1994 and charges for discontinued
operations recorded at Banner in the fourth quarter of Fiscal 1994.

Long term debt decreased $44.1 million during Fiscal 1994 as a result of
the Company repurchasing some of its senior debt.

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

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

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

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

<PAGE>
IMPACT OF FUTURE ACCOUNTING CHANGES

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

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

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

On July 1, 1994 the Company adopted SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS No. 115"). SFAS No. 115
provides new rules on accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments
in debt securities. The effect of implementing SFAS No. 115, by the Company,
was not material.<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------

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

Page
----

Consolidated Balance Sheets as of June 30, 1994 and 1993...... 31

Consolidated Statements of Earnings - The Three Years Ended
June 30, 1994, 1993, and 1992................................. 33

Consolidated Statements of Stockholders' Equity - The Three
Years Ended June 30, 1994, 1993, and 1992..................... 35

Consolidated Statements of Cash Flows - The Three Years
Ended June 30, 1994, 1993, and 1992........................... 36

Notes to Consolidated Financial Statements.................... 38

Report of Independent Public Accountants...................... 71

Supplementary data regarding "Quarterly Financial Information
(Unaudited)" is set fourth under this Item 8 in Note 22 to Consolidated
Financial Statements.

<PAGE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
June 30, June 30,
ASSETS 1994 1993
- ------ -------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents..................... $ 102,368 $ 70,099
(of which $4,745 and $4,200 is restricted)
Short-term investments........................ 6,649 5,425
Accounts receivable-trade, less allowances
of $3,468 and $1,900........................ 74,196 64,423
Inventories:
Finished goods............................. 47,120 51,776
Work-in-process............................ 30,907 30,766
Raw materials.............................. 11,988 8,987
--------- ---------
90,015 91,529

Prepaid expenses and other current assets..... 20,128 14,308
--------- ---------
Total Current Assets.......................... 293,356 245,784

Property, plant and equipment - net........... 174,147 199,506

Net assets held for sale...................... 36,375 30,124
Cost in excess of net assets acquired,
(Goodwill) less accumulated amortization of
$29,622 and $24,694.......................... 205,395 216,365
Investments and advances - affiliated
companies.................................... 71,532 129,916
Deferred loan costs........................... 15,952 19,674
Prepaid pension assets........................ 61,628 54,316
Long-term investments......................... 15,458 18,256
Notes receivable and other assets............. 39,686 46,941
--------- ---------
$ 913,529 $ 960,882
========= =========

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

<PAGE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
June 30, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
- ------------------------------------ -------- --------
<S> <C> <C>
Current Liabilities:
Bank notes payable and current maturities
of long-term debt........................... $ 14,978 $ 66,790
Accounts payable............................. 35,271 29,043
Accrued liabilities:
Salaries, wages and commissions........... 14,932 13,890
Employee benefit plan costs............... 2,120 1,321
Insurance................................. 15,014 15,548
Interest.................................. 16,936 18,500
Other..................................... 35,620 30,349
--------- ---------
84,622 79,608
Income taxes payable......................... 12,713 2,560
--------- ---------
Total Current Liabilities.................... 147,584 178,001

Long-term debt............................... 522,406 566,491
Other long-term liabilities.................. 25,116 19,009
Retiree health care liabilities.............. 51,189 50,797
Noncurrent income taxes...................... 53,162 46,950
Minority interest in subsidiaries............ 24,552 25,037
Redeemable preferred stock of subsidiary..... 17,552 17,732

Stockholders' Equity:

Class A common stock, 10 cents par value;
authorized 40,000,000 shares, 19,647,705 shares
issued (19,645,305 in 1993) and 13,406,109
shares outstanding (13,403,709 in 1993).... 1,965 1,965
Class B common stock, 10 cents par value;
authorized 20,000,000 shares, 2,696,886
shares issued and outstanding (2,699,286
in 1993)................................... 270 270
Paid-in capital.............................. 66,775 66,737
Retained earnings............................ 52,736 36,914
Cumulative translation adjustment............ 3,346 2,698
Additional minimum liability for pensions,
net of tax................................ (1,405) --

Treasury Stock, at cost, 6,241,596 shares of
Class A common stock....................... (51,719) (51,719)
--------- ---------
Total Stockholders' Equity................... 71,968 56,865
--------- ---------
$ 913,529 $ 960,882
========= =========

The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<PAGE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
<CAPTION>
For the Years Ended June 30,
--------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Sales................................. $444,145 $463,567 $489,780
Other income, net..................... 5,742 6,889 4,664
------- ------- -------
449,887 470,456 494,444
Costs and Expenses:
Cost of sales......................... 337,881 351,001 358,034
Selling, general & administrative..... 85,831 90,485 97,903
Research and development.............. 3,940 3,262 4,140
Amortization of goodwill.............. 6,020 6,065 5,881
Restructuring......................... 18,860 15,469 2,500
Unusual items......................... 6,693 -- --
------- ------- -------
459,225 466,282 468,458

Operating (loss) income................. (9,338) 4,174 25,986

Interest expense........................ 73,071 72,110 74,439
Interest income......................... (3,388) (1,692) (4,864)
------- ------- -------
Net interest expense.................... 69,683 70,418 69,575

Investment income, net.................. 6,165 2,696 9,450
Equity in earnings of affiliates........ (882) 11,196 7,296
Minority interest....................... (2,552) (2,289) (210)
Non-recurring income.................... 129,082 -- --
------- ------- -------
Earnings (loss) from continuing
operations before taxes............... 52,792 (54,641) (27,053)

Income tax provision (benefit).......... 25,009 (11,176) (6,885)
------- ------- -------
Earnings (loss) from continuing
operations............................ 27,783 (43,465) (20,168)

Earnings (loss) from discontinued
operations, net....................... -- -- 405
Loss on disposal of discontinued
operations, net....................... (368) (25) (3,401)
------- ------- -------
Earnings (loss) before extraordinary
items and cumulative effect of
accounting changes.................... 27,415 (43,490) (23,164)

Extraordinary items, net................ (643) (12,614) 329

Cumulative effect of change in
accounting for postretirement
benefits, net......................... (8,015) -- --

Cumulative effect of change in
accounting for income taxes, net..... (2,935) -- --
------- ------- -------
Net earnings (loss)..................... $ 15,822 $(56,104) $(22,835)
======= ======= =======

The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
/TABLE
<PAGE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
<CAPTION>
For the Years Ended June 30,
--------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Earnings (Loss) per Common Share:
Primary and Fully Diluted:
Earnings (loss) from continuing
operations........................... $ 1.72 $ (2.70) $ (1.24)
Loss from discontinued operations, net. (.02) -- (0.18)
Earnings (loss) before extraordinary
items and cumulative effect of
accounting changes................... 1.70 (2.70) (1.42)
Extraordinary items, net............... (.04) (.78) 0.02
Cumulative effect of change in
accounting for postretirement
benefits, net........................ (.50) -- --
Cumulative effect of change in
accounting for income taxes, net..... (.18) -- --
------- ------- -------
Net earnings (loss) per share.......... $ .98 $ (3.48) $ (1.40)
======= ======= =======

Weighted Average Number of Shares used
in Computing Earnings Per Share:
Primary.................................. 16,103 16,113 16,318
Fully diluted............................ 16,103 16,113 16,318

The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
/TABLE
<PAGE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<CAPTION>
Additional
Minimum
Class A Class B Cumulative Liability
Common Common Paid-in Retained Translation for Treasury
Total Stock Stock Capital Earnings Adjustment Pensions Stock
------- ----- ----- ------- -------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, July 1, 1991 $142,795 $1,723 $ 510 $65,630 $118,876 $ 2,611 $ - $(46,555)
- ----------------------
Net loss.............. (22,835) - - - (22,835) - - -
Dividends paid........ (3,023) - - - (3,023) - - -
Cumulative translation
adjustment........... 3,558 - - - - 3,558 - -
Options exercised:
Proceeds received.... 30 - - 30 - - - -
Exchange of Class B
for Class A common
stock................ - 241 (239 (2) - - - -
Purchase of treasury
stock................ (4,920) - - - - - - (4,920)
------- ----- ----- ------ ------- ------- ------- -------
BALANCE, June 30, 1992 115,605 1,964 271 65,658 93,018 6,169 - (51,475)
- ----------------------
Net loss.............. (56,104) - - - (56,104) - - -
Cumulative translation
adjustment........... (3,471) - - - - (3,471) - -
Exchange of Class B
for Class A common
stock................ - 1 (1) - - - - -
Purchase of treasury
stock................ (244) - - - - - - (244)
Gain on Initial Public
Offering of Rexnord
Corporation.......... 1,079 - - 1,079 - - - -
------- ----- ----- ------ ------- ------- ------- -------
BALANCE, June 30, 1993 56,865 1,965 270 66,737 36,914 2,698 - (51,719)
- ----------------------
Net earnings.......... 15,822 - - - 15,822 - - -
Cumulative translation
adjustment........... 648 - - - - 648 - -
Gain on outside
purchase of preferred
stock of subsidiary.. 38 - - 38 - - - -
Additional minimum
liability for
pensions............. (1,405) - - - - - (1,405) -
------- ----- ----- ------ ------- ------- ------- ------
BALANCE, June 30, 1994 $ 71,968 $1,965 $ 270 $66,775 $ 52,736 $ 3,346 $ (1,405) $(51,719)
======= ===== ===== ====== ======= ======= ======= =======

