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
Commission 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)
-----------------------------------------------------------------------------
(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):
<TABLE>
<CAPTION>
<S> <C>
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
-----------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$289,140,000
(5) Total fee paid:
$57,828.00
</TABLE>
|X| 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:
$57,828.00
(2) Form, Schedule or Registration Statement No.:
Schedule 14A
(3) Filing Party:
Shared Technologies Inc.
(4) Date Filed:
December 1, 1995
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 February 9, 1996, at the offices of S.G. Warburg & Co., Inc., 277
Park Avenue, New York, New York, commencing at 2:00 p.m., 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 _____________________, 1996.
The date of this Proxy Statement is _____________________, 1996.
<PAGE>
SHARED TECHNOLOGIES INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
February 9, 1996 at 2:00 p.m.
Notice is hereby given that a Special Meeting of Stockholders of Shared
Technologies Inc. ("STI") will be held on February 9, 1996, at 2:00 p.m., at the
offices of S.G. Warburg & Co., Inc., 277 Park Avenue, New York, New York (the
"Meeting"), to consider and act upon the following matter:
Approval of Merger and Amendments to Restated 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,
as amended pursuant to that certain Amendment dated , 1996 (the
"Merger Agreement"), as a result of which STI will issue to RHI
Holdings, Inc., the sole holder of FII common stock ("RHI),
upon delivery to STI by RHI of its stock certificates
evidencing the common stock of FII 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 $40,000,000 (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
Restated 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: January , 1996
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. PROPERLY EXECUTED PROXIES WILL BE VOTED IN THE
MANNER DIRECTED BY THE STOCKHOLDER. IF NO DIRECTION IS MADE, THE PROXY WILL BE
VOTED "FOR" THE MERGER AND THE AMENDMENTS TO THE RESTATED CERTIFICATE OF
INCORPORATION.
<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 February 9, 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 2:00 p.m., Eastern Time, on
February 9, 1996, at the offices of S.G. Warburg & Co., Inc., 277 Park Avenue,
New York, New York. This Proxy Statement and the Proxy are first being mailed to
Stockholders on or about , 1996.
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, as amended pursuant to that certain
Amendment dated
, 1996 (the "Merger Agreement") and, as required by the
Merger Agreement as a condition of the Merger, amendments to the Restated
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 RHI Holdings, Inc. ("RHI"), the sole holder of all outstanding shares of FII
common stock, will receive, (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 $40,000,000
(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 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 $183,500,000 (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 8,506,448 issued and outstanding shares of Common
Stock held of record and beneficially by 1,879 Stockholders. As of the Record
Date, the members of the Board and the executive officers of STI owned an
aggregate of 2,220,236 shares (approximately 23.6% of the total shares of Common
Stock outstanding). Anthony D. Autorino, Chief Executive Officer, President and
Chairman of STI and owner of 13.6% 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 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.
A COPY OF STI'S ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1994 MAY BE OBTAINED WITHOUT CHARGE
TO ANY STOCKHOLDER AS OF THE RECORD DATE UPON WRITTEN REQUEST TO THE SECRETARY,
SHARED TECHNOLOGIES INC., 100 GREAT MEADOW ROAD, WETHERSFIELD, CONNECTICUT
06109.
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 January , 1996.
<PAGE>
SHARED TECHNOLOGIES INC.
PROXY STATEMENT
Table of Contents
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........... 11
Special Factors...................................................... 11
Interests of Certain Persons In the Merger........................... 11
No Appraisal Rights for Stockholders................................. 11
Material Federal Income Tax Consequences............................. 12
Regulatory Requirements.............................................. 12
Summary Financial Information - STI.................................. 13
Summary Financial Information - FII.................................. 14
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............................................................. 19
Background of the Merger............................................. 19
Reasons for the Merger and Amendments; Recommendations
of the Board of Directors.......................................... 24
Required Financing and Effects Thereof............................... 25
Opinion of S.G. Warburg.............................................. 25
The Proposed Merger.................................................. 27
Pro Forma Impact Analysis............................................ 29
FII Recapitalization, Liabilities and Indemnification................ 31
Material Federal Income Tax Consequences............................. 32
Accounting Treatment of the Merger................................... 33
Interests of Certain Persons in the Merger........................... 33
Effect if the Merger and Amendments are Not Approved................. 34
PROPOSAL TO APPROVE THE MERGER AND AMENDMENTS............................... 36
General.............................................................. 36
Certain Effects Of The Merger........................................ 36
Effective Time....................................................... 38
Other Terms and Conditions........................................... 38
Additional Agreements................................................ 38
<PAGE>
Changes to Bylaws.................................................... 40
Rights of Dissenting Stockholders.................................... 40
Fees and Expenses.................................................... 41
Regulatory Requirements.............................................. 41
Amendment; Termination .............................................. 41
PRO FORMA FINANCIAL INFORMATION............................................. 43
Pro Forma Consolidated Balance Sheet................................. 44
Pro Forma Consolidated Balance Sheet
September 30, 1995................................................. 45
Pro Forma Consolidated Statement of Operations
for the year ended December 31, 1994............................... 46
Pro Forma Consolidated Statement of
Operations for the nine months ended September 30, 1995............ 47
Notes to Pro Forma
Consolidated Financial Information................................. 48
INFORMATION ABOUT STI....................................................... 53
Business............................................................. 53
Price Range of Common Stock.......................................... 53
Selected Financial Data.............................................. 54
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 56
Liquidity Capital Resources.......................................... 59
Experts.............................................................. 60
Description of Securities............................................ 60
Security Ownership of Certain Beneficial Owners
and Management..................................................... 64
INFORMATION ABOUT FII....................................................... 67
Formation, Historical Operations and Recapitalization................ 67
Communications Services Business..................................... 68
FII Senior Notes..................................................... 68
Legal Matters........................................................ 68
Selected Financial Data.............................................. 69
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 71
Experts.............................................................. 75
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
<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 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
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 succe
ssor 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, will undergo a
recapitalization (the "FII Recapitalization") to
transfer from FII and VSI to RHI 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 February 9, 1996, at the
offices of S.G. Warburg & Co., Inc., 277 Park Avenue,
New York, New York, commencing at 2:00 p.m., 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 8,506,448_ 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, as amended
pursuant to that certain Amendment dated , 1996 (the
"Merger Agreement") as a result of which RHI, 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 $40,000,000 (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
<PAGE>
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").
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 January 1, 1996, 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. On a fully diluted basis (assuming the
issuance and exercise of all options reserved
(1,500,000) under STI's 1996 Equity Incentive Plan),
RHI will own approximately 39% and all other holders
will own approximately 61%. If any officer or director
of RHI is issued any options under the 1996 Equity
Incentive Plan, RHI's and such individuals' aggregate
beneficial ownership position could be increased. The
Merger in and of itself, therefore, will not result in
RHI having voting control of the Surviving
Corporation. The fact that RHI does not attain voting
control notwithstanding, RHI will nevertheless be able
to exert considerable control over the Surviving
Corporation in light of the fact that it will own 41%
of the outstanding shares of Common Stock, and in
light of the terms of the Shareholders Agreement as
described below.
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", "Proposal to Approve the Merger
and Amendments - Additional Agreements" and
"Information about STI - Description of Securities".
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
<PAGE>
Common Stock to satisfy its indemnification
obligations for a breach, such issuance will result in
a dilution of the interests of the STI Stockholders.
As a result of the Merger, the Surviving Corporation
shall repay an aggregate of approximately $183,500,000
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 of debt securities of the
Surviving Corporation (the "Financing") (i) to pay the
Preferred Consideration, (ii) to repay the
$183,500,000 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,
dated November 15, 1995 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 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 10 employees, each
with annual base salaries exceeding $100,000 and with
aggregate annual base salaries aggregating
approximately $1,300,000. 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. Effective with the Merger, Mr. Steiner
and Mr. Borer will each enter into an employment
agreement with the Surviving Corporation. Their
respective salaries under such employment agreements
<PAGE>
will be $350,000 and $250,000. See "Proposal to
Approve the Merger and Amendments - Interests of
Certain Persons in the Merger".
