PRELIMINARY COPY
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement |_| Confidential for Use of the Com-
mission Only (as permitted by
Rule 14a-6(e)(2))
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
SHARED TECHNOLOGIES INC.
(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|_| $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a) of Schedule 14A.
|_| $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
|X| Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction
applies: Common Stock, Cumulative Convertible Preferred
Stock, Special Preferred Stock.
(2) Aggregate number of securities to which transaction applies:
<PAGE>
(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):
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Common stock (6,000,000 shares at $3.44 per share*) = $20,640,000
Cumulative Convertible Preferred Stock = $25,000,000 (liquidation value)
Special Preferred Stock = $20,000,000 (liquidation value)
Payment for preferred stock and assumed debt = $223,500,000
* Average of the high ($3.62) and low ($3.25) prices as
reported on November 24, 1995, a date which is within five
(5) business days prior to the date of filing.
</TABLE>
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(4) Proposed maximum aggregate value of transaction: $289,140,000
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(5) Total fee paid: $57,828.00
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|_| 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:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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This Proxy Statement is being furnished to holders of Common Stock, par
value $.004 per share ("Common Stock"), of Shared Technologies Inc., a Delaware
corporation ("STI"), in connection with the solicitation of proxies by the Board
of Directors for use at the Special Meeting of Stockholders (the "Meeting") to
be held on ___________________, at_____ ___________________________________,
commencing at______, local time, and at any adjournment or postponement thereof.
This Proxy Statement and the accompanying form of proxy are intended to
be mailed to stockholders of STI on or about December 29, 1995.
The date of this Proxy Statement is _____________________.
<PAGE>
SHARED TECHNOLOGIES INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
_______________, 1996 at ______________ .m
Notice is hereby given that a Special Meeting of Stockholders of Shared
Technologies Inc. ("STI") will be held on 1996, at ____________ .m, at
___________________ ____________________________________ (the "Meeting"), to
consider and act upon the following matter:
Approval of Merger and Amendments to Certificate of
Incorporation. Approval of (i) the merger of Fairchild
Industries, Inc. ("FII") with and into STI with STI as the
surviving corporation (the "Merger") pursuant to the terms of
an Agreement and Plan of Merger, dated as of November 9, 1995
(the "Merger Agreement"), as a result of which STI will issue
to the sole holder of FII common stock 6,000,000 shares of
Common Stock and shares of STI Cumulative Convertible Preferred
Stock and Special Preferred Stock having an aggregate initial
liquidation preference of $45,000,000 (together the "Preferred
Stock") and holders of preferred stock of FII will be paid
approximately $44,000,000 (the terms of the Merger Agreement
and Preferred Stock are described in, and a copy of the Merger
Agreement is attached as Exhibit A to, the attached Proxy
Statement, which the Board of Directors of STI encourages each
stockholder to review carefully), and (ii) amendments to the
Certificate of Incorporation of STI as required by the Merger
Agreement as a condition to the Merger to:
a) increase the authorized Common Stock, $.004 par
value per share of STI from 20,000,000 to
50,000,000 shares;
b) increase the authorized shares of preferred
stock, $.01 par value per share from 10,000,000
to 25,000,000; and
c) change the name of STI to "Shared Technologies
Fairchild Inc."
Only holders of record of Common Stock at the close of business on
December 22, 1995, are entitled to notice of and to vote at the Meeting.
By Order of the
Board of Directors,
Kenneth M. Dorros, Secretary
Dated: _______________, 199__
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE
AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE IN
ORDER TO ASSURE REPRESENTATION OF YOUR SHARES AT THE MEETING. NO POSTAGE NEED BE
AFFIXED IF THE PROXY IS MAILED IN THE UNITED STATES. THE GIVING OF SUCH PROXY
DOES NOT AFFECT YOUR RIGHT TO VOTE IN PERSON. YOU MAY REVOKE YOUR PROXY AT
ANYTIME BEFORE IT IS VOTED.
<PAGE>
PRELIMINARY COPY
SHARED TECHNOLOGIES INC.
100 Great Meadow Road
Wethersfield, CT 06109
PROXY STATEMENT FOR A SPECIAL MEETING
OF STOCKHOLDERS
TO BE HELD ON _____________, 1996.
INTRODUCTION
This Proxy Statement is being furnished on behalf of Shared
Technologies Inc., a Delaware corporation ("STI"), in connection with the
solicitation of proxies to be voted at a Special Meeting (together with any
adjournment(s) thereof, the "Meeting") of Stockholders of STI (the
"Stockholders"). The Meeting is to be held at ____:___ __ .m., Eastern Time, on
_______, 1996, at ________________________________, __________________________.
This Proxy Statement and the Proxy are first being mailed to Stockholders on or
about December 29, 1995.
The Board of Directors of STI (the "Board") is soliciting the proxies
of the Stockholders who were known on STI's records as holders of issued and
outstanding shares of common stock, par value $.004 per share (the "Common
Stock") of STI as of the close of business on December 22, 1995 (the "Record
Date") to consider and vote upon approval of a merger by and between STI and
Fairchild Industries, Inc., a Delaware corporation ("FII") with STI as the
Surviving Corporation (the "Merger"), pursuant to an Agreement and Plan of
Merger dated as of November 9, 1995 (the "Merger Agreement") and, as required by
the Merger Agreement as a condition of the Merger, amendments to the Certificate
of Incorporation to (a) increase the authorized Common Stock to 50,000,000
shares, (b) increase the authorized preferred stock to 25,000,000 shares and (c)
change the name of STI to "Shared Technologies Fairchild Inc." (the
"Amendments").
The Merger will be effected subject to the terms and conditions of the
Merger Agreement which are summarized in this Proxy Statement. A copy of the
Merger Agreement is attached as Exhibit A to this Proxy Statement. All
Stockholders are encouraged to review the Merger Agreement in its entirety.
Upon consummation of the Merger, the Amendments will become effective
and 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 at the rate of ten percent, less
the amount of dividends actually paid, and (iii) shares of STI Special Preferred
Stock 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 cancelled in consideration of the payment of the full liquidation value
thereof together with accrued dividends aggregating approximately $44,000,000
(the "Preferred Consideration"). All shares of Series B Preferred Stock of FII
will be contributed to STI as the entity surviving the Merger (the "Surviving
Corporation") and cancelled. See "Information about STI - Description of
Securities".
<PAGE>
Upon consummation of the Merger, all shares of FII capital stock shall
no longer be outstanding, shall automatically be cancelled and retired and shall
cease to exist, and each holder of a certificate representing any shares of FII
common stock and FII preferred stock shall cease to have any rights with respect
thereto, except, as to holders of FII common stock, the right to receive the
Common Consideration and, as to holders of FII preferred stock, the right to
receive the Preferred Consideration, each upon the surrender of their respective
stock certificates.
In connection with the Merger, STI has agreed that it will be
responsible for certain FII liabilities as hereinafter described. STI will,
however be indemnified by RHI Holdings, Inc., FII's parent ("RHI") and its
parent, The Fairchild Corporation and certain other FII affiliates with respect
to all non-telecommunications liabilities not specifically assumed (as described
in the next paragraph). 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 FII's
telecommunications business. Prior to the Merger, FII and its affiliates will
undergo a recapitalization designed to leave in FII only telecommunications
assets and liabilities (and the liabilities specified in the next paragraph) and
to divest FII of assets and liabilities associated with its Aerospace Fasteners
and Industrial Products businesses and discontinued operations. See "Special
Factors - FII Recapitalization, Liabilities and Indemnification".
STI intends to use funds obtained from bank loans and the sale of debt
securities of the Surviving Corporation (the "Financing") (i) to pay the
Preferred Consideration, (ii) to repay all principal and accrued interest owed
to the holders of FII's 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 ($125,000,000
outstanding; the aggregate amount so repaid is hereafter referred to as the
"Note Purchase Amount"), (iii) to pay approximately $179,000,000 (less the Note
Purchase Amount) in indebtedness of FII, (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, and it is a condition to the
consummation of the Merger that net proceeds from the financing be sufficient to
pay all of the foregoing. STI has retained CS First Boston Corporation to raise
the required funds and has received a "highly confident" letter from CS First
Boston Corporation with respect to its ability to secure $260,000,000 in debt.
See "Special Factors Required Financing and Effects Thereof".
Approval of the Merger and Amendments will require the favorable vote
of the holders of a majority of all outstanding shares of Common Stock. As of
the Record Date, there were _____ issued and outstanding shares of Common Stock
held of record by _______ Stockholders. As of the Record Date, the members of
the Board and the executive officers of STI owned an aggregate of ___ shares
(approximately ___ percent of the total shares of Common Stock outstanding).
Anthony D. Autorino, Chief Executive Officer, President and Chairman of STI and
owner of _____% of the outstanding shares of Common Stock has delivered an
irrevocable proxy to FII in favor of the Merger and Amendments. For additional
information concerning the beneficial ownership of shares of Common Stock, see
"Information About STI - Security Ownership of Certain Beneficial Owners and
Management."
The Board believes that the Merger is fair to the other Stockholders
and in the best interest of STI and its Stockholders, and the Board of Directors
recommends that the Stockholders vote for approval of the Merger and Amendments.
In making this recommendation, the Board is relying upon, among other things,
the opinion of S.G. Warburg & Co. Inc. ("S.G. Warburg"), which STI retained to
determine the fairness, from a financial point of view, of the consideration
offered by STI in the Merger. See "Special Factors - Board of Directors
Determination of Fairness of the Proposal" and "Special Factors - Opinion of
S.G. Warburg."
<PAGE>
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN CONNECTION
WITH THE SOLICITATION OF PROXIES AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY STI, FII OR
ANY OTHER PERSON. THIS PROXY STATEMENT DOES NOT CONSTITUTE THE SOLICITATION OF A
PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO
MAKE ANY SUCH SOLICITATION IN SUCH JURISDICTION. THE DELIVERY OF THIS PROXY
STATEMENT SHALL NOT UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF STI OR FII SINCE THE DATE HEREOF OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
AVAILABLE INFORMATION
STI is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files periodic reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the Commission's
public reference facilities located at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549 and the public reference facilities in the Commission's
New York Regional Office, 7 World Trade Center, Suite 1300, New York, New York
10048 and Chicago Regional Office, Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be
obtained at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549.
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 OR UPON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The date of this Proxy Statement is_____________________, 1995.
<PAGE>
SHARED TECHNOLOGIES INC.
PROXY STATEMENT
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
INTRODUCTION..................................................................................... 1
AVAILABLE INFORMATION............................................................................ 3
SUMMARY OF PROXY STATEMENT....................................................................... 6
Business of the Companies................................................................. 6
The Meeting and Proxy Information......................................................... 7
The Merger and Amendments................................................................. 7
Security Ownership of Management and Certain Other Persons................................ 10
Special Factors........................................................................... 11
Interests of Certain Persons In the Merger................................................ 11
No Appraisal Rights for Stockholders...................................................... 11
Material Federal Income Tax Consequences.................................................. 11
Regulatory Requirements................................................................... 11
Summary Financial Information - STI....................................................... 13
Summary Financial Information - FII....................................................... 13
Summary Pro Forma Financial Information
- STI and FII Combined.................................................................. 15
THE MEETING...................................................................................... 16
General................................................................................... 16
Matters To Be Considered at the Meeting................................................... 16
Board of Directors Recommendation......................................................... 16
Voting at the Meeting; Record Date........................................................ 16
Proxies................................................................................... 17
SPECIAL FACTORS.................................................................................. 18
Background of the Merger.................................................................. 18
Required Financing and Effects Thereof.................................................... 21
Opinion of S.G. Warburg................................................................... 22
FII Recapitalization, Liabilities and Indemnification..................................... 26
Material Federal Income Tax Consequences.................................................. 27
Accounting Treatment of the Merger........................................................ 29
Interests of Certain Persons in the Merger................................................ 29
Effect if the Merger and Amendments are Not Approved...................................... 29
Reasons for the Merger and Amendments; Recommendations
of the Board of Directors............................................................... 29
PROPOSAL TO APPROVE THE MERGER AND AMENDMENTS.................................................... 31
General................................................................................... 31
Certain Effects Of The Merger............................................................. 31
Effective Time............................................................................ 31
Other Terms and Conditions................................................................ 31
Additional Agreements..................................................................... 33
Changes to Bylaws......................................................................... 34
Rights of Dissenting Stockholders......................................................... 34
<PAGE>
Fees and Expenses......................................................................... 35
Regulatory Requirements................................................................... 35
Amendment; Termination ................................................................... 35
PRO FORMA FINANCIAL INFORMATION.................................................................. 37
Pro Forma Consolidated Balance Sheet...................................................... 38
Pro Forma Consolidated Statement of Operations
for the year ended December 31, 1994.................................................... 40
Pro Forma Consolidated Statement of
Operations for the nine months ended September 30, 1995................................. 41
Notes to Unaudited
Pro Forma Financial Statements.......................................................... 42
INFORMATION ABOUT STI............................................................................ 44
Business.................................................................................. 44
Price Range of Common Stock............................................................... 44
Selected Financial Data................................................................... 45
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................... 46
Experts................................................................................... 50
Description of Securities................................................................. 50
Security Ownership of Certain Beneficial Owners
and Management.......................................................................... 54
INFORMATION ABOUT FII............................................................................ 57
Formation, Historical Operations and Recapitalization..................................... 57
Communications Services Business.......................................................... 58
FII Senior Notes.......................................................................... 58
Legal Matters............................................................................. 59
Selected Financial Data................................................................... 60
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................... 61
Experts................................................................................... 64
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF STI................................................ F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF FII................................................ F-37
EXHIBITS
Merger Agreement.......................................................................... A
Opinion of S.G. Warburg & Co., Inc........................................................ B
</TABLE>
<PAGE>
SUMMARY OF PROXY STATEMENT
The following is a summary of certain information contained elsewhere
in this Proxy Statement. Reference is made to, and this summary is qualified in
its entirety by, the more detailed information contained, or incorporated by
reference in, this Proxy Statement and the Exhibits hereto. Unless otherwise
defined herein, capitalized terms used in this summary have the respective
meaning ascribed to them elsewhere in this Proxy Statement. Stockholders are
urged to read carefully this Proxy Statement and the Exhibits hereto in their
entirety.
Business of the Companies
<TABLE>
<S> <C>
Shared Technologies
Inc. ("STI").................. STI was originally incorporated in Delaware on January 30, 1986. By a Plan and
Agreement of Merger dated March 8, 1988, STI effected a statutory merger with and
into Balcon, Inc., a Delaware corporation (incorporated September 23, 1987), which
survived the merger and changed its name to Shared Technologies Inc. Since such
time, STI's primary business has been to provide shared tenant telecommunications
services to tenants of modern, multi-tenant office buildings. The principal
executive offices of STI are located at 100 Great Meadow Road, Wethersfield,
Connecticut 06109.
Fairchild Industries,
Inc. ("FII")................... FII is incorporated in Delaware and is the successor corporation to Fairchild
Industries, Inc., a corporation incorporated in Maryland in 1936, pursuant to a
merger effective on May 4, 1987. FII has historically operated a number of
businesses which have been discontinued but is currently operating through its
wholly owned subsidiary VSI Corporation ("VSI") in its three business segments:
Aerospace Fasteners, Industrial Products and Communications Services, the latter
through Fairchild Communications Services Company. Prior to and as a condition of
the Merger which is the subject of this Proxy Statement, FII, VSI and FII's
parent, RHI Holdings, Inc. ("RHI"), will undergo a recapitalization (the "FII
Recapitalization") to transfer from FII and VSI to FII's parent, RHI Holdings,
Inc., all assets other than those related to its Communications Services business
which furnishes telecommunications services and equipment to tenants of commercial
office buildings. All references to FII in this Proxy Statement, unless stated to
the contrary, are to FII following the FII Recapitalization. The principal
executive offices of FII are located at 300 West Service Road, Chantilly, Virginia
22021-0804. See "Information About FII - Formation, Historical Operations and
Recapitalization."
<PAGE>
The Meeting and Proxy Information
Time, Date and Place........... The Meeting will be held on ______________________,
at _____________________________________________, commencing at _________, local
time, and at any adjournment or postponement thereof.
Record Date; Shares
Entitled to Vote.............. Holders of record of shares of Common Stock on the close of business on December
22, 1995, are entitled to notice of and to vote at the Meeting. At such date,
there were ____________ shares of Common Stock outstanding, each of which will be
entitled to one vote on each matter to be acted upon or which may properly come
before the Meeting.
Vote Required.................. The approval of the Merger and Amendments will require the affirmative vote of the
holders of a majority of the shares of Common Stock outstanding as of the record
date for the Meeting and entitled to vote.
The proxy set forth on the proxy card which is enclosed with this Proxy Statement
contains a space where each Stockholder may indicate whether such Stockholder
chooses to vote such Stockholder's shares of Common Stock in favor of or against
the Merger and Amendments or to abstain from voting. If the proxy is duly completed
and returned to the Transfer Agent, the proxy will be voted in accordance with the
instructions thereon. If a Stockholder returns the proxy duly executed, but does
not indicate the manner in which the proxy will be voted, the proxy will be voted
FOR the Merger and Amendments.
The Merger and Amendments
Purpose of the Meeting;
The Merger.................... The purpose of the Meeting is to consider and vote upon approval of (i) a merger
(the "Merger") by and between STI and FII, pursuant to an Agreement and Plan of
Merger dated as of November 9, 1995 (the "Merger Agreement") as a result of which
the sole holder of FII common stock will receive "Common Consideration" of
6,000,000 shares of Common Stock and shares of Cumulative Convertible Preferred
Stock and Special Preferred Stock (together hereinafter referred to as the
"Preferred Stock") and holders of preferred stock of FII will be paid in the
aggregate "Preferred Consideration" of approximately $44,000,000 (the terms of the
Merger Agreement and Preferred Stock are described in, and a copy of the Merger
Agreement is attached as Exhibit A to, this Proxy Statement, which the Board of
Directors of STI encourages each Stockholder to review carefully), and, (ii) as
required by the Merger Agreement as a condition of the Merger, amendments to the
Certificate of Incorporation of STI to (a) increase the authorized Common Stock
from 20,000,000 to 50,000,000 shares, (b) increase the authorized Preferred Stock
from 10,000,000 to 25,000,000 and (c) change the name of STI to "Shared
Technologies Fairchild Inc." (the "Amendments").
<PAGE>
Certain Effects of
the Merger and
Amendments.................... Upon issuance of the Common Consideration, an additional 6,000,000 shares of
Common Stock will be outstanding and based upon the capitalization of STI as of
_______________, 1995, the sole common stockholder of FII, RHI, will own
approximately 41% of the outstanding shares of STI Common Stock immediately
following consummation of the Merger, and the holders of currently outstanding
shares of Common Stock will decrease their ownership position to 59%. The
Cumulative Convertible Preferred Stock, also issued as part of the Common
Consideration, will be, at the time of issuance, convertible into 3,921,568 shares
of Common Stock thereby providing RHI with the immediate potential for an increased
Common Stock ownership position to 54% (42% on a fully diluted basis. The
Cumulative Convertible Preferred Stock pays dividends of 6% annually and will have
an aggregate liquidation preference (and a mandatory redemption price at the end of
12 years) of $25,000,000 plus an amount equal to the total amount of dividends the
holders would have received if dividends had been paid at the rate of 10%, less the
amount of dividends actually paid. The Special Preferred Stock pays no dividends
but has an initial liquidation preference of $20,000,000 which increases by
$1,000,000 each year to a maximum of $30,000,000. The rights of the Preferred Stock
will be junior to the rights of the Series C Preferred Stock of STI and on parity
with the rights of all other outstanding Preferred Stock of STI. See "Proposal to
Approve the Merger Agreement and Amendments General" and "Information about STI -
Description of Securities".
As a result of the Merger, the Surviving Corporation shall repay an aggregate of
approximately $179,000,000 in indebtedness of FII and shall become liable for other
liabilities of FII's telecommunications business and potentially, as a matter of
law, liabilities of FII's former businesses. See "Special Factors - FII
Recapitalization, Liabilities and Indemnification". STI intends to use funds
obtained from bank financing and the private placement or public sale of debt
securities of the Surviving Corporation (the "Financing") (i) to pay the Preferred
Consideration, (ii) to repay the $179,000,000 of indebtedness of FII, (iii) to
refinance STI's current loan facilities and (iv) to pay the fees and expenses
incurred in connection with the Merger, and it is a condition to the consummation
of the Merger that net proceeds from the Financing be sufficient to pay all of the
foregoing. STI has retained CS First Boston Corporation to raise the needed funds
and to secure a $25,000,000 working capital line of credit and has received a
"highly confident" letter from CS First Boston Corporation with respect to its
ability to secure $260,000,000 in debt. See "Special Factors - Required Financing
and the Effects Thereof" and "FII Recapitalization, Liabilities and
Indemnification".
Concurrently with the Merger, FII's Chief Operating Officer Mel D. Borer will
become President, Chief Operating Officer and a Director of the Surviving
Corporation and RHI shall have the right
<PAGE>
to nominate three additional members of the Board of Directors who shall then be
elected to the Board, with Anthony D. Autorino, STI's Chairman and Chief Executive
Officer, having the right to nominate seven Board members. Additionally, if four
consecutive dividend payments are missed with respect to the Cumulative Convertible
Preferred Stock, FII shall have the right to nominate one additional director and
if eight consecutive dividend payments are missed, FII shall have the right to
nominate a second additional director (with such additional director(s) to be added
in lieu of existing non-RHI directors). Mr. Autorino and RHI have agreed to vote
all of their respective shares of Common Stock in favor of each other's nominees.
See "Proposal to Approve the Merger and Amendments - Certain Effects of the Merger;
Additional Agreements; Description of Securities; Changes to Bylaws".
FII has disclosed to STI that it has entered into two year employment agreements
with 12 employees (including Messrs. Steiner and Borer), each with annual base
salaries exceeding $100,000 and with aggregate annual base salaries aggregating
approximately $1,900,000. The Shareholders Agreement to be entered into among STI,
Mr. Autorino and RHI concurrently with the Merger provides that Jeffrey J. Steiner,
Chairman of the Board, Chief Executive Officer and President of FII, RHI, and The
Fairchild Corporation will be Vice Chairman of the Surviving Corporation. His
salary under the aforesaid employment agreement will be $350,000. Mr. Borer will
have an annual base salary of $250,000. Messrs. Steiner and Borer will also receive
options under STI's 1996 Equity Incentive Plan to purchase ____________ and
___________ shares respectively of the Common Stock of STI. See "Proposal to
Approve the Merger and Amendments - Interests of Certain Persons in the Merger".
Termination of the Merger
Agreement.................... The Merger Agreement may be terminated at any time before or after action thereon
by the Stockholders at the Meeting upon certain events. If the Merger Agreement
is terminated due to action by a party's Board of Directors to withdraw, modify or
amend in an adverse manner its recommendation of the Merger as a result of the
exercise of its fiduciary duties, such party shall be required to pay the other
$5,000,000. See "Proposal to Approve the Merger and Amendments - Amendment,
Termination"; and "Fees and Expenses".
Opinion of the
Financial Advisor.............. The Board of Directors retained the services of S.G. Warburg & Co., Inc. ("S.G.
Warburg") as financial advisor to assist in the consideration of and negotiation
of the Merger and to deliver a fairness opinion with respect to the Merger. By
letter dated November 9, 1995, and addressed to the Board, S.G. Warburg rendered
its opinion that from a financial point of view the financial consideration to be
paid by STI in the Merger upon the terms and conditions set forth in the Merger
Agreement is fair to STI. See "Special Factors - Opinion of S.G. Warburg". S.G.
Warburg did not address the matter of indemnification to be provided to STI by
<PAGE>
FII's affiliates. See "Special Factors - FII Recapitalization, Liabilities and
Indemnifications."
Reasons for the Merger......... The Board of Directors of STI believes that the terms of the Merger are fair to,
and in the best interests of, STI and its Stockholders. STI's Board of Directors
believes that the business combination with FII will further STI's long-term
strategic objective of increasing shareholder value by achieving economies of
scale, expanding geographic coverage and adding products, and thereby increasing
its overall business base for further internal growth and acquisitions. See "The
Meeting - Board of Directors Recommendations; Special Factors - Reasons for the
Merger and Amendments."
Reasons for the
Amendments..................... The Merger Agreement requires that the authorized Common Stock be increased to
50,000,000 from 20,000,000 and that the authorized preferred stock be increased to
25,000,000 from 10,000,000. STI currently has 8,504,823 shares of Common Stock
outstanding with commitments to reserve 5,625,824 additional shares. STI
currently has 10,000,000 shares of authorized preferred stock and the Board has
authorized series or classes thereof aggregating 6,700,000 shares thereunder. An
aggregate of 1,363,772 shares of preferred stock of all designated series are
issued and outstanding. The Board has approved the increases in order to provide
for the issuance of the Common Consideration, including the potential conversion
of the Cumulative Convertible Preferred Stock to provide available Common Stock
for the 1996 Equity Incentive Plan and to provide future flexibility in connection
with acquisitions, stock options and capital raising. See "Information about STI
- Description of Securities".
Recommendation of the
Board of Directors........... The directors of STI approved the Merger and Amendments pursuant to the Merger
Agreement at a meeting on November 9, 1995, and declared it advisable and
recommended a vote in favor of approval by the holders of Common Stock of STI.
See "Special Factors - Reasons for the Merger and Amendments; Recommendations of
the Board of Directors."
SECURITY OWNERSHIP OF
MANAGEMENT AND CERTAIN
OTHER PERSONS................ As of September 30, 1995, directors and executive officers of STI and their
affiliates may be deemed to be beneficial owners of approximately 23.6% of the
outstanding shares of Common Stock at such date. Anthony D. Autorino, Chief
Executive Officer, President and Chairman of the Board of STI has delivered to FII
his irrevocable proxy to vote in favor of the Merger. See "Information About STI
- Security Ownership of Certain Beneficial Owners and Management" and "The Meeting
- Voting at the Meeting; Record Date".
SPECIAL FACTORS................ STI stockholders should consider carefully, before determining how to vote their
shares at the Meeting, certain risks associated with
<PAGE>
merging with FII. See "Special Factors - FII Recapitalization, Liabilities and
Indemnification."
INTERESTS OF CERTAIN PERSONS
IN THE MERGER................ In considering the recommendations of STI's Board of Directors, Stockholders should
be aware that certain members of management and the Board of Directors of STI have
certain interests in the Merger that are in addition to the interests of
Stockholders of STI generally. Prior to the Effective Time, the Surviving
Corporation shall enter into a two-year employment agreement with Anthony D.
Autorino as Chief Executive Officer and Chairman of the Surviving Corporation
providing for an annual base salary of $500,000 and significant severance payments
upon a change of control and shall enter into a two-year employment agreement with
Vincent DiVincenzo as Senior Vice President and Chief Financial Officer of the
Surviving Corporation providing for an annual base salary of $150,000 and
significant severance payments upon a change of control. Additionally, the Board
has approved the adoption of a new stock option plan and the issuance thereunder to
Mr. Autorino and other executive officers of the Surviving Corporation of options
to purchase Common Stock. See "Special Factors - Interests of Certain Persons in
the Merger".
NO APPRAISAL RIGHTS FOR
STOCKHOLDERS................. Stockholders of STI who are opposed to the Merger and vote against or do not vote
for the Merger at the Meeting will have no appraisal rights if the Merger is
approved and consummated. See "Proposal to Approve the Merger and Amendments;
Rights of Dissenting Stockholders".
MATERIAL FEDERAL INCOME
TAX CONSEQUENCES.............. Assuming that (i) the Merger is structured as described in this Proxy Statement,
(ii) RHI enters into the Shareholders Agreement restricting resale of the
securities received by RHI in the Merger and (iii) RHI has no plan or intention of
disposing of the shares of Common Stock and Preferred Stock of STI received
pursuant to the Merger, the Merger should be treated as a reorganization under
section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code")
(a so-called "Type A reorganization"). If the Merger is treated as a Type A
reorganization, FII will not recognize any gain or loss as a result of the Merger,
and the tax basis of the assets of FII in the hands of STI will be the same as the
tax basis of such assets in the hands of FII immediately prior to the Merger.
Notwithstanding whether the Merger is treated as a Type A reorganization, neither
STI nor the current shareholders of STI will recognize any gain or loss as a
result of the Merger. See "Special Factors - Material Federal Income Tax
Consequences".
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
<PAGE>
various state regulatory approvals to transfer from Fairchild Communications
Services Company 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 Cumulative Convertible
Preferred Stock and Special Preferred Stock must be filed with the Secretary of
State of Delaware to establish the Preferred Stock.
</TABLE>
<PAGE>
SUMMARY FINANCIAL INFORMATION - STI
The summary information set forth below is derived from, and should be read in
conjunction with, the selected financial data and consolidated financial
statements and notes thereto of STI and its subsidiaries appearing elsewhere in
this Proxy Statement.
<TABLE>
<CAPTION>
For the nine months For the nine months
Fiscal year ended December 31 ended September 30, 1995 ended September 30, 1994
-------------------------------------------- ------------------------ ------------------------
1992 1993 1994
---- ---- ----
Statements of
Operations Data:
<S> <C> <C> <C> <C> <C>
Net revenues $ 24,077 $ 25,426 $ 45,367 $ 43,675 $ 31,514
Net income 2,724 140 2,286 2,074 1,563
Net income (loss)
per common share .59 (.04) .27 .20 .21
Weighted average
common shares 4,062,710 5,132,296 6,792,277 8,698,207 5,699,483
December 31
1992 1993 1994 September 30, 1995 September 30, 1994
---- ---- ---- ------------------ ------------------
Balance Sheet Data:
Working capital (deficit) $(4,506) $(3,874) $(3,691) $(2,124) $(2,199)
Total assets 18,752 20,601 37,925 47,079 36,737
Long Term Debt 2,282 1,777 2,886 4,012 3,232
Stockholders' equity 6,034 9,302 20,881 23,971 20,414
</TABLE>
<PAGE>
SUMMARY FINANCIAL INFORMATION - FII
The summary information set forth below is derived from, and should be
read in conjunction with, the selected financial data and consolidated financial
statements and notes thereto of FII and its subsidiaries appearing elsewhere in
this Proxy Statement.
<TABLE>
<CAPTION>
(in thousands)
Year ended June 30 Three Months Ended
-------------------- -------------------
October 2, October 1,
1994 1995
(unaudited)
1993 1994 1995
---- ---- ----
Statements of
Operations Data:
<S> <C> <C> <C> <C> <C>
Sales 68,639 74,897 109,741 20,124 33,138
Net income (loss)
after preferred
dividends (16,130) (37,889) (16,261) (668) (581)
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
June 30 October 1, 1995
--------- ---------------
1993 1994 1995 (unaudited)
---- ---- ----
<S> <C> <C> <C> <C>
Working capital 32,279 23,373 57,342 54,824
Total assets 370,750 334,464 359,481 359,366
Total long-term
debt and
obligations
under capital
leases 61,377 183,259 181,309 181,015
Stockholders'
equity 129,521 96,321 110,519 111,258
</TABLE>
<PAGE>
SUMMARY PRO FORMA FINANCIAL INFORMATION - STI AND FII COMBINED
The following summary pro forma financial information is derived from,
and should be read in conjunction with, the separate consolidated financial
statements of each of STI and FII and the notes thereto and the more detailed
pro forma financial information and notes thereto included elsewhere in this
Proxy Statement. All figures are in thousands except for per share and weighted
average information.
STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
Combined
fiscal year Combined nine months
ended ended
Dec. 31, 1994 September 30, 1995
------------- ------------------
<S> <C> <C>
Revenues $175,156 $136,400
Net income
(loss) (9,631) (6,695)
Net income
(loss) per
common share $(0.69) $(0.46)
Weighted average
common shares 14,046,742 14,715,790
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
Combined
Sept. 30, 1995
<S> <C>
Working capital $(2,885)
Total assets 370,314
Long-term debt 239,739
Stockholders'
equity 45,069
(1) See Notes to Unaudited Pro forma Financial Statements.
</TABLE>
<PAGE>
THE MEETING
GENERAL
This Proxy Statement is being furnished to holders of Common Stock in
connection with the solicitation of proxies by the STI Board of Directors for
use at the Meeting to be held on __________________________________________, at
_____________________ ____________________________________, commencing at
________, local time, and at any adjournment or postponement thereof.
This Proxy Statement and the accompanying forms of proxy are first
being mailed to Stockholders of STI on or about December 29, 1995.
MATTERS TO BE CONSIDERED AT THE MEETING
At the Meeting, holders of STI Common Stock will consider and vote upon
(i) the merger of FII with and into STI, with STI as the surviving corporation
(the "Merger") pursuant to the terms of an Agreement and Plan of Merger dated as
of November 9, 1995, as a result of which the sole holder of FII common stock
will receive 6,000,000 shares of STI Common Stock and [shares of STI Cumulative
Convertible Preferred Stock and Special Preferred Stock and (ii) amendments to
the Certificate of Incorporation of STI as required by the Merger Agreement as a
condition to the Merger to: a) increase the authorized Common Stock, $.004 par
value per share of STI to 50,000,000 shares; b) increase the authorized shares
of preferred stock, $.01 par value per share to 25,000,000 shares; and c) change
the name of STI to "Shared Technologies Fairchild, Inc." (the "Amendments").
BOARD OF DIRECTORS RECOMMENDATION
The directors of STI have approved the Merger Agreement and recommended
a vote FOR approval of the Merger and Amendments.
VOTING AT THE MEETING; RECORD DATE
The Board of Directors has fixed December 22, 1995 as the record date
for the determination of the Stockholders entitled to notice of and to vote at
the Meeting. Accordingly, only holders of record of Common Stock on the record
date will be entitled to notice of and to vote at the Meeting. As of
_________________ there were _____________ shares of Common Stock outstanding,
and entitled to vote at the Meeting held by approximately ___ holders of record.
Each holder of record of shares of Common Stock on the record date is entitled
to cast one vote per share on the approval of the Merger and Amendments,
exercisable in person or by properly executed proxy, at the Meeting. On matters
upon which the holders of shares of Common Stock vote, the presence, in person
or by properly executed proxy, of the holders of a majority of the outstanding
shares of Common Stock entitled to vote at the Meeting, is necessary to
constitute a quorum at the Meeting.
The affirmative vote of the holders of a majority of all outstanding
shares of Common Stock and entitled to vote, is required to approve the Merger
and Amendments.
In certain circumstances, a stockholder will be considered to be
present at the Meeting for quorum purposes but will not be deemed to have cast a
vote on a matter. Such circumstances exist when a stockholder is present but
specifically abstains from voting on a matter or when shares are represented at
the Meeting by a proxy conferring authority to vote only on certain matters. In
conformity with Delaware law, shares abstaining from voting or not voted on
certain matters will not be treated as votes cast with respect to those matters,
and therefore will not affect the outcome of any such matter.
<PAGE>
As of September 30, 1995, directors and executive officers of STI and
their affiliates may be deemed to be beneficial owners of approximately 23.6% of
the outstanding shares of STI Common Stock. Anthony D. Autorino, Chief Executive
Officer, President and Chairman of the Board of STI has delivered to FII his
irrevocable proxy to vote for the Merger.
As of ________________, 1995, FII owned no outstanding shares of STI
Common Stock.
PROXIES
This Proxy Statement is being furnished to STI Stockholders in
connection with the solicitation of proxies by and on behalf of the Board of
Directors of STI for use at the Meeting.
All shares of STI Common Stock which are entitled to vote and are
represented at the Meeting by properly executed proxies received prior to or at
the Meeting, and not revoked, will be voted at such Meeting in accordance with
the instructions indicated on such proxies. If no instructions are indicated,
such proxies will be voted:
FOR approval and adoption of the Merger and Amendments.
If any other matters are properly presented at the Meeting for
consideration, including, among other things, consideration of a motion to
adjourn the Meeting to another time and/or place (including, without limitation,
for the purpose of soliciting additional proxies), the persons named in the
enclosed form of proxy and acting thereunder will have discretion to vote on
such matters in accordance with their best judgment.
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before it is voted. Proxies may be revoked by (i)
filing with the Secretary of STI, at or before the taking of the vote at the
Meeting, a written notice of revocation bearing a later date than the proxy,
(ii) duly executing a later dated proxy relating to the same shares and
delivering it to the Secretary of STI before the taking of the vote at the
Meeting, or (iii) attending the Meeting and voting in person (although
attendance at the Meeting will not in and of itself constitute a revocation of a
proxy). Any written notice of revocation or subsequent proxy should be sent so
as to be delivered to Shared Technologies Inc., 100 Great Meadow Road,
Wethersfield, CT 06109, Attention: Secretary, or hand delivered to the Secretary
of STI before the taking of the vote at the Meeting.
All expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement, will be borne by STI. In addition to solicitation
by use of the mails, proxies may be solicited by directors, officers and
employees of STI in person or by telephone, telegram or other means of
communication. Such directors, officers and employees will not be additionally
compensated, but may be reimbursed for reasonable out-of-pocket expenses in
connection with such solicitation. [STI has retained [________________________]
at an estimated cost of $________ plus reimbursement of expenses, to assist in
its solicitation of proxies from brokers, nominees, institutions and
individuals.] Arrangements will also be made with custodians, nominees and
fiduciaries for forwarding of proxy solicitation materials to beneficial owners
of shares held of record by such custodians, nominees and fiduciaries. STI will
reimburse such custodians, nominees and fiduciaries for reasonable expenses
incurred in connection therewith.
A representative of Rothstein, Kass & Company, P.C., STI's principal
accountants for the current year and the most recently completed fiscal year, is
expected to be present at the Meeting and to be available to respond to
appropriate questions.
<PAGE>
SPECIAL FACTORS
BACKGROUND OF THE MERGER
The terms of the Merger are set forth elsewhere in this Proxy
Statement, and the following is a description only of the background and context
of the Board's decision to approve the Merger Agreement. References to terms of
the agreements in this context are not intended to be definitive and
Stockholders should carefully study the particular terms of the Merger as set
forth in other parts of this Proxy Statement.
In June, 1994, the Board appointed an ad hoc committee consisting of
Messrs. Autorino, DiVincenzo, Hutheesing and Decker as a Strategic Steering
Committee to review, analyze and present to the Board strategic alternatives for
STI. Mr. Oakes was subsequently appointed to the Steering Committee in May 1995.
The Steering Committee was charged with reporting back to the Board with
proposals to enhance shareholder value.
The Steering Committee generally reviewed possible acquisition targets
and possible acquirors of STI. STI representatives conducted discussions with
certain of these companies with respect to such possibilities.
Upon recommendation of the Steering Committee, STI engaged the
investment banking firm of S.G. Warburg & Co., Inc. ("S.G. Warburg") to work
with the Steering Committee in developing strategic alternatives. The result of
the efforts of the Steering Committee and S.G. Warburg was a presentation by the
Steering Committee to the full Board on October 19-20, 1995 describing four
alternative courses available to STI: 1) continue to build shareholder value
through organic growth; 2) acquire an existing business for cash or stock or
both; 3) seek a purchaser for STI, or 4) seek a business combination.
The Board determined that although STI did have the option to continue
to grow organically in its core businesses, given the increasing competition in
the telecommunications field by highly capitalized market participants, reliance
on growth without acquisitions did not appear to be a practical way in an
appropriate time frame to improve the valuation of STI in the marketplace. Any
increase in the scale of business from organic growth was viewed as gradual and
less certain than alternatives discussed below.
The Board determined that the most direct way for STI to grow
dramatically and constructively would be to acquire existing businesses. STI's
management believed that this strategy was hampered by the current
undervaluation of STI's shares in the market relative to companies in the
industry and prices paid for comparable companies in acquisitions, which would
make acquisitions strictly through issuance of shares more expensive. STI
regularly uses its available cash for operations and investment in equipment for
expansion of operations, leaving relatively little cash available for
significant acquisitions. Another obstacle was the scarcity of available
acquisition candidates of appropriate size and market position.
Although a sale of STI's business or of STI itself would be an
alternative in that STI's assets, experience, and market position are attractive
to a range of communications companies for a variety of reasons, due to the
deemed undervaluation of the shares of STI, and because other alternatives
appeared to be more promising, the Steering Committee and the Board concluded
that it would not be prudent in the interest of building shareholder value in
the near term to pursue a sale of STI or its assets at this time.
At a special meeting of the Board held on October 19 and 20, 1995, S.G.
Warburg presented a summary of strategic alternatives and an evaluation of the
four courses examined by the Steering
<PAGE>
Committee. For the reasons set forth above, S.G. Warburg recommended that STI
attempt to pursue a merger with a strategically appropriate candidate. STI's
Chairman, Anthony D. Autorino, had by that date engaged in preliminary
discussions with Jeffrey J. Steiner, Chairman of The Fairchild Corporation,
about a possible acquisition by STI of the telecommunications business of FII.
As part of its report to the Board, S.G. Warburg presented and analyzed
the possible structure of a transaction in which STI could acquire the FII
telecommunications business, an enterprise significantly larger than STI's own
operations. Management believed that a combination with FII could circumvent, to
some extent, the pricing issues created by the undervaluation of STI, due to
FII's perceived willingness to remain a significant shareholder in STI and the
perceived ability of the Surviving Corporation to leverage the combined
operations to generate cash payable in the Merger. Therefore, the Board
discussed with S.G. Warburg structuring an offer which included merger
consideration of (i) Common Stock, (ii) preferred stock with a conversion
feature at a price in excess of STI's current trading price, (iii) cash to FII
preferred stockholders and (iv) assumed debt, the latter two components to be
funded by borrowings of the Surviving Corporation. In the course of the meeting,
S.G. Warburg presented a summary of a proposed Merger, including the following:
o An overview of the key elements of the Merger.
o An overview of the aggregate consideration of the Merger being provided to
RHI at face value and at approximate trading value.
o A summary of the sources of financing for the Merger.
o A summary of the advantages and issues of the Merger.
Due to the significant adverse tax impact on The Fairchild Corporation
("TFC"), the parent holding company of RHI Holdings, Inc., the holder of all of
the common stock of FII, of an outright sale of FII's communications assets, TFC
advised STI that the only acceptable approach to an acquisition by STI was a
merger without recognition of gain by TFC for tax purposes. In a merger,
however, the surviving corporation, STI in this case, inherits all of the
liabilities of the acquired company as well as its assets.
A merger with FII was discussed as a unique opportunity for STI. FII is
the largest provider of shared telecommunications services in the country, with
revenues nearly double those of STI. FII is in the same business as STI, located
in 23 cities in the United States including many locations where STI has no
presence. FII recently acquired JWP Telecom, Inc. with its complementary
"systems" business, through which it sells and services telecommunications
equipment, and this would give STI improved access to potential customers. In
addition, a merger with FII would bring to STI a pool of experienced managers
who could be instrumental in the growth of STI.
Finally, according to the analysis conducted by STI, a combination with
such a closely related business would result in significant economies of scale,
or synergies, in terms of bulk purchasing of long distance services, sharing of
infrastructure, management combinations and marketing efficiencies.
STI reviewed the potential liabilities arising as a result of a merger,
and identified three primary areas of concern. These are liabilities outside of
FII's communications business for which STI would become legally responsible and
include: (i) approximately $50,000,000 present value in unfunded post-retirement
health benefits payable on behalf of former FII employees, (ii) a dispute with
the United States Government under Government Contract Accounting rules
concerning potential liability of FII arising out of the use of and accounting
for approximately $50,000,000 in excess pension funds relating to certain
government contracts in the discontinued aircraft production business of FII,
and (iii) certain claims relating to remediation of environmental damage
resulting from discontinued FII operations. Based on a review of engineering
studies conducted for FII of claims for known contamination, STI estimates that
it is reasonably possible that the costs resulting from such claims could range
from $8,000,000 to $30,000,000, although further investigation could result in
either a lower or higher estimated cost level. There may be off-sets from
third-party claims or
<PAGE>
insurance recoveries which would reduce potential liability. STI's estimates did
not include any claims for unknown liabilities for properties not yet surveyed
for environmental contamination which could have occurred as long ago as thirty
years.
A principal subject of negotiations between STI and FII was the matter
of handling the liabilities of FII arising from non-communications activities.
The negotiated result, as described in further detail elsewhere in this Proxy
Statement (see "FII Recapitalization, Liabilities and Indemnification"), was to
have TFC and RHI indemnify STI for all such liabilities. In addition, the TFC
affiliates holding the aircraft fasteners business and assets and the entity
holding the D-M-E industrial mold business and assets are to indemnify STI
indefinitely for liabilities arising out of their respective businesses. As
further security, it was agreed that the Preferred Stock to be delivered as part
of the Common Consideration for the Merger (excluding cumulative Convertible
Preferred Stock with a face liquidation preference of $1,500,000) would be
pledged by RHI as security for the indemnification agreements for not less than
three years and until such time as TFC's audited balance sheet reflected a GAAP
net worth of at least $225,000,000, including for such purpose the value of the
Preferred Stock, and until such net worth had grown at least $25,000,000 from
September 30, 1995, not including for such purpose any net worth attributable to
investments in the Preferred Stock in STI. See "FII Recapitalization,
Liabilities and Indemnification" and "Proposal to Approve the Merger and
Amendments - Additional Agreements".
STI and FII representatives negotiated the terms of a merger agreement
for presentation to the two companies' boards of directors during the period
between October 19, 1995 and November 9, 1995. Contemporaneously, STI's
management conferred with representatives of CS First Boston and engaged that
firm to seek approximately $260,000,000 in debt financing to be incurred by the
corporation which would survive the merger. The proceeds of the debt financing
would be used primarily to issue cash consideration to the holders of preferred
stock of FII, and to retire certain debt of FII, all as part of the Merger.
On November 9, 1995, STI's Board of Directors held a meeting at which
S.G. Warburg made a presentation updating its presentation to the Board on
October 19, 1995. S.G. Warburg stated that the proposed Merger Agreement
reflected in substance the transaction structure discussed at the October 19,
1995 meeting, and S.G. Warburg highlighted modifications concerning certain
financial aspects which had been agreed between STI and FII and the financial
implications of such modifications on the combined company. S.G. Warburg further
stated that its continuing analysis had, in fact, increased the estimate of the
financial benefits of the synergies arising from a merger with FII. S.G. Warburg
also presented its letter concluding that the consideration paid by STI for the
Merger was fair from a financial point of view to STI. In addition to discussing
the analysis conducted relative to the rendering of its fairness opinion, S.G.
Warburg presented to the Board the following analyses for consideration by the
Board:
o An estimated pro forma combined income statement of the combined
company for the five-year period following the consummation of the Merger.
o A pro forma earnings per share dilution analysis for the combined
company for the five-year period following the consummation of the Merger.
o An analysis of pro forma cash flow for the combined company for the
five-year period following the consummation of the Merger.
o A pro forma EBITDA analysis (including projected synergies), income
tax calculations (including projected utilization of net operating loss carry
forwards) and a pro forma combined cash flow statement and a debt amortization
schedule, all estimated for the five-year period following the consummation of
the Merger.
