SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of the
Securities Exchange Act of 1934
Check the appropriate boxes:
|_| Preliminary Information Statement
|_| Confidential, for Use of the Commission Only (as permitted by
Rule 14c-5(d)(2))
|X| Definitive Information Statement
FAIRCHILD INDUSTRIES, INC.
(Name of Registrant As Specified In Charter)
Payment of Filing Fee (Check the appropriate box):
|_| $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14c-5(g).
|X| Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
1) Title of each class of securities to which transaction applies:
Series A Preferred Stock, without par value, of Fairchild Industries,
Inc. and Series C Preferred Stock, without par value, of Fairchild
Industries, Inc.
2) Aggregate number of securities to which transaction applies:
331,125 Shares of Series A Preferred Stock of Fairchild Industries, Inc.
558,360 Shares of Series C Preferred Stock of Fairchild Industries, Inc.
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
Common Stock of Shared Technologies Inc. (6,000,000 shares at $3.44 per
share*) = $20,640,000
Cumulative Convertible Preferred Stock of Shared Technologies Inc. =
$25,000,000 (liquidation value)
Special Preferred Stock of Shared Technologies Inc. = $20,000,000
(liquidation value)
4) Proposed maximum aggregate value of transaction:
$289,140,000
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* Average of the high ($3.62) and low ($3.25) prices as reported on a date which
is within five (5) business days prior to the Filing Date.
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5) Total fee paid:
$57,828.00**
|_| Fee paid previously with preliminary materials
|_| Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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** Pursuant to Rule 0-11(c)(3) under the Securities Exchange Act of 1934, as
amended, none of such fee is enclosed herewith because all of such fee was
paid by Shared Technologies Inc. in connection with its Schedule 14-A filed
with the Securities and Exchange Commission on December 1, 1995 (the "Filing
Date").
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INFORMATION STATEMENT
---------------
Concerning the Merger of
Fairchild Industries, Inc.
with and into
Shared Technologies Inc.
---------------
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT
TO SEND US A PROXY.
---------------
INTRODUCTION
This Information Statement is being furnished to the holders of outstanding
shares of Series A Preferred Stock, without par value (the "Class A Preferred
Stock") of Fairchild Industries, Inc., a Delaware corporation ("FII"), and
Series C Preferred Stock, without par value (the "Class C Preferred Stock," and
collectively with the Series A Preferred Stock, the "Preferred Stock") of FII in
connection with the proposed acquisition by Shared Technologies Inc., a Delaware
corporation ("STI"), of the telecommunications systems and service business (the
"Communications Business") operated by Fairchild Communications Services Company
("FCSC"), a Delaware general partnership all of whose corporate general partners
are wholly owned subsidiaries of VSI Corporation ("VSI"), a wholly owned
subsidiary of FII. The acquisition is to be effected by a merger (the "Merger")
of FII with and into STI. STI will be the corporation that survives the Merger
and will change its name to "Shared Technologies Fairchild Inc." (the "Surviving
Corporation"). In the Merger, each outstanding share of Preferred Stock will be
converted into the right to receive an amount of cash equal to $45.00 plus
accrued and unpaid dividends up to, but not including, the effective date of the
Merger (the "Preferred Consideration"), which is the amount that FII would be
required to pay holders of Preferred Stock if it redeemed the Preferred Stock.
In addition, pursuant to the Merger, each share of common stock, $100 par
value per share, of FII (the "FII Common Stock" and collectively with the
Preferred Stock, the "Capital Stock") will be converted into the right to
receive a pro rata share of (i) 6,000,000 shares of common stock, $.004 par
value per share, of STI (the "STI Common Stock"), (ii) shares of Cumulative
Convertible Preferred Stock of STI (the "Convertible Preferred Stock") bearing a
six percent initial annual dividend and having an aggregate liquidation
preference of $25,000,000 plus an amount equal to the total amount of dividends
the holders would have received if dividends had been paid quarterly in cash at
the rate of ten percent per annum for the life of the issue, less the amount of
dividends actually paid, and (iii) shares of Special Preferred Stock of STI (the
"Special Preferred Stock" and collectively with the Convertible Preferred Stock,
the "Merger Preferred Stock") having an aggregate initial liquidation preference
of $20,000,000 (all of the foregoing clauses (i), (ii) and (iii), collectively,
the "Common Consideration" and collectively with the Preferred Consideration,
the "Merger Consideration"). In connection with the Merger all shares of Series
B Preferred Stock, without par value, of FII will be contributed to the
Surviving Corporation and canceled.
The Merger will be effected pursuant to an Agreement and Plan of Merger
dated as of November 9, 1995, as amended by the First Amendment to the Agreement
and Plan of Merger dated February 2, 1996 (the "Merger Agreement"), among FII,
RHI Holdings, Inc., a Delaware corporation and the immediate parent of FII
("RHI"), The Fairchild Corporation, a Delaware corporation and the immediate
parent of RHI ("Fairchild"), and STI. After the effective date of the Merger,
the Preferred Stock will not trade on the New York Stock Exchange.
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Upon consummation of the Merger, all shares of Preferred Stock shall no
longer be outstanding, shall automatically be canceled and retired and shall
cease to exist, and each holder of a certificate representing any shares of
Preferred Stock shall cease to have any rights with respect thereto, except the
right to receive the Preferred Consideration, upon the surrender of their
respective stock certificates as herein provided.
As the result of the structure of the transaction as a merger with FII, STI
will become liable for all obligations arising out of FII's operations predating
the Merger, including those which are unrelated to the Communications Business.
STI will, however, be indemnified by RHI, Fairchild and certain other affiliates
of FII with respect to all non-Communications Business liabilities not
specifically assumed (as described in the next paragraph). Prior to the Merger,
FII and its affiliates will undergo a reorganization designed to leave in FII
only the assets and liabilities relating to the Communications Business and the
liabilities specified in the next paragraph. See "FII Reorganization,
Liabilities and Indemnification."
STI intends to issue $100,000,000 in zero coupon bonds and borrow
$138,000,000 in term loans (the "Financing") (i) to pay the Preferred
Consideration, (ii) to repay all principal, accrued interest and premium (the
"Note Purchase Amount") owed to the holders of FII's $125,000,000 aggregate
principal outstanding 12-1/4% Senior Secured Notes Due 1999 (the "FII Senior
Notes") to the extent that such holders elect to be repaid pursuant to a tender
offer initiated by FII preceding the Merger, (iii) to pay an amount of bank and
other indebtedness of FII equal to $223,500,000 less the Preferred Consideration
and the Note Purchase Amount, (iv) to repay State Street Bank and Trust Company
for all amounts outstanding as of the consummation of the Merger with respect to
STI's current loan facility and (v) to fund fees and expenses incurred in
connection with the Merger. FII has the right not to consummate the Merger if
net proceeds from the Financing are not sufficient to pay all of the foregoing.
STI and FII have retained CS First Boston Corporation ("CS First Boston") to
raise the required funds for the financing. See "Financing for the Merger."
As of February 1, 1996 there are issued and outstanding 1,400 shares of FII
Common Stock, 331,125 shares of Series A Preferred Stock, 2,362 shares of Series
B Preferred Stock, and 558,360 shares of Series C Preferred Stock. Each share of
FII Common Stock is entitled to 10,000 votes per share, each share of Series A
and Series C Preferred Stock is entitled to one vote per share, and the Series B
Preferred Stock is non-voting. RHI owns all of the issued and outstanding shares
of Common Stock, 400 shares of Series A Preferred Stock, 2,362 shares of Series
B Preferred Stock and 4,900 shares of Series C Preferred Stock, which
collectively account for approximately 94% of the combined voting power of the
outstanding Capital Stock. Since September 1, 1995, RHI has purchased 11,300
shares of Series A Preferred Stock on the open market and sold to FII 50,500
shares of Series A Preferred Stock and in return for a capital contribution was
issued 60 shares of Series B Preferred Stock by FII. PURSUANT TO THE DELAWARE
GENERAL CORPORATION LAW (THE "DGCL"), RHI, AS THE OWNER OF MORE THAN 50% OF THE
COMBINED VOTING POWER OF THE CAPITAL STOCK, HAS ELECTED TO APPROVE THE MERGER BY
WRITTEN CONSENT WITHOUT A STOCKHOLDERS' MEETING. SUCH APPROVAL WILL BE EFFECTIVE
ON OR ABOUT MARCH 13, 1996 (THE "APPROVAL DATE"). OTHER THAN SUCH WRITTEN
CONSENT, NO FURTHER ACTION BY THE STOCKHOLDERS OF FII IS NECESSARY TO APPROVE OR
CONSUMMATE THE MERGER AND NO SUCH APPROVAL WILL BE SOUGHT. FII WILL NOT HOLD A
MEETING OF THE STOCKHOLDERS OF FII IN CONNECTION WITH THE MERGER. IT IS
ANTICIPATED THAT THE MERGER WILL BE CONSUMMATED ON OR SHORTLY AFTER THE APPROVAL
DATE SUBJECT TO THE SATISFACTION OR, WHERE PERMISSIBLE, WAIVER OF THE CONDITIONS
TO THE MERGER SET FORTH IN THE MERGER AGREEMENT. PURSUANT TO THE DGCL HOLDERS OF
PREFERRED STOCK DO NOT HAVE DISSENTERS' RIGHTS OF APPRAISAL IN RESPECT OF THE
MERGER.
This Information Statement is first being mailed to holders of Preferred
Stock on February 23, 1996, and constitutes the notice of corporate action
without a meeting required by Section 228(d) of the DGCL.
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The principal executive offices of FII are located at 300 West Service
Road, Chantilly, Virginia 22021 and its telephone number is (703) 478-5800.
This Information Statement is accompanied by FII's Form 10-K for the fiscal
year ended June 30, 1995 and FII's Form 10-Q for the fiscal quarter ended
December 31, 1995.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS INFORMATION STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The date of this Information Statement is February 23, 1996
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TABLE OF CONTENTS
Page
INTRODUCTION ............................................................... 1
SPECIAL FACTORS ............................................................ 6
Background of and Reasons for the Merger .......................... 6
Interest of Certain Persons in the Merger ......................... 7
Written Consent ................................................... 8
Accounting Treatment of the Merger ................................ 8
Payment to Holders of Preferred Stock ............................. 8
Certain Effects of the Merger ..................................... 9
Certain Tax Consequences of the Merger ............................ 9
THE MERGER AGREEMENT ...................................................... 10
General .......................................................... 10
Effective Time ................................................... 10
Other Terms and Conditions ....................................... 10
Representations and Warranties ................................... 11
Additional Agreements ............................................ 11
Changes to Bylaws ................................................ 13
Fees and Expenses ................................................ 13
Regulatory Requirements .......................................... 13
Amendment; Termination ........................................... 14
FII REORGANIZATION, LIABILITIES AND INDEMNIFICATION ....................... 15
FINANCING FOR THE MERGER .................................................. 16
INFORMATION CONCERNING FII ................................................ 17
Formation, Historical Operations and Reorganization .............. 17
Communications Business .......................................... 18
SELECTED HISTORICAL FINANCIAL DATA OF FII ................................. 18
INFORMATION CONCERNING STI ................................................ 20
Recent Developments .............................................. 20
General .......................................................... 21
Equipment ........................................................ 23
STS Buildings .................................................... 24
Owner/Developer Agreements ....................................... 24
Tenant Contracts ................................................. 25
Government Regulation ............................................ 25
Marketing ........................................................ 26
Seasonality ...................................................... 27
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Page
Legal Proceedings ................................................ 27
SELECTED HISTORICAL FINANCIAL DATA FOR STI ................................ 28
FAIRCHILD INDUSTRIES INC. UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS ....................................... 29
FAIRCHILD INDUSTRIES INC. NOTES TO PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS ....................................... 33
ABSENCE OF DISSENTERS' RIGHTS ............................................. 34
MARKET PRICE OF AND DIVIDENDS ON THE PREFERRED STOCK AND
RELATED STOCKHOLDER MATTERS ............................................. 34
FAIRCHILD INDUSTRIES, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL
STATEMENTS .............................................................. F-1
EXHIBIT A - Agreement and Plan of Merger .................................. A-1
EXHIBIT B - First Amendment to Agreement and Plan of Merger ............... A-2
EXHIBIT C - FII's Form 10-Q for the quarterly period ended
December 31, 1995 ......................................... A-3
EXHIBIT D - FII's Form 10-K for the year ended June 30, 1995............... A-4
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SPECIAL FACTORS
Background of and Reasons for the Merger
The terms of the Merger are set forth elsewhere in this Information
Statement and the following is a description only of the background of and
reasons for the Board's decision to approve the Merger Agreement.
On September 20, 1995, after previously initiating contact with Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ"), FII engaged DLJ to evaluate
the feasibility of an initial public offering of FCSC and to consider the
possibility of a sale of FCSC that would allow FII to realize the value of the
FCSC business. Jeffrey J. Steiner, Chairman and Chief Executive Officer of FII,
and other officers of FII chose DLJ as FII's investment banker because of DLJ's
expertise in the telecommunications industry.
On September 20, 1995, Fairchild, the indirect parent of FII, made a public
announcement that it was either going to sell the telecommunications business of
FII or conduct an initial public offering of its telecommunications business. As
a result of such announcement, STI's Chairman, Anthony D. Autorino, initiated
contact with Jeffrey J. Steiner on September 29, 1995 regarding a possible
acquisition by STI of the telecommunications business of FII and they agreed to
hold a meeting on October 3, 1995. In addition to Mr. Autorino and Mr. Steiner,
James Crystal of S.G. Warburg & Company Inc. ("S.G. Warburg"), STI's financial
advisor, and Vincent DiVincenzo and Paul Barry of STI attended the October 3
meeting. At such meeting, the parties discussed the acquisition of FII by STI.
Mr. Steiner informed STI that FII was very shortly thereafter expected to file a
registration statement in connection with its initial public offering and that,
due to the significant adverse tax impact on Fairchild of an outright sale of
FII's communications assets, the only acceptable approach to an acquisition by
STI was a merger without recognition of gain by Fairchild for tax purposes.
On October 5, 1995, Messrs. Autorino and Steiner met with Richard Ivers,
Michael Johnson and Robin Rankin of First Boston to discuss financing the
transaction. First Boston concluded from such meeting that First Boston would
examine whether it was willing to raise the financing for the transaction and
whether it could provide a "highly confident" letter to STI in connection
therewith.
Between October 5 and October 10, 1995, Mr. Steiner and Mr. Autorino had
numerous telephone conversations in which they discussed the potential synergies
of the combined companies, the general structure of the merged entity and the
consideration to be paid in the Merger. Between October 5 and October 16, 1995
Mr. Steiner, Donald E. Miller, Vice President, General Counsel and Secretary of
FII, and John L. Flynn, Vice President of FII, had numerous discussions with
Cahill Gordon & Reindel, outside legal counsel to FII, to discuss deal
structure, components of the purchase price, financing and the issues regarding
indemnifying STI for liabilities not relating to FCSC. On October 12, 1995,
Messrs. Miller and Flynn, representatives from Cahill Gordon & Reindel, FII's
outside legal counsel, representatives from Gadsby & Hannah, STI's outside legal
counsel, and Kenneth M. Dorros, General Counsel of STI, met to discuss the
general structure of the merger. Specific issues discussed at the October 12
meeting were the liabilities of FII that STI would inherit as a consequence of
the merger and the indemnification to be provided by FII to cover such
liabilities. On October 16, 1995, Mr. Autorino conversed with Mr. Steiner to
finalize the specifics of the transaction for presentation to their respective
Boards, at which time they agreed on the transaction structure and a payment
structure involving the issuance of securities and the assumption of certain
liabilities. Although the basic terms of the transaction were established as of
such time, Messrs. Autorino and Steiner continued discussions and had meetings
on October 25, October 26 and 30, November 2 and November 7, 1995 to address the
following issues: the compositions of the equity components of the Merger
consideration, including the terms of the Merger Preferred Stock and the terms
of the Shareholders' Agreement, specifically the standstill agreement, lock-up
periods and board of directors representation by RHI.
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After the commencement of the STI discussions, Mr. Steiner and the
Company's outside legal counsel, Cahill Gordon & Reindel, also discussed the
possibility of the sale of FCSC with a subsidiary of a major international
company, but such discussions did not eventuate in any detailed negotiations or
firm offers. Such discussions were initiated by DLJ, FII's financial advisor.