The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
/TABLE
<PAGE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
For the Years Ended June 30,
--------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)............................... $ 15,822 $ (56,104) $ (22,835)
Adjustments to reconcile net earnings (loss) to
net cash used for operating activities:
Cumulative change in accounting for post-
retirement benefits, net.................... 8,015 -- --
Cumulative change in accounting for income
taxes, net.................................. 2,935 -- --
Extraordinary loss on recapitalization of
Rexnord Corporation......................... -- 11,808 --
Depreciation and amortization................. 36,227 33,955 29,051
Accretion of discount on long-term
liabilities................................. 6,731 3,355 6,510
Net gain on sale of Rexnord investment........ (129,082) -- --
Provision for restructuring and unusual items
(excluding cash payments of $6,020 in 1994
and $7,896 in 1993)......................... 19,533 7,573 --
Loss (gain) on sale of property, plant and
equipment................................... 214 2,294 (194)
Equity in loss (earnings) of affiliates....... 882 (11,196) (7,296)
Minority interest............................. 2,552 2,289 210
Change in receivables......................... (2,803) 7,252 4,932
Change in inventories......................... 4,246 9,444 (1,184)
Change in other current assets................ (4,498) 30,092 (12,067)
Change in other non-current assets............ (3,055) (8,386) (7,939)
Change in accounts payable, accrued
liabilities, and other long-term liabilities 9,010 (53,496) (27,914)
-------- -------- --------
Net cash used for operating activities............ (33,271) (21,120) (38,726)
-------- -------- --------

Cash flows from investing activities:
Change in investments............................. 1,574 31,845 9,260
Purchase of property, plant and equipment......... (16,279) (15,596) (35,874)
Proceeds from sale of property, plant and
equipment....................................... 7,982 1,301 2,656
Equity investments in affiliates.................. (3,393) (19,527) (4,981)
Acquisition of subsidiaries, net of cash acquired. (1,905) (7,313) --
Net proceeds from sale of Rexnord Corporation..... 178,089 -- --
-------- -------- --------
Net cash provided by (used for) investing
activities...................................... 166,068 (9,290) (28,939)
-------- -------- --------

The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
/TABLE
<PAGE>
<TABLE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
For the Years Ended June 30,
--------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of debt.................... $ 68,558 $ 223,038 $ 93,988
Debt repayments, net.............................. (135,932) (164,804) (103,179)
Repurchase of debentures - net.................... (34,016) (559) (4,746)
Purchases of treasury shares...................... -- (244) (4,890)
Dividends paid.................................... -- -- (3,023)
-------- -------- --------
Net cash provided by (used in) financing
activities...................................... (101,390) 57,431 (21,850)
-------- -------- --------
Effect of exchange rate changes on cash........... 862 (2,868) 340
Net increase (decrease) in cash and cash
equivalents..................................... 32,269 24,153 (89,175)
Beginning of the year............................. 70,099 45,946 135,121
-------- -------- --------
End of the year................................... $ 102,368 $ 70,099 $ 45,946
======== ======== ========

The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Corporate Structure: The Fairchild Corporation (the "Company") was
incorporated under the laws of the State of Delaware in October, 1969. RHI
Holdings, Inc. ("RHI") is a direct subsidiary of the Company. RHI is the
owner of all of the common stock of Fairchild Industries, Inc. ("FII") which,
in turn, is the 100% owner of VSI Corporation ("VSI"). The Company's
operations are conducted primarily through VSI. The Company also holds a
significant equity interest in Banner Aerospace, Inc. ("Banner").

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

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

Statements of Cash Flows: For purposes of the statements of cash flows,
the Company considers all temporary investments with original maturity dates
of three months or less as cash equivalents. Total net cash disbursements
(receipts) made by the Company for income taxes and interest were as follows:
<TABLE>
<CAPTION>
(In thousands) 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Interest....................... $ 66,788 $ 63,567 $ 76,807
Income Taxes................... (16) (23,171) (7,017)
</TABLE>

Restricted Cash: On June 30, 1994, the Company had restricted cash of
$4,745,000 all of which is maintained as collateral for certain debt
facilities. Cash investments are in high grade, short-term certificates of
deposit.

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

Properties and Depreciation: Properties are stated at cost and
depreciated over estimated useful lives, generally on a straight-line basis.
For Federal income tax purposes, accelerated depreciation methods are used.
No interest costs were capitalized in any of the years presented. Property,
plant and equipment consisted of the following:
<TABLE>
<CAPTION>
June 30, June 30,
(In thousands) 1994 1993
-------- --------
<S> <C> <C>
Land....................................... $ 17,811 $ 22,859
Buildings and improvements................. 47,376 52,370
Machinery and equipment.................... 184,171 171,539
Transportation vehicles.................... 618 10,939
Furniture and fixtures..................... 7,501 6,451
Construction in progress................... 6,358 5,209
------- -------
263,835 269,367
Less: Accumulated depreciation............ (89,688) (69,861)
------- -------
Net property, plant and equipment.......... $174,147 $199,506
======= =======
</TABLE>
Amortization of Goodwill: The excess of the cost of purchased
businesses over the fair value of their net assets at acquisition dates
(goodwill) is being amortized on a straight-line basis over 40 years.

Deferred Loan Costs: Deferred loan costs associated with various debt
issues are being amortized over the terms of the related debt, based on the
amount of outstanding debt, using the effective interest method.
Amortization expense for these loan costs for Fiscal 1994, 1993 and 1992 was
$4,253,000, $3,355,000 and $3,772,000, respectively.

Impairment of Long Lived Assets: The Company reviews its long lived
assets, including property, plant and equipment, identifiable intangibles and
goodwill, for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable. To determine
recoverability of its long lived assets the Company evaluates the probability
that undiscounted future net cash flows, without interest charges, will be
less than the carrying amount of the assets.

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

Foreign Currency Translation: All balance sheet accounts of foreign
subsidiaries are translated at the current exchange rate as of the end of the
accounting period. Income statement items are translated at average currency
exchange rates. The resulting translation adjustment is recorded as a
separate component of stockholders' equity. Transaction gains and losses
included in other income were not significant in Fiscal 1994, 1993 and 1992.

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

Non-Recurring Items: Non-recurring income for Fiscal 1994 consists of
the net pretax gain of $129,082,000 on the sale of Rexnord Corporation
("Rexnord") stock (see Note 2).

Extraordinary items: The Company recognized extraordinary gains and
losses, net of write-offs of deferred debt issue costs and debt discounts,
from the early extinguishment of debt resulting from the repurchases of its
debentures on the open market or in negotiated transactions. Total
repurchases made by the Company were $33,658,000 face value purchased for
$34,016,000 in Fiscal 1994, $559,000 face value purchased for $495,000 in
Fiscal 1993, and $4,746,000 face value purchased for $4,085,000 in Fiscal
1992. The Company recorded extraordinary income (loss), net of taxes, of
$(643,000), $18,000, and $329,000 relating to these repurchases in Fiscal
1994, 1993 and 1992, respectively.

The Company also recognized an extraordinary loss of $11,804,000, net of
tax, in Fiscal 1993 relating to the recapitalization of Rexnord prior to the
Company selling its significant equity ownership (see Note 4).

Earnings Per Share: Primary and fully diluted earnings per share are
computed by dividing net income available to common shareholders by the
weighted average number of shares and share equivalents outstanding during
the period. To compute the incremental shares resulting from stock options
and warrants for primary earnings per share, the average market price of the
Company's stock during the period is used. To compute the incremental shares
resulting from stock options and warrants for fully diluted earnings per
share, the greater of the ending market price or the average market price of
the Company's stock is used. In computing earnings per share for Fiscal
1994, 1993 and 1992, the conversion of options and warrants was not assumed,
as the effect was anti-dilutive.

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

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

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

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

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

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

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

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

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

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

5. DISCONTINUED OPERATIONS AND NET ASSETS HELD FOR SALE
----------------------------------------------------

In Fiscal 1990, the Company adopted a plan to dispose of Thompson
Aircraft Tire Company ("Thompson"), an aircraft tire retreading and
distribution operation. On April 15, 1992, the Company completed the sale of
the U.S. operations of Thompson and received approximately $5,300,000 in
cash. As a result of the sale, in Fiscal 1992, the Company recorded an
after-tax loss on disposal of discontinued operation of $1,452,744. In
addition, the Company recorded a loss on disposal of two small subsidiaries,
and a write-down on other assets not related to continuing operations.