<PAGE>
o An analysis of relative credit ratios including total debt to EBITDA,
total debt and preferred stock to EBITDA, EBITDA to net interest, EBITDA to net
interest and preferred dividends and EBITDA less capital expenditures to gross
interest.
o An analysis of the share ownership of STI by STI's management and
shareholders and FII's shareholders, both on a stand-alone basis and pro forma
giving effect to the Merger.
o A pro forma debt paydown and interest expense table of the combined
company, estimated for the five-year period following the consummation of the
Merger and a pro forma balance sheet for the combined company.
The Board of Directors discussed certain elements of the transaction,
in particular the potential impact on the price of the shares of Common Stock
and the scope of the exposure to pre-merger liabilities of FII. The Board then
voted to approve the Merger Agreement and to recommend its approval to the
Stockholders.
REQUIRED FINANCING AND EFFECTS THEREOF
In order to pay the Preferred Consideration (approximately
$44,000,000), repay $125,000,000 in face principal amount of the FII Senior
Notes and pay an amount of bank and other indebtedness of FII equal to
approximately $54,000,000 and to refinance STI's current borrowing facilities
STI plans to borrow the requisite funds through the issuance of senior and
subordinated debt instruments. STI has received a letter from CS First Boston
Corporation ("CS First Boston") stating that it is "highly confident" that it
can raise $260,000,000 in debt in connection with the Merger, which would
include a $25,000,000 working capital line of credit. 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 "Proposal to Approve the Merger and Amendments
- - Fees and Expenses" and "Proposal to Approve the Merger and Amendments -
Amendment, Termination."
OPINION OF S.G. WARBURG
The Board of Directors of STI initially engaged S.G. Warburg & Co. Inc.
("S.G. Warburg") to act as financial advisor with respect to the examination of
various strategic options available to STI. As part of that engagement, the
Board of STI requested that S.G. Warburg assist it in preparing for, considering
and negotiating a merger between STI and FII. S.G. Warburg has delivered its
written opinion to the Board of Directors of STI that, as of November 9, 1995,
the financial consideration to be paid upon the terms and conditions set forth
in the Merger Agreement dated November 9, 1995 between STI and FII is fair, from
a financial point of view, to STI. STI stockholders are urged to read this
opinion in its entirety for assumptions made, matters considered and limits of
review by S.G. Warburg. S.G. Warburg did not make or seek to obtain an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of STI or FII, nor did S.G. Warburg make any physical inspection of
the properties or assets of STI or FII. STI discussed the liabilities of FII and
the risks associated therewith with its legal and financial advisors. However,
the opinion of S.G. Warburg does not address the indemnification to be provided
to STI by TFC, RHI and their respective affiliates. See "Special Factors - FII
Recapitalization, Liabilities and Indemnification" and "Reasons for the Merger
and Amendments; Recommendations of the Board of Directors". No limitations were
imposed by the STI Board upon S.G. Warburg with respect to the investigations
made or procedures followed by it in rendering its opinion. S.G. Warburg has not
been requested to update its opinion to the date of this Proxy Statement.
<PAGE>
THE FULL TEXT OF THE OPINION OF S.G. WARBURG, WHICH SETS FORTH
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN BY S.G.
WARBURG, IS ALSO ATTACHED HERETO AS EXHIBIT B TO THIS PROXY STATEMENT. S.G.
WARBURG'S OPINION IS DIRECTED ONLY TO THE FINANCIAL TERMS OF THE MERGER AND DOES
NOT CONSTITUTE A RECOMMENDATION TO ANY STI STOCKHOLDER AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE MEETING. THE SUMMARY OF THE OPINION OF S.G.
WARBURG SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In arriving at its opinion, S.G. Warburg (i) reviewed the consolidated
financial statements of recent years of The Fairchild Corporation and Fairchild
Industries, Inc. as filed with the Securities and Exchange Commission; (ii)
reviewed certain audited financial statements for STI for the three years ending
December 31, 1994 and more recent unaudited financial information (including
that for the six months ended June 30, 1995); (iii) reviewed certain internal
financial statements relating to STI prepared by the management of STI and
certain internal financial statements relating to FII prepared by the management
of FII; (iv) reviewed certain financial projections of STI and FII prepared by
their respective management; (v) discussed the past and current operations and
financial condition and prospects of STI and FII with their respective senior
management; (vi) analyzed the pro forma impact of the merger on STI; (vii)
reviewed certain financial and stock market information of certain companies
S.G. Warburg deemed appropriate in analyzing STI and FII, as well as the
financial terms of certain other related transactions; (viii) participated in
selected discussions and negotiations among representatives of STI and FII and
their respective advisors; (ix) reviewed the Merger Agreement, the Shareholders'
Agreement, the Registration Rights Agreement and other relevant documentation
concerning the transaction; and (x) performed such other financial studies,
analyses and examinations and considered such other factors as S.G.
Warburg deemed relevant.
In arriving at its opinion, S.G. Warburg relied, without independent
verification, upon the accuracy and completeness of all financial and other
information publicly available or furnished to or otherwise discussed with it,
including information prepared by STI management. With respect to financial
forecasts and other information provided to or otherwise discussed with it, S.G.
Warburg assumed that such forecasts and other information were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the respective senior managements of STI and FII as to the expected
future financial performance of STI and FII. S.G. Warburg also relied upon the
views of the management of STI and FII in assuming that certain long-term
strategic benefits, both operational and financial, will result from the Merger.
S.G. Warburg expressed no opinion as to the price at which the Common Stock and
preferred stock of the Surviving Corporation will trade subsequent to the
Merger. S.G. Warburg's opinion was based upon financial, stock market and other
conditions and circumstances existing and disclosed to it as of the date of its
opinion.
In delivering its opinion and discussing the proposed transaction with
the Board of Directors of STI, S.G. Warburg presented certain of the foregoing
information in the form of analyses and valuation summaries to the Board. The
initial meeting with the Board was held on October 19-20, 1995, and an update
concerning the financial aspects relating to the Merger was provided to the
Board on November 9, 1995.
October 19-20, 1995 STI Board Presentation
At the October 19-20, 1995 meeting of the STI Board of Directors, S.G.
Warburg presented information concerning major developments and reviewed
materials relating to the following matters: (i) strategic alternatives
available to STI, including the proposed Merger, (ii) a valuation of FII and
potential synergies made possible by the proposed Merger, (iii) the pro forma
impact to STI of the Merger, and (iv) quantitative analysis relating to the
foregoing matters.
November 9, 1995 STI Board Presentation
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At the November 9, 1995 meeting of the STI Board of Directors, S.G.
Warburg made a presentation concerning material changes to the financial terms
of the Merger since the October 19, 1995 meeting. S.G. Warburg also reviewed the
conclusions of its fairness opinion as outlined below.
THE PROPOSED MERGER
Valuation Analyses
S.G. Warburg reviewed with the STI Board the analyses discussed below
relating to the valuation of FII. Several valuation techniques were applied to
determine value.
Introduction to Comparable Companies and Precedent Transactions Analysis
In the absence of companies publicly traded in directly comparable
lines of business, S.G. Warburg analyzed the U.S. long-distance reseller
industry and the U.S. business and government telecommunications systems
industry.
Analysis of Public Trading Valuation of Selected Comparable Companies
The market multiples analysis which S.G. Warburg applied in its
valuation performs two functions: (i) it compares how the selected comparable
companies are valued by the stock market, and (ii) it calculates an implied
value of the target company by assuming that the target trades in the public
market with multiples similar to those of other publicly traded companies in its
industry.
S.G. Warburg presented to the STI Board an analysis of the public
trading valuation of selected comparable companies, including share price,
market value, adjusted market value, multiples of market value and multiples of
adjusted market value. All earnings per share figures for the comparable
companies were based on the consensus net income estimates of selected
investment banking firms and all earnings per share estimates for STI were based
on internal estimates.
Such comparable companies that S.G. Warburg examined included: ACC
Corp.; AmeriConnect, Inc.; Frontier Corp.; Incomnet, Inc.; LCI International,
Inc.; MFS Communications Company, Inc.; Network Long Distance, Inc.; Phoenix
Network, Inc.; Total-Tel USA Communications, Inc.; UStel, Inc.; U.S. Long
Distance Corp.; US Wats, Inc.; WinStar Communications, Inc.; and WorldCom Inc.
S.G. Warburg compared market values as multiples to, among other
things, latest 12 months and estimated fiscal 1995 and 1996 net income for both
industries. The respective multiples of the long-distance reseller companies
were between the following ranges: (i) latest 12 months net income: 6.3x to
63.3x (with a mean of 34.3x and a median of 30.6x) and (ii) estimated 1995 net
income: 4.1x to 13.9x (with a mean of 10.5x and a median of 13.7x). The
respective multiples of the telecommunications systems companies were between
the following ranges: (i) latest 12 months net income: 15.6x to 61.4x (with a
mean of 29.2x and a median of 20.0x); (ii) estimated 1995 net income: 15.9x to
24.7x (with a mean of 18.8x and a median of 17.3x); and (iii) estimated 1996 net
income: 11.8x to 19.5x (with a mean of 14.9x and a median of 14.2x).
S.G. Warburg compared adjusted market capitalization to, among other
things, latest twelve months revenues, earnings before interest and taxes plus
depreciation and amortization ("EBITDA") and the sum of (x) EBITDA and (y)
selling, general and administrative (SG&A) expenses. The respective multiples of
the long-distance reseller companies were between the following ranges: (i)
latest 12 months net revenue: 0.60x to 1.26x (with a mean of 0.92x and a median
of 0.81x); (ii) latest 12 months EBITDA: 6.7x to 49.0x (with a mean of 26.2x and
a median of 24.4x); and (iii) latest twelve months EBITDA+SG&A: 0.6x to 6.4x
(with a mean of 2.8x and a median of 2.6x). The respective multiples of the
telecommunications systems companies were between the following ranges:
<PAGE>
(i) latest 12 months net revenue: 1.0x and 3.1x (with a mean of 1.7x and a
median of 1.3x); (ii) latest 12 months EBITDA: 5.2x to 15.2x (with a mean of
8.8x and a median of 7.3x); and (iii) latest 12 months EBITDA+SG&A: 3.1x to 7.8x
(with a mean of 4.7x and a median of 3.3x).
S.G. Warburg also presented an analysis of operating statistics of the
comparable companies including, among other things, operating margins (in
relation to EBITDA, EBIT and net income) and estimated five-year earnings per
share growth rates.
The multiples applied to FII result in an implied enterprise value
range, excluding any acquisition premium, of approximately $230,000,000 to
$250,000,000.
Analysis of Selected Precedent Transactions
The precedent transactions analysis examines various financial
multiples that were paid in selected merger and acquisition transactions
involving companies in the same industry as the target. These multiples are then
applied to the financial statistics of the target company to arrive at a value
range for the target company in the context of an arms-length negotiated
transaction.
S.G. Warburg analyzed, among other things, the implied multiples paid
in relation to revenues, earnings before income, taxes, depreciation and
amortization (EBITDA), and the sum of (x) EBITDA and (y) SG&A Expenses of the
selected mergers and acquisitions. S.G. Warburg compared these multiples with
the implied multiples under the terms of the Merger.
Among the precedent transactions that S.G. Warburg reviewed were the
acquisition of ITC, Inc. by U.S. Long Distance Corp., the acquisition of
Corporate Telemanagement Group by LCI International Inc., the acquisition of
Enhanced Telemanagement, Inc. by Frontier Corp., the acquisition of WCT
Communications, Inc. by Rochester Telephone Corp., the acquisition of RealCom
Office Communications by MFS Communications Company, Inc., the acquisition of
Centex Telemanagement Inc. by MFS Communications Company, Inc., the acquisition
of Advanced Telecommunications Corp. by LDDS Communications Inc., and the
acquisition of Telecom USA, Inc. by MCI Communications Corporation.
The multiples of revenues, EBITDA, and EBITDA+SG&A were between the
following ranges: (i) revenues: 0.7x to 2.2x (with a mean of 1.3x and a median
of 1.2x); (ii) EBITDA: 9.3x to 13.0x (with a mean of 11.3x and a median of
11.6x); and (iii) EBITDA+SG&A: 1.6x to 4.8x (with a mean of 3.3x and a median of
3.3x).
The multiples applied to FII result in an implied enterprise value
range of approximately $245,000,000 to $300,000,000.
No company, transaction or business used in the comparable company and
selected merger and acquisition transactions analyses as a comparison is
identical to STI or FII or the Merger. Accordingly, an analysis of the results
of the foregoing is not entirely mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics and other factors that can affect the acquisition or public
trading value of the comparable companies or the business segment or company to
which they are being compared.
Discounted Cash Flow Analysis
The discounted cash flow ("DCF") analysis performed by S.G. Warburg
calculated the present value of the target company based on the combination of
two components: (i) the present value of projected future cash flows from
operations for the five-year period commencing in 1996, and (ii) the present
value of an estimated terminal value based on a range of multiples of EBITDA at
some future point in time.
<PAGE>
In its DCF analysis, S.G. Warburg applied discount rates ranging
between 12% and 16%, and applied terminal value multiples ranging between 7.0x
and 8.0x EBITDA. This analysis resulted in an implied enterprise value range of
approximately $230,000,000 to $260,000,000.
Additionally, S.G. Warburg discussed with the STI Board a DCF analysis
including forecast increases in pro forma combined operating profit resulting
from the combination of the businesses ("synergies") as estimated by the
managements of STI and FII. Utilizing the same discount rate and terminal value
multiples as above, this analysis resulted in an implied enterprise value range
of approximately $255,000,000 to $290,000,000. Accordingly, on a DCF basis, this
analysis resulted in an implied value range of the synergies of approximately
$25,000,000 to $30,000,000.
PRO FORMA IMPACT ANALYSIS
S.G. Warburg presented to the STI Board information concerning the pro
forma impact of the Merger based upon the detailed quantitative analysis
discussed below.
S.G. Warburg presented to the STI Board an analysis of the transaction
structure and Merger setting forth the kind and amount of securities to be
issued and the sources and uses of funds in the Merger. S.G. Warburg also
discussed the impact of the use of preferred stock as part of the consideration
in the Merger.
S.G. Warburg also presented an analysis of the pro forma impact of the
Merger to STI on a stand-alone basis, including estimated revenue, EBITDA, cash
flow and net income, as well as leverage, estimated earnings per share, cash
flow per share and EBITDA per share for 1995 (pro forma for the transaction) and
1996. S.G. Warburg noted that the impact of the Merger for 1996 when compared
against STI on a stand-alone basis is significantly dilutive as to estimated
earnings per share but accretive as to both estimated cash flow per share and
EBITDA per share. The pro forma analysis assumed a certain level of long-term
strategic benefits which were based upon the views of STI's management.
In arriving at its opinion, S.G. Warburg performed a variety of
financial analyses, the material portions of which are summarized above. The
summary set forth above does not purport to be a complete description of the
analyses performed by S.G. Warburg. In addition, S.G. Warburg believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all such
factors and analyses, could create a misleading view of the process underlying
its analyses set forth in its opinion. The matters considered by S.G. Warburg in
arriving at its opinion are based on numerous macroeconomic, operating and
financial assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond STI's or FII's
control. Any estimates incorporated in the analyses performed by S.G. Warburg
are not necessarily indicative of actual past or future results or values, which
may be significantly more or less favorable than such estimates. Estimated
values do not purport to be appraisals and do not necessarily reflect the prices
at which businesses or companies may be sold in the future, and such estimates
are inherently subject to uncertainty. Arriving at a fairness opinion is a
complex process, not necessarily susceptible to partial or summary description.
No company utilized as a comparison is identical to STI or FII. Accordingly, an
analysis of comparable companies and comparable business combinations resulting
from the transactions is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the comparable companies and other factors that could affect
the value of the comparable companies or company to which they are being
compared.
The STI Board selected S.G. Warburg as its financial advisor because it
is an internationally recognized investment banking firm and S.G. Warburg has
substantial experience in transactions similar to the Merger and is familiar
with STI and its business. S.G. Warburg is an investment banking
<PAGE>
firm engaged, among other things, in the valuation of businesses and their
securities in connection with mergers and acquisitions. Prior to its engagement
to act as financial advisor with respect to the examination of various strategic
options available to STI in July 1995, S.G. Warburg had not rendered any
investment banking services to STI.
Pursuant to the terms of an engagement letter amended November 8, 1995,
STI has paid S.G. Warburg monthly retainers aggregating $150,000 in relation to
the examination of various strategic options available to STI. Additionally,
S.G. Warburg will receive a fee of $1,100,000 for acting as financial advisor in
connection with the Merger, including rendering its opinion. In addition, STI
has agreed to retain S.G. Warburg (and any successor firm) as its financial
advisor for the next three years for which S.G. Warburg will receive an annual
retainer of $250,000. Whether or not the Merger is consummated, STI has also
agreed to reimburse S.G. Warburg for its reasonable out-of-pocket expenses,
including all reasonable fees and disbursements of counsel, and to indemnify
S.G. Warburg and certain related persons against certain liabilities relating to
or arising out of its engagement, including certain liabilities under the
federal securities laws.
FII RECAPITALIZATION, 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.
Prior to the Merger, and as a precondition of the Merger, FII, its parent and
RHI's parent, The Fairchild Corporation ("TFC") and certain other subsidiaries
of TFC will undergo a recapitalization pursuant to which FII will divest itself
of all assets unrelated to the communications business (the "Communications
Business"). RHI will assume all liabilities of FII unrelated to the
Communications Business, including but not limited to: (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; (iv) a secured note payable in an
aggregate principal amount of approximately $3,300,000 at September 30, 1995;
and (v) all other accrued liabilities and any and all other unasserted
liabilities unrelated to FII's Communications Business (the "Non-communications
Liabilities"). See "Special Factors - Background of the Merger" and "Information
About FII - Legal Proceedings".
In the Merger Agreement, TFC, RHI and FII make representations and
warranties with respect to the Communications Business and the Merger Agreement
provides that STI and TFC on the one hand and RHI 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 Common Stock having a fair market value
equal to the loss to the party it must indemnify.
While TFC 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 D-M-E, Inc., a company to be formed in the
FII Recapitalization ("D-M-E") and Fairchild Fasteners, Inc. will enter into
Indemnification Agreements with respect to the respective liabilities of the
plastic and injection molding and aerospace and industrial fasteners businesses
formerly 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 Cumulative Convertible Preferred Stock
(other than an amount equal to $1,500,000 in initial liquidation preference) and
the
<PAGE>
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 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 Preferred Stock or for any amount owed in excess of the liquidation
value of such 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 TFC 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).
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Neither STI nor its current Stockholders (the "Current Stockholders")
will recognize any gain or loss as a result of the Merger. Assuming that (i) the
Merger is structured as described in this Proxy Statement, (ii) RHI enters into
the Shareholders Agreement including a lock-up provision with respect to the
resale of STI stock (as described below) and (iii) RHI has no plan or intention
of disposing of the shares of Common Stock and Preferred Stock of STI received
pursuant to the Merger, the Merger should be treated as a reorganization under
section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the
"Code") (a so-called "Type A reorganization"). If the Merger is treated as a
Type A reorganization, FII will not recognize any gain or loss as a result of
the Merger, and the tax basis of the assets of FII in the hands of STI will be
the same as the tax basis of such assets in the hands of FII immediately prior
to the Merger.
The following is a summary of the material federal income tax
consequences to STI and the Current Stockholders as a consequence of the Merger,
based upon the advice of Gadsby & Hannah, as tax advisor to STI. This discussion
is based upon the laws, regulations and reported rulings and decisions in effect
as of the date of this Proxy Statement (or, in the case of certain regulations,
proposed as of such date), all of which are subject to change, retroactively or
prospectively, and to possibly differing interpretations.
No ruling on the federal income tax consequences of the Merger has been
or will be requested from the Internal Revenue Service or from any other tax
authority. FII, with respect to the FII Recapitalization, is seeking a ruling
with respect to the tax consequences thereof, the receipt of which is a
condition to the Merger. See "Proposal to Approve the Merger and Amendments -
Other Terms and Conditions". Moreover, this discussion does not address any
foreign, state or local income or other tax consequences of the Merger.
ACCORDINGLY, EACH CURRENT STOCKHOLDER IS STRONGLY URGED TO CONSULT SUCH
CURRENT STOCKHOLDER'S OWN TAX ADVISOR REGARDING ANY SPECIFIC TAX CONSEQUENCES OF
THE MERGER, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, INCOME AND OTHER TAX
CONSEQUENCES OF THE MERGER AND POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
Federal Income Tax Consequences for STI and FII. STI will not recognize
any gain or loss as a result of the Merger.
<PAGE>
The federal income tax consequences of the Merger for FII will depend
upon whether or not the Merger is treated as a reorganization under section
368(a)(1)(A) of the Code (a so-called "Type A reorganization") for federal
income tax purposes.
In order to qualify as a Type A reorganization, the Merger must satisfy
four requirements. First, the Merger must qualify as a merger or consolidation
under state law. Second, the Merger must have a bona fide business purpose
(other than tax avoidance). Third, after the Merger, STI must continue FII's
communications business or use a significant portion of FII's "historic business
assets" in its business. Fourth, the shareholders of FII immediately before the
Merger must, in the aggregate, maintain a significant continuing equity interest
in the Surviving Corporation after the Merger (the "Continuity of Interest
Test"). It is the judgment of Gadsby & Hannah that the fact that RHI is the only
pre-Merger FII shareholder that receives an equity interest in STI pursuant to
the Merger notwithstanding, the Continuity of Interest Test will be met if the
value of the Common Stock and Preferred Stock of STI received by RHI pursuant to
the Merger has a value equal to at least 50 percent of the value (measured at
the time of the Merger) of the total consideration paid by STI to the
shareholders of FII, and RHI actually retains ownership of such stock for at
least two years (assuming that at the time of the Merger, RHI has no plan or
intention to dispose of the Common Stock and Preferred Stock of STI received by
RHI in the Merger). Therefore, if (i) the Merger is structured as described in
this Proxy Statement, (ii) RHI enters into a Lock-Up Agreement (as defined
below) and (iii) RHI has no plan or intention of disposing of the shares of
Common Stock and Preferred Stock of STI, then the Merger should qualify as a
Type A reorganization for federal income tax purposes.
If the Merger qualifies as a Type A reorganization, FII will not
recognize any gain or loss as a result of the Merger and the tax basis of the
assets of FII in the hands of STI will be the same as the tax basis of such
assets in the hands of FII immediately prior to the Merger. The holding period
of the assets of FII received by STI will include the period during which such
assets were held by FII.
If the Merger does not qualify as a Type A reorganization, it most
likely will be treated as a taxable exchange of FII's assets for shares of
Common Stock and Preferred Stock of STI and cash, followed by a liquidation of
FII in which the shareholders of FII immediately before the Merger receive the
Merger consideration. Under such treatment, STI's tax basis of the assets of FII
in the hands of STI would be the fair market value of the Merger consideration
(which includes the value of the Common Stock and Preferred Stock of STI, the
cash consideration and the amount of FII's liabilities assumed by STI), and the
holding period of the assets of FII received by STI would begin on the date of
the Merger.
Federal Income Tax Consequences for the Current Stockholders. Whether
or not the Merger qualifies as a Type A reorganization, the Current Stockholders
will not recognize any gain or loss as a result of the Merger.
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.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of STI's Board of Directors,
Stockholders should be aware that certain members of management and the Board of
Directors of STI have certain interests in the Merger that are in addition to
the interests of Stockholders of STI generally. Prior to the Effective Time, the
Surviving Corporation shall enter into a two-year employment agreement with each
of Mr.
<PAGE>
Autorino and Mr. DiVincenzo as Chief Executive Officer and Chairman, and Senior
Vice President and Chief Financial Officer, respectively, of the Surviving
Corporation, providing for annual base salaries of $500,000 and $150,000,
respectively, and significant severance payments upon a change of control.
Messrs. Autorino, DiVincenzo, _______, and have received options for ______,
______, _____, and _____ shares respectively. Neither Mr. Autorino nor Mr.
DiVincenzo currently has an employment agreement but are paid annual salaries of
$330,000 and $115,000, respectively. Additionally, the Board adopted the 1996
Equity Incentive Plan (the "1996 Plan") providing for issuance of options to
employees and _____ to purchase up to 1,500,000 shares of Common Stock as
determined by the [Compensation Committee]. The [Compensation Committee] has
also approved the issuance under the 1996 Plan thereunder to Mr. Autorino and
other executive officers of the Surviving Corporation [effective upon the
Merger] of options to purchase Common Stock.
EFFECT IF THE MERGER AND AMENDMENTS ARE NOT APPROVED
If the Merger and Amendments are not approved as required by the Merger
Agreement, each party bears its own fees and expenses and shares the $1,000,000
"highly confident" letter fee of CS First Boston. STI will most likely continue
to pursue additional acquisitions or business combinations to further its long
term objective to maximize shareholder value. See "Fees and Expenses".
REASONS FOR THE MERGER AND AMENDMENTS; RECOMMENDATIONS OF THE BOARD OF DIRECTORS
The Board of Directors of STI believes that the terms of the Merger
Agreement are fair to, and in the best interests of, STI and its stockholders.
Accordingly, the Board of Directors of STI has approved the Merger Agreement,
declared it advisable and recommended the approval by STI Stockholders of the
Merger and Amendments. STI's Board of Directors believes that the business
combination with FII will further STI's long-term strategic objective to
maximize shareholder value.
In reaching its determinations and recommendations described above, the
Board of Directors of STI considered the factors described below:
(i) The opinion of S.G. Warburg;
(ii) Information with respect to the financial condition,
business, operations and prospects of both STI and
FII, on both an historical and prospective basis;
(iii) Information with respect to the terms and structure
of the Merger including the business, financial and
tax aspects to STI;
(iv) That significant benefits will inure to STI from the
integration of the operations, management,
capabilities and purchasing power of the operations
of the two companies and the increase in the
geographic scope of operations;
(v) That STI would require significant infusions of
capital or an affiliation with another entity to
preserve and expand its current business and thereby
increase its competitiveness and profitability;
(vi) That after considering a range of possible
alternative transactions, there was substantial
uncertainty as to STI's ability to consummate an
alternative transaction or series of transactions on
satisfactory terms within a reasonable time; and
(vii) That increasing the authorized Common Stock and
preferred stock will provide the Surviving
Corporation with an increased ability to consider
and consummate acquisitions and to raise capital.
<PAGE>
In view of the wide variety of factors considered by the STI Board of Directors
in connection with its evaluation of the Merger and Amendments, the STI 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 the
factors identified in subsections (i), (ii), (iii) and (iv) above were
particularly significant to the deliberations of the STI Board of Directors.
The STI Board believes that the terms of the Merger are fair to the STI
stockholders, and THE STI BOARD OF DIRECTORS RECOMMENDS THAT STI STOCKHOLDERS
APPROVE THE MERGER AND AMENDMENTS. The STI Board has authorized consummation of
the Merger subject to the approval of the STI Stockholders and certain other
conditions. See "Proposal to Approve the Merger and Amendments - Other Terms and
Conditions."
<PAGE>
PROPOSAL TO APPROVE THE MERGER AND AMENDMENTS
The following information is not intended to be a complete description
of all information relating to the Merger and Amendments and is qualified in its
entirety by reference to more detailed information contained elsewhere in this
Proxy Statement, including the Exhibits hereto. A copy of the Merger Agreement
is attached as Exhibit A and is incorporated herein by reference.
GENERAL
The Merger Agreement provides for the merger of FII with STI, with STI
surviving the Merger with the new name "Shared Technologies Fairchild Inc."
(hereinafter sometimes referred to as the "Surviving Corporation"). 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 in the aggregate (i) 6,000,000
shares of Common Stock, (ii) shares of Cumulative Convertible Preferred Stock
paying a 6% initial annual dividend and having an aggregate liquidation
preference (and a mandatory redemption price at the end of 12 years) of
$25,000,000 plus an amount equal to the total amount of dividends the holders
would have received if dividends had been paid at the rate of 10% less the
amount of dividends actually paid and (iii) shares of Special Preferred Stock
having an initial aggregate liquidation preference of $20,000,000, which
increases $1,000,000 each year after 1996 to a maximum liquidation preference of
$30,000,000. The Special Preferred Stock also features certain mandatory
redemption provisions. In the Merger, certain shares of preferred stock of FII
owned by RHI will be canceled and all other holders of preferred stock of FII
will be paid cash by STI aggregating approximately $44,000,000 (which equals the
aggregate liquidation preference of such securities) plus dividends accrued to
the date of payment. See "Information about STI Description of Securities". Upon
the filing of the Certificate of Merger the Amendments will become effective to
cause the name change and to increase the authorized Common Stock, $.004 par
value per share from 20,000,000 to 50,000,000 shares and to increase the
authorized shares of preferred stock from 10,000,000 to 25,000,000. See
"Information About STI - Description of Securities".
CERTAIN EFFECTS OF THE MERGER
As a result of the Merger, the holders of the currently outstanding
shares of Common Stock will decrease their ownership position from 100% to 59%.
A single stockholder, RHI, will own 41% of the outstanding Common Stock of the
Surviving Corporation. RHI, Mr. Autorino (who, upon the Merger will own 8.36% of
the outstanding Common Stock of the Surviving Corporation) and STI shall, as a
precondition to the Merger, enter into a Shareholders' Agreement pursuant to
which they agree to cause the Board of Directors to consist at all times of
eleven directors, with RHI having the ability to nominate three (four at such
time as Mr. Borer is not also a director) and Mr. Autorino having the ability to
nominate seven. Each party agrees to vote for the other party's nominees. The
issuance of the Special Preferred Stock and Cumulative Convertible Preferred
Stock will not have an effect on the voting rights of current holders of Common
Stock, as each is non-voting, except as may be required by law, and except, in
the case of the Cumulative Convertible Preferred Stock, certain rights to elect
up to two directors as to which Mr. Autorino had nomination rights upon payment
defaults as described below. See, "Information About STI - Description of
Securities". By their respective terms, the Special Preferred Stock and
Cumulative Convertible Preferred Stock will rank junior to the rights on
liquidation and as to payment of dividends with respect to the Series C
Preferred Stock, and on parity with each of the Series D and Series F classes of
preferred stock.
Concurrently with the Merger, FII's Chief Operating Officer Mel D.
Borer will become President and a Director of the Surviving Corporation and FII
shall have the right to nominate three additional members of the Board of
Directors who shall then be elected to the Board, with Mr. Autorino having the
right to nominate seven Board members. Additionally, if four consecutive
dividend payments are missed with respect to the Convertible Preferred Stock,
FII shall have the right
<PAGE>
to nominate one additional director and if eight consecutive dividend payments
are missed, FII shall have the right to nominate a second additional director.
See "Information About STI - Description of Securities". FII has disclosed to
STI that it has entered into two year employment agreements with 12 employees
(including Messrs. Steiner and Borer), each with annual base salaries exceeding
$100,000 and with aggregate annual base salaries aggregating approximately
$1,900,000. The Shareholders' Agreement to be entered into among STI, Mr.
Autorino and RHI concurrently with the Merger provides that Jeffrey J. Steiner,
Chairman of the Board, Chief Executive Officer and President of FII, RHI and TFC
will be Vice Chairman of the Surviving Corporation. His base salary under the
aforesaid employment agreement will be $350,000. Mr. Borer, who is currently
Chief Operating Officer of FII, will have an annual base salary of $250,000.
Messrs. Steiner and Borer will also receive options under STI's 1996 Equity
Incentive Plan to purchase _______ and ______ shares, respectively, of the
Common Stock of STI.
In connection with the Merger, STI has agreed to indemnify FII for
losses incurred by FII in connection with a breach of STI's representations and
warranties as set forth in the Merger Agreement. In the event of any such breach
and liability by STI therefor, STI has the option, in lieu of paying cash, to
issue shares of Common Stock to RHI equal in value to the amount of any such
loss. If STI should choose to issue shares of Common Stock to satisfy its
indemnification obligations for a breach, such issuance will result in a
dilution of the interests of the STI Stockholders.
Upon consummation of the Merger and the issuance of 6,000,000 shares of
Common Stock to RHI, the sole stockholder of FII, with a current market value of
approximately $4.00 per share, the holders of the STI Series C Preferred Stock
will be entitled to a downward adjustment in the applicable conversion price of
the Series C Preferred Stock, which adjustment will entitle the such holders to
approximately 75,000 additional shares of Common Stock upon conversion of the
Series C Preferred Stock. Any such conversion of the Series C Preferred Stock
will result in the further dilution of the interests of the STI Stockholders.
In connection with the Merger, STI has granted to RHI certain demand
and piggy-back registration rights with respect to the Common Stock and
Preferred Stock issued to RHI (i) pursuant to the Merger Agreement, (ii) in the
future to satisfy indemnification obligations, and (iii) issuable and issued
upon conversion of shares of the Cumulative Convertible Preferred Stock. Any
exercise of such registration rights may result in dilution of the interest of
STI's stockholders, hinder STI's efforts to arrange future financings and/or
have an adverse effect on the market price of the Common Stock.
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 Amendments by Stockholders of STI owning a majority
of the outstanding 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 Recapitalization shall have been effected, (vi) FII shall
have made a cash 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 consent to the transfer by FII of all
assets of FII (other than the stock of VSI) to RHI and to amend the indenture
under which the FII Senior Notes were issued to remove all covenants which can
be amended or deleted by majority vote, (vii) the parties shall have received
the opinion of Donaldson, Lufkin & Jenrette Securities Corporation or another
investment banking firm of nationally recognized standing that the fair market
value of the Preferred Stock is at
<PAGE>
least equal to the positive difference between $47,500,000 and the value of the
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) FII shall have received a favorable tax ruling with respect to no income
recognition or other adverse income tax consequences as a result of the FII
Recapitalization, (x) 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, (xi) STI's and
FII's representations and warranties contained in the Merger Agreement shall be
true in all material respects, (xii) STI shall have completed the distribution
to its stockholders of all of the capital stock of Shared Technologies Cellular,
Inc. ("Cellular") owned by STI and Cellular shall have executed a
non-competition agreement with STI acceptable to FII and (xiii) the
Indemnification Agreements, Shareholders Agreement, Pledge Agreement and Tax
Sharing Agreement 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.
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
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.
ADDITIONAL AGREEMENTS
Shareholders Agreement. The Merger Agreement provides that as a
pre-condition to the Merger, Anthony D. Autorino, 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 STI owned by them. 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 STI without the consent of 80% of the Board of
Directors. 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 STI securities representing 10% or more
of the outstanding shares of STI, 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 STI 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
<PAGE>
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 Mr. Autorino or RHI owns less than 25% of the
shares of Common Stock owned respectively by such Stockholders on the date of
the Merger.
Indemnification Agreements. Concurrently with the Merger TFC, RHI and
certain affiliates will enter into Indemnification Agreements with respect to
the historical non-telecommunications business liabilities of FII. See "Special
Factors - FII Recapitalization, Liabilities and Indemnification".
Pledge Agreement. As security for the obligations under the
Indemnification Agreements, RHI will, concurrently with the Merger, pledge to
the Surviving Corporation all shares of the Preferred Stock included in the
Common Consideration issued to RHI in the Merger 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. 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 or from STI payment of premiums, interest
and deferred financing fees associated with retirement of FII's 12.25% 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 Common Stock, Cumulative Convertible Preferred Stock and Special
Preferred Stock issued to RHI. RHI has agreed not to sell any such 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
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 TFC relative to
the Bylaw Amendments, a vote of 80% of the Board be obtained, and (vii) to add
the office of Vice Chairman.
RIGHTS OF DISSENTING STOCKHOLDERS
Stockholders of STI who are opposed to the Merger and vote against or
do not vote for the Merger at the Meeting will have no appraisal or similar
rights if the Merger is approved and consummated.
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
<PAGE>
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. See "Special Factors - Opinion of S.G. Warburg". If
the Merger is not consummated due to no fault of either party, 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 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 Fairchild
Communications Services Company 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 Cumulative
Convertible Preferred Stock and Special Preferred Stock must be filed with the
Secretary of State of Delaware to establish the Preferred Stock.
AMENDMENT, TERMINATION
The Merger Agreement may be amended or supplemented at any time, before
or after the Meeting, 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 Meeting without
the approval of the STI Stockholders. If the conditions to the Merger set forth
in the Merger Agreement are not met on or before January 31, 1996, the Merger
Agreement may be terminated by FII or STI, unless due to the failure to receive
the Tax Ruling or the failure of the Commission to give timely approval to the
proxy materials of STI, in which case the applicable date is February 28, 1996.
See "Proposal to Approve the Merger and Amendments - Other Terms and
Conditions".
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:
(0) By agreement of the Boards of Directors of FII and
STI;
<PAGE>
(0) By mutual written agreement of FII and STI;
(0) By FII or STI if STI or FII, respectively, fails to
perform in any material respect any of its
obligations under the Merger Agreement;
(0) 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 case
permanently restraining, enjoining or otherwise
prohibiting the transaction contemplated by the
Merger Agreement and such order, decree, ruling or
other action shall have become final and
nonappealable;
(0) 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;
(0) 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
(0) 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; see also "Proposal to Approve the Merger and
Amendments - Fees and Expenses."
<PAGE>
PRO FORMA FINANCIAL INFORMATION
(unaudited)
The following unaudited pro forma financial statements (the "Pro Forma
Financial Statements") are based upon the consolidated financial statements of
STI adjusted to give effect to the Merger.
The pro forma adjustments are described in the accompanying notes to
the pro forma consolidated balance sheet and the pro forma consolidated
statements of operations. The pro forma statements of operations gives effect to
such adjustments as if the transactions occurred as of January 1 of the
respective periods and the pro forma balance sheet gives effect to such
adjustments as if the transactions occurred as of September 30, 1995.
The pro forma adjustments are based upon available information and
certain assumptions that management believes are reasonable. The Pro Forma
Financial Statements do not purport to represent what STI's results of
operations or financial position would actually have been had the transactions
in fact occurred on January 1 of the respective periods, or to project STI's
results of operations or financial position for any future period or at any
future date.
The Pro Forma Financial Statements should be read in conjunction with
the consolidated financial statements of STI and FII included elsewhere in this
Proxy Statement and each such company's "Management's Discussion and Analysis of
Results of Operations and Financial Condition."
<PAGE>
Shared Technologies Fairchild Inc.
Pro Forma Consolidated Balance Sheet
September 30, 1995
(unaudited)
<TABLE>
<CAPTION>
Pro Forma Pro
In thousands STI FII Adjustments Forma
- ------------ --------- --------- ----------- --------
CURRENT ASSETS:
<S> <C> <C> <C> <C> <C>
Cash $ 1,410 -- B (880) $ 530
Accounts receivable, less allowance
for doubtful accounts 11,588 23,036 B (2,241) 32,383
Other current assets 1,345 2,773 B (480) 3,638
New current assets of operations
transferred to RHI 53,391 A (53,391) --
Deferred income taxes 550 550
------ --------- ---------
Total current assets 14,893 79,200 37,101
------ --------- ---------
Equipment, at cost
Telecommunications equipment 29,500 77,289 B (1,314) 105,475
Office and date processing
equipment 6,132 7,234 B (440) 12,926
------ --------- ---------
35,632 84,523 118,401
Less - Accumulated depreciation 18,063 33,513 B 592 50,964
------ --------- ---------
17,569 51,010 67,417
------ --------- ---------
Other Assets 14,617 229,156 B (3,610) 265,796
A (221,972)
A 247,605
--------- --------- --------- ---------
Total Assets $ 47,079 $ 359,366 (36,131) 370,314
========= ========= ========= =========
</TABLE>
<PAGE>
Shared Technologies Fairchild Inc.
Pro Forma Consolidated Balance Sheet
September 30, 1995
(unaudited)
<TABLE>
<CAPTION>
Pro Forma
In thousands STI FII Adjustments Pro Forma
CURRENT LIABILITIES:
<S> <C> <C> <C> <C> <C>
Notes payable and current portion of long-term $2,438 $514 B (7) $1,345
debt and capital lease obligation C (1,600)
Accounts payable 10,664 14,068 B (3,770) 20,962
Accrued expenses 2,666 6,213 A 14,500 12,879
Advanced billings 1,248 3,581 C 10,500 4,800
-------- --------- --------
Total current liabilities 17,016 24,376 B (29) 39,986
-------- --------- --------
Long-Term Debt and Capital Lease Obligations, 4,012 180,501 B (1) 239,739
less current portion
C (182,773)
C 238,000
Post retirement benefits 104 104
-------- --------- --------
Minority interest in Net Assets of Subsidiaries 1,663 B (1,663) -
-------- ---------- --------
Redeemable Put Warrant 416 416
-------- ---------- --------
FII Series A preferred stock 19,112 C (19,112) -
FII Series C preferred stock 24,015 C (24,015) -
STFI Cumulative preferred stock A 25,000 25,000
STFI Special preferred stock A 20,000 20,000
STOCKHOLDERS EQUITY
STI Series C preferred stock 9 9
STI Series D preferred stock 5 5
FII Series B preferred stock 230,200 A (230,200) -
Common Stock 34 140 A (140) 36
A 2
Additional paid-in capital 44,647 2,575 A (2,575) 68,645
A 23,998
Translation adjustment 7,040 A (7,040)
Accumulated deficit (20,723) (128,697) B (2,903) (23,626)
A 128,697 -
Obligations to issue common stock
Total stockholders' equity 23,972 111,258 45,069
------- -------= --------
Total liabilities and stockholders' equity $47,079 $359,366 (36,131) 370,314
======= ======== ======== ========
</TABLE>
<PAGE>
Shared Technologies Fairchild Inc.
Pro Forma Consolidated Statement of Operations
For the Year Ended
December 31, 1994
(unaudited)
<TABLE>
<CAPTION>
Pro Forma Pro
In thousands STI FII Adjustments Forma
- ------------ --------- --------- ----------- --------
<S> <C> <C> <C>
Revenues 47,694 127,462 175,156
Cost of Revenue 29,527 92,571 F (830) 121,268
-------- ------ -------
Gross Margin 18,167 34,891 53,888
Selling, General & Administrative Expenses
Field 12,413 19,315 31,728
Corporate 4,167 D 4,211 5,865
F (2,513)
Operating Income 1,587 15,576 16,295
Minority interest in net income (43) (43)
Interest Expense (743) (20,562) E (5,133) (26,438)
Interest Income 146 146
--------- --------- --------
Net Income before taxes 947 (4,986) (10,040)
Income taxes 487 H 58 545
--------- --------- --------
Net income before preferred dividends 1,434 (4,986) (9,495)
Preferred Stock Dividends (538) G 402 (136)
--------- --------- --------
Net Income Applicable to Common Stock $896 ($4,986) (9,631)
======== ========= ========
</TABLE>
<PAGE>
Shared Technologies Fairchild Inc.
Pro Forma Consolidated Statement of Operations
For the Nine Months Ended
September 30, 1995
(unaudited)
<TABLE>
<CAPTION>
Pro Forma Pro
In thousands STI FII Adjustments Forma
- ------------ --------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
Revenues 36,472 99,928 $136,400
Cost of Revenue 22,330 75,349 F (623) 97,057
------ ------ ------
Gross Margin 14,142 24,579 39,344
Selling, General & Administrative Expenses
Field 9,245 9,759 19,004
Corporate 3,384 D 2,828 4,327
F (1,885)
Operating Income 1,513 14,820 16,012
Interest Expense (683) (16,064) E (3,159) (19,906)
Interest Income 128 128
----- ------ ---------
Net income before taxes 958 (1,244) (3,766)
Income taxes (74) H 69 (5)
----- ------ ---------
Net income before preferred dividends 884 (1,244) (3,771)
Preferred Stock Dividends (299) (2,927) G 302 (2,924)
----- ------ ---------
Net Income Applicable to Common Stock $585 ($4,171) ($6,695)
==== ====== ========
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(A) The pro forma consolidated balance sheet gives effect to the proposed Merger
of FII into STI by combining the respective balance sheets of the two companies
at September 30, 1995, on a purchase accounting basis. The pro forma
consolidated balance sheet adjustment takes into account the effect of a
reorganization at the FII level that transfers certain non telecommunication
assets to FII's parent company. The capital accounts have been adjusted to
reflect the issuance of 6 million shares of common stock of STI at an estimated
market value of $4 per share, shares of 10% cumulative convertible preferred
stock with a liquidation preference of $25 million, shares of special preferred
stock with a liquidation preference of $20 million and the retirement of all FII
common and preferred stock.
(B) The pro forma consolidated balance sheet gives effect to the proposed
dividend of all Shared Technologies Cellular, Inc. (STC) stock held by STI) to
shareholders of STI. STC was a consolidated subsidiary of STI. All assets and
liabilities of STC were eliminated as a pro forma adjustment. The adjustment
resulted in a dividend that increased the accumulated deficit by $2.9 million.
(C) New debt has been recorded in the pro forma consolidated balance sheet to
reflect the issuance of $100 million in 13% zero coupon bonds and $138 million
in term loans through CS First Boston Corporation. Cash from these borrowings is
expected to be used as follows: $44 million to holders of FII Series A and C
preferred stock; $179 million to retire various FII debt; $4 million to retire
all outstanding State Street Bank term loans; and $11 million in estimated
expenses and nonrecurring charges related to the Merger. The pro forma
consolidated balance sheet assumes all these events will take place at the
merger.
(D) The pro forma consolidated statements of operations gives effect to the
proposed Merger by combining the respective statements of the two companies for
the nine months ended September 30, 1995, and the year ended December 31, 1994.
The respective statements of operations for STI and FII have been adjusted to
reflect all material acquisitions prior to the proposed merger, as if they had
occurred at the beginning of the respective periods. In addition, the pro forma
consolidated statements of operations of STI exclude all operations of STC in
anticipation of STI's divestiture. (See Note B). Thus the statements of STI
include Access Telecommunications Group L.P. and Office Telephone Management for
the entire periods and the statements of FII include JWP Telecom, Inc. for the
entire periods. The purchase accounting for the Merger results in approximately
$248 million of goodwill which is expected to be amortized over 40 years. The
pro forma consolidated statements of operations reflect net goodwill
amortization of $2.8 and $4.2 million for the periods ended September 30, 1995
and December 31, 1994 respectively.
(E) Interest expenses, in the pro forma consolidated statements of operations,
has been adjusted to reflect the net effect of the change in outstanding debt
described in Note C as if it had occurred at the beginning of the respective
periods. The following table details the calculation of the adjustment by
period.
<PAGE>
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
$ 100 million in 13% zero coupon bonds $9.8 $13.0
138 million in bank debt estimated 9% interest 9.3 12.4
179 million in retired FII debt (15.9) (20.3)
------- -------
Net Adjustment $3.2 $5.1
==== ====
</TABLE>
(F) The pro forma statements of operations include the estimated effect of
certain cost savings and increases associated with the consolidation of the
operation of STI and FII. The following table details the components of the
adjustment by period.