On November 8, 1995 the two companies finalized the terms of the Merger,
and on November 9, 1995 FII's Board of Directors held a telephonic meeting at
which Mr. Steiner presented the terms of the Merger to FII's Board of Directors.
Mr. Steiner discussed with the Board the terms of the proposed Merger with STI
and that the transaction was beneficial to the shareholders of FII.
Present at the Board meeting were all the directors of the Company, Mr.
Miller and representatives from Cahill Gordon & Reindel, outside legal counsel
to FII. The factors considered by the Board of Directors were:
(1) The significant amount of FII's debt that STI would assume.
(2) The potential synergies between the two companies.
(3) The unlikelihood of enhancing shareholder value by pursuing an initial
public offering ("IPO") of FCSC.
In view of the factors considered by the FII Board of Directors in
connection with its evaluation of the Merger, the FII Board of Directors did not
find it practicable to, and did not, quantify or otherwise assign relative
values to the individual factors considered in reaching its determination and
recommendation with respect to the Merger, although factor (1) was particularly
significant to the Board's recommendation in light of the Company's significant
debt. Factor (2) was significant given the potential synergies between FCSC and
STI. For example, there could be synergies such as significant economies of
scale in purchasing long distance services, the combining of marketing efforts
and management and the sharing of infrastructure. Factor (3) was also
significant because at most an initial public offering would have generated $100
million to $150 million in gross proceeds to the shareholders of FCSC, whereas
the aggregate value of the Merger is $289,140,000. The $289,140,000 aggregate
value of the Merger is based upon the sum of (i) the cash to be received by
STI's payment of bank and other indebtedness of FII, the Preferred
Consideration, and the Note Purchase Amount (all totalled, $223,500,000) and
(ii) the value of the Common Consideration ($65,640,000), consisting of (x) the
value of the STI Common Stock (6,000,000 shares at $3.44 per share, the average
of the high and low prices as reported on a date which was within five (5)
business days prior to the Filing Date), (y) the liquidation preference value of
the Convertible Preferred Stock ($25,000,000), and (z) the aggregate initial
liquidation preference value of the Special Preferred Stock ($20,000,000). With
regard to the Preferred Consideration, the Board of Directors did not consider
the relative value of the consideration to be paid to common stockholders versus
preferred stockholders. Rather, the Board only considered the optional
redemption price for the Preferred Stock under its Certificate of Designation.
The Preferred Consideration is that amount which, as a matter of law, the
preferred stockholders are entitled to receive. Based on the foregoing, the
Board of Directors voted to approve the Merger Agreement including the Preferred
Consideration.
Interest of Certain Persons in the Merger
At the Effective Time, the Surviving Corporation will enter into an
employment agreement with Jeffrey J. Steiner, the Chairman of the Board, Chief
Executive Officer and President of FII, and prior to the Effective Time, FII
will enter into an employment agreement with Mel D. Borer, President of FCSC. It
is expected that such employment agreements will provide for annual salaries of
$350,000 and $250,000, respectively. Neither Mr. Steiner nor Mr. Borer presently
has an employment agreement with FII. Messrs. Steiner and Borer will also be
eligible to receive options from the Surviving Corporation under the Surviving
Corporation's 1996 Equity Incentive Plan. Mr. Steiner's performance goals, which
were approved by the stockholders of Fairchild at the annual meeting of
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stockholders held on November 16, 1995, allow the Compensation and Stock Option
Committee of the Board of Directors of Fairchild to award Mr. Steiner a bonus of
up to 1.5% of any extraordinary transaction, which may, in the discretion of the
Compensation and Stock Option Committee, be paid in cash or securities,
including securities issued in connection with the Merger.
Mr. Steiner is the beneficial owner of approximately 39% of the outstanding
common stock of Fairchild and has approximately 73% of the voting power of all
common stock of Fairchild. Fairchild owns 100% of the stock of RHI and RHI owns
100% of the FII Common Stock. Fairchild presently consolidates FII's income
statement and balance sheet into the Fairchild income statement and balance
sheet. Upon consummation of the Merger, Fairchild will indirectly own 42% of the
common stock of the Surviving Corporation on a fully diluted basis and will
therefore account for such ownership via the equity method, thus reducing
Fairchild's consolidated debt by approximately $180,000,000 and not recognizing
any related interest expense.
Written Consent
As of February 1, 1996 there are issued and outstanding 1,400 shares of FII
Common Stock, 331,125 shares of Series A Preferred Stock, 2,362 shares of Series
B Preferred Stock and 558,360 shares of Series C Preferred Stock. Each share of
FII Common Stock is entitled to 10,000 votes per share, each share of Series A
and Series C Preferred Stock is entitled to one vote per share, and the Series B
Preferred Stock is non-voting. RHI owns all of the issued and outstanding shares
of FII Common Stock, 400 shares of Series A Preferred Stock, 2,362 shares of
Series B Preferred Stock and 4,900 shares of Series C Preferred Stock, which
collectively account for approximately 94% of the combined voting power of the
outstanding Capital Stock. Since September 1, 1995, RHI has purchased 11,300
shares of Series A Preferred Stock on the open market and sold to FII 50,500
shares of Series A Preferred Stock and in return for a capital contribution was
issued 60 shares of Series B Preferred Stock by FII. Pursuant to the DGCL, RHI,
as the owner of more than 50% of the combined voting power of the Capital Stock,
has elected to approve the Merger by written consent without a stockholders'
meeting. Such approval will be effective on the Approval Date. OTHER THAN SUCH
WRITTEN CONSENT, NO FURTHER ACTION BY THE STOCKHOLDERS OF FII IS NECESSARY TO
APPROVE OR CONSUMMATE THE MERGER AND NO SUCH APPROVAL WILL BE SOUGHT. FII WILL
NOT HOLD A MEETING OF THE STOCKHOLDERS OF FII IN CONNECTION WITH THE MERGER. It
is anticipated that the Merger will be consummated on or shortly after the
Approval Date subject to the satisfaction or, where permissible, waiver of the
conditions to the Merger set forth in the Merger Agreement.
Accounting Treatment of the Merger
The Merger is intended to qualify as purchase accounting for financial
reporting purposes. Under the purchase method of accounting, the assets and
liabilities of FII will be recorded on the books of STI at their fair market
values. STI will allocate the excess cost of purchasing FII over the fair value
of FII's net tangible assets at acquisition to identifiable intangible assets to
the extent possible. The residual will be treated as goodwill and will be
amortized on a straight-line basis over 40 years.
Payment to Holders of Preferred Stock
As soon as practicable after the effective time of the Merger, a
transmittal letter and instructions will be sent to each record holder of
Preferred Stock immediately prior to the effective time of the Merger advising
such holder of the procedure for surrendering his certificate or certificates
for the Preferred Consideration. To receive the payment to which they are
entitled pursuant to the terms of the Merger, holders of Preferred Stock must
carefully comply with the instructions on the transmittal letter and return it,
along with their certificates which formerly represented shares of Preferred
Stock, to Chemical Mellon Shareholder Services, L.L.C. pursuant to the terms
thereof.
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Interest will not be paid on the amount payable upon surrender of certificates
which formerly represented shares of Preferred Stock.
Certain Effects of the Merger
If the Merger is consummated, holders of shares of Preferred Stock will not
have an opportunity to continue their preferred equity interest in FII after the
date the Merger is consummated. However, such holders will be entitled to
receive the Preferred Consideration in exchange for their shares of Preferred
Stock. After the effective date of the Merger, the Preferred Stock will not
trade on the New York Stock Exchange.
Upon consummation of the Merger, all shares of Preferred Stock shall no
longer be outstanding, shall automatically be canceled and retired and shall
cease to exist, and each holder of a certificate representing any shares of
Preferred Stock shall cease to have any rights with respect thereto, except the
right to receive the Preferred Consideration, upon the surrender of their
respective stock certificates as herein provided.
Certain Tax Consequences of the Merger
The receipt of cash in consideration for the shares of Preferred Stock by a
holder of such Preferred Stock pursuant to the Merger will be a taxable
transaction for federal income tax purposes under the Internal Revenue Code (the
"Code"), and may also be a taxable transaction under applicable state, local,
foreign and other tax laws.
In general, a stockholder will recognize gain or loss equal to the
difference between the tax basis for the shares of Preferred Stock held by such
stockholder and the amount of cash received in exchange therefor. Such gain or
loss will be a capital gain or loss if the shares of Preferred Stock are capital
assets in the hands of the stockholder and will be long-term capital gain or
loss if the holding period for the Preferred Stock is more than one year.
The foregoing discussion may not be applicable to certain stockholders,
including persons who will have substantial direct or indirect stock interests
in STI following the Merger, persons who are not citizens or residents of the
United States or persons who are otherwise subject to special tax treatment
under the Code.
THE FOREGOING DISCUSSION OF CERTAIN TAX CONSEQUENCES OF THE MERGER IS
INCLUDED FOR GENERAL INFORMATION ONLY AND IS BASED ON EXISTING TAX LAW AS OF THE
DATE OF THIS INFORMATION STATEMENT, WHICH MAY DIFFER ON THE EFFECTIVE DATE OF
THE MERGER. EACH STOCKHOLDER IS URGED TO CONSULT SUCH STOCKHOLDER'S OWN TAX
ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH STOCKHOLDER OF THE
MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN AND
OTHER TAX LAWS.
THE MERGER AGREEMENT
The following information is a summary of all material terms of the Merger
Agreement. However, such summary is not intended to be a complete description of
the Merger Agreement and is qualified in its entirety by a copy of the Merger
Agreement which is attached as Exhibit A hereto and is incorporated herein by
reference.
General
The Merger Agreement provides for the merger of FII with STI, with STI
surviving the Merger. As the Surviving Corporation of the Merger, STI will
change its name to "Shared Technologies Fairchild Inc." As a result of the
Merger, all shares of FII Common Stock (all of which are owned by RHI) will be
converted into the right to receive the Common Consideration and all shares of
Preferred Stock will be converted into the right to receive the Preferred
Consideration.
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Effective Time
The Merger will be effective upon the issuance of a Certificate of Merger
by the Secretary of State of Delaware (the "Effective Time").
Other Terms And Conditions
The respective obligations of STI and FII to consummate the Merger are
subject to the fulfillment or written waiver of the following conditions: (i)
approval of the Merger and certain amendments to the certificate of
incorporation of STI (the "Amendments") by Stockholders of STI owning a majority
of the outstanding STI Common Stock, (ii) the waiting period applicable to the
consummation of the Merger under the Hart-Scott-Rodino Act shall have expired or
been terminated, (iii) the absence of any order, statute, rule, regulation,
executive order, injunction, stay, decree or restraining order prohibiting the
consummation of the Merger and transactions contemplated by the Merger
Agreement, (iv) all necessary consents of third parties shall have been
obtained, (v) the FII Reorganization (as hereinafter defined) shall have been
effected, (vi) FII shall have made a cash tender offer (the "Tender Offer") to
purchase all of the FII Senior Notes and in connection therewith shall have
obtained the acceptance of such offer by Noteholders representing at least 51%
of the outstanding principal amount of the FII Senior Notes and such Noteholders
shall have consented to the following amendments and waivers to the indenture
under which the FII Senior Notes were issued: (A) the deletion of the covenants
in Article 4 of the Indenture entitled "SEC Reports" (other than certain Trust
Indenture Act requirements), "Limitation on Company Indebtedness," "Limitation
on Restricted Payments," "Limitation on Liens," "Limitation on Sale-Leaseback
Transactions," "Limitation on Subsidiary Indebtedness and Preferred Stock,"
"Limitation on Payment Restrictions Affecting Subsidiaries," "Limitation on
Transfers of Assets and Subsidiary Stock," "Limitation on Transactions with
Affiliates," "Maintenance of Consolidated EBITDA Coverage" and "Change of
Control" and the deletion of Article 5 of the Indenture entitled "Successor
Company"; (B) modification of the section in Article 6 of the Indenture entitled
"Events of Default" so that only defaults in payments due under the FII Senior
Notes and certain events of bankruptcy or insolvency described therein, as
modified by the amendments, would constitute Events of Default; (C) the
modification or deletion of the sections in Article 9 of the Indenture entitled
"Revocation and Effect of Consents and Waivers"; "Payment for Consent"; (D) the
deletion of Article 10 of the Indenture entitled "Security Documents"; (E) the
release of collateral (the "Collateral") securing FII's obligations under the
FII Senior Notes and the Indenture, comprised of all of the outstanding common
stock and Series B Preferred Stock of FII held by RHI and all of the outstanding
common stock of FII's wholly owned subsidiary VSI held by FII; and (F) the
termination of the security documents relating to the Collateral; (vii) the
parties shall have received the opinion of DLJ or another investment banking
firm of nationally recognized standing that the fair market value of the Merger
Preferred Stock is at least equal to the positive difference between $43,500,000
and the value of the STI Common Stock received as part of the Common
Consideration (based upon the closing price thereof on the date preceding the
Effective Time), (viii) Mel Borer shall have been offered an employment
agreement acceptable to STI and FII, (ix) there shall not have occurred since
December 31, 1994 (as to STI) or June 30, 1995 (as to FII), any material adverse
change in their respective businesses, operations, assets, financial condition
or results of operations on a consolidated basis (it being understood that no
such material adverse change shall be deemed to have occurred with respect to
FII if the pro forma consolidated net worth of FII is at least $80,000,000), (x)
STI's and FII's representations and warranties contained in the Merger Agreement
shall be true in all material respects, (xi) STI shall have executed a
non-competition agreement with Shared Technologies Cellular, Inc. ("STC")
acceptable to FII and (xii) the Indemnification Agreements, Shareholders
Agreement, Pledge Agreement and Tax Sharing Agreement (each of the foregoing as
hereinafter defined) shall have been executed and delivered.
Any condition to consummation of the Merger, other than approval by the
Stockholders of STI and any required regulatory approvals, may be waived in
writing by the party to the Merger Agreement entitled to the benefit of the
condition. See Exhibit A.
<PAGE>
-11-
The Merger Agreement provides that the Merger and Amendments will become
effective upon the filing and recordation of the Certificate of Merger and
Certificates of Designations, Preferences and Rights with respect to the Merger
Preferred Stock with the Secretary of State of the State of Delaware (i.e., the
Effective Time). STI intends to make such filing promptly after the satisfaction
or written waiver, where permissible, of the conditions contained in the Merger
Agreement.
Representations and Warranties
The representations and warranties of each of STI and FII contained in the
Merger Agreement are customary for transactions of this type. The
representations and warranties of each company include, without limitation,
representations and warranties as to the following: (i) due organization and
good standing; (ii) the number of subsidiaries owned; (iii) capitalization; (iv)
authority to enter into the Merger Agreement; (v) entering into the Merger
Agreement will not violate certain agreements; (vi) all filings with the
Securities and Exchange Commission have been made during the past three years;
(vii) since the date of the most recent Annual Report on Form 10-K there have
not been material adverse changes to the business; (viii) there is no material
litigation; (ix) adequate insurance; (x) good title to each of its properties;
(xi) all leases requiring the payment of at least $35,000 per annum are valid
and are in full force; (xii) all the contracts that have a change of control
provision; (xiii) labor matters; (xiv) compliance with law; (xv) each Board of
Directors has approved the Merger; (xvi) taxes; (xvii) employee benefit plans;
(xviii) environmental matters; (xix) undisclosed liabilities; and (xx) finders
or brokers.
Additional Agreements
Shareholders Agreement. The Merger Agreement provides that as a
pre-condition to the Merger, Anthony D. Autorino, the Chairman of the Board,
President and Chief Executive Officer of STI, RHI and STI enter into a
Shareholders Agreement pursuant to which Mr. Autorino and RHI agree to certain
restrictions with respect to the resale of securities of the Surviving
Corporation owned by them (the "Shareholders Agreement"). Mr. Autorino and RHI
will agree not to sell, within the two year period beginning with the date of
the Merger, other than to affiliates or certain family members, more than 10% of
their respective holdings as of the date of the Merger Agreement in securities
of the Surviving Corporation without the consent of 80% of the Board of
Directors of the Surviving Corporation (other than the Special Preferred Stock).