Termination of the Merger
Agreement; Amendments.. 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.
The Merger Agreement may be amended by a writing
executed by all parties to the Merger Agreement. 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 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. As of the
record date, STI had 8,506,448 shares of Common Stock
outstanding with commitments to reserve 5,625,824
additional shares. As of the record date, STI had
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
<PAGE>
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 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
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
payments upon a change of control. Additionally, the
Board has approved the adoption of the 1996 Equity
Incentive Plan and has authorized and reserved
1,500,000 shares of Common Stock therefor. 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".
<PAGE>
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 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.
<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. (In thousands, except per share data.)
<TABLE>
<CAPTION>
For the nine months For the nine months
Fiscal year ended December 31 ended September 30, 1995 ended September 30, 1994
-------------------------------------------- ------------------------ ------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C> <C> <C>
Statements of
Operations Data:
Net revenues $ 45,367 $ 25,426 $ 24,077 $ 43,675 $ 31,514
Net income 2,286 140 2,724 2,074 1,563
Net income (loss)
per common share .27 (.04) .59 .20 .21
Weighted average
common shares 6,792,277 5,132,296 4,062,710 8,698,207 5,699,483
</TABLE>
<TABLE>
<CAPTION>
December 31
1994 1993 1992 September 30, 1995
---- ---- ---- ------------------
(unaudited)
Balance Sheet Data:
<S> <C> <C> <C> <C>
Working capital (deficit) $ (3,691) $ (3,874) $ (4,506) $(2,124)
Total assets 37,925 20,601 18,752 47,079
Long Term Debt 2,886 1,777 2,282 4,012
Stockholders' equity 20,881 9,302 6,034 23,971
</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 1, October 2,
1995 1994
(unaudited)
1995 1994 1993
---- ---- ----
Statements of
Operations Data:
<S> <C> <C> <C> <C> <C> <C>
Sales 109,741 74,897 68,639 33,138 20,124
Net income (loss)
after preferred
dividends (16,261) (37,889) (16,130) (581) (668)
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
June 30 October 1, 1995
--------- ---------------
1995 1994 1993 (unaudited)
---- ---- ----
<S> <C> <C> <C> <C>
Working capital 57,342 23,373 32,279 54,824
Total assets 359,481 334,464 370,750 359,366
Total long-term
debt and
obligations
under capital
leases 181,309 183,259 61,377 181,015
Stockholders'
equity 110,519 96,321 129,521 111,258
</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
</TABLE>
(1) See Notes to Unaudited Pro forma Financial Statements.
<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 February 9, 1996, at the offices of S.G.
Warburg & Co., Inc., 277 Park Avenue, New York, New York, commencing at 2:00
p.m., 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 January , 1996.
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 amended pursuant to a certain Amendment dated , 1996, as
a result of which RHI Holdings, Inc., the sole holder of FII common stock, will
receive 6,000,000 shares of STI Common Stock and shares of 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
(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 the Record Date there were 8,506,448 shares of Common Stock
outstanding, and entitled to vote at the Meeting held of record and beneficially
by 1,879 Stockholders. Each Stockholder 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 the date of this Proxy Statement, 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 insofar as they are not
otherwise instructed and insofar as they are not voting proxies which have voted
against the Merger to adjourn the Meeting for the purpose of soliciting
additional proxies or otherwise in contravention of a vote against the Merger.
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. 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. These discussions
did not result in any definitive offers by STI or other companies but provided
the Steering Committee with the opportunity to learn more about other businesses
in the industry.
Upon recommendation of the Steering Committee, on July 11, 1995 Mr.
Autorino and Mr. Hutheesing initiated contact with S.G. Warburg and on September
5, 1995 STI engaged S.G. Warburg to work with the Steering Committee in
developing strategic alternatives. . S.G. Warburg met with the management of STI
and with members of the Steering Committee on August 4, September 13, and
October 11, 1995 to discuss STI's business evolution, acquisition history,
strategy and operational performance measures and objectives. As a result of
these discussions, an analysis of recent telecommunications and shared tenant
services industry trends (e.g., announced financial results and recent
acquisitions by industry participants including MFS Communications Co. Inc.,
Frontier Corp. and WorldCom Inc.), and S.G. Warburg's experience in executing
other acquisitions and strategic advisory assignments for telecommunications
companies, S.G. Warburg and the Steering Committee proposed the following 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. S.G.
Warburg presented these four alternative courses to the full Board on October
19-20, 1995. The proposed Merger between STI and FII was recommended by S.G.
Warburg as the most viable alternative because: (a) it represented the most
effective means to improve the share price performance of STI; (b) the Surviving
Corporation would represent the largest player in the shared tenant services
industry; (c) the proposed Merger would enhance the management depth of STI; and
(d) financial analysis indicated that at the value range proposed by FII, the
Merger could be expected to have a favorable financial impact on STI. S.G.
Warburg further discussed the terms of a proposed business combination with FII
and presented analyses, described below, to address the proposed amount of
consideration put forth by FII.
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
<PAGE>
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.
On September 20, 1995, The Fairchild Corporation ("TFC") made a public
announcement that it was either going to sell the telecommunications business of
FII or conduct an initial public offering of the stock of a newly reorganized
FII consisting only of the telecommunications business. As a result of such
announcement, STI's Chairman, Anthony D. Autorino initiated contact with Jeffrey
J. Steiner on September 29, 1995, Chairman of TFC, regarding a possible
acquisition by STI of the telecommunications business of FII and they agreed to
hold a meeting on October 3, 1995. In addition to Mr. Autorino and Mr. Steiner,
a representative of S.G. Warburg and other STI officers attended the October 3rd
meeting. At such meeting, the parties discussed the acquisition of FII by STI.
Mr. Steiner informed STI that FII was very shortly thereafter expected to file a
registration statement in connection with its initial public offering, that the
investment bankers handling the initial public offering had valued the
telecommunications business at $300,000,000 and that a purchase price for the
telecommunications business would have to approximate that amount. Additionally,
due to the significant adverse tax impact on TFC of an outright sale of FII's
communications assets, Mr. Steiner advised STI that the only acceptable approach
to an acquisition by STI was a merger without recognition of gain by TFC for tax
purposes.
On October 5, 1995, Messrs. Autorino and Steiner met with Richard Ivers
and other representatives of CS First Boston Corporation ("First Boston") to
discuss financing the transaction. First Boston concluded from such meeting that
First Boston would examine whether it was willing to raise the financing for the
transaction and whether it could provide a "highly confident" letter to STI in
connection therewith.
Between October 5 and October 10, 1995, Mr. Autorino and Mr. Steiner
had numerous telephone conversations discussing the various points of the
Merger. On October 10, 1995, Mr. Autorino and certain other STI officers met
with representatives of First Boston and S.G. Warburg to discuss deal structure,
components of the purchase price and financing. Between October 10 and October
16, 1995, STI conducted numerous discussions with representatives of First
Boston and S.G. Warburg to work out more specific terms. On October 16, 1995,
Mr. Autorino conversed with Mr. Steiner to finalize the specifics of the
transaction for presentation to their respective Boards, at which time they
agreed on the transaction structure and a payment structure involving the
issuance of securities and the assumption of certain liabilities. Although the
basic terms of the transaction were extablished as of such time, Messers.
Autorino and Steiner continued discussions and had meetings on October 26 and 30
and November 7, 1995 relative to addressing specific issues up to the time of
the Merger Agreement was executed.