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Net payroll savings $1.9 $2.5
Network savings 0.6 0.8
----- -----
Net adjustment $2.5 $3.3
==== ====
</TABLE>
(G) Preferred stock dividends in the pro forma statements of operations were
adjusted to reflect the change in outstanding preferred stock described in note
B. The net effect was to decrease preferred dividends by approximately $300,000
and $400,00 for the periods ended September 30, 1995 and December 31, 1994
respectively.
(H) Income tax expense was adjusted to reflect no federal income tax due to net
operating losses generated for each of the pro forma statements of operations
presented. The pro forma statements have been adjusted to include an estimated
amount of minimum state income tax cost.
<PAGE>
INFORMATION ABOUT STI
BUSINESS
STI was originally incorporated in Delaware on January 30, 1986. By a
Plan and Agreement of Merger dated March 8, 1988, STI effected a statutory
merger with and into Balcon, Inc., a Delaware corporation (incorporated
September 23, 1987), which survived the merger and changed its name to Shared
Technologies Inc. Since such time, STI's primary business has been to provide
shared tenant telecommunications services to tenants of modern, multi-tenant
office buildings. The principal executive offices of STI are located at 100
Great Meadow Road, Wethersfield, Connecticut 06109.
PRICE RANGE OF COMMON STOCK
The Common Stock is included for quotation on the Nasdaq National
Market under the symbol "STCH". On November 8, 1995, the date preceding the
public announcement of the Merger, the high and low sale price of the Common
Stock was $4.250 and $3.625, respectively, per share.
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth the selected financial data of STI for each of
the last five years. Financial statements for 1991 and 1990 are not presented in
this Proxy Statement. Such selected financial data were derived from audited
consolidated financial statements not included herein. The selected financial
data of STI should be read in conjunction with the Consolidated Financial
Statements and related notes appearing elsewhere in this Proxy Statement. 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>
Statement of Operations Data: 1994 1993 1992 1991 1990
- ----------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue $45,367 $25,426 $24,077 $23,172 $21,804
Gross margin 19,195 10,912 9,254 6,358 5,786
Selling, general and
administrative expenses 16,972 10,102 9,959 10,717 10,246
Operating income (loss) 2,223 810 (705) (4,359) (4,460)
Interest expense, net (359) (438) (290) (1,268) (950)
Minority interest in net (income)
losses of subsidiaries (128) (82) (37) 4 29
Loss on settlement agreement - - - - (489)
Extraordinary Item -
(Loss) gain on restructuring - (150) 3,756 - -
Income tax benefits 550 - - - -
Net income (loss) 2,286 140 2,724 (5,623) (5,869)
Net income (loss) per
common share .27 (.04) .59 (1.59) (1.63)
Weighted average common
shares outstanding 6,792 5,132 4,063 3,730 3,601
Cash dividends declared
per preferred share .29 .32 .30 .30 -
Cash dividends paid
per preferred share .29 .32 .38 .18 -
Cash dividends declared or
paid per common share - - - - -
Balance Sheet Data:
Working capital deficit (3,691) ($ 3,874) ($ 4,506) ($15,615) ($ 5,751)
Total assets 37,925 20,601 18,752 18,436 14,531
Notes payable, convertible
promissory notes payable,
other long-term debt (incl.
current portion) 4,727 3,719 4,745 10,030 6,927
Stockholders' equity (deficit) 20,881 9,302 6,034 (3,148) (999)
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
STI's revenues rose to $43,675,000 for the nine months ended September
30, 1995, an increase of $12,161,000 or 39% over the nine months ended September
30, 1994. Revenues rose to $15,965,000 for the three month period ended
September 30, 1995 an increase of $1,471,000 or 9% over the three month period
ended September 30, 1994. Each division continued to contribute significantly to
the increase in revenue. Shared tenant services (STS) increased $4,798,000 or
23%, facility management services (FMS) grew $5,823,000 or 169% and cellular
services (STC) rose $1,540,000 or 20% for the nine months ended September 30,
1995 over the nine months ended September 30, 1994. The majority of the growth
in STS revenue was attributable to the June 1994 acquisition of Access
Telecommunications Group, L.P. (Access). Growth in FMS revenue was attributable
to the Access acquisition as well as the June 1995 acquisition of Office
Telephone Management (OTM). $876,000 of the FMS revenue growth for the nine and
three months ended September 30, 1995, was due to the addition of OTM. The
growth in STC revenues was due to expanded operations through the opening of new
locations and recent acquisitions.
STI's revenues rose to a record $45,367,000 in 1994, an increase of
$19,941,000 or 78% over 1993 revenues of $25,426,000. This was a substantial
increase over the 6% and 4% increases in 1993 and 1992 respectively.
Acquisitions were the major contributors to revenue growth in 1994 and 1993
respectively.
$8,942,000 of the 1994 revenue increase was attributable to the June
1994 acquisition of Access Telecommunication Group, L.P. ("Access"). Another
$8,017,000 was due to the expanded operations of the Cellular division. The
Cellular division was dramatically expanded in the fourth quarter of 1993
through the acquisition of Road and Show East, Inc. and Road and Show South Ltd.
nationwide rental phone businesses ("Road and Show"). STI also continued to
expand operations at existing locations. The remaining revenue increase of
$2,982,000 was achieved mainly at existing shared tenant services ("STS")
locations.
STI's revenue of $25,426,000 for the year ended December 31, 1993
represented an increase of $1,349,000, or 6%, over the year ended December 31,
1992. Of this increase, $288,000 was due to an increase in STS revenue and
$256,000 was due to an increase in FMS revenue. The remaining increase of
$805,000 was attributable to the fourth quarter acquisitions of Road and Show.
Gross margin dropped to 39% of revenue for the nine months ended
September 30, 1995 from 43% for the nine months ended September 30, 1994. Gross
margin decreased to 39% of revenue for the three months ended September 30, 1995
compared to 40% for the three months ended September 30, 1994.
Changes in STI's gross margin were impacted by changes in sales mix and
the Company's continued growth in 1995. STS accounted for 58% and 51% of total
sales for the nine and three months ended September 30, 1995 compared to 65% and
56% for the same periods ended September 30, 1994. FMS accounted for 21% and 25%
of total sales for the nine and three months ended September 30, 1995 compared
to 11% and 19% for the same periods ended September 30, 1994. STC accounted for
21% and 24% of total sales for the nine and three months ended September 30,
1995 compared to 24% and 25% for the same periods ended September 30, 1994. For
the nine months ended September 30, 1995, STS produced a 45% gross margin and
FMS a 23% gross margin compared to 45% and 19% for the period ended September
30, 1994 For the three months ended September 30, 1995 STS produced a 47% gross
margin and FMS a 26% gross margin compared to 42% and 21% for the period ended
September 30, 1994. Several factors have impacted the swings in gross margin for
these divisions. The purchase of Access in 1994 added significantly to the
revenue bases of both divisions and caused STS gross margin to drop while FMS
gross margin increased. In the last quarter management successfully increased
STS margins through reduction in direct costs and culling non profitable
business from their revenue base. FMS margins improved over the last three
months mainly due to the addition of OTM which recorded gross margins of 35% for
the third quarter. STC gross margin dropped to 40% and 37% for the nine and
three months ended September 30, 1995 from 48% and 50% for the nine and three
months ended September 30, 1994. This drop was mainly due to the acquisition of
Cellular
<PAGE>
Hotline, Inc. in May 1995, which produced lower gross margin than the core
business and 1994 second quarter World Cup cellular rentals which produced
unusually high gross margins.
Gross margin dipped slightly in 1994 to 42.3% of revenues from 42.9% of
revenues in 1993. This drop was the result of significant changes in the
Company's revenue mix in 1994.
The FMS and Cellular Service divisions grew dramatically in 1994 due to
the acquisitions mentioned earlier. The FMS division revenues accounted for
14.3% of the total revenues in 1994 as compared to 6.0% in 1993, and the
Cellular division revenues were responsible for 22.5% of total revenues in 1994
as compared to 8.7% in 1993. The STS division accounted for 63.2% of total
revenues in 1994 as compared to 85.3% in 1993.
Although the change in sales mix resulted in only a small change in
overall gross margin, each division produced gross margin at a different rate.
STS cost of revenues as a percentage of revenue increased slightly in 1994
resulting in gross margin of 45.2% versus gross margin of 46.4% in 1993. The
main reason for the decrease was the addition of several STS buildings through
the acquisition of Access. These buildings historically have achieved lower
gross margins than those at existing STS locations. The FMS division produced a
gross margin of 20.4% in 1994 which is up from 16.9% in 1993. The FMS division
focuses on the sale of long distance services outside the STS buildings, and
operates in a competitive environment which prevents high gross margin. Improved
margin was achieved through increased sales volume and lower rates negotiated in
1994. The Cellular Division produced a gross margin of 48.2% in 1994, which is
up from a 27.1% gross margin produced in 1993. The rental component of the
Cellular division was greatly expanded through the acquisition of Road and Show
in the fourth quarter of 1993. Cellular rental revenues produce gross margins
near 50%.
Gross margin increased to 42.9% of revenues for the year ended December
31, 1993 compared to 38.4% of revenues for the year ended December 31, 1992.
This improvement was due almost entirely to the improved margin on long distance
and local access services as a result of increased volume which enabled STI to
negotiate better rates with its vendors.
Selling, general and administrative expenses as a percentage of revenue
were 37% and 38% for the nine and three months ended September 30, 1995 compared
to 37% and 36% for the nine and three months ended September 30, 1994. The STS
and FMS divisions have reduced cost as a percentage of revenue through synergies
created with STI's overall growth. However this has been offset by STC which has
added overhead costs related to aggressively growing the cellular business in
the wake of its April 1995 public offering. As STC revenues grow, management
expects to see a decrease in the percentage of selling, general and
administration costs to revenue.
Interest expense increased by $346,000 for the nine months ended
September 30, 1995 over the nine months ended September 30, 1994 and $143,000
for the three months ended September 30, 1995 over the three months ended
September 30, 1994. This is attributable to the addition of interest bearing
debt since June 1994.
In late April 1995 STI successfully completed a public offering of its
cellular subsidiary's stock. Following the sale STI's percentage of ownership
dropped from 86% to approximately 60%. The accounting treatment of the sale
required STI to record a gain of approximately $1,375,000 for nine months ended
September 30, 1995.
Pretax income increased by $1,466,000 or 499% to a record $1,736,000
from $290,000 in 1993. This compares to a $1,322,000 increase in 1993 from a
pretax loss of $1,032,000 in 1992.
These increases were achieved through increased sales volume and
reductions in selling, general and administrative expenses as a percentage of
revenue. Selling, general and administrative expenses as a percentage of revenue
continued to drop in 1994, down to 37% from 40% in 1993. This improvement was
<PAGE>
made through the synergies created with the acquisition of Access and
management's ongoing efforts to contain overhead costs.
Selling, general and administrative expenses as a percentage of revenue
dropped to 40% in 1993 compared to 41% for the year ended December 31, 1992. The
decrease was achieved despite the addition of 10 new STS buildings and the
acquisition of Road and Show which added approximately $200,000 of selling,
general and administrative expenses. The improvement was due to a decrease in
consulting expenses associated with the settlement of certain obligations of
STI, settlement of the Javits litigation for less than previously provided and
the capitalization of startup costs associated with certain new operations.
During 1994 STI was successful in controlling interest expense despite
the addition of $2,300,000 of new, interest bearing, debt. Interest expense
decreased to $522,000 in 1994 from $529,000 in 1993. Interest expense, net of
interest income, increased $148,000 in the year ended December 31, 1993 compared
to the year ended December 31, 1992 due to approximately $292,000 accrued
related to estimated interest and penalty payments to taxing authorities that
may arise from late payments.
Effective January 1, 1993, STI implemented Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes", (SFAS 109). This
Statement requires the adoption of an asset and liability approach to accounting
for income taxes. STI's income tax provision is substantially less than the
amount derived by applying the federal statutory rates to pre-tax income,
principally due to the availability of net operating loss carryforwards from
prior years. As discussed in the Notes to STI's financial statements, for the
year ended December 31, 1994, STI had recorded a tax benefit of $550,000, and
reserved the balance of approximately $7,357,000 through a valuation allowance.
SFAS No. 109, requires that STI record a valuation allowance when it is
"more likely than not that some portion or all of the deferred tax asset will
not be realized". The ultimate realization of this deferred tax asset depends on
the ability to generate sufficient taxable income in the future. While
management believes that the total deferred tax asset may be fully realized by
future operating results, together with tax planning opportunities, the losses
in recent years and the desire to be more conservative makes it appropriate to
record a valuation allowance.
STI restated its 1993 financial statements to reflect the write-off of
certain startup costs of approximately $120,000, previously capitalized, related
to certain cellular telephone operations..
In 1992 STI settled certain obligations to its lenders and other
creditors. This resulted in an extraordinary gain for the year ended December
31, 1992 of $5,162,000 before restructuring expenses of $1,361,000 and income
taxes of $45,000 and an adjustment to the restructuring gain which resulted in
an extraordinary loss for the year ended December 31, 1993 of $150,000.
STI's working capital deficit at September 30, 1995 was $2,124,000
compared to $3,691,00 at December 31, 1994. Stockholders' equity at September
30, 1995 was $23,971,000 compared to $20,881,000 at December 31, 1994.
Net cash provided by operations decreased to $1,878,000 for the nine
months ended September 30, 1995 versus $1,959,000 for the nine months ended
September 30, 1994. STI continues to utilize cash from operations to manage its
working capital deficit.
STI continued to invest heavily in equipment at both new and existing
locations. $3,099,000 was spent on capital expenditures for the nine months
ended September 30, 1995 compared to $2,521,000 for the nine months ended
September 30, 1994. STI has also continued to expand through acquisition
investing $2,483,000 in 1995 to acquire Office Telephone Management Inc. and
Cellular Hotline Inc. During 1994 $3,780,000 was invested to acquire Access
Telecommunication Group, L.P. ("Access").
<PAGE>
Cash to finance this growth was provided mainly from financing
activities. During the first nine months of 1995 $1,160,000 was raised from
sales of new stock, $3,274,000 from an initial public offering of STI's cellular
subsidiary, and $2,929,000 from new borrowings. A portion of these proceeds were
used to repay $1,751,000 in principal debt and repurchase $375,00 in STC stock.
During 1994 $4,785,000 was raised from financing activities, the majority of the
proceeds came from sales of stock and new borrowings. These proceeds were used
to purchase equipment, finance the purchase of Access and repay existing debt.
STI plans to continue to manage the working capital deficit and to
expand operations throughout 1995. This growth is expected to be financed with
cash from operations and new borrowings from existing credit lines.
During 1994 STI continued to effectively manage a working capital
deficit and produce record earnings from operations. Net cash provided by
operation reached a record $3,000,000 in 1994 compared to $2700,000 in 1993 and
$571,000 in 1992. This helped reduce the working capital deficit to $3,691,000
at December 31, 1994 compared to $3,874,000 for December 31, 1993.
STI continued to focus investing activities on growth through
acquisition and on upgrading telecommunication equipment at existing locations.
Over the past three years Shared Technologies has invested $7,300,000 in
equipment purchases to increase line counts and remain competitive. At the same
time, the Company invested $4,200,000 to complete two major acquisitions; Access
in June 1994 and Road and Show in the fourth quarter of 1993. Both companies
have been integrated into STI's operations and have produced favorable results.
Financing activities were focused primarily on raising capital to
provide cash for investing activities. In 1994 STI entered an agreement with a
bank to obtain a $1.0 million dollar term note and a $4.0 million revolver.
During 1994 STI borrowed $1.3 million against the revolver to help finance the
current year's equipment purchases. In addition STI raised $4,600,000 from sales
of common stock to help finance the acquisition of Access. During 1993 and 1992
approximately $7,500,000 was raised from sales of common and preferred stock to
help STI fund operations. During the past three years, the Company has made
$8,300,000 in repayments of notes payable, long term debt and capital lease
obligations.
Cash requirements for 1995 will include normal ongoing operations, and
capital expenditures. STI plans to invest heavily in growth through the addition
of several STS buildings and the expansion of the centrex component of the STS
division. This growth will be financed through cash from operations and the bank
agreement previously mentioned.
EXPERTS
The consolidated financial statements of Shared Technologies, Inc. for
the years ended December 31, 1993 and 1994 included in this Proxy Statement have
been audited by Rothstein, Kass & Company, P.C., independent public accountants,
as indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
The consolidated financial statements of Shared Technologies, Inc. for
the year ended December 31, 1992 included in this Proxy Statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports. Reference is made to
said report which includes an explanatory paragraph that describes the
litigation discussed in Note 14 to the consolidated financial statements.
DESCRIPTION OF SECURITIES
Common Stock
<PAGE>
STI's authorized capital stock includes 20,000,000 shares of Common
Stock, $.004 par value. If the Merger and Amendments are approved, upon filing
the Certificate of Merger with the Secretary of State of Delaware including
therein the Amendments, the authorized Common Stock will increase to 50,000,000
shares. At September 30, 1995, there were 8,504,823 shares of Common Stock
outstanding. Upon the Merger an additional 6,000,000 shares will be issued to
RHI. The holders of STI Common Stock are entitled to one vote for each share on
all matters submitted to a vote of stockholders and are entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors out
of legally available funds. The holders of Common Stock have no preemptive,
subscription, redemption or conversion rights. The outstanding shares of Common
Stock are, and the Common Stock to be issued in the Merger will be, when issued,
fully paid and non-assessable.
STI currently has reserved 5,625,824 shares of Common Stock for
issuance upon the conversion or exercise of certain outstanding securities. Of
the total of 6,845,555 shares of Common Stock reserved, (i) 1,200,000 shares
have been reserved for issuance upon exercise of options granted under STI's
1987 Stock Option Plan, (ii) 2,958,120 shares have been reserved for issuance
upon exercise of common stock purchase warrants, (iii) 596,664 shares have been
reserved for issuance upon conversion of the Series C Preferred Stock, (iv)
456,842 shares have been reserved for issuance upon conversion of the Series D
Preferred Stock, and (v) 164,198 shares have been reserved for issuance upon
conversion of the Series F Preferred Stock.
In connection with the Merger, STI will be required to reserve an
additional 3,921,568 shares of Common Stock (i) for issuance upon the conversion
of the Cumulative Convertible Preferred Stock and (ii) to satisfy its
indemnification obligations to FII in the event STI elects to pay in shares of
Common Stock. See "Description of Securities - Preferred Stock" and "Certain -
Effects of the Merger".
Preferred Stock
STI currently has authorized 10,000,000 shares of "blank check"
preferred stock with $.01 par value per share and has issued and outstanding two
different series of preferred stock: (i) 906,930 shares of Series C Preferred
Stock, $.01 par value per share; (ii) 456,842 shares of Series D Preferred
Stock, $.01 par value per share.
CUMULATIVE CONVERTIBLE PREFERRED STOCK.
In connection with the Merger, STI will issue $25,000,000 of Cumulative
Convertible Preferred Stock (the "Cumulative Convertible Preferred Stock").
Dividends on the Cumulative Convertible Preferred Stock are payable quarterly at
the rate of 6% per annum in cash. If for any reason a dividend is not paid in
cash when scheduled, the amount of such dividend shall accrue interest at a rate
of 12% per annum until paid.
LIQUIDATION PREFERENCE: The Cumulative Convertible Preferred Stock will have a
liquidation preference of $25,000,000 in the aggregate plus an additional amount
(the "Additional Amount") equal to the total amount of dividends the holder of
the Cumulative Convertible Preferred Stock would have received if dividends were
paid quarterly in cash at the rate of 10% per annum for the life of the issue
minus the total amount of cash dividends actually paid (the "Liquidation
Preference").
CONVERSION: Each share of Cumulative Convertible Preferred Stock is convertible
at anytime at the option of the holder into such number of Common Shares as is
determined by dividing the liquidation preference thereof by the conversion
price of $6.3750. The conversion price is subject to adjustment upon occurrence
of customary adjustment events including, but not limited to, stock dividends,
stock subdivisions and reclassification or combinations.
OPTIONAL REDEMPTION: The Cumulative Convertible Preferred Stock is not
redeemable at STI's option during the first three years after issuance, but
thereafter, upon 30 days' prior written notice, is redeemable at STI's option at
a redemption price of 100% of the Liquidation Preference.
<PAGE>
MANDATORY REDEMPTION: On the 12th anniversary date of original issuance of the
Cumulative Convertible Preferred Stock, STI shall redeem 100% of the outstanding
shares of Cumulative Convertible Preferred Stock for the Liquidation Preference.
RANKING: STI is not permitted to issue preferred stock ranking senior to the
Cumulative Convertible Preferred Stock as to rights on liquidation and as to
payment of dividends without the approval of the holders of at least two-thirds
of the issued and outstanding shares of the Cumulative Convertible Preferred
Stock. The Cumulative Convertible Preferred Stock will rank junior to the Series
C Preferred Stock of STI and on a parity with each of the Series D preferred
stock and the Special Preferred Stock with regard to the right to receive
dividends and amounts distributable upon liquidation, dissolution or winding up
of STI.
VOTING RIGHTS: RHI will be entitled to appoint two directors in the aggregate to
the Board of Directors in addition to other directors to which RHI is entitled
(with such additional director(s) to be added in lieu of existing non-RHI
directors) in the following circumstances: in the event that STI fails to make
four consecutive dividend payments on the Cumulative Convertible Preferred
Stock, RHI will be entitled to elect one such additional director, and if eight
consecutive such dividend payments fail to be made, RHI will be entitled to
elect a second such additional director. The Convertible Preferred Stock has no
other voting rights, except as required by law.
CERTAIN RESTRICTIONS: No dividends or distributions on junior or parity equity
securities shall be permitted if STI has failed to pay in full all accrued
dividends or failed to satisfy its mandatory redemption obligation at maturity
with respect to the Cumulative Convertible Preferred Stock. No redemptions or
repurchases of junior or parity equity securities (other than the Special
Preferred Stock) shall be permitted while the Cumulative Convertible Preferred
Stock is in arrears or in default. STI will not be permitted to create or permit
to exist any contractual restriction which would restrict in any way its ability
to make required payments on the Cumulative Convertible Preferred Stock or the
Series C Preferred Stock of STI.
SPECIAL PREFERRED STOCK.
In connection with the Merger, STI will issue Special Preferred Stock.
The Special Preferred Stock will be issued in such denominations as is requested
by RHI. There will be no dividends payable on the Special Preferred Stock.
LIQUIDATION PREFERENCE: The Special Preferred Stock will have a liquidation
preference of $20,000,000 initially in the aggregate, increasing by $1,000,000
each year after 1996 to a maximum liquidation preference of $30,000,000 in 2007.
OPTIONAL REDEMPTION: The Special Preferred Stock is redeemable at STI's option
at any time upon 30 days' prior written notice, at a redemption price of 100% of
the liquidation preference.
MANDATORY REDEMPTION: All outstanding Special Preferred Stock will be
mandatorily redeemable in its entirety at 100% of liquidation preference upon a
Change of Control of STI and, in any event, in 2007. In addition, on March 31 of
each year, commencing with March 31, 1997, STI shall mandatorily redeem at a
price equal to 100% of the liquidation preference in effect from time to time an
amount (the "Required Redemption Amount") of Special Preferred Stock equal to
50% of the amount, if any, by which the consolidated earnings before interest
and taxes plus depreciation and amortization ("EBITDA") of STI and its
subsidiaries exceeds the Threshold Amount (as described below) for the
immediately preceding year ended on December 31. To the extent the Required
Redemption Amount exceeds 50% of the sum (the "Income Limitation") of (i) the
consolidated net income of STI and its subsidiaries for the immediately
preceding year ended on December 31 (without deducting therefrom any amounts on
account of dividends paid or payable on any preferred stock or redemptions of
any preferred stock of STI, including the Cumulative Convertible Preferred
Stock, Special Preferred Stock and Series C and Series D Classes of preferred
stock) plus (ii) amounts attributable to the amortization of goodwill for such
immediately preceding year, such excess amount shall be carried forward and
<PAGE>
be considered a Required Redemption Amount for the next succeeding year and for
each year thereafter until paid.
The Threshold Amount for each year shall be as follows:
Year Ended Threshold
December 31, Amount*
1996.................... $47,000,000
1997.................... 53,000,000
1998.................... 57,500,000
1999.................... 60,500,000
2000.................... 63,500,000
2001.................... 66,500,000
2002.................... 69,500,000
2003.................... 72,500,000
2004.................... 75,500,000
2005.................... 78,500,000
2006.................... 81,500,000
* In the event that STI or any subsidiary sells or disposes of any material
asset or business, the Threshold Amount for each year thereafter shall be
reduced by the amount of EBITDA attributable to such asset or business
for the four fiscal quarters immediately preceding such sale or
disposition.
RANKING: STI is not permitted to issue preferred stock ranking senior to the
Special Preferred Stock as to rights on liquidation and as to payment of
dividends without the approval of the holders of at least two-thirds of the
issued and outstanding shares of the Special Preferred Stock. The Special
Preferred Stock will rank junior to the Series C Preferred Stock of STI and on a
parity with the Series D preferred stock and the Convertible Preferred Stock
with regard to the right to receive dividends and amounts distributable upon
liquidation, dissolution or winding up of STI.
VOTING RIGHTS: STI will be entitled to appoint two directors in the aggregate to
the Board of Directors of the Company in addition to other directors to which
STI is entitled (with such additional director(s) to be added in lieu of
existing non-STI directors) in the following circumstances in the event that STI
fails to make four consecutive dividend payments on the Cumulative Convertible
Preferred Stock, STI will be entitled to elect one such additional director, and
if eight consecutive such dividend payments fail to be made, STI will be
entitled to elect a second such additional director. The Special Preferred Stock
has no other voting rights, except as required by law.
CERTAIN RESTRICTIONS: No dividends, distributions, redemptions or repurchases on
junior or parity equity securities shall be permitted if STI has failed to
satisfy its mandatory redemption obligations with respect to the Special
Preferred Stock. STI will not be permitted to create or permit to exist any
contracted restriction which would restrict in any way STI's payment obligations
with respect to the Special Preferred Stock or the Series C Preferred Stock.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 30,
1995, with respect to STI's Common Stock owned by (1) each director of STI, (2)
the executive officer whose total annual salary and bonus exceeded $100,000, (3)
all directors and executive officers of STI as a group, and (4) each person who
is known by STI to own beneficially more than five percent of STI's Common
Stock. Unless otherwise indicated in the footnotes to the table, all stock is
owned of record and beneficially by the persons listed in the table.
<TABLE>
<CAPTION>
Number Percentage
of of
Shares Common
Beneficially Stock
Names and Addresses(1) Owned(2) Outstanding
Directors and Executive Officers
<S> <C> <C>
Anthony D. Autorino............................................ 1,213,275(3) 13.8%
Chairman, President and
Chief Executive Officer
Ronald E. Scott................................................ 309,023(4) 3.6%
Director, Executive Vice President
and Chief Operating Officer
Vincent DiVincenzo............................................. 39,363(5) *
Director, Senior Vice President -
Administration and Finance, Treasurer
and Chief Financial Officer
James D. Rivette............................................... 35,074(6) *
Director and President, Shared Tenant
Services Division
William A. DiBella............................................. 61,663(7) *
Director
Herbert L. Oakes, Jr........................................... 37,886(8) *
Director
Edward J. McCormack, Jr........................................ 116,377(9) 1.4%
Director
Jo McKenzie.................................................... 19,575(10) *
Director
Thomas H. Decker............................................... 24,750(11) *
Director
Lewis M. Rambo................................................. 22,800(12) *
Director (Resigned as of October 10, 1995)
Ajit G. Hutheesing............................................. 316,957(13) 3.6%
Director
All directors and executive officers as
a group (13 persons)......................................... 2,220,236(14) 23.6%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Stockholders
<S> <C> <C>
Zesiger Capital Group LLC...................................... 1,709,325(15) 18.5%
320 Park Avenue
New York, NY 10022
BEA Associates................................................. 422,5756 5.0%
153 East 53rd Street
One Citicorp Center
New York, NY 10022
Access Trust,
Stuart M. Crow as Trustee.................................... 498,867 5.9%
2001 Ross Avenue, Suite 3200
Dallas, TX 75201
Wellington Management Company.................................. 418,000 4.9%
75 State Street
Boston, MA 02109
The Kaufmann Fund, Inc......................................... 400,324 4.7%
140 E. 45th Street, 43rd Floor
New York, NY 10017
Wanger Asset Management, L.P................................... 500,000(17) 5.9%
227 West Monroe Street, Suite 3000
Chicago, IL 60606
- -------------------------------
* Less than 1%
</TABLE>
(1) The address of each of STI's directors is c/o Shared Technologies Inc.,
100 Great Meadow Road, Suite 104, Wethersfield, Connecticut 06109.
(2) Except as otherwise specifically noted, the number of shares stated as
being owned beneficially includes shares believed to be held
beneficially by spouses and minor children. The inclusion herein of any
shares deemed beneficially owned does not constitute an admission of
beneficial ownership of those shares. Each stockholder possesses sole
voting and investment power with respect to the shares listed opposite
such stockholder's name, except as otherwise indicated.
(3) Includes 214,584 shares currently issuable upon exercise of options
exercisable as of, or within 60 days, after September 30, 1995. Also
includes 98,750 shares owned of record by Mr. Autorino's spouse, as to
which Mr. Autorino disclaims beneficial ownership. Also includes 5,827
shares owned by Mr. Autorino through STI's Savings and Retirement Plan.
Also includes 11,500 shares of Series D Preferred Stock, which are
convertible into 11,500 shares of Common Stock, and 11,500 Common Stock
Purchase Warrants, which are convertible into an additional 11,500
shares of Common Stock. Also, includes 17,500 shares of Series D
Preferred Stock owned of record by Mr. Autorino's spouse and 17,500
Common Stock Purchase Warrants also owned by her, as to which shares
and warrants Mr. Autorino disclaims beneficial ownership.
(4) Includes Common Stock Purchase Warrants which are exercisable for
101,250 shares of Common Stock as of, or within 60 days after September
30, 1995. Includes 140,000 shares of Common Stock which were converted
from Series F Preferred Stock, which such shares are subject to
post-closing adjustments pursuant to STI's purchase of Access
Telecommunication Group, L.P.
(5) Includes 36,667 shares currently issuable upon exercise of options
exercisable as of, or within 60 days after, September 30, 1995. Also
includes 2,244 shares owned by Mr. DiVincenzo through STI's Savings and
Retirement Plan.
<PAGE>
(6) Includes 30,833 shares currently issuable upon exercise of options
exercisable as of, or within 60 days after, September 30, 1995. Also
includes 1,000 shares owned by Mr. Rivette's spouse, as to which Mr.
Rivette disclaims beneficial ownership. Also includes 2,470 shares
owned by Mr. Rivette through STI's Savings and Retirement Plan.
(7) Includes 32,913 shares currently issuable upon exercise of options
exercisable as of, or within 60 days after, September 30, 1995. Also
includes 28,750 shares owned of record by Mr. DiBella's spouse, as to
which Mr. DiBella disclaims beneficial ownership.
(8) Includes 24,575 shares currently issuable upon exercise of options
exercisable as of, or within 60 days after, September 30, 1995. Also
includes 2,625 shares owned of record by Overseas and Foreign Investors
Inc., of which Mr. Oakes is an officer. Also includes 1,687 shares
owned of record by L&H International, Inc., of which Mr. Oakes is an
officer, director and stockholder and 2,187 shares owned of record by
H.L. Oakes & Co., Inc., of which Mr. Oakes is an officer, director and
principal. Also included are 6,812 shares owned of record by Overseas &
Foreign Managers, Inc., of which Mr. Oakes is an officer.
(9) Includes 19,500 shares currently issuable upon exercise of options
exercisable as of, or within 60 days after, September 30, 1995. Also
includes 66,335 shares owned of record by Mr. McCormack's spouse, as to
which Mr. McCormack disclaims beneficial ownership.
(10) Includes 19,575 shares currently issuable upon exercise of options
exercisable as of, or within 60 days after, September 30, 1995.
(11) Includes 18,750 shares currently issuable upon exercise of options
exercisable as of, or within 60 days after, September 30, 1995.
(12) Includes 18,000 shares currently issuable upon exercise of options
exercisable as of, or within 60 days after, September 30, 1995.
(13) Includes 15,000 shares currently issuable upon exercise of options
exercisable as of, or within, 60 days after September 30, 1995. Also
includes a Common Stock Purchase Warrant which is convertible into
298,957 shares of Common Stock as of, or within 60 days, after
September 30, 1995, which is owned of record by International Capital
Partners, Inc., of which Mr. Hutheesing is the Chairman, Chief
Executive Officer and a stockholder.
(14) Includes a total of 447,480 shares which officers and directors of STI
have the right to acquire under outstanding stock options exercisable
as of, or within 60 days after, September 30, 1995. Also includes
29,000 shares of Series D Preferred Stock currently convertible into
29,000 shares of Common Stock and 29,000 Common Stock Purchase
Warrants, as set forth in footnote 3 above. Also includes 298,957
shares of Common Stock issuable upon conversion of a Common Stock
Purchase Warrant, as set forth in footnote 13 above. Also includes
15,494 shares owned by officers and directors through STI's Savings and
Retirement Plan.
(15) Includes warrants to purchase 746,325 shares of common stock, which
includes 746,325 shares currently issuable upon exercise of warrants
exercisable as of, or within 60 days after, September 30, 1995.
(16) Wanger Asset Management, L.P. ("WAM") serves as investment advisors to
Acorn Investment Trust, Series Designated Acorn Fund ("Acorn").
Includes 375,000 shares beneficially owned by Acorn. Wanger Asset
Management Ltd. ("WAM LTD") is the general partner of WAM and Ralph
Wanger is the principal stockholder of WAM LTD.
<PAGE>
INFORMATION ABOUT FII
FORMATION, HISTORICAL OPERATIONS AND RECAPITALIZATION
FII is a Delaware corporation and is the subsidiary of RHI Holdings,
Inc. ("RHI"), which, in turn, is the wholly-owned subsidiary of The Fairchild
Corporation ("TFC").
FII is currently operating through its wholly owned subsidiary VSI
Corporation ("VSI") in three business segments: Aerospace Fasteners, Industrial
Products and Communications Services.
The Aerospace Fasteners segment designs, manufactures and markets high
performance, specialty fastening systems, primarily for aerospace applications.
The Industrial Products segment includes (i) D-M-E Company ("DME") which
designs, manufactures and markets tooling and electronic control systems for the
plastic injection molding and die casting industries, (ii) Fairchild Data
Corporation, a supplier of modems, (iii) Convac GmbH, a subsidiary acquired in
June 1994, which is a leading European designer and manufacturer of wet
processing tools, equipment and systems required for the manufacture of
semiconductor chips and related products and for compact and optical storage
disks and flat panel displays, and (iv) Scandinavian Bellyloading Company,
acquired in September 1994, which designs and manufactures patented cargo
loading systems which are installed in the cargo area of commercial aircraft.
On November 13, 1995, FII and Cincinnati Milacron, Inc. ("CM") entered
into a letter agreement setting forth the basic terms and conditions of a
transaction pursuant to which CM will acquire the DME business for approximately
$260 million.
Prior to and as a precondition to the Merger which is the subject of
this Proxy Statement, FII, VSI and FII's parent RHI Holdings, Inc. ("RHI") will
undergo a recapitalization to transfer from FII and VSI to RHI all assets other
than those related to the Communications Services business which furnishes
communications services and equipment to tenants of commercial office buildings
and sells, installs and maintains communications systems for business and
government customers. The principal executive offices of FII are located at 300
West Service Road, Chantilly, Virginia 22021-0804.
As part of the recapitalization, FII and VSI are transferring to FII's
immediate parent, RHI, all of their assets and liabilities except for: (i) those
expressly related to FII's telecommunications services and systems business;
(ii) FII's outstanding 12 1/4% Senior Secured Notes due 1999 with an aggregate
face value of $125,000,000 (the "FII Senior Notes"); and (iii) approximately
$55,373,000 of existing bank and other indebtedness. As a pre-condition to the
Merger, FII must secure the consent of holders of a majority in interest of the
FII Senior Notes to the recapitalization and to amend the indenture pursuant to
which the FII Senior Notes were issued to delete all covenants which may be
deleted by a majority. The successful completion of each element in the
foregoing discussion are conditions to the consummation of the other components
of the recapitalization and Merger. On ________, 1995, FII commenced a tender
offer for and consent solicitation with respect to, the FII Senior Notes.
FII, through Fairchild Communications Services Company ("FCSC") (a
partnership of which the partners are all wholly owned subsidiaries of VSI)
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. 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.
Fairchild Communications 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 recapitalization, FCSC
will be merged into VSI.
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 $110,000,000 in
<PAGE>
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 SERVICES BUSINESS
FII negotiates long-term telecommunications franchises with owners and
developers of office buildings. Under these arrangements, FII 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.
Telecom 2000 Services include access to services provided by regulated
communications companies including local, long distance, international and "800"
telephone services. Fairchild Communications 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.
FII typically provides its services at rates equal to or below those which
customers could otherwise obtain, in part due to discounts it can obtain as a
high volume purchaser of telephone services.
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. FII's 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 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 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.
FII SENIOR NOTES
The FII Senior Notes, aggregate $125,000,000 in face amount bear annual
interest of 12 1/4% payable semiannually in arrears, are payable in full on July
31, 1999, are secured by a pledge of the stock of VSI, FII's wholly owned
subsidiary, and may be redeemed at any time after July 31, 1997, provided,
however if redeemed during the period August 1, 1997 through July 31, 1998
redemption must be made at 102% of the face amount. In accordance with the
Merger Agreement and the terms of the Indenture pursuant to which the FII Senior
Notes were issued, FII will make a tender offer to purchase the FII Senior
Notes, which sale would be consummated by the Surviving Corporation following
the merger. As a condition to the tender offer FII must obtain the consent of
holders of 51% of the FII Senior Notes to amend the terms of the FII Senior
Notes to remove all covenants in the Indenture which may be removed with the
consent of a majority of such holders. Such consent is a condition to the
consummation to the Merger. If the merger is consummated, the Surviving
Corporation will purchase any tendered FII Senior Notes and will remain liable
to pay the remainder in accordance with their remaining terms.
LEGAL MATTERS
GOVERNMENT CLAIMS: The Corporate Administrative Contracting Officer (the "ACO"),
based upon the advice of the United States Defense Contract Audit Agency, has
made a determination that FII did not comply with Federal Acquisition
Regulations and Cost Accounting Standards in accounting for (i) the 1985
reversion to FII
<PAGE>
of certain assets of terminated defined benefit pension plans, and (ii) pension
costs upon the closing of segments of FII's business. The ACO has directed FII
to prepare a cost impact proposal relating to such plan terminations and segment
closings and, following receipt of such cost impact proposal, may seek
adjustments to contract prices. The ACO alleges that substantial amounts will be
due if such adjustments are made. FII believes it has properly accounted for the
asset reversions in accordance with applicable accounting standards. FII has had
discussions with the government to attempt to resolve these pension accounting
issues.
ENVIRONMENTAL MATTERS: FII and other aerospace fastener and industrial product
manufacturers are subject to stringent Federal, state and local environmental
laws and regulations concerning, among other things, the discharge of hazardous
materials into the environment and generation, handling, storage, transportation
and disposal of waste and hazardous materials. To date, such laws and
regulations have not had a material effect on the financial conditions of FII,
although FII has expended, and can be expected to expend in the future,
significant amounts for investigation of environmental conditions, installation
of environmental control facilities, remediation of environmental conditions and
other similar matters, particularly in the Aerospace Fasteners segment.
In connection with its plans to dispose of certain real estate, FII
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 FII, that may require FII either
to take corrective action or to contribute to a clean-up. FII is also a
defendant in certain lawsuits and proceedings seeking to require FII 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 FII
believes that it has recorded adequate reserves in its financial statements to
complete such investigation and take any necessary corrective actions or make
any necessary contributions. No amounts have been recorded as due from third
parties, including insurers, or set off against, any liability of FII, unless
such parties are contractually obligated to contribute and are not disputing
such liability.
As of June 30, 1995, the consolidated total recorded liabilities of FII
for environmental matters referred to above totaled $8,601,000. As of June 30,
1995, the estimated probable exposures for these matters was $8,580,000. FII has
reported that it is reasonably possible FII's total exposure for these matters
could be approximately $15,778,000. Based on a review of engineering studies
conducted for FII of claims for known contamination, STI estimates that it is
reasonably possible that the costs resulting from such claims could range from
$8,000,000 to $30,000,000, although further investigation could result in either
a lower or higher estimated cost level. There may be off-sets from third-party
claims or insurance recoveries which would reduce potential liability. STI's
estimates did not include any claims for unknown liabilities for properties not
yet surveyed for environmental contamination which could have occurred as long
ago as thirty years.
OTHER MATTERS: FII is involved in various other claims and lawsuits incidental
to its business, some of which involve substantial amounts. FII, either on its
own or through its insurance carriers, is contesting these matters.
SELECTED FINANCIAL DATA
The selected financial data were derived from FII's consolidated
financial statements. The 1995, 1994 and 1993 financial statements were audited
by Arthur Andersen LLP, independent auditors. The independent auditors' report
is included elsewhere in this Proxy statement.
The selected financial data should be read in conjunction with "The
Recapitalization," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the audited financial statements and related notes
thereto, and the unaudited pro forma financial statements and related notes
thereto included elsewhere in this Proxy Statement.
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended June Three Months Ended
October 2, October 1,
1991 1992 1993 1994 1995 1994 1995
---- ---- ---- ---- ---- ---- ----
(unaudited) (unaudited)
(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 $ 20,124 $ 33,138
Operating Income 9,489 12,539 14,420 16,142 18,253 4,350 4,741
Interest expense 19,621 16,049 20,033 19,538 21,280 5,430 5,490
Loss from
continuing operations (10,132) (3,510) (5,613) (3,396) (3,027) (1,080) (749)
Net earnings (loss) 17,890 14,255 (12,257) (33,987) (12,359) 307 394
Preferred stock dividends 4,302 3,724 3,873 3,902 3,902 975 975
Net earnings (loss) after
preferred stock dividends 13,588 10,531 (16,130) (37,889) (16,261) (668) (581)
</TABLE>
<TABLE>
<CAPTION>
October 1, 1995
(unaudited)
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 $ 54,824
Total assets 420,658 439,010 370,750 334,464 359,481 359,366
Total long-term debt 192,858 189,577 186,377 183,259 181,309 181,015
Series A redeemable
preferred stock 50,848 44,238 19,112 19,112 19,112 19,112
Series C cumulative
preferred stock - - 24,015 24,015 24,015 24,015
Total stockholders' equity 167,168 194,154 129,521 96,321 110,519 111,258
- -------------------------
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The communications division of the Company was formed in 1985 as a
provider of telecommunication services to commercial occupants of multitenant
office buildings. Since then, the Company has focused on a strategy of growth
both internally and through acquisitions. From July 1986 to July 1994, the
Company completed 17 acquisitions in the telecommunications services business,
which added approximately $48 million of annual revenues. The largest
acquisition during this period was the Amerisystems Partnership in September
1990. Amerisystems added approximately $23 million of annual revenue to the
Company and enabled the Company to enter ten additional metropolitan markets,
including Chicago and Houston.
In December 1992, the Company acquired the assets of Office Networks,
Inc., which added approximately $6.7 million of annual revenue and enabled the
Company to enter the Indianapolis market. Shortly thereafter, the Company
completed two additional acquisitions in Indianapolis, making this metropolitan
market one of the Company's most profitable.
In November 1994, the Company entered the systems business by acquiring
the assets of JWP Telecom, Inc. ("JWP Telecom"). The addition of
telecommunications equipment will allow the Company to achieve cost savings as
the Company's systems and services businesses continue to consolidate. The
Company feels that cross-marketing opportunities are particularly attractive in
those metropolitan markets in which the Company presently has an infrastructure
in place for its systems business but currently does not provide services. These
existing infrastructures provide the Company a means of entering such systems
markets with little or no incremental expense.
Earnings before interest and taxes ("EBIT") as a percentage of revenues
for the Company's systems businesses is approximately 5% compared to over 2% for
the services businesses. This lower percentage was anticipated by management
prior to the JWP Telecom acquisition and was reflected in the purchase price. As
the Company is able to realize cost savings through consolidation of its
services and systems business, management believes EBIT as a percentage of
revenues from the systems business will improve, but will never equal the
percentage attained in the services business.
RESULTS OF OPERATIONS
Set forth below are various components of the Company's statements of
operations for each of the First Quarters of fiscal years ended September 30,
1995 ("Q1, 1996"), and September 30, 1994 ("Q1, 1995").
<TABLE>
<CAPTION>
Q1, 1996 Q1, 1995
<S> <C> <C>
Sales 100% 100%
Cost of sales 76% 71%
Gross Profit 24% 29%
General & Administrative Expense 9% 7%
Goodwill Amortization 1% 1%
Earnings before interest and taxes 14% 21%
</TABLE>
<PAGE>
Set forth below are various components of the Company's statements of
operations for each of the fiscal years ended June 30, 1993 ("Fiscal 1993"),
June 30, 1994 ("Fiscal 1994") and June 30, 1995 ("Fiscal 1995"), expressed as a
percentage of sales.
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Sales........................................................................... 100% 100% 100%
Cost of Sales................................................................... 71% 71% 74%
---- ---- ----
Gross Profit.................................................................... 29% 29% 26%
General administrative expense.................................................. 7% 7% 8%
Goodwill amortization........................................................... 1% 1% 1%
Other (income) expense..........................................................
Earnings before interest and taxes.............................................. 21% 21% 17%
=== === ===
</TABLE>
Q1, 1996 V. Q1, 1995:
Revenues: Total revenues in Q1, 1996 increased 64.7% to $33.1 million
from $20.1 million in Q1, 1995. This increase was mainly the result of the
acquisition of the assets from JWP. In addition, revenue increased from sales to
tenants in newly-franchised office buildings, and sales to tenants in existing
office buildings under franchise.
Gross Profit: Gross profit in Q1, 1996 increased 39.2% to $8.1 million
from $5.8 million in Q1, 1995. This increase was primarily due to increased
revenues and economies of scale from increased volume resulting in part from the
JWP acquisition. Gross profit as a percent of sales decreased 5% primarily due
to the lower margins associated with the systems business acquired from JWP.
This decline was anticipated by management at the time of acquisition.
General and Administrative Expenses: General and Administrative
expenses in Q1, 1996 increased 141.4% to $3.2 million from $1.3 million in Q1,
1995. Approximately $1.4 million of the increase was due to the acquisition of
JWP. The remainder was due to wage and salary increases and increased
amortization of intangible assets other than goodwill.
Interest Expense, Net: Interest expense in Q1, 1996 was approximately
equivalent to interest expense in Q1, 1995. There were no significant changes in
rates or borrowing between the two periods that are being compared.