Following the two year "lock-up," each party may transfer the securities
provided that such party grants the other party the first right to negotiate the
purchase of such securities for a 30 day period. If either party to the
Shareholders Agreement desires to transfer more than 50% of his or its holdings
to a single party or to an affiliated group (other than through underwriters in
a public offering or otherwise in the securities markets generally), then such
party must offer the other party "take-along" rights by which the other party
shall have the right to sell a proportional amount of its shares to the same
purchaser in the same transaction. Furthermore, if one of the parties receives
an offer which it desires to accept from a person or related group of persons to
purchase shares of the Surviving Corporation's securities representing 10% or
more of the outstanding shares of the Surviving Corporation, then such party
shall offer the other party a right of first refusal to purchase such shares on
the same terms and conditions before accepting such offer to purchase.
The Shareholders Agreement also subjects the parties to a voting agreement
with respect to the election of Directors. Among other things, each party agrees
to (i) vote for four nominees of RHI; provided, that so long as Mr. Borer shall
be President of the Surviving Corporation they agree that he shall be a member
of the Board of Directors and RHI may only nominate three directors, and seven
nominees of Mr. Autorino, (ii) vote for the nominees of the other and for Mr.
Borer so long as he is President, and (iii) cause to be established an Executive
Committee of the Board of Directors which may act by unanimous consent only, to
consist of Mr. Autorino, who shall be Chairman and Chief Executive Officer of
the Surviving Corporation, Mr. Borer, the President and Chief Operating Officer
of the Surviving Corporation and Jeffrey J. Steiner (or another person
designated by RHI), who shall be Vice-Chairman of the Surviving Corporation. The
Shareholders Agreement terminates at such time as either
<PAGE>
-12-
Mr. Autorino or RHI owns less than 25% of the shares of common stock of the
Surviving Corporation owned respectively by such Stockholders on the date of the
Merger.
Indemnification Agreements. Concurrently with the Merger, Fairchild, RHI
and Fairchild Holding Corp., a wholly-owned subsidiary of RHI to be formed prior
to the consummation of the Merger, will enter into Indemnification Agreements
with respect to the historical non-Communications Business liabilities of FII
(the "Indemnification Agreements"). See "FII Reorganization, Liabilities and
Indemnification."
Pledge Agreement. As security for the obligations under the Indemnification
Agreements, RHI will, pursuant to a Pledge Agreement (the "Pledge Agreement"),
concurrently with the Merger, pledge to the Surviving Corporation all shares of
the Merger Preferred Stock other than Cumulative Convertible Preferred Stock
having an aggregate face liquidation preference of $1,500,000.
Tax Sharing Agreement. Concurrently with the Merger, STI and RHI shall
enter into a Tax Sharing Agreement (the "Tax Sharing Agreement"). Pursuant to
the Tax Sharing Agreement, STI will pay to RHI fifty percent of any reduction of
STI tax which results either from STI utilization of pre-Merger net operating
loss carryforwards or tax credit carryforwards of FII and VSI Corporation
("VSI") or from STI payment of premiums, interest and deferred financing fees
associated with retirement of the FII Senior Notes and VSI's bank indebtedness
existing at the time of the Merger. The Tax Sharing Agreement also will provide
for payments between STI and RHI in the event that amended tax returns or audit
adjustments shift FII income or deductions between the pre-Merger and
post-Merger periods.
Registration Rights Agreement. In connection with the Merger, the Surviving
Corporation will enter into a Registration Rights Agreement with respect to the
STI Common Stock, Cumulative Convertible Preferred Stock and Special Preferred
Stock issued to RHI as part of the Merger Consideration. RHI has agreed not to
sell any such stock (other than the Special Preferred Stock) during the two year
period following the date of the Merger. After such time, RHI may demand that
STI register the sale of any or all of such stock on three separate occasions,
and it may also elect to "piggyback" upon a registration otherwise effected by
STI for its own account or the account of other stockholders (subject to
underwriter restrictions in the event of a registration for the account of STI
and subject to the existing rights of such other stockholders now in existence).
Changes to Bylaws
The Merger Agreement provides for certain changes in the bylaws (the "Bylaw
Amendments") of STI relative to (i) the requirement for a stockholder meeting in
any instance where stockholder approval is required, (ii) rights to elect Board
of Directors members consistent with the Shareholders Agreement, (iii)
restrictions upon the issuance of options or other rights to acquire STI Common
Stock without majority stockholder approval, (iv) the establishment of an
Executive Committee, (v) amending provisions relative to the Executive Officers
of the Surviving Corporation, (vi) amending the provisions relative to amending
the bylaws to require that in any instance where amendments are to be effected
by the Board, and such amendments adversely affect the rights of Fairchild
relative to the Bylaw Amendments, a vote of 80% of the Board be obtained, and
(vii) to add the office of Vice Chairman.
Fees And Expenses
If the Merger is effected, the Merger Agreement requires that the Surviving
Corporation pay 1) the fees and expenses incurred by FII in connection therewith
up to a maximum of $800,000, 2) CS First Boston $7,500,000 ($1,000,000 of which,
the "Letter Fee", in payment for the "highly confident" letter, has been paid
$500,000 by each of FII and STI), and 3) approximately $1,500,000 of
miscellaneous expenses and nonrecurring charges related to the Merger. STI has
already paid fees of $150,000 to S.G. Warburg and is required to pay $1,100,000
for acting as financial advisor in connection with the Merger. If the Merger is
not consummated due to no fault of either party,
<PAGE>
-13-
each party will pay its own fees in connection with the transaction and will
share the Letter Fee. If the Merger Agreement is terminated because (i) the
Stockholders of STI fail to approve the Merger and Amendments, (ii) STI fails to
perform in any material respect any of its obligations under the Merger
Agreement, or (iii) STI's Board shall have withdrawn, modified or amended in an
adverse manner its recommendation of the Merger as a result of the exercise of
its fiduciary duties, STI shall reimburse FII for all of its expenses incurred
in connection with the transaction and shall, if such termination is due to the
event described in (iii), pay FII a fee of $5,000,000. If the Merger Agreement
is terminated because (i) FII fails to perform in any material respect any of
its obligations under the Merger Agreement or (ii) FII's Board of Directors
shall have withdrawn, modified or amended in an adverse manner its
recommendation of the Merger as a result of the exercise of its fiduciary
duties, FII shall reimburse STI for all of its expenses incurred in connection
with the transaction and shall, if such termination is due to the event
described in (ii), pay STI a fee of $5,000,000.
STI has also agreed to pay CS First Boston an engagement fee of $500,000 as
an advisor on general financial matters for a period of one year following the
Merger.
Regulatory Requirements
No federal or state filing requirements must be made or regulatory
approvals obtained in connection with the Merger and Amendments other than (i)
the filing of notification, and the receipt of consents or approvals, required
by applicable provisions of, the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and regulations promulgated pursuant thereto and (ii) the
application for various state regulatory approvals to transfer from FCSC to the
Surviving Corporation the applicable certificates of public convenience and
necessity (or similar certificates) authorizing the Surviving Corporation to
resell intrastate telecommunications services in such states. However, the
Certificate of Merger including the Amendments will be required to be filed with
the Secretary of State of Delaware in order for the Merger and Amendments to be
effective and a Certificate of Designations, Preferences and Rights with respect
to each of the Convertible Preferred Stock and Special Preferred Stock must be
filed with the Secretary of State of Delaware to establish the Merger Preferred
Stock.
Amendment; Termination
The Merger Agreement may be amended or supplemented at any time, before or
after the Special Meeting of stockholders of STI called for the purpose of
voting on the Merger (the "STI Meeting") and Amendments, by an instrument in
writing duly executed by the parties to the Merger Agreement. However, no change
which materially and adversely affects the right of the STI stockholders can be
made after the STI Meeting without the approval of the STI stockholders. If the
conditions to the Merger set forth in the Merger Agreement are not met by March
8, 1996, the Merger Agreement may be terminated by FII or STI.
The Merger Agreement may also be terminated, and the Merger abandoned, at
any time before or after approval by either or both of the FII and STI
stockholders and at any time prior to the closing under the Merger Agreement:
o By agreement of the Boards of Directors of FII and STI;
o By mutual written agreement of FII and STI;
o By FII or STI if STI or FII, respectively, fails to perform in any
material respect any of its obligations under the Merger Agreement;
o By FII or STI if a court of competent jurisdiction or a governmental,
regulatory or administrative agency or commission shall have issued an
order, decree, or ruling or taken any other action, in each
<PAGE>
-14-
case permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by the Merger Agreement and such order,
decree, ruling or other action shall have become final and
nonappealable;
o By STI if the Board shall have withdrawn, modified or amended in an
adverse manner its recommendation of the Merger as a result of the
exercise of its fiduciary duties;
o By FII if its Board of Directors shall have withdrawn, modified or
amended in an adverse manner its recommendation of the Merger as a
result of the exercise of its fiduciary duties; or
o By either STI or FII if either of their respective Boards of Directors
reasonably determines that market conditions will not permit the
completion of the financing required to effect the transactions
contemplated by the Merger Agreement in a timely manner or on acceptable
terms or it becomes obvious that the necessary marketing activities or
filings necessary for such financing have not been completed in a timely
manner necessary to complete the Merger.
Upon termination, the Merger Agreement shall be void and have no effect,
without any liability on the part of any party or its directors, officers or
stockholders, except that the parties are not relieved of liability for any
breach of the Merger Agreement. In certain instances a party shall be
responsible for the fees of the other party and if the termination is due to the
last event described above, the party terminating shall pay the other
$5,000,000. See Exhibit A.
FII REORGANIZATION, LIABILITIES AND INDEMNIFICATION
In order to provide for favorable tax treatment to the FII stockholders,
the transaction between STI and FII was structured as a merger. As a result of
this structure, the Surviving Corporation will be liable for all liabilities of
FII with respect to its operations prior to the effective time of the Merger.
Prior to the Merger, and as a precondition of the Merger, FII, RHI, Fairchild
and certain other subsidiaries of Fairchild will undergo a reorganization (the
"FII Reorganization") pursuant to which FII will divest itself of all assets
unrelated to the Communications Business. RHI will assume all liabilities of FII
unrelated to the Communications Business (except (x) the Senior Notes, (y) the
Preferred Stock and (z) bank and other indebtedness of FII equal to $223,500,000
less the Note Purchase Amount and the Preferred Consideration), but including:
(i) contingent liabilities related to the alleged failure by FII to comply with
certain Federal Acquisition Regulations and Cost Accounting Standards in
accounting for (x) the 1985 reversion to FII of certain assets of terminated
defined benefit pension plans and (y) pension costs upon the closing of segments
of FII's business; (ii) all environmental liabilities except those related to
FII's Communications Business; (iii) approximately $50,000,000 (at June 30,
1995) of costs associated with post-retirement healthcare benefits; and (iv) all
other accrued liabilities and any and all other unasserted liabilities unrelated
to FII's Communications Business (the "Non-communications Liabilities").
In the Merger Agreement, Fairchild, RHI and FII make representations and
warranties with respect to the Communications Business, and the Merger Agreement
provides that RHI and Fairchild on the one hand and STI on the other shall
indemnify each other from losses arising out of any breaches of their respective
representations and warranties in the Merger Agreement to the extent that losses
to a party exceed $4,000,000. Each party's right to bring claims for indemnity
under the Merger Agreement expires on March 31, 1997. STI may meet its
indemnification obligations by issuing STI Common Stock having a fair market
value equal to the loss to the party it must indemnify.
While Fairchild and RHI, as a precondition to the Merger, will enter
into a joint and several Indemnification Agreement with respect to all
Non-communications Liabilities and Fairchild Holding Corp. will enter into
Indemnification Agreements with respect to the liabilities of the aerospace and
industrial fasteners business formerly
<PAGE>
-15-
operated by FII, pursuant to which they will indemnify the Surviving Corporation
for the aforesaid liabilities, as a matter of law the Surviving Corporation will
not be released from FII's obligations with respect to such liabilities. There
is no expiration date with respect to the Indemnification Agreements. All
indemnification obligations under the Indemnification Agreements are secured by
all of the shares of Convertible Preferred Stock (other than an amount equal to
$1,500,000 in initial liquidation preference) and the Special Preferred Stock
issued to RHI in the Merger. Accordingly, to the extent the indemnifying parties
are unable to or do not in fact meet their obligations under the Indemnification
Agreements, the Surviving Corporation will be required to satisfy in full any
liabilities not satisfied by the indemnifying parties.
While the pledge of shares of Merger Preferred Stock permits the
Surviving Corporation to foreclose upon and cancel such stock as to which the
liquidation value equals the obligation of an indemnifying party, this right
will not in fact provide the Surviving Corporation with cash reimbursement for
liabilities paid. The Surviving Corporation may demand cash payment in lieu of
foreclosing upon the Merger Preferred Stock or for any amount owed in excess of
the liquidation value of such Merger Preferred Stock. The pledge of stock
expires on that date which is the later to occur of the third anniversary of the
pledge agreement and the date as of which the consolidated net worth of
Fairchild is at least (x) $25,000,000 greater than such net worth at September
30, 1995 and (y) $225,000,000 (including the value of the Convertible Preferred
Stock).
FINANCING FOR THE MERGER
In order to pay the Preferred Consideration (approximately $40,026,825),
pay the Note Purchase Amount and pay an amount of bank and other indebtedness of
FII equal to approximately $223,500,000 less the Preferred Consideration and the
Note Purchase Amount and to refinance STI's current borrowing facilities, STI
plans to borrow the requisite funds through the issuance of $100 million in zero
coupon bonds and $138 million in term loans through CS First Boston. STI has
received a letter from CS First Boston stating that it is "highly confident"
that it can raise $260,000,000 in debt in connection with the Merger. STI and
FII have paid CS First Boston $1,000,000 for the letter which is creditable
against the $7,500,000 payable to CS First Boston upon consummation of the
financing in connection with the Merger. There can be no assurance that CS First
Boston will be able to raise, or that STI will be able to borrow, sufficient
funds to meet its obligations under the Merger on acceptable terms, in which
case the Merger Agreement will be terminated. See "The Merger Agreement --
Amendment; Termination." Assuming STI is successful in raising the funds
necessary to consummate the Merger, an amount necessary to pay the Preferred
Consideration will be deposited by STI at the time of the effectiveness of the
Merger with an independent escrow agent, such amount to be held by such escrow
agent and used solely to pay the Preferred Consideration. Accordingly, pro forma
financial information for STI is not relevant and is not included in this
Information Statement.
<PAGE>
-16-
INFORMATION CONCERNING FII
Formation, Historical Operations and Recapitalization
FII is a Delaware corporation and is the subsidiary of RHI, which, in
turn, is the wholly-owned subsidiary of Fairchild.
In addition to its Communications Business, FII currently operates,
inter alia through its wholly owned subsidiary VSI, an Aerospace Fasteners
Business and Industrial Products Businesses.
The Aerospace Fasteners Business designs, manufactures and markets high
performance, specialty fastening systems, primarily for aerospace applications.
The Industrial Products Business includes (i) D-M-E Company ("D-M- E") which
designs, manufactures and markets tooling and electronic control systems for the
plastic injection molding and die casting industries and (ii) Fairchild Data
Corporation, a supplier of modems.
On January 26, 1996, FII sold D-M-E to Cincinnati Milacron, Inc. ("CM")
pursuant to an asset purchase agreement dated as of January 23, 1996 for
approximately $245 million (the "D-M-E Asset Sale"), comprised of approximately
$62.3 million in cash and three 8% promissory notes of CM. One note, in the
amount of $11.7 million, will be payable upon the receipt of required regulatory
clearance in Belgium, and will be canceled and the corresponding Belgium assets
reconveyed, in the event such clearance is not obtained. Of the other two notes,
one is in the aggregate principal amount of approximately $166 million, which
note is collateralized by a letter of credit issued by Bankers Trust Company in
the amount equal to the principal of such promissory note (the "Collateralized
D-M-E Note"), and the other is unsecured and is in the aggregate principal
amount of approximately $5 million (the "Unsecured D-M-E Note" and, collectively
with the Collateralized D-M-E Note, the "D-M-E Term Notes"). Each of the D-M-E
Term Notes is due and payable one year following the consummation of the D-M-E
Asset Sale, except that upon 30 days' prior notice, Fairchild may require
prepayment of, or CM may prepay, each of the D-M-E Term Notes at any time
beginning on or after July 29, 1996.