The net assets of these businesses were reflected in net assets held for
sale and their results of operations have been reclassified as discontinued
operations in the statements of earnings and related footnotes for the
periods presented.

Presented below is a table summarizing discontinued operations.
<TABLE>
<CAPTION>
(In thousands)
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Sales............................. $ -- $ -- $ 20,813
======= ======= =======
Earnings from discontinued
operations...................... -- -- 613
Applicable tax provision.......... -- -- (208)
------- ------- -------
Earnings from discontinued
operations...................... $ -- $ -- $ 405
======= ======= =======
Loss on disposal of discontinued
operations...................... $ (565) $ (37) $ (5,026)
Applicable tax benefit............ 197 12 1,625
Loss on disposal of discontinued ------- ------- -------
operations...................... $ (368) $ (25) $ (3,401)
======= ======= =======
</TABLE>

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

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

Net assets held for sale are recorded at estimated net realizable
values, which reflect anticipated sales proceeds, and other carrying costs to
be incurred during the holding period. Interest is not allocated to net
assets held for sale.

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

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

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

Short-term
----------
<S> <C> <C> <C> <C>
Limited Partnership:
SC-BI Partners L.P. (a)......... $ 2,899 $ 2,899 $ 4,335 $ 4,335
Common Stock...................... 2,969 4,053 -- --
Other Investments................. 781 1,021 1,106 1,090
------ ------ ------ ------
$ 6,649 $ 7,973 $ 5,441 $ 5,425
====== ====== ====== ======
Long-term
---------

Limited Partnerships:
SC-BI Partners L.P. (a)......... $ -- $ -- $ 2,000 $ 2,000
Real Estate Development Joint
Venture (b)................... 3,396 3,396 3,808 3,808
Bidermann Industries USA, Inc. (c) 9,314 9,314 9,700 9,700
Preferred Stock................... 2,006 2,006 2,006 2,006
Other Investments................. 742 742 742 742
------ ------ ------ ------
$15,458 $15,458 $18,256 $18,256
====== ====== ====== ======

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

(b) Represents a former plant site in Redondo Beach, California, which was
contributed to a joint venture with a developer that has built and partially
leased a retail center.

(c) The Company is a judgement creditor of Maurice Bidermann ("Bidermann").
On July 7, 1993, Bidermann filed for reorganization under Chapter 11 of the
Bankruptcy Code. However, subsequent to the 1994 fiscal year end, on a
motion by the Company, the Bankruptcy Court dismissed Bidermann's Chapter 11
proceedings. The Company believes that between its ownership of shares of
Bidermann Industries USA, Inc., and the value of assets of Bidermann which
have been attached by the Company, that the book value will be recovered.
The Company has classified this investment as long-term since the timing of
recovery is uncertain.
</TABLE>
In determining realized gains and losses, the cost of the securities
sold was based on specific identification of the security. Interest on
corporate obligations, as well as dividends on preferred and common stock,
are accrued at the balance sheet date.

Investment income is summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Dividend income................... $ 1 $ 78 $ 544
Net realized gains................ 7,248 2,330 4,905
Temporary valuation adjustment.... (1,084) 288 4,001
------- ------- -------
Investment income - net......... $ 6,165 $ 2,696 $ 9,450
======= ======= =======
</TABLE>
7. INVESTMENTS AND ADVANCES - AFFILIATED COMPANIES
-----------------------------------------------

The following table presents summarized financial information on a
combined 100% basis of Banner and Nacanco Paketleme ("Nacanco"), the
Company's principal investments, which are accounted for using the equity
method.
<TABLE>
<CAPTION>
(In thousands)

Income Statement: 1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Net sales.................... $276,382 $302,480 $297,556
Gross profit................. 98,361 78,561 90,536
Earnings from continuing
operations................. 21,964 257 13,481
Discontinued operations, net. (17,581) (695) (1,817)
Net earnings (loss).......... 4,383 (438) 11,665

June 30, June 30,
Balance Sheet: 1994 1993
-------- --------
Current assets................ $ 280,144 $ 284,248
Non-current assets............ 57,881 58,422
Total assets.................. 338,025 342,670
Current liabilities........... 60,753 52,266
Non-current liabilities....... 126,920 152,445
</TABLE>

On June 30, 1994, the Company owned approximately 47.2% of Banner common
stock, which is included in investments and advances - affiliated companies.
The Company recorded equity earnings (loss) of $(5,697,000), $(1,380,000) and
$1,915,000 on its investment in Banner for Fiscal 1994, 1993 and 1992,
respectively. At the close of trading on August 26, 1994, Banner stock was
quoted at $5.75 per share. Based on this price the Company's equity
investment in Banner had an approximate market value of $48,875,000 versus a
carrying value of $50,425,000. The Company believes this decline in market
value is temporary.

On June 30, 1994, the Company owned approximately 33.0% of Nacanco
common stock. The Company recorded equity earnings of $5,429,000, $820,000
and $2,518,000 from this investment for Fiscal 1994, 1993 and 1992,
respectively.

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

The Company's share of equity in earnings (loss) of all unconsolidated
affiliates for 1994, 1993 and 1992 was $(882,000), $11,196,000, and
$7,296,000, respectively. The carrying value of investments and advances -
affiliated companies consists of the following:
<TABLE>
<CAPTION>
(In thousands) June 30, June 30,
1994 1993
-------- --------
<S> <C> <C>
Banner Aerospace................... $ 50,425 $ 55,651
Rexnord Corporation (see Note 2)... -- 61,452
Nacanco............................ 14,598 6,669
Other.............................. 6,509 6,144
------- -------
$ 71,532 $129,916
======= =======
</TABLE>
On June 30, 1994, approximately $55,268,000 of the Company's $52,736,000
consolidated retained earnings was from undistributed earnings of 50 percent
or less owned affiliates accounted for by the equity method.

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

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

<PAGE>
<TABLE>
<CAPTION>
(In thousands, except Weighted Average
for percents) Interest Rates For
The Year Ended June 30, June 30,
June 30, 1994 1994 1993
------------- -------- --------
<S> <C> <C> <C>
Short-term notes payable............. 8.88% $ 3,974 $ 56,492
======= =======

Bank credit agreement................ 6.78% $ 97,315 $102,700
Senior secured notes due 1999........ 12.15% 125,000 125,000
Subordinated notes and debentures.... 12.85% 300,016 332,810
Industrial revenue bonds............. 7.95% 1,500 1,506
Capital lease obligations
(See Note 19)...................... 12.61% 3,302 6,588
Other notes payable, collateralized
by property, plant and equipment,
interest from 5.5% to 11.5%........ 7.66% 6,277 8,185
----- ------- -------
11.50% 533,410 576,789
Less: Current maturities............ (11,004) (10,298)
------- -------
Net long-term debt................... $522,406 $566,491
======= =======
</TABLE>
The Company maintains a credit agreement (the "Credit Agreement") with a
consortium of banks, which provides a revolving credit facility and two term
loans to FII, and a revolving credit facility to RHI (collectively the
"Credit Facilities"). The revolving credit facility provided to RHI
generally bears interest at 2.0% over the London Interbank Offered Rate
("LIBOR"), and matures February 28, 1995. The revolving credit facility and
Term Loan VII, provided to FII, generally bears interest at 2.75% over LIBOR
and Term Loan VIII, provided to FII, at 3.75% over LIBOR. The commitment fee
on the unused portion of the revolving credit facilities was 0.5% at June 30,
1994. The Credit Facilities provided to FII mature on March 31, 1997. The
Credit Facilities are secured by substantially all of FII's assets.

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

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

(2) Subsequent to June 30, 1994 the revolving credit facility at FII was
modified by $9,250,000 to $50,250,000. In addition, the borrowing rate
increased to generally bear interest at 3.75% over LIBOR and the commitment
fee increased to 1.0%.
</TABLE>
At June 30, 1994, the Company had unused short-term bank lines of credit
aggregating $52,490,000 at interest rates approximating the prime rate. The
Company also has short-term lines of credit relating to foreign operations
aggregating $12,147,000 against which the Company owed $3,592,000 at June 30,
1994.

At June 30, 1994, the Company had outstanding letters of credit of
$11,910,000, which were supported by the Credit Agreement and other bank
facilities on an unsecured basis.