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 Committee as described above. For the
reasons set forth above, S.G. Warburg recommended that STI attempt to pursue a
merger with a strategically appropriate candidate. As part of its report to the
Board,
<PAGE>
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:
o A review of the four alternatives described above.
o An overview of the nature of FII's business, its strategy and its recent
financial performance.
o A preliminary valuation of FII consisting of an analysis of comparable
companies, precedent transactions, and discounted cash flow. 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 An analysis of the pro forma impact of the Merger on STI's capital
structure.
o A summary of the advantages and issues of the Merger.
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.
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.
STI thus 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 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
<PAGE>
Indemnification"), was to have TFC and RHI indemnify STI for all such
liabilities whether existing at the time of the Merger or arising thereafter
pursuant to a certain Indemnification Agreement, which liabilities are any and
all losses, liabilities and damages or actions or claims (or actions or
proceedings, whether commenced or threatened) in respect thereof ("Losses")
resulting from any liability or claims (including without limitation counsel
fees and expenses of STI in the event RHI and TFC fail to assume the defense
thereof) which related to the operations of FII or any of its subsidiaries prior
to the consummation of the Merger except for Losses related to FII
telecommunications business and the liabilities specifically assumed by STI
pursuant to the Merger Agreement. In addition, two TFC affiliates are to
indemnify STI indefinitely for liabilities arising out of the respective
aircraft fasteners and industrial mold businesses pursuant to certain
Indemnification Agreements, which liabilities are any and all Losses resulting
from any liability or claims (including without limitation counsel fees and
expenses of STI in the event the TFC affiliates fail to assume the defense
thereof) which related to the aerospace and industrial fasteners business as
previously owned and conducted by FII prior to the consummation of the Merger.
Notwithstanding such Indemnification Agreements, STI will not be released from
its obligations with respect to the Non-communications Liabilities as a matter
of law. Accordingly, to the extent RHI is unable to meet its obligations under
the Indemnification Agreement, STI will be required to satisfy in full any of
the Non-communications Liabilities not satisfied by RHI. RHI is primarily a
holding company and, therefore, any claim by STI pursuant to the Indemnification
Agreement will be effectively subordinated to the creditors of RHI's
subsidiaries. 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", "Proposal to
Approve the Merger and Amendments - Additional Agreements", and ""Consolidated
Financial Statements of FII" (not taking into account the FII Recapitalization).
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 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. In the
period from the October 19-20 Board Meeting, the management of STI and FII
continued to conduct a detailed review of personnel and rental office
requirements, the terms of existing long-distance contracts of the two companies
and consolidation of advertising/marketing and employee benefits programs. The
effect of this review, and a discussion of these revised estimates with the
management, was to increase the previously-forecast estimated annual synergies
included in S.G. Warburg's analysis by approximately $1 million per annum in the
period 1997 through 2000. 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:
<PAGE>
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.
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.
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;
<PAGE>
(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.
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.
Factor (i) was particularly significant to the Board's recommendation because of
the intense level of analysis that S.G. Warburg performed with respect to the
valuation of FII, the liabilities of FII and the prospective earnings that could
be achieved by such a merger. Factors (ii), (iii) and (iv) were particularly
significant because these were items that could directly affect shareholder
value.
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."
REQUIRED FINANCING AND EFFECTS THEREOF
In order to pay the Preferred Consideration (approximately
$40,000,000), repay $125,000,000 in face principal amount of the FII Senior
Notes and interest and premiums thereon and pay an amount of bank and other
indebtedness of FII equal to approximately $58,500,000 and to refinance STI's
current borrowing facilities, STI plans to borrow the requisite funds through
bank financing and the issuance of senior unsecured debt instruments
concurrently with the Merger (the "Financing"). STI has received a letter from
CS First Boston Corporation ("First Boston"), dated November 15, 1995 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 intends to raise the $260,000,000 through the private
placement of debt securities, the closing of which will occur concurrently with
the Merger, which is currently anticipated to take place mid to late February
1996. STI and FII have paid First Boston $1,000,000 for the letter which is
creditable against the $7,500,000 payable to First Boston upon consummation of
the Financing in connection with the Merger. There can be no assurance that
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."
The terms of the Financing will contain a number of significant
covenants that will, among other things, restrict the ability of STI to dispose
of assets or merge, incur debt, pay dividends, repurchase or redeem capital
stock and indebtedness, create liens, make capital expenditures and make certain
investments or acquisitions and otherwise restrict corporate activities. The
bank indebtedness
<PAGE>
will be secured primarily by the cash, cash equivalents, inventory, accounts
receivable, equipment, intangibles (to the extent necessary to realize on such
inventory and accounts receivable) and bank accounts of STI. In addition, the
terms of the Financing will contain, among other covenants, requirements that
STI maintain specified financial ratios, including maximum leverage and minimum
interest coverage, and minimum working capital.
The breach of any of these covenants would result in a default under
the bank indebtedness. In the event of any such default, depending on the
actions taken by the lenders, the lenders could elect to declare all amounts
borrowed under the bank indebtedness, together with accrued interest and other
fees, to be due and payable or apply all the available cash of STI to repay such
borrowings or to collateralize letters of credit (in which event cash would not
be available to STI for other purposes). If STI were unable to repay any such
borrowings when due, the lenders could proceed against all the collateral.
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.
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 for the three years ended June 30, 1995 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
<PAGE>
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 as described in detail below, See "The Proposed Merger, Valuation
Analyses -- Introduction to Comparable Companies and Precedent Transaction
Analysis"; "The Proposed Merger -- Valuation Analyses, Analysis of Public
Trading Valuation of Selected Comparable Companies" and "The Proposed Merger --
Valuation Analyses, Analysis of Selected Precedent 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 a
discounted cash flow analysis on the pro forma combined company's financial
projections for the period 1995 through 2000 and calculated the expected rate of
return which STI Shareholders might realize, assuming Management's projections
for the pro forma combined company were achieved."
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 discussions which had commenced between
STI and FII and reviewed materials relating to the following matters: (i) the
four strategic alternatives described above (See "Background of the Merger")
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. At the October 19-20, 1995 meeting, 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.
This action was deemed by S.G. Warburg to be the most effective means to
increase shareholder value and address issues concerning STI management depth.
The proposed Merger between STI and FII was recommended by S.G. Warburg as the
most viable alternative because: (a) it represented the most effective means to
improve the share price performance of STI; (b) the Surviving Corporation would
represent the largest player in the shared tenant services industry; (c) the
proposed Merger would enhance the management depth of STI; and (d) financial
analysis indicated that, at the value range proposed by FII, the Merger could be
expected to have a favorable financial impact on STI.
<PAGE>
November 9, 1995 STI Board Presentation
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 adjusted market capitalization to latest 12
months sales, earnings before interest, taxes, depreciation and amortization
("EBITDA"), the sum of (x) EBITDA and (y) selling, general and administrative
("SG&A") expenses, and earnings before interest and taxes ("EBIT") as well as
market values as multiples to latest 12 months net income and estimated fiscal
1995 and 1996 net income for both industries. These were deemed to comprise all
material comparable company valuation parameters. S.G. Warburg compared market
values as multiples to latest 12 months and estimated fiscal 1995 and 1996 net
income for comparable companies in 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).
<PAGE>
S.G. Warburg compared adjusted market capitalization to 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: (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 the implied multiples paid in relation to
revenues, EBITDA, the sum of (x) EBITDA and (y) SG&A Expenses of the selected
mergers and acquisitions, EBIT and net income. S.G. Warburg compared these
multiples with the implied multiples under the terms of the Merger. S.G. Warburg
deemed the only material precedent transaction valuation parameters to be
implied multiples paid in relation to revenues. EBITDA and the sum of (x) EBITDA
and (y) SG&A expenses."