On January 28, 1996, Fairchild sold substantially all of the assets of
Fairchild Data Corporation to SSE Datacom, Inc. ("SSED"), a wholly owned
subsidiary of SSE Telecom, Inc. ("SSET"), pursuant to an asset purchase
agreement dated as of January 26, 1996 for approximately $7 million (the
"Fairchild Data Corporation Sale"), comprised of approximately $5.2 million in
cash and approximately $1.8 million (200,000 shares) of the common stock of SSET
(the "SSET Common Stock"). Fairchild's right to retain 100,000 shares of the
SSET Common Stock is subject to SSED's achieving specified profit margins within
twelve months of the Fairchild Data Corporation Sale. Also, Fairchild was issued
a three year warrant to purchase 50,000 additional shares of the common stock of
SSET.
Prior to and as a precondition to the Merger, FII, VSI and RHI will
undergo the FII Reorganization to transfer from FII and VSI to RHI all assets
other than those related to the Communications Business. See "FII
Reorganization, Liabilities and Indemnification."
FII, through FCSC, provides telecommunications equipment and services to
tenants of commercial office buildings, under the trade name Telecom 2000(R)
Services. As a result of its acquisition of JWP Telecom, Inc. ("JWP Telecom") in
the second fiscal quarter of fiscal 1995, FII also sells, installs, and
maintains telecommunications systems for business and government customers,
under the name Telecom 2000 Systems. FII is a distributor for Northern Telecom,
NEC, Octel, Centigram and Active Voice, all leading manufacturers of telephone
systems, voice mail systems and other equipment. As part of the FII
Reorganization, the partners of FCSC will be merged into VSI, thereby dissolving
the FCSC partnership by operation of law.
<PAGE>
-17-
The Communications Business was founded as a start-up venture in 1985
and has grown rapidly through expansions and acquisitions. Sales have grown from
$1,400,000 in Fiscal 1986 to $109,741,000 in Fiscal 1995. Approximately
$80,000,000 of such increase was attributable to acquisitions (determined on an
annualized basis at the date of acquisition), primarily the acquisition of the
telecommunications assets of Amerisystems and JWP Telecom. The JWP Telecom
acquisition contributed sales of approximately $31,000,000 in Fiscal 1995.
Communications Business
FII, through FCSC, negotiates long-term telecommunications franchises
with owners and developers of office buildings. Under these arrangements, FII,
through FCSC, installs switching equipment, cable and telephone equipment, and
subsequently contracts directly with individual tenants in the buildings to
provide multi-year, single-point-of-contact telecommunications services.
Services. Telecom 2000 Services include access to services provided by
regulated communications companies including local, long distance, international
and "800" telephone services. FII, through FCSC, also provides telephone
switching equipment and telephones as well as voice mail, telephone calling
cards, local area networks and voice and data cable installation and customized
billing services that assist customers in controlling their telecommunications
expense.
Systems. FII's Telecom 2000 Systems business sells telecommunications
equipment directly to end-users and installs, services and maintains the
equipment after the sale. Systems installations include PBX and key telephone
systems, voice mail and automated call distribution systems and entire call
centers. The systems business employs a staff of field and design engineers
capable of assisting customers in planning and implementation of all of their
telecommunications plant needs. Customer service options range from basic
business hour response to 24 hours a day, 365 days per year maintenance
contracts. FII, through FCSC, will also contract with customers to staff their
facilities with dedicated service personnel under long term contracts.
Customers. Telecom 2000 Services' and Systems' customers consist of
small to medium size businesses as well as larger organizations and governmental
agencies. As of June 30, 1995, FII's Communications Business had offices in 30
cities serving over 10,000 customers. Contract terms with Telecom 2000 Services
customers typically have a term of three to five years with provision for
automatic renewal. Contracts with Telecom 2000 Systems customers for maintenance
services typically have a term of one year with provision for automatic renewal.
SELECTED HISTORICAL FINANCIAL DATA OF FII
The selected historical financial data were derived from FII's
consolidated financial statements. The selected historical financial data should
be read in conjunction with the unaudited pro forma financial statements and
related notes thereto included elsewhere herein.
<PAGE>
<TABLE>
<CAPTION>
-18-
Fiscal Year Ended June Six Months Ended
January 1, December 31,
1991 1992 1993 1994 1995 1995 1995
(dollars in thousands except per share amount)
Income Statement Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Sales $ 48,405 $ 58,662 $ 68,639 $ 74,897 $109,741 $ 48,564 $ 64,631
Operating Income 9,489 12,539 14,420 16,082 18,253 8,318 9,452
Interest expense 19,621 16,049 20,033 19,538 21,280 10,754 10,952
Loss from continuing
operations (10,132) (3,510) (5,613) (3,456) (3,027) (2,436) (1,500)
Net earnings (loss) 17,890 14,255 (12,257) (33,987) (12,359) (1,599) (107)
Preferred stock dividends 4,302 3,724 3,873 3,902 3,902 1,951 1,901
Net earnings (loss) after
preferred stock dividends 13,588 10,531 (16,130) (37,889) (16,261) (3,550) (2,008)
<CAPTION> December
31, 1995
Balance Sheet Data
(at June 30, 1995):
<S> <C> <C> <C> <C> <C> <C>
Working capital $ 41,204 $ 67,334 $ 32,279 $ 23,373 $ 57,342 $ 70,159
Total assets 420,658 439,010 370,750 331,318 351,309 348,261
Total long-term debt and
Capital Lease Obligations 192,858 189,577 186,377 183,259 181,309 183,183
Series A redeemable
preferred stock 50,848 44,238 19,112 19,112 19,112 16,691
Series C cumulative
preferred stock -- -- 24,015 24,015 24,015 24,015
Total stockholders' equity 167,168 194,154 153,536 117,190 126,362 127,156
</TABLE>
<PAGE>
-19-
INFORMATION CONCERNING STI
Recent Developments
In May 1991, STI acquired the stock of Boston Telecommunications Company
("BTC"), a provider of Tenant Services in the Boston area. STI paid $1,097,000
consisting of acquisition cost less cash received of $197,000, stock purchase
warrants valued at $300,000 and a $600,000 promissory note payable. In May 1989,
STI acquired interests in four entities providing STS ("Shared Tenant Services")
in the greater Chicago area from Shared Services, Inc. and I.S.E., Inc. for
$180,000. Additionally, in February 1989, STI purchased the stock of
Multi-Tenant Services, Inc. ("MTS") a former division of BellSouth Corporation,
for $4,048,000 of which $391,000 was paid in cash and in payment of the balance
STI assumed existing lease obligations. MTS was a provider of STS in nine
metropolitan areas.
In December and October 1993, STI commenced management and subsequently
completed the acquisition of certain assets and liabilities of Road and Show
South, Ltd. ("South") and Road and Show Cellular East, Inc. ("East"). The
purchase price for South was $1,261,611 which represents $46,111 cash and an
obligation to issue 221,000 shares of STI Common Stock. The purchase price for
East was $750,245 which represents $209,245 cash and an obligation to issue
108,200 shares of STI Common Stock. The number of shares of STI Common Stock
related to these acquisitions was adjusted on December 1, 1994 based on the
price of STI Common Stock at that date, for which an aggregate of 64,966
additional shares will be issued. As of December 31, 1994, no shares of STI
Common Stock had been issued for the East acquisition. The shares of STI Common
Stock in connection with the South acquisition have been issued, but have not
been delivered pending the outcome of certain claims against, and by, the former
owners of South.
In June 1994, STI completed its acquisition of the partnership interests
of Access Telecommunication Group, L.P. ("Access") for $9,000,000 subject to
certain post-closing adjustments. The $9,000,000 includes $4,000,000 paid at
closing with the proceeds from the private placement sale of approximately
1,062,000 shares of STI Common Stock, and the issuance to the sellers of 400,000
shares of Series E Preferred Stock, valued at $1,500,000 and 700,000 shares of
Series F Preferred Stock valued at $3,500,000.
On June 30, 1995 STI purchased all of the outstanding capital stock of
Office Telephone Management ("OTM"). OTM provides telecommunication management
services primarily to businesses located in executive office suites. The
purchase price is currently allocated as follows:
Goodwill $ 1,915,000
Property, Plant & Equipment 1,400,000
Accounts Receivable, (net) 400,000
Other current assets 20,000
Debt (current and long-term) (545,000)
Accounts Payable (525,000)
Accrued Expense (530,000)
------------
Net Purchase Price $ 2,135,000
============
In May and June 1995, STI's cellular subsidiary Shared Technologies
Cellular, Inc. ("STC") commenced management and subsequently completed its
acquisition of the outstanding capital stock of Cellular Hotline, Inc.
("Hotline") for $617,000. The $617,000 was comprised of $367,000 in cash, paid
at closing, and the issuance of 50,000 shares of $367,000 in cash, paid at
closing, and the issuance of 50,000 shares of STC common stock. At the
discretion of the former Hotline stockholders, STC was required to repurchase
all or a portion of the shares for $5.00 per share, at any time during the
period commencing three months and ending six months after June 19, 1995.
<PAGE>
-20-
The former Hotline stockholders exercised their put option during that period.
Additionally at closing, STC issued options to purchase 50,000 additional shares
of STC common stock, exercisable at $7.50 per share for three years. The
agreement provides for additional payments based upon attaining certain levels
of activation revenues, as defined, over a one year period.
Unaudited proforma consolidated statements of operations for the
nine-month period ended September 30, 1994 and 1995 as though the acquisitions
of Access, OTM and Hotline had been made at the beginning of the period are as
follows:
1994 1995
---- ----
Revenues $40,796,000 $46,401,000
Net Income 1,730,000 1,697,000
Net Income Per Share $0.23 $0.2
Weighted Average Shares 7,488,054 8,698,207
During 1992, STI completed a restructuring due to its working capital
deficit and the maturity of its principal financing arrangements which were due
to the Federal Deposit Insurance Corporation ("FDIC"), as receiver for STI's
principal lender. The restructuring included STI and all of its subsidiaries.
The restructuring resulted in STI recording a gain of $5,162,000 before related
expenses of $1,361,000 for consulting fees related to the restructuring and
income taxes of $45,000. As a result of the restructuring, approximately
$900,000 of vendor payables and $1,500,0000 of capital lease obligations were
forgiven and $3,300,000 of vendor payables were converted to three year
non-interest bearing notes payable. Additionally, a settlement agreement was
entered into with the FDIC as receiver for STI's principal lender which resulted
in STI paying off its term loan and revolving credit arrangements and
recognizing a gain of approximately $2,700,000. In April 1994 STI entered into a
settlement agreement which provides for the payment of $750,000 plus interest at
10% which resulted in an accrued extraordinary loss of $150,000 in 1993.
In connection with the restructuring, STI also raised equity capital of
approximately $5,780,000 from certain institutional investors, net of expenses.
Such offering was exempt from registration based upon Regulation S of the
Securities Act of 1933, as amended. A firm, one of whose principals is a
director and stockholder of STI served as underwriter for the offering. STI paid
this firm underwriting commissions and expenses totaling $446,750 for the
offering. No other parties to the restructuring were affiliated with STI. STI
also entered into agreements with Series A and B Preferred Stockholders to
convert their holdings, including $327,920 of the accrued dividends related
thereto, into Series C Preferred Stock. As part of this conversion, $40,990 of
the accrued dividends was forgiven by the stockholders.
General
STI is a provider of telecommunications services and equipment,
including basic telephone equipment, local and long distance network services
and on-site maintenance. STI also offers its customers data services, as well as
data processing and office automation equipment, service and support.
Additionally, STI sells and rents cellular telephones in several locations both
to its existing customers and the general marketplace.
STS, through its subsidiaries and affiliated partnerships is engaged in
providing shared tenant services ("STS") to tenants of modern, multi-tenant
office buildings. As an STS provider, STI generally obtains the exclusive right
from a building owner (the "Owner/Developer") to install an on-site
communications system, called a private branch exchange ("PBX"), or an off-site
communication system, called centrex, and to market telecommunications and
office automation services and equipment to tenants. An STS project requires
significant expenditures for capital
<PAGE>
-21-
equipment and installation costs. The initial cost of capital equipment to
establish STS in a new building ranges from $50,000 to $300,000 with additional
start-up working capital requirements ranging from $10,000 to $100,000.
The STS provider often leases space within the building for on-site
support staff. STS provides an Owner/Developer with an important building
amenity and provides a tenant with the availability of one-stop shopping for a
wide range of telecommunications and office automation equipment and services as
well as on-site training, maintenance and support, without any capital
investment.
STI's services are provided to its customers under the concept of
one-stop shopping for basic telecommunications, voice and data transmission, and
office automation services and equipment which include:
- Access to cost-effective centralized digital switching - Broad selection
of telephone equipment - Discounted, quality long-distance service - Local
telephone service - System maintenance, management and administration -
Customized call reporting and billing
- Office automation equipment including computer, facsimile and peripherals
- On-site training and assistance - Cable and wiring design and maintenance
- Equipment service and support - Cellular sale and rental
To date, STI has concentrated primarily on developing the telephone
portion of its business. STI telephone services consist of selecting and
installing telephone equipment on tenant's premises and providing ongoing
service to train tenants, to perform moves, adds and changes, and to maintain
the telephone equipment. Tenants are quoted a monthly charge for leased
equipment which includes a rental fee for the equipment, a charge for access to
the PBX owned by STI and installed in the buildings or to the centrex service,
and a local access charge based on the cost of the trunk lines which connect the
building to the central office of the local telephone company. In addition,
tenants are charged for special services and usage, including IN-WATS lines,
dedicated circuits, directory listings, local message units (where applicable),
directory assistance, credit card calls, third-party billing calls, and
long-distance at a discount from the standard rates charged by long distance
providers.
As the telecommunications business is established in each building, STI
increases its emphasis on the sale or lease of personal computers and
peripherals, and the marketing of computer time sharing, voice mail, message
centers, local area networks for computers, voice messaging, facsimile
transmission, copying equipment and data transmission. STI also sells computer
equipment and peripherals, and sells or rents cellular phones, to customers who
are not tenants in buildings in which it provides STS.
STI provides a monthly statement to each customer delineating all STS
charges. STI bills for the prior month's usage, installation, moves, adds and
changes on the first of the following month. The statements also include
equipment, local and system access and other special service charges in advance
for the succeeding month. The local access charge reflects the cost to STI of
the trunk lines connecting the building to the central office of the local
telephone company and is levied on STI by the local telephone company. In
general, STI passes this cost through to tenants.
Customers are billed for all telecommunications usage, including
long-distance calls. Currently, STI offers a discount of 15% to 40% from the
AT&T direct distance dial published rates, which discounts can be changed by STI
on 30 days' notice. STI currently purchases long-distance services from many
providers. STI estimates that
<PAGE>
-22-
by efficiently managing its long-distance network, it can provide long-distance
services at a discount of up to 40% of the AT&T direct distance dial rates.
STI provides facilities management services to customers who have a
preference or requirement for a dedicated PBX system. Certain of these customers
own their own equipment, and STI provides management and maintenance for that
equipment. STI also has facilities management contracts with customers who have
leased equipment owned by STI including PBX and handset equipment. STI's
objective with these customers is to become the provider of choice for all long
distance, local access and system features, if those services are not part of
the initial contract.
Through STC, STI is a provider of short-term portable cellular telephone
services in the United States. STC rents portable cellular telephones, primarily
to travelers, persons organizing and attending special events such as
conventions and sporting events, as well as local businesses and government
agencies. It is a condition precedent to the Merger that STI execute a
non-competition agreement with STC acceptable to FII.
Equipment
STI offers its telecommunications services through either a PBX or
centrex-based system.
A PBX is a telecommunications switch that has the following
characteristics:
- is owned by a private user, not a telephone company - automatically
switches incoming and outgoing calls over trunk lines so
that dedicated telephone lines are not required
- functions like a telephone company central office, except that it is
under the direct control of its owner
- offers more features than are typically available through private
business lines, key systems or centrex services
- is typically capable of handling from 100 to 2,000 users
STI owns or leases PBXs and other equipment manufactured by InteCom
Inc., Northern Telecom, AT&T, NEC and Mitel. This equipment can be acquired from
a variety of sources. STI employs its own technicians to maintain its PBXs,
which have, on average, an estimated useful life of approximately eight to
twelve years. From time to time, STI upgrades its PBXs by adding additional
software and hardware which can increase the capabilities and extend the useful
life of a PBX beyond the ordinary eight to twelve year period.