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

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

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

<PAGE>
<TABLE>
<CAPTION>
12.25% 13.125% 12% 13%
(In thousands) Senior Subordinated Intermediate Junior
Subordinated Debentures Subordinated Subordinated
Notes Debentures Debentures
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Date Issued March 1986 March 1986 Oct. 1986 March 1987
Face Value $ 60,000 $ 75,000 $160,000 $102,000
Balance, June 30,
1994 $ 31,510 $ 34,840 $118,832 $ 24,743
Percent Issued at 95.864 95.769 93.470 98.230
Bond Discount $ 2,482 $ 3,173 $ 10,448 $ 1,805
Amortization 1994 $ 279 $ 90 $ 621 $ 23
1993 $ 265 $ 79 $ 547 $ 20
1992 $ 236 $ 69 $ 482 $ 18
Yield to Maturity 13.00% 13.800% 13.06% 13.27%
Interest Payments Semi-Annual Semi-Annual Semi-Annual Semi-Annual
Sinking Fund Start
Date N/A 3/15/97 10/15/97 3/1/98
Sinking Fund
Installments N/A $ 7,500 $ 32,000 $ 10,200
Fiscal Year Maturity 1996 2006 2002 2007
Redeemable by
Company after 3/15/89 3/15/89 10/15/89 3/1/92

11.875% 12.75% 12.25% 9.75%
RHI Senior RHI FII FII
Subordinated Debentures Senior Subordinated
Debentures Notes Debentures
------------ ------------ ----------- ------------
Date Issued March 1987 Oct. 1984 Aug. 1992 Jan. 1978
Face Value $126,000 $ 36,000 $125,000 $ 16,082
Balance, June 30,
1994 $ 85,593 $ 500 $125,000 $ 3,998
Percent Issued at 99.214 99.680 100.0 95.784
Bond Discount $ 990 $ 115 N/A $ 678
Amortization 1994 $ 80 $ -- $ -- $ 6
1993 $ 43 $ -- $ -- $ 11
1992 $ 36 $ -- $ -- $ 11
Yield to Maturity 12.01% 12.75% 12.25% 9.75%
Interest Payments Semi-Annual Semi-Annual Semi-Annual Annual
Sinking Fund Start
Date 3/1/97 N/A N/A 4/1/83
Sinking Fund
Installments $ 31,500 N/A N/A $1,005
Fiscal Year Maturity 1999 1995 1999 1998
Redeemable by
Company after 3/1/92 N/A 7/31/97 1/1/98
</TABLE>
Under the most restrictive covenants of the above indentures, the
Company's consolidated net worth must not be less than $35,000,000 and RHI's
consolidated net worth must not be less than $125,000,000. At the present
time, none of the Company's consolidated retained earnings are available for
capital distributions due to a cumulative earnings restriction. The
indentures also provide restrictions on the amount of additional borrowings
by the Company.

The Company and its subsidiaries are each subject to certain covenants
under the Credit Agreement, including a material adverse change clause, and
restrictions on dividends, capital expenditures, capital leases, operating
leases, investments and indebtedness. It requires the Company to comply with
certain financial covenants including achieving cumulative earnings before
interest, taxes, depreciation and amortization ("EBITDA covenant"), and
maintaining certain coverage ratios. The Company was in compliance with the
Credit Agreement at June 30, 1994.

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

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

Annual maturities of long-term debt obligations (exclusive of capital
lease obligations) for each of the five years following June 30, 1994, are as
follows: $8,818,000 for 1995, $41,509,000 for 1996, $87,648,000 for 1997,
$23,627,000 for 1998 and $215,637,000 for 1999.

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

Pensions
--------

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

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

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

<PAGE>
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Discount Rate............................ 8.5% 8.5% 8.5%
Expected rate of increase in salaries.... 4.5% 4.5% 4.5%
Expected long-term rate of return on
plan assets............................ 9.0% 9.0% 9.0%
</TABLE>
The following table sets forth the funded status and amounts recognized
in the Company's statement of financial position at June 30, 1994, and 1993
for the plans:
<TABLE>
<CAPTION>
(In thousands) June 30, June 30,
1994 1993
-------- --------
<S> <C> <C>
Projected benefit obligation:
Vested benefit obligation................. $183,120 $172,349
Non-vested benefits....................... 10,684 11,110
------- -------
Accumulated benefit obligation............ 193,804 183,459
Effect on projected future compensation
levels.................................. 4,418 4,042
------- -------
198,222 187,501

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

Unrecognized net loss....................... 35,843 14,782
Unrecognized prior service cost............. 411 639
Unrecognized net transition assets.......... (594) (3,039)
Additional minimum liability for one defined
plan...................................... (2,166) --
------- -------
Prepaid pension cost prior to SFAS 109
implementation............................ 75,028 77,179

Effect of SFAS 109 implementation........... (13,400) --
------- -------
Prepaid pension cost........................ $ 61,628 $ 77,179
======= =======
Prepaid pension cost, net of tax............ $ 54,316
=======
</TABLE>

Plan assets include Class A Common Stock of the Company valued at
$3,172,000 and $2,968,000 at June 30, 1994 and 1993, respectively.
Substantially all of the plan assets are invested in listed stocks and bonds.

<PAGE>
Postretirement Health Care Benefits
-----------------------------------

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

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

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

The Company provides health care benefits for most retired employees.
Postretirement health care expense from continuing operations totaled
$1,948,000, $1,366,000 and $840,000 for the years ended June 30, 1994, 1993
and 1992, respectively. The Company has accrued approximately $35,386,000 as
of June 30, 1994, for postretirement health care benefits related to
discontinued operations. This represents the cumulative discounted value of
the long-term obligation and includes interest expense of $3,011,000,
$4,866,000 and $5,099,000 for the years ended June 30, 1994, 1993 and 1992,
respectively. The components of expense in 1994 are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Service cost of benefits earned...................$ 437
Interest cost on liabilities...................... 4,526
Net amortization and deferral..................... (4)
-------
Net periodic postretirement benefit cost..........$ 4,959
=======
</TABLE>
The following table sets forth the funded status for the Company's
postretirement health care benefit plans:

<PAGE>
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Accumulated postretirement benefit obligations:
Retirees........................................$ 48,556
Fully eligible active participants.............. 497
Other active participants....................... 4,962
-------
Accumulated postretirement benefit obligation..... 54,015
Unrecognized net loss............................. 113
-------
Accrued postretirement benefit liability..........$ 53,902
=======
</TABLE>
The accumulated postretirement benefit obligation was determined using
a discount rate of 8.5%, and a health care cost trend rate of 9.5% and 6.5%
for pre-age-65 and post-age-65 employees, respectively, gradually decreasing
to 4.5% and 5.0%, respectively, in the year 2003 and thereafter.

Increasing the assumed health care cost trend rates by 1% would increase
the accumulated postretirement benefit obligation as of June 30, 1994, by
approximately $2,122,000, and increase the net periodic postretirement
benefit cost by approximately $245,000 for Fiscal 1994.

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

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

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

As permitted under SFAS 109, prior years' financial statements have not
been restated. The Company elected the immediate recognition method and
recorded a $2,412,000 charge representing the prior years' cumulative effect.
This charge represents deferred taxes that had to be recorded related
primarily to fixed assets, prepaid pension expenses, and inventory basis
differences.

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

The provision for income taxes from continuing operations is summarized
as follows:
<TABLE>
<CAPTION>
(In thousands)
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.......................... $ 4,976 $ (12,823) $ (23,891)
State............................ 735 2,031 944
Foreign.......................... 204 1,152 3,618
-------- -------- --------
5,915 (9,640) (19,329)

Deferred:
Federal......................... 18,851 (533) 12,078
State........................... 243 (1,003) 366
-------- -------- --------
19,094 (1,536) 12,444
-------- -------- --------
Net tax provision (benefit)........ $ 25,009 $ (11,176) $ (6,885)
======== ======== ========
</TABLE>
The income tax provision for continuing operations differs from that
computed using the statutory Federal income tax rate of 35% in 1994 and 34%
in the 1993 and 1992 periods for the following reasons:
<TABLE>
<CAPTION>
(In thousands)
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Computed statutory amount......... $ 18,477 $ (18,578) $ (9,198)
State income taxes, net of
applicable federal tax benefit.. 720 679 865
Foreign Sales Corporation benefit. (228) (222) (305)
Nondeductible acquisition
valuation items................. 4,431 2,053 969
Equity income and dividends....... -- (2,979) (1,620)
Tax on foreign earnings, net of
tax credits..................... 352 3,337 2,166
Difference between book and tax
basis of assets acquired and
liabilities assumed............. 1,366 582 636
Tax benefit of operating losses
not currently recognizable...... -- 4,964 --
Other............................. (109) (1,012) (398)
--------- --------- --------
Net tax provision(benefit)........ $ 25,009 $ (11,176) $ (6,885)
========= ========= ========
</TABLE>
The following table is a summary of the significant components of the
Company's deferred tax assets and liabilities as of June 30, 1994.