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 of the companies being compared, macroeconomic factors and
securities market performance at the time of
<PAGE>
valuation 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.
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 securities market performance at the time of the
valuation, 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
<PAGE>
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 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.
<PAGE>
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 Fairchild Holding Corp., a company to be
formed in the FII Recapitalization 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 whether arising before or after the Merger. The Indemnification
Agreement notwithstanding, STI will not be released from its obligations with
respect to the Non-communications Liabilities as a matter of law. Accordingly,
to the extent RHI is unable to meet its obligations under the Indemnification
Agreement, STI will be required to satisfy in full any of the Non-communications
Liabilities not satisfied by RHI. RHI is primarily a holding company and,
therefore, any claim by STI 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 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 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.
See FII's Consolidated Financial Statements (pre-FII Recapitalization) for a
description of liabilities as of the dates thereof.
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) at the time of the Merger RHI
will have no plan or intention at the time of the Merger 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.
<PAGE>
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. 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.
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) at the time of the Merger RHI will have 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.
<PAGE>
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. 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. 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 directors to purchase up to
1,500,000 shares of Common Stock as determined by the Compensation Committee.
Although the Compensation Committee has not approved specific issuances under
the 1996 Plan, the Compensation Committee could grant options to Mr. Autorino,
Mr. Steiner and other directors and executive officers of the Surviving
Corporation after the Effective Date of the Merger which could increase the
ownership of such individuals.
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 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".
<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. All of the
material terms of the Merger Agreement have been described and/or summarized in
this Proxy Statement and there are no other terms of the Merger or the Merger
Agreement which have not been described in this Proxy Statement or the Exhibits
hereto which are material to a Stockholder's understanding of the Merger.
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, RHI, the sole holder of FII common stock will receive (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. 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. On a fully diluted basis
(assuming the issuance and exercise of all options reserved (1,500,000) under
STI's 1996 Equity Incentive Plan), RHI will own approximately 39% and all other
holders will own approximately 61%. If any officer or director of RHI is issued
any options under the 1996 Equity Incentive Plan, RHI's and such individuals'
aggregate beneficial ownership position could be increased. The Merger in and of
itself, therefore, will not result in RHI having voting control of the Surviving
Corporation. The fact that RHI does not attain voting control notwithstanding,
RHI will nevertheless be able to exert considerable control over the Surviving
Corporation in light of the fact that it will own 41% of the outstanding shares
of Common Stock, and in light of the terms of the Shareholders Agreement. See
"Additional Agreements" and "Interests of Certain Persons in the Merger".
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
<PAGE>
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 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 10 employees, each with annual base salaries
exceeding $100,000 and with aggregate annual base salaries aggregating
approximately $1,300,000. 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. Concurrently
with the Merger, Mr. Steiner and Mr. Borer will enter into employment agreements
with the Surviving Corporation. Their base salaries under the aforesaid
employment agreements will be $350,000 and $250,000 respectively.
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").
<PAGE>
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 and release all collateral held as
security for the indebtedness under the FII Senior Notes, (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 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) Shared Technologies Cellular, Inc. STC 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
<PAGE>
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 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.
The reason for the Shareholders' Agreement is to achieve the resulting
effects thereof which are to blend the perceived complementary talents of the
two management groups for an extended period and to maintain the continued
interest, through continuity of ownership, of RHI and its owners and Mr.
Autorino in the operational and financial success of the Surviving Corporation.
STI and FII managements believe that these results will assist in sustaining and
improving shareholder value in the Surviving Corporation.
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), for not less than three years and until such time as TFC's audited
balance sheet reflects 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 has
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.
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
<PAGE>
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).
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) 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 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
<PAGE>
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;
(0) Bymutual 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
<PAGE>
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 (unless such termination is later than February 28,
1996), 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 consolidated 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, 1994, 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
Consolidated 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, 1994, or to project STI's results of
operations or financial position for any future period or at any future date.
The Pro Forma Consolidated 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>
(A) (B)
Recapitalize Reclassify STC Pro Forma Pro
In thousands STI FII FII to Equity Adjustments Forma
- ------------ ------- --------- ------------- ----------- ----------- --------
Basis
CURRENT ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Cash $1,410 $ - $(880) $530
Accounts receivable, less allowance 11,588 23,036 (2,241) 32,383
for doubtful accounts
Other current assets 1,345 2,773 (480) 3,638
Net current assets of operations 53,391 (53,391) -
transferred to
RHI
Deferred income taxes 550 550
--------- ------------ ------------- ------------- ------------- ---------
Total current assets 14,893 79,200 (53,391) (3,601) - 37,101
------ ------ -------- ------- ------------- ------
Equipment, at cost:
Telecommunications equipment 29,500 77,289 (1,314) A (33,513) 71,962
Office and data processing equip- 6,132 7,234 (440) 12,926
ment --------- --------- ------------- ------------- ----------- ----------
35,632 84,523 (1,754) (33,513) 84,888
Less - Accumulated depreciation (18,063) (33,513) 592 A 33,513 (17,471)
-------- -------- ------------- ------------ ------ -----------
17,569 51,010 - (1,162) - 67,417
------ ------ ------------- ------------- ------------ ----------
Other Assets 14,617 37,694 (3,610) A (30,510) 268,699
2,903 A (240,105)
C 7,500
Net non-current assets transferred 184,422 (184,422)
to RHI
---------- --------- -----------
Total Assets $47,079 $352,326 ($237,813) ($5,470) $217,095 $373,217
============ ======= ======== ========== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Shared Technologies Fairchild Inc.
Pro Forma Consolidated Balance Sheet
September 30, 1995
(unaudited)
(A) (B) Pro Forma Pro Forma
Recapitalize Reclassify STC Adjustments
In thousands STI FII FII to Equity Basis
CURRENT LIABILITIES:
<S> <C> <C> <C> <C> <C> <C>
Notes payable and current portion
of long-term debt and capital
lease obligation $2,438 $514 $(7) G $(1,600) $1,345
Accounts payable 10,664 14,068 (3,770) 20,962
Accrued expenses 2,666 6,213 F 7,000 12,879
G 7,500
G (10,500)
Advanced billings 1,248 3,581 (29) 4,800
-------- --------- --------- ---------- ----------- ----------
Total current liabilities 17,016 24,376 - (3,806) 2,400 39,986
-------- --------- --------- --------- ---------- ----------
Long-Term Debt and Capital Lease
Obligations, 4,012 180,501 (1) G (182,773) 239,739
less current portion
G 238,000
Post retirement benefits 104 104
-------- --------- --------- ----------- ----------- ----------
Minority interest in Net Assets of 1,663 (1,663) -
-------- ---------- --------- ----------- ----------- ----------
Subsidiaries
Redeemable Put Warrant 416 416
-------- ---------- --------- ----------- ----------- ----------
FII Series A preferred stock 19,112 G (19,112) -
FII Series C preferred stock 24,015 G (24,015) -
STFI Cumulative preferred stock F 25,000 25,000
STFI Special preferred stock F 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 F (230,200) -
Common Stock 34 140 F (140) 36
F 2
Additional paid-in capital 44,647 2,575 F (2,575) 68,645
F 23,998
Translation adjustment -
Accumulated deficit (20,723) (128,697) (237,813) F 366,510 (20,723)
-
Obligations to issue common stock
Total stockholders' equity 23,972 104,218 (230,813) - 152,468 47,972
------ ------- --------- --------- --------- ------
Total liabilities and $47,079 $352,326 ($237,813) ($5,470) $217,095 $373,217
stockholders' equity ======= ======== ========== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Shared Technologies Fairchild Inc.