An alternative to the PBX is digital centrex, a service offered by the
local regulated telephone company. Recently, a number of local telephone
companies have enhanced their digital centrex offerings to be more competitive
with PBXs in terms of both features and price. In addition, some telephone
companies have petitioned their local regulatory commission to permit them to
negotiate pricing with large users (defined as a company using over 100 lines),
rather than charging tariffed rates. In response to these developments, STI has
entered into an arrangement with Illinois Bell to provide service in downtown
Chicago via digital centrex, eliminating the need for a PBX in each building,
and has entered into an exclusive agreement with the Owner/Developers of two
buildings to provide STS/centrex. Additionally, in 1993 STI began providing
centrex services in Indianapolis.
STI offers a full range of customer premise equipment, including
telephones, computers and peripherals, and facsimile and voice mail equipment
compatible with its PBX and centrex-based systems. STI has no long-term
contracts establishing the price at which it acquires equipment, but can
negotiate pricing due to the availability of multiple sources of supply.
STS Buildings
<PAGE>
-23-
As of December 31, 1994, STI was providing STS to tenants in 93
buildings located in 15 metropolitan areas. In those cities where STI provides
STS to tenants in more than one building, STI is able to realize significant
operating economies by sharing management, administrative, sales and technical
staff across a number of buildings. The following table sets forth as of
December 31, 1994, on a city-by-city basis, the Net Leasable Square Feet and the
Potential Lines of Service in each building where STI provides STS to tenants as
estimated by management.
<TABLE>
<CAPTION>
Net Potential Number of Number
Leasable Lines of Lines in of
City Sq. Ft. Service Service Buildings
<S> <C> <C> <C> <C>
Atlanta, GA 3,777,000 12,589 3,552 9
Birmingham, AL 1,435,000 1,450 1,157 3
Boston, MA 4,846,000 15,144 2,660 11
Chicago, IL 3,567,000 11,890 3,145 9
Hartford, CT 2,032,000 6,773 3,408 9
Los Angeles, CA 895,000 2,983 212 2
Mahwah, NJ 625,000 1,067 1,069 2
Memphis, TN 320,000 1,067 181 1
Nashville, TN 972,000 3,240 776 2
New Orleans, LA 3,226,000 9,511 3,371 5
Phoenix, AZ 2,484,000 8,280 2,426 12
Indianapolis, IN 1,044,000 3,480 945 9
Seattle, WA 4,482,000 14,940 2,840 8
Dallas, TX 10,125,000 26,591 5,662 11
Myrtle Beach, SC 140,000 155 20 1
---------- -------- ------- ---
TOTAL 39,970,000 119,160 31,424 93
</TABLE>
Of the potential 119,160 lines of service, STI has under contract 31,424
lines (26.4%). Accordingly, management believes that the opportunity exists for
STI to increase penetration and revenues in the buildings to which it currently
provides STS.
Owner/Developer Agreements
In most buildings where its provides STS, STI or its assignor has
entered into a contractual agreement (the "Owner/Developer Agreement") with the
building Owner/Developer. Subject to specific provisions contained in certain
Owner/Developer Agreements, the Owner/Developer Agreements generally grant STI
the exclusive right to provide STS in the building and the Owner/Developer is
precluded from entering into a "materially similar arrangement" with a third
party. In addition, STI is granted a right of first refusal in the building for
the offering of additional STS, such as telephone answering services, word and
data processing, telex, copier services and certain other STS. The term of the
agreement is generally for ten years and may contain one or two five-year
renewal options.
The Owner/Developer Agreements generally provide for the payment of
royalties to the Owner/Developer which may be based on a percentage of gross
revenues or on a percentage of rental, sale and service income or net
long-distance revenues. Such royalty payments may commence at the initial
service date, at some later date, typically 18 to 24 months after STI commences
to provide STS to the building, or at the time STI achieves a certain level of
market penetration in the building.
STI is responsible for the costs and expenses incurred in operating and
maintaining the STS equipment in the building and must obtain the
Owner/Developer's approval to make any modification in the STS equipment which
<PAGE>
-24-
would affect the building structure. The agreement is assignable by the
Owner/Developer upon the sale of the building. Certain Owner/Developers also
have the right to purchase STI's STS equipment in the building at a nominal or
fair market price if the agreement is terminated.
Each Owner/Developer Agreement either contains a lease, or references a
separately executed lease, for the space necessary for STI's on-site personnel
and equipment. These leases generally provide for a deferral of rental payments
until a certain occupancy percentage has been obtained in the building, or a
certain period of time, typically 12 to 24 months, after STI commences
operations.
Tenant Contracts
STI is a party to a Master Shared Tenant Services Agreement ("Tenant
Contract") with substantially all of its customers. The Tenant Contract contains
terms and conditions governing the provision of STS. Subsequent to signing a
Tenant Contract, tenants submit individual customer orders for specific
equipment rentals and STS. In addition to the typical Tenant Contracts for STS,
STI has agreements with several tenants who have their own PBS to maintain the
system and manage the tenant's telephone call billing system, and STI receives a
monthly fee for its services.
STI generally signs contracts for a period of five years or a term
coterminous with the customer's lease in the building. STI has contracts ranging
from month to month to five years. The Company feels it has staggered the
contracts such that there is no time when a material amount of contracts come
due at the same time. Additionally, STI does not have any individual contracts
which are material.
Government Regulation
As a provider of telephone services, STI's operations are materially
affected by regulatory developments on both a federal and state level. The
Federal Communications Commission ("FCC") regulates interstate communications
and the state public utility commission ("PUCs") regulate intrastate
communications. The FCC has determined that STS providers, sharing a PBX and
related equipment within the same premises, should be characterized as end
users, as opposed to interexchange carriers for access charge purposes, thereby
entitling them to a more favorable rate structure. Although there is currently
no major effort underway to modify the existing FCC regulatory scheme with
regard to STS providers, any change in the liability of such providers for
access charges or any substantial change with regard to other regulatory
constraints could have a material adverse effect on STI's business. PUCs may
regulate STS providers through direct regulatory requirements as well as through
the terms, conditions of service and rates contained in the tariffs of the
underlying local exchange carrier covering service offerings to STS providers.
To date, STI has, to some degree, elected to operate in states which maintain a
comparatively favorable regulatory environment for STS providers sharing a PBX
and related equipment. All of the states in which STI now operates do not
currently require a certification of or otherwise directly regulate STS
providers with the exception of Alabama, which has granted such certification to
STI. STI also has obtained certification to resell certain intrastate
long-distance services in California, which requires such certification.
Although at present none of these states has any proceeding or other effort
underway to materially modify their regulatory treatment of such STS providers,
no assurance can be given that such proceedings will not be initiated in the
future. Further, regulatory agencies in many states have not yet generally
addressed the issue of sharing centrex lines and the regulatory consequences of
such operations are uncertain; however, STI to date has only engaged in sharing
centrex lines in states (Illinois and Indiana) where regulatory agencies have
expressly permitted such operations. STI intends to expand its use of centrex
lines to additional states in the future. It will take appropriate measures to
investigate the regulatory environment in each state and intends to comply with
applicable requirements for sharing of these lines on a state-by-state basis.
<PAGE>
-25-
Marketing
STI employs a marketing concept involving the establishment of a hub STS
building in close proximity with other satellite STS buildings which can be
managed by one regional director and which share sales and administrative and
technical personnel.
After an appropriate building has been identified, STI begins marketing
its services to the Owner/Developer to obtain the exclusive right to provide STS
in the building. On occasion, an Owner/Developer will issue a formal request for
proposal and seek competitive bids. Once agreement with the Owner/Development
has been reached, marketing efforts with tenants are commenced. Tenant marketing
occurs during the leasing process of a building, which is during the planning
stage of the tenant's move. STI also has the opportunity to increase penetration
in highly leased and popular buildings by:
- When there is a new tenant replacing a moving out tenant, STI is
invited by the leasing manager to present the "building's
communication amenity package" provided by STI.
- When a current tenant is up for lease renewal, the leasing manager
will again recommend that the tenant consider using the "building's
communication amenity package" provided by STI.
In most cases the building management company or the building owners
point out to the prospective lessee or renewal tenant the cost savings by taking
advantage of the "building's communication amenity package" which can save the
prospective company between $1.25 and $1.75 per square foot.
Typically, STI's marketing initially concentrates on working in
conjunction with the building's leasing agent to provide STS to prospective
tenants. Once the tenant has committed to a lease, marketing efforts are focused
on tenant subscription to the STS offerings within the building.
STI's customers consist primarily of small to medium-size tenants, such
as brokerage, accounting and law firms. While the majority of STI's customers
are tenants in STS buildings, STI also provides services and sells and leases
equipment to end-users who are not located in STS buildings.
Seasonality
While STI's STS business is not generally seasonal, STI has experienced,
over the last several years, a reduction in local and long distance revenues in
the month of December which is believed to be associated with the holiday
season.
Legal Proceedings
In 1993, STI settled a lawsuit with The New York State Convention Center
Operating Corp. ("CCOC"), which arose in connection with STI's operations at the
Jacob K. Javits Convention Center in New York City, which operations were
terminated in December, 1991. However, as part of the termination of such
operations, STI's departure from the Convention Center resulted in the
termination of its agreement with Tel-A-Booth Communications, Ltd.
("Tel-A-Booth"), the payphone service provider for the building.
Tel-A-Booth is currently in a Chapter 7 bankruptcy proceeding, pursuant
to which STI is listed as a creditor of Tel-A-Booth in the amount of $300,000.
STI is named as a co-defendant in a lawsuit brought by Tel-A-Booth
arising out of the termination of its agreement with STI. The lawsuit, which was
commenced in New York State Supreme Court, County of New York,
<PAGE>
-26-
on January 10, 1992 is now proceeding toward trial. Tel-A-Booth has claimed
damages of $10,000,000, primarily for lost profits. STI has asserted various
counterclaims against the plaintiff. STI views that it has substantial defenses
to the plaintiff's claims, and, based on information obtained from discovery,
STI believes that the plaintiff suffered no recoverable damages.
In addition to the above matters, STI is a party to various legal
actions, the outcome of which, in the opinion of management, will not have a
material impact on STI's financial condition and results of operations.
<PAGE>
-27-
SELECTED HISTORICAL FINANCIAL DATA FOR STI
The following table sets forth the selected historical financial data of
STI for each of the last five years ended December 31, and the nine months ended
September 30, 1995 and 1994. In September 1992 STI effected a one-for-four
reverse stock split of common stock and increased the par value of common stock
from $.001 to $.004 per share. Weighted average common shares outstanding and
per share information have been retroactively adjusted to reflect this split.
All amounts, except per share amounts, are in thousands.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------------
- -----------------------
Statement of Operations Data: 1994(1) 1993 1992 1991 1990 1995(2) 1994(1)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 45,367 $ 25,426 $ 24,077 $ 23,172 $ 21,804 $ 43,675 $ 31,514
Gross margin 19,195 10,912 9,254 6,358 5,786 17,046 13,524
Selling, general and
administrative expenses 16,972 10,102 9,959 10,717 10,246 16,116 11,760
Operating income (loss) 2,223 810 (705) (4,359) (4,460) 930 1,764
Interest expense, net (359) (438) (290) (1,268) (950) (444) (158)
Minority interest in net
(income) losses of subsidiaries (128) (82) (37) 4 29 213 (43)
Loss on settlement agreement -- -- -- -- (489) -- --
Gain on sale of subsidiary stock -- -- -- -- -- 1,375 --
Income tax benefits 550 -- -- -- -- -- --
Earnings before extraordinary
item 2,286 290 (1,032) (5,623) (5,869) 2,074 1,563
Extraordinary Item -
(Loss) gain on restructuring -- (150) 3,756 -- -- -- --
Net income (loss) 2,286 140 2,724 (5,623) (5,869) 2,074 1,563
Net income (loss) per common
share before extraordinary item -- (.01) (.33) -- -- -- --
Net income (loss) per
common share .27 (.04) .59 (1.59) (1.63) .20 .21
Weighted average common
shares outstanding 6,792 5,132 4,063 3,730 3,601 8,698 5,699
Cash dividends declared per
preferred share .29 .32 .30 .30 -- .22 .22
Cash dividends paid per
preferred share .29 .32 .38 .18 -- .22 .22
Cash dividends declared or
paid per common share -- -- -- -- -- -- --
Balance Sheet Data:
Period End Balances:
Working capital deficit ($3,691) ($3,874) ($4,506) ($15,615) ($5,751) ($2,124) ($2,199)
Total assets 37,925 20,601 18,752 18,436 14,531 47,079 36,737
Notes payable, convertible
promissory notes payable,
other long-term debt (incl.
current portion) 4,727 3,719 4,745 10,030 6,927 6,450 5,305
Stockholders' equity (deficit) 20,881 9,302 6,034 (3,148) (999) 23,971 20,414
</TABLE>
(1) The 1994 results include the acquisition of Access Telecommunications
Group, L.P. in June 1994 and the Acquisitions of Road and Show South in
December 1993 and Road and Show East in October 1993.
(2) Includes a full period of the Access Telecommunications Group, L.P.
acquisition in June 1994. Also includes the results of operations from
OTM and Hotline, which were acquired by STI in 1995.
<PAGE>
-28-
FAIRCHILD INDUSTRIES INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma Fairchild Industries Inc. consolidated
financial statements give effect, on a purchase accounting basis, to the
acquisition of JWP Telecom. The unaudited pro forma Fairchild Industries Inc.
consolidated financial statements also reflect the adjustment for the FII
Reorganization which transfers certain non-telecommunications assets to FII's
parent company RHI prior to the Merger.
The unaudited pro forma Fairchild Industries Inc. financial statements are not
necessarily indicative of the results or financial position which actually would
have occurred if the JWP Telecom acquisition, the change to a December 31 year
end and the FII Reorganization had been in effect since July 1, 1994, nor are
they necessarily indicative of future results or financial position.
The unaudited pro forma Fairchild Industries Inc. consolidated statements of
operations give effect to the acquisition of JWP Telecom and the FII
Reorganization as if they had occurred on July 1, 1994, and the unaudited pro
forma Fairchild Industries, Inc. consolidated balance sheet gives effect to
these items as if they had occurred on December 31, 1995 for the purpose of
presenting the unaudited pro forma Fairchild Industries Inc. consolidated
financial statements.
<PAGE>
-29-
<TABLE>
<CAPTION>
Fairchild Industries Inc.
Pro Forma Consolidated Balance Sheet
December 31, 1995
(unaudited)
December 31, (1)
1995 Recapitalize Pro Forma
In thousands FII FII FII
- ------------ ----------- ------------ ---------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash 905 $ 905
Accounts receivable, less allowance for
doubtful accounts 22,184 22,184
Other current assets 3,272 3,272
Net current assets of operating transferred to RHI 65,220 (65,220) --
------- -------- --------
Total current assets 91,581 (65,220) 26,361
-------- --------
Equipment, at cost:
Telecommunications equipment 80,821 80,821
------- -------- --------
Office and data processing equipment 5,231 5,231
86,052 86,052
Less - Accumulated depreciation (35,872) (35,872)
------- -------- --------
50,180 50,180
Other Assets 36,622 36,622
Net non-current assets transferred to RHI 169,878 (169,878)
------- -------- --------
Total Assets 348,261 $(235,098) $113,163
======= ========== ========
CURRENT LIABILITIES:
Notes payable and current portion of long-term
debt and capital lease obligations 303 -- $ 303
Accounts payable 11,268 11,268
Accrued expenses 6,157 6,157
Advanced billings 3,694 3,694
------- -------- --------
Total current liabilities 21,422 -- 21,422
------- -------- --------
Long-Term Debt and Capital Lease Obligations,
less current portion 182,880 (9,500)
------- -------- --------
Post-retirement benefits 112 112
------- -------- --------
FII Series A preferred stock 16,691 16,691
------- -------- --------
STOCKHOLDERS' EQUITY:
FII Series C preferred stock 24,015 24,015
FII Series B preferred stock 230,200 230,200
Common Stock 140 140
Additional paid-in capital 2,925 2,925
Accumulated deficit (130,124) (225,598))
------- -------- --------
Total stockholders' equity 127,156 (225,598))
------- -------- --------
Total liabilities and stockholders' equity 348,261 $(235,098) $ 113,163
======= ======== ========
</TABLE>
See accompanying notes to these pro forma consolidated financial statements
<PAGE>
-30-
<TABLE>
<CAPTION>
Fairchild Industries Inc.