<TABLE>
<CAPTION>
(In thousands) June 30, 1994
-------------
<S> <C>
Deferred tax assets:
Accrued expenses..................... $ 9,797
Asset basis differences.............. 7,569
Employee compensation and benefits... 5,328
Environmental reserves............... 6,451
Loss and credit carryforwards........ 14,034
Postretirement benefits.............. 20,093
Other................................ 1,803
-------
65,075
Deferred tax liabilities:
Asset basis differences.............. (43,296)
Inventory............................ (9,870)
Pensions............................. (20,833)
Other................................ (15,676)
--------
(89,675)
--------
Net deferred tax liability............. $ (24,600)
========
</TABLE>
For fiscal years prior to the change in method of accounting for taxes,
the deferred income tax component of the income tax provision for continuing
operations consists of the effect of timing differences related to:
<TABLE>
<CAPTION>
(In thousands) 1993 1992
------- -------
<S> <C> <C>
Pension expense and employee benefits...... $ 9,062 $ 3,083
Depreciation............................... (17,549) 3,602
Investment earnings (loss)................. (880) 3,591
Various reserves and accruals.............. 6,078 191
Other...................................... 1,753 1,977
------- -------
$ (1,536) $ 12,444
======= =======
</TABLE>
For tax purposes, the Company had available, at June 30, 1994, net
operating loss ("NOL") carryforwards for regular Federal income tax purposes
of approximately $32,000,000, which will expire as follows: $23,000,000 in
year 2003, $2,000,000 in year 2008, and $7,000,000 in year 2009. The Company
also had general business credit carryforwards for tax purposes of
approximately $3,000,000, which will expire during the years 2000 through
2001.

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

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

In the opinion of management, adequate provision has been made for all
income taxes and interest, and any liability that may arise for prior
periods, as a result of the proposed adjustments, will not have a material
effect on the financial condition or results of operations of the Company.

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

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

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

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

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

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

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

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

13. EQUITY SECURITIES
-----------------

The Company had 13,406,109 shares of Class A common stock and 2,696,886
shares of Class B common stock outstanding at June 30, 1994. Class A common
stock is traded on both the New York and Pacific Stock Exchange. There is no
public market for the Class B common stock. Shares of Class A common stock
are entitled to one vote per share and cannot presently be exchanged for
shares of Class B common stock. Shares of Class B common stock are entitled
to ten votes per share and can be exchanged, at any time, for shares of Class
A common stock on a share-for-share basis. During Fiscal 1994, 2,400 shares
of Class B common stock were converted by shareholders into Class A common
stock.

RHI holds an investment in the Company's Class A common stock of
approximately $44,606,000. The Company accounts for the Class A common stock
held by RHI as Treasury Stock.

14. STOCK OPTIONS, WARRANTS, AND DEFERRED PERFORMANCE INCENTIVE PLAN
----------------------------------------------------------------

The Company has reserved 4,320,000 shares of Class A common stock for
issue to key employees under the Company's 1986 Stock Option Plan. This plan
authorizes the granting of options over a ten-year period at not less than
the market value of the common stock at the time of the grant. The option
price is payable in cash or, with the approval of the stock option committee
of the Board of Directors, in shares of common stock, valued at fair market
value at the time of exercise. The options normally terminate five years
from their date of grant, subject to extension of up to 10 years or for a
stipulated period of time after an employee's death or termination of
employment.

Stock Options Granted to Directors
----------------------------------

On May 19, 1988, the Board of Directors approved the grant of 180,000
shares of stock options to six outside Directors of the Company at an
exercise price of $6.04. In Fiscal 1990 and 1991, the Company granted and
approved 75,000 and 60,000 options, respectively, to certain Directors.
These stock options expire five years from the date of the grant. The Board
of Directors authorized the grant of stock options of 190,000 shares to
outside Directors of the Company to replace expired stock options, subject to
shareholder approval at the Company's next annual meeting.

Stock option transactions are summarized below:
<TABLE>
<CAPTION>

(In thousands Shares Shares under option plan
except per share available --------------------------
data) for grant 1986 Other Price
-----------------------------------------
<S> <C> <C> <C> <C>
July 1, 1991....... 463 1,559 191 $5.16-11.00
Granted............ (129) 129 - $4.625-7.00
Exercised.......... - (5) - $5.16-6.50
Canceled........... 40 (40) - $6.50-7.56
---------------------------
June 30, 1992...... 374 1,643 191 $4.625-11.00
Granted............ (291) 101 190 $4.125-4.25
Canceled........... 537 (387) (150) $5.16-9.125
---------------------------
June 30, 1993...... 620 1,357 231 $4.125-11.00
Granted............ (57) 27 30 $3.50-4.125
Canceled........... 124 (64) (60) $4.25-9.125
---------------------------
June 30, 1994...... 687 1,320 201 $3.50-11.00
===========================
</TABLE>
Warrants
--------

At June 30, 1994, the Company had outstanding warrants to purchase
375,000 shares of the Company's common stock for $7.67 per share. The
warrants can be used to purchase either Class A or B common stock and will
expire on March 13, 1995.

Deferred Performance Incentive Plan
-----------------------------------

On December 12, 1986, stockholders approved a deferred performance
incentive plan to promote the financial interest of the Company and its
stockholders. The plan awards performance incentive units which can convert
into cash or equity awards, subject to certain limitations, which have a term
of six years from the date of grant, based on the incremental increase in
earnings per share over the base of Fiscal 1986 earnings per share,
compounded annually by 15 percent.

During Fiscal 1989, the Board of Directors authorized 250,000 units for
grants which were subsequently approved by stockholders. At June 30, 1994,
there were 220,000 incentive units outstanding and 50,000 incentive units
available for grant. No expense was recognized in Fiscal 1994, 1993 or 1992
based on provisions of the plan.

15. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------

Statement of Financial Accounting Standards No. 107, ("SFAS No. 107")
"Disclosures about Fair Value of Financial Instruments", requires disclosures
of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used,
including discount rate and estimates of future cash flows. Certain of the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.

The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:

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

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

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

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

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

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

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

Off-balance-sheet Instruments: Fair values for the Company's off-
balance-sheet instruments (letters of credit, commitments to extend credit,
and lease guarantees) are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the counter parties' credit standing. The current period's fair value of
the Company's off-balance-sheet instruments is immaterial.

The carrying amounts and fair values of the Company's financial
instruments at June 30, 1994 and June 30, 1993 are as follows:
<TABLE>
<CAPTION>
June 30, 1994 June 30, 1993
---------------------- ------------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Cash.............................. $102,368 $102,368 $ 70,099 $ 70,099
Investment Securities:
Short-term equity securities.... 3,348 3,443 503 3,245
Short-term limited partnerships. 2,899 2,899 4,520 4,732
Short-term other investments.... 402 400 402 400
Long-term equity securities..... 2,748 3,147 2,748 3,147
Long-term limited partnerships.. 3,396 3,508 5,808 7,141
Long-term Bidermann investment.. 9,314 9,314 9,700 9,700
Notes Receivable:
Current......................... 1,426 1,362 4,228 4,550
Long-term....................... 6,873 7,234 8,575 8,731
Short-term debt................... 3,974 3,974 56,492 56,492
Long-term debt:
Bank credit agreement........... 97,315 97,315 102,700 102,700
Subordinated debentures and
senior notes ................. 425,016 419,404 457,810 462,656
Industrial revenue bonds........ 1,500 1,500 1,506 1,506
Capitalized leases.............. 3,302 3,302 6,588 6,588
Other........................... 6,278 6,278 8,185 8,185
Minority interest................. 23,981 21,675 24,015 18,425
Redeemable preferred stock of
subsidiary...................... 17,552 15,461 17,732 13,378
</TABLE>
16. RESTRUCTURING CHARGES
---------------------

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

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

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

17. UNUSUAL ITEMS
-------------

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

18. RELATED PARTY TRANSACTIONS
--------------------------

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

The Company and its subsidiaries are all parties to a tax sharing
agreement whereby the Company files a consolidated federal income tax return
and the subsidiaries make payments to the Company based on the amount of
federal income taxes, if any, the subsidiary would have paid if it had filed
a separate tax return.

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

19. COMMITMENTS AND CONTINGENCIES
-----------------------------

Leases
------

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

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

CL Motor Freight Litigation
- ---------------------------

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

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

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

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

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

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

20. BUSINESS SEGMENT INFORMATION
----------------------------

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

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

The Company's financial data by business segment is as follows:

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

Corporate Administrative Expense. (16,868) (19,506) (21,979)
Other Corporate Income........... 2,231 5,309 3,662
--------- --------- ---------
Total Consolidated Operating
Income (Loss).................... $ (9,338) $ 4,174 $ 25,986
========= ========= =========
Capital Expenditures:
Aerospace Fasteners.............. $ 4,320 $ 5,711 $ 11,471
Industrial Products.............. 3,997 4,002 5,041
Communications Services.......... 7,775 5,792 10,040
Corporate and Other.............. 187 91 9,322
--------- --------- ---------
Total Capital Expenditures......... $ 16,279 $ 15,596 $ 35,874
========= ========= =========
Depreciation and Amortization:
Aerospace Fasteners.............. $ 14,373 $ 14,280 $ 12,525
Industrial Products.............. 6,765 6,154 5,791
Communications Services.......... 8,948 7,936 6,192
Corporate and Other.............. 6,141 5,585 4,543
--------- --------- ---------
Total Depreciation and Amortization $ 36,227 $ 33,955 $ 29,051
========= ========= =========
June 30, June 30, June 30,
1994 1993 1992
--------- --------- ---------
Identifiable Assets:
Aerospace Fasteners.............. $ 306,008 $ 337,185 $ 373,651
Industrial Products.............. 164,632 146,754 148,053
Communications Services.......... 79,087 78,752 72,528
Corporate and Other.............. 363,802 398,191 415,144
--------- --------- ---------
Total Identifiable Assets.......... $ 913,529 $ 960,882 $1,009,376
========= ========= =========