Depreciation and Amortization: Depreciation and amortization in Q1,
1996 increased 18.0% to $2.7 million from $2.3 million in Q1, 1995. The increase
is due to the additional depreciation and amortization from the JWP acquisition.
In addition, depreciation increased because of significant capital investment in
switching equipment installed in office buildings in the services business.
FISCAL 1995 V. FISCAL 1994:
Revenues: Total revenues in Fiscal 1995 increased 46.5% to $109.7
million from $74.9 million in Fiscal 1994. This increase was a result of
acquisitions, sales to tenants in newly-franchised office buildings, and sales
to tenants in existing office buildings already under franchise. The JWP Telecom
acquisition contributed $31 million in revenue for Fiscal 1995.
<PAGE>
Gross Profit: Gross profit in Fiscal 1995 increased 28.5% to $28.1
million from $21.9 million in Fiscal 1994. This increase was primarily due to
increased revenues above and economies of scale from increased volume resulting
in part from the JWP Telecom acquisition. Gross profit as a percent of sales
decreased 4% primarily due to the lower margins associated with the systems
business acquired from JWP Telecom.
General and Administrative Expenses: General and administrative
expenses in Fiscal 1995 increased 77% to $9.2 million from $5.2 million in
Fiscal 1994. Approximately $3.6 million of the increase was due to the
acquisition of JWP Telecom and the remainder was due to wage and salary
increases and increased amortization of intangible assets other than goodwill.
Interest Expense, Net: Interest expense in Fiscal 1995 increased 9.2%
to $21.3 million from $19.5 million in Fiscal 1994. This increase was due
primarily to higher intercompany interest expense and higher interest rates
during the fiscal 1995 period.
Depreciation and Amortization: Depreciation and amortization in Fiscal
1995 increased 15.5% to $10.3 million from $8.9 million in Fiscal 1994. This
increase reflects increased depreciation and amortization associated with the
JWP Telecom acquisition. In addition, depreciation increased because of
significant capital investment in switching equipment installed in office
buildings in the services business.
FISCAL 1994 V. FISCAL 1993:
Revenues: Total revenues in Fiscal 1994 increased 9.1% to $74.9 million
from $68.6 million in Fiscal 1993. This increase was due primarily to increased
sales to customers in new and existing office buildings under franchise.
Gross Profit: Gross profit in Fiscal 1994 increased 11.7% to $21.9
million from $19.6 million in Fiscal 1993. The increase is due primarily to
increased sales to customers in new and existing office buildings and economies
of scale from increased volume.
General and Administrative Expenses: General and administrative
expenses in Fiscal 1994 increased 10.6% to $5.2 million from $4.7 million in
Fiscal 1993. The increase is due primarily to wage and salary increases and
increased amortization of intangible assets other than goodwill acquired in the
last half of Fiscal 1992.
Interest Expense, Net: Interest expense in fiscal 1994 decreased 16.3%
to $19.5 million from $20.0 million in Fiscal 1993. The decrease was due
primarily to lower rates on intercompany borrowings in fiscal 1994 compared to
Fiscal 1993.
Depreciation and Amortization: Depreciation and amortization in Fiscal
1994 increased 12.7% to $8.9 million from $7.9 million in Fiscal 1993. The
increase was due to an acquisition made in the first half of Fiscal 1992 and
because of significant capital investment in switching equipment installed in
office buildings in the services business.
LIQUIDITY AND CAPITAL RESOURCES:
Historically, the communications division of the Company has
experienced rapid growth which has required substantial investment in capital
expenditures and intangible assets from acquisitions. Cash requirements needed
to fund these expenditures and assets has come from operating cash flow and
contributions from the Company's parent corporation.
<PAGE>
Although the communications division of the Company has grown rapidly,
cash requirements for working capital have been minimal. This is due primarily
to the ability of the Company to negotiate favorable payment terms with its
vendors. In addition, the Company maintains strict collections procedures to
minimize working capital needs in accounts receivable.
Net cash used by financing activities was $4.1 million and $3.9 million
in Q1, 1996 and Q1, 1995 respectively. Cash used in acquisition was $0.6 million
in Q1, 1995 primarily for the purchase of assets from the Eaton and Lauth
Telecom operations. Cash used primarily for purchasing telecommunication assets
for office buildings was $2.2 million and $1.8 million in Q1, 1996 and Q1, 1995
respectively. Cash used in operations transferred to RHI was $1.9 million and
$1.5 million in Q1, 1996 and Q1, 1995 respectively.
Net cash provided by financing activities was $6.4 million and $2.0
million in Q1, 1996 and Q1, 1995 respectively. Proceeds from issuance of
preferred stock in Q1, 1996 was $2.4 million and in Q1, 1995 was $11.4 million.
Cash used in financing activities for payment of dividends in Q1, 1996 was $1.0
million, and in Q1, 1995 was $1.0 million. Cash provided by operations
transferred to RHI in Q1, 1996 was $5.2 million. Cash used in operations
transferred to RHI in Q1, 1995 was $8.0 million. Capital lease repayments were
$0.2 million and $0.4 million in Q1, 1996 and Q1, 1995 respectively.
Net cash provided by operating activities was $19.1 million, $11.7
million, and $13.6 million in Fiscal 1995, Fiscal 1994, and Fiscal 1993,
respectively. The increase in cash provided by operations was primarily from
increased depreciation and amortization ($1.4 million), and from changes in
operations to be transferred to RHI ($7.9 million). Primarily because of the JWP
Telecom acquisition, billed and unbilled receivables increased by $10.1 million
and inventory increased by $1.0 million in Fiscal 1995, but was significantly
offset by an $8.3 million increase in accounts payable and accrued liabilities.
Net cash used in investing activities was $27.6 million, $14.9 million,
and $19.6 million in Fiscal 1995, Fiscal 1994 and Fiscal 1993, respectively.
Cash used in acquisitions was $11.6 million in fiscal 1995 primarily for the JWP
Telecom acquisition and $7.3 million in Fiscal 1993 primarily for the Office
Networks, Inc. acquisition. Cash used primarily for purchasing telecommunication
assets for office buildings was $10.3 million, $7.8 million, and $5.8 million in
Fiscal 1995, Fiscal 1994, and Fiscal 1993, respectively. Cash used in operations
transferred to RHI was $5.8 million, $7.1 million and $6.5 million in Fiscal
1995, Fiscal 1994, and Fiscal 1993, respectively.
Net cash provided by financing activities was $9.9 million, $3.3
million and $6.0 million in Fiscal 1995, Fiscal 1994, and Fiscal 1993,
respectively. Proceeds from issuances of preferred stock was $24.4 million, $4.0
million, and $29.0 million in Fiscal 1995, Fiscal 1994, and Fiscal 1993,
respectively. The purchase/exchange of preferred stock in Fiscal 1993 used $25.1
million of cash provided by financing activities. Cash used in financing
activities for payment of dividends was $3.9 million, $3.9 million and $53.8
million in Fiscal 1995, Fiscal 1994 and Fiscal 1993, respectively. Capital Lease
repayments were $2.0 million, $3.1 million and $3.2 million for fiscal 1995,
Fiscal 1994 and Fiscal 1993, respectively. Cash used in operations transferred
to RHI in Fiscal 1995 was $8.8 million, and Fiscal 1993 was $59.1 million. Cash
provided by operations transferred to RHI in Fiscal 1994 was $6.1 million.
EXPERTS
The consolidated financial statements of Fairchild Industries, Inc.
included in this Proxy Statement to the extent and for the periods indicated in
their reports have been audited by Arthur
<PAGE>
Andersen LLP, independent public accountants, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
<PAGE>
F -2
SHARED TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Unaudited Financial Statements
Consolidated Balance Sheets as of September 30, 1995 and
December 31, 1994 (unaudited).................................................. F-2
Consolidated Statements of Operations for the Nine Month
Periods ended September 30, 1995 and 1994 (unaudited).......................... F-4
Consolidated Statements of Cash Flows for the Nine Month
Period ended September 30, 1995 and 1994 (unaudited)........................... F-6
Consolidated Statement of Stockholder Equity........................................ F-8
Notes to Consolidated Financial Statements for the Nine Month Period
ended September 30, 1995 (unaudited)........................................... F-11
Audited Financial Statements
Report of Rothstein, Kass & Company, P.C., Independent Auditors..................... F-14
Report of Arthur Andersen LLP, Independent Public Accountants....................... F-15
Consolidated Balance Sheets as of December 31, 1994 and 1993........................ F-16
Consolidated Statements of Operations for the Years Ended
December 31, 1994, 1993 and 1992............................................... F-17
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1994, 1993 and 1992................................... F-18
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1993 and 1992............................................... F-20
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1994, 1993 and 1992............................................... F-22
</TABLE>
<PAGE>
Shared Technologies Inc.
Consolidated Balance Sheets
September 30, 1995 and December 31, 1994
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------ ------------
CURRENT ASSETS:
<S> <C> <C>
Cash $1,410,374 $172,262
Accounts receivable, less allowance
for doubtful accounts of $914,000
in 1995 and $584,000 in 1994 11,587,514 8,532,770
Other current assets 1,344,891 727,375
Deferred income taxes 550,000 550,000
------- -------
Total current assets 14,892,779 9,982,407
---------- ---------
Equipment, at cost:
Telecommunications equipment 29,499,909 26,222,732
Office and data processing
equipment 6,131,803 4,995,191
---------- ---------
35,631,712 31,217,923
Less - Accumulated depreciation 18,062,821 15,473,023
---------- ----------
17,568,891 15,744,900
---------- ----------
Other Assets 14,617,414 12,197,929
----------- ----------
Total Assets $47,079,084 $37,925,236
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
Shared Technologies Inc.
Consolidated Balance Sheets
September 30, 1995 and December 31, 1994
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
CURRENT LIABILITIES:
<S> <C> <C>
Notes payable and current portion of
long-term debt and capital lease
obligations $2,437,710 $1,840,401
Accounts payable 10,664,246 8,191,350
Accrued expenses 2,666,048 2,381,736
Advance billings 1,248,382 1,260,158
---------- ---------
Total current liabilities 17,016,386 13,673,645
---------- ----------
Long-Term Debt and Capital Lease Obligations less current portion 4,012,234 2,886,365
--------- ---------
Minority Interest in Net Assets of Subsidiaries 1,662,690 101,504
--------- -------
Redeemable Put Warrant 416,287 383,048
------- -------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value:
Series C, authorized 1,500,000 shares,
outstanding 906,930 shares in 1995 and 1994 9,069 9,069
Series D, authorized 1,000,000 shares,
outstanding 456,900 shares in 1995 and 1994 4,569 4,569
Series E, authorized 400,000
shares, outstanding no shares in
1995 and 400,000 shares in 1994 4,000
Series F, authorized 700,000
shares, outstanding no shares in
1995 and 700,000 shares in 1994 7,000
Common Stock; $.004 par value,
20,000,000 shares authorized;
8,476,315 and 6,628,246 shares
outstanding in 1995 and 1994
respectively 33,905 26,513
Additional paid-in capital 44,647,005 41,488,128
Accumulated deficit (20,723,061) (22,465,105)
Obligations to issue common stock 1,806,500
---------- ----------
Total stockholders' equity 23,971,487 20,880,674
---------- ----------
Total liabilities and stockholders' equity $47,079,084 $37,925,236
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
Shared Technologies Inc.
Consolidated Statements of Operations
For the Nine Months Ended
September 30, 1995 and 1994
(unaudited)
<TABLE>
<CAPTION>
September 30, 1995 September 30, 1994
<S> <C> <C>
Revenue:
Shared tenant services $25,248,201 $20,450,338
Facility management services 9,266,253 3,443,468
Cellular services 9,160,128 7,620,195
---------- ---------
Total Revenue 43,674,582 31,514,001
---------- ----------
Cost of Revenue:
Shared tenant services 13,933,976 11,224,004
Facility management services 7,163,639 2,796,147
Cellular services 5,530,558 3,969,979
---------- ---------
Total Cost of Revenue 26,628,173 17,990,130
----------- ----------
Gross Margin 17,046,409 13,523,871
Selling, General & Administrative Expenses:
Field 12,659,071 8,700,681
Corporate 3,457,279 3,058,956
--------- ---------
Operating Income 930,059 1,764,234
Gain on sale of subsidiary stock 1,374,544 -
Interest Expense (574,209) (228,117)
Interest Income 130,016 69,792
Minority Interest in Net (Income)
Loss of Subsidiaries 213,445 (43,080
-------- -------
Net Income 2,073,855 1,562,829
Preferred Stock Dividends (298,575) (349,974)
Net Income Applicable to Common Stock $1,775,280 $1,212,855
========== ==========
Net Income Per Common Share $0.20 $0.21
====== =====
Weighted Average Shares Outstanding 8,698,207 5,699,483
========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
Shared Technologies Inc.
Consolidated Statements of Operations
For the Three Months Ended
September 1995 and 1994
(unaudited)
<TABLE>
<CAPTION>
September 30, 1995 September 30, 1994
<S> <C> <C>
Revenue:
Shared tenant services $8,178,263 $8,101,762
Facility management services 3,916,491 2,691,972
Cellular services 3,870,059 3,699,285
---------- ---------
Total Revenue 15,964,813 14,493,019
---------- ----------
Cost of Revenue:
Shared tenant services 4,353,841 4,667,446
Facility management services 2,913,726 2,137,853
Cellular services 2,451,861 1,854,885
--------- ---------
Total Cost of Revenue 9,719,428 8,660,184
--------- ---------
Gross Margin 6,245,385 5,832,835
Selling, General & Administrative Expenses:
Field 4,678,533 3,954,061
Corporate 1,313,734 1,206,329
--------- ---------
Operating Income 253,118 672,445
Interest Expense (244,596) (101,768)
Interest Income 58,568 32,234
Minority Interest in Net Loss of Subsidiaries 124,600
-------
Net Income 191,690 602,911
------- -------
Preferred Stock Dividends (99,680) (130,772)
-------- ---------
Net Income Applicable to Common Stock $92,010 $472,139
======= ========
Net Income Per Common Share $0.01 $0.07
===== =====
Weighted Average Shares Outstanding 8,751,048 6,549,668
========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
Shared Technologies Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended
September 30, 1995 and 1994
(unaudited)
<TABLE>
<CAPTION>
September 30, 1995 September 30, 1994
<S> <C> <C>
Cash Flows Provided by Operating Activities
Net Income $2,073,855 $1,562,829
Adjustments:
Gain on sale of subsidiary stock (1,374,544)
Depreciation & amortization 3,266,030 2,293,934
Minority interest in net income
(loss) of subsidiaries (213,445) 43,080
Change in Assets and Liabilities:
Accounts receivable (2,407,574) (2,126,013)
Other current assets (593,696) (38,746)
Other assets (309,640) 43,993
Accounts payable 1,541,358 1,046,443
Accrued expenses (57,756) (883,911)
Advanced billings (46,776) 16,932
-------- ------
Net cash provided by operating activities 1,877,812 1,958,541
--------- ---------
Cash Flows used in Investing Activities
Acquisitions (2,482,793) (3,779,725)
Capital expenditures (3,099,289) (2,521,417)
----------- -----------
Net cash used in investing activities (5,582,082) (6,301,142)
----------- -----------
Cash Flows From Financing Activities:
Preferred stock dividends (298,575) (349,974)
Net proceeds from sale of subsidiary stock 3,274,175
Purchase of subsidiary treasury stock (375,000)
Proceeds from borrowings 2,929,193 2,121,547
Repayments of notes payable, long-
term debt and capital lease obligations (1,750,860) (1,697,627)
Net proceeds from sales of common and preferred stock 1,163,449 4,711,509
--------- ---------
Net cash provided by financing activities 4,942,382 4,785,455
--------- ---------
Net increase in cash 1,238,112 442,854
Cash, Beginning of Period 172,262 408,533
------- -------
Cash, End of Period $1,410,374 $851,387
========== ========
</TABLE>
<PAGE>
Shared Technologies Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended
September 30, 1995 and 1994
(unaudited)
<TABLE>
<CAPTION>
September 30, 1995 September 30, 1994
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for -
Interest $568,963 $227,650
Income taxes $73,611 $25,032
Supplemental Disclosures of Noncash Investing and Financing
Activities:
Issuance of common stock in connection with acquisitions $1,806,500 -
========== ==========
Issuance of preferred stock in connection with acquisition - $5,000,000
========== ==========
Dividend accretion on redeemable put warrant $33,236 -
========== ==========
Issuance of common stock to settle accrued expenses $185,320 $66,946
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
Shared Technologies Inc.
Consolidated Statement of Stockholders' Equity
For the period ended September 30, 1995
(unaudited)
<TABLE>
<CAPTION>
Series C Preferred Series D Preferred Series E Preferred Series F Preferred
Stock Stock Stock Stock
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 906,930 $9,069 456,900 $4,569 400,000 $4,000 700,000 $7,000
Issuance of Common Stock
per obligation to issue - - - - - - - -
Conversion of Preferred Stock - - - - (400,000) ($4,000) (700,000) ($7,000)
Sale of Common Stock - - - - - - - -
Common stock issued in
lieu of compensation and other - - - - - - - -
Net income - - - - - - - -
Dividend accretion of
redeemable put warrant - - - - - - - -
Preferred stock dividends - - - - - - - -
Balance, September 30, 1995 906,930 $9,069 456,900 $4,569 0 $0 0 $0
======= ====== ======= ====== =========== ========== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
Shared Technologies Inc.
Consolidated Statement of Stockholders' Equity
For the period ended September 30, 1995
(unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
Paid-in
Shares Amount Capital
<S> <C> <C> <C>
Balance, January 1, 1995 6,628,246 $26,513 $41,488,128
Issuance of Common Stock
per obligation to issue 405,395 1,621 1,804,879
Conversion of Preferred 1,100,000 4,400 6,600
Stock
Sale of Common Stock 315,500 1,262 1,228,062
Common stock issued in
lieu of compensation and 27,174 109 119,336
other
Net income - - -
Dividend accretion of
redeemable put warrant - - -
Preferred stock dividends - - -
Balance, September 30, 1995 8,476,315 $33,905 $44,647,005
========= ======= ===========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
Shared Technologies Inc.
Consolidated Statement of Stockholders' Equity
For the period September 30, 1995
(unaudited)
<TABLE>
<CAPTION>
Obligations Total
Accumulated to Issue Stockholders'
Deficit Common Stock Equity
<S> <C> <C> <C>
Balance, January 1, 1995 ($22,465,105) $1,806,500 $20,880,674
Issuance of Common Stock
per obligation to issue - (1,806,500) (0)
Conversion of Preferred - - (0)
Stock
Sale of Common Stock - - 1,229,324
Common stock issued in
lieu of compensation and - - 119,445
other
Net income 2,073,855 - 2,073,855
Dividend accretion of
redeemable put warrant (33,236) - (33,236)
Preferred stock dividends (298,575) - (298,575)
Balance, September 30, 1995 ($20,723,061) $0 $23,971,487
============= ==== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
Shared Technologies Inc.
Notes to Consolidated Financial Statements
September 30, 1995
(Unaudited)
1. Basis of Presentation: The consolidated financial statements included herein
have been prepared by Shared Technologies Inc. (the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission and reflect all
adjustments, consisting only of normal recurring adjustments, which are, in the
opinion of management, necessary to present a fair statement of the results for
interim periods. Certain information and footnote disclosures have been omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these consolidated financial statements be read in conjunction
with the consolidated financial statements and the notes thereto included in the
Company's December 31, 1994 report on Form 10-K. Certain reclassifications to
prior year financial statements were made in order to conform to the 1995
presentation.
2. Income Taxes: The Company and its subsidiaries file a consolidated federal
income tax return but generally file separate state income tax returns. As of
December 31, 1994, the Company has net operating loss carryforwards for federal
income tax purposes of approximately $22.7 million, which expire, if unused,
from 2001 to 2007.
3. Acquisitions: In June 1994, the Company acquired all of the partnership
interests in Access Telecommunication Group, L.P. and Access Telemanagement,
Inc. (collectively, "Access"). The purchase price was $9,252,000, of which
$4,252,000 was paid in cash and the balance through the issuance of 400,000
shares of Series E Preferred Stock valued at $3.75 per share and 700,000 shares
of Series F Preferred Stock valued at $5.00 per share.
On June 30, 1995 the Company 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, the Company'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 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. The
former Hotline stockholders exercised their put option during that period.
Additionally at closing, STC issued options to purchase 50,000 additional
<PAGE>
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 through 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 0.20
Weighted Average Shares 7,488,054 8,698,207
4. Contingencies: While providing services at the Jacob K. Javits Convention
Center in 1991, the Company licensed the right to provide certain public pay
telephone services at the Center to Tel-A-Booth Communications, Ltd. In 1992,
Tel-A-Booth filed a claim against the New York Convention Center Operating
Corporation and its facilities manager, Ogden Allied Facility Management, and
against the Company seeking $10,000,000 in damages for which no amounts have
been provided in the accompanying consolidated financial statements. While any
litigation contains an element of uncertainty, management is of the opinion
based on the current status of the claim that the ultimate resolution of this
matter should not have a material adverse effect upon either results of
operations, cash flows or financial position of the Company.
The Company's subsidiary, Shared Technologies Cellular, Inc. (STC) has entered
into an agreement for partial settlement of certain litigation arising in
connection with its purchase of certain assets from Road and Show South, Ltd.
("Road and Show") Pursuant to the settlement, STC has been indemnified against a
claim from a former employee of an affiliate of Road and Show. As between STC
and Road and Show, certain claims exist, which the parties have agreed to
attempt to settle through mediation or arbitration. The Company's management
believes that in the event such claims are resolved against STC that they would
not, in the aggregate, have a material adverse effect on the Company's financial
condition.
In addition to the above matters, the Company is a party to various legal
actions, the outcome of which, in the opinion of management, will not have a
material adverse effect on the Company's financial condition and results of
operations.
5. Gain on sale of subsidiary stock: In April, 1995, the Company's cellular
subsidiary Shared Technologies Cellular, Inc. ("STC") completed its SB-2 filing
with the Securities and Exchange Commission and became a public company. Prior
to this date STC had been an approximately 86% owned subsidiary of the Company.
STC sold 950,000 shares of common stock at $5.25 which generated net proceeds of
approximately $3,274,000, after underwriters' commissions and offering expenses.
These proceeds are intended to be used to finance marketing activities relating
to STC's cellular telephone rental service ($1.15 million), repayment of
indebtedness to the Company ($1.25 million), acquisition of telecommunication
equipment, billing technology management information systems and centralized
reservation systems ($.5 million) and the balance for working capital and
general corporate purposes. The net effect on the consolidated financial
statements for the second quarter was a gain of approximately $1,375,000.
<PAGE>
6. Subsequent Events: In November 1995 the Company signed an agreement under
which Fairchild Industries Inc. ("FII"), following a reorganization transferring
all non-communications assets to its parent RHI Holding Inc., will merge into
the Company. The company will be called Shared Technologies Fairchild Inc. Under
the proposed merger agreement the Company will issue 6,000,000 shares of common
stock, 1,000,000 shares of convertible preferred stock with a $25,000,000
liquidation preference and 1,000,000 shares of special preferred stock with an
initial $20,000,000 liquidation preference and raise approximately $238,000,000
through senior debt from banks and subordinated debt from the capital markets.
The Company has entered into financing arrangements with CS First Boston which
include a highly confident letter for all of the debt financing for the
transaction.
In November 1995 the Company's cellular subsidiary, STC, commenced management
and subsequently completed its acquisition of certain assets of PTC Cellular,
Inc. ("PTCC"). The purchase price was $3,800,000, comprised of $300,000 in cash,
the assumption of $1,200,000 in assumed accounts payable, a 5-year promissory
note in the principal amount of $2,000,000 and the issuance of 100,000 shares of
STC common stock, $.01 par value. Additionally, the agreement allows for royalty
payments in the amount of three percent (3%) of quarterly revenues generated
from certain of the acquired assets not to exceed an aggregate of $2,500,000.
Also, STC has committed to PTCC to obtain financing in the amount of $7,000,000
within six months of the acquisition date.
Pro Forma financial information is not yet available.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Shared Technologies Inc.
We have audited the accompanying consolidated balance sheets of Shared
Technologies Inc. and Subsidiaries as of December 31, 1994 and 1993 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 the 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Shared Technologies
Inc. and Subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ROTHSTEIN, KASS & COMPANY, P.C.
/s/ Rothstein, Kass & Company, P.C.
Roseland, New Jersey
March 24, 1995, except for Notes 7 and 11
as to which the date is April 11, 1995
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
------------------------------------------------------------------
To Shared Technologies Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Shared Technologies Inc. (a Delaware
corporation) and subsidiaries for the year ended December 31, 1992. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Shared
Technologies Inc. and subsidiaries for the year ended December 31, 1992 in
conformity with generally accepted accounting principles.
As discussed in Note 14 to the consolidated financial statements, the Company
and others have been named in a lawsuit seeking damages of approximately $10
million, including $1.4 million for equipment purchased, for which no provision
has been made in the accompanying consolidated financial statements. The Company
has filed answers to this complaint denying the material allegations of the
claim. Although the claim is being contested by the Company, the outcome of this
matter is uncertain at this time.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
Hartford, Connecticut
March 23, 1993 (except with respect to the matter discussed
in the second paragraph of Note 14, as to which the date is
April 14, 1994)
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
------------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 172,262 $ 408,533
Accounts receivable, less allowance for doubtful accounts
and discounts of $584,000 in 1994 and $310,000 in 1993 8,532,770 4,614,188
Other current assets 727,375 545,071
Deferred income taxes 550,000
-------------
Total current assets 9,982,407 5,567,792
------------- -------------
EQUIPMENT:
Telecommunications 26,222,732 21,298,405
Office and data processing 4,995,191 4,358,275
------------- -------------
31,217,923 25,656,680
Less accumulated depreciation and amortization 15,473,023 13,545,303
------------- -------------
15,744,900 12,111,377
OTHER ASSETS:
Intangible assets 11,197,887 2,347,958
Other 1,000,042 573,535
------------- -------------
12,197,929 2,921,493
------------- -------------
$ 37,925,236 $ 20,600,662
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease obligations $ 1,840,401 $ 1,941,876
Accounts payable 8,191,350 4,482,239
Accrued expenses 2,381,736 2,068,771
Advance billings 1,260,158 948,938
------------- -------------
Total current liabilities 13,673,645 9,441,824
------------- -------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
less current portion 2,886,365 1,777,431
------------- -------------
MINORITY INTERESTS IN NET ASSETS OF SUBSIDIARIES 101,504 78,971
------------- -------------
REDEEMABLE PUT WARRANT 383,048
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value:
Series C, authorized 1,500,000 shares, outstanding
906,930 shares in 1994 and 987,930 in 1993 9,069 9,879
Series D, authorized 1,000,000 shares, outstanding
456,900 shares in 1994 and 453,158 in 1993 4,569 4,532
Series E, authorized 400,000 shares in 1994 and no shares
in 1993, outstanding 400,000 shares in 1994 4,000
Series F, authorized 700,000 shares in 1994 and no shares
in 1993, outstanding 700,000 shares in 1994 7,000
Common stock, $.004 par value, authorized 20,000,000
shares, outstanding 6,628,246 shares in 1994 and
5,190,335 in 1993 26,513 20,761
Capital in excess of par value 41,488,128 31,759,048
Accumulated deficit (22,465,105) (24,248,284)
Obligations to issue common stock 1,806,500 1,756,500
------------- -------------
Total stockholders' equity 20,880,674 9,302,436
------------- -------------
$ 37,925,236 $ 20,600,662
============= =============
</TABLE>
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
---------- ----------- -----
<S> <C> <C> <C>
REVENUES:
Shared tenant services $ 28,666,574 $ 21,683,186 $ 21,395,125
Facilities management services 6,482,637 1,542,893 1,287,452
Cellular services 10,217,300 2,199,727 1,394,387
------------- ------------- -------------
Total revenues 45,366,511 25,425,806 24,076,964
------------- ------------- -------------
COST OF REVENUES:
Shared tenant services 15,716,890 11,627,939 12,727,935
Facilities management services 5,161,130 1,282,064 1,082,643
Cellular services 5,293,845 1,604,040 1,011,642
------------- ------------- -------------
Total cost of revenues 26,171,865 14,514,043 14,822,220
------------- ------------- -------------
GROSS MARGIN 19,194,646 10,911,763 9,254,744
OPERATING EXPENSES, selling, general and administrative 16,971,416 10,101,985 9,959,366
------------- ------------- -------------
OPERATING INCOME (LOSS) 2,223,230 809,778 (704,622)
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense (522,112) (529,565) (410,830)
Interest income 162,951 91,889 120,815
Minority interests in net income of subsidiaries (128,084) (81,928) (37,391)
------------- ------------- -------------
(487,245) (519,604) (327,406)
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAX CREDIT
AND EXTRAORDINARY ITEM 1,735,985 290,174 (1,032,028)
INCOME TAX CREDIT 550,000
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 2,285,985 290,174 (1,032,028)
EXTRAORDINARY ITEM, (loss) gain on restructuring (in 1992,
net of restructuring expenses of $1,361,000, and income
taxes of $45,000, after extraordinary benefit of
utilizing net operating loss carryforwards of $3,000,000) (150,000) 3,756,327
------------- ------------- -------------
NET INCOME 2,285,985 140,174 2,724,299
PREFERRED STOCK DIVIDENDS (478,159) (344,650) (334,478)
------------- ------------- -------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 1,807,826 $ (204,476) $ 2,389,821
============= ============= =============
INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item $ .27 $ (.01) $ (.33)
Extraordinary item (.03) .92
------------- ----- ----
Net income (loss) $ .27 $ (.04) $ .59
=========== ====== =====
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 6,792,277 5,132,296 4,062,710
============= ============= =========
</TABLE>
See accompanying notes to consolidated financial
statements.
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY Years Ended December 31, 1994,
1993 and 1992
<TABLE>
<CAPTION>
Series B Series C Series D
Preferred Stock Preferred Stock Preferred Stock
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1992 914,750 $ 9,147 - $ - - $ -
Dividends on preferred stock
Conversion of Series A Preferred Stock
to Series C Preferred Stock 110,000 1,100
Conversion of Series B Preferred Stock
to Series C Preferred Stock (914,750) (9,147) 914,750 9,147
Conversion of preferred stock dividends
payable to Series C Preferred Stock 81,980 820
Proceeds from sale of common stock
including subscriptions of $162,980
collected subsequent to December 31,
1992 and net of expenses of $470,000
Common stock issued in lieu of
compensation and other
Exercise of common stock options
Exercise of common stock warrants
Net income
BALANCE, December 31, 1992 1,106,730 11,067
Dividends on preferred stock
Proceeds from sale of Series D
Preferred Stock, net of expenses
of $411,549 453,158 4,532
Redemption of Series C Preferred
Stock (118,800) (1,188)
Common stock to be issued
for acquisitions
Common stock issued in lieu
of compensation
Common stock issued in lieu
of deferred financing fees
Exercise of common stock options
Net income
BALANCE, December 31, 1993 987,930 9,879 453,158 4,532
Preferred stock dividends
Dividend accretion of redeemable put warrant
Exercise of common stock options
and warrants
Proceeds from sale of Series D
Preferred Stock 3,742 37
Issuances for acquisitions
Proceeds from sale of common stock, net
of expenses of $371,067
Common stock issued in lieu of
compensation and conversion of
Series C Preferred Stock and other (81,000) (810)
Net income
BALANCE, December 31, 1994 - $ - 906,930 $ 9,069 456,900 $ 4,569
========== ========= ========= ========== ========== ==========
See accompanying notes to consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Obligations
Series E Series F Capital in to Issue Total
Preferred Stock Preferred Stock Common Stock Excess of Accumulated Common Stockholders'
- -------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Par Value Deficit Stock Equity
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- $ - - $ - 3,740,732 $ 14,963 $ 23,261,185 $ (26,433,629) $ - $ (3,148,334)
(334,478) (334,478)
438,900 440,000
327,100 327,920
1,250,000 5,000 5,775,000 5,780,000
31,985 128 127,558 127,686
53,938 216 110,827 111,043
15,542 62 6,155 6,217
2,724,299 2,724,299
- -------------------------------------------------------------------------------------------------------------------------------
5,092,197 20,369 30,046,725 (24,043,808) 6,034,353
(344,650) (344,650)
1,736,601 1,741,133
(384,912) (386,100)
1,756,500 1,756,500
49,345 197 228,229 228,426
13,793 55 49,945 50,000
35,000 140 82,460 82,600
140,174 140,174
- -------------------------------------------------------------------------------------------------------------------------------
5,190,335 20,761 31,759,048 (24,248,284) 1,756,500 9,302,436
(478,159) (478,159)
(24,647) (24,647)
26,061 104 71,320 71,424
(1,511) (1,474)
400,000 4,000 700,000 7,000 4,989,000 5,000,000
1,328,700 5,315 4,556,243 4,561,558
83,150 333 114,028 50,000 163,551
2,285,985 2,285,985
- -------------------------------------------------------------------------------------------------------------------------------
400,000 $ 4,000 700,000 $ 7,000 6,628,246 $ 26,513 $ 41,488,128 $ (22,465,105) $ 1,806,500 $ 20,880,674
========== ======== ======== ======== ========== ========= ============ ============= ============ ============
</TABLE>
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- -----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,285,985 $ 140,174 $ 2,724,299
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss (gain) on restructuring 150,000 (5,162,576)
Depreciation and amortization 3,702,004 2,562,024 2,447,925
Provision for doubtful accounts 412,617 253,000
Common stock of subsidiary issued for services 16,500
Stock options and common stock issued
in lieu of compensation and other 113,551 278,426 127,686
Minority interests 128,084 81,928 37,391
Gain on sale of franchise (202,033)
Deferred income taxes (550,000)
Amortization of discount on note 52,267
Change in assets and liabilities:
Accounts receivable (2,147,159) (990,468) (468,931)
Other current assets (179,462) 131,664 123,015
Other assets (429,835) (243,689)
Accounts payable 1,629,214 963,950 1,504,715
Accrued expenses (1,707,272) (1,211,878) (783,854)
Advance billings (66,679) 91,531 21,826
-------------- -------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,057,782 2,206,662 571,496
-------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment, net (3,223,420) (2,034,760) (2,014,182)
Acquisitions of Road and Show South and East (255,356)
Acquisition of Access (3,947,649)
Long-term deposits (1,557) (296,994)
Proceeds from restricted investments 852,698
Other investments (95,548)
Deferred registration costs (182,135)
--------------
NET CASH USED IN INVESTING ACTIVITIES (7,353,204) (2,291,673) (1,554,026)
-------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable, long-term debt and
capital lease obligations (2,409,274) (1,895,419) (3,962,571)
Proceeds from borrowings 2,315,075
Proceeds from sales of common and preferred stock 4,631,509 1,823,733 5,734,280
Redemption of preferred stock (386,100)
Preferred stock dividends paid (478,159) (344,650) (88,538)
-------------- -------------- -------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 4,059,151 (802,436) 1,683,171
-------------- -------------- -------------
NET INCREASE (DECREASE) IN CASH (236,271) (887,447) 700,641
CASH, beginning of year 408,533 1,295,980 595,339
-------------- -------------- -------------
CASH, end of year $ 172,262 $ 408,533 $ 1,295,980
============== ============== =============
</TABLE>
See accompanying notes to consolidated
financial statements.
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
---------------- ---------- -----
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION, cash paid during the year for interest $ 441,272 $ 386,134 $ 401,208
============== ============== =============
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Conversion of accrued expenses to note payable
in connection with litigation settlement $ - $ 460,478 $ -
============== ============== ============
Obligations to issue common stock in connection
with acquisitions $ 50,000 $ 1,756,500 $ -
============== ============== ============
Conversion of accounts payable to long-term debt $ - $ - $ 3,288,236
============== ============== =============
Conversion of preferred stock dividends payable
to Series C Preferred Stock $ - $ - $ 327,920
============== ============== =============
Issuance of preferred stock in connection with acquisition $ 5,000,000 $ - $ -
============== ============== ============
Redeemable put warrant issued in connection with
bank financing $ 358,401 $ - $ - _
============== ============== ============
Capital lease obligation incurred for lease of new equipment $ 63,589 $ - $ - _
============== ============== ============
Dividend accretion on redeemable put warrant $ 24,647 $ - $ - _
============== ============== ============
Costs of intangible assets included in accounts payable $ 202,985 $ - $ - _
============== ============== ============
Note received for sale of franchise $ 202,033 $ - $ - _
============== ============== ============
</TABLE>
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND ORGANIZATION:
The Company is in the shared tenant services (STS) and facilities
management services (FMS) industry, providing telecommunications
and office automation services and equipment to tenants of office
buildings. One of the Company's subsidiaries, Shared Technologies
Cellular, Inc. (STC), is a provider of short-term portable
cellular telephone services.
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned and majority-owned
subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION - Revenues are recognized as services are
performed. The Company bills customers monthly in advance for
equipment rentals and local telephone access service and defers
recognition of these revenues until the service is provided.
Enhanced office service revenues (included in both STS and FMS
revenues), which consists primarily of product and equipment
sales, is recognized at the time of shipment.
CASH - The Company maintains its cash in bank deposit accounts,
which, at times, may exceed federally insured limits. The Company
has not experienced any losses in such accounts and believes it is
not subject to any significant credit risk on cash.
EQUIPMENT - Equipment is stated at cost. Depreciation and
amortization is provided using the straight-line method over the
following estimated useful lives:
Telecommunications equipment 8 years
Office and data processing equipment 3-8 years
Effective January 1, 1992, the Company prospectively changed the
estimated depreciable life of telecommunications equipment
purchased prior to January 1, 1991 from five to eight years. The
change resulted in approximately $933,000 ($.23 per common share)
less depreciation expense for the year ended December 31, 1992
than would have been recorded using the previous estimated
depreciable life of five years. Excluding the impact of this
change, the loss before extraordinary item per common share for
1992 would have been $.56.
Major renewals and betterments are capitalized. The cost of
maintenance and repairs which do not materially prolong the useful
life of the assets are charged to expense as incurred.
Rent - Certain leases require escalating base rents or provide for
rent abatements for a period of time. The Company is expensing the
rents on a straight-line basis over the terms of the leases.
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INTANGIBLE ASSETS:
Goodwill - Goodwill represents the excess of the purchase prices
over the fair values of the net assets of businesses acquired. The
Company monitors the profitability of the acquired businesses to
assess whether any impairment of recorded goodwill has occurred.
Goodwill is amortized over periods ranging from 5 years to 40
years.
Deferred Startup Costs - Costs relating to the startup of
operations in certain new locations have been deferred and
amortized over one to two years upon commencement of the related
operations.
Software Development Costs - In connection with its cellular
subsidiary (SafeCall) operations, the Company has incurred certain
software development costs relating to the "privacy network" and
are amortized over 5 years starting with the implementation of the
related software.
Other Intangible Assets - Other intangible assets are being
amortized over 5 years.
Deferred Registration Costs - The Company has deferred legal fees,
other fees and costs incurred in connection with a proposed public
offering of a subsidiary. These costs will be charged to capital
in excess of par value upon completion of the offering, otherwise
the costs will be charged to operations. At December 31, 1994,
approximately $182,000 of these costs are included in other
assets.
INCOME TAXES - Effective January 1, 1993, the Company adopted
Statement of Financial Accounting Standards (SFAS No. 109),
"Accounting for Income Taxes", which requires an asset and
liability approach to financial reporting for income taxes.
Deferred income tax assets and liabilities are computed annually
for differences between financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future, based on enacted tax laws and rates
applicable to the periods in which the differences are expected to
effect taxable income. Valuation allowances are established, when
necessary, to reduce the deferred income tax assets to the amount
expected to be realized. Prior to adopting SFAS No. 109, the
Company accounted for income taxes using the deferral method as
required by Accounting Principles Board Opinion No. 11. The
adoption of SFAS 109 had no material impact on the Company's
financial statements since the Company fully reserved for the tax
benefits flowing from its net operating losses (Note 13).
INCOME (LOSS) PER COMMON SHARE - Primary income (loss) per common
share is computed by deducting preferred stock dividends from net
income in order to determine net income applicable to common
stock, which is then divided by the weighted average number of
common shares outstanding including the effect of options,
warrants and obligations to issue common stock, if dilutive.
Fully diluted income (loss) per common share is computed by
dividing net income applicable to common stock by the weighted
average number of common and common equivalent shares and the
effect of preferred stock conversions, if dilutive. Fully diluted
income (loss) per common share is substantially the same as
primary income (loss) per common share for the years ended
December 31, 1994, 1993 and 1992.
RECLASSIFICATIONS - Certain reclassifications to prior years
financial statements were made in order to conform to the 1994
presentation.
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - RESTRUCTURING:
During 1992, the Company completed a restructuring which resulted
in recording a gain of $5,162,000 before related expenses of
$1,361,000 and income taxes of $45,000. As a result of the
restructuring, approximately $900,000 of vendor payables and
$1,500,000 of capital lease obligations were forgiven and
$3,300,000 of vendor payables were converted into three year
non-interest bearing notes payable (Note 7). Additionally, an
agreement was entered into with the Federal Deposit Insurance
Corporation (FDIC), as receiver for the Company's principal
lender, whereby the Company paid off its term and revolving credit
loans for $2,450,000 and recognized a gain of approximately
$2,700,000. Had interest been accrued, the gain on restructuring
and interest expense would have each increased by approximately
$440,000. In connection with settling his guarantee of these
obligations, the Company's president issued to the FDIC a
non-interest bearing promissory note for $675,000 due in 1997 and
pledged 100,000 shares of his common stock and his options to
purchase 25,000 shares of common stock of the Company as
collateral.
As of December 31, 1993, the Company was negotiating the
settlement of a $600,000 promissory note (Note 7), which was
settled in 1994 by issuance of a $750,000 promissory note.
Accordingly, for the year ended December 31, 1993, the Company
recorded, as an extraordinary item, an expense of $150,000 in
connection with the completion of the restructuring.
In connection with the restructuring, the Company sold common
stock, resulting in net proceeds of approximately $5,780,000
(which included $163,000 of subscriptions receivable as of
December 31, 1992) and entered into agreements with Series A and B
Preferred stockholders to convert their holdings, including
$327,920 of accrued dividends related thereto, into Series C
Preferred Stock.
NOTE 4 - ACQUISITIONS:
In December and October 1993, the Company commenced management of,
and subsequently acquired certain assets and assumed certain
liabilities of Road and Show South, Ltd. (South) and Road and Show
Cellular East, Inc. (East), respectively. The purchase price for
South was $1,261,611, of which $46,111 was paid in cash and the
balance through the issuance of 221,000 shares of the Company's
common stock valued at $1,215,500. The purchase price for East was
$750,245, of which $209,245 was paid in cash and the balance
through the issuance, upon demand, of 108,200 shares of the
Company's common stock valued at $541,000. The number of shares of
common stock related to these acquisitions was adjusted on
December 1, 1994 based on the price of the Company's 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 common stock
had been issued for the East acquisition. The shares 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 (Note 16).
In June 1994, the Company acquired all of the partnership
interests in Access Telecommunication Group, L.P. and Access
Telemanagement, Inc. (collectively Access). The purchase price was
$9,252,031, of which $4,252,031 was paid in cash and the balance
through the issuance of 400,000 shares of Series E Preferred Stock
valued at $3.75 per share and 700,000 shares of Series F Preferred
Stock valued at $5.00 per share.
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - ACQUISITIONS (CONTINUED):
The acquisitions were accounted for as purchases, and the purchase
prices were allocated on the basis of the relative fair market
values of the net assets.
The excess of costs over fair value of the net assets acquired is
recorded as goodwill (aggregating approximately $10,289,000) in
the accompanying consolidated financial statements. Amortization
of goodwill approximated $181,000 and $15,000 in 1994 and 1993,
respectively.
Additional payments may be required for the East acquisition based
upon the attainment of certain future revenues of the Company and
will be charged to goodwill when they become earned.
The following unaudited pro forma statements of operations for
1994 and 1993 give effect to the acquisitions, as if they occurred
on January 1 in each year:
<TABLE>
<CAPTION>
1994 1993
---------- --------
<S> <C> <C>
Revenues $ 54,547,694 $ 47,479,720
Cost of revenues 32,612,238 30,774,241
---------------- ---------------
Gross margin 21,935,456 16,705,479
Selling, general and administrative expenses 19,573,151 16,846,048
---------------- ---------------
Operating income (loss) 2,362,305 (140,569)
Other expense, net (459,378) (572,072)
---------------- ---------------
Income (loss) before income tax credit and
extraordinary item 1,902,927 (712,641)
Income tax credit 550,000
----------------
Income (loss) before extraordinary item 2,452,927 (712,641)
Extraordinary item (150,000)
---------------- ---------------
Net income (loss) 2,452,927 (862,641)
Preferred stock dividends (538,159) (464,650)
---------------- ---------------
Net income (loss) applicable to common stock $ 1,914,768 $ (1,327,291)
================ ===============
Net income (loss) per common share:
Income (loss) before extraordinary item $ .25 $ (.21)
Extraordinary item (.03)
---------------- ---------------
Net income (loss) $ .25 $ (.24)
=============== ===============
Weighted average number of common
shares outstanding 7,753,409 5,526,492
================ ===============
</TABLE>
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INTANGIBLE ASSETS:
Intangible assets consist of the following at December 31, 1994
and 1993:
<TABLE>
<CAPTION>
1994 1993
------------ ----------
<S> <C> <C>
Goodwill $ 11,185,606 $ 2,307,692
Deferred startup costs 491,246 172,689
Software development costs 186,334 68,000
Other 198,129 175,756
-------------- ---------------
12,061,315 2,724,137
Accumulated amortization 863,428 376,179
-------------- ---------------
$ 11,197,887 $ 2,347,958
============== ===============
</TABLE>
NOTE 6 - ACCRUED EXPENSES:
Accrued expenses at December 31, 1994 and 1993 consist of the
following:
<TABLE>
<CAPTION>
1994 1993
------------ -----
<S> <C> <C>
State sales and excise taxes $ 861,406 $ 1,194,746
Deferred lease obligations 149,986 153,805
Compensation 416,773 76,787
Property taxes 140,102 72,443
Concession fees 101,835 64,754
Other 711,634 506,236
-------------- ---------------
$ 2,381,736 $ 2,068,771
============== ===============
</TABLE>
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
Long-term debt and capital lease obligations at December 31, 1994
and 1993 consist of the following:
<TABLE>
<CAPTION>
1994 1993
------------ -----
<S> <C> <C>
Revolving $4,000,000 credit line, due in monthly installments
of approximately $36,500 commencing March 1995 and bearing
interest at 2% above prime rate (10.5% at
December 31, 1994) (Note 8) $ 1,008,939 $ -
Initial term loan, due in quarterly installments of $50,000
commencing November 24, 1994, with final payment of $700,000
due May 1996 and bearing
interest at 2% above prime rate 950,000
</TABLE>
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED):
<TABLE>
<CAPTION>
1994 1993
---------- -----
<S> <C> <C>
Notes payable to vendors, non-interest bearing
due in aggregate quarterly installments of
approximately $249,000 through June 1995 497,595 1,615,490
Promissory note payable in semi-annual
installments through May 31, 1996 and
bearing interest at 10% per annum (see below) 268,300 750,000
Promissory note, $550,000 original face amount discounted at
7.75%, payable in quarterly installments of $25,000 through
March 31, 1999, collateralized by commitment to issue
106,250 shares of
Series C Preferred Stock 359,193 428,003
Promissory note, $450,000 original face amount, non-interest
bearing, payable in quarterly installments of $16,071
through
June 30, 1999 289,068 353,353
Capital lease obligations, collateralized
by related telecommunications and data
processing equipment and all of the assets
acquired from Access (Note 4) 1,353,671 572,461
-------------- ---------------
4,726,766 3,719,307
Less current portion 1,840,401 1,941,876
-------------- ---------------
$ 2,886,365 $ 1,777,431
============== ===============
</TABLE>
In connection with the Company's 1992 restructuring (Note 3),
approximately $3,300,000 of vendor payables were converted to
non-interest bearing notes payable. As part of the restructuring,
the Company also renegotiated the terms of a $450,000 promissory
note. Prior to the restructuring, the note provided for interest
at the prime rate plus 1% and was due in 1990. As of December 31,
1992, the Company was negotiating the settlement of a $600,000
promissory note, which was subsequently settled for a $750,000
promissory note, with interest at 10% per annum. In connection
with the restructuring, approximately $1,500,000 of capital lease
obligations was forgiven. As of December 31, 1992, one settlement
requiring a cash payment of $588,000 had not been completed. A
payment of $588,000 plus penalties and interest of $50,000 was
made in 1993.