Pro Forma Consolidated Statement of Operations
For the Six Months Ended
December 31, 1995
FII
(unaudited) Six Months Pro Forma Pro Forma
In thousands Ended 12/31/95 Adjustments FII
- ------------ -------------- ------------ -----------
<S> <C> <C> <C>
Revenues $ 64,631 $ $ 64,631
Cost of Revenue 34,467 34,467
--------- ---------- ---------
Gross Margin 30,164 30,164
Selling, General & Administrative Expenses 20,712 20,712
--------- ---------- ---------
Operating Income 9,452 9,452
Interest Expense (10,952) (10,952)
--------- ---------- ---------
Net income (1,500) (1,500)
Operating results of operations transferred
to RHI 1,393 (1) (1,393) --
--------- ---------- ---------
Preferred Stock Dividends (1,901) (1,901)
--------- ---------- ---------
Net Income Applicable to Common Stock $ (2,008) $ (1,393) $ (3,401)
========= =========== =========
</TABLE>
See accompanying notes to these pro forma consolidated financial statements
<PAGE>
-31-
<TABLE>
<CAPTION>
Fairchild Industries Inc.
Pro Forma Consolidated Statement of Operations
For the Fiscal Year Ended
June 30, 1995
FII (2)
(unaudited) Year Ended JWP Pro Forma Pro Forma
In thousands 6/30/95 Acquisition Adjustments FII
<S> <C> <C> <C> <C>
Revenues $ 109,741 $ 22,975 $ 132,716
Cost of Revenue 58,360 16,998 75,358
Gross Margin 51,381 5,977 57,358
Selling, General & Administrative
Expenses 33,128 6,242 (2) 103 39,495
(2) 22
Operating Income 18,253 (265) (125) 17,863
Interest Expense (21,280) 50 (330) (21,560)
Net income (3,027) (215) (455) (3,697)
Operating results of operations transferred
to RHI (9,332) (1) 9,332 --
Preferred Stock Dividends (3,902) (3,902)
Net Income Applicable to Common Stock $ (16,261) $ (215 ) $ 8,877 $ (7,599)
</TABLE>
See accompanying notes to these pro forma consolidated financial statements
<PAGE>
-32-
FAIRCHILD INDUSTRIES INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) The unaudited pro forma Fairchild Industries Inc. consolidated financial
statements were adjusted to reflect FII Reorganization prior to the Merger.
Subsequent to June 30, 1995, FII and its immediate parent RHI announced plans to
reorganize FII in order to improve its financial and operating flexibility and
strengthen its financial position. Concurrent with the Merger, and as part of
the FII Reorganization, FII is transferring to RHI, all of its assets and
liabilities except those expressly related to FII's telecommunications business,
$125,000,000 principal amount of 12 1/4% Senior Secured Notes Due 1999, the
Series A and Series C Preferred Stock of FII, an estimated $9,500,000 in accrued
premium on early retirement of the 12 1/4% Senior Secured Notes Due 1999 and
approximately $45,873,000 of existing bank indebtedness. On January 26, 1996,
FII sold D-M-E to Cincinnati Milacron, Inc. for approximately $245 million. Due
to the sale of D-M-E, the amount of net assets transferred to RHI will actually
be lower when the Merger occurs.
(2) On November 28, 1994, FII completed the acquisition of substantially all of
the telecommunications assets of JWP Telecom, a telecommunications systems
integrator specializing in the distribution, installation and maintenance of
voice and data communications equipment, for approximately $11,000,000 plus the
assumption of approximately $3,000,000 of liabilities. FII recorded $1,610,000
and $5,595,000 in identifiable intangibles and goodwill, respectively. The pro
forma consolidated statement of operations for the fiscal year ended June 30,
1995 include an adjustment to record JWP Telecom operations for the first 4
months of fiscal 1995. An adjustment of $103,000 for additional amortization was
recorded for the year ended June 30, 1995. Additional depreciation expense of
$22,000, related to fair market value of fixed assets, was recorded for the year
ended June 30, 1995. Additional interest expense of $330,000 was recorded to
reflect the estimated interest cost at 9% on additional borrowings of
$11,000,000 required to obtain the cash paid to acquire JWP Telecom.
<PAGE>
-33-
ABSENCE OF DISSENTERS' RIGHTS
Holders of shares of Preferred Stock will not have dissenters' rights
under the DGCL as a result of the Merger.
MARKET PRICE OF AND DIVIDENDS ON THE
PREFERRED STOCK AND RELATED STOCKHOLDER MATTERS
The Series A Preferred Stock and Series C Preferred Stock are listed on
the New York Stock Exchange under the symbols "FENA" and "FENC" respectively.
The following tables give the high and low sales prices for each full quarterly
period within the two most recent fiscal years.
<TABLE>
<CAPTION>
Fiscal Year Series A Preferred Stock Series C Preferred Stock
Ending Quarter High Low High Low
<S> <C> <C> <C> <C> <C>
June 1994 First 36 3/4 31 35 3/4 33
Second 36-7/8 34 36 1/2 32-1/8
Third 38 1/2 35 1/2 39 1/2 34
Fourth 38 1/2 35 40-5/8 36-3/4
June 1995 First 38 1/2 36 39 37
Second 38 3/4 36 38 1/4 36 3/4
Third 40 36 38 36 1/4
Fourth 40 36 38-3/8 36 3/4
June 1996 First 41 35 1/2 39-7/8 37-1/4
Second 44 39 1/2 43 1/4 37-1/2
</TABLE>
On November 8, 1995, the date preceding the public announcement of the
Merger, the high and low sale prices of the Series A Preferred Stock were $40.00
and $40.00 respectively and the "bid" and the "asked" prices of the Series C
Preferred Stock were $38.00 and $38.625 respectively.
During the fiscal years ending June 1994 and June 1995, and for the
first two quarters of the fiscal year ending June 1996, a quarterly dividend of
$.90 per share was paid on the Series A Preferred Stock, and a quarterly
dividend of $1.06 was paid on the Series C Preferred Stock.
Based on the number of record holders, there are approximately 350
holders of each of the Series A and C Preferred Stock.
All holders of the outstanding Series A and Series C Preferred Stock
will receive the Preferred Consideration pursuant to the Merger, including any
and all Directors and Officers who are holders of the Preferred Stock.
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Post-Reorganization/Merger Financials
Report of Arthur Andersen LLP, Independent Public Accountants......... F-2
Consolidated Balance Sheets as of June 30, 1994 and 1995
and October 1, 1995 (unaudited)..................................... F-3
Consolidated Statements of Income for the Years Ended June 30, 1993, 1994 and
1995 and the three months ended
October 2, 1994 and October 1, 1995 (unaudited)..................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended June 30, 1992, 1993, 1994 and 1995 and the three
months ended October 1, 1995 (unaudited)............................ F-6
Consolidated Statements of Cash Flows for the Years Ended June 30, 1993, 1994
and 1995 and the three months ended
October 1, 1994 and October 2, 1995 (unaudited)..................... F-7
Notes to Consolidated Financial Statements ................................F-8
F-1
<PAGE>
After the reorganization transactions discussed in Note 1 to Fairchild
Industries, Inc.'s consolidated financial statements are effected,
we expect to be in a position to render the following audit report.
ARTHUR ANDERSEN LLP
January 9, 1996
Report of Independent Public Accountants
To Fairchild Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Fairchild
Industries, Inc. (a Delaware Corporation) as of June 30, 1994 and 1995, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended June 30, 1993, 1994 and 1995. 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 Fairchild Industries, Inc. as
of June 30, 1994 and 1995, and the results of its operations and its cash flows
for the years ended June 30, 1993, 1994 and 1995, in conformity with generally
accepted accounting principles.
F-2
<PAGE>
<TABLE>
<CAPTION>
Fairchild Industries, Inc.
Consolidated Balance Sheets
(In thousands)
Assets
June 30, December 31,
1994 1995 1995
---- ---- -----------
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 64 $ 1,469 $ 905
Billed accounts receivable - trade, net of allowances
of $204, $254 and $471 6,369 14,429 15,582
Unbilled accounts receivable 3,487 6,218 6,602
Inventories - 1,246 1,064
Prepaid and other current assets 1,326 2,283 2,208
Net current assets of operations transferred to RHI 25,760 56,876 65,220
-------- -------- --------
Total current assets 37,006 82,521 91,581
Property, plant and equipment, at cost:
Buildings and improvements 3,417 3,733 3,873
Equipment and autos 59,455 73,968 80,821
Furniture and fixtures 734 3,097 1,358
-------- -------- --------
63,606 80,798 86,052
Accumulated depreciation (23,104) (31,239) (35,872)
-------- -------- --------
Property, plant and equipment, net 40,502 49,559 50,180
Goodwill, less accumulated amortization of $2,389,
$3,013 and $3,376 20,686 25,958 25,811
Other intangible assets, less accumulated amortization
of $4,383, $5,938 and $6,771 6,682 7,589 6,756
Deferred loan costs 5,960 4,561 3,882
Prepaid pension cost 216 195 173
Net non-current assets of operations transferred to RHI 220,266 180,926 169,878
-------- -------- --------
Total assets $ 331,318 $ 351,309 $ 348,261
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
Fairchild Industries, Inc.
Consolidated Balance Sheets
(In thousands)
Liabilities and Stockholders' Equity
June 30, December 31,
1994 1995 1995
------- ------ --------
(unaudited)
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 6,744 $ 12,780 $ 11,268
Advance billings -- 941 850
Deferred revenue on maintenance contracts 371 3,109 2,844
Accrued liabilities-
Salaries and wages 935 1,986 775
Sales, payroll and use taxes 1,254 1,162 1,371
Commissions 297 293 236
Dividends 975 975 925
Other 1,103 3,182 2,850
Current portion of capital lease obligations 1,954 751 303
-------- -------- --------
Total current liabilities 13,633 25,179 21,422
12.25% senior secured notes due 1999 125,000 125,000 125,000
Bank credit agreement 55,373 55,373 57,794
Capital lease obligations 932 185 86
Postretirement benefits 78 98 112
Redeemable preferred stock: $3.60 cumulative Series A
Convertible Preferred Stock, without par value,
424,701 shares authorized, issued and outstanding at
June 30, 1994 and 1995 and 370,901 shares authorized,
issued and outstanding at December 31, 1995 all at a
redemption value of $45.00 per share 19,112 19,112 16,691
-------- -------- --------
Total liabilities 214,128 224,947 221,105
Stockholders' equity:
Series B preferred stock: without par value, 3,000
shares authorized, 2,025, 2,278 and 2,302 issued
and outstanding; liquidation value of $100,000
per share 202,500 227,800 230,200
Series C cumulative preferred stock: without par value,
558,360 shares authorized, issued and outstanding;
liquidation value of $45.00 per share 24,015 24,015 24,015
Common stock, par value of $100.00 per share,
1,400 shares authorized, issued and outstanding 140 140 140
Paid-in capital 2,390 2,523 2,925
Accumulated deficit (111,855) (128,116)
(130,124)
Total stockholders' equity 117,190 126,362 127,156
-------- -------- --------
Total liabilities and stockholders' equity $331,318 $351,309 $348,261
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
Fairchild Industries, Inc.
Consolidated Statements of Income
(In thousands)
Years Ended Six Months Ended
June 30, January 1, December 31,
--------------------------------
- --------------------------
1993 1994 1995 1995 1995
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues $ 68,639 $ 74,897 $109,741 $ 48,564 $ 64,631
Cost of revenues 33,735 36,979 58,360 25,765 34,467
--------- --------- --------- --------- ---------
Gross profit 34,904 37,918 51,381 22,799 30,164
General and administrative expenses 19,944 21,258 32,504 14,161 20,349
Goodwill amortization 540 578 624 320 363
--------- --------- --------- --------- ---------
Operating income 14,420 16,082 18,253 8,318 9,452
Interest expense 20,033 19,538 21,280 10,754 10,952
--------- --------- --------- --------- ---------
Net loss from continuing
operations before taxes (5,613) (3,456) (3,027) (2,436) (1,500)
Taxes - - - - -
Operating results of operations transferred to RHI (6,644) (30,531) (9,332) 837 1,393
--------- --------- --------- --------- ---------
Net earnings (loss) before preferred
dividends (12,257) (33,987) (12,359) (1,599) (107)
Series A preferred dividends 1,713 1,529 1,529 764 714
Series C preferred dividends 2,160 2,373 2,373 1,187 1,187
--------- --------- --------- --------- ---------
Net loss after preferred dividends $(16,130) $(37,889) $(16,261) $ (3,550) $ (2,008)
========= ========= ========= ========= =========
Dividends to RHI $ 50,000 $ - $ - $ - $ -
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTURE>
Fairchild Industries, Inc.
Consolidated Statements of Changes in Stockholders'
Equity
(In thousands)
Series B Series C
Common Preferred Preferred Paid-in Accumulated
Stock Stock Stock Capital Deficit Total
-------- --------- --------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1992 $ 140 $ 192,600 -- $ 2,230 $ (6,985) $ 187,985
Net loss -- -- -- -- (12,257) (12,257)
Issuance of Series B Preferred Stock to parent -- 5,000 -- -- -- 5,000
Exchange of Series A Preferred Stock for
issuance of Series C Preferred Stock -- -- $ 24,015 -- -- 24,015
Cash dividends to preferred stockholders -- -- -- -- (3,873) (3,873)
Cash dividends to parent -- -- -- -- (50,000) (50,000)
Balance, June 30, 1993 140 197,600 24,015 2,230 (73,115) 150,870
Net loss -- -- -- -- (33,987) (33,987)
Issuance of Series B Preferred Stock to parent -- 4,900 -- 143 -- 5,043
Transfer of subsidiary from parent -- -- -- 17 (851) (834)
Cash dividends to preferred stockholders -- -- -- -- (3,902) (3,902)
Balance, June 30, 1994 140 202,500 24,015 2,390 (111,855) 117,190
Net loss -- -- -- -- (12,359) (12,359)
Issuance of Series B Preferred Stock to parent -- 25,300 -- 88 -- 25,388
Transfer of pension plan from parent -- -- -- 45 -- 45
Cash dividends to preferred stockholders -- -- -- -- (3,902) (3,902)
Balance, June 30, 1995 140 227,800 24,015 2,523 (128,116) 126,362
Net Income -- -- -- -- (107) (107)
Issuance of Series B Preferred Stock to parent -- 2,400 -- -- -- 2,400
Cash dividends to preferred stockholders -- -- -- -- (1,901) (1,901)
Paid-in capital from parent -- -- -- 402 -- 402
Balance, December 31, 1995 (unaudited) $ 140 $ 230,200 $ 24,015 $ 2,925 $(130,124) $ 127,156
-------- --------- --------- --------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
Fairchild Industries, Inc.