Pro Forma Consolidated Statement of Operations
For the Year Ended
December 31, 1994
(unaudited)
(D)
(E) Pro Forma
Adjust FII (A) (C) (C) (C) Adjustments
In thousands to Recapitalize OTM JWP Access for
- ------------ -
STI FII Calendar FII Acquisition Acquisition Acquisition Acquisitions
Year
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $45,367 $109,741 $(28,778) $ 3,454 $46,499 $ 9,181
Cost of Revenue 26,172 81,652 (23,484) 2,254 34,403 6,384 56
------ -------- --------- - ------- ------- -------- --------
Gross Margin 19,195 28,089 (5,294) 1,200 12,096 2,797 (56)
Selling, General &
Administrative Expenses 16,972 9,836 (3,157) 1,214 12,636 2,496 128
106
282
60
Operating Income 2,223 18,253 (2,137) - (14) (540) 301 (632)
Minority interest in
inet income of subsidiaries (128)
Equity in earnings of STC
Interest Expense (522) (21,280) 617 (151) 101 (67)
Interest Income 163 28
--- -------- -------- -------- ------- ------- -------- --------
Net Income before taxes 1,736 (3,027) (1,520) - (165) (439) 329 (699)
Income tax credit 550
--- -------- -------- -------- ------- ------- -------- --------
Net income before preferred
dividends 2,286 (3,027) (1,520) - (165) (439) 329 (699)
Operating results of operations
transferred to RHI (9,332) 9,332
Preferred Stock Dividends (478) (3,902) (60)
----- --------- -------- -------- ------- ------- -------- ---------
$1,808 ($16,261) ($1,520) $9,332 $(165) $(439) $329 $(759)
====== ========= ========= ======== ======== ======== ======== =========
Income (Loss) per Common Share $ 0.27
Weighted Average Number of Common
Shares Outstanding 6,792
=====
</TABLE>
<TABLE>
<CAPTION>
(B)
Reclassify
STC Pro Forma Pro Forma
In thousands to Equity Adjustments STFI
- ------------ - ----------- ----
Basis
<S> <C> <C> <C>
Revenues $(10,217) $175,247
Cost of Revenue (5,293) J (830) 121,314
--------- --------- ---------
Gross Margin (4,924) 830 53,933
Selling, General &
Administrative Expenses (4,274) H 4,011 37,739
J (2,513)
L (58)
Operating Income (650) (610) 16,194
Minority interest in
inet income of subsidiaries 85 (43)
Equity in earnings of STC 517 517
Interest Expense 65 I (5,133) (27,291)
M (921)
Interest Income (17) 174
--------- --------- ---------
Net Income before taxes - (6,664) (10,449)
Income tax credit 550
-------- --------- ---------
Net income before preferred
dividends - (6,664) (9,899)
Operating results of operations
transferred to RHI
Preferred Stock Dividends K 402 (4,038)
-------- -------- ----------
$ - $(6,262) $(13,937)
======== ========== ==========
Income (Loss) per Common Share $(1.09)
Weighted Average Number of Common
Shares Outstanding 6,000 12,792
========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Shared Technologies Fairchild Inc.
Pro Forma Consolidated Statement of Operations
For the Nine Months Ended
September 30, 1995
(unaudited)
(D)
(E) (A) (C) Pro Forma (B)
Adjust FII Recapitalize OTM Adjustments Reclassify STC
In thousands STI FII to FII Acquisition for to Equity Basis
- ------------ --- --- ----------- ----------- ---- ---------------
Calendar Acquisitions
Year
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $43,674 $33,138 $66,790 $1,958 $(9,160)
Cost of Revenue 26,628 25,049 50,300 1,233 (5,531)
------ -------- -------- - ------- -------- ---------
Gross Margin 17,046 8,089 16,490 725 (3,629)
Selling, General & Admini-
strative Expenses Field 16,116 3,348 6,411 626 64 (4,321)
Operating Income 930 4,741 10,079 - 99 (64) 602
Minority interest in net
loss of subsidiaries 213 (213)
Gain on sale of subsidiary
stock 1,375
Equity in (loss) of STC (411)
Interest Expense (574) (5,490) (10,574) (119) (34) 24
Interest Income 130 (2)
--- -------- -------- -------- ------- -------- ---------
Net Income 2,074 (749) (495) - (20) (98) -
Operating results of opera-
tions
transferred to RHI 1,143 (1,143)
Preferred Stock Dividends (299) (975) (1,950)
----- --------- --------- -------- ------- -------- --------
Net Income Applicable to
Common Stock $1,775 ($581) ($2,445) ($1,143) $(20) ($98) $ -
====== ========= ========= ========= ======== ========= ========
Income (Loss) per Common
Share $0.20
=====
Weighted Average Number of
Common Shares Outstanding 8,698
=====
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Adjustments STFI
In thousands ----------- -------
- ------------
<S> <C> <C>
Revenues $136,400
Cost of Revenue J$ (1,373) 96,306
-------- ---------
Gross Margin 1,373 40,094
Selling, General & Admini-
strative Expenses Field H 2,678 22,392
J (2,552)
L (68)
Operating Income 1,315 17,702
Minority interest in net
loss of subsidiaries -
Gain on sale of subsidiary
stock 1,375
Equity in (loss) of STC (411)
Interest Expense I (3,159) (20,617)
M (691)
Interest Income 128
--------- ---------
Net Income (2,535) (1,823)
Operating results of opera-
tions -
transferred to RHI
Preferred Stock Dividends K 300 (2,924)
-------- ----------
Net Income Applicable to
Common Stock $(2,235) $(4,747)
========== ==========
Income (Loss) per Common
Share $(0.32)
==========
Weighted Average Number of
Common Shares Outstanding 6,000 14,698
========= =========
</TABLE>
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(A) The pro forma consolidated financial statements were adjusted to reflect the
FII Recapitalization prior to the merger. See footnote 1. to the Fairchild
Industries, Inc. and Subsidiary October 1, 1995 consolidated financial
statements.
(B) The pro forma consolidated financial statements give effect to the issuance
by Shared Technologies Cellular, Inc. ("STC") of approximately $3,000,000 of
preferred stock in December 1995 which resulted in STI's loss of voting control
of STC. STC was a consolidated subsidiary of STI. The pro forma balance sheet
was adjusted to account for STC on the equity basis. All assets and liabilities
of STC were eliminated and a non current asset of approximately $2,903,000 was
recorded to reflect STI's equity investment in STC at September 30, 1995. The
pro forma consolidated statements of operations were adjusted to account for
STC's income or loss on the equity basis. STI will continue to provide certain
management and administrative services to STC pursuant to a Management Agreement
through calendar year 1996. A monthly fee of $25,000 (not to exceed $200,000 per
year) is payable by STC to STI unless in any month STC has a pre-tax loss or the
amount of such fee would exceed pre-tax profit prior to the payment of such fee.
(C) The pro forma consolidated financial statements include adjustment columns
to reflect the acquisitions of Office Telephone Management Inc. (OTM), JWP
Telecom, Inc. (JWP), and Access Telecommunication Group, L.P. (Access) as if
they occurred on January 1, 1994. OTM was acquired by STI in June 1995. See
footnote 2. to the Shared Technologies Inc. September 30, 1995 consolidated
financial statements. JWP was acquired in November 1994 by FII. See footnote 2.
to the Fairchild Industries, Inc. and Subsidiary October 1, 1995 consolidated
financial statements. Access was acquired in June 1994 by STI. See footnote 4.
to the Shared Technologies Inc. December 31, 1994 consolidated financial
statements.
(D) Certain adjustments were recorded to reflect the acquisitions of OTM, JWP,
and Access on a pro forma basis.