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

(2) - Includes charges to reflect the cost of restructuring of $18,860,000,
$15,469,000 and $2,500,000 in Fiscal 1994, 1993 and 1992, respectively, and
an unusual loss from earthquake damage and business interruption of
$4,000,000 in Fiscal 1994.
</TABLE>
21. FOREIGN OPERATIONS AND EXPORT SALES
-----------------------------------

The Company's operations are located primarily in the United States and
Europe. Inter-area sales are not significant to the total sales of any
geographic area. The Company's financial data by geographic area is as
follows:
<TABLE>
<CAPTION>
(In thousands)
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Sales by Geographic Area:
United States.................... $ 358,614 $ 369,343 $ 394,148
Europe........................... 76,366 85,479 89,208
Other............................ 9,165 8,745 6,424
--------- --------- ---------
Total Sales........................ $ 444,145 $ 463,567 $ 489,780
========= ========= =========
Operating Income by Geographic Area:
United States.................... $ (1,011) $ 15,390 $ 34,285
Europe........................... 5,847 2,034 9,011
Other............................ 463 947 1,007
--------- --------- ---------
Total Segment Operating Income..... $ 5,299 $ 18,371 $ 44,303
========= ========= =========

June 30, June 30, June 30,
1994 1993 1992
Identifiable Assets by Geographic --------- --------- ---------
Area:
United States.................... $ 458,621 $ 479,751 $ 509,922
Europe........................... 86,545 78,176 81,080
Other............................ 4,561 4,764 3,230
Corporate and other assets....... 363,802 398,191 415,144
--------- --------- ---------
Total Identifiable Assets.......... $ 913,529 $ 960,882 $1,009,376
========= ========= =========
</TABLE>
Export sales are defined as sales to customers in foreign countries by
the Company's domestic operations. Export sales amounted to the following:
<TABLE>
<CAPTION>
(In thousands)
1994 1993 1992
--------- --------- ---------

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

The following table of quarterly financial data has been prepared from
the financial records of the Company without audit, and reflects all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results of operations for the interim periods presented:

<TABLE>
<CAPTION>
Quarter Ended
(In thousands, except per --------------------------------------------
share data) Oct. 3 Jan. 2 Apr. 3 June 30
1993 1994 1994 1994
--------------------------------------------
<S> <C> <C> <C> <C>
1994:
Net sales.................... $110,491 $108,830 $112,836 $111,988
Gross profit................. 22,962 25,875 27,138 30,289
Earnings (loss) from
continuing operations...... (11,151) 70,467 (11,195) (20,338)
Loss from discontinued
operations, net............ (29) (29) (259) (51)
Extraordinary items, net..... -- -- (147) (496)
Cumulative effect of change
in accounting for post-
retirement benefits, net... (8,015) -- -- --
Cumulative effect of change
in accounting for income
taxes, net................. (2,935) -- -- --
------- ------- ------- -------
Net earnings (loss) available
to common stockholders..... $(22,130) $ 70,438 $(11,601) $(20,885)
======= ======= ======= =======
Earnings per share:
Primary and Fully Diluted:
Earnings (loss) from
continuing operations.. $ (.69) $ 4.37 $ (.69) $ (1.27)
Loss from discontinued
operations, net........ -- -- (.02) --
Extraordinary items, net. -- -- (.01) (.03)
Cumulative effect of
change in accounting
for postretirement
benefits, net.......... (.50) -- -- --
Cumulative effect of
change in accounting
for income taxes, net.. (.18) -- -- --
------- ------- ------- -------
Net earnings (loss) share $ (1.37) $ 4.37 $ (.72) $ (1.30)
======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
Quarter Ended
(In thousands, except --------------------------------------------
per share data) Sept. 27 Dec. 27 Mar. 28 June 30
1992 1992 1993 1993
--------------------------------------------
<S> <C> <C> <C> <C>
1993:
Net sales.................... $118,100 $116,548 $114,399 $114,520
Gross profit................. 31,918 29,665 27,648 23,335
Loss from continuing
operations.................. (3,000) (7,858) (10,752) (21,855)
Earnings (loss) from discon-
tinued operations.......... (37) (36) (35) 83
Extraordinary items - net.... (12,224) 23 4 (417)
------- ------- ------- -------
Net loss available to common
stockholders............... $(15,261) $ (7,871) $(10,783) $(22,189)
======= ======= ======= =======
Earnings per share:
Primary and Fully Diluted:
Loss from continuing
operations............ $ (.19) $ (.49) $ (.67) $ (1.36)
Earnings from
discontinued operations -- -- -- .01
Extraordinary items...... (.76) -- -- (.03)
------- ------- ------- -------
Net loss per share....... $ (.95) $ (.49) $ (.67) $ (1.38)
======= ======= ======= =======
</TABLE>
Earnings (loss) from continuing operations includes charges to reflect
the cost of restructuring the Company's Aerospace Fasteners Segment, of
$9,903,000 and $8,957,000 in the second and fourth quarters of Fiscal 1994,
respectively, and $1,500,000, $932,000 and $13,037,000 in the second, third
and fourth quarters of Fiscal 1993, respectively. The Company recorded an
unusual loss in the third and fourth quarter of Fiscal 1994 of $3,200,000 and
$3,493,000, respectively, to cover the estimated net cost of the damages and
related business interruption caused by an earthquake and the write down of
real estate and other assets.

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

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

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

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

To The Fairchild Corporation:

We have audited the accompanying consolidated balance sheets of The Fairchild
Corporation (a Delaware corporation) and subsidiaries as of June 30, 1994 and
1993, and the related consolidated statements of earnings, stockholders'
equity and cash flows for the years ended June 30, 1994, 1993 and 1992.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Fairchild Corporation
and subsidiaries as of June 30, 1994 and 1993, and the results of their
operations and their cash flows for the years ended June 30, 1994, 1993 and
1992, in conformity with generally accepted accounting principles.

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

Arthur Andersen LLP

Washington, D.C.
August 26, 1994

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

None.

PART III
--------

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

The information required by this Item is incorporated herein by
reference from the 1994 Proxy Statement.

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

The information required by this Item is incorporated herein by
reference from the 1994 Proxy Statement.

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

The information required by this Item is incorporated herein by
reference from the 1994 Proxy Statement.

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

The information required by this Item is incorporated herein by
reference from the 1994 Proxy Statement.

<PAGE>
PART IV

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

The following documents are filed as part of this Report:

(a)(1) Financial Statements.

All financial statements of the registrant as set forth under Item 8 of
this report on Form 10-K (see index on Page 30).

(a)(2) Financial Statement Schedules and Report of Independent Public
Accountants.

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

VIII Valuation and Qualifying Accounts 85

IX Short-Term Borrowings 85

X Supplementary Income Statement
Information 86

All other schedules are omitted because they are not required, are
inapplicable, or the information is included in the consolidated financial
statements or notes thereto.
<PAGE>
Report of Independent Public Accountants
----------------------------------------

To The Fairchild Corporation:

We have audited in accordance with generally accepted auditing standards, the
Consolidated Financial Statements of The Fairchild Corporation and
subsidiaries included in this Form 10-K and have issued our report thereon
dated August 26, 1994. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedules
listed in the index on page 73 are the responsibility of the Company's
management and are presented for purposes of complying with the Securities
and Exchange Commission's rules and are not part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.

Arthur Andersen LLP

Washington, D.C.
August 26, 1994
<PAGE>
(a)(3) Exhibits.

3 (a) Registrant's Restated Certificate of Incorporation
(incorporated by reference to Exhibit "C" of Registrant's
Proxy Statement dated October 27, 1989).

(b) Registrant's Amended and Restated By-Laws (incorporated by
reference from Registrant's Annual Report on Form 10-K for fiscal
year ended June 30, 1990 (the "1990 10-K")).

4 (a) Specimen of Class A Common Stock certificate (incorporated by
reference to Registration Statement No. 33-15359 on Form S-2).

(b) Specimen of Class B Common Stock certificate (incorporated by
reference from Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1989 (the "1989 10-K")).

(c) Form of Indenture between Registrant and J. Henry Schroder Bank
& Trust Company, pursuant to which Registrant's 13-1/8%
Subordinated Debentures due 2006 (the "Senior Debentures") were
issued (the "Debenture Indenture"), and specimen of Senior
Debenture (incorporated by reference to Registration Statement
No. 33-3521 on Form S-2).

(d) First Supplemental Indenture dated as of November 26, 1986, to
the Debenture Indenture (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1986 (the "December 1986 10-Q").