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED):
In May 1994, the Company entered into a $5,000,000 financing
agreement with a bank. The agreement provides for a revolving
credit line for a maximum, as defined, of $4,000,000 to be used
for expansion in the shared tenant services business. Aggregate
drawings on the line convert semi-annually, through May 1996, to
three year term loans. In addition, the agreement provides for a
$1,000,000 term loan. The loans are collateralized by certain
assets of the Company. The agreement provides for, among other
things, the Company to maintain certain financial covenants. As of
December 31, 1994, the Company was in violation of certain of
these covenants and on March 31, 1995 received a waiver of those
covenants for the year ended December 31, 1994.
Scheduled aggregate payments on long-term debt and capital lease
obligations are as follows:
<TABLE>
<CAPTION>
Capital Lease
Year ending December 31: Long-Term Debt Obligations
<S> <C> <C>
1995 $ 1,343,645 $ 596,262
1996 1,279,796 413,471
1997 499,663 332,947
1998 193,540 190,299
1999 56,451 28,278
--------------- --------------
$ 3,373,095 1,561,257
===============
Less amount representing interest 207,586
Present value of future payments,
including current portion of $496,756 $ 1,353,671
==============
</TABLE>
Telecommunications and data processing equipment includes assets
acquired under capital leases with a net book value of
approximately $1,534,000 and $514,000 as of December 31, 1994 and
1993, respectively.
NOTE 8 - REDEEMABLE PUT WARRANT:
In connection with the bank financing agreement, the Company
issued the bank a redeemable put warrant for a number of common
shares equal to 2.25% of the Company's outstanding common stock,
subject to anti-dilution adjustments. The warrant is redeemable at
the Company's option prior to May 1996, and at the bank's option
at any time after May 1997. As defined in the agreement, the
Company has guaranteed the bank a minimum of $500,000 upon
redemption of the warrant, and therefore, has valued the warrant
at the present value of the minimum guarantee discounted at
11.25%. The discount is being amortized on a straight-line basis
over four years.
NOTE 9 - STOCKHOLDERS' EQUITY:
The Company is authorized to issue 10,000,000 shares of preferred
stock, issuable from time to time in one or more series with such
rights, preferences, privileges and restrictions as determined by
the directors. In 1994, the Company increased its authorized
number of shares of common stock to 20,000,000.
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED):
On August 28, 1992, the Board of Directors approved a one-for-four
reverse stock split of common stock and the par value of common
stock was increased from $.001 to $.004 per share. The applicable
number of common share and per common share information herein
have been retroactively restated to reflect the effect of the
reverse split.
In September 1992, the Company completed a private placement to
sell to certain investors 1,250,000 shares of its common stock at
$5 per share. The Company received $5,780,000, net of
underwriters' commissions of $470,000 and including subscriptions
totalling $162,980 collected subsequent to December 31, 1992. A
commission of $446,750 was paid to a firm, one of whose principals
is a director and stockholder of the Company.
In connection with the 1992 restructuring (Note 3), all Series A
and B Preferred Stock, including $327,920 of accrued dividends,
were converted into Series C Preferred Stock. At that time, Series
A and Series B Preferred Stock were eliminated. Series C Preferred
Stock is entitled to a liquidation value of $4 per share and
dividends of $.32 per share per annum payable quarterly in
arrears, and the shares are non-voting. These shares are
convertible into common stock, at the holder's option, on a one
share of common stock for two shares of Series C Preferred Stock
basis, at any time, subject to certain anti-dilution protection
for the Preferred Stockholders. At the Company's option, the
Series C Preferred Stock is redeemable, in whole or in part, at
any time after June 30, 1993, at $6 per share plus all accrued
dividends.
In December 1993, the Company commenced a private placement to
sell to certain investors units consisting of one share of Series
D Preferred Stock and one warrant to purchase one share of common
stock. As of December 31, 1994, the Company had sold 456,900 units
for net proceeds of $1,739,659, after deducting expenses of
$430,616. Series D Preferred Stock is entitled to dividends of 5%
per annum payable quarterly and may be redeemed for $7 per share,
plus all accrued dividends, at the option of the Company. The
shares are non-voting and are convertible into shares of the
Company's common stock on a one-for-one basis at the holder's
option. The shares rank senior to all shares of the Company's
common stock and junior to Series C Preferred Stock. The common
stock purchase warrants are exercisable at a per share price of
$5.75. In connection with the offering, the investment banking
firm received warrants to purchase 15,600 shares of the Company's
common stock at an exercise price of $5.75 per share. The Company
has the right to require the holder to exercise the warrants, and
if not exercised, they will expire in the event that the Company's
common stock trades at or above $8.50 per share. As of December
31, 1994, no warrants had been exercised.
In May and June 1994, the Company sold, through a private
placement to certain investors, 1,328,700 shares of common stock
and an equal number of warrants, for net proceeds of $4,511,558,
after deducting expenses of $371,067. The warrants are exercisable
prior to June 26, 1999 at a per share price of $4.25, subject to
certain anti-dilution protection. As of December 31, 1994, no
warrants had been exercised. The proceeds from this offering were
used for the Access acquisition (Note 4).
In June 1994, the Company issued 400,000 shares of Series E
Preferred Stock, $.01 par value, and 700,000 shares of Series F
Preferred Stock, $.01 par value, in connection with the Access
acquisition.
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED):
Series E Preferred Stock is entitled to a liquidation value of
$3.75 per share and dividends of $.30 per share per annum,
payable cumulatively in the form of cash or the Company's common
stock, and the shares are non-voting. The shares rank senior to
common stock, junior to Series C Preferred Stock and on par with
Series F Preferred Stock. The Series E Preferred Stock previously
issued was converted into 400,000 shares of common stock in
January 1995. In addition, upon conversion, the holders received
warrants, which expire on December 31, 1999, to purchase 175,000
shares of common stock, at an exercise price of $4.25 per share,
subject to certain anti-dilutive provisions.
Series F Preferred Stock is entitled to a liquidation value of
$5.00 per share and no dividends. The shares are senior to common
stock and junior to Series C Preferred Stock. These shares are
convertible on July 1, 1995 into common stock at the liquidation
value, as adjusted and defined, and subject to certain
anti-dilution adjustments.
Additionally, the Company issued warrants to the sellers of
Access to purchase 225,000 shares of the Company's common stock
at an exercise price of $4.25 per share, subject to certain
anti-dilution adjustments.
The following table summarizes the number of common shares
reserved for issuance as of December 31, 1994. There were no
preferred shares reserved for issuance as of December 31, 1994.
Common stock purchase warrants 2,935,223
Preferred stock 2,134,504
5,069,727
NOTE 10 - RESTATEMENT OF 1993 FINANCIAL STATEMENTS:
The Company has restated its 1993 consolidated financial
statements to reflect the write-off of certain startup costs of
approximately $120,000, previously capitalized, relating to
certain cellular telephone operations.
<TABLE>
<S> <C>
Income before extraordinary item:
As previously reported $ 410,221
As adjusted 290,174
Net income:
As previously reported 260,221
As adjusted 140,174
Net income (loss) per common share before extraordinary
item:
As previously reported .01
As adjusted (.01)
Net loss per common share:
As previously reported (.02)
As adjusted (.04)
Accumulated deficit:
As previously reported 24,128,237
As adjusted 24,248,284
</TABLE>
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - STOCK OPTION PLANS:
The Company has non-qualified stock option plans which provide
for the grant of common stock options to officers, directors,
employees and certain advisors and consultants at the discretion
of the Board of Directors (Committee). All options granted are
exercisable at a minimum price equal to the fair market value of
the Company's common stock at the date of grant, and are
exercisable in accordance with vesting schedules set individually
by the Committee. As of December 31, 1994, as amended on April
11, 1995, 1,157,146 shares of common stock are reserved for
options, including options exercised to date, and the term of the
options granted is from five to ten years. The April 11, 1995
amendment is awaiting stockholder approval. The activity in the
plans was as follows:
<TABLE>
<CAPTION>
Exercise Price Per Share
Number of Weighted
Options Range Average
<S> <C> <C> <C>
Balance outstanding, January 1, 1992 368,187 $ 1.72-24.50 $ 4.08
Granted 61,375 5.00 5.00
Expired (21,583) 2.84-24.50 17.09
Exercised (53,938) 1.72- 2.84 2.06
------------
Balance outstanding, December 31, 1992 354,041 1.72-12.00 3.77
Granted 173,500 4.00- 5.50 5.32
Expired (28,780) 2.84-12.00 10.19
Exercised (35,000) 1.72- 2.84 2.36
------------
Balance outstanding, December 31, 1993 463,761 1.72-11.00 4.06
Granted 317,000 3.25-4.50 3.60
Expired (59,062) 4.00-5.50 5.43
Exercised (25,000) 2.84 2.84
------------ --------------- -----
Balance outstanding, December 31, 1994 696,699 $ 1.72-11.00 $ 3.78
============ =============== =========
</TABLE>
At December 31, 1994, options to purchase 314,695 shares of
common stock were exercisable.
In September 1994, the Board of Directors adopted the 1994 Director
Option Plan (the Director Plan) pursuant to which 250,000 shares of
common stock are reserved for issuance upon the exercise of options
to be granted to non-employee directors of the Company. Under the
Director Plan, an eligible director will automatically receive
non-statutory options to purchase 15,000 shares of common stock at
an exercise price equal to the fair market value of such shares at
the date of the grant. Each option shall vest over a three year
period, but generally may not be exercised more than 90 days after
the date an optionee ceases to serve as a director of the Company,
and expires after ten years from date of grant. As of December 31,
1994, options to purchase 105,000 shares of common stock have been
granted at an exercise price of $4.38. The Plan is awaiting
stockholder approval.
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - RETIREMENT AND SAVINGS PLAN:
On March 3, 1989, the Company adopted the Shared Technologies
Inc. Savings and Retirement Plan (the Plan). The Plan covers
substantially all of the Company's employees and the Company is
applying for compliance with section 401(k) of the Internal
Revenue Code. Participants in the Plan may elect to make
contributions up to a maximum of 20% of their compensation. For
each participant, the Company will make a matching contribution
of one-half of the participant's before and after tax
contributions up to 5% of the participant's compensation.
Matching contributions may be made in the form of the Company's
common stock. Participants vest in the matching contributions at
the rate of 33% per year. The Company's expense relating to the
matching contributions was approximately $163,000, $116,000 and
$51,000 for 1994, 1993 and 1992, respectively.
NOTE 13 - INCOME TAXES:
For 1992, the Company recorded a provision for minimum federal
and state income taxes of $45,000, after the benefit of utilizing
net operating loss (NOL) carryforwards of approximately
$3,000,000. At December 31, 1994, the Company's NOL carryforward
for federal income tax return purposes is approximately
$22,700,000 expiring between 2001 and 2007. NOL's available for
state income tax purposes are less than those for federal
purposes and generally expire earlier than the federal NOL's.
Limitations will apply to the use of NOL's in the event certain
changes in Company ownership occur in the future.
For the years ended December 31, 1994 and 1993, taxes computed at
the statutory federal rate differ from the Company's effective
rate due primarily to the availability of NOL's.
The components of deferred income tax assets (liabilities) as of
December 31, 1994 and 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Tax effect of net operating loss carryforwards $ 9,011 $ 9,789
Financial reserves not yet tax deductible 233 130
Equipment (1,200) (1,114)
Goodwill (107)
----------
Deferred income tax asset 7,937 8,805
Valuation allowance (7,387) (8,805)
---------- ----------
Net deferred tax asset $ 550 $ -
========== ==========
</TABLE>
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - INCOME TAXES (CONTINUED):
At December 31, 1994, the Company's net operating losses of
$22,700,000 are included in the gross deferred income tax asset
of $7,937,000, of which $550,000 was recorded as a deferred tax
asset, and the balance reserved through a valuation allowance of
$7,387,000.
SFAS No. 109, requires that the Company record a valuation
allowance when it is "more likely than not that some portion or
all of the deferred tax asset will not be realized". The ultimate
realization of this deferred tax asset depends on the ability to
generate sufficient taxable income in the future. The Company has
undergone substantial restructuring resulting in a lower and more
competitive cost structure. While management believes that the
total deferred tax asset will be fully realized by future
operating results together with tax planning opportunities, the
losses in recent years and a desire to be conservative make it
appropriate to record a valuation allowance.
NOTE 14 - COMMITMENTS AND CONTINGENCIES:
Contingencies - The Company had been the provider of
telecommunications services at the Jacob K. Javits Convention
Center (the Center) in New York City. Effective January 1, 1992,
as a result of a contractual dispute with the New York Convention
Center Operating Corporation (CCOC), the Company no longer
provided services at the Center. A claim for approximately
$5,400,000 was filed against the Company by CCOC for damages. In
November 1993, the litigation with CCOC was settled and provided
for the Company to pay $25,000 and issue a $550,000 note payable
over five years, with no interest. The present value of the note
was accrued by the Company (Note 7).
While providing services at the Center, the Company licensed the
right to provide certain public pay telephone services at the
Center to Tel-A-Booth Communications, Ltd. (Tel-A-Booth).
Tel-A-Booth has filed a claim against the Company which seeks
$10,000,000 in damages including $1,400,000 for equipment
purchased, for which no amounts have been provided in the
accompanying consolidated financial statements.
Discovery was completed in early 1995 and revealed certain
inconsistencies in plaintiff's claims, which cast in doubt the
bona fides of plaintiff's demand for $10 million on each of its
claims against the Company. Of the $10 million in claimed
damages, all but $1.4 million represents plaintiff's estimation
of lost profits as a result of the Company's alleged breach of
contract. The remaining $1.4 million represents the cost of the
400 telephones which plaintiff purportedly purchased for
installation at The Center, pursuant to the contract, but which
were ultimately not installed.
Furthermore, the Company has asserted that the pertinent contract
between plaintiff and the Company bars plaintiff's recovery of
lost profits. More specifically, the contract provides that "[n]
either party hereto shall be liable, directly or through any
indemnification provision herein, for consequential (including
lost profits) or indirect damages arising in any way out of this
Agreement." Although plaintiff has argued that the language
surrounding this clause limits its application to claims brought
by third parties and thus the clause was not intended to limit
damage claims between plaintiff and the Company, management
believes this is a further defense to the claim.
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
With respect to the $1.4 million damage claim, discovery has
revealed that plaintiff borrowed this entire amount from a
private lender, using the telephones to be purchased as
collateral. Subsequent to plaintiff's termination at The Center,
the lender took possession of the collateral (which was then
sold) and forgave the entire indebtedness in exchange. Arguably,
plaintiff suffered no direct damage from the alleged breach of
contract since plaintiff was restored to its initial position
following this transaction.
While any litigation contains an element of uncertainty,
management is of the opinion -based on the current status of the
claim - that the ultimate resolution of this matter should not
have a material adverse effect upon either results of operations,
cash flows or financial position of the Company.
The Company's sales and use tax returns in certain jurisdictions
are currently under examination. Management believes these
examinations will not result in a material change from
liabilities provided.
STC is a party to an employment claim which arose prior to STC's
acquisition of South. STC is seeking indemnification from South
(Note 16).
In addition to the above matters, the Company is a party to
various legal actions, the outcome of which, in the opinion of
management, will not have a material adverse effect on the
Company's financial condition and results of operations.
In November 1994, a subsidiary signed a letter of intent with an
investment banking firm for the purpose of underwriting an
initial public offering. If the public offering is successful and
depending on the number of shares sold, the Company's investment
in the subsidiary would be reduced from approximately 85% to
approximately 60%.
Commitments - The Company has entered into operating leases for
the use of office facilities and equipment, which expire through
October 2004. Certain of the leases are subject to escalations
for increases in real estate taxes and other operating expenses.
Rent expense amounted to approximately $1,856,000, $1,700,000 and
$1,676,000 for the years ended December 31, 1994, 1993 and 1992,
respectively.
Aggregate approximate future minimum rental payments under these
operating leases are as follows:
Year ending December 31:
1995 $ 1,863,000
1996 1,483,000
1997 1,150,000
1998 988,000
1999 815,000
Thereafter 1,178,000
$ 7,477,000
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
In January 1994, the Company entered into a consulting agreement
for financial and marketing services, which expires in November
1996. The agreement provides for the following compensation;
$30,000 upon signing, $3,000 per month retainer, and $150,000
upon the attainment of a specific financial ratio, which as of
December 31, 1994 had not been attained. In addition, the
consultant was issued a three year warrant to purchase 300,000
shares of the Company's common stock at a purchase price of $5.75
and a five year warrant to purchase 250,000 shares of the
Company's common stock at a purchase price of $7.00 per share.
The consultant may not compete with the Company during the term
of this agreement and for two years thereafter.
The consultant, through its affiliate, acquired from the Company
approximately 1.5% (31,381 shares) of STC's common stock at a
price of $.08 per share.
In connection with the acquisition of East, STC entered into a
three year consulting agreement, providing that during the first
two years of the agreement the former owner is to be paid an
annual consulting fee equal to 3% of STC's total cellular
telephone rental revenues in excess of $4,000,000. In addition,
an annual bonus of $100,000 is payable if total cellular
telephone rental revenues exceed $5,000,000 per annum. The former
owner may not engage in any business competing with STC, within a
certain geographical area. For the year ended December 31, 1994,
approximately $203,000 of fees relating to this agreement were
incurred.
In February 1994, the Company entered into a consulting agreement
with a company controlled by the founder of Road and Show. The
agreement, which was amended effective September 1, 1994 and
expires December 31, 1996, provides for compensation of $205,000
and $200,000 for 1995 and 1996, respectively. In addition, the
original agreement provided for the issuance of 31,381 shares of
STC common stock, with a value ascribed thereto of $2,500 ($.08
per share). During the term of the agreement and for two years
thereafter, the consultant may not compete with STC in the
business of renting cellular telephones anywhere in the United
States, Mexico and Canada. The consultant also received options
to purchase 31,381 shares of STC's common stock at an exercise
price, as amended, of $3.675 per share, pursuant to STC's stock
option plan.
In connection with the Access acquisition, the Company has
entered into two employment agreements with former owners of
Access. Each agreement is for three years expiring in June 1997.
If terminated without cause, the Company shall pay all
compensation due under the agreements for the lesser of eighteen
months or the time remaining in the initial term. Aggregate
minimum payments under the agreements during the years ending
December 31, 1995, 1996 and 1997 are $330,000, $342,500 and
$175,000, respectively.
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - RELATED PARTY TRANSACTIONS:
In 1992, the Company issued 12,500 shares of common stock to a
Board of Directors member and former shareholder of a Company
acquired (BTC). The shares were issued since the Company was
unable to obtain the release of his guarantee of certain BTC
obligations in connection with the 1992 restructuring (Note 3).
The Company has also agreed to indemnify the individual for any
future amounts incurred by him related to his guarantee. The fair
value of the shares issued was recorded as an expense in 1992.
As of December 31, 1993, approximately $288,000 had been paid for
life insurance premiums made on behalf of the Company's
president, which was to be repaid from the proceeds of a
$2,500,000 face value life insurance policy which was owned by
the president. In January 1994, the beneficiary on the policy was
changed to the Company in order to reduce the premium payments
required by the Company. As of December 31, 1994, the amount due
to the Company for premiums paid exceeded the cash surrender
value of the policy by approximately $135,000. Accordingly, the
President has agreed to reimburse the Company for this amount.
The receivable and cash surrender value are reflected in other
assets in the accompanying consolidated balance sheets.
NOTE 16 - SUBSEQUENT EVENTS:
During January 1995, the Company commenced a private placement to
sell to a certain investor 300,000 shares of common stock at
$4.25 per share, pursuant to Regulation S of the Securities Act
of 1933. In connection with this transaction, the underwriter
received a commission of $120,000 and a five year common stock
purchase warrant to acquire 30,000 shares of the Company's common
stock for $5.00 per share.
On January 17, 1995, STC filed a complaint against South (which
includes its affiliates). The complaint alleges that the failure
by South to disclose a certain claim constituted a breach of the
asset purchase agreement. STC seeks damages and a declaratory
judgement that the payment in the Company's common stock to
South, pursuant to the agreement, should be reduced by the amount
of any damages caused to the Company by such breach. In addition,
the Company seeks indemnification from South, including requiring
South to defend the Company from and against such claim.
On January 27, 1995, South commenced an action against STC
alleging, among other things, that STC's failure to deliver to
South the Company's common stock under the asset purchase
agreement constituted a breach of contract and fraud. South is
seeking unspecified actual and punitive damages of not less than
$10,000,000. STC sought a stay of this action and is considering
depositing the Company's common stock with the Court. Although it
has not received an opinion of counsel with regard to this
matter, STC believes it has meritorious defenses to this action.
In the event of an adverse outcome in this action, the Company
does not believe that damages payable would be material unless
the market value of the Company's common stock materially
decreases prior to delivery thereof.
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants....................... F-38
Consolidated Balance Sheets as of June 30, 1995 and 1994
and October 1, 1995 (unaudited)................................................ F-39
Consolidated Statements of Income for the Years Ended June 30, 1995 and
1994 and the three months ended
October 1, 1995 and October 2, 1994 (unaudited)................................ F-41
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended June 30, 1995 and 1994 and the three months
ended October 1, 1995 (unaudited).............................................. F-42
Consolidated Statements of Cash Flows for the Years Ended June 30, 1995
and 1994 and the three months ended
October 1, 1995 and October 2, 1994 (unaudited)................................ F-43
Notes to Consolidated Financial Statements ......................................... F-44
</TABLE>
<PAGE>
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, 1995 and 1994, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended June 30, 1995, 1994 and 1993. 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, 1995 and 1994, and the results of its operations and its cash flows
for the years ended June 30, 1995, 1994 and 1993, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
Washington, D.C.,
November 28, 1995
<PAGE>
Fairchild Industries, Inc.
Consolidated Balance Sheets
(In thousands)
Assets
<TABLE>
<CAPTION>
October 1, June 30,
1995 1995 1994
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ - $ 1,469 $ 64
Billed accounts receivable - trade, net of allowances of $383,
$254 and $204 16,795 14,429 6,369
Unbilled accounts receivable 6,241 6,218 3,487
Inventories 869 1,246 -
Prepaid and other current assets 1,904 2,283 1,326
Net current assets of operations transferred to RHI 53,391 56,876 25,760
Total current assets 79,200 82,521 37,006
Property, plant and equipment, at cost:
Buildings and improvements 3,802 3,733 3,417
Equipment and autos 77,289 73,968 59,455
Furniture and fixtures 3,432 3,097 734
84,523 80,798 63,606
Accumulated depreciation (33,513) (31,239) (23,104)
Property, plant and equipment, net 51,010 49,559 40,502
Goodwill, less accumulated amortization of $3,189, $3,013 and $2,389 25,939 25,958 20,686
Other intangible assets, less accumulated amortization of $6,353,
$5,938 and $4,383 7,174 7,589 6,682
Deferred loan costs 4,397 4,561 5,960
Prepaid pension cost 184 195 216
Net non-current assets of operations transferred to RHI 191,462 189,098 223,412
Total assets $359,366 $359,481 $334,464
The accompanying notes are an integral
part of these financial statements.
</TABLE>
<PAGE>
Fairchild Industries, Inc.
Consolidated Balance Sheets
(In thousands)
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
October 1, June 30,
1995 1995 1994
(unaudited)
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 14,068 $ 12,780 $ 6,744
Advanced billings 537 941 -
Deferred revenue on maintenance contracts 3,044 3,109 371
Accrued liabilities-
Salaries and wages 1,771 1,986 935
Sales, payroll and use taxes 1,451 1,162 1,254
Commissions 215 293 297
Dividends 975 975 975
Other 1,801 3,182 1,103
Current portion of capital lease obligations 514 751 1,954
Total current liabilities 24,376 25,179 13,633
12.25% senior secured notes due 1999 125,000 125,000 125,000
Bank credit agreement 55,373 55,373 55,373
Capital lease obligations 128 185 932
Postretirement benefits 104 98 78
Redeemable preferred stock: $3.60 cumulative Series A Convertible
Preferred Stock, without par value, 424,701 shares authorized,
issued and outstanding at redemption value of $45.00 per share 19,112 19,112 19,112
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
Total liabilities 248,108 248,962 238,143
Stockholders' equity:
Series B preferred stock: without par value, 3,000 shares
authorized, 2,302, 2,278 and 2,025 issued and outstanding;
liquidation value of $100,000 per share 230,200 227,800 202,500
Common stock, par value of $100.00 per share, 1,400 shares
authorized, issued and outstanding 140 140 140
Paid-in capital 2,575 2,523 2,390
Accumulated deficit (128,697) (128,116) (111,855)
Cumulative translation adjustment 7,040 8,172 3,146
Total stockholders' equity 111,258 110,519 96,321
Total liabilities and stockholders' equity $359,366 $359,481 $334,464
The accompanying notes are an integral
part of these financial statements.
</TABLE>
<PAGE>
Fairchild Industries, Inc.
Consolidated Statements of Income
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Years Ended
October 1, October 2, June 30,
1995 1994 1995 1994 1993
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues $ 33,138 $ 20,124 $109,741 $ 74,897 $ 68,639
Cost of revenues 25,049 14,314 81,652 53,031 49,007
Gross profit 8,089 5,810 28,089 21,866 19,632
General and administrative expenses 3,172 1,314 9,212 5,146 4,672
Goodwill amortization 176 146 624 578 540
Operating income 4,741 4,350 18,253 16,142 14,420
Interest expense 5,490 5,430 21,280 19,538 20,033
Net loss from continuing
operations before taxes (749) (1,080) (3,027) (3,396) (5,613)
Taxes - - - - -
Operating results of operations
transferred to RHI 1,143 1,387 (9,332) (30,591) 6,644)
Net earnings (loss) before
preferred dividends 394 307 (12,359) (33,987) (12,257)
Series A preferred dividends 382 382 1,529 1,529 1,713
Series C preferred dividends 593 593 2,373 2,373 2,160
Net loss after preferred
dividends $ (581) $ (668) $(16,261) $(37,889) $(16,130)
Dividends to RHI Holdings, Inc. (Parent) $ - $ - $ - $ - $ 50,000
The accompanying notes are an
integral part of these financial statements.
</TABLE>
<PAGE>
Fairchild Industries, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(In thousands)
<TABLE>
<CAPTION>
Series B Cumulative
Common Stock Preferred Stock Paid-in Accumulated Translation
Capital Deficit Adjustment Total
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1992 $140 $192,600 $2,230 $(6,985) $ 6,169 $194,154
Net loss - - - (12,257) - (12,257)
Issuance of Series B Preferred Stock to parent - 5,000 - - - 5,000
Cash dividends to preferred stockholders - - - (3,873) - (3,873)
Cash dividends to parent - - - (50,000) - (50,000)
Cumulative translation adjustment, net - - - - (3,503) (3,503)
Balance, June 30, 1993 140 197,600 2,230 (73,115) 2,666 129,521
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)
Cumulative translation adjustment, net - - - - 480 480
Balance, June 30, 1994 140 202,500 2,390 (111,855) 3,146 96,321
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)
Cumulative translation adjustment, net - - - - 5,026 5,026
Balance, June 30, 1995 $140 $227,800 $2,523 $(128,116) $8,172 $110,519
Net Income - - - 394 - 394
Issuance of Series B Preferred Stock to parent - 2,400 - - - 2,400
Cash dividends to preferred stockholders - - - (975) - (975)
Cumulative translation adjustment, net - - - - (1,132) (1,132)
Paid in capital from parent - - 52 - - 52
Balance, October 1, 1995 (unaudited) $140 $230,200 $2,575 $(128,697) $ 7,040 $111,258
===== ========== ========= ============= ======== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
Fairchild Industries, Inc.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Years Ended
October 1, October 2, June 30,
1995 1994 1995 1994 1993
(unaudited)
- ------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash flows (used in)/provided by operating
activities:
Net loss from continuing operations $ (749) $(1,080) $(3,027) $(3,396) $(5,613)
Adjustments to reconcile net income to net cash
(used in)/provided by operating activities:
Amortization and depreciation 2,702 2,289 10,330 8,947 7,935
(Decrease) increase in advanced billings (404) - 326 - -
Increase in billed accounts receivable (2,366) (1,630) (8,060) (251) (1,086)
(Increase) decrease in unbilled accounts
receivable (23) (108) (2,014) 277 (666)
Decrease (increase) in deferred loan cost 164 338 1,399 1,008 (3,703)
(Decrease) increase in non-current assets 2,257 (1,793) (536) (43) (404)
Increase in inventories (377) - (1,033) - -
(Decrease) increase in prepaid and other 379 757 (709) (374) (20)
assets
(Decrease) increase in accrued liabilities (1,385) (522) 2,716 406 339
(Decrease) increase in deferred revenue (65) (138) (162) (24) 359
Increase (decrease) in accounts payable 1,288 1,288 5,576 (1,325) (86)
Operations transferred to RHI (5,182) 2,689 14,341 6,438 16,579
Net cash (used in)/provided by (3,761) 2,090 19,147 11,663 13,634
operating activities
Cash flows used in investing activities:
Acquisitions, net of cash acquired - (550) (11,550) - (7,313)
Purchases of property, plant and equipment (2,183) (1,815) (10,349) (7,775) (5,769)
Proceeds from sales of property, plant and
equipment - 25 31 8
Operations transferred to RHI (1,930) (1,497) (5,754) (7,105) (6,539)
Net cash used in investing activities (4,113) (3,862) (27,628) (14,849) (19,613)
Cash flows provided by financing activities:
Issuance of Series B preferred stock 2,400 11,400 24,400 4,000 5,000
Issuance of Series C preferred stock - - - - 24,015
Purchase/exchange of Series A preferred stock - - - - (25,126)
Payment of dividends (975) (975) (3,902) (3,902) (53,782)
Paid-in capital contribution 52 - 88 143 -
Repayments of capital lease obligations (237) (394) (1,950) (3,118) (3,200)
Operations transferred to RHI (5,165) (8,030) (8,750) 6,127 59,070
Net cash provided by financing 6,405 2,001 9,886 3,250 5,977
activities
Net increase (decrease) in cash (1,469) 229 1,405 64 (2)
Cash, beginning of period/year 1,469 64 64 - 2
Cash, end of period/year $ - $ 293 $ 1,469 $ 64 $ -
Supplementary disclosures of cash flow information:
Cash paid during the period/year for interest $ 5,490 $ 5,430 $ 21,280 $ 19,538 $20,033
Cash paid during the period/year for taxes $ - $ - $ - $ - $ -
</TABLE>
<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 "Recapitalization"). The
Company's plans to merge into Shared Technologies Inc. ("STI") (the "Merger")
are an integral part of the Recapitalization. Concurrent with the Merger, and as
part of the Recapitalization, 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 $55.4 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 STI and TFC on the one hand and RHI 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 at the
rate of ten percent, 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 Recapitalization, 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
<PAGE>
fastening systems, primarily for aerospace applications. The Industrial Products
business designs, manufacturers 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 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 recapitalization 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, the Company will not be released from its obligations
with respect to the Assumed Liabilities as a matter of law. 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. Since the execution of the Merger Agreement,
FII has entered into a letter agreement setting forth the general terms of a
sale of substantially all of the assets of DME Company, its Industrial Products
Segment, which, if consummated, may have an effect on RHI's ability to meet
RHI's indemnification obligations.
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.
<PAGE>
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
$8,153,000, $6,998,000 and $6,191,000 for fiscal 1995, 1994 and 1993
respectively.
UNBILLED RECEIVABLES AND ADVANCED 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.
<PAGE>
INTANGIBLE ASSETS AND GOODWILL
Intangible assets as of June 30, 1995 and 1994, respectively, are comprised of
the following:
Useful
1995 1994 Lives
(In Thousands)
Noncompete contracts $ 3,659 $ 2,774 5-10 years
Subscriber base 6,456 6,256 10 years
Right of first refusal 700 700 10 years
Acquisition/organization costs 1,321 720 5-20 years
Other 1,391 615 8-10 years
13,527 11,065
Accumulated amortization (5,938) (4,383)
$ 7,589 $ 6,682
The intangible assets are being amortized over their expected useful lives
described above. Amortization expense related to these intangible assets
amounted to $1,555,000, $1,371,000 and $1,203,000 for the years ended June 30,
1995, 1994 and 1993, respectively.
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 to the extent possible. 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 its long-lived assets, including property, plant and
equipment, identifiable intangibles and goodwill, for impairment whenever events
or changes in circumstances indicate that the carrying amount of the assets may
not be 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.
<PAGE>
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
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.
<PAGE>
3. OPERATIONS BEING TRANSFERRED TO RHI:
The operations being transferred to RHI had the following operating results and
net assets (in thousands).
June 30,
1995 1994
Current assets $165,738 $173,835
Property, plant and equipment, net 108,632 116,799
Goodwill 170,028 175,243
Net assets held for sale 34,811 34,515
Other assets 23,072 31,792
Current liabilities (108,862) (148,075)
Debt to be assumed by RHI (84,982) (94,393)
Other liabilities (62,463) (40,544)
Net assets to be transferred $245,974 $249,172
<TABLE>
<CAPTION>
For the Years Ended
June 30,
1995 1994 1993
<S> <C> <C> <C>
Revenues $401,779 $ 369,792 $400,594
Cost of sales 311,150 284,850 302,067
Selling, general and administrative 76,171 67,438 69,549
Research and development 4,100 3,940 3,262
Amortization of goodwill 5,218 5,228 5,298
Restructuring charges - 18,860 15,469
Unusual items - 6,000 -
Operating income (loss) 5,140 (16,524) 4,949
Interest expense 14,004 11,129 12,788
Other income 1,549 4,008 2,269
Income tax provision (benefit) 2,017 (4,792)` 264
Cumulative effect of accounting changes for
income taxes and postretirement benefits - 11,738 810
Net loss of transferred operations $ (9,332) $ (30,591) $ (6,644)
</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. 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 Company's litigation contingencies are
part of the liabilities being transferred to RHI. These contingencies include
the determination by the ACO, based upon the advise 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)
<PAGE>
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 entered into 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.
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 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 $84,982,000 and $94,393,000 of this debt as of June 30, 1995 and
1994, respectively, in connection with the Merger. The remaining 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.
<PAGE>
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>
1995 1994 1993
(In thousands)
<S> <C> <C> <C>
Service cost of benefits earned during the period $106 $ 97 $ 55
Interest cost of projected benefit obligation 63 56 35
Return on plan assets (55) (57) (39)
Net amortization and deferral 5 12 8
Amortization of prior service cost (8) (8) 4
Total pension cost $111 $100 $ 63
</TABLE>
Assumptions used in accounting for the plans were:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Discount rate 8.5% 8.5% 8.5%
Expected rate of increase in salaries 4.5% 4.5% 4.5%
Expected long-term rate of return on plan assets 9.0% 9.0% 9.0%
</TABLE>
<PAGE>
The following table sets forth the funded status and amounts recognized in the
Company's balance sheets at June 30, 1995 and 1994 for the continuing operations
portion of its defined benefit pension plans:
<TABLE>
<CAPTION>
1995 1994
(In thousands)
<S> <C> <C>
Vested benefit obligation $493 $421
Non-vested benefit obligation 32 27
Accumulated benefit obligation 525 448
Projected benefit obligation 758 642
Plan assets at fair value 800 699
Plan assets in excess of projected benefit obligation 42 57
Unrecognized net loss 150 155
Unrecognized prior service cost 3 4
Prepaid pension cost $195 $216
</TABLE>
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 not
significant. 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 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1995 1994
(In thousands)
<S> <C> <C>
Service cost of benefits earned $13 $12
Interest cost on liabilities 7 6
Net periodic postretirement benefit cost $20 $18
</TABLE>
The following table sets forth the funded status for the continuing portion of
the Company's postretirement health care benefit plan at June 30, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
(In thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation $87 $67
Unrecognized net gain 11 11
Accrued postretirement benefit cost $98 $78
</TABLE>
The accumulated postretirement benefit obligation was determined using a
discount rate of 8.5%,
<PAGE>
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 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 35.0% in 1995 and 1994 and 34.0%
in 1993 for the following reasons:
<TABLE>
<CAPTION>
1995 1994 1993
(In thousands)
<S> <C> <C> <C>
Computed statutory amount $(1,059) $(1,189) $(1,908)
Effect of net operating losses 826 981 1,719
Nondeductible acquisition valuation items 218 202 184
Other 15 6 5
$ - $ - $ -
</TABLE>
<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, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
Deferred Deferred
June 30, (Provision) June 30, (Provision)
1995 Benefit 1994 Benefit
(In thousands)
<S> <C> <C> <C> <C>
Deferred tax assets:
Accrued expenses $ 89 $ 17 $ 72 $ (15)
Employee compensation and benefits 237 45 192 32
Deferred revenue 1,088 958 130 (9)
NOL carryforwards 13,133 822 12,311 1,682
Postretirement benefits 162 27 135 41
Other 48 8 40 (58)
14,757 1,877 12,880 1,673
Deferred tax liabilities:
Asset basis differences - fixed assets (5,367) - (5,367) (592)
Asset basis differences - intangible assets (1,624) (198) (1,426) (143)
Other (326) - (326) (10)
(7,317) (198) (7,119) (745)
Less- valuation allowance (7,440) (1,679) (5,761) (928)
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)
Other................................................. 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.
<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. 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.
Annual maturity redemption requirements for redeemable preferred stock as of
June 30, 1995, 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. 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.
<PAGE>
Fair values of Series A and Series C preferred stock of the Company are based on
quoted market prices.
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, 1995 and June 30, 1994 are as follows.
<TABLE>
<CAPTION>
June 30, 1995 June 30, 1994
Carrying Fair Carrying Fair
Amount Value Amount Value
(In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,469 $ 1,469 $ 64 $ 64
Accounts receivable 20,647 20,647 9,856 9,856
Accounts payable 12,780 12,780 6,744 6,744
Accrued liabilities 6,623 6,623 3,589 3,589
Advanced billings 941 941 - -
Deferred revenue on maintenance contracts
3,109 3,109 371 371
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 15,714 19,112 15,608
Series C cumulative preferred stock 24,015 20,939 24,015 21,427
</TABLE>
10. RELATED PARTY TRANSACTIONS:
Corporate general and administrative expense was billed to the Company on a
monthly basis during 1995, 1994 and 1993. 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 $537,000, $441,000 and
$342,000 in fiscal 1995, 1994 and 1993, respectively.
The Company had sales to TFC and subsidiaries of TFC of $1,031,000, $707,000 and
$601,000 for the years ended June 30, 1995, 1994 and 1993, respectively.
<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 $4,204,000, $3,023,000 and
$2,985,000 for the years ended June 30, 1995, 1994 and 1993, 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.
<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, 1995 and
1994, give effect to the JWP acquisition as if the acquisition had occurred at
the beginning of each year.
Unaudited
Fiscal 1995 Fiscal 1994
(In thousands)
Sales $132,716 $122,426
Cost of sales (98,628) (86,860)
Other expenses (36,926) (38,917)
Net loss from continuing operations (2,838) (3,351)
Operating results of operations transferred to RHI (9,332) (30,591)
Net loss before preferred dividends $(12,170) $(33,942)
<PAGE>
EXHIBIT INDEX
Exhibit Description Page
A Merger Agreement
B Opinion of S.G. Warburg & Co., Inc.
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of November 9, 1995, by
and among Fairchild Industries, Inc., a Delaware corporation ("Fairchild"), RHI
Holdings, Inc., a Delaware corporation ("RHI"), The Fairchild Corporation, a
Delaware corporation ("TFC"), and Shared Technologies Inc., a Delaware
corporation ("Shared Technologies").
W I T N E S S E T H :
WHEREAS, the Boards of Directors of Fairchild and Shared
Technologies have approved the merger of Fairchild with and into Shared
Technologies (the "Merger") upon the terms and subject to the conditions set
forth herein and in accordance with the laws of the State of Delaware;
WHEREAS, RHI, which is a wholly owned subsidiary of TFC, is
the sole owner of all of the outstanding common stock of Fairchild and has
approved the Merger upon the terms and subject to the conditions set forth
herein, and RHI has received an irrevocable proxy from the holder of
approximately 9.84% of Shared Technologies' common stock (based on the shares
outstanding as of the date hereof) agreeing to vote for the Merger;
WHEREAS, Fairchild is the sole owner of 100% of the issued and
outstanding capital stock of VSI Corporation ("VSI");
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and agreements herein contained, the parties hereto, intending
to be legally bound, agree as follows:
ARTICLE I
MERGER
1.1 The Merger. At the Effective Time (as hereinafter
defined), Fairchild shall be merged with and into Shared Technologies as
provided herein. Thereupon, the corporate existence of Shared Technologies, with
all its purposes, powers and objects, shall continue unaffected and unimpaired
by the
<PAGE>
Merger, and the corporate identity and existence, with all the purposes, powers
and objects, of Fairchild shall be merged with and into Shared Technologies and
Shared Technologies as the corporation surviving the Merger shall be fully
vested therewith and shall change its name to "Shared Technologies Fairchild
Inc." The separate existence and corporate organization of Fairchild shall cease
upon the Merger becoming effective as herein provided and thereupon Fairchild
and Shared Technologies shall be a single corporation, Shared Technologies
Fairchild Inc. (herein sometimes called the "Surviving Corporation"). Prior to
the Effective Time, Fairchild and its subsidiaries will undergo a corporate
reorganization (the "Fairchild Reorganization") pursuant to which all the assets
of Fairchild and its subsidiaries (other than certain indebtedness and preferred
stock) will be transferred to, and liabilities of Fairchild and its subsidiaries
will be assumed by, RHI except for the assets and liabilities comprising the
telecommunications systems and service business of Fairchild Communications
Services Company, which as a result of said reorganization, will reside in VSI,
all as described on Schedule 9.1. Except where indicated to the contrary, all
references herein to "Fairchild" shall be deemed to refer to Fairchild as it
will exist following the Fairchild Reorganization and, accordingly, none of the
representations, warranties, restrictions or covenants contained in this
Agreement apply to the businesses, operations, assets or liabilities of
Fairchild Industries, Inc. and its subsidiaries other than as they relate to the
telecommunications systems and service business of Fairchild, and each of TFC,
RHI and Fairchild may operate such other businesses and assets (including
without limitation selling assets and businesses and incurring liabilities) as
it deems appropriate in the exercise of its business judgment.
1.2 Filing. As soon as practicable after the requisite
approval of the Merger by the stockholders of Shared Technologies and the
fulfillment or waiver of the conditions set forth in Sections 9.1, 9.2 and 9.3
or on such later date as may be mutually agreed to between Fairchild and Shared
Technologies, the parties hereto will cause to be filed with the office of the
Secretary of State of the State of Delaware, a certificate of merger (the
"Certificate of Merger"), in such form as required by, and executed in
accordance with, the relevant provisions of the Delaware General Corporation Law
(the "DGCL").
1.3 Effective Time of the Merger. The Merger shall be
effective at the time that the filing of the Certificate of
<PAGE>
Merger with the office of the Secretary of State of the State of Delaware is
completed, or at such later time specified in such Certificate of Merger, which
time is herein sometimes referred to as the "Effective Time" and the date
thereof is herein sometimes referred to as the "Effective Date."
ARTICLE II
CERTIFICATE OF INCORPORATION; BY-LAWS;
SHAREHOLDERS AGREEMENT
2.1 Certificate of Incorporation. The Certificate of
Incorporation of Shared Technologies, as amended in accordance with this
Agreement, shall be the Certificate of Incorporation of the Surviving
Corporation.
2.2 By-Laws. The By-Laws of Shared Technologies, as amended in
accordance with this Agreement, shall be the By-Laws of the Surviving
Corporation until the same shall thereafter be altered, amended or repealed in
accordance with law, the Certificate of Incorporation of the Surviving
Corporation or said By-Laws.
2.3 Shareholders Agreement. At the Effective Time, Shared
Technologies, RHI and Anthony D. Autorino shall enter into a shareholders
agreement in the form of Exhibit A hereto (the "Shareholders Agreement")
providing for the election of directors and officers of the Surviving
Corporation.
ARTICLE III
CONVERSION OF SHARES
3.1 Conversion. At the Effective Time the issued shares of
capital stock of Fairchild shall, by virtue of the Merger and without any action
on the part of the holders thereof, become and be converted as follows: (A) each
outstanding share of Common Stock, $100.00 par value per share, of Fairchild
(the "Fairchild Common Stock") shall be converted into and become the right to
receive a Pro Rata Amount (as defined below) of the Merger Consideration (as
defined below); and (B) each outstanding share of Series A Preferred Stock,
without par value, of Fairchild (the "Series A Preferred Stock") and each
outstanding
<PAGE>
share of Series C Preferred Stock, without par value, of Fairchild (the "Series
C Preferred Stock") shall be converted into the right to receive an amount in
cash equal to $45.00 per share ($44,237,745 in the aggregate for all such shares
of Series A Preferred Stock and Series C Preferred Stock) plus accrued and
unpaid dividends thereon to the Effective Time. "Merger Consideration" means (x)
6,000,000 shares of Common Stock, $.004 par value per share, of Shared
Technologies (the "Technologies Common Stock"), (y) shares of Convertible
Preferred Stock of Shared Technologies (the "Convertible Preferred Stock")
having an initial aggregate liquidation value of $25,000,000 and the other terms
set forth on the attached Schedule 3.1(a) and (z) shares of Special Preferred
Stock of Shared Technologies (the "Special Preferred Stock") having an initial
aggregate liquidation value of $20,000,000 and the other terms set forth on the
attached Schedule 3.1(b). The Convertible Preferred Stock and Special Preferred
Stock are collectively referred to as the "Preferred Stock." With respect to any
share of capital stock, "Pro Rata Amount" means the product of the Merger
Consideration multiplied by a fraction, the numerator of which is one and the
denominator of which is the aggregate number of all issued and outstanding
shares of such capital stock on the Effective Date.