Consolidated Statements of Cash Flow
(In thousands)
Years Ended Six Months Ended
June 30, January 1, December 31,
1993 1994 1995 1995 1995
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows (used in)/provided by operating activities:
Net loss from continuing operations) $(5,613) $(3,396) $(3,027) $(2,436) ($1,500)
Adjustments to reconcile net income to net cash (used
in)/provided by operating activities:
Amortization and depreciation 7,935 8,947 10,330 4,113 5,627
(Decrease) increase in advanced billings - - 326 352 (91)
Increase in billed accounts receivable (1,086) (251) (8,060) (6,730) (1,153)
(Increase) decrease in unbilled accounts receivable(666) 277 (2,014) (4,054) (384)
Decrease (increase) in non-current assets (404) (43) (536) (765) (4,625)
(Increase) decrease in inventories - - (1,033) (2,437) 182
(Decrease) increase in prepaid and other assets (20) (374) (709) (401) 75
(Decrease) increase in accrued liabilities 339 406 2,716 (68) (1,441)
(Decrease) increase in deferred revenue 359 (24) (162) 197 (265)
Increase (decrease) in accounts payable (86) (1,325) 5,576 5,588 (1,512)
Operations transferred to RHI 16,579 6,438 14,341 17,156 7,501
------- -------- ------- ------- -------
Net cash (used in)/provided by operating 17,337 10,655 17,748 10,515 2,414
activities
Cash flows used in investing activities:
Acquisitions, net of cash acquired) (7,313) - (11,550) (11,550) -
Purchases of property, plant and equipment) (5,769) (7,775) (10,349) (4,540) (5,476)
Proceeds from sales of property, plant and equipment
8 31 25 - -
-
Operations transferred to RHI (6,539) (7,105) (5,754) (3,787) (2,525)
------- -------- ------- ------- -------
Net cash used in investing activities (19,613) (14,849) (27,628) (19,877) (8,001)
Cash flows provided by financing activities:
Issuance of Series B preferred stock 5,000 4,000 24,400 23,100 2,400
Issuance of Series C preferred stock 24,015 - - - -
Purchase/exchange of Series A preferred stock (25,126) - - - (2,072)
Payment of dividends (53,782) (3,902) (3,902) (1,951) (1,951)
Paid-in capital contribution - 143 88 - 402
Repayments of capital lease obligations (3,200) (3,118) (1,950) (1,171) (547)
Decrease (increase) in deferred loan cost (3,703) 1,008 1,399 692 (679)
Operations transferred to RHI 59,070 6,127 (8,750) (11,372) 7,470
------- -------- ------- ------- -------
Net cash provided by financing activities 2,274 4,258 11,285 9,298 5,023
Net increase (decrease) in cash (2) 64 1,405 (64) (564)
Cash, beginning of period/year 2 - 64 64 1,469
------- ------- -------- --------- -------
Cash, end of period/year $ - $ 64 $ 1,469 $ - $ 905
======== ======= ======= ========= =======
Supplementary disclosures of cash flow information:
Cash paid during the period/year for interest $ 20,033 $ 19,538 $ 21,280 $ 10,754 $ 10,952
======== ======= ======= ========= =======
Cash paid during the period/year for taxes $ - $ - $ - $ - $ -
======== ======= ======= ========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
Fairchild Industries, Inc.
Notes to Consolidated Financial Statements
(unaudited with respect to October 1, 1995 and the three months ended
October 1, 1995 and October 2, 1994)
1. Organization, Merger and Summary of Significant Accounting Policies:
Fairchild Industries, Inc. is incorporated in the State of Delaware. As used
herein, the term "Company" refers to Fairchild Industries, Inc. The Company is
a subsidiary of RHI Holdings, Inc. ("RHI"), which is in turn a wholly-owned
subsidiary of The Fairchild Corporation ("TFC").
Subsequent to June 30, 1995, TFC announced plans to recapitalize the Company in
order to improve the financial and operating flexibility and strengthen the
financial position of TFC and its subsidiaries (the "Reorganization"). The
Company's plans to merge into Shared Technologies Inc. ("STI") (the "Merger")
are an integral part of the Reorganization. Concurrent with the Merger, and as
part of the Reorganization, the Company is transferring to its immediate parent,
RHI, all of its assets and liabilities except those expressly related to the
Company's telecommunications business (the "Telecommunications Business"), $125
million principal amount of the Company's 12 1/4% Senior Secured Notes Due 1999
(the "12 1/4% Notes"), and approximately $57.8 million of existing bank
indebtedness. The Merger is contingent on STI obtaining sufficient financing.
In the Merger Agreement, TFC, RHI and FII make representations and warranties
with respect to the Telecommunications Business and the Merger Agreement
provides that TFC and RHI on the one hand and STI on the other hand shall
indemnify each other from losses arising out of any breaches of their respective
representations and warranties in the Merger Agreement to the extent that losses
to a party exceed $4,000,000.
Upon consummation of the Merger, all outstanding shares of FII common stock will
be converted into the right to receive in the aggregate (i) 6,000,000 shares of
STI Common Stock, (ii) shares of STI Cumulative Convertible Preferred Stock
bearing a six percent initial annual dividend and having an aggregate
liquidation preference of $25,000,000 plus an amount equal to the total amount
of dividends the holders would have received if dividends had been paid
quarterly in cash at the rate of ten percent per annum for the life of the
issue, less the amount of dividends actually paid, and (iii) shares of STI
Special Preferred having an aggregate initial liquidation preference of
$20,000,000 (the "Common Consideration"). In connection with the Merger, all
shares of Series A Convertible Preferred Stock and Series C Cumulative Preferred
Stock of FII will be redeemed by STI and canceled in consideration of the
payment of the full liquidation value thereof together with accrued dividends
aggregating approximately $44,000,000 (the "Preferred Consideration"). RHI is
transferring to the Company as a contribution to its capital all of the
outstanding shares of the Company's Series B Preferred Stock.
Prior to the Reorganization, in addition to the Telecommunications Business, the
Company conducted two other businesses: the Aerospace Fasteners and Industrial
Products businesses. The Aerospace Fasteners business designs, manufactures and
markets high performance, specialty fastening systems, primarily for aerospace
applications. The Industrial Products business designs and markets tooling and
electronic control systems for the plastic injection molding and die casting
industries. The Telecommunications Business is the sole continuing operation of
the Company and accounted for 21.4% of the Company's total combined sales for
the three businesses for the fiscal year ended June 30, 1995. The
Telecommunications Business has no operations or sales outside of the United
States of America.
F-8
<PAGE>
The transaction between STI and FII was structured as a merger. As a result of
this structure, the Surviving Corporation will be liable for all liabilities of
FII with respect to its operations prior to the Effective Time. Prior to the
Merger, and as a precondition of the Merger, FII, RHI, TFC and certain other
subsidiaries of TFC will undergo a reorganization pursuant to which FII will
divest itself of all assets unrelated to the Telecommunications Business. RHI
will assume all liabilities of FII unrelated to the Telecommunications Business,
including but not limited to: (i) contingent liabilities related to the
Company's alleged failure to comply with certain Federal Acquisition Regulations
and Cost Accounting Standards in accounting for (a) the 1985 reversion to the
Company of certain assets of terminated defined benefit pension plans and (b)
pension costs associated with the discontinuation of certain of its former
operations; (ii) all environmental liabilities except those related to the
Company's Telecommunications Business; (iii) approximately $50,000,000 (at June
30, 1995) of costs associated with postretirement healthcare benefits; (iv) a
secured note payable in an aggregate principal amount of approximately
$3,300,000 at September 30, 1995; and (v) all other accrued and any and all
other unasserted liabilities that do not relate to or arise out of the
Telecommunications Business (which liabilities consist principally of those
related to certain divested businesses).
The Company and RHI will enter into an agreement (the "Indemnification
Agreement") pursuant to which RHI will assume and agree to discharge in full,
and will indemnify the Company from, the Assumed Liabilities. Notwithstanding
the Indemnification Agreement, as a matter of law the Company will not be
released from its obligations with respect to the Assumed Liabilities.
Accordingly, to the extent RHI is unable to meet its obligations under the
Indemnification Agreement, the Company will be required to satisfy in full any
of the Assumed Liabilities not satisfied by RHI. RHI is primarily a holding
company and, therefore, any claim by the Company pursuant to the Indemnification
Agreement will be effectively subordinated to the creditors of RHI's
subsidiaries. There is no expiration date with respect to the Indemnification
Agreement. All indemnification obligations are secured by all of the shares of
preferred stock issued by STI to RHI in the Merger.
On January 26, 1996, FII sold D-M-E to Cincinnati Milacron, Inc. ("CM") pursuant
to an asset purchase agreement dated as of January 23, 1996 for approximately
$245 million (the "D-M-E Asset Sale"), comprised of approximately $62.3 million
in cash and three 8% promissory notes of CM. One note, in the amount of $11.7
million, will be payable upon the receipt of required regulatory clearance in
Belgium, and will be canceled and the corresponding Belgium assets reconveyed,
in the event such clearance is not obtained. Of the other two notes, one is in
the aggregate principal amount of approximately $166 million, which note is
collateralized by a letter of credit issued by Bankers Trust Company in the
amount equal to the principal of such promissory note (the "Collateralized D-M-E
Note"), and the other is unsecured and is in the aggregate principal amount of
approximately $5 million (the "Unsecured D-M-E Note" and, collectively with the
Collateralized D-M-E Note, the "D-M-E Term Notes"). Each of the D-M-E Term Notes
is due and payable one year following the consummation of the D-M-E Asset Sale,
except that upon 30 days' prior notice, Fairchild may require prepayment of, or
CM may prepay, each of the D-M-E Term Notes at any time beginning on or after
July 29, 1996.
On January 28, 1996, Fairchild sold substantially all of the assets of Fairchild
Data Corporation to SSE Datacom, Inc. ("SSED"), a wholly owned subsidiary of SSE
Telecom, Inc. ("SSET"), pursuant to an asset purchase agreement dated as of
January 26, 1996 for approximately $7 million (the "Fairchild Data Corporation
Sale"), comprised of approximately $5.2 in cash and approximately $1.8 million
(200,000 shares) of the common stock of SSET (the "SSET Common Stock").
Fairchild's right to retain 100,000 shares of the SSET Common Stock is subject
to SSED's achieving specified profit margins within twelve months of the
Fairchild Data Corporation Sale. Also, Fairchild was issued a three year warrant
to purchase 50,000 additional shares of the common stock of SSET.
F-9
<PAGE>
With respect to the contingent liabilities described in clause (i) of the second
preceding paragraph, the Corporate Administrative Contracting Officer (the
"ACO") has directed the Company to prepare cost impact proposals relating to
such plan terminations and segment closings and, following receipt of such cost
impact proposals, may seek adjustments to contract prices. The ACO alleges that
substantial amounts will be due if such adjustments are made. The Company
believes it properly accounted for the asset reversions in accordance with
applicable accounting standards. The Company has had discussions with the
government to attempt to resolve these pension accounting issues. However, there
can be no assurance that the Company will be able to satisfactorily resolve
them.
As of June 30, 1995, the consolidated total recorded liabilities of the Company
for the environmental matters referred to above totaled $8,601,000 which was the
estimated probable exposure for these matters. It is reasonably possible that
the total exposure for these matters could be as much as $15,778,000.
Fiscal year
The fiscal year ("fiscal") of the Company ends on June 30. All references herein
to "1995," "1994," and "1993" mean the fiscal years ended June 30, 1995, 1994
and 1993, respectively.
Cash Equivalents/Statements of Cash Flows
For purposes of these statements, the Company considers all highly liquid
investments with original maturity dates of three months or less as cash
equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
primarily using the weighted average method. The inventories consist of
telecommunications equipment waiting to be installed at customer sites.
Properties and Depreciation
Properties are stated at cost and depreciated over estimated useful lives,
generally on a straight-line basis. No interest costs were capitalized in any of
the years presented. Useful lives for property, plant and equipment are:
Buildings and improvements 17 - 40 years
Equipment and autos 3 - 10 years
Furniture and fixtures 10 years
Depreciation expense related to property, plant and equipment amounted to
$6,191,000, $6,998,000 and $8,153,000 for fiscal 1993, 1994 and 1995,
respectively.
F-10
<PAGE>
Unbilled Receivables and Advance Billings
Unbilled receivables arise from those contracts under which billings can only be
rendered upon the achievement of certain contract stages or upon submission of
appropriate billing detail. Advance billings represent pre-billings for services
not yet rendered. Unbilled receivables and advance billings are generally for
services rendered within one year.
Revenue Recognition
The majority of the Company's revenues are related to the sale and installation
of telecommunications equipment and services and maintenance after the sale.
Service revenues are billed and earned on a monthly basis. For systems
installations, usually three to five months, the Company uses the percentage-
of-completion method, measured by costs incurred versus total estimated cost at
completion. The Company bills maintenance contracts in advance. The deferred
revenue is relieved when the revenue is earned.
F-11
<PAGE>
Intangible Assets and Goodwill
Intangible assets as of June 30, 1994 and 1995, respectively, are comprised of
the following:
Useful
1994 1995 Lives
-------- ------- -------
Noncompete contracts $ 2,774 $ 3,659 5-10 years
Subscriber base 6,256 6,456 10 years
Right of first refusal 700 700 10 years
Acquisition/organization costs 720 1,321 5-20 years
Other 615 1,391 8-10 years
------- --------
11,065 13,527
Accumulated amortization (4,383) (5,938)
------- --------
$ 6,682 $ 7,589
======= ========
The intangible assets are being amortized over their expected useful lives
described above. Amortization expense related to these intangible assets
amounted to $1,203,000, $1,371,000 and $1,555,000 for the years ended June 30,
1993, 1994 and 1995, respectively.
To the extent possible, the Company allocates the excess of cost of purchased
businesses over the fair value of their net tangible assets at acquisition dates
to identifiable intangible assets. The residual is treated as goodwill and is
amortized on a straight-line basis over 40 years.
Impairment of Long-Lived Assets
The Company reviews for impairment, its long-lived assets, including property,
plant and equipment, identifiable intangibles and goodwill, whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be fully recoverable. To determine recoverability of its long-lived assets, the
Company evaluates the probability that future undiscounted net cash flows,
without interest charges, will be less than the carrying amount of the assets.
Impairment is measured at fair value.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed Of."
SFAS 121 establishes accounting standards for the impairment of long- lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used, and for long-lived assets, and certain identifiable
intangibles to be disposed of. SFAS 121 is required to be implemented by the
Company on, or before, July 1, 1996. Since the Company's present policy is
identical to the policy prescribed by SFAS 121, there will be no effect from
implementation.
Interim Financial Statements
The accompanying interim consolidated financial statements, as of October 1,
1995 and for the three months ended October 1, 1995 and October 2, 1994, of the
Company have been prepared by the Company without audit. Certain information and
footnote disclosures normally included in financial statements presented in
accordance with generally accepted accounting principles have been omitted from
F-12
<PAGE>
the accompanying interim statements. The Company believes the disclosures made
are adequate to make the information presented not misleading.
In the opinion of the Company, the accompanying unaudited interim consolidated
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of October 1, 1995 and the results of its operations and its cash
flows for the three months ended October 1, 1995 and October 2, 1994.
Interim results are not necessarily indicative of annual performance because of
the impact of seasonal variations.
2. Acquisitions:
On November 28, 1994, the Company completed the acquisition of substantially all
of the telecommunications assets of JWP Telecom, Inc. ("JWP") for approximately
$11,000,000, plus the assumption of approximately $3,000,000 of liabilities. The
Company recorded $1,610,000 and $5,595,000 in identifiable intangibles and
goodwill, respectively, as a result of this acquisition. JWP is a
telecommunications system integrator, specializing in the distribution,
installation and maintenance of voice and data communications equipment. In the
first quarter of fiscal 1995, the Company acquired all the shared
telecommunications assets of Eaton & Lauth Co., Inc., for approximately
$550,000. The Company recorded $250,000 and $300,000 of the acquisition price as
identifiable intangibles and goodwill, respectively. See Note 12 for the pro
forma information, assuming acquisition of JWP at the beginning of fiscal 1995
and at the beginning of fiscal 1994.
In fiscal 1993, the Company acquired all the telecommunications assets of Office
Networks, Inc. for approximately $7,300,000. The Company recorded $2,282,000 and
$2,748,000 in identifiable intangibles and goodwill, respectively, as a result
of this acquisition.
F-13
<PAGE>
3. Operations Being Transferred to RHI:
The operations being transferred to RHI had the following operating results and
net assets (in thousands).