Adjustments for goodwill amortization and interest expense were recorded related
to the OTM acquisition for both the 1995 and 1994 consolidated statements of
operations. The OTM acquisition generated $1,900,000 in goodwill and is being
amortized over 15 years. An adjustment of $64,000 and $128,000 was recorded for
additional goodwill amortization for the periods ended September 30, 1995 and
December 31, 1994, respectively. The OTM acquisition required the issuance of a
note payable for $800,000. An adjustment for additional interest expense was
recorded of $34,000 and $67,000 for the periods ended September 30, 1995 and
December 31, 1994, respectively.
Adjustments for additional goodwill amortization and depreciation expenses were
recorded related to the JWP acquisition. An adjustment of $282,000 for goodwill
amortization was recorded for the period ended December 31, 1994. Additional
depreciation expense, related to fair market value of fixed assets acquired, of
$60,000 was recorded for the period ended December 31, 1994.
Adjustments for additional goodwill amortization expense, depreciation expense
on fixed assets increased to fair market value, and preferred stock dividends
related to Series E preferred stock issued with the Access acquisition were
recorded. Goodwill created in the acquisition equaled $8,500,000 and is being
amortized over 40 years. An adjustment of $106,000 was recorded to reflect
additional goodwill amortization expense for the period ended December 31, 1994.
Additional depreciation expense, related to the fair market value of fixed
assets acquired of $56,000 was recorded for the period ended December 31, 1994.
<PAGE>
Additional preferred stock dividends of $60,000 was recorded to reflect an
additional six months on 400,000 shares with an 8% coupon and a value of $3.75
per share. See footnote 9 to the STI December 31, 1994 consolidated financial
statements.
(E) The FII historical statements of operations were based on a fiscal year
ended June 30. The pro forma consolidated statements of operations were adjusted
to present FII on a December 31 (calendar year) basis.
(F) The pro forma consolidated balance sheet gives effect to the proposed merger
of FII, after the FII Recapitalization, into STI by combining the respective
balance sheets of the two companies at September 30, 1995, on a purchase
accounting basis. The merger was accounted as a purchase through the issuance of
$69,000,000 in STI equity. The STI equity consisted of 6,000,000 shares of
common stock at an estimated market value of $4 per share, shares of 10%
cumulative convertible preferred stock with an aggregate liquidation preference
of $25,000,000, and shares of special preferred stock with an aggregate
liquidation preference of $20,000,000. The purchase price was allocated at fair
value as follows (amounts in thousands):
<TABLE>
<S> <C>
Current assets $ 25,809
Fixed Assets 51,010
Goodwill 240,105
Non current assets 7,184
Accrued liabilities for closing costs (7,000)
Current liabilities (24,376)
Long term debt (180,501)
FII series A preferred stock (19,112)
FII series C preferred stock (24,105)
---------
Post retirement benefits (104)
----------------------------------------------------------------------------------
Net purchase price $ 69,000
========
</TABLE>
(G) New debt has been recorded in the pro forma consolidated balance sheet to
reflect the issuance of $238,000,000 in new debt; $100,000,000 in zero coupon
bonds and $138,000,000 in term loans. Proceeds from these borrowings is expected
to be used as follows: (amounts in thousands)
<TABLE>
<S> <C>
Repurchase of FII series A preferred stock $19,112
Repurchase of FII series C preferred stock 24,015
Retirement of debt acquired from FII 180,501
Retirement of State Street debt 4,000
Payment of finance fees 7,500
Payment of various acquisition costs 2,872
------
Total proceeds $238,000
</TABLE>
The pro forma consolidated balance sheet assumes all these events will take
place with the merger. All interest expense related to retired debt and all
preferred stock dividends related to retired preferred stock were eliminated in
the pro forma consolidated statements of operations. See
<PAGE>
footnotes (E) and (G). $7,500,000 in finance fees were capitalized and recorded
as a non current asset. See footnote (I) and (M).
(H) The purchase accounting for the merger resulted in $240,000,000 of goodwill
which will be amortized over 40 years. Certain intangible assets acquired from
FII were given zero value and the corresponding goodwill amortization was
eliminated. The pro forma consolidated statements of operations reflect an
adjustment to goodwill amortization of $2,678,000 and $4,011,000 for the periods
ended September 30, 1995 and December 31, 1994 respectively. The following table
details the calculation of the adjustment by period (amounts in thousands):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Goodwill amortization $4,500 $6,000
FII amortization eliminated (1,822) (1,989)
------- -------
Net adjustment $2,678 $4,011
====== ======
</TABLE>
(I) Interest expense, 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 on January 1, 1994. The following
table details the calculation of the adjustment by period (amount in thousands):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
$100 million in zero coupon bonds,
estimated 13% interest $ 9,750 $ 13,000
138 million in bank debt estimated 9% interest 9,315 12,420
179 million in various retired FII debt (15,906) (20,287)
-------- --------
Net adjustment $ 3,159 $ 5,133
======= =======
</TABLE>
A 1/8% change in the estimated interest rates for the $100,000,000 in zero
coupon bonds and the $138,000,000 in bank debt ($238,000,000 in new debt) would
result in a change in interest expense of $297,500.
(J) The pro forma consolidated statements of operations include the estimated
effect of certain cost savings and increases associated with the consolidation
of the operations of STI and FII. The following table details the components of
the adjustment by period: (amounts in thousands)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Net S,G&A savings $2,552 $2,513
Network savings 1,373 830
----- ---
Total adjustment $3,925 $3,343
====== ======
</TABLE>
(K) Preferred stock dividends in the pro forma consolidated statements of
operations were adjusted to reflect the change in outstanding preferred stock
described in notes F and G. The net effect was to decrease preferred stock
dividends by approximately $300,000 and $402,000 for
<PAGE>
the periods ended September 30, 1995 and December 31, 1994 respectively. The
following table details the components of the adjustment by period: (amounts in
thousands)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Preferred stock dividends on new preferred
stock (footnote F) $2,625 $3,500
Elimination of preferred stock dividends on
retired preferred stock (footnote A) (2,925) (3,902)
------- -------
Net adjustment $300 $402
==== ====
</TABLE>
(L) STI recorded federal alternative minimum tax for both 1994 and 1995. Income
tax expense was adjusted to eliminate the federal alternative minimum income tax
as net losses before net operating loss carryforwards were generated for each of
the pro forma consolidated statements of operations presented. The pro forma
consolidated statements of operations have also been adjusted to reduce state
income taxes to an estimated minimum required amount. This resulted in a
reduction of income taxes of $68,000 and $58,000 for the periods ended September
30, 1995 and December 31, 1994 respectively.
(M) $7,500,000 in financing fees associated with the assumption of $238,000,000
in debt were capitalized. Additional interest expense was recorded for each
period presented based on an amortization period of 10 years for $3,500,000 of
the fees and 7 years for the remaining $4,000,000. The allocation is based on
the respective amounts of zero coupon bonds and bank debt assumed and the
respective lives of each. The adjustment resulted in additional interest expense
of $691,000 and $921,000 for the periods ended September 30, 1995 and December
31, 1994 respectively.
<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 and the nine months ended September 30, 1995 and 1994.