3.2 Preferred Stock Pledge. Immediately after the Effective
Time, RHI shall pledge all of the shares of Preferred Stock then issued to it
(other than shares of Convertible Preferred Stock having an aggregate
liquidation preference of $1,500,000) to secure RHI's and Fairchild's
obligations under the Indemnification Agreement of TFC and RHI (the form of
which is attached as Exhibit B-1 hereto) pursuant to the terms of a Pledge
Agreement (the form of which is attached as Exhibit C hereto) and with a pledge
agent mutually agreed upon by the parties. Such shares will be released from
such pledge on the later to occur of (i) third anniversary of the Effective Time
and (ii) the date on which the consolidated net worth (computed in accordance
with generally accepted accounting principles) of The Fairchild Corporation at
such time (or evidenced by any audited balance sheet) is at least (x) $25
million greater than such net worth at September 30, 1995 (excluding for such
purpose any value attributed to the Preferred Stock on such balance sheet) and
(y) $225 million (including for such purpose the value of the Preferred Stock).
ARTICLE IV
<PAGE>
CERTAIN EFFECTS OF THE MERGER
4.1 Effect of the Merger. On and after the Effective Time and
pursuant to the DGCL, the Surviving Corporation shall possess all the rights,
privileges, immunities, powers, and purposes of each of Fairchild and Shared
Technologies; all the property, real and personal, including subscriptions to
shares, causes of action and every other asset (including books and records) of
Fairchild and Shared Technologies, shall vest in the Surviving Corporation
without further act or deed; and the Surviving Corporation shall assume and be
liable for all the liabilities, obligations and penalties of Fairchild and
Shared Technologies; provided, however, that this shall in no way impair or
affect the indemnification obligations of any party pursuant to indemnification
agreements entered into in connection with this Agreement. No liability or
obligation due or to become due and no claim or demand for any cause existing
against either Fairchild or Shared Technologies, or any stockholder, officer or
director thereof, shall be released or impaired by the Merger, and no action or
proceeding, whether civil or criminal, then pending by or against Fairchild or
Shared Technologies, or any stockholder, officer or director thereof, shall
abate or be discontinued by the Merger, but may be enforced, prosecuted, settled
or compromised as if the Merger had not occurred, and the Surviving Corporation
may be substituted in any such action or proceeding in place of Fairchild or
Shared Technologies.
4.2 Further Assurances. If at any time after the Effective
Time, any further action is necessary or desirable to carry out the purposes of
this Agreement and to vest the Surviving Corporation with full right, title and
possession to all assets, property, rights, privileges, powers and franchises of
either of Fairchild or Shared Technologies, the officers of such corporation are
fully authorized in the name of their corporation or otherwise to take, and
shall take, all such further action and TFC will, and cause each of its
subsidiaries (direct or indirect) to, take all actions reasonably requested by
the Surviving Corporation (at the Surviving Corporation's expense) in
furtherance thereof.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SHARED TECHNOLOGIES
<PAGE>
Shared Technologies represents and warrants to Fairchild that:
5.1 Organization and Qualification. Each of Shared
Technologies and its subsidiaries (which for purposes of this Agreement, unless
indicated to the contrary, shall not include Shared Technologies Cellular, Inc.)
is a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation and has all requisite corporate
power and authority to own, lease and operate its properties and to carry on its
business as now being conducted. Each of Shared Technologies and its
subsidiaries is duly qualified as a foreign corporation to do business, and is
in good standing, in each jurisdiction where the character of its properties
owned or leased or the nature of its activities makes such qualification
necessary, except for failures to be so qualified or in good standing which
would not, individually or in the aggregate, have a material adverse effect on
the general affairs, management, business, operations, condition (financial or
otherwise) or prospects of Shared Technologies and its subsidiaries taken as a
whole (a "Shared Technologies Material Adverse Effect"). Neither Shared
Technologies nor any of its subsidiaries is in violation of any of the
provisions of its Certificate of Incorporation (or other applicable charter
document) or By-Laws. Shared Technologies has delivered to Fairchild accurate
and complete copies of the Certificate of Incorporation (or other applicable
charter document) and By-Laws, as currently in effect, of each of Shared
Technologies and its subsidiaries.
5.2 Capital Stock of Subsidiaries. The only direct or indirect
subsidiaries of Shared Technologies are those listed in Section 5.2 of the
Disclosure Statement previously delivered by Shared Technologies to Fairchild
(the "Disclosure Statement"). Shared Technologies is directly or indirectly the
record (except for directors' qualifying shares) and beneficial owner (including
all qualifying shares owned by directors of such subsidiaries as reflected in
Section 5.2 of the Disclosure Statement) of all of the outstanding shares of
capital stock of each of its subsidiaries, there are no proxies with respect to
such shares, and no equity securities of any of such subsidiaries are or may be
required to be issued by reason of any options, warrants, scrip, rights to
subscribe for, calls or commitments of any character whatsoever relating to, or
securities or rights
<PAGE>
convertible into or exchangeable for, shares of any capital stock of any such
subsidiary, and there are no contracts, commitments, understandings or
arrangements by which any such subsidiary is bound to issue additional shares of
its capital stock or securities convertible into or exchangeable for such
shares. Other than as set forth in Section 5.2 of the Disclosure Statement, all
of such shares so owned by Shared Technologies are validly issued, fully paid
and nonassessable and are owned by it free and clear of any claim, lien or
encumbrance of any kind with respect thereto. Except as disclosed in Section 5.2
of the Disclosure Statement, Shared Technologies does not directly or indirectly
own any interest in any corporation, partnership, joint venture or other
business association or entity.
5.3 Capitalization. The authorized capital stock of Shared
Technologies consists of 20,000,000 shares of Common Stock, par value $.004 per
share, and 10,000,000 shares of Preferred Stock, par value $.01 per share. As of
the date hereof, 8,495,815 shares of Common Stock were issued and outstanding
and 1,527,970 shares of Preferred Stock were issued and outstanding. All of such
issued and outstanding shares are validly issued, fully paid and nonassessable
and free of preemptive rights. As of the date hereof 5,022,083 shares of Common
Stock were reserved for issuance upon exercise of outstanding convertible
securities, warrants, options, and options which may be granted under the stock
option plans of Shared Technologies (the "Stock Option Plans"), all of which
warrants, options and Stock Option Plans are listed and described in Section 5.3
of the Disclosure Statement. Other than the Stock Option Plans, Shared
Technologies has no other plan which provides for the grant of options to
purchase shares of capital stock, stock appreciation or similar rights or stock
awards. Except as set forth above, there are not now, and at the Effective Time,
except for shares of Common Stock issued after the date hereof upon the
conversion of convertible securities and the exercise of warrants and options
outstanding on the date hereof or issued after the date hereof pursuant to the
Stock Option Plans, there will not be, any shares of capital stock of Shared
Technologies issued or outstanding or any subscriptions, options, warrants,
calls, claims, rights (including without limitation any stock appreciation or
similar rights), convertible securities or other agreements or commitments of
any character obligating Shared Technologies to issue, transfer or sell any of
its securities.
<PAGE>
5.4 Authority Relative to This Agreement. Shared Technologies
has full corporate power and authority to execute and deliver this Agreement and
to consummate the Merger and other transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the Merger and
other transactions contemplated hereby have been duly and validly authorized by
the Board of Directors of Shared Technologies and no other corporate proceedings
on the part of Shared Technologies are necessary to authorize this Agreement or
to consummate the Merger or other transactions contemplated hereby (other than,
with respect to the Merger, the approval of Shared Technologies' stockholders
pursuant to Section 251(c) of the DGCL). This Agreement has been duly and
validly executed and delivered by Shared Technologies and, assuming the due
authorization, execution and delivery hereof by Fairchild, constitutes a valid
and binding agreement of Shared Technologies, enforceable against Shared
Technologies in accordance with its terms, except to the extent that its
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws affecting the enforcement of creditors'
rights generally or by general equitable or fiduciary principles.
5.5 No Violations, etc.
(a) Assuming that all filings, permits, authorizations,
consents and approvals or waivers thereof have been duly made or obtained as
contemplated by Section 5.5(b) hereof, except as listed in Section 5.5 of the
Disclosure Statement, neither the execution and delivery of this Agreement by
Shared Technologies nor the consummation of the Merger or other transactions
contemplated hereby nor compliance by Shared Technologies with any of the
provisions hereof will (i) violate, conflict with, or result in a breach of any
provision of, or constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, or result in the termination
or suspension of, or accelerate the performance required by, or result in a
right of termination or acceleration under, or result in the creation of any
lien, security interest, charge or encumbrance upon any of the properties or
assets of Shared Technologies or any of its subsidiaries under, any of the
terms, conditions or provisions of (x) their respective charters or by-laws, (y)
except as set forth in Section 5.5 of the Disclosure Statement, any note, bond,
mortgage, indenture or deed of trust, or (z) any license, lease, agreement or
other instrument or obligation to which Shared Technologies or any such
<PAGE>
subsidiary is a party or to which they or any of their respective properties or
assets may be subject, or (ii) subject to compliance with the statutes and
regulations referred to in the next paragraph, violate any judgment, ruling,
order, writ, injunction, decree, statute, rule or regulation applicable to
Shared Technologies or any of its subsidiaries or any of their respective
properties or assets, except, in the case of clauses (i)(z) and (ii) above, for
such violations, conflicts, breaches, defaults, terminations, suspensions,
accelerations, rights of termination or acceleration or creations of liens,
security interests, charges or encumbrances which would not, individually or in
the aggregate, either have a Shared Technologies Material Adverse Effect or
materially impair Shared Technologies' ability to consummate the Merger or other
transactions contemplated hereby.
(b) No filing or registration with, notification to and no
permit, authorization, consent or approval of any governmental entity is
required by Shared Technologies in connection with the execution and delivery of
this Agreement or the consummation by Shared Technologies of the Merger or other
transactions contemplated hereby, except (i) in connection with the applicable
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), (ii) the filing of the Certificate of Merger with the
Secretary of State of the State of Delaware, (iii) the approval of Shared
Technologies' stockholders pursuant to the DGCL, (iv) filings with applicable
state public utility commissions and (v) such other filings, registrations,
notifications, permits, authorizations, consents or approvals the failure of
which to be obtained, made or given would not, individually or in the aggregate,
either have a Shared Technologies Material Adverse Effect or materially impair
Shared Technologies' ability to consummate the Merger or other transactions
contemplated hereby.
(c) As of the date hereof, Shared Technologies and its
subsidiaries are not in violation of or default under (x) their respective
charter or bylaws, and (y) except as set forth in Section 5.5 of the Disclosure
Statement, any note, bond, mortgage, indenture or deed of trust, or (z) any
license, lease, agreement or other instrument or obligation to which Shared
Technologies or any such subsidiary is a party or to which they or any of their
respective properties or assets may be subject, except, in the case of clauses
(y) and (z) above, for such violations or defaults which would not, individually
or in the
<PAGE>
aggregate, either have a Shared Technologies Material Adverse Effect or
materially impair Shared Technologies' ability to consummate the Merger or other
transactions contemplated hereby.
5.6 Commission Filings; Financial Statements.
(a) Shared Technologies has filed all required forms, reports
and documents during the past three years (collectively, the "SEC Reports") with
the Securities and Exchange Commission (the "SEC"), all of which complied when
filed in all material respects with all applicable requirements of the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder (the "Securities Act") and the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder (the "Exchange
Act"). As of their respective dates the SEC Reports (including all exhibits and
schedules thereto and documents incorporated by reference therein) did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
audited consolidated financial statements and unaudited consolidated interim
financial statements of Shared Technologies and its subsidiaries included or
incorporated by reference in such SEC Reports have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
during the periods involved (except as may be indicated in the notes thereto),
and fairly present the consolidated financial position of Shared Technologies
and its subsidiaries as of the dates thereof and the consolidated results of
operations and consolidated cash flows for the periods then ended (subject, in
the case of any unaudited interim financial statements, to normal year-end
adjustments and to the extent they may not include footnotes or may be condensed
or summary statements).
(b) Shared Technologies will deliver to Fairchild as soon as
they become available true and complete copies of any report or statement mailed
by it to its securityholders generally or filed by it with the SEC, in each case
subsequent to the date hereof and prior to the Effective Time. As of their
respective dates, such reports and statements (excluding any information therein
provided by Fairchild, as to which Shared Technologies makes no representation)
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in
<PAGE>
light of the circumstances under which they are made, not misleading and will
comply in all material respects with all applicable requirements of law. The
audited consolidated financial statements and unaudited consolidated interim
financial statements of Shared Technologies and its subsidiaries to be included
or incorporated by reference in such reports and statements (excluding any
information therein provided by Fairchild, as to which Shared Technologies makes
no representation) will be prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto) and will fairly
present the consolidated financial position of Shared Technologies and its
subsidiaries as of the dates thereof and the consolidated results of operations
and consolidated cash flows for the periods then ended (subject, in the case of
any unaudited interim financial statements, to normal year-end adjustments and
to the extent they may not include footnotes or may be condensed or summary
statements).
5.7 Absence of Changes or Events. Except as set forth in
Shared Technologies' Form 10-K for the fiscal year ended December 31, 1994, as
filed with the SEC, since December 31, 1994:
(a) there has been no material adverse change, or any
development involving a prospective material adverse change, in the general
affairs, management, business, operations, condition (financial or
otherwise) or prospects of Shared Technologies and its subsidiaries taken
as a whole;
(b) there has not been any direct or indirect redemption,
purchase or other acquisition of any shares of capital stock of Shared
Technologies or any of its subsidiaries, or any declaration, setting aside
or payment of any dividend or other distribution by Shared Technologies or
any of its subsidiaries in respect of its capital stock (except for the
distribution of the shares of Shared Technologies Cellular, Inc.);
(c) except in the ordinary course of its business and
consistent with past practice neither Shared Technologies nor any of its
subsidiaries has incurred any indebtedness for borrowed money, or assumed,
guaranteed, endorsed or otherwise as an accommodation become responsible
for the obligations of any other individual, firm or corporation, or
<PAGE>
made any loans or advances to any other individual, firm or corporation;
(d) there has not been any change in accounting methods,
principles or practices of Shared Technologies or its subsidiaries;
(e) except in the ordinary course of business and for amounts
which are not material, there has not been any revaluation by Shared
Technologies or any of its subsidiaries of any of their respective assets,
including, without limitation, writing down the value of inventory or
writing off notes or accounts receivables;
(f) there has not been any damage, destruction or loss,
whether covered by insurance or not, except for such as would not,
individually or in the aggregate, have a Shared Technologies Material
Adverse Effect; and
(g) there has not been any agreement by Shared Technologies or
any of its subsidiaries to (i) do any of the things described in the
preceding clauses (a) through (f) other than as expressly contemplated or
provided for in this Agreement or (ii) take, whether in writing or
otherwise, any action which, if taken prior to the date of this Agreement,
would have made any representation or warranty in this Article V untrue or
incorrect.
5.8 Proxy Statement. None of the information supplied by
Shared Technologies for inclusion in the proxy statement to be sent to the
shareholders of Shared Technologies in connection with the Special Meeting (as
hereinafter defined), including all amendments and supplements thereto (the
"Proxy Statement"), shall on the date the Proxy Statement is first mailed to
shareholders, at the time of the Special Meeting or at the Effective Time, be
false or misleading with respect to any material fact, or omit to state any
material fact required to be stated therein or necessary in order to make the
statements made therein, in light of the circumstances under which they are
made, not misleading or necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Special
Meeting which has become false or misleading. None of the information to be
filed by Fairchild and Shared Technologies with the SEC in connection with the
Merger or in any other documents to be filed with the SEC or any other
regulatory or governmental
<PAGE>
agency or authority in connection with the transactions contemplated hereby,
including any amendments thereto (the "Other Documents"), insofar as such
information was provided or supplied by Shared Technologies, will contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they are made, not misleading. The Proxy Statement
shall comply in all material respects with the requirements of the Exchange Act.
5.9 Litigation. Except as set forth in Section 5.9 of the
Disclosure Statement, there is no (i) claim, action, suit or proceeding pending
or, to the best knowledge of Shared Technologies or any of its subsidiaries,
threatened against or relating to Shared Technologies or any of its subsidiaries
before any court or governmental or regulatory authority or body or arbitration
tribunal, or (ii) outstanding judgment, order, writ, injunction or decree, or
application, request or motion therefor, of any court, governmental agency or
arbitration tribunal in a proceeding to which Shared Technologies, any
subsidiary of Shared Technologies or any of their respective assets was or is a
party except, in the case of clauses (i) and (ii) above, such as would not,
individually or in the aggregate, either have a Shared Technologies Material
Adverse Effect or materially impair Shared Technologies' ability to consummate
the Merger.
5.10 Insurance. Section 5.10 of the Disclosure Statement lists
all insurance policies in force on the date hereof covering the businesses,
properties and assets of Shared Technologies and its subsidiaries, and all such
policies are currently in effect. True and complete copies of all such policies
have been delivered to Fairchild. Except as set forth in Section 5.10 of the
Disclosure Statement, Shared Technologies has not received notice of the
cancellation of any such insurance policy.
5.11 Title to and Condition of Properties. Except as set forth
in Section 5.11 of the Disclosure Statement, Shared Technologies and its
subsidiaries have good title to all of the real property and own outright all of
the personal property (except for leased property or assets) which is reflected
on Shared Technologies' and its subsidiaries' December 31, 1994 audited
consolidated balance sheet contained in Shared Technologies' Form 10-K for the
fiscal year ended December 31, 1994 filed with the SEC (the "Balance Sheet")
except for property
<PAGE>
since sold or otherwise disposed of in the ordinary course of business and
consistent with past practice. Except as set forth in Section 5.11 of the
Disclosure Statement, no such real or personal property is subject to claims,
liens or encumbrances, whether by mortgage, pledge, lien, conditional sale
agreement, charge or otherwise, except for those which would not, individually
or in the aggregate, have a Shared Technologies Material Adverse Effect. Section
5.11 of the Disclosure Statement contains a true and complete list of all real
properties owned by Shared Technologies and its subsidiaries.
5.12 Leases. There has been made available to Fairchild true
and complete copies of each lease requiring the payment of rentals aggregating
at least $35,000 per annum pursuant to which real or personal property is held
under lease by Shared Technologies or any of its subsidiaries, and true and
complete copies of each lease pursuant to which Shared Technologies or any of
its subsidiaries leases real or personal property to others. A true and complete
list of all such leases is set forth in Section 5.12 of the Disclosure
Statement. All of the leases so listed are valid and subsisting and in full
force and effect and are subject to no default with respect to Shared
Technologies or its subsidiaries, as the case may be, and, to Shared
Technologies' knowledge, are in full force and effect and subject to no default
with respect to any other party thereto, and the leased real property is in good
and satisfactory condition.
5.13 Contracts and Commitments. Other than as disclosed in
Section 5.13 of the Disclosure Statement, no existing contract or commitment
contains an agreement with respect to any change of control that would be
triggered by the Merger. Other than as set forth in Section 5.13 of the
Disclosure Statement, neither this Agreement, the Merger nor the other
transactions contemplated hereby will result in any outstanding loans or
borrowings by Shared Technologies or any subsidiary of Shared Technologies
becoming due, going into default or giving the lenders or other holders of debt
instruments the right to require Shared Technologies or any of its subsidiaries
to repay all or a portion of such loans or borrowings.
5.14 Labor Matters. Each of Shared Technologies and its
subsidiaries is in compliance in all material respects with all applicable laws
respecting employment and employment
<PAGE>
practices, terms and conditions of employment and wages and hours, and neither
Shared Technologies nor any of its subsidiaries is engaged in any unfair labor
practice. There is no labor strike, slowdown or stoppage pending (or, to the
best knowledge of Shared Technologies, any labor strike or stoppage threatened)
against or affecting Shared Technologies or any of its subsidiaries. No petition
for certification has been filed and is pending before the National Labor
Relations Board with respect to any employees of Shared Technologies or any of
its subsidiaries who are not currently organized.
5.15 Compliance with Law. Except for matters set forth in the
Disclosure Statement, neither Shared Technologies nor any of its subsidiaries
has violated or failed to comply with any statute, law, ordinance, regulation,
rule or order of any foreign, federal, state or local government or any other
governmental department or agency, or any judgment, decree or order of any
court, applicable to its business or operations, except where any such violation
or failure to comply would not, individually or in the aggregate, have a Shared
Technologies Material Adverse Effect; the conduct of the business of Shared
Technologies and its subsidiaries is in conformity with all foreign, federal,
state and local energy, public utility and health requirements, and all other
foreign, federal, state and local governmental and regulatory requirements,
except where such nonconformities would not, individually or in the aggregate,
have a Shared Technologies Material Adverse Effect. Shared Technologies and its
subsidiaries have all permits, licenses and franchises from governmental
agencies required to conduct their businesses as now being conducted, except for
such permits, licenses and franchises the absence of which would not,
individually or in the aggregate, have a Shared Technologies Material Adverse
Effect.
5.16 Board Recommendation. The Board of Directors of Shared
Technologies has, by a majority vote at a meeting of such Board duly held on, or
by written consent of such Board dated, November 9, 1995, approved and adopted
this Agreement, the Merger and the other transactions contemplated hereby,
determined that the Merger is fair to the holders of shares of Shared
Technologies Common Stock and recommended that the holders of such shares of
Common Stock approve and adopt this Agreement, the Merger and the other
transactions contemplated hereby.
<PAGE>
5.17 Employment and Labor Contracts. Neither Shared
Technologies nor any of its subsidiaries is a party to any employment,
management services, consultation or other similar contract with any past or
present officer, director, employee or other person or, to the best of Shared
Technologies' knowledge, any entity affiliated with any past or present officer,
director or employee or other person other than those set forth in Section 5.17
of the Disclosure Statement and other than those which (x) have a term of less
than one year and (y) involve payments of less than $30,000 per year, in each
case true and complete copies of which contracts have been delivered to
Fairchild, and other than the agreements executed by employees generally, the
forms of which have been delivered to Fairchild.
5.18 Patents and Trademarks. Shared Technologies and its
subsidiaries own or have the right to use all patents, patent applications,
trademarks, trademark applications, trade names, inventions, processes, know-how
and trade secrets necessary to the conduct of their respective businesses,
except for those which the failure to own or have the right to use would not,
individually or in the aggregate, have a Shared Technologies Material Adverse
Effect ("Proprietary Rights"). All issued patents and trademark registrations
and pending patent and trademark applications of the Proprietary Rights have
previously been delivered to Fairchild. No rights or licenses to use Proprietary
Rights have been granted by Shared Technologies or its subsidiaries except those
listed in Section 5.18 of the Disclosure Statement; and no contrary assertion
has been made to Shared Technologies or any of its subsidiaries or notice of
conflict with any asserted right of others has been given by any person except
those which, even if correct, would not, individually or in the aggregate, have
a Shared Technologies Material Adverse Effect. Shared Technologies has not given
notice of any asserted claim or conflict to a third party with respect to Shared
Technologies' Proprietary Rights. True and complete copies of all material
license agreements under which Shared Technologies or any of its subsidiaries is
a licensor or licensee have been delivered to Fairchild.
5.19 Taxes. "Tax" or "Taxes" shall mean all federal, state,
local and foreign taxes, duties, levies, charges and assessments of any nature,
including social security payments and deductibles relating to wages, salaries
and benefits and payments to subcontractors (to the extent required under
applicable Tax law), and also including all interest, penalties and additions
<PAGE>
imposed with respect to such amounts. Except as set forth in Section 5.19 of the
Disclosure Statement: (i) Shared Technologies and its subsidiaries have prepared
and timely filed or will timely file with the appropriate governmental agencies
all franchise, income and all other material Tax returns and reports required to
be filed for any period ending on or before the Effective Time, taking into
account any extension of time to file granted to or obtained on behalf of Shared
Technologies and/or its subsidiaries; (ii) all material Taxes of Shared
Technologies and its subsidiaries in respect of the pre-Merger period have been
paid in full to the proper authorities, other than such Taxes as are being
contested in good faith by appropriate proceedings and/or are adequately
reserved for in accordance with generally accepted accounting principles; (iii)
all deficiencies resulting from Tax examinations of federal, state and foreign
income, sales and franchise and all other material Tax returns filed by Shared
Technologies and its subsidiaries have either been paid or are being contested
in good faith by appropriate proceedings; (iv) to the best knowledge of Shared
Technologies, no deficiency has been asserted or assessed against Shared
Technologies or any of its subsidiaries, and no examination of Shared
Technologies or any of its subsidiaries is pending or threatened for any
material amount of Tax by any taxing authority; (v) no extension of the period
for assessment or collection of any material Tax is currently in effect and no
extension of time within which to file any material Tax return has been
requested, which Tax return has not since been filed; (vi) no material Tax liens
have been filed with respect to any Taxes; (vii) Shared Technologies and each of
its subsidiaries will not make any voluntary adjustment by reason of a change in
their accounting methods for any pre-Merger period that would affect the taxable
income or deductions of Shared Technologies or any of its subsidiaries for any
period ending after the Effective Date; (viii) Shared Technologies and its
subsidiaries have made timely payments of the Taxes required to be deducted and
withheld from the wages paid to their employees; (ix) the Tax Sharing Agreement
under which Shared Technologies or any subsidiary will have any obligation or
liability on or after the Effective Date is attached as Exhibit E; (x) Shared
Technologies has foreign losses as defined in Section 904(f)(2) of the Code
listed in Section 5.19 of the Disclosure Statement; (xi) Shared Technologies and
its subsidiaries have unused foreign tax credits set forth in Section 5.19 of
the Disclosure Statement; and (xii) to the best knowledge of Shared
Technologies, there are no
<PAGE>
transfer pricing agreements made with any taxation authority involving Shared
Technologies and its subsidiaries.
5.20 Employee Benefit Plans; ERISA.
(a) Except as set forth in Section 5.20 of the Disclosure
Statement, there are no "employee pension benefit plans" as defined in Section
3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), covering employees employed in the United States, maintained or
contributed to by Shared Technologies or any of its subsidiaries, or to which
Shared Technologies or any of its subsidiaries contributes or is obligated to
make payments thereunder or otherwise may have any liability ("Pension Benefits
Plans").
(b) Shared Technologies has furnished Fairchild with a true
and complete schedule of all "welfare benefit plans" (as defined in Section 3(1)
of ERISA) covering employees employed in the United States, maintained or
contributed to by Shared Technologies or any of its subsidiaries ("Welfare
Plans"), all multiemployer plans as defined in Section 3(37) of ERISA covering
employees employed in the United States to which Shared Technologies or any of
its subsidiaries is required to make contributions or otherwise may have any
liability, and, to the extent covering employees employed in the United States,
all stock bonus, stock option, restricted stock, stock appreciation right, stock
purchase, bonus, incentive, deferred compensation, severance and vacation plans
maintained or contributed to by Shared Technologies or a subsidiary.
(c) Shared Technologies and each of its subsidiaries, and each
of the Pension Benefit Plans and Welfare Plans, are in compliance with the
applicable provisions of ERISA (the "Code") and other applicable laws except
where the failure to comply would not, individually or in the aggregate, have a
Shared Technologies Material Adverse Effect.
(d) All contributions to, and payments from, the Pension
Benefit Plans which are required to have been made in accordance with the
Pension Benefit Plans and, when applicable, Section 302 of ERISA or Section 412
of the Code have been timely made except where the failure to make such
contributions or payments on a timely basis would not, individually or in the
aggregate, have a Shared Technologies Material Adverse Effect. All contributions
required to have been made in accordance with
<PAGE>
Section 302 of ERISA or Section 412 of the Code to any employee pension benefit
plan (as defined in Section 3(2) of ERISA) maintained by an ERISA Affiliate of
Shared Technologies or any of its subsidiaries have been timely made except
where the failure to make such contributions on a timely basis would not
individually or in the aggregate have a Shared Technologies Material Adverse
Effect. For purposes of this Agreement, "ERISA Affiliate" shall mean any person
(as defined in Section 3(9) of ERISA) that is a member of any group of persons
described in Section 414(b), (c), (m) or (o) of the Code of which Shared
Technologies or a subsidiary is a member.
(e) The Pension Benefit Plans intended to qualify under
Section 401 of the Code are so qualified and have been determined by the
Internal Revenue Service ("IRS") to be so qualified and nothing has occurred
with respect to the operation of such Pension Benefit Plans which would cause
the loss of such qualification or exemption or the imposition of any material
liability, penalty or tax under ERISA or the Code. Such plans have been or will
be, on a timely basis, (i) amended to comply with changes to the Code made by
the Tax Reform Act of 1986, the Unemployment Compensation Amendments of 1992,
the Omnibus Budget Reconciliation Act of 1993, and other applicable legislative,
regulatory or administrative requirements; and (ii) submitted to the Internal
Revenue Service for a determination of their tax qualification, as so amended;
and no such amendment will adversely affect the qualification of such plans.
(f) Each Welfare Plan that is intended to qualify for
exclusion of benefits thereunder from the income of participants or for any
other tax-favored treatment under any provisions of the Code (including, without
limitation, Sections 79, 105, 106, 125 or 129 of the Code) is and has been
maintained in compliance with all pertinent provisions of the Code and Treasury
Regulations thereunder.
(g) Except as disclosed in Shared Technologies' Form 10-K for
the fiscal year ended December 31, 1994, there are (i) no investigations
pending, to the best knowledge of Shared Technologies, by any governmental
entity involving the Pension Benefit Plans or Welfare Plans, (ii) no termination
proceedings involving the Pension Benefit Plans and (iii) no pending or, to the
best of Shared Technologies' knowledge, threatened claims (other than routine
claims for benefits), suits or proceedings against any Pension Benefit or
Welfare Plan, against the assets
<PAGE>
of any of the trusts under any Pension Benefit or Welfare Plan or against any
fiduciary of any Pension Benefit or Welfare Plan with respect to the operation
of such plan or asserting any rights or claims to benefits under any Pension
Benefit or Welfare Plan or against the assets of any trust under such plan,
which would, in the case of clause (i), (ii) or (iii) of this paragraph (f),
give rise to any liability which would, individually or in the aggregate, have a
Shared Technologies Material Adverse Effect, nor, to the best of Shared
Technologies' knowledge, are there any facts which would give rise to any
liability which would, individually or in the aggregate, have a Shared
Technologies Material Adverse Effect in the event of any such investigation,
claim, suit or proceeding.
(h) None of Shared Technologies, any of its subsidiaries or
any employee of the foregoing, nor any trustee, administrator, other fiduciary
or any other "party in interest" or "disqualified person" with respect to the
Pension Benefit Plans or Welfare Plans, has engaged in a "prohibited
transaction" (as such term is defined in Section 4975 of the Code or Section 406
of ERISA) which would be reasonably likely to result in a tax or penalty on
Shared Technologies or any of its subsidiaries under Section 4975 of the Code or
Section 502(i) of ERISA which would, individually or in the aggregate, have a
Shared Technologies Material Adverse Effect.
(i) Neither the Pension Benefit Plans subject to Title IV of
ERISA nor any trust created thereunder has been terminated nor have there been
any "reportable events" (as defined in Section 4043 of ERISA and the regulations
thereunder) with respect to either thereof which would, individually or in the
aggregate, have a Shared Technologies Material Adverse Effect nor has there been
any event with respect to any Pension Benefit Plan requiring disclosure under
Section 4063(a) of ERISA or any event with respect to any Pension Benefit Plan
requiring disclosure under Section 4041(c)(3)(C) of ERISA which would,
individually or in the aggregate, have a Shared Technologies Material Adverse
Effect.
(j) Neither Shared Technologies nor any subsidiary of Shared
Technologies has incurred any currently outstanding liability to the Pension
Benefit Guaranty Corporation (the "PBGC") or to a trustee appointed under
Section 4042(b) or (c) of ERISA other than for the payment of premiums, all of
which have been paid when due. No Pension Benefit Plan has applied for, or
<PAGE>
received, a waiver of the minimum funding standards imposed by Section 412 of
the Code. The information supplied to the actuary by Shared Technologies or any
of its subsidiaries for use in preparing the most recent actuarial report for
Pension Benefit Plans is complete and accurate in all material respects.
(k) Neither Shared Technologies, any of its subsidiaries nor
any of their ERISA Affiliates has any liability (including any contingent
liability under Section 4204 of ERISA) with respect to any multiemployer plan,
within the meaning of Section 3(37) of ERISA, covering employees employed in the
United States.
(l) Except as disclosed in Section 5.20 of the Disclosure
Statement, with respect to each of the Pension Benefit and Welfare Plans, true,
correct and complete copies of the following documents have been delivered to
Fairchild: (i) the current plans and related trust documents, including
amendments thereto, (ii) any current summary plan descriptions, (iii) the most
recent Forms 5500, financial statements and actuarial reports, if applicable,
(iv) the most recent IRS determination letter, if applicable; and (v) if any
application for an IRS determination letter is pending, copies of all such
applications for determination including attachments, exhibits and schedules
thereto.
(m) Neither Shared Technologies, any of its subsidiaries, any
organization to which Shared Technologies is a successor or parent corporation,
within the meaning of Section 4069(b) of ERISA, nor any of their ERISA
Affiliates has engaged in any transaction, within the meaning of Section 4069(a)
of ERISA, the liability for which would, individually or in the aggregate, have
a Shared Technologies Material Adverse Effect.
(n) Except as disclosed in Section 5.20 of the Disclosure
Statement, none of the Welfare Plans maintained by Shared Technologies or any of
its subsidiaries are retiree life or retiree health insurance plans which
provide for continuing benefits or coverage for any participant or any
beneficiary of a participant following termination of employment, except as may
be required under the Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended ("COBRA"), or except at the expense of the participant or the
participant's beneficiary. Shared Technologies and each of its subsidiaries
which maintain a "group health plan" within the meaning of Section 5000(b)(1) of
the Code
<PAGE>
have complied with the notice and continuation requirements of Section 4980B of
the Code, COBRA, Part 6 of Subtitle B of Title I of ERISA and the regulations
thereunder except where the failure to comply would not, individually or in the
aggregate, have a Shared Technologies Material Adverse Effect.
(o) No liability under any Pension Benefit or Welfare Plan has
been funded nor has any such obligation been satisfied with the purchase of a
contract from an insurance company as to which Shared Technologies or any of its
subsidiaries has received notice that such insurance company is in
rehabilitation.
(p) Except pursuant to the agreements listed in Section 5.20
of the Disclosure Statement, the consummation of the transactions contemplated
by this Agreement will not result in an increase in the amount of compensation
or benefits or accelerate the vesting or timing of payment of any benefits or
compensation payable to or in respect of any employee of Shared Technologies or
any of its subsidiaries.
(q) Shared Technologies has disclosed to Fairchild in Section
5.20 of the Disclosure Statement each material Foreign Plan to the extent the
benefits provided thereunder are not mandated by the laws of the applicable
foreign jurisdiction. Shared Technologies and each of its subsidiaries and each
of the Foreign Plans are in compliance with applicable laws and all required
contributions have been made to the Foreign Plans, except where the failure to
comply or make contributions would not, individually or in the aggregate, have a
Shared Technologies Material Adverse Effect. For purposes hereof, the term
"Foreign Plan" shall mean any plan, with respect to benefits voluntarily
provided by Shared Technologies or any subsidiary with respect to employees of
any of them employed outside the United States.
5.21 Environmental Matters.
(a) Except as set forth in Section 5.21 of the Disclosure
Statement:
(i) each of Shared Technologies and its subsidiaries,
and the properties and assets owned by them, and to the actual
knowledge of Shared Technologies, all properties operated, leased,
managed or used by Shared Technologies and its subsidiaries are in
compliance with all applicable Environmental Laws except where the
failure to be
<PAGE>
in compliance would not, individually or in the aggregate, have a
Shared Technologies Material Adverse Effect;
(ii) there is no Environmental Claim that is (1) pending
or threatened against Shared Technologies or any of its subsidiaries or
(2) pending or threatened against any person or entity or any assets
owned by Shared Technologies or its subsidiaries whose liability for
such Environmental Claim has been retained or assumed by contract or
otherwise by Shared Technologies or any of its subsidiaries or can be
imputed or attributed by law to Shared Technologies or any of its
subsidiaries, the effect of any of which would, individually or in the
aggregate, have a Shared Technologies Material Adverse Effect;
(iii) there are no past or present actions, activities,
circumstances, conditions, events or incidents arising out of, based
upon, resulting from or relating to the ownership, operation or use of
any property or assets currently or formerly owned, operated or used by
Shared Technologies or any of its subsidiaries (or any predecessor in
interest of any of them), including, without limitation, the
generation, storage, treatment or transportation of any Hazardous
Materials, or the emission, discharge, disposal or other Release or
threatened Release of any Hazardous Materials into the Environment
which is presently expected to result in an Environmental Claim;
(iv) no lien has been recorded under any Environmental
Law with respect to any material property, facility or asset owned by
Shared Technologies or any of its subsidiaries; and to the actual
knowledge of Shared Technologies, no lien has been recorded under any
Environmental Law with respect to any material property, facility or
asset, operated, leased or managed or used by Shared Technologies or
its subsidiaries and relating to or resulting from Shared Technologies
or its subsidiaries operations, lease, management or use for which
Shared Technologies or its subsidiaries may be legally responsible;
(v) neither Shared Technologies nor any of its
subsidiaries has received notice that it has been identified as a
potentially responsible party or any request for information under the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended
<PAGE>
("CERCLA"), the Resource Conservation and Recovery Act, as amended
("RCRA"), or any comparable state law nor has Shared Technologies or
any of its subsidiaries received any notification that any Hazardous
Materials that it or any of their respective predecessors in interest
has used, generated, stored, treated, handled, transported or disposed
of, or arranged for transport for treatment or disposal of, or arranged
for disposal or treatment of, has been found at any site at which any
person is conducting or plans to conduct an investigation or other
action pursuant to any Environmental Law;
(vi) to the actual knowledge of Shared Technologies,
there has been no Release of Hazardous Materials at, on, upon, under,
from or into any real property in the vicinity of any property
currently or formerly owned by Shared Technologies or any of its
subsidiaries that, through soil, air, surface water or groundwater
migration or contamination, has become located on, in or under such
properties and, to the actual knowledge of Shared Technologies, there
has been no release of Hazardous Materials at, on, upon, under or from
any property currently or formerly operated, leased, managed or used by
Shared Technologies or any of its subsidiaries that through soil, air,
surface water or groundwater migration or contamination has become
located on, in or under such properties as resulting from or relating
to Shared Technologies or any of its subsidiaries operations, lease,
management or use thereof of for which Shared Technologies and any of
its subsidiaries may be legally responsible;
(vii) no asbestos or asbestos containing material or any
polychlorinated biphenyls are contained within products presently
manufactured and, to the best knowledge of Shared Technologies
manufactured at any time by Shared Technologies or any of its
subsidiaries and, to the actual knowledge of Shared Technologies there
is no asbestos or asbestos containing material or any polychlorinated
biphenyl in, on or at any property or any facility or equipment owned,
operated, leased, managed or used by Shared Technologies or any of its
subsidiaries;
(viii) no property owned by Shared Technologies or any of
its subsidiaries and to the actual knowledge of Shared Technologies, no
property operated, leased, managed
<PAGE>
or used by Shared Technologies and any of its subsidiaries is (i)
listed or proposed for listing on the National Priorities List under
CERCLA or (ii) listed in the Comprehensive Environmental Response,
Compensation, Liability Information System List promulgated pursuant to
CERCLA, or on any comparable list published by any governmental
authority;
(ix) no underground storage tank or related piping is
located at, under or on any property owned by Shared Technologies or
any of its subsidiaries or to the actual knowledge of Shared
Technologies, any property operated, leased, managed or used by Shared
Technologies, nor to the actual knowledge of Shared Technologies, has
any such tank or piping been removed or decommissioned from or at such
property;
(x) all environmental investigations, studies, audits,
assessments or reviews conducted of which Shared Technologies has
actual knowledge in relation to the current or prior business or assets
owned, operated, leased, managed or used of Shared Technologies or any
of its subsidiaries or any real property, assets or facility now or
previously owned, operated, leased, managed or used by Shared
Technologies or any of its subsidiaries have been delivered to
Fairchild; and
(xi) each of Shared Technologies and its subsidiaries has
obtained all permits, licenses and other authorizations
("Authorizations") required under any Environmental Law with respect to
the operation of its assets and business and its use, ownership and
operation of any real property, and each such Authorization is in full
force and effect.
(b) For purposes of Section 5.21(a):
(i) "Actual Knowledge of Shared Technologies" means the
actual knowledge of individuals at the corporate management level of
Shared Technologies and its subsidiaries.
(ii) "Environment" means any surface water, ground water,
drinking water supply, land surface or subsurface
<PAGE>
strata, ambient air and including, without limitation, any indoor
location;
(iii) "Environmental Claim" means any notice or claim by
any person alleging potential liability (including, without limitation,
potential liability for investigatory costs, cleanup costs,
governmental costs, or harm, injuries or damages to any person,
property or natural resources, and any fines or penalties) arising out
of, based upon, resulting from or relating to (1) the emission,
discharge, disposal or other release or threatened release in or into
the Environment of any Hazardous Materials or (2) circumstances forming
the basis of any violation, or alleged violation, of any applicable
Environmental Law;
(iv) "Environmental Laws" means all federal, state, and
local laws, codes, and regulations relating to pollution, the
protection of human health, the protection of the Environment or the
emission, discharge, disposal or other release or threatened release of
Hazardous Materials in or into the Environment;
(v) "Hazardous Materials" means pollutants, contaminants
or chemical, industrial, hazardous or toxic materials or wastes, and
includes, without limitation, asbestos or asbestos-containing
materials, PCBs and petroleum, oil or petroleum or oil products,
derivatives or constituents; and
(vi) "Release" means any past or present spilling,
leaking, pumping, pouring, emitting, emptying, discharging, injecting,
escaping, leaching, dumping or disposing of Hazardous Materials into
the Environment or within structures (including the abandonment or
discarding of barrels, containers or other closed receptacles
containing any Hazardous Materials).
5.22 Disclosure. No representation or warranty by Shared
Technologies herein, or in any certificate furnished by or on behalf of Shared
Technologies to Fairchild in connection herewith, contains or will contain any
untrue statement of a material fact or omits or will omit to state a material
fact necessary in order to make the statements herein or therein, in light of
the circumstances under which they were made, not misleading.
<PAGE>
5.23 Absence of Undisclosed Liabilities. Neither Shared
Technologies nor any of its subsidiaries has any liabilities or obligations
(including without limitation any liabilities or obligations related to Shared
Technologies Cellular, Inc.) of any nature, whether absolute, accrued,
unmatured, contingent or otherwise, or any unsatisfied judgments or any leases
of personalty or realty or unusual or extraordinary commitments, except the
liabilities recorded on the Balance Sheet and the notes thereto, and except for
liabilities or obligations incurred in the ordinary course of business and
consistent with past practice since December 31, 1994 that would not
individually or in the aggregate have a Shared Technologies Material Adverse
Effect.
5.24 Finders or Brokers. Except as set forth in Section 5.24
of the Disclosure Statement, none of Shared Technologies, the subsidiaries of
Shared Technologies, the Board of Directors or any member of the Board of
Directors has employed any investment banker, broker, finder or intermediary in
connection with the transactions contemplated hereby who might be entitled to a
fee or any commission in connection with the Merger, and Section 5.24 of the
Disclosure Statement sets forth the maximum consideration (present and future)
agreed to be paid to each such party.
5.25 State Antitakeover Statutes. Shared Technologies has
granted all approvals and taken all other steps necessary to exempt the Merger
and the other transactions contemplated hereby from the requirements and
provisions of Section 203 of the DGCL and any other applicable state
antitakeover statute or regulation such that none of the provisions of such
Section 203 or any other "business combination," "moratorium," "control share"
or other state antitakeover statute or regulation (x) prohibits or restricts
Shared Technologies' ability to perform its obligations under this Agreement or
its ability to consummate the Merger and the other transactions contemplated
hereby, (y) would have the effect of invalidating or voiding this Agreement any
provision hereof, or (z) would subject Fairchild to any material impediment or
condition in connection with the exercise of any of its rights under this
Agreement.
ARTICLE VI
<PAGE>
REPRESENTATIONS AND WARRANTIES OF TFC, RHI AND FAIRCHILD
Each of TFC, RHI and Fairchild represents and warrants to
Shared Technologies that:
6.1 Organization and Qualification. Each of Fairchild and its
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has all
requisite corporate power and authority to own, lease and operate its properties
and to carry on its business as now being conducted. Each of Fairchild and its
subsidiaries is duly qualified as a foreign corporation to do business, and is
in good standing, in each jurisdiction where the character of its properties
owned or leased or the nature of its activities makes such qualification
necessary, except for failures to be so qualified or in good standing which
would not, individually or in the aggregate, have a material adverse effect on
the general affairs, management, business, operations, condition (financial or
otherwise) or prospects of Fairchild and its subsidiaries taken as a whole (a
"Fairchild Material Adverse Effect"). Neither Fairchild nor any of its
subsidiaries is in violation of any of the provisions of its Certificate of
Incorporation (or other applicable charter document) or By-Laws. Fairchild has
delivered to Shared Technologies accurate and complete copies of the Certificate
of Incorporation (or other applicable charter document) and By-Laws, as
currently in effect, of each of Fairchild and its subsidiaries.
6.2 Capital Stock of Subsidiaries. The only direct or indirect
subsidiaries of Fairchild are those listed in Section 6.2 of the Disclosure
Statement previously delivered by Fairchild to Shared Technologies (the
"Disclosure Statement"). Fairchild is directly or indirectly the record (except
for directors' qualifying shares) and beneficial owner (including all qualifying
shares owned by directors of such subsidiaries as reflected in Section 6.2 of
the Disclosure Statement) of all of the outstanding shares of capital stock of
each of its subsidiaries, there are no proxies with respect to such shares, and
no equity securities of any of such subsidiaries are or may be required to be
issued by reason of any options, warrants, scrip, rights to subscribe for, calls
or commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of any capital stock of any such
subsidiary, and there are no contracts, commitments, understandings or
arrangements by which any such subsidiary is
<PAGE>
bound to issue additional shares of its capital stock or securities convertible
into or exchangeable for such shares. Other than as set forth in Section 6.2 of
the Disclosure Statement, all of such shares so owned by Fairchild are validly
issued, fully paid and nonassessable and are owned by it free and clear of any
claim, lien or encumbrance of any kind with respect thereto. Except as disclosed
in Section 6.2 of the Disclosure Statement, Fairchild does not directly or
indirectly own any interest in any corporation, partnership, joint venture or
other business association or entity.