(e) Form of Indenture between Registrant and Manufacturers Hanover
Trust Company pursuant to which Registrant's 12-1/4% Senior
Subordinated Notes due 1996 (the "Senior Notes") were issued (the
"Note Indenture"), and specimen of Senior Note (incorporated by
reference to Registration Statement No. 33-03521 on Form S-2).

(f) First Supplemental Indenture dated as of November 26, 1986, to
the Note Indenture (incorporated by reference to the December
1986 10-Q).

(g) Indenture between Registrant and Connecticut National Bank (as
successor to National Westminster Bank) dated as of October 15,
1986, pursuant to which Registrant's Intermediate Subordinated
Debentures due 2001 (the "Intermediate Debentures") were issued,
and specimen of Intermediate Debenture (incorporated by reference
to Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1986 (the "September 1986 10-Q")).

(h) Indenture between Rexnord Acquisition Corp. ("RAC") and Bank of
New York (as successor to Irving Trust Company) dated as of March
2, 1987, pursuant to which RAC's Senior Subordinated Debentures
due 1999 (the "Rexnord Senior Debentures") were issued (the
"Rexnord Senior Indenture"), and specimen of Rexnord Senior
Debenture incorporated by reference from Registrants Annual
Report on Form 10-K for fiscal year ended June 30, 1987 (the
"1987 10-K").

(i) First Supplemental Indenture between Rexnord Inc. ("Rexnord")
(as successor to RAC) and Irving Trust Company dated as of July
1, 1987, to the Rexnord Senior Indenture (incorporated by
reference to Registration Statement No. 33-15359 on Form S-2).

(j) Second Supplemental Indenture between Rexnord Holdings Inc.
("Rexnord Holdings") (as successor to Rexnord) and Irving Trust
Company dated as of August 16, 1988, to the Rexnord Senior
Indenture (incorporated by reference to Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1988 (the
"1988 10-K")).

(k) Indenture between Registrant and Norwest Bank Minneapolis, N.A.
dated as of March 2, 1987, pursuant to which Registrant's Junior
Subordinated Debentures due 2007 (the "Junior Debentures") were
issued, and specimen of Junior Debenture (incorporated by
reference to Final Amendment to Tender Offer Statement on
Schedule 14D-1 of Banner Acquisition Corp. ("BAC") dated March 9,
1987).

(l) First Supplemental Indenture between Registrant and Norwest
Bank, Minnesota Bank, N.A., dated as of February 28, 1991, to
Indenture dated as of March 2, 1987, relating to the Junior
Debentures (incorporated by reference to the 1991 10-K).

(m) Securities Purchase Agreement dated as of October 15, 1986, by
and among Registrant and each of the Purchasers of the
Intermediate Debentures (incorporated by reference to the
September 1986 10-Q).

(n) Securities Purchase Agreement dated as of March 2, 1987, by and
among Registrant, RAC and each of the Purchasers of the Junior
Debentures, the Rexnord Senior Debentures and other securities
(incorporated by reference to the 1987 10-K).

(o) Registration Rights Agreement dated as of October 15, 1986, by
and among Registrant and each of the purchasers of the
Intermediate Debentures (incorporated by reference to the
September 1986 10-Q).

(p) Registration Rights Agreement dated as of March 2, 1987, by and
among Registrant, RAC and each of the purchasers of the Junior
Debentures, the Rexnord Senior Debentures and other securities
(incorporated by reference to Registrant's Report on Form 8-K
dated March 17, 1987).

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

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

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

(t) Indenture dated as of January 1, 1978 between Fairchild and
Bankers Trust Company, pursuant to which Fairchild's 9-3/4%
Subordinated Debentures due April 1, 1988 were issued
(incorporated by reference to Registration Statement No.
2-60451 on Form S-7).

(u) Indenture dated as of March 1, 1991, between Registrant and
Sovran Bank, N.A., pursuant to which the Registrant's 14% Senior
Secured Notes were issued (incorporated by reference to the
1991 10-K).

(v) Indenture date as of August 1, 1992, between Fairchild and
NationsBank, N.A. pursuant to which Fairchild's 12 1/4% Senior
Secured Notes were issued (incorporated by reference to the
1992 10-K).

10 (a) Restated and Amended Credit Agreement (the "RHI Credit
Agreement") dated as of July 27, 1992 (incorporated by
reference to the 1992 10-K).

(a)(i) Amendment No. 1, dated as of June 30, 1994, to the Restated
and Amended Credit Agreement dated as of July 27, 1992
(incorporated by reference to the 1993 10-K).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

<PAGE>
(m) Form of Amended and Restated Stockholders' Agreement among
Rex-PT Holdings, Registrant, Rexnord Holdings and certain
investors (incorporated by reference to the 1988 10-K).

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

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

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

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

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

(s) Share Purchase Agreement dated as of October 31, 1990, among
Registrant, Banner Investments, Inc., North West Water Inc. and
North West Water Group PLC (the "Envirex Agreement")
(incorporated by reference to Form 8-K dated November 30, 1990).

(t) Amendments 1 - 6 to the Envirex Agreement (incorporated by
reference to 1991 10-K).

(u) Stock Purchase Agreement dated as of November 13, 1990, by and
between Registrant, Thompson Holding Company, Inc., Thompson
Aircraft Tire Corporation, a Delaware corporation, Thompson
Aircraft Tire Corporation, a Florida corporation and Bridgestone
Corporation (incorporated by reference to Form 8-K dated January
18, 1991).

(v) Option Sale Agreement dated December 26, 1990 by and between
Rexnord Holdings Inc. and Zaria, Inc. (incorporated by reference
to 1991 10-K).

(w) Stock Purchase Agreement dated as of June 28, 1991 by and
between Sovereign Air Limited and S.A. Holdings, Inc.
(incorporated by reference to 1991 10-K).

(x) Agreement dated as of June 28, 1991 between Banner
Investments, Inc. and Rexnord Holdings, Inc. (incorporated
by reference to 1991 10-K).

(y) Agreement dated November 8, 1990, by and among Registrant and
Columbia Savings and Loan (incorporated by reference to 1991
10-K).

(z) Escrow and Amendment to Purchase Agreement as entered on
January 24, 1991 among Registrant, Columbia Savings and Loan and
Citibank, N.A. (incorporated by reference to 1991 10-K).

(a)(a) Stock Purchase Agreement dated as of February 7, 1992 among
Registrant, Thompson Aircraft Tire Corporation and Aero Tires
& Brakes, Inc. (incorporated by reference to 1993 10-K).

(b)(b) Exchange and Standstill Agreement dated June 19, 1992 by and
among Registrant, Rexnord Holdings Inc. and Rex-PT Holdings,
Inc. (incorporated by reference to 1992 10-K).

(c)(c) Registration Rights Agreement dated July 9, 1992 between
Rexnord Corporation and Rexnord Holdings Inc. (incorporated
by reference 1993 10-K).

(d)(d) Allocation Agreement dated April 13, 1992 by and among The
Fairchild Corporation, RHI Holdings, Inc., Rex-PT Holdings,
Rexnord Corporation, Rexnord Puerto Rico, Inc. and Rexnord Canada
Limited (incorporated by reference to 1992 10-K).

(e)(e) Trademark Purchase Agreement dated April 13, 1992 by and
between Rexnord Corporation and RHI Holdings, Inc. (incorporated
by reference to 1992 10-K).

(f)(f) Deferred Compensation Agreement between Registrant and Samuel J.
Krasney dated July 14, 1972, as amended November 17, 1978,
September 3, 1985 (the "Krasney Deferred Compensation Agreement")
(incorporated by reference to Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1985).

(g)(g) Amendment to the Krasney Deferred Compensation Agreement dated
September 6, 1990 (incorporated by reference to 1991 10-K).

(h)(h) Incentive Compensation Bonus Arrangement (description
incorporated by reference to Registrant's Proxy Statement dated
October 26, 1988).

(i)(i) Amended and Restated Employment Agreement between Registrant
and Samuel J. Krasney dated April 24, 1990 (incorporated by
reference to the 1990 10-K).

(j)(j) Letter Agreements dated August 4, 1994 among Samuel J. Krasney,
The Fairchild Corporation and Jeffrey J. Steiner (incorporated
by reference to 1993 10-K).

<PAGE>
(k)(k) Amendment to the Krasney Option dated October 18, 1985
(incorporated by reference to the 1989 10-K).

(l)(l) Second Amendment to the Krasney Option dated April 30, 1986
(incorporated by reference to Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1986).

(m)(m) Amended and Restated 1986 Deferred Performance Incentive Plan
of Banner Industries, Inc. (the "Deferred Incentive Plan")
(incorporated by reference to the 1988 10-K).

(n)(n) 1988 U.K. Stock Option Plan of Banner Industries, Inc.
(incorporated by reference to the 1988 10-K).

(o)(o) Description of grants of stock options to non-employee
directors of Registrant (incorporated by reference to the 1988
10-K).