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>
NINE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30,
Statement of Operations Data: 1994(1) 1993 1992 1991 1990 1995(2) 1994(1)
- ------------------------------------------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $45,367 $25,426 $24,077 $23,172 $21,804 $43,675 $31,514
Gross margin 19,195 10,912 9,254 6,358 5,786 17,046 13,524
Selling, general and
administrative expenses 16,972 10,102 9,959 10,717 10,246 16,116 11,760
Operating income (loss) 2,223 810 (705) (4,359) (4,460) 930 1,764
Interest expense, net (359) (438) (290) (1,268) (950) (444) (158)
Minority interest in net (income)
losses of subsidiaries (128) (82) (37) 4 29 213 (43)
Loss on settlement agreement - - - - (489) - -
Gain on sale of subsidiary stock - - - - - 1,375 -
Extraordinary Item -
(Loss) gain on restructuring - (150) 3,756 - - - -
Income tax benefits 550 - - - - - -
Net income (loss) 2,286 140 2,724 (5,623) (5,869) 2,074 1,563
Net income (loss) per common
share before extraordinary item - (.01) (.33) - - - -
Net income (loss) per
common share .27 (.04) .59 (1.59) (1.63) .20 .21
Weighted average common
shares outstanding 6,792 5,132 4,063 3,730 3,601 8,698 5,699
Cash dividends declared
per preferred share .29 .32 .30 .30 - .22 .22
Cash dividends paid
per preferred share .29 .32 .38 .18 - .22 .22
Cash dividends declared or
paid per common share - - - - - - -
Balance Sheet Data:
Period End Balances
Working capital deficit (3,691) ($ 3,874) ($ 4,506) ($15,615) ($ 5,751) ($2,124) ($2,199)
Total assets 37,925 20,601 18,752 18,436 14,531 47,079 36,737
Notes payable, convertible
promissory notes payable,
other long-term debt (incl.
current portion) 4,727 3,719 4,745 10,030 6,927 6,450 5,305
Stockholders' equity (deficit) 20,881 9,302 6,034 (3,148) (999) 23,971 20,414
</TABLE>
<PAGE>
(1) The 1994 results include the acquisition of Access Telecommunications Group,
L.P. in June 1994 and the Acquisitions of Road and Show South in December 1993
and Road and Show East in October 1993.
(2) Includes a full period of the Access Telecommunications Group, L.P.
acquisition in June 1994.
<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 $3,800,000 of
interest bearing debt since June 1994. This debt was incurred as a result of
STI's bank financing in May, 1994. The financing provides for a $4,000,000
secured revolving credit line, aggregate draws converted semi-annually to three
year term loans with level monthly amortization and a $1,000,000 two year term
loan, six month interest only, with quarterly amortization and a balloon payment
of $700,000. These loans bear interest at the bank's prime rate plus 2% and are
secured by STI's assets. STI has issued a warrant to the bank for shares equal
to 2.25% of STI's outstanding common stock on a fully diluted basis. The
weighted average debt for the nine-month period ended September 30, 1995 was
approximately $5,348,000 at a weighted rate of 10.74%.
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.
<PAGE>
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
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. The
Javits claim of approximately $5,400,000 was filed against STI by the New York
Convention Center Operating Corporation ("CCOC"). In November 1993, the
litigation with CCOC was settled and provided for STI to pay $25,000 and issue a
$550,000 note payable over five years, with no interest.
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.
The pro forma consolidated statements of operations for the year ended
December 31, 1994 result in revenues of $175,200,000, operating profit of
$16,200,000 and a net loss of $14,400,000. The pro forma consolidated statements
of operations for the nine months ended September 30, 1995 result in revenues of
$136,400,000, operating profit of $16,100,000 and a net loss of $5,900,000. The
losses are due to increases in debt and amortization of the goodwill resulting
from the acquisition.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
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").
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 $1,000,000 term note and a $4,000,000 revolver. During 1994 STI
borrowed $1,300,000 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.
<PAGE>
The pro forma consolidated balance sheet as of September 30, 1995 has a
working capital deficit of $2,885,000 and stockholders' equity of $47,972,000.
It is the opinion of management that the Surviving Corporation will generate
sufficient cash flow to sustain its operations for the forseeable future.
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
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, and (iv)
456,842 shares have been reserved for issuance upon conversion of the Series D
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 and (ii) 456,842 shares of Series D Preferred
Stock, $.01 par value per share.
<PAGE>
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.
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.
<PAGE>
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 be
considered a Required Redemption Amount for the next succeeding year and for
each year thereafter until paid.
<TABLE>
<CAPTION>
The Threshold Amount for each year shall be as follows:
Year Ended Threshold
December 31, Amount*
<S> <C>
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
</TABLE>
* 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.
<PAGE>
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............................................ 1,213,169(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%
<PAGE>
Principal Stockholders
Zesiger Capital Group LLC...................................... 1,792,325(15) 21.1%
320 Park Avenue
New York, NY 10022
BEA Associates................................................. 845,150(16) 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
</TABLE>
- -------------------------------
* Less than 1%
(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 11,579 shares of Series D Preferred Stock, which are
convertible into 11,579 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 17,368 shares of Series D
Preferred Stock owned of record by Mr. Autorino's spouse and 17,368
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 Sept-
ember 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 Stockexercisable
as of, or within 60 days after, September 30, 1995.
(16) Includes warrants to purchase 845,150 shares of Common Stock as of, or
within 60 days after September 30, 1995.
(17) 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
$260,000,000.
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 December 22, 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 stock of FII 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 and to release all collateral held as
security. 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
<PAGE>
Federal Acquisition Regulations and Cost Accounting Standards in accounting for
(i) the 1985 reversion to FII of certain assets of terminated defined benefit
pension plans, and (ii) pension costs upon the closing of segments of FII's
business. The ACO has directed FII to prepare 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. None of the amounts estimated for FII's
environmental liabilities are related to the Communications Services segment. 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 for the fiscal years 1995, 1994, 1993, 1992
and 1991 were derived from FII's consolidated financial statements which were
audited by Arthur Andersen LLP, independent auditors. The independent auditors'
report related to fiscal years 1995, 1994 and 1993 is included elsewhere in this
Proxy statement. The selected financial data for the three months ended October
1, 1995 and October 2, 1994 were derived from financial statements prepared by
FII without audit. The financial statements include all adjustments which, in
the opinion of FII Management, are required for a fair presentation of such
financial statements.
<PAGE>
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.
<TABLE>
<CAPTION>
Fiscal Year Ended June Three Months Ended
October 2, October 1,
1991 1992 1993 1994 1995 1994 1995
---- ---- ---- ---- ---- ---- ----
(dollars in thousands except per share amount)
Income Statement Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Sales $ 48,405 $ 58,662 $ 68,639 $ 74,897 $109,741 $ 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)
October 1, 1995
Balance Sheet Data
Working capital $ 41,204 $ 67,334 $ 32,279 $ 23,373 $ 57,342 $ 54,824
Total assets 418,047 432,841 368,084 331,318 351,309 352,326
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 164,557 187,985 126,855 93,175 102,347 104,128
- -------------------------
</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, FII has focused on a strategy of growth both
internally and through acquisitions. From July 1986 to July 1994, FII completed
17 acquisitions in the telecommunications services business, which added
approximately $48,000,000 of annual revenues. The largest acquisition during
this period was the Amerisystems Partnership in September 1990. Amerisystems
added approximately $23,000,000 of annual revenue to FII and enabled FII to
enter ten additional metropolitan markets, including Chicago and Houston.
In December 1992, FII acquired the assets of Office Networks, Inc.,
which added approximately $6,700,000 of annual revenue and enabled FII to enter
the Indianapolis market. Shortly thereafter, FII completed two additional
acquisitions in Indianapolis, making this metropolitan market one of FII's most
profitable.
In November 1994, FII entered the systems business by acquiring the
assets of JWP Telecom, Inc. ("JWP Telecom"). The addition of telecommunications
equipment will allow FII to achieve cost savings as FII's systems and services
businesses continue to consolidate. FII feels that cross-marketing opportunities
are particularly attractive in those metropolitan markets in which FII presently
has an infrastructure in place for its systems business but currently does not
provide services. These existing infrastructures provide FII a means of entering
such systems markets with little or no incremental expense.