6.3 Capitalization. The authorized capital stock of Fairchild
consists of 1,400 shares of Common Stock, par value $100.00 per share, and
3,000,000 shares of Preferred Stock, without par value. As of the date hereof,
1,400 shares of Common Stock are issued and outstanding (all of which are owned
by RHI), 424,701 shares of Series A Preferred Stock are issued and outstanding,
2,278 shares of Series B Preferred Stock are issued and outstanding (which will
be extinguished immediately prior to the Effective Time) and 558,360 shares of
Series C Preferred Stock are issued and outstanding. All of such issued and
outstanding shares are validly issued, fully paid and nonassessable and free of
preemptive rights. Except as set forth above, there are not now, and at the
Effective Time, there will not be, any shares of capital stock of Fairchild
issued or outstanding or any subscriptions, options, warrants, calls, claims,
rights (including without limitation any stock appreciation or similar rights),
convertible securities or other agreements or commitments of any character
obligating Fairchild to issue, transfer or sell any of its securities.
6.4 Authority Relative to This Agreement. Each of TFC and RHI
is a corporation duly organized, validly existing and in good standing under the
laws of Delaware. Each of TFC, RHI and Fairchild has full corporate power and
authority to execute and deliver this Agreement and to consummate the Merger and
other transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the Merger and other transactions contemplated
hereby have been duly and validly authorized by the Board of Directors of each
of TFC (which owns all of the outstanding common stock of RHI), RHI and
Fairchild and no other corporate proceedings on the part of TFC, RHI or
Fairchild are necessary to authorize this Agreement or to consummate the Merger
or other transactions contemplated hereby. This Agreement has been duly and
validly executed and delivered
<PAGE>
by each of TFC (which owns all of the outstanding common stock of RHI), RHI and
Fairchild and, assuming the due authorization, execution and delivery hereof by
Shared Technologies, constitutes a valid and binding agreement of each of TFC,
RHI and Fairchild, enforceable against each of TFC, RHI and Fairchild in
accordance with its terms, except to the extent that its enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws affecting the enforcement of creditors' rights generally or by
general equitable or fiduciary principles.
6.5 No Violations, etc.
(a) Assuming that all filings, permits, authorizations,
consents and approvals or waivers thereof have been duly made or obtained as
contemplated by Section 6.5(b) hereof, neither the execution and delivery of
this Agreement by TFC, RHI or Fairchild nor the consummation of the Merger or
other transactions contemplated hereby nor compliance by Fairchild with any of
the provisions hereof will (i) violate, conflict with, or result in a breach of
any provision of, or constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under, or result in the
termination or suspension of, or accelerate the performance required by, or
result in a right of termination or acceleration under, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
properties or assets of TFC, RHI or Fairchild or any of their respective
subsidiaries under, any of the terms, conditions or provisions of (x) their
respective charters or by-laws, (y) except as set forth in Section 6.5 of the
Disclosure Statement, any note, bond, mortgage, indenture or deed of trust, or
(z) any license, lease, agreement or other instrument or obligation, to which
TFC, RHI or Fairchild or any such subsidiary is a party or to which they or any
of their respective properties or assets may be subject, or (ii) subject to
compliance with the statutes and regulations referred to in the next paragraph,
violate any judgment, ruling, order, writ, injunction, decree, statute, rule or
regulation applicable to TFC, RHI or Fairchild or any of their respective
subsidiaries or any of their respective properties or assets, except, in the
case of clauses (i)(z) and (ii) above, for such violations, conflicts, breaches,
defaults, terminations, suspensions, accelerations, rights of termination or
acceleration or creations of liens, security interests, charges or encumbrances
which would not, individually or in the aggregate, either have a Fairchild
Material Adverse Effect or materially impair Fairchild's ability
<PAGE>
to consummate the Merger or other transactions contemplated hereby.
(b) No filing or registration with, notification to and no
permit, authorization, consent or approval of any governmental entity is
required by TFC, RHI or Fairchild or any of their respective subsidiaries in
connection with the execution and delivery of this Agreement or the consummation
by Fairchild of the Merger or other transactions contemplated hereby, except (i)
in connection with the applicable requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (ii) the filing
of the Certificate of Merger with the Secretary of State of the State of
Delaware, (iii) filings with applicable state public utility commissions, and
(iv) such other filings, registrations, notifications, permits, authorizations,
consents or approvals the failure of which to be obtained, made or given would
not, individually or in the aggregate, either have a Fairchild Material Adverse
Effect or materially impair Fairchild's ability to consummate the Merger or
other transactions contemplated hereby.
(c) As of the date hereof, Fairchild and its subsidiaries are
not in violation of or default under (x) their respective charter or bylaws, and
(y) except as set forth in Sections 6.5 and 6.9 of the Disclosure Statement, any
note, bond, mortgage, indenture or deed of trust, or (z) any license, lease,
agreement or other instrument or obligation to which Fairchild or any such
subsidiary is a party or to which they or any of their respective properties or
assets may be subject, except, in the case of clauses (y) and (z) above, for
such violations or defaults which would not, individually or in the aggregate,
either have a Fairchild Material Adverse Effect or materially impair Fairchild's
ability to consummate the Merger or other transactions contemplated hereby.
6.6 Commission Filings; Financial Statements.
(a) Fairchild has filed all required forms, reports and
documents during the past three years (collectively, the "SEC Reports") with the
Securities and Exchange Commission (the "SEC"), all of which complied when filed
in all material respects with all applicable requirements of the Securities Act
of 1933, as amended, and the rules and regulations promulgated thereunder (the
"Securities Act") and the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder
<PAGE>
(the "Exchange Act"). As of their respective dates the SEC Reports (including
all exhibits and schedules thereto and documents incorporated by reference
therein) did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The audited consolidated financial statements and unaudited
consolidated interim financial statements of Fairchild and its subsidiaries
included or incorporated by reference in such SEC Reports were prepared in
accordance with generally accepted accounting principles applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto), and fairly presented the consolidated financial position of Fairchild
and its subsidiaries (before giving effect to the Fairchild Reorganization) as
of the dates thereof and the consolidated results of operations and consolidated
cash flows for the periods then ended (subject, in the case of any unaudited
interim financial statements, to normal year-end adjustments and to the extent
they may not include footnotes or may be condensed or summary statements).
(b) Fairchild will deliver to Shared Technologies as soon as
they become available true and complete copies of any report or statement mailed
by it to its securityholders generally or filed by it with the SEC, in each case
subsequent to the date hereof and prior to the Effective Time. As of their
respective dates, such reports and statements (excluding any information therein
provided by Shared Technologies, as to which Fairchild makes no representation)
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they are made, not misleading
and will comply in all material respects with all applicable requirements of
law. The audited consolidated financial statements and unaudited consolidated
interim financial statements of Fairchild and its subsidiaries to be included or
incorporated by reference in such reports and statements (excluding any
information therein provided by Shared Technologies, as to which Fairchild makes
no representation) will be prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto) and will fairly
present the consolidated financial position of Fairchild and its subsidiaries
(before giving effect to the Fairchild Reorganization unless otherwise specified
therein) as
<PAGE>
of the dates thereof and the consolidated results of operations and consolidated
cash flows for the periods then ended (subject, in the case of any unaudited
interim financial statements, to normal year-end adjustments and to the extent
they may not include footnotes or may be condensed or summary statements).
(c) Fairchild has delivered to Shared Technologies audited
financial statements for the three years ended June 30, 1995 (the "Fairchild
Financial Statements") which were prepared in accordance with generally accepted
accounting principles applied on a consistent basis and which fairly present the
consolidated financial position, results of operations and cash flows of
Fairchild and its subsidiaries as if the Fairchild Reorganization had occurred
at the beginning of such three-year period. In addition, Fairchild has delivered
to Shared Technologies an unaudited pro forma balance sheet of each of D-M-E
Inc., Fairchild Fasteners Inc. and RHI as of June 30, 1995 which was prepared in
accordance with generally accepted accounting principles applied on a consistent
basis and which fairly presents the consolidated financial position of such
entities if the Fairchild Reorganization had occurred at such date.
(d) Fairchild will deliver to Shared Technologies within 45
days of the end of each fiscal quarter subsequent to the date hereof and prior
to the Effective Time unaudited consolidated interim financial statements for
such quarter prepared in accordance with generally accepted accounting
principles on the same basis as the Fairchild Financial Statements were
prepared.
6.7 Absence of Changes or Events. Except as set forth in
Fairchild's Form 10-K for the fiscal year ended June 30, 1995, as filed with the
SEC, since June 30, 1995:
(a) there has been no material adverse change, or any
development involving a prospective material adverse change, in the general
affairs, management, business, operations, condition (financial or otherwise) or
prospects of Fairchild and its subsidiaries taken as a whole; (it being
understood that no such material adverse change shall be deemed to have occurred
with respect to Fairchild and VSI, taken as a whole, if the pro forma
consolidated net worth of Fairchild, as evidenced by a pro forma closing date
balance sheet to be delivered to Shared Technologies on the Effective Date, is
at least $80,000,000);
<PAGE>
(b) except as contemplated by Schedule 9.1 and except for
dividends by Fairchild to RHI in an amount not exceeding capital contributions
made to Fairchild by RHI since June 30, 1995 plus $4,000,000, there has not been
any direct or indirect redemption, purchase or other acquisition of any shares
of capital stock of Fairchild or any of its subsidiaries, or any declaration,
setting aside or payment of any dividend or other distribution by Fairchild or
any of its subsidiaries in respect of their capital stock;
(c) except in the ordinary course of its business and
consistent with past practice neither Fairchild nor any of its subsidiaries has
incurred any indebtedness for borrowed money, or assumed, guaranteed, endorsed
or otherwise as an accommodation become responsible for the obligations of any
other individual, firm or corporation, or made any loans or advances to any
other individual, firm or corporation;
(d) there has not been any change in accounting methods,
principles or practices of Fairchild or its subsidiaries;
(e) except in the ordinary course of business and for amounts
which are not material, there has not been any revaluation by Fairchild or any
of its subsidiaries of any of their respective assets, including, without
limitation, writing down the value of inventory or writing off notes or accounts
receivables;
(f) there has not been any damage, destruction or loss,
whether covered by insurance or not, except for such as would not, individually
or in the aggregate, have a Fairchild Material Adverse Effect; and
(g) there has not been any agreement by Fairchild or any of
its subsidiaries to (i) do any of the things described in the preceding clauses
(a) through (f) other than as expressly contemplated or provided for in this
Agreement or (ii) take, whether in writing or otherwise, any action which, if
taken prior to the date of this Agreement, would have made any representation or
warranty in this Article VI untrue or incorrect.
6.8 Proxy Statement. None of the information supplied by
Fairchild or any of its subsidiaries for inclusion in the
<PAGE>
proxy statement to be sent to the shareholders of Shared Technologies in
connection with the Special Meeting (as hereinafter defined), including all
amendments and supplements thereto (the "Proxy Statement"), shall on the date
the Proxy Statement is first mailed to shareholders, and at the time of the
Special Meeting or at the Effective Time, be false or misleading with respect to
any material fact, or omit to state any material fact required to be stated
therein or necessary in order to make the statements made therein, in light of
the circumstances under which they are made, not misleading or necessary to
correct any statement in any earlier communication with respect to the
solicitation of proxies for the Special Meeting which has become false or
misleading. None of the information to be filed by Fairchild and Shared
Technologies with the SEC in connection with the Merger or in any other
documents to be filed with the SEC or any other regulatory or governmental
agency or authority in connection with the transactions contemplated hereby,
including any amendments thereto (the "Other Documents"), insofar as such
information was provided or supplied by Fairchild or any of its subsidiaries,
will contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement shall comply in all material respects with the
requirements of the Exchange Act.
6.9 Litigation. Except as set forth in Section 6.9 of the
Disclosure Statement, there is no (i) claim, action, suit or proceeding pending
or, to the best knowledge of TFC, RHI, Fairchild or any of their subsidiaries,
threatened against or relating to Fairchild or any of its subsidiaries before
any court or governmental or regulatory authority or body or arbitration
tribunal, or (ii) outstanding judgment, order, writ, injunction or decree, or
application, request or motion therefor, of any court, governmental agency or
arbitration tribunal in a proceeding to which Fairchild, any subsidiary of
Fairchild or any of their respective assets was or is a party except, in the
case of clauses (i) and (ii) above, such as would not, individually or in the
aggregate, either have a Fairchild Material Adverse Effect or materially impair
Fairchild's ability to consummate the Merger or other transactions contemplated
hereby.
6.10 Insurance. Section 6.10 of the Disclosure Statement lists
all insurance policies in force on the date hereof covering the businesses,
properties and assets of
<PAGE>
Fairchild and its subsidiaries, and all such policies are currently in effect.
True and complete copies of all such policies have been delivered to Shared
Technologies. Except as set forth in Section 6.10 of the Disclosure Statement,
Fairchild has not received notice of the cancellation of any such insurance
policy.
6.11 Title to and Condition of Properties. Except as set forth
in Section 6.11 of the Disclosure Statement, Fairchild and its subsidiaries have
good title to all of the real property and own outright all of the personal
property (except for leased property or assets) which is reflected on
Fairchild's and its subsidiaries' June 30, 1995 audited consolidated balance
sheet contained in the Fairchild Financial Statements (the "Balance Sheet")
except for property since sold or otherwise disposed of in the ordinary course
of business and consistent with past practice. Except as set forth in Sections
6.9 and 6.11 of the Disclosure Statement, no such real or personal property is
subject to claims, liens or encumbrances, whether by mortgage, pledge, lien,
conditional sale agreement, charge or otherwise, except for those which would
not, individually or in the aggregate, have a Fairchild Material Adverse Effect.
Section 6.11 of the Disclosure Statement contains a true and complete list of
all real properties owned by Fairchild and its subsidiaries.
6.12 Leases. There has been made available to Shared
Technologies true and complete copies of each lease requiring the payment of
rentals aggregating at least $35,000 per annum pursuant to which real or
personal property is held under lease by Fairchild or any of its subsidiaries,
and true and complete copies of each lease pursuant to which Fairchild or any of
its subsidiaries leases real or personal property to others. A true and complete
list of all such leases is set forth in Section 6.12 of the Disclosure
Statement. All of the leases so listed are valid and subsisting and in full
force and effect and subject to no default with respect to Fairchild or its
subsidiaries, as the case may be, and, to Fairchild's knowledge, are in full
force and effect and subject to no default and subject to no default with
respect to any other party thereto, and the leased real property is in good and
satisfactory condition.
6.13 Contracts and Commitments. Other than as disclosed in
Section 6.13 of the Disclosure Statement, no existing contract or commitment
contains an agreement with
<PAGE>
respect to any change of control that would be triggered as a result of the
Merger. Other than as set forth in Section 6.13 of the Disclosure Statement,
neither this Agreement, the Merger nor the other transactions contemplated
hereby will result in any outstanding loans or borrowings by Fairchild or any
subsidiary of Fairchild becoming due, going into default or giving the lenders
or other holders of debt instruments the right to require Fairchild or any of
its subsidiaries to repay all or a portion of such loans or borrowings.
6.14 Labor Matters. Each of Fairchild and its subsidiaries is
in compliance in all material respects with all applicable laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours, and neither Fairchild nor any of its subsidiaries is engaged in
any unfair labor practice. There is no labor strike, slowdown or stoppage
pending (or, to the best knowledge of Fairchild, any labor strike or stoppage
threatened) against or affecting Fairchild or any of its subsidiaries. No
petition for certification has been filed and is pending before the National
Labor Relations Board with respect to any employees of Fairchild or any of its
subsidiaries who are not currently organized.
6.15 Compliance with Law. Except for matters set forth in the
Disclosure Statement, neither Fairchild nor any of its subsidiaries has violated
or failed to comply with any statute, law, ordinance, regulation, rule or order
of any foreign, federal, state or local government or any other governmental
department or agency, or any judgment, decree or order of any court, applicable
to its business or operations, except where any such violation or failure to
comply would not, individually or in the aggregate, have a Fairchild Material
Adverse Effect; the conduct of the business of Fairchild and its subsidiaries is
in conformity with all foreign, federal, state and local energy, public utility
and health requirements, and all other foreign, federal, state and local
governmental and regulatory requirements, except where such nonconformities
would not, individually or in the aggregate, have a Fairchild Material Adverse
Effect. Fairchild and its subsidiaries have all permits, licenses and franchises
from governmental agencies required to conduct their businesses as now being
conducted, except for such permits, licenses and franchises the absence of which
would not, individually or in the aggregate, have a Fairchild Material Adverse
Effect.
<PAGE>
6.16 Board Recommendation. The Board of Directors of Fairchild
has, by a unanimous vote at a meeting of such Board duly held on, or by
unanimous written consent of such Board dated, November 9, 1995, approved and
adopted this Agreement, the Merger and the other transactions contemplated
hereby.
6.17 Employment and Labor Contracts. Neither Fairchild nor any
of its subsidiaries is a party to any employment, management services,
consultation or other similar contract with any past or present officer,
director, employee or other person or, to the best of Fairchild's knowledge, any
entity affiliated with any past or present officer, director or employee or
other person other than those set forth in Section 6.17 of the Disclosure
Statement and other than those which (x) have a term of less than one year and
(y) involve payments of less than $30,000 per year, in each case true and
complete copies of which contracts have been delivered to Shared Technologies,
and other than the agreements executed by employees generally, the forms of
which have been delivered to Shared Technologies.
6.18 Patents and Trademarks. Fairchild and its subsidiaries
own or have the right to use all patents, patent applications, trademarks,
trademark applications, trade names, inventions, processes, know-how and trade
secrets necessary to the conduct of their respective businesses, except for
those which the failure to own or have the right to use would not, individually
or in the aggregate, have a Fairchild Material Adverse Effect ("Proprietary
Rights"). All issued patents and trademark registrations and pending patent and
trademark applications of the Proprietary Rights have previously been delivered
to Shared Technologies. No rights or licenses to use Proprietary Rights have
been granted by Fairchild or its subsidiaries except those listed in Section
6.18 of the Disclosure Statement; and no contrary assertion has been made to
Fairchild or any of its subsidiaries or notice of conflict with any asserted
right of others has been given by any person except those which, even if
correct, would not, individually or in the aggregate, have a Fairchild Material
Adverse Effect. Fairchild has not given notice of any asserted claim or conflict
to a third party with respect to Fairchild's Proprietary Rights. True and
complete copies of all material license agreements under which Fairchild or any
of its subsidiaries is a licensor or licensee have been delivered to Shared
Technologies.
<PAGE>
6.19 Taxes. "Tax" or "Taxes" shall mean all federal, state,
local and foreign taxes, duties, levies, charges and assessments of any nature,
including social security payments and deductibles relating to wages, salaries
and benefits and payments to subcontractors (to the extent required under
applicable Tax law), and also including all interest, penalties and additions
imposed with respect to such amounts. Except as set forth in Sections 6.9 and
6.19 of the Disclosure Statement: (i) Fairchild and its subsidiaries have
prepared and timely filed or will timely file with the appropriate governmental
agencies all franchise, income and all other material Tax returns and reports
required to be filed for any period ending on or before the Effective Time,
taking into account any extension of time to file granted to or obtained on
behalf of Fairchild and/or its subsidiaries; (ii) all material Taxes of
Fairchild and its subsidiaries in respect of the pre-Merger period have been
paid in full to the proper authorities, other than such Taxes as are being
contested in good faith by appropriate proceedings and/or are adequately
reserved for in accordance with generally accepted accounting principles; (iii)
all deficiencies resulting from Tax examinations of federal, state and foreign
income, sales and franchise and all other material Tax returns filed by
Fairchild and its subsidiaries have either been paid or are being contested in
good faith by appropriate proceedings; (iv) to the best knowledge of Fairchild,
no deficiency has been asserted or assessed against Fairchild or any of its
subsidiaries, and no examination of Fairchild or any of its subsidiaries is
pending or threatened for any material amount of Tax by any taxing authority;
(v) no extension of the period for assessment or collection of any material Tax
is currently in effect and no extension of time within which to file any
material Tax return has been requested, which Tax return has not since been
filed; (vi) no material Tax liens have been filed with respect to any Taxes;
(vii) Fairchild and each of its subsidiaries will not make any voluntary
adjustment by reason of a change in their accounting methods for any pre-Merger
period that would affect the taxable income or deductions of Fairchild or any of
its subsidiaries for any period ending after the Effective Date; (viii)
Fairchild and its subsidiaries have made timely payments of the Taxes required
to be deducted and withheld from the wages paid to their employees; (ix) the Tax
Sharing Agreement under which Fairchild or any subsidiary will have any
obligation or liability on or after the Effective Date is attached as Exhibit E;
(x) Fairchild has foreign losses as defined in Section 904(f)(2) of the Code
listed in Section 6.19 of the
<PAGE>
Disclosure Statement; (xi) Fairchild and its subsidiaries have unused foreign
tax credits set forth in Section 6.19 of the Disclosure Statement; and (xii) to
the best knowledge of Fairchild, there are no transfer pricing agreements made
with any taxation authority involving Fairchild and its subsidiaries.
6.20 Employee Benefit Plans; ERISA.
(a) Except as set forth in Section 6.20 of the Disclosure
Statement, there are no "employee pension benefit plans" as defined in Section
3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), covering employees employed in the United States, maintained or
contributed to by Fairchild or any of its subsidiaries, or to which Fairchild or
any of its subsidiaries contributes or is obligated to make payments thereunder
or otherwise may have any liability ("Pension Benefits Plans").
(b) Fairchild has furnished Shared Technologies with a true
and complete schedule of all "welfare benefit plans" (as defined in Section 3(1)
of ERISA) covering employees employed in the United States, maintained or
contributed to by Fairchild or any of its subsidiaries ("Welfare Plans"), all
multiemployer plans as defined in Section 3(37) of ERISA covering employees
employed in the United States to which Fairchild or any of its subsidiaries is
required to make contributions or otherwise may have any liability, and, to the
extent covering employees employed in the United States, all stock bonus, stock
option, restricted stock, stock appreciation right, stock purchase, bonus,
incentive, deferred compensation, severance and vacation plans maintained or
contributed to by Fairchild or a subsidiary.
(c) Fairchild and each of its subsidiaries, and each of the
Pension Benefit Plans and Welfare Plans, are in compliance with the applicable
provisions of ERISA and other applicable laws except where the failure to comply
would not, individually or in the aggregate, have a Fairchild Material Adverse
Effect.
(d) All contributions to, and payments from, the Pension
Benefit Plans which are required to have been made in accordance with the
Pension Benefit Plans and, when applicable, Section 302 of ERISA or Section 412
of the Code have been timely made except where the failure to make such
contributions or payments on a timely basis would not, individually or in the
aggregate, have a Fairchild Material Adverse Effect. All
<PAGE>
contributions required to have been made in accordance with Section 302 of ERISA
or Section 412 of the Code to any employee pension benefit plan (as defined in
Section 3(2) of ERISA) maintained by an ERISA Affiliate of Fairchild or any of
its subsidiaries have been timely made except where the failure to make such
contributions on a timely basis would not individually or in the aggregate have
a Fairchild Material Adverse Effect. For purposes of this Agreement, "ERISA
Affiliate" shall mean any person (as defined in Section 3(9) of ERISA) that is a
member of any group of persons described in Section 414(b), (c), (m) or (o) of
the Code of which Fairchild or a subsidiary is a member.
(e) The Pension Benefit Plans intended to qualify under
Section 401 of the Code are so qualified and have been determined by the
Internal Revenue Service ("IRS") to be so qualified and nothing has occurred
with respect to the operation of such Pension Benefit Plans which would cause
the loss of such qualification or exemption or the imposition of any material
liability, penalty or tax under ERISA or the Code. Such plans have been or will
be, on a timely basis, (i) amended to comply with changes to the Code made by
the Tax Reform Act of 1986, the Unemployment Compensation Amendments of 1992,
the Omnibus Budget Reconciliation Act of 1993, and other applicable legislative,
regulatory or administrative requirements; and (ii) submitted to the Internal
Revenue Service for a determination of their tax qualification, as so amended;
and no such amendment will adversely affect the qualification of such plans.
(f) Each Welfare Plan that is intended to qualify for
exclusion of benefits thereunder from the income of participants or for any
other tax-favored treatment under any provisions of the Code (including, without
limitation, Sections 79, 105, 106, 125, or 129 of the Code) is and has been
maintained in compliance with all pertinent provisions of the Code and Treasury
Regulations thereunder.
(g) Except as disclosed in Fairchild's Form 10-K for the
fiscal year ended June 30, 1995, there are (i) no investigations pending, to the
best knowledge of Fairchild, by any governmental entity involving the Pension
Benefit Plans or Welfare Plans, (ii) no termination proceedings involving the
Pension Benefit Plans and (iii) no pending or, to the best of Fairchild's
knowledge, threatened claims (other than routine claims for benefits), suits or
proceedings against any Pension Benefit or Welfare Plan, against the assets of
any of the trusts
<PAGE>
under any Pension Benefit or Welfare Plan or against any fiduciary of any
Pension Benefit or Welfare Plan with respect to the operation of such plan or
asserting any rights or claims to benefits under any Pension Benefit or Welfare
Plan or against the assets of any trust under such plan, which would, in the
case of clause (i), (ii) or (iii) of this paragraph (f), give rise to any
liability which would, individually or in the aggregate, have a Fairchild
Material Adverse Effect, nor, to the best of Fairchild's knowledge, are there
are any facts which would give rise to any liability which would, individually
or in the aggregate, have a Fairchild Material Adverse Effect in the event of
any such investigation, claim, suit or proceeding.
(h) None of Fairchild, any of its subsidiaries or any employee
of the foregoing, nor any trustee, administrator, other fiduciary or any other
"party in interest" or "disqualified person" with respect to the Pension Benefit
Plans or Welfare Plans, has engaged in a "prohibited transaction" (as such term
is defined in Section 4975 of the Code or Section 406 of ERISA) which would be
reasonably likely to result in a tax or penalty on Fairchild or any of its
subsidiaries under Section 4975 of the Code or Section 502(i) of ERISA which
would, individually or in the aggregate, have a Fairchild Material Adverse
Effect.
(i) Neither the Pension Benefit Plans subject to Title IV of
ERISA nor any trust created thereunder has been terminated nor have there been
any "reportable events" (as defined in Section 4043 of ERISA and the regulations
thereunder) with respect to either thereof which would, individually or in the
aggregate, have a Fairchild Material Adverse Effect nor has there been any event
with respect to any Pension Benefit Plan requiring disclosure under Section
4063(a) of ERISA or any event with respect to any Pension Benefit Plan requiring
disclosure under Section 4041(c)(3)(C) of ERISA which would, individually or in
the aggregate, have a Fairchild Material Adverse Effect.
(j) Neither Fairchild nor any subsidiary of Fairchild has
incurred any currently outstanding liability to the Pension Benefit Guaranty
Corporation (the "PBGC") or to a trustee appointed under Section 4042(b) or (c)
of ERISA other than for the payment of premiums, all of which have been paid
when due. No Pension Benefit Plan has applied for, or received, a waiver of the
minimum funding standards imposed by Section 412 of the Code. The information
supplied to the actuary by Fairchild or any of its subsidiaries for use in
preparing the most recent actuarial
<PAGE>
report for Pension Benefit Plans is complete and accurate in all material
respects.
(k) Except as set forth in Section 6.20 of the Disclosure
Statement, neither Fairchild, any of its subsidiaries nor any of their ERISA
Affiliates has any liability (including any contingent liability under Section
4204 of ERISA) with respect to any multiemployer plan, within the meaning of
Section 3(37) of ERISA, covering employees employed in the United States.
(l) Except as disclosed in Section 6.20 of the Disclosure
Statement, with respect to each of the Pension Benefit and Welfare Plans, true,
correct and complete copies of the following documents have been delivered to
Shared Technologies: (i) the current plans and related trust documents,
including amendments thereto, (ii) any current summary plan descriptions, (iii)
the most recent Forms 5500, financial statements and actuarial reports, if
applicable, (iv) the most recent IRS determination letter, if applicable; and
(v) if any application for an IRS determination letter is pending, copies of all
such applications for determination including attachments, exhibits and
schedules thereto.
(m) Neither Fairchild, any of its subsidiaries, any
organization to which Fairchild is a successor or parent corporation, within the
meaning of Section 4069(b) of ERISA, nor any of their ERISA Affiliates has
engaged in any transaction, within the meaning of Section 4069(a) of ERISA, the
liability for which would, individually or in the aggregate, have a Fairchild
Material Adverse Effect.
(n) Except as disclosed in Section 6.20 of the Disclosure
Statement, none of the Welfare Plans maintained by Fairchild or any of its
subsidiaries are retiree life or retiree health insurance plans which provide
for continuing benefits or coverage for any participant or any beneficiary of a
participant following termination of employment, except as may be required under
the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended
("COBRA"), or except at the expense of the participant or the participant's
beneficiary. Fairchild and each of its subsidiaries which maintain a "group
health plan" within the meaning of Section 5000(b)(1) of the Code have complied
with the notice and continuation requirements of Section 4980B of the Code,
COBRA, Part 6 of Subtitle B of Title I of ERISA and the
<PAGE>
regulations thereunder except where the failure to comply would not,
individually or in the aggregate, have a Fairchild Material Adverse Effect.
(o) No liability under any Pension Benefit or Welfare Plan has
been funded nor has any such obligation been satisfied with the purchase of a
contract from an insurance company as to which Fairchild or any of its
subsidiaries has received notice that such insurance company is in
rehabilitation.
(p) Except pursuant to the agreements listed in Section 6.20
of the Disclosure Statement, the consummation of the transactions contemplated
by this Agreement will not result in an increase in the amount of compensation
or benefits or accelerate the vesting or timing of payment of any benefits or
compensation payable to or in respect of any employee of Fairchild or any of its
subsidiaries.
(q) Fairchild has disclosed to Shared Technologies in Section
6.20 of the Disclosure Statement each material Foreign Plan to the extent the
benefits provided thereunder are not mandated by the laws of the applicable
foreign jurisdiction. Fairchild and each of its subsidiaries and each of the
Foreign Plans are in compliance with applicable laws and all required
contributions have been made to the Foreign Plans, except where the failure to
comply or make contributions would not, individually or in the aggregate, have a
Fairchild Material Adverse Effect. For purposes hereof, the term "Foreign Plan"
shall mean any plan with respect to benefits voluntarily provided by Fairchild
or any subsidiary with respect to employees of any of them employed outside the
United States.
6.21 Environmental Matters.
(a) Except as set forth in Section 6.21 of the Disclosure
Statement:
(i) each of Fairchild and its subsidiaries, and the
properties and assets owned by them, and to the actual knowledge of
Fairchild, all properties operated, leased, managed or used by
Fairchild and its subsidiaries are in compliance with all applicable
Environmental Laws except where the failure to be in compliance would
not, individually or in the aggregate, have a Fairchild Material
Adverse Effect;
<PAGE>
(ii) there is no Environmental Claim that is (1) pending or
threatened against Fairchild or any of its subsidiaries or (2) pending
or threatened against any person or entity or any assets owned by
Fairchild or its subsidiaries whose liability for such Environmental
Claim has been retained or assumed by contract or otherwise by
Fairchild or any of its subsidiaries or can be imputed or attributed by
law to Fairchild or any of its subsidiaries, the effect of any of which
would, individually or in the aggregate, have a Fairchild Material
Adverse Effect;
(iii) there are no past or present actions, activities,
circumstances, conditions, events or incidents arising out of, based
upon, resulting from or relating to the ownership, operation or use of
any property or assets currently or formerly owned, operated or used by
Fairchild or any of its subsidiaries (or any predecessor in interest of
any of them), including, without limitation, the generation, storage,
treatment or transportation of any Hazardous Materials, or the
emission, discharge, disposal or other Release or threatened Release of
any Hazardous Materials into the Environment which is presently
expected to result in an Environmental Claim;
(iv) no lien has been recorded under any Environmental Law
with respect to any material property, facility or asset owned by
Fairchild or any of its subsidiaries, and to the actual knowledge of
Fairchild, no lien has been recorded under any Environmental Law with
respect to any material property, facility or asset, operated, leased
or managed or used by Fairchild or its subsidiaries and relating to or
resulting from Fairchild or its subsidiaries operations, lease,
management or use for which Fairchild or its subsidiaries may be
legally responsible;
(v) neither Fairchild nor any of its subsidiaries has
received notice that it has been identified as a potentially
responsible party or any request for information under the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), the Resource Conservation and Recovery
Act, as amended ("RCRA"), or any comparable state law nor has Fairchild
or any of its subsidiaries received any notification that any Hazardous
<PAGE>
Materials that it or any of their respective predecessors in interest
has used, generated, stored, treated, handled, transported or disposed
of, or arranged for transport for treatment or disposal of, or arranged
for disposal or treatment of, has been found at any site at which any
person is conducting or plans to conduct an investigation or other
action pursuant to any Environmental Law;
(vi) to the actual knowledge of Fairchild, there has been no
Release of Hazardous Materials at, on, upon, under, from or into any
real property in the vicinity of any property currently or formerly
owned by Fairchild or any of its subsidiaries that, through soil, air,
surface water or groundwater migration or contamination, has become
located on, in or under such properties and, to the actual knowledge of
Fairchild, there has been no release of Hazardous Materials at, on,
upon, under or from any property currently or formerly operated,
leased, managed or used by Fairchild or any of its subsidiaries that
through soil, air, surface water or groundwater migration or
contamination has become located on, in or under such properties as
resulting from or relating to Fairchild or any of its subsidiaries
operations, lease, management or use thereof of for which Fairchild and
any of its subsidiaries may be legally responsible;
(vii) no asbestos or asbestos containing material or any
polychlorinated biphenyls are contained within products presently
manufactured and, to the best knowledge of Fairchild manufactured at
any time by Fairchild or any of its subsidiaries and, to the actual
knowledge of Fairchild there is no asbestos or asbestos containing
material or any polychlorinated biphenyl in, on or at any property or
any facility or equipment owned, operated, leased, managed or used by
Fairchild or any of its subsidiaries;
(viii) no property owned by Fairchild or any of its
subsidiaries and to the actual knowledge of Fairchild, no property
operated, leased, managed or used by Fairchild and any of its
subsidiaries is (i) listed or proposed for listing on the National
Priorities List under CERCLA or (ii) listed in the Comprehensive
Environmental Response, Compensation, Liability Information System List
promulgated pursuant to CERCLA, or on any comparable list published by
any governmental authority;
<PAGE>
(ix) no underground storage tank or related piping is located
at, under or on any property owned by Fairchild or any of its
subsidiaries or, to the actual knowledge of Fairchild, any property
operated, leased, managed or used by Fairchild and any of its
subsidiaries, nor, to the actual knowledge of Fairchild, has any such
tank or piping been removed or decommissioned from or at such property;
(x) all environmental investigations, studies, audits,
assessments or reviews conducted of which Fairchild has actual
knowledge in relation to the current or prior business or assets owned,
operated, leased managed or used by Fairchild or any of its
subsidiaries or any real property, assets or facility now or previously
owned operated, managed, leased or used by Fairchild or any of its
subsidiaries have been delivered to Shared Technologies; and
(xi) each of Fairchild and its subsidiaries has obtained all
permits, licenses and other authorizations ("Authorizations") required
under any Environmental Law with respect to the operation of its assets
and business and its use, ownership and operation of any real property,
and each such Authorization is in full force and effect.
(b) For purposes of Section 6.21(a):
(i) "Actual Knowledge of Fairchild" means the actual
knowledge of individuals at the corporate management level of Fairchild
and its subsidiaries.
(ii) "Environment" means any surface water, ground water,
drinking water supply, land surface or subsurface strata, ambient air
and including, without limitation, any indoor location;
(iii) "Environmental Claim" means any notice or claim by any
person alleging potential liability (including, without limitation,
potential liability for investigatory costs, cleanup costs,
governmental costs, or harm, injuries or damages to any person,
property or natural resources, and any fines or penalties) arising out
of, based upon, resulting from or relating to (1) the emission,
discharge, disposal or other release or threatened release in or into
the Environment of any Hazardous Materials or
<PAGE>
(2) circumstances forming the basis of any violation, or alleged
violation, of any applicable Environmental Law;
(iv) "Environmental Laws" means all federal, state and local
laws, codes and regulations relating to pollution, the protection of
human health, the protection of the Environment or the emission,
discharge, disposal or other release or threatened release of Hazardous
Materials in or into the Environment;
(v) "Hazardous Materials" means pollutants, contaminants or
chemical, industrial, hazardous or toxic materials or wastes, and
includes, without limitation, asbestos or asbestos-containing
materials, PCBs and petroleum, oil or petroleum or oil products,
derivatives or constituents; and
(vi) "Release" means any past or present spilling, leaking,
pumping, pouring, emitting, emptying, discharging, injecting, escaping,
leaching, dumping or disposing of Hazardous Materials into the
Environment or within structures (including the abandonment or
discarding of barrels, containers or other closed receptacles
containing any Hazardous Materials).
6.22 Disclosure. No representation or warranty by Fairchild
herein, or in any certificate furnished by or on behalf of Fairchild to Shared
Technologies in connection herewith, contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary in order to make the statements herein or therein, in light of the
circumstances under which they were made, not misleading.
6.23 Absence of Undisclosed Liabilities. Except as set forth
in Section 6.9 of the Disclosure Statement, neither Fairchild nor any of its
subsidiaries has any liabilities or obligations of any nature, whether absolute,
accrued, unmatured, contingent or otherwise, or any unsatisfied judgments or any
leases of personalty or realty or unusual or extraordinary commitments, except
the liabilities recorded on the Balance Sheet and the notes thereto, and except
for liabilities or obligations incurred in the ordinary course of business and
consistent with past practice since June 30, 1995 that would not individually or
in the aggregate have a Fairchild Material Adverse Effect.
<PAGE>
6.24 Finders or Brokers. Except as set forth in Section 6.24
of the Disclosure Statement, none of Fairchild, the subsidiaries of Fairchild,
the Board of Directors or any member of the Board of Directors has employed any
investment banker, broker, finder or intermediary in connection with the
transactions contemplated hereby who might be entitled to a fee or any
commission in connection with of the Merger, and Section 6.24 of the Disclosure
Statement sets forth the maximum consideration (present and future) agreed to be
paid to each such party.
ARTICLE VII
CONDUCT OF BUSINESS OF FAIRCHILD AND
SHARED TECHNOLOGIES PENDING THE MERGER
7.1 Conduct of Business of Fairchild and Shared Technologies
Pending the Merger. Except as contemplated by this Agreement or as expressly
agreed to in writing by Fairchild and Shared Technologies, during the period
from the date of this Agreement to the Effective Time, each of Fairchild and its
subsidiaries and Shared Technologies and its subsidiaries will conduct their
respective operations according to its ordinary course of business consistent
with past practice, and will use all commercially reasonable efforts to preserve
intact its business organization, to keep available the services of its officers
and employees and to maintain satisfactory relationships with suppliers,
distributors, customers and others having business relationships with it and
will take no action which would materially adversely affect the ability of the
parties to consummate the transactions contemplated by this Agreement. Without
limiting the generality of the foregoing, and except as otherwise expressly
provided in this Agreement, prior to the Effective Time, neither Fairchild nor
Shared Technologies will nor will they permit any of their respective
subsidiaries to, without the prior written consent of the other party:
(a) amend its certificate of incorporation or by-laws, except
Shared Technologies may amend its certificate of incorporation and
bylaws as required by the terms of this Agreement;
(b) authorize for issuance, issue, sell, deliver, grant any
options for, or otherwise agree or commit to
<PAGE>
issue, sell or deliver any shares of any class of its capital stock or
any securities convertible into shares of any class of its capital
stock, except (i) pursuant to and in accordance with the terms of
currently outstanding convertible securities, warrants and options, and
(ii) options granted under the Stock Option Plans of Shared
Technologies, in the ordinary course of business consistent with past
practice;
(c) split, combine or reclassify any shares of its capital
stock, declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in
respect of its capital stock or purchase, redeem or otherwise acquire
any shares of its own capital stock or of any of its subsidiaries,
except as otherwise expressly provided in this Agreement (including,
without limitation, Section 6.7(b)) and except for the distribution of
the shares of Shared Technologies Cellular Inc. to the shareholders of
Shared Technologies;
(d) except in the ordinary course of business, consistent with
past practice (i) create, incur, assume, maintain or permit to exist
any long-term debt or any short-term debt for borrowed money other than
under existing lines of credit; (ii) assume, guarantee, endorse or
otherwise become liable or responsible (whether directly, contingently
or otherwise) for the obligations of any other person except its wholly
owned subsidiaries in the ordinary course of business and consistent
with past practices; or (iii) make any loans, advances or capital
contributions to, or investments in, any other person;
(e) except as otherwise expressly contemplated by this
Agreement (including without limitation as set forth in Schedule 6.17
to the Disclosure Statement) or in the ordinary course of business,
consistent with past practice, (i) increase in any manner the
compensation of any of its directors, officers or other employees; (ii)
pay or agree to pay any pension, retirement allowance or other employee
benefit not required, or enter into or agree to enter into any
agreement or arrangement with such director, officer or employee,
whether past or present, relating to any such pension, retirement
allowance or other employee benefit, except as required under currently
existing agreements, plans or arrangements; (iii) grant any severance
or
<PAGE>
termination pay to, or enter into any employment or severance agreement
with, any of its directors, officers or other employees; or (iv) except
as may be required to comply with applicable law, become obligated
(other than pursuant to any new or renewed collective bargaining
agreement) under any new pension plan, welfare plan, multiemployer
plan, employee benefit plan, benefit arrangement, or similar plan or
arrangement, which was not in existence on the date hereof, including
any bonus, incentive, deferred compensation, stock purchase, stock
option, stock appreciation right, group insurance, severance pay,
retirement or other benefit plan, agreement or arrangement, or
employment or consulting agreement with or for the benefit of any
person, or amend any of such plans or any of such agreements in
existence on the date hereof;
(f) except as otherwise expressly contemplated by this
Agreement, enter into any other agreements, commitments or contracts,
except agreements, commitments or contracts for the purchase, sale or
lease of goods or services in the ordinary course of business,
consistent with past practice;
(g) except in the ordinary course of business, consistent with
past practice, or as contemplated by this Agreement, authorize,
recommend, propose or announce an intention to authorize, recommend or
propose, or enter into any agreement in principle or an agreement with
respect to, any plan of liquidation or dissolution, any acquisition of
a material amount of assets or securities, any sale, transfer, lease,
license, pledge, mortgage, or other disposition or encumbrance of a
material amount of assets or securities or any material change in its
capitalization, or any entry into a material contract or any amendment
or modification of any material contract or any release or
relinquishment of any material contract rights; or
(h) agree to do any of the foregoing.
ARTICLE VIII
COVENANTS AND AGREEMENTS
8.1 Approval of Stockholders; SEC and Other Filings.
<PAGE>
(a) Shared Technologies shall cause a special meeting of its
stockholders (the "Special Meeting") to be duly called and held as soon as
reasonably practicable for the purpose of (i) voting on this Agreement, (ii)
authorizing Shared Technologies' Board of Directors, to the extent permitted by
law, to make modifications of or amendments to this Agreement as Shared
Technologies' Board of Directors deems proper without further stockholder
approval and (iii) voting on all other actions contemplated hereby which require
the approval of Shared Technologies' stockholders, including without limitation
any such approval needed to amend Shared Technologies' Certificate of
Incorporation and Bylaws as required by this Agreement. Shared Technologies
shall comply with all applicable legal requirements in connection with the
Special Meeting.
(b) Shared Technologies and Fairchild shall cooperate with
each other and use their best efforts to file with the SEC or other applicable
regulatory or governmental agency or authority, as the case may be, as promptly
as practicable the Proxy Statement and the Other Documents. The parties shall
use their best efforts to have the Proxy Statement cleared by the SEC as
promptly as practicable after filing and, as promptly as practicable after the
Proxy Statement has been so cleared, shall mail the Proxy Statement to the
stockholders of Shared Technologies as of the record date for the Special
Meeting. Subject to the fiduciary obligations of Shared Technologies' Board of
Directors under applicable law as advised by Gadsby & Hannah or other nationally
recognized counsel, the Proxy Statement shall contain the recommendation of the
Board in favor of the Merger and for approval and adoption of this Agreement. In
addition to the irrevocable proxy received from a stockholder of Shared
Technologies prior to the date hereof, Shared Technologies shall use its best
efforts to solicit from stockholders of Shared Technologies proxies or consents
in favor of such approval and to take all other action necessary or, in the
reasonable judgment of Fairchild, helpful to secure the vote of stockholders
required by law to effect the Merger. Shared Technologies and Fairchild each
shall use its best efforts to obtain and furnish the information required to be
included in the Proxy Statement and any Other Document, and Shared Technologies,
after consultation with Fairchild, shall use its best efforts to respond as
promptly as is reasonably practicable to any comments made by the SEC or any
other applicable regulatory or governmental agency or authority with respect to
any of the foregoing (or any preliminary version thereof). Shared
<PAGE>
Technologies will promptly notify Fairchild of the receipt of the comments of
the SEC or any other applicable regulatory or governmental agency or authority,
as the case may be, and of any request by any of the foregoing for amendments or
supplements to the Proxy Statement or any Other Document, as the case may be, or
for additional information, and will supply Fairchild with copies of all
correspondence between Shared Technologies and its representatives, on the one
hand, and the SEC, any other applicable regulatory or governmental agency or
authority or the members of the staff of any of the foregoing, on the other
hand, with respect to the Proxy Statement or any Other Document, as the case may
be. If at any time prior to the Special Meeting any event should occur relating
to Shared Technologies or any of its subsidiaries or Fairchild or any of its
affiliates or associates, or relating to the Financing (as hereinafter defined)
which should be set forth in an amendment of or a supplement to, the Proxy
Statement or any Other Document, Shared Technologies will promptly inform
Fairchild or Fairchild will promptly inform Shared Technologies, as the case may
be. Whenever any event occurs which should be set forth in an amendment of, or a
supplement to, the Proxy Statement or any Other Document, as the case may be,
Fairchild and Shared Technologies will upon learning of such event, cooperate
and promptly prepare, file and mail such amendment or supplement.
(c) Fairchild shall use its best efforts to file with and
obtain from the Internal Revenue Service a favorable ruling to the effect set
forth in Schedule 9.2(d) hereto. Fairchild and Shared Technologies shall
cooperate with each other and use their best efforts to effect a tender offer
and consent solicitation for the outstanding 12 1/4% Senior Notes due 1999 of
Fairchild and, if the Merger is consummated, to retire all such Notes tendered
in such offer.