<TABLE>
<CAPTION>
June 30,
-------------------------
1994 1995
----- -----
<S> <C> <C>
Current assets $173,835 $165,738
Property, plant and equipment, net 116,799 108,632
Goodwill 175,243 170,028
Net assets held for sale 34,515 34,811
Other assets 131,792 23,072
Current Liabilities (148,075) (108,862)
Debt to be assumed by RHI) (94,393) (84,982)
Other liabilities (40,544) (62,463)
Cumulative Translation Adjustment (3,146) (8,172)
Net assets to be transferred $246,026 $237,802
<CAPTION>
For the Years Ended
June 30,
1993 1994 1995
<S> <C> <C> <C>
Revenues $400,594 $369,792 $401,779
Cost of sales 302,067 284,850 311,150
Selling, general and administrative 69,549 67,438 76,171
Research and development 3,262 3,940 4,100
Amortization of goodwill 5,298 5,228 5,218
Restructuring charges 15,469 18,860 -
Unusual items 6,000 -
Operating income (loss) 4,949 (16,524) 5,140
Interest expense 12,788 11,129 14,004
Other income 2,269 4,008 1,549
Income tax provision (benefit) 264 (4,792) 2,017
Cumulative effect of accounting changes for
income taxes and postretirement benefits 810 11,678 -
Net loss of transferred operations $ (6,644) $ (30,531) $ (9,332)
</TABLE>
The interest allocated to discontinued operations represents the interest on the
debt to be assumed by RHI. Goodwill was allocated to business segments at the
acquisition date of FII by TFC (June 1989) based on the ratio of estimated fair
value of the units to total estimated fair value. In addition, the remaining
goodwill allocated to the telecommunications business relates to acquisitions
made by the telecommunications business. The provision for income taxes, which
was calculated on a separate company basis, was allocated entirely to
discontinued operations as the continuing operations experienced losses after
interest in all historical periods. The cumulative effect from changing
accounting for income taxes has been solely allocated to operations transferred
to RHI as the telecommunications business
F-14
<PAGE>
has experienced losses after interest in all historical periods and any tax
assets could not be realized. The cumulative effect from changing accounting for
postretirement benefits was partially allocated to continuing operations based
upon actuarial reports. See Note 5 for further discussion regarding the
cumulative effect from changing accounting for postretirement benefits. The
Company's litigation contingencies are part of the liabilities being transferred
to RHI. These contingencies include the determination by the ACO, based upon the
advice of the United States Defense Contract Audit Agency, that the Company did
not comply with Federal Acquisition Regulations and Cost Accounting Standards in
accounting for (i) the 1985 reversion to the Company of certain assets of
terminated defined benefit pensions plans, and (ii) costs upon the closing of
segments of the Company's business. The ACO has directed the Company to prepare
cost impact proposals relating to such plan terminations and segment closings
and following receipt of such cost impact proposals, may seek adjustments to
contract prices. The ACO alleges that substantial amounts will be due if such
adjustments are made. The Company believes it has properly accounted for the
asset reversions in accordance with applicable accounting standards. The Company
has had discussions with the government to attempt to resolve these pension
accounting issues.
To date, the stringent Federal, state and local environmental laws and
regulations, which apply to the Company and other aerospace fastener and
industrial product manufacturers, concerning, among other things, the discharge
of materials into the environment and the generation, handling, storage,
transportation and disposal of waste and hazardous materials, have not had a
material effect on the financial condition of the Company.
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 to take corrective action or to contribute to a cleanup. 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 investigations and take any necessary
corrective actions or make any necessary contributions. None of the amounts
estimated for FII's environmental liabilities are related to the Communications
Services Business. 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.
The reserves recorded by the Company related to the litigation discussed above
have been included in operations transferred to RHI.
4. Long-Term Obligations:
The Company maintains a credit agreement (the "Credit Agreement") with a
consortium of banks, which provides a revolving credit facility and term loans
(collectively the "Credit Facilities"). The Credit Facilities generally bear
interest at 3.75% over the London Interbank Offer Rate ("LIBOR") for the
revolving credit facility and Term Loan VIII, and at 2.75% over LIBOR for Term
Loan VII, respectively. The LIBOR was approximately 6% as of June 30, 1995. The
commitment fee on the unused portion of the revolving credit facility was 1.0%
at June 30, 1995. The Credit Facilities mature March 31, 1997 and are secured by
substantially all the Company's assets. RHI has assumed $94,393,000 and
$84,982,000 of this debt as of June 30, 1994 and 1995, respectively, in
connection with the Merger. The remaining
F-15
<PAGE>
debt related to the continuing operations will be repaid as part of the Merger
and there will be no further obligation of the Company.
The Credit Agreement, as amended, contains certain covenants, 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 issued the 12.25% Senior Secured Notes (the "Notes") in August 1992.
The Notes require semi-annual interest payments and mature in 1999, however, the
Company may redeem the Notes at any time after July 31, 1997. If the Company
desires to redeem the Notes prior to July 31, 1997, a majority of the holders
must consent to the redemption. The Notes are secured by a lien on all of the
issued and outstanding common stock and Series B Preferred Stock of the Company
and all issued and outstanding common stock of its wholly-owned subsidiary, VSI
Corporation. There are no direct or contingent liabilities or compensating
balance arrangements as a result of the Notes.
The Company is party to several capital leases with interest rates ranging from
5.85% to 15.50%. (See Note 11 for additional capital lease disclosures.)
Annual maturities of long-term debt obligations (exclusive of capital lease
obligations) for each of the five years following June 30, 1995 are as follows:
$14,338,000 for 1996, $121,231,000 for 1997, $1,001,000 for 1998, $125,056,000
for 1999 and $56,000 for 2000.
5. Pensions and Postretirement Benefits:
Pensions
The Company has established defined benefit pension plans covering substantially
all employees. The Company's funding policy for the plans is to contribute each
year the minimum amount required under the Employee Retirement Income Security
Act of 1974. A portion of the Company's pension cost and prepaid pension cost
have been included in operations transferred to RHI.
The following table provides a summary of the components of net periodic pension
cost for the plans:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Service cost of benefits earned during the period $ 55 $ 97 $106
Interest cost of projected benefit obligation 35 56 63
Return on plan assets (39) (57) (55)
Net amortization and deferral 8 12 5
Amortization of prior service cost 4 (8) (8)
---- ----- -----
Total pension cost $ 63 $100 $111
F-16
<PAGE>
Assumptions used in accounting for the plans were:
1993 1994 1995
---- ---- ----
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%
The following table sets forth the funded status and amounts recognized in the
Company's balance sheets at June 30, 1994 and 1995 for the continuing operations
portion of its defined benefit pension plans:
1994 1995
---- ----
(In thousands)
Vested benefit obligation $421 $493
Non-vested benefit obligation 27 32
Accumulated benefit obligation 448 525
Projected benefit obligation 642 758
Plan assets at fair value 699 800
Plan assets in excess of projected benefit obligation 57 42
Unrecognized net loss 155 150
Unrecognized prior service cost 4 3
---- ----
Prepaid pension cost $216 $195
Postretirement Health Care Benefits
Effective July 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 106 ("SFAS No. 106"), "Employers' Accounting for Postretirement
Benefits Other Than Pensions." This standard requires that the expected cost of
postretirement benefits be accrued and charged to expense during the years the
employees render the services. The impact of the accounting change was $60,000
which was included in general and administrative expenses. A portion of the
Company's net periodic postretirement benefit cost and accrued postretirement
benefit cost have been included in operations transferred to RHI.
The components of expense for continuing operations in 1994 and 1995 are as
follows:
1994 1995
---- ----
(In thousands)
Service cost of benefits earned $12 $13
Interest cost on liabilities 6 7
Net periodic postretirement benefit cost $18 $20
The following table sets forth the funded status for the continuing portion of
the Company's postretirement health care benefit plan at June 30, 1994 and 1995.
F-17
<PAGE>
1994 1995
---- ----
(In thousands)
Accumulated postretirement benefit obligation $67 $87
Unrecognized net gain 11 11
Accrued postretirement benefit cost $78 $98
The accumulated postretirement benefit obligation was determined using a
discount rate of 8.5%, and a health care cost trend rate of 8.0% and 7.5% for
pre-age-65 and post-age-65 employees, respectively, gradually decreasing to 4.5%
and 4.5%, respectively, in the year 2003 and thereafter.
Increasing the assumed health care cost trend rates by 1% would increase the
accumulated postretirement benefit obligation related to the continuing
operations of the Company as of June 30, 1995, by approximately $29,000, and
increase net periodic postretirement benefit cost by approximately $7,000 for
fiscal 1995.
6. 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 No. 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 No. 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 No. 109, prior years' financial statements were not
restated. The effect of the accounting change was not material.
There was no provision or benefit for current or deferred income taxes from
continuing operations for 1995, 1994 and 1993 due to the historical losses of
continuing operations.
The income tax provision for continuing operations differs from that computed
using the statutory Federal income tax rate of 34.0% in 1993 and 35.0% in 1994
and 1995 for the following reasons:
1993 1994 1995
(In thousands)
Computed statutory amount $(1,908) $(1,189) $(1,059)
Effect of net operating losses 1,719 981 826
Nondeductible acquisition valuation items 184 202 218
Other 5 6 15
------- ------- -------
$ -- $ - $ -
======== ======== ========
F-18
<PAGE>
The following table is a summary of the significant components of the continuing
operations portion of the Company's deferred tax assets and liabilities as of
June 30, 1994 and 1995.
</TABLE>
<TABLE>
<CAPTION>
1994 1995
Deferred Deferred
(Provision) June 30, (Provision) June 30,
Benefit 1994 Benefit 1995
------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C>
Deferred tax assets:
Accrued expenses $ (15) $ 72 $ 17 $ 89
Employee compensation and benefits 32 192 45 237
Deferred revenue (9) 130 958 1,088
NOL carryforwards 1,682 12,311 822 13,133
Postretirement benefits 41 135 27 162
Other 58 40 8 48
------- -------- --------- --------
1,673 12,880 1,877 14,757
Deferred tax liabilities:
Asset basis differences - fixed assets (592) (5,367) - (5,367)
Asset basis differences - intangible assets (143) (1,426) (198)) (1,624)
Other (10) (326) - (326)
------- -------- --------- --------
(745) (7,119) (198)) (7,317)
------- -------- --------- --------
Less -- valuation allowance (928) (5,761) (1,679) (7,440)
------- -------- --------- --------
Net deferred tax liability $ - $ - $ - $ -
======= ======== ========= ========
</TABLE>
For fiscal 1993, 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:
1993
(In thousands)
Deferred revenue.................................... 122
Intangible amortization............................. (386)
Depreciation........................................ (1,346)
Effect of net operating loss........................ 1,610
-------
$ -
=======
In the opinion of management, adequate provision has been made for all income
taxes and interest, and any tax liability that may arise for prior periods will
not have a material effect on the financial condition or results of operations
of the Company.
The Company has entered into a tax sharing agreement with its parent whereby the
Company is included in the consolidated federal income tax return of TFC. The
Company makes payments to TFC based on the amount of federal income taxes, if
any, it would have paid had it filed a separate federal income tax return.
F-19
<PAGE>
7. Redeemable Preferred Stock:
As part of the Merger discussed in Note 1, the outstanding Series A Preferred
Stock will be redeemed at $45.00 per share. The Series A Preferred Stock is
subject to annual mandatory redemptions and annual dividend payments of $3.60
per share. The Company did not purchase any shares during the past three fiscal
years. In the second quarter of fiscal 1996, FII repurchased 53,800 shares of
the Series A Preferred Stock for $2,072,000. This represented a $349,000
discount to the redemption value of $2,421,000. This discount was recorded as
additional paid-in capital. Series A Preferred Stock is listed on the New York
Stock Exchange ("NYSE").
Holders of the Series A Preferred Stock have general voting rights.
Additionally, in the event of a cumulative arrearage equal to six quarterly
dividends, all Series A Preferred stockholders have the right to elect
separately, as a class, two members to the Board of Directors. No cash dividends
can be declared or paid on any stock junior to the Series A Preferred Stock in
the event of dividend arrearages or a default in the obligation to redeem such
Series A Preferred Stock. Due to the merger of the Company with RHI in August
1989, holders of the Series A Preferred Stock are entitled, at their option, but
subject to compliance with certain covenants under the Company's Credit
Agreement, to redeem their shares for $27.18 in cash.
As of June 30, 1995, annual maturity redemption requirements for redeemable
preferred stock are as follows: $4,211,000 for 1996, $7,450,000 for 1997, and
$7,450,000 for 1998.
8. Equity Securities:
As part of the Merger discussed in Note 1, the Series C Preferred Stock will be
redeemed at redemption value of $45.00 per share. 558,360 shares of Series C
Preferred Stock were authorized, issued and outstanding at June 30, 1995 and
1994, respectively. Also, as part of the Merger, RHI will contribute to the
Company all of the Company's outstanding Series B Preferred Stock. Such Series B
Preferred Stock will be retired and canceled in connection with the Merger.
9. Fair Value of Financial Instruments:
Statement of Financial Accounting Standards No. 107 ("SFAS 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. Financial
instruments are defined as cash, evidence of an ownership interest in an entity
or a contract that imposes a contractual obligation to deliver cash or other
financial instruments to the second party. In cases where quoted market prices
are not available, fair values are based on estimates of future cash flows. In
that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. SFAS 107 excludes certain financial
instruments and all nonfinancial 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.
The carrying amount reported in the balance sheet approximates the fair value
for cash and cash equivalents, accounts receivable, accounts payable, advanced
billings, deferred revenue, accrued liabilities and capital lease obligations.
Fair values of Series A and Series C preferred stock of the Company are based on
quoted market prices.
F-20
<PAGE>
There is no active market for the Company's long-term debt. Therefore, the fair
value for the Company's fixed rate long-term debt is estimated using discounted
cash flow analysis, based on the Company's current incremental borrowing rates
for similar types of borrowing arrangements.
Fair values for the Company's off-balance-sheet instruments, 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 fair value of the Company's off-balance-sheet instruments
at June 30, 1995 is not material.
The carrying amounts and fair values of the Company's financial instruments at
June 30, 1994 and June 30, 1995 are as follows.
<TABLE>
<CAPTION>
June 30, 1994 June 30, 1995
---------------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- -------- -------
(In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 64 $ 64 $ 1,469 $ 1,469
Accounts receivable 9,856 9,856 20,647 20,647
Accounts payable 6,744 6,744 12,780 12,780
Accrued liabilities 3,589 3,589 6,623 6,623
Advanced billings - - 941 941
Deferred revenue on maintenance contracts 371 371 3,109 3,109
Bank credit agreement 55,373 55,373 55,373 55,373
12.25% senior secured notes 125,000 125,000 125,000 125,000
Redeemable preferred stock 19,112 15,608 19,112 15,714
Series C cumulative preferred stock 24,015 21,427 24,015 20,939
</TABLE>
10. Related Party Transactions:
Corporate general and administrative expense was billed to the Company on a
monthly basis during 1993, 1994 and 1995. These costs represent the cost of
services incurred on behalf of the Company by TFC and its subsidiaries based
primarily on estimated hours spent by corporate employees. The Company has
reimbursed TFC and its subsidiaries for such services. Corporate general and
administrative expense allocated to the Company was $342,000, $441,000 and
$537,000 in fiscal 1993, 1994 and 1995, respectively.
The Company had sales to TFC and subsidiaries of TFC of $601,000, $707,000 and
$1,031,000 for the years ended June 30, 1993, 1994 and 1995, respectively.
F-21
<PAGE>
11. 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.
June 30,
Description 1995
- ---------------------------------------- --------------
(In thousands)
Building improvements $ 422
Equipment and autos 11,582
Furniture and fixtures 297
Less- Accumulated depreciation (6,446)
--------
$ 5,855
========
Future minimum lease payments:
Operating Capital
Leases Leases
------- -------
(In thousands)
1996 $ 4,414 $ 812
1997 4,635 189
1998 4,867 8
1999 5,110 --
2000 5,366 --
------- -------
$24,392 1,009
Less-Amount representing interest ======= (73)
-------
Present value of capital lease obligations $ 936
=======
Rental expense under all leases amounted to $2,985,000, $3,023,000 and
$4,204,000 for the years ended June 30, 1993, 1994 and 1995, respectively.
Other Matters
The Company's continuing operations are involved in various claims and lawsuits
incidental to its business. 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 will not have a material
adverse effect on the financial condition or the future operating results of the
Company. See further discussion of the Assumed Liabilities in Note 1.
F-22
<PAGE>
12. Pro Forma Information (Unaudited):
As described in Note 2, the Company acquired substantially all of the
telecommunications assets of JWP on November 28, 1994. The following unaudited
pro forma condensed results of operations for the years ended June 30, 1994 and
1995 give effect to the JWP acquisition as if the acquisition had occurred at
the beginning of each year.
Unaudited
Fiscal 1994 Fiscal 1995
(In thousands)
Sales $122,426 $132,716
Cost of sales (86,860) (98,628)
Other expense (38,917) (36,926)
-------- ---------
Net loss from continuing operations (3,351) (2,838)
Operating results of operations transferred to RHI) (30,591) (9,332)
-------- ---------
Net loss before preferred dividends $(33,942) $(12,170)
F-23
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Exhibit Page
EXHIBIT A - AGREEMENT AND PLAN OF MERGER ................................. A-1
EXHIBIT B - FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER .............. A-2
EXHIBIT C - FII'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
DECEMBER 31, 1995 ............................................ A-3
EXHIBIT D - FII'S FORM 10-K FOR THE YEAR ENDED JUNE 30, 1995 ............. A-4