(p)(p) Amended and Restated Employment Agreement between Registrant
and Jeffrey J. Steiner dated September 10, 1992 (incorporated
by reference to 1993 10-K).

(q)(q) Agreement dated as of November 8, 1988 between Samuel J.
Krasney and Registrant, and Amendment No. 1 thereto dated as of
January 23, 1989, regarding exercise of performance incentive
units granted under the Deferred Incentive Plan (incorporated by
reference to the 1989 10-K).

(r)(r) Agreement dated as of November 8, 1988 between Jeffrey J.
Steiner and Registrant, and Amendment No. 1 thereto dated as of
January 23, 1989, regarding exercise of performance incentive
units granted under the Deferred Incentive Plan (incorporated by
reference to the 1989 10-K).

(s)(s) Letter Agreement dated October 23, 1991 between Registrant and
Eric I. Steiner (incorporated by reference to 1992 10-K).

(t)(t) Letter Agreement dated October 23, 1991 between Registrant and
John D. Jackson (incorporated by reference to 1992 10-K).

(u)(u) Letter Agreement dated October 23, 1991 between Registrant and
Michael T. Alcox (incorporated by reference to 1992 10-K).

(v)(v) Letter Agreement dated October 23, 1991 between Registrant and
Donald E. Miller (incorporated by reference to 1992 10-K).

(w)(w) Letter Agreement dated October 23, 1991 between Registrant and
John L. Flynn (incorporated by reference to 1992 10-K).

(x)(x) Letter Agreement dated April 8, 1994 between Registrant and
Thomas Flaherty (incorporated by reference to 1993 10-K).

<PAGE>
(y)(y) Purchase Agreement by and between BTR Dunlop Holdings, Inc.,
RHI Holdings, Inc., and Registrant, dated as of December 2,
1993 (incorporated by reference to Registrant's current
report on Form 8-K dated December 23, 1993.

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

*22 List of significant subsidiaries of Registrant.

*23 Consent of Arthur Andersen LLP, independent public
accountants.

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

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

*Filed herewith.

(b) Reports on Form 8-K

Registrant filed no reports on Form 8-K during the last quarter of
Fiscal 1994.
<PAGE>
SIGNATURES
----------

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

THE FAIRCHILD CORPORATION

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

By: Christopher Colavito
-------------------------
Vice President and
Controller

Date: September 21, 1994

<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant, in their capacities and on the dates indicated.

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

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

Samuel J. Krasney September 21, 1994
-------------------------------
Vice Chairman and Director

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

Philip David September 21, 1994
-------------------------------
Director

Christopher Colavito September 21, 1994
-------------------------------
Vice President and Controller

Harold J. Harris September 21, 1994
-------------------------------
Director

Herbert S. Richey September 21, 1994
-------------------------------
Director

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

Eric I. Steiner September 21, 1994
-------------------------------
Senior Vice President and
Director

Mortimer M. Caplin September 21, 1994
-------------------------------
Director

Thomas J. Flaherty September 21, 1994
-------------------------------
Chief Operating Officer and
Director
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
- --------------------------------------------------------------

Changes in the allowance for doubtful accounts are as follows:
<TABLE>
<CAPTION>
For the Years Ended June 30,
(In thousands) ----------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Beginning balance................. $ 1,900 $ 2,275 $ 2,054
Charged to cost and expenses...... 1,124 820 785
Charges to other accounts (1)..... 1,410 (926) (1,183)
Amounts written off............... (966) (269) 619
------- ------- -------
Ending balance.................... $ 3,468 $ 1,900 $ 2,275
======= ======= =======

(1) Recoveries of amounts written off in prior periods, foreign currency
translation and the change in related noncurrent taxes. Included in Fiscal
1994 is $1,179,000 relating to the acquisition of a subsidiary.
</TABLE>
SCHEDULE IX - SHORT-TERM BORROWINGS
- -----------------------------------
<TABLE>
<CAPTION>
(In thousands) June 30, June 30, June 30,
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Lines of credit available......... $ 72,955 $ 43,669 $ 36,802
======= ======= =======
Balance at end of year............ $ 3,974 $ 56,492 $ 20,718
======= ======= =======
Weighted average interest rates
at June 30...................... 10.47% 7.38% 7.01%
======= ======= =======
Maximum amount outstanding at
any month end................... $ 77,313 $ 56,492 $ 23,075
======= ======= =======
Average amount outstanding during
the year........................ $ 12,304 $ 10,698 $ 10,988
======= ======= =======
Weighted average interest rates
during the year................. 8.88% 9.00% 9.79%
======= ======= =======
</TABLE>
The average amount outstanding during the year is determined based upon
the amount outstanding at each month end. The weighted average interest rate
during the year is determined by dividing annual interest expense on short-
term borrowings by the average daily short-term borrowings outstanding.
<PAGE>
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
- -------------------------------------------------------

Maintenance and repair expenditures are charged to expense as incurred,
and expenditures for betterments and major renewals are capitalized.
Maintenance and repairs amounted to $7,470,000, $7,063,000 and $6,965,000 in
Fiscal 1994, 1993, and 1992, respectively. The carrying amounts of assets
which are sold or retired and the related accumulated depreciation are
removed from the accounts in the year of disposal, and any resulting gain or
loss is reflected in income. Such gains (losses) were not significant for
the years ended June 30, 1994, 1993, and 1992.

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

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

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

SECTION 1. Amendments to the Credit Agreement.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

VSI CORPORATION

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

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

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

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

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

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

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

GENERALE BANK,
as a Senior Lender

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

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

CAISSE NATIONALE DE CREDIT AGRICOLE,
as a Senior Lender

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

MITSUBISHI BANK, LTD.,
as a Senior Lender

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

CANADIAN IMPERIAL BANK OF COMMERCE,
as a Senior Lender

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

PILGRIM PRIME RATE TRUST,
as a Senior Lender

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

UNION BANK,
as a Senior Lender

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

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

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

EATON VANCE PRIME RATE RESERVES,
as a Senior Lender

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

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

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

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

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

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

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

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

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

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

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

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

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

SECTION 1. Amendments to the Credit Agreement.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(e) the Subordinated Debt Repayment; and

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

RHI HOLDINGS, INC.

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

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

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

Facility A Commitment: $2,500,000

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

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

Facility A Commitment: $2,500,000

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FAIRCHILD INDUSTRIES, INC.

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

VSI CORPORATION

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

CITICORP NORTH AMERICA, INC.,
as a Senior Lender

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

THE BANK OF NOVA SCOTIA, as a
Senior Lender

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

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

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

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

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

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

MITSUBISHI BANK, LTD., as a Senior
Lender

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

CANADIAN IMPERIAL BANK OF COMMERCE,
as a Senior Lender

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

PILGRIM PRIME RATE TRUST, as a
Senior Lender

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

UNION BANK, as a Senior Lender

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

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

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

EATON VANCE PRIME RATE RESERVES, as
a Senior Lender

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

CAISSE NATIONALE DE CREDIT AGRICOLE
as a Senior Lender

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

Attached<PAGE>

March 4, 1994

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

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

Dear Colin,

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

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

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

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

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

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

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

Please call me regarding any questions.

Sincerely,

KLS/ss
Enclosure

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

List of Significant Subsidiaries of The Fairchild Corporation

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

<ARTICLE> 5
<CIK> 0000009779
<NAME> THE FAIRCHILD CORPORATION
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1994
<PERIOD-END> JUN-30-1994
<CASH> 102368
<SECURITIES> 2969
<RECEIVABLES> 77664
<ALLOWANCES> (3468)
<INVENTORY> 90015
<CURRENT-ASSETS> 293356
<PP&E> 263835
<DEPRECIATION> (89688)
<TOTAL-ASSETS> 913529
<CURRENT-LIABILITIES> 147584
<BONDS> 522406
<COMMON> 2235
17552
0
<OTHER-SE> 69733
<TOTAL-LIABILITY-AND-EQUITY> 913529
<SALES> 444145
<TOTAL-REVENUES> 449887
<CGS> 337881
<TOTAL-COSTS> 433672
<OTHER-EXPENSES> 25553
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73071
<INCOME-PRETAX> 52792
<INCOME-TAX> 25009
<INCOME-CONTINUING> 27783
<DISCONTINUED> (368)
<EXTRAORDINARY> (643)
<CHANGES> (10950)
<NET-INCOME> 15822
<EPS-PRIMARY> 0.98
<EPS-DILUTED> 0.98

</TABLE>

CONSENT OF INDEPENDENT PUBLIC ACCOUNTS
---------------------------------------

As independent public accountants, we hereby consent to the
incorporation of our report on the consolidated financial
statements of The Fairchild Corporation and Subsidiaries for the
year end June 30, 1994, included in this Form 10-K into the
Company's previously filed for Form S-8 Registration Statements
Nos. 35-27317, 33-21698 and 33-06183.

Washington, DC
September 21, 1994