8.2 Additional Agreements; Cooperation.
(a) Subject to the terms and conditions herein provided, each
of the parties hereto agrees to use its best efforts to take, or cause to be
taken, all action and to do, or cause to be done, all things necessary, proper
or advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement, and to cooperate with each other in
connection with the foregoing, including using its best efforts (i) to obtain
all necessary waivers, consents and approvals from other parties to loan
agreements, leases and
<PAGE>
other contracts that are specified on Schedule 8.2 to the Disclosure Statement,
(ii) to obtain all necessary consents, approvals and authorizations as are
required to be obtained under any federal, state or foreign law or regulations,
(iii) to defend all lawsuits or other legal proceedings challenging this
Agreement or the consummation of the transactions contemplated hereby, (iv) to
lift or rescind any injunction or restraining order or other order adversely
affecting the ability of the parties to consummate the transactions contemplated
hereby, (v) to effect all necessary registrations and filings, including, but
not limited to, filings under the HSR Act and any pre-merger notifications
required in any other country, if any, and submissions of information requested
by governmental authorities, (vi) provide all necessary information for the
Proxy Statement and (vii) to fulfill all conditions to this Agreement. In
addition, Fairchild agrees to use its best efforts (subject to compliance with
all applicable securities laws) to solicit and receive the irrevocable proxies
from shareholders of Shared Technologies contemplated by Section 10.1(b). Shared
Technologies agrees to use its best efforts to cause the distribution to its
shareholders of all shares of capital stock of Shared Technologies Cellular,
Inc. ("STCI") owned by Shared Technologies and its subsidiaries to be completed
prior to the Effective Time and, prior to such distribution to cause STCI, to
enter into an agreement preventing STCI from competing in the telecommunications
systems and service business.
(b) Shared Technologies will supply Fairchild with copies of
all correspondence, filings or communications (or memoranda setting forth the
substance thereof) between Shared Technologies or its representatives, on the
one hand, and the Federal Trade Commission, the Antitrust Division of the United
States Department of Justice, the SEC and any other regulatory or governmental
agency or authority or members of their respective staffs, on the other hand,
with respect to this Agreement, the Merger and the other transactions
contemplated hereby. Each of the parties hereto agrees to furnish to the other
party hereto such necessary information and reasonable assistance as such other
party may request in connection with its preparation of necessary filings or
submissions to any regulatory or governmental agency or authority, including,
without limitation, any filing necessary under the provisions of the HSR Act or
any other applicable Federal or state statute.
<PAGE>
(c) Fairchild will supply Shared Technologies with copies of
all correspondence, filings or communications (or memoranda setting forth the
substance thereof) between Fairchild or its representatives, on the one hand,
and the Federal Trade Commission, the Antitrust Division of the United States
Department of Justice, the SEC or any other regulatory or governmental agency or
authority or members of their respective staffs, on the other hand, with respect
to this Agreement, the Merger and the other transactions contemplated hereby.
8.3 Publicity. Shared Technologies and Fairchild agree to
consult with each other in issuing any press release and with respect to the
general content of other public statements with respect to the transactions
contemplated hereby, and shall not issue any such press release prior to such
consultation, except as may be required by law.
8.4 No Solicitation.
(a) Each of Shared Technologies and Fairchild agrees that,
prior to the Effective Time, it shall not, and shall not authorize or permit any
of its subsidiaries or any of its or its subsidiaries' directors, officers,
employees, agents or representatives to, directly or indirectly, solicit,
initiate, facilitate or encourage (including by way of furnishing or disclosing
non-public information) any inquiries or the making of any proposal with respect
to any merger, consolidation or other business combination involving Shared
Technologies or its subsidiaries or Fairchild or its subsidiaries or acquisition
of any kind of all or substantially all of the assets or capital stock of Shared
Technologies and its subsidiaries taken as a whole or Fairchild and its
subsidiaries taken as a whole (an "Acquisition Transaction") or negotiate,
explore or otherwise communicate in any way with any third party (other than
Shared Technologies or Fairchild, as the case may be) with respect to any
Acquisition Transaction or enter into any agreement, arrangement or
understanding requiring it to abandon, terminate or fail to consummate the
Merger or any other transactions contemplated by this Agreement; provided that
Shared Technologies or Fairchild may, in response to an unsolicited written
proposal with respect to an Acquisition Transaction from a financially capable
third party that contains no financing condition, (i) furnish or disclose
non-public information to such third party and (ii) negotiate, explore or
otherwise communicate with such third party, in each case only if the Board of
Directors of
<PAGE>
such party determines in good faith by a majority vote, after consultation with
its legal and financial advisors, and after receipt of the written opinion of
outside legal counsel of such party that failing to take such action would
constitute a breach of the fiduciary duties of such Board of Directors, that
taking such action is reasonably likely to lead to an Acquisition Transaction
that is more favorable to the stockholders of such party than the Merger and
that failing to take such action would constitute a breach of the Board's
fiduciary duties.
(b) Each of Shared Technologies and Fairchild shall
immediately advise the other in writing of the receipt of any inquiries or
proposals relating to an Acquisition Transaction and any actions taken pursuant
to Section 8.4(a).
8.5 Access to Information.
(a) From the date of this Agreement until the Effective Time,
each of Shared Technologies and Fairchild will give the other party and its
authorized representatives (including counsel, environmental and other
consultants, accountants and auditors) full access during normal business hours
to all facilities, personnel and operations and to all books and records of it
and its subsidiaries, will permit the other party to make such inspections as it
may reasonably require and will cause its officers and those of its subsidiaries
to furnish the other party with such financial and operating data and other
information with respect to its business and properties as such party may from
time to time reasonably request.
(b) Each of the parties hereto will hold and will cause its
consultants and advisors to hold in strict confidence pursuant to the
Confidentiality Agreement dated October 1995 between the parties (the
"Confidentiality Agreement") all documents and information furnished to the
other in connection with the transactions contemplated by this Agreement as if
each such consultant or advisor was a party thereto, and the provisions of the
Confidentiality Agreement shall survive any termination of this Agreement but
will be extinguished at the Effective Time if the Merger occurs.
8.6 Financing. Fairchild will cooperate with Shared
Technologies to assist Shared Technologies in obtaining the financing required
for Shared Technologies to effect the Merger
<PAGE>
(including the funds necessary to repay the indebtedness referred to on Exhibit
9.1 and to pay the amounts owing to the holders of the Series A and Series C
Preferred Stock) (the "Financing"). Immediately prior to the Effective Time,
Fairchild will certify the aggregate amount of accrued and unpaid dividends on
the Series A Preferred Stock and Series C Preferred Stock to be paid by Shared
Technologies pursuant to the Merger.
8.7 Notification of Certain Matters. Shared Technologies or
Fairchild, as the case may be, shall promptly notify the other of (i) its
obtaining of actual knowledge as to the matters set forth in clauses (x) and (y)
below, or (ii) the occurrence, or failure to occur, of any event which
occurrence or failure to occur would be likely to cause (x) any representation
or warranty contained in this Agreement to be untrue or inaccurate in any
material respect at any time from the date hereof to the Effective Time, or (y)
any material failure of Shared Technologies or Fairchild, as the case may be, or
of any officer, director, employee or agent thereof, to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
under this Agreement; provided, however, that no such notification shall affect
the representations or warranties of the parties or the conditions to the
obligations of the parties hereunder.
8.8 Board of Directors of Shared Technologies. The Shared
Technologies Board of Directors shall take such corporate action as may be
necessary to cause the directors comprising its full board to be changed at the
Effective Time to include, subject to the requisite vote of the shareholders of
Shared Technologies, immediately after the Effective Time on the Surviving
Corporation Board of Directors the persons specified pursuant to the
Shareholders Agreement.
8.9 Indemnification.
(a) The Surviving Corporation shall indemnify, defend and hold
harmless the present and former officers, directors, employees and agents of
Fairchild and its subsidiaries against all losses, claims, damages, expenses or
liabilities arising out of actions or omissions or alleged actions or omissions
occurring at or prior to the Effective Time to the same extent and on the same
terms and conditions (including with respect to advancement of expenses)
provided for in Fairchild's Certificate of Incorporation and By-Laws and
agreements in effect at the date
<PAGE>
hereof (to the extent consistent with applicable law); provided that such
actions or omissions or alleged actions or omissions are exclusively related to
the business of the Fairchild Communications Services Company; and, provided,
further, that in no event will this indemnity extend to the transactions
effected pursuant to this Agreement, including but not limited to the Fairchild
Reorganization.
(b) The provisions of this Section 8.9 are intended to be for
the benefit of and shall be enforceable by each indemnified party hereunder, his
or her heirs and his or her representatives.
8.10 Fees and Expenses.
(a) Except as set forth in Section 8.10(b), in the event this
Agreement is terminated, Shared Technologies and Fairchild shall bear their
respective expenses incurred in connection with the Merger, including, without
limitation, the preparation, execution and performance of this Agreement and the
transactions contemplated hereby, and all fees and expenses of investment
bankers, finders, brokers, agents, representatives, counsel and accountants,
except that the fees and expenses of CS First Boston shall be shared equally by
Shared Technologies and Fairchild. If the Merger occurs, then the Surviving
Corporation shall be responsible, and reimburse Fairchild, for all of such
expenses incurred by Shared Technologies and Fairchild in connection with the
Merger (but Fairchild's expenses shall only be borne by the Surviving
Corporation to the extent set forth in Schedule 8.10).
(b) If this Agreement is terminated pursuant to Section
10.1(d), (e) or (h), then Shared Technologies shall promptly, but in no event
later than the next business day after the date of such termination, pay
Fairchild, in immediately available funds, the amount of any and all fees and
expenses incurred by Fairchild (including, but not limited to, fees and expenses
of Fairchild's counsel, investment banking fees and expenses and printing
expenses) in connection with this Agreement, the Merger and the other
transactions contemplated hereby and, in addition, if such termination is
pursuant to Section 10.1(h), a fee of $5,000,000. If this Agreement is
terminated pursuant to Section 10.1(f) or (i) or pursuant to Section 10.1(c)
solely due to the failure of Fairchild to satisfy the condition in Section
9.2(d) or to obtain tenders and
<PAGE>
consents from at least 51% of the outstanding principal amount of Fairchild's 12
1/4% Senior Notes due 1999 as contemplated by Schedule 9.1, then Fairchild shall
promptly, but in no event later than the next business day after the date of
such termination, pay Shared Technologies, in immediately available funds, the
amount of any and all fees and expenses incurred by Shared Technologies
(including, but not limited to, fees and expenses of Shared Technologies'
counsel, investment banking fees and expenses and printing expenses) in
connection with this Agreement, the Merger and the other transactions
contemplated hereby and in addition, if such termination is pursuant to Section
10.1(i), a fee of $5,000,000.
8.11 Post-Merger Cooperation. After the Effective Time, the
Surviving Corporation shall cooperate with RHI and permit RHI to take all
actions (including without limitation the right to endorse checks and enter into
agreements) reasonably required by RHI to allow RHI to assert title (and
prosecute claims against and defend claims brought by third parties), whether in
its own name or in the name of Fairchild, with respect to all assets, claims and
privileges of Fairchild that were owned by it, and defend against all
liabilities and claims attributable to it, in each case, immediately prior to
the Fairchild Reorganization and that did not relate to the telecommunications
systems and service business. After the Effective Time, RHI will cooperate with
the Surviving Corporation and permit the Surviving Corporation to take all
actions (including without limitation the right to endorse checks and enter into
agreements) reasonably required by the Surviving Corporation to allow the
Surviving Corporation to assert title (and prosecute claims against third
parties) whether in its own name or in the name of Fairchild, with respect to
all assets, claims and privileges of Fairchild's telecommunications systems and
service business.
ARTICLE IX
CONDITIONS TO CLOSING
9.1 Conditions to Obligations of Each Party to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the fulfillment or waiver by the Board of Directors of the waiving
party (subject to applicable law) at or prior to the Effective Date of each of
the following conditions:
<PAGE>
(a) Shared Technologies' shareholders shall have duly approved
and adopted the Merger, this Agreement and any other transactions
contemplated hereby which require the approval of such shareholders by
law as required by applicable law;
(b) any waiting period (and any extension thereof) applicable
to the consummation of the Merger under the HSR Act shall have expired
or been terminated;
(c) no order, statute, rule, regulation, executive order,
injunction, stay, decree or restraining order shall have been enacted,
entered, promulgated or enforced by any court of competent jurisdiction
or governmental or regulatory authority or instrumentality that
prohibits the consummation of the Merger or the transactions
contemplated hereby;
(d) all necessary consents and approvals of any United States
or any other governmental authority or any other third party required
for the consummation of the transactions contemplated by this Agreement
shall have been obtained except for such consents and approvals the
failure to obtain which individually or in the aggregate would not have
a material adverse effect on the Surviving Corporation and any waiting
period applicable to the consummation of the Merger under the HSR Act
shall have expired or been terminated;
(e) each of the transactions set forth on the attached
Schedule 9.1 shall have been consummated;
(f) the parties shall have received the written opinion of
Donaldson, Lufkin & Jenrette Securities Corporation or another
investment banking firm of nationally recognized standing selected by
Fairchild that the fair market value of the Preferred Stock is at least
equal to the positive difference between $47.5 million and the value of
the Shared Technologies Common Stock to be received as Merger
Consideration (based upon the closing price thereof on the date
preceding the Effective Time); and
<PAGE>
(g) Mel D. Borer shall have been offered an employment
agreement on terms satisfactory to both Fairchild and Shared
Technologies.
9.2 Additional Conditions to Obligations of Fairchild. The
obligations of Fairchild to effect the Merger shall be subject to the
fulfillment or waiver (subject to applicable law), at or prior to the Effective
Date, of each of the following conditions:
(a) Shared Technologies shall have furnished Fairchild with
certified copies of resolutions duly adopted by its Board of Directors
approving the execution and delivery of this Agreement and the Merger
and all other necessary corporate action to enable Shared Technologies
to comply with the terms of this Agreement;
(b) Shared Technologies shall have performed or complied in
all material respects with all its agreements, obligations and
covenants required by this Agreement to be performed by it on or prior
to the Effective Date, and Shared Technologies shall have delivered to
Fairchild a certificate, dated the Effective Date, of its President and
its Secretary to such effect;
(c) the representations and warranties of Shared Technologies
contained herein shall be true and correct in all material respects on
the date of this Agreement and the Effective Date as though such
representations and warranties were made at and on such date, and
Shared Technologies shall have delivered to Fairchild a certificate,
dated the Effective Date, of its President and its Secretary to such
effect;
(d) Fairchild shall have received a favorable ruling of the
Internal Revenue Service to the effect set forth in Schedule 9.2(d)
hereto;
(e) Shared Technologies shall have amended its Certificate of
Incorporation and Bylaws to the extent set forth in Schedule 9.2(e);
(f) there shall not have occurred since December 31, 1994 any
material adverse change in the business,
<PAGE>
operations, assets, financial condition or results of operations of
Shared Technologies and its subsidiaries taken as a whole;
(g) Shared Technologies shall have executed and delivered a
registration rights agreement in the form of Exhibit D hereto;
(h) Shared Technologies shall have entered into a Tax Sharing
Agreement with RHI in the form of Exhibit E hereto; and
(i) Shared Technologies shall have, prior to the Effective
Time, completed the distribution to its shareholders of all of the
capital stock of Shared Technologies Cellular, Inc. owned by Shared
Technologies and Shared Technologies Cellular, Inc. shall have executed
a non-competition agreement with Shared Technologies, in form and
substance satisfactory to Fairchild.
9.3 Additional Conditions to Obligations of Shared
Technologies. The obligations of Shared Technologies to effect the Merger shall
be subject to the fulfillment or waiver (subject to applicable law), at or prior
to the Effective Date, of each of the following conditions:
(a) Each of TFC, RHI and Fairchild shall have furnished Shared
Technologies with certified copies of resolutions duly adopted by its
Board of Directors approving the execution and delivery of this
Agreement and the Merger and all other necessary corporate action to
enable Fairchild to comply with the terms of this Agreement;
(b) Fairchild shall have performed or complied in all material
respects with all its agreements, obligations and covenants required by
this Agreement to be performed by it on or prior to the Effective Date
and Fairchild shall have delivered to Shared Technologies a
certificate, dated the Effective Date, of its President and its
Secretary to such effect;
(c) the representations and warranties of TFC, RHI and
Fairchild contained herein shall be true and correct in all material
respects on the date of this Agreement and the Effective Date as though
such representations and warranties
<PAGE>
were made at and on such date and Fairchild shall have delivered to
Shared Technologies a certificate, dated the Effective Date, of its
President and its Secretary to such effect;
(d) there shall not have occurred since June 30, 1995 any
material adverse change in the business, operations, assets, financial
condition or results of operations of Fairchild and its wholly owned
subsidiary, VSI, taken as a whole (it being understood that no such
material adverse change shall be deemed to have occurred with respect
to Fairchild and VSI, taken as a whole, if the pro forma consolidated
net worth of Fairchild, as evidenced by a pro forma closing date
balance sheet to be delivered to Shared Technologies on the Effective
Date, is at least $80,000,000); and
(e) RHI, The Fairchild Corporation, D-M-E Inc. and Fairchild
Fasteners Inc. shall have entered into Indemnification Agreements with
Shared Technologies in the forms of Exhibits B1-3 hereto; and RHI shall
have delivered to Shared Technologies an executed Pledge Agreement in
the form of Exhibit C hereto, as well as the Preferred Stock required
to be pledged thereby.
ARTICLE X
TERMINATION
10.1 Termination. This Agreement may be terminated at any
time prior to the Effective Time whether before or after approval by the
stockholders of Shared Technologies:
(a) by mutual written consent of Fairchild and Shared
Technologies;
(b) by Fairchild if RHI has not received within 10 business
days after the date of this Agreement irrevocable proxies from holders
of more than 50% of Shared Technologies common stock (on a fully
diluted basis) agreeing to vote for the Merger; provided, that such
right of termination must be exercised, if at all, within 13 business
days after the date of this Agreement;
<PAGE>
(c) by either Fairchild or Shared Technologies if the
Effective Time has not occurred on or prior to January 31, 1996 unless
the Merger has not occurred at such time solely by reason of the
condition set forth in Section 9.2(d) having not yet been satisfied or
because of the failure of the Securities and Exchange Commission to
give timely approval to the proxy materials for Shared Technologies
shareholders, in which case February 28, 1996 or such other date, if
any, as Fairchild and Shared Technologies shall agree upon, unless the
absence of such occurrence shall be due to the failure of the party
seeking to terminate this Agreement (or its subsidiaries or affiliates)
to perform in all material respects each of its obligations under this
Agreement required to be performed by it at or prior to the Effective
Time;
(d) by either Fairchild or Shared Technologies if, at the
Special Meeting (including any adjournment thereof), the stockholders
of Shared Technologies fail to adopt and approve this Agreement, the
Merger and any of the other transactions contemplated hereby in
accordance with Delaware law;
(e) by Fairchild if Shared Technologies fails to perform in
any material respect any of its obligations under this Agreement;
(f) by Shared Technologies if Fairchild fails to perform in
any material respect any of its obligations under this Agreement;
(g) by Fairchild or Shared Technologies 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 case permanently restraining, enjoining
or otherwise prohibiting the transactions contemplated by this
Agreement and such order, decree, ruling or other action shall have
become final and nonappealable;
(h) by Shared Technologies if its Board of Directors shall
have withdrawn, modified or amended in an adverse manner its
recommendation of the Merger as a result of its exercise of its
fiduciary duties; or
<PAGE>
(i) by Fairchild if its Board of Directors shall have
withdrawn, modified or amended in an adverse manner its recommendation
of the Merger as a result of its exercise of its fiduciary duties; or
(j) by either Shared Technologies or Fairchild if either of
their respective Board of Directors reasonably determine that market
conditions will not permit the completion of the Financing contemplated
by Section 8.6 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.
10.2 Effect of Termination. In the event of the termination of
this Agreement pursuant to the foregoing provisions of this Article X, this
Agreement shall become void and have no effect, with no liability on the part of
any party or its stockholders or directors or officers in respect thereof except
for agreements which survive the termination of this Agreement and except for
liability that TFC, RHI, Fairchild or Shared Technologies might have arising
from a breach of this Agreement.
ARTICLE XI
SURVIVAL AND INDEMNIFICATION
11.1 Survival of Representations and Warranties. All
representations and warranties made in this Agreement shall survive from the
Effective Time until March 31, 1997 and shall not be extinguished by the Merger
or any investigation made by or on behalf of any party hereto.
11.2 Indemnification by TFC and RHI. Each of TFC and RHI
hereby agrees, jointly and severally, to indemnify and hold harmless Shared
Technologies against any and all losses, liabilities and damages or actions (or
actions or proceedings, whether commenced or threatened) or claims (including,
without limitation, counsel fees and expenses of Shared Technologies in the
event that TFC or RHI fail to assume the defense thereof) in respect thereof
(hereinafter referred to collectively as "Losses") resulting from any breach of
the representations and warranties made by TFC, RHI or Fairchild in this
Agreement;
<PAGE>
provided, however, that TFC's and RHI's obligations under this Section 11.2 is
to the extent that the Losses exceed $4,000,000. Notwithstanding the foregoing,
in no event shall Shared Technologies be entitled to indemnification for, and
the term "Losses" shall not include any consequential damages or damages which
are speculative, remote or conjectural (except to the extent represented by a
successful claim by a third party).
If any action, proceeding or claim shall be brought or
asserted against Shared Technologies by any third party, which action,
proceeding or claim, if determined adversely to the interests of Shared
Technologies would entitle Shared Technologies to indemnity pursuant to this
Agreement, Shared Technologies shall promptly but in no event later than 10 days
from the date Shared Technologies receives written notice of such action,
proceeding or claim, notify TFC and RHI of the same in writing specifying in
detail the basis of such claim and the facts pertaining thereto (but the failure
to give such notice in a timely fashion shall not affect TFC's and RHI's
obligations under this Section 11.2 except to the extent it prejudiced or
damaged their ability to defend, settle or compromise such claim or to pay any
Losses resulting therefrom), and TFC and RHI shall be entitled (but not
obligated) to assume the defense thereof by giving written notice thereof within
10 days after TFC and RHI received notice of the claim from Shared Technologies
to Shared Technologies and have the sole control of defense and settlement
thereof (but only, with respect to any settlement, if such settlement involves
an unconditional release of Shared Technologies and its subsidiaries in respect
of such claim), including the employment of counsel and the payment of all
expenses.
11.3 Indemnification by Shared Technologies. Shared
Technologies hereby agrees to indemnify and hold harmless TFC and RHI against
any and all losses, liabilities and damages or actions (or actions or
proceedings, whether commenced or threatened) or claims (including, without
limitation, counsel fees and expenses of TFC and RHI in the event that Shared
Technologies fails to assume the defense thereof) in respect thereof hereinafter
referred to as the "Shared Technologies' Losses") resulting from the breach of
the representations and warranties made by Shared Technologies in this
Agreement; provided, however, that Shared Technologies' obligation under this
Section 11.3 is to the extent that the Shared Technologies' Losses exceed
$4,000,000. Notwithstanding the foregoing, in no
<PAGE>
event shall TFC or RHI be entitled to indemnification for, and the term "Shared
Technologies' Losses" shall not include any consequential damages or damages
which are speculative, remote or conjectural (except to the extent represented
by a successful claim by a third party).
Shared Technologies at its option may make any indemnification
pursuant to this Section 11.3 in cash or in shares of Common Stock of Shared
Technologies having a fair market value at the time of issuance in an amount
equal to the amount of such loss. In the event that Shared Technologies makes a
payment in cash in fulfillment of its obligation under this Section 11.3, the
term "Shared Technologies' Losses" shall also include the diminution as a result
of such payment in the value of the shares of Common Stock and Preferred Stock
as a result of such payment. In the event that Shared Technologies issues Common
Stock in fulfillment of its obligation under this Section 11.3, the term "Shared
Technologies' Losses" shall also include the diminution as a result of such
issuance in the value of the shares of Common Stock and Preferred Stock of
Shared Technologies owned by RHI prior to such issuance.
If any action, proceeding or claim shall be brought or
asserted against TFC or RHI by any third party, which action, proceeding or
claim, if determined adversely to the interests of TFC or RHI would entitle TFC
or RHI to indemnity pursuant to this Agreement, TFC or RHI shall, promptly but
in no event later than 10 days from the date TFC or RHI receives written notice
of such action, proceeding or claim, notify Shared Technologies of the same in
writing specifying in detail the basis of such claim and the facts pertaining
thereto (but the failure to give such notice in a timely fashion shall not
affect Shared Technologies' obligations under this Section 11.3 except to the
extent it prejudiced or damaged Shared Technologies' ability to defend, settle
or compromise such claim or to pay any Losses resulting therefrom), and Shared
Technologies shall be entitled (but not obligated) to assume the defense thereof
by giving written notice thereof within 10 days after Shared Technologies
received notice of the claim from TFC or RHI to TFC or RHI and have the sole
control of defense and settlement thereof (but only, with respect to any
settlement, if such settlement involves an unconditional release of TFC and RHI
and their respective subsidiaries in respect of such claim), including the
employment of counsel and the payment of all expenses.
<PAGE>
11.4 Set-Off. In the event that either TFC, RHI or Shared
Technologies fails to make any payment required by Section 11.2 or 11.3 hereof,
the party entitled to receive such payment may set off the amount thereof
against any other payments owed by it to the party failing to make such payment.
ARTICLE XII
MISCELLANEOUS
12.1 Closing and Waiver.
(a) Unless this Agreement shall have been terminated in
accordance with the provisions of Section 10.1 hereof, a closing (the "Closing"
and the date and time thereof being the "Closing Date") will be held as soon as
practicable after the conditions set forth in Sections 9.1, 9.2 and 9.3 shall
have been satisfied or waived. The Closing will be held at the offices of Cahill
Gordon & Reindel, 80 Pine Street, New York, New York or at such other places as
the parties may agree. Immediately thereafter, the Certificate of Merger will be
filed.
(b) At any time prior to the Effective Date, any party hereto
may (i) extend the time for the performance of any of the obligations or other
acts of any other party hereto, (ii) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements of any other party or with any conditions to its own obligations
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in writing
duly authorized by and signed on behalf of such party.
12.2 Notices.
(a) Any notice or communication to any party hereto shall be
duly given if in writing and delivered in person or mailed by first class mail
(registered or certified, return receipt requested), facsimile or overnight air
courier guaranteeing next day delivery, to such other party's address.
If to The Fairchild Corporation, RHI Holdings, Inc. or
Fairchild Industries, Inc.:
<PAGE>
300 West Service Road
P.O. Box 10803
Chantilly, VA 22001
Facsimile No.: (703) 888-5674
Attention: Donald Miller, Esq.
with a copy to:
James J. Clark, Esq.
Cahill Gordon & Reindel
80 Pine Street
New York, NY 10005
Facsimile No.: (212) 269-5420
If to Shared Technologies Inc.:
100 Great Meadow Road, Suite 104
Wethersfield, CT 06109
Facsimile No.: (203) 258-2401
Attention: Legal Department
with a copy to:
Walter D. Wekstein, Esq.
Harold J. Carroll, Esq.
Gadsby & Hannah
125 Summer Street
Boston, MA 02110
Facsimile No.: (617) 345-7050
(b) All notices and communications will be deemed to have been
duly given: at the time delivered by hand, if personally delivered; five
business days after being deposited in the mail, if mailed; when sent, if sent
by facsimile; and the next business day after timely delivery to the courier, if
sent by overnight air courier guaranteeing next day delivery.
12.3 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.4 Interpretation. The headings of articles and sections
herein are for convenience of reference, do not
<PAGE>
constitute a part of this Agreement, and shall not be deemed to limit or affect
any of the provisions hereof. As used in this Agreement, "person" means any
individual, corporation, limited or general partnership, joint venture,
association, joint stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof; "subsidiary" of any
person means (i) a corporation more than 50% of the outstanding voting stock of
which is owned, directly or indirectly, by such person or by one or more other
subsidiaries of such person or by such person and one or more subsidiaries
thereof or (ii) any other person (other than a corporation) in which such
person, or one or more other subsidiaries of such person or such person and one
or more other subsidiaries thereof, directly or indirectly, have at least a
majority ownership and voting power relating to the policies, management and
affairs thereof; and "voting stock" of any person means capital stock of such
person which ordinarily has voting power for the election of directors (or
persons performing similar functions) of such person, whether at all times or
only so long as no senior class of securities has such voting power by reason of
any contingency.
12.5 Variations and Amendment. This Agreement may be varied or
amended only by written action of Shared Technologies and Fairchild, before or
after the Special Meeting at any time prior to the Effective Time.
12.6 No Third Party Beneficiaries. Except for the provisions
of Sections 8.9 (which are intended to be for the benefit of the persons
referred to therein, and may be enforced by such persons) and 8.11, nothing in
this Agreement shall confer any rights upon any person or entity which is not a
party or permitted assignee of a party to this Agreement.
12.7 Use of Fairchild Name. RHI hereby grants a royalty free
license in perpetuity to Shared Technologies for the use of the Fairchild name
to Shared Technologies for exclusive use by Shared Technologies as a trade name
in the telecommunications system and services business but not for any other
use. In no event may Shared Technologies assign the right to use the Fairchild
name to any other person.
12.8 Governing Law. Except as the laws of the State of
Delaware are by their terms applicable, this Agreement shall be governed by, and
construed in accordance with, the laws of the
<PAGE>
State of New York without regard to principles of conflicts of laws.
12.9 Entire Agreement. This Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all other prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof.
12.10 No Recourse Against Others. No director, officer or
employee, as such, of Shared Technologies, TFC, RHI or any of their respective
subsidiaries shall have any liability for any obligations of Shared
Technologies, TFC or RHI, respectively, under this Agreement for any claim based
on, in respect of or by reason of such obligations or their creation.
12.11 Validity. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Merger
Agreement to be executed by their duly authorized officers all as of the day and
year first above written.
SHARED TECHNOLOGIES INC.
By: /s/ Anthony D. Autorino
Title: Chairman of the Board,
Chief Executive Officer
and President
FAIRCHILD INDUSTRIES, INC.
By: /s/ Jeffrey J. Steiner
Title: Chairman of the Board,
Chief Executive Officer
and President
THE FAIRCHILD CORPORATION
By: /s/ Jeffrey J. Steiner
Title: Chairman of the Board,
Chief Executive Officer
and President
RHI HOLDINGS, INC.
By: /s/ Jeffrey J. Steiner
Title: Chairman of the Board,
Chief Executive Officer
and President
<PAGE>
Schedule 9.1
The steps comprising the Fairchild Recapitalization are as
follows:
1. Fairchild Industries, Inc., as it exists on the date of the
Merger Agreement ("FII"), will cause Fairchild Communications Services Company,
a Delaware partnership ("FCSC") to merge into FII's wholly owned subsidiary, VSI
Corporation ("VSI").
2. FII will then cause VSI to transfer all of VSI's assets and
liabilities (other than those of the former FCSC, but excluding from those real
estate owned by FCSC, and other than the Assumed Indebtedness described below)
to one or more wholly owned subsidiaries.
3. FII (or Shared Technologies) will make a cash tender offer
to purchase all of the outstanding 12 1/4% Senior Notes due 1999 (the "12 1/4%
Notes") of FII and, in connection therewith, will obtain such Noteholders'
consent (representing at least 51% of the outstanding principal amount of the 12
1/4% Notes) to the transfer by FII of all of the assets of FII (other than the
stock of VSI) to RHI and to amend the indenture under which the 12 1/4% Notes
were issued to remove all covenants which can be amended or deleted by majority
vote. The aggregate amount needed to be paid to consummate such tender offer and
consent solicitation is herein called the "Note Purchase Amount".
4. Prior to the Effective Time, FII will transfer (in one or
more transactions) all of its assets to RHI, and RHI will assume all
liabilities, except for (i) the stock of VSI (which will only have in it the
assets and liabilities of the former FCSC), (ii) the 12 1/4% Senior Notes, (iii)
the Series A and C Preferred Stock and (iv) an amount of bank and other
indebtedness (the "Assumed Indebtedness") equal to $223,500,000 minus (x) the
Note Purchase Amount and (y) $44,237,745 (the aggregate redemption price of the
Series A and C Preferred Stock) plus accrued dividends thereon through the
Effective Time, and RHI will contribute all of the outstanding Series B
Preferred Stock to FII.
5. Concurrently with the consummation of the Merger, the
Surviving Corporation will (i) purchase the 12 1/4% Notes tendered for the Note
Purchase Amount, (ii) repay the Assumed Indebtedness in full and (iii) deposit
in escrow the funds
<PAGE>
necessary to pay the holders of the Series A and Series C Preferred Stock the
amounts owed to them under the Merger Agreement.
<PAGE>
Schedule 9.2(d)
TAX RULINGS REQUESTED BY FAIRCHILD
Fairchild requests the following rulings be issued regarding
the mergers of the three corporate subsidiaries of VSI into VSI:
1. The mergers will qualify as a complete liquidation of each
of the three corporate subsidiaries (FCSII, FCSI, and FCNMC, which are
the partners in FCSC) underss. 332(a) of the Internal Revenue Code of
1986, as amended (the "Code");
2. No gain or loss will be recognized by VSI on its receipt of
the assets from each of the three corporate subsidiaries underss.
332(a);
3. No gain or loss will be recognized by the three corporate
subsidiaries on the distribution of their respective assets to VSI in
complete liquidation underss. 336 andss. 337(a).
Fairchild requests the following rulings regarding the
formation of Subsidiary 1, the distribution of the stock of Subsidiary 1 by VSI
to FII, and the distribution of the stock of Subsidiary 1 by FII to RHI:
4. VSI will recognize no gain or loss on its transfer of
assets (except the Telecommunications business) to Subsidiary 1 in
exchange for common stock of Subsidiary 1 and assumption of liabilities
by Subsidiary 1 (ss.ss. 351 and 357(a) of the Code and Rev. Rul.
77-449, 1977-2 C.B. 110).
VSI's basis in the stock of Subsidiary 1 received in the
transaction will equal the basis of the property transferred in exchange
therefor, reduced by the sum of the liabilities assumed by Subsidiary 1, or to
which assets transferred are taken subject (ss. 358(a) and (d)).
5. Subsidiary 1 will recognize no gain or loss on its transfer
of assets to Subsidiaries 2, 3, 4, 5, 6 and 7 in exchange for the
common stock of Subsidiaries 2, 3, 4, 5, 6 and 7 and the assumption of
liabilities by Subsidiaries 2 to 7 (ss.ss. 351 and 357(a) and Rev. Rul.
77-449).
<PAGE>
Subsidiary 1's basis in the stock of Subsidiaries 2 to 7
received in the transaction will equal the basis of the property transferred to
Subsidiaries 2 to 7, respectively, in exchange therefor, reduced by the sum of
the liabilities assumed by Subsidiaries 2 to 7 or to which assets transferred
are taken subject (ss. 358(a) and (d)).
6. No income, gain or loss will be recognized by Subsidiary 1
upon the receipt of the assets of Fastener and D-M-E businesses, stock
of FDC, plus real estate held for sale in exchange for stock of
Subsidiary 1 and Subsidiary 1's assumption of liabilities (ss.
1032(a)).
7. The basis of the assets received by Subsidiary 1 will be
the same as the basis of such assets in the hands of VSI immediately
prior to the Distribution (ss. 362(b)).
8. No income, gain or loss will be recognized by FII as the
Shareholder of VSI on its receipt of the Subsidiary 1 common stock
pursuant to the Distribution (ss. 355(a)).
9. No income, gain or loss will be recognized by RHI as the
Shareholder of FII on its receipt of Subsidiary 1 common stock pursuant
to the Distribution (ss. 355(a)).
10. No income, gain or loss will be recognized by VSI and FII
upon the distributions to their respective Shareholders of all of the
Subsidiary 1's common stock pursuant to the Distribution (ss. 355(c)).
<PAGE>
Schedule 9.2(e)
The Restated Certificate of Incorporation of Shared
Technologies (the "Certificate") shall be amended in the following manner:
(a) Article Four of the Certificate shall be amended to (i)
increase the authorized common shares of the Corporation, $.004 par value, to
50,000,000 and (ii) to increase the authorized shares of preferred stock of the
Corporation, $.01 par value, to 25,000,000; and
(b) The Certificate shall be amended or a certificate of
designation shall be filed to reflect the terms of the Convertible Preferred
Stock and the [Special] Preferred Stock in form and substance satisfactory to
RHI and consistent with Schedules 3.1 (c) and (b) hereof; and
The Amended and Restated Bylaws of the Corporation (the
"Bylaws") shall be amended in the following manner:
(a) Article II, Section 11 of the Bylaws is deleted in its
entirety and is replaced by the following paragraph:
"No action requiring shareholder approval may be taken without
a meeting of the shareholders entitled to vote thereon."
(b) Article III, Section 1 of the Bylaws shall be amended to
include the following sentences at the end of such section:
"So long as The Fairchild Corporation and its affiliates
(collectively, "TFC") owns 25% or more of the common stock of the Corporation
that TFC owned on the [Date of Merger] TFC shall have the irrevocable right to
appoint four (4) members of the Board of Directors; provided, that so long as
Mel D. Borer is President and a Director of the Corporation, TFC shall only be
entitled to appoint three (3) directors."
"The Board of Directors may not grant any options for, or any
other rights to acquire, common stock of the Corporation, except for options
issued pursuant to a plan approved by the shareholders or in a transaction with
non-affiliates where such party pays cash for such option or right, unless such
transaction is approved by a majority of the shareholders."
<PAGE>
(c) Article III, Section 10 of the Bylaws shall be deleted in
its entirety and replaced with the following paragraph:
"Executive Committee. The Board of Directors of the
Corporation shall have an executive committee consisting of the President, a
director appointed by TFC as long as TFC owns at least 25% of the common stock
of the Corporation that TFC owned on the [Date of Merger], and a third director
appointed by the Board of Directors of the Corporation. All actions taken by the
Executive Committee may only be taken pursuant to a unanimous vote by the
members thereof."
(d) Article III, Sections 11, 12 and 13 shall be amended to
include the following sentence as the second sentence of each such section:
"As long as TFC owns at least 25% of the common stock of the
Corporation, TFC will be entitled to appoint one director to such committee."
(e) Article IV, Section 5 shall be amended to include the
following sentence at the end of such section:
"The Corporation shall have a Vice Chairman of the Board of
Directors who shall have such duties as are designated by the Board of
Directors."
(f) Article IV, Section 6 shall be deleted in its entirety and
replaced with the following paragraph:
"Executive Officers. The Chairman of the Board of the
Corporation shall also be the Chief Executive Officer of the Corporation and
shall be the senior executive of the Corporation and shall have overall
supervision of the affairs of the Corporation. The President of the Corporation
shall also be the Chief Operating Officer of the Company and he shall be
responsible for the day-to-day business operations of the Corporation under the
direction of the Chief Executive Officer. Each of the Chief Executive Officer
and the President shall see that all orders and resolutions of the Board of
Directors of the Corporation are carried into effect, subject, however, to the
right of the Board of Directors to delegate any specific powers, except as may
be exclusively conferred on the President by law, to the Chairman or any other
officer of the Corporation. Each of
<PAGE>
the Chief Executive Officer and the President may execute bonds, mortgages, and
other contracts requiring a signature under the seal of the Corporation.
(g) Article VIII, Section 1 shall be deleted in its entirety
and replaced with the following paragraph:
"By Directors or Shareholders. The bylaws of the Corporation
may be altered, amended or repealed at any validly called and convened meeting
of the shareholders by the affirmative vote of the holders of a majority of the
voting power of shares entitled to vote thereon represented at such meeting in
person or by proxy and at any validly called and convened meeting of the board
of directors by the affirmative vote of at least a majority of the directors
(unless such alteration, amendment or repeal in any way adversely affects the
rights granted to TFC hereunder or in Article II, Section 11, Article III,
Section 10 or Article IV, Section 6 of these bylaws, in which event a vote of
80% of the directors shall be required); provided, however, that the notice of
such meeting shall state that such alteration, amendment or repeal will be
proposed."
<PAGE>
EXHIBIT B
S.G. WARBURG S.G. Warburg & Co., Inc.
277 Park Avenue, New York, NY 10172
Telephone: (212) 224-7000
Telex: 170984
Facsimile: (212) 224-7019
November 9, 1995
Board of Directors
Shared Technologies Inc.
100 Great Meadow Road, Suite 104
Wethersfield, Connecticut 06109
Gentlemen and Madam:
We understand that Shared Technologies Inc. ("Shared Technologies" or the
"Company"), The Fairchild Corporation ("TFC"), Fairchild Industries, Inc. and
its wholly owned subsidiary, VSI Corporation, (collectively "Fairchild") and RHI
Holdings Inc. ("RHI") propose to enter into an Agreement and Plan of Merger
dated as of November 9, 1995 (the "Merger Agreement"). The terms of the Merger
Agreement provide, among other things, that Fairchild shall be merged with and
into Shared Technologies (the "Merger") and that Shared Technologies as the
corporation surviving the Merger shall change its name to Shared Technologies
Fairchild Inc. ("Shared Technologies Fairchild"). In consideration for acquiring
the shares of Fairchild: (i) Shared Technologies will issue to RHI $25 million
in convertible preferred shares; (ii) Shared Technologies will issue to RHI 6.0
million common shares; (iii) cash proceeds of $223.5 million will be made
available to Fairchild through the issuance by Shared Technologies Fairchild of
various debt instruments; and, (iv) Shared Technologies will issue to RHI
Special Preferred Stock with an initial liquidation preference of $20 million,
together the "Merger Consideration". The terms and conditions of the merger and
the Merger Consideration are more fully set forth in the Merger Agreement.
You have requested our opinion as to the fairness, from a financial point of
view, to Shared Technologies of the consideration to be paid by Shared
Technologies in exchange for the shares of Fairchild pursuant to the Merger
Agreement.
For purposes of the opinion set forth herein, we have among other things:
(i) reviewed the consolidated financial statements of recent years of The
Fairchild Corporation and
<PAGE>
Fairchild Industries, Inc. as filed with the Securities and Exchange
Commission;
(ii) reviewed certain audited financial statements of Fairchild
Communications Services Company ("FCS") for the three years ended June
30, 1995;
(iii) reviewed certain audited financial statements for Shared Technologies
for the three years ending December 31, 1994 and more recent unaudited
financial information (including that for the six months ended June 30,
1995);
(iv) reviewed certain internal financial statements relating to Shared
Technologies prepared by the management of Shared Technologies and
certain internal financial statements relating to FCS prepared by the
management of FCS;
(v) reviewed certain financial projections of Shared Technologies and FCS
prepared by their respective management;
(vi) discussed the past and current operations and financial condition and
prospects of Shared Technologies and FCS with their respective senior
management;
(vii) analyzed the pro forma impact of the merger on Shared Technologies;
(viii) reviewed certain financial and stock market information of certain
companies we deemed appropriate in analyzing Shared Technologies and
FCS, as well as the financial terms of certain other related
transactions;
(ix) participated in selected discussions and negotiations among
representatives of Shared Technologies and FCS and their respective
advisors;
(x) reviewed the Merger Agreement, the Shareholders' Agreement, the
Registration Rights Agreement and other relevant documentation
concerning the transaction; and
(xi) performed such other financial studies, analyses and examinations and
considered such other factors as we deemed relevant.
We have assumed and relied upon, without independent verification, the accuracy
and completeness of the information reviewed by us for purposes of this opinion.
With respect to
<PAGE>
the financial projections relating to Shared Technologies and FCS used in our
analyses, we have assumed that they have been reasonably prepared on a basis
which reflects the best currently available estimates and judgments of Shared
Technologies' and FCS's management, respectively, as to the future financial
performance of their respective companies. Our opinion also incorporates
management's expectations of the projected synergies to be realized as a result
of the Merger. We have not prepared any independent valuation or appraisal of
the assets of Shared Technologies or FCS.
Our opinion is necessarily based on the economic, market, and other conditions
in effect on, and the information made available to us as of, the date hereof.
Our opinion does not address the matter of indemnification provided to Shared
Technologies by TFC, RHI and their respective affiliates.
S.G. Warburg & Co. Inc. is acting as financial advisor to Shared Technologies in
connection with this transaction and will receive a fee for its services.
Based upon and subject to the foregoing, it is our opinion as investment bankers
that as of the date hereof, the consideration offered to RHI is fair, from a
financial point of view, to Shared Technologies.
Very truly yours,
S.G. WARBURG & CO. INC.
By: By:
/s/ James M. Stewart /s/ David M. Cohen
Name: James M. Stewart Name: David M. Cohen
Title: Managing Director Title: Managing Director
<PAGE>
PRELIMINARY COPY
SHARED TECHNOLOGIES INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
JANUARY __, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Anthony D. Autorino and Vincent DiVincenzo, or
either of them, as proxies, each with the power to appoint his substitute, and
hereby authorizes them to represent and to vote all the shares of common stock,
par value $.004, (the "Common Stock") of Shared Technologies Inc. ("STI") held
of record by the undersigned on December 22, 1995 at the Special Meeting of
Stockholders to be held on January __, 1996 or any adjournment or adjournments
thereof, upon all matters set forth in the Notice of Special Meeting of
Stockholders and Proxy Statement dated December __, 1995, a copy of which has
been received by the undersigned, as follows:
1. To approve (i) the merger of Fairchild Industries Inc. with and into
STI pursuant to the terms of an Agreement and Plan of Merger, dated as
of November 9, 1995 and (ii) amendments to the Certificate of
Incorporation of STI as required by the Merger Agreement as a condition
to the Merger to:
(a) increase the authorized Common Stock, $.004 par value of STI
from 20,000,000 to 50,000,000;
(b) increase the authorized shares of preferred stock, $.01 par
value, of STI from 10,000,000 to 25,000,000; and
(c) change the name of STI to "Shared Technologies Fairchild, Inc."
|_| FOR |_| AGAINST |_| ABSTAIN
2. Grant authority to vote upon such other matters as may properly come
before the Special Meeting as Anthony D. Autorino and Vincent
DiVincenzo determine are in the best interest of the Company.
|_| FOR |_| AGAINST |_| ABSTAIN
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of Stockholders and Proxy Statement. Any proxy heretofore given to
vote said Common Stock is hereby revoked. The undersigned hereby ratify and
confirm all that said proxy or any of their substitutes may lawfully do by
virtue hereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED. IF NO DIRECTION IS GIVEN, THIS
PROXY WILL BE VOTED "FOR" EACH OF THE MATTERS STATED.
<PAGE>
Please be sure to complete, sign and date this Proxy and return it in
the enclosed envelope. If acting as an executor, administrator, trustee or
guardian, you should so indicate when signing. If the signer is a
corporation, please sign the full corporate name, by a duly authorized
officer. If Common Stock is held jointly, each Stockholder should sign.
Date:___________________
________________________________ __________________________
SIGNATURE CO-OWNER SIGN HERE