Operating income as a percentage of revenues for FII'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 FII is able to realize
cost savings through consolidation of its services and systems business,
management believes operating income 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 FII'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%
Operating income 14% 21%
</TABLE>
<PAGE>
Set forth below are various components of FII'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 and administrative expense.............................................. 7% 7% 8%
Goodwill amortization........................................................... 1% 1% 1%
Operating Income................................................................ 21% 21% 17%
=== === ===
</TABLE>
Q1, 1996 V. Q1, 1995:
Revenues: Total revenues in Q1, 1996 increased 64.7% to $33,100,000
from $20,100,000in Q1, 1995. This increase was mainly the result of an
additional $13,000,000 in system revenues from the acquisition of JWP. Revenue
remained stable 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 $8,100,000
from $5,800,000 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 $3,200,000 from $1,300,000 in Q1, 1995.
Approximately $1,400,000 of the increase was due to the acquisition of JWP. The
remainder was due to wage and salary increases of $400,000 and increased
amortization of intangible assets other than goodwill of $100,000.
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 $2,700,000 from $2,300,000n in Q1, 1995. The increase is
due to the additional depreciation and amortization of approximately $300,000
from the JWP acquisition. In addition, depreciation increased another $100,000
because of significant capital investment in switching equipment installed in
office buildings in the services business.
<PAGE>
FISCAL 1995 V. FISCAL 1994:
Revenues: Total revenues in Fiscal 1995 increased 46.5% to $109,700,000
from $74,900,000 in Fiscal 1994. The JWP acquisition represented the primary
increase by contributing $31,000,000 in additional revenue for Fiscal Year 1995.
The remaining increase was a result of an additional $1,700,000 in sales to
tenants in newly-franchised office buildings, an increase of $1,600,000 in sales
to tenants in existing office buildings already under franchise and other
revenue increases of $500,000.
Gross Profit: Gross profit in Fiscal 1995 increased 28.5% to
$28,100,000 from $21,900,000 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 $9,200,000 from $5,200,000 in Fiscal
1994. Approximately $3,600,000 of the increase was due to the acquisition of JWP
and the remainder was due to approximately $200,000 in wage and salary increases
and increased amortization of intangible assets other than goodwill of $200,000.
Interest Expense, Net: Interest expense in Fiscal 1995 increased 9.2%
to $21,300,000 from $19,500,000 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 $10,300,000 from $8,900,000 in Fiscal 1994. This
increase reflects increased depreciation and amortization of $700,000 associated
with the JWP acquisition. In addition, depreciation increased by $700,000
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 $74,900,000
from $68,600,000 in Fiscal 1993. This increase was due primarily to increased
sales of $1,300,000 to customers in new buildings, $4,900,000 in additional
sales in existing office buildings under franchise and other increases of
$100,000 in revenue.
Gross Profit: Gross profit in Fiscal 1994 increased 11.7% to
$21,900,000 from $19,600,000 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 $5,200,000 from $4,700,000 in Fiscal
1993. The increase was due primarily to $300,000 in additional wage and salary
increases and increased amortization of intangible assets other than goodwill of
$200,000 acquired in the last half of Fiscal 1992.
Interest Expense, Net: Interest expense in fiscal 1994 decreased 16.3%
to $19,500,000 from $20,000,000 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 $8,900,000 from $7,900,000 in Fiscal 1993. The increase
was due to an acquisition
<PAGE>
made in the first half of Fiscal 1992 which contributed $400,000 in depreciation
and amortization and because of significant capital investment in switching
equipment installed in office buildings in the services business which resulted
in an additional $600,000 in depreciation.
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.
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 $4,100,000 and $3,900,000 in
Q1, 1996 and Q1, 1995 respectively. Cash used in acquisition was $600,000 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 $2,200,000 and $1,800,000 in Q1, 1996 and Q1, 1995
respectively. Cash used in operations transferred to RHI was $1,900,000 and
$1,500,000 in Q1, 1996 and Q1, 1995 respectively.
Net cash provided by financing activities was $6,400,000 and $2,000,000
in Q1, 1996 and Q1, 1995 respectively. Proceeds from issuance of preferred stock
in Q1, 1996 was $2,400,000 and in Q1, 1995 was $11,400,000. Cash used in
financing activities for payment of dividends in Q1, 1996 was $1,000,000, and in
Q1, 1995 was $1,000,000. Cash provided by operations transferred to RHI in Q1,
1996 was $5,200,000. Cash used in operations transferred to RHI in Q1, 1995 was
$8,000,000. Capital lease repayments were $200,000 and $400,000 in Q1, 1996 and
Q1, 1995 respectively.
Net cash provided by operating activities was $19,100,000, $11,700,00,
and $13,600,000 in Fiscal 1995, Fiscal 1994, and Fiscal 1993, respectively. The
increase in cash provided by operations was primarily from increased
depreciation and amortization ($1,400,000), and from changes in operations to be
transferred to RHI ($7,900,000). Primarily because of the JWP Telecom
acquisition, billed and unbilled receivables increased by $10,100,000 and
inventory increased by $1,000,000 in Fiscal 1995, but was significantly offset
by an $8,300,000 increase in accounts payable and accrued liabilities.
Net cash used in investing activities was $27,600,000, $14,900,000, and
$19,600,000 in Fiscal 1995, Fiscal 1994 and Fiscal 1993, respectively. Cash used
in acquisitions was $11,600,000 in fiscal 1995 primarily for the JWP Telecom
acquisition and $7,300,000 in Fiscal 1993 primarily for the Office Networks,
Inc. acquisition. Cash used primarily for purchasing telecommunication assets
for office buildings was $10,300,000, $7.,800,000, and $5,800,000 in Fiscal
1995, Fiscal 1994, and Fiscal 1993, respectively. Cash used in operations
transferred to RHI was $5,800,000, $7,100,000 and $6,500,000 in Fiscal 1995,
Fiscal 1994, and Fiscal 1993, respectively.
Net cash provided by financing activities was $9,900,000, $3.,300,000
and $6,000,000 in Fiscal 1995, Fiscal 1994, and Fiscal 1993, respectively.
Proceeds from issuances of preferred stock was $24,400,000, $4,000,000, and
$29,000,000 in Fiscal 1995, Fiscal 1994, and Fiscal 1993, respectively. The
purchase/exchange of preferred stock in Fiscal 1993 used $25,100,000 of cash
provided by financing activities. Cash used in financing activities for payment
of dividends
<PAGE>
was $3,900,000, $3,900,000 and $53,800,000 in Fiscal 1995, Fiscal 1994 and
Fiscal 1993, respectively. Capital Lease repayments were $2,000,000, $3,100,000
and $3,200,000 for fiscal 1995, Fiscal 1994 and Fiscal 1993, respectively. Cash
used in operations transferred to RHI in Fiscal 1995 was $8,800,000, and Fiscal
1993 was $59,100,000. Cash provided by operations transferred to RHI in Fiscal
1994 was $6,100,000.
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 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 -3
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Unaudited Financial Statements
<S> <C>
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
September 30, 1995 (unaudited)................................................. F-11
Audited Financial Statements
Report of Rothstein, Kass & Company, P.C., Independent Auditors..................... F-15
Report of Arthur Andersen LLP, Independent Public Accountants....................... F-16
Consolidated Balance Sheets as of December 31, 1994 and 1993........................ F-17
Consolidated Statements of Operations for the Years Ended
December 31, 1994, 1993 and 1992............................................... F-18
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1994, 1993 and 1992................................... F-19
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1993 and 1992............................................... F-21
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1994, 1993 and 1992............................................... F-23
</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>
F - 4
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>
F - 6
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. 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
==========
The purchase price was paid with $1,335,000 of cash and the issuance of a
$800,000 note.
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 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
3. 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.
4. 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.
5. 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, results of operations and cash flows.
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, results of
operations and cash flows.
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>
F-18
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
========= ========= =========
See accompanying notes to consolidated financial
statements.
</TABLE>
<PAGE>
F-19
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>
F-21
<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 (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)
--------
NET CASH USED IN INVESTING ACTIVITIES (7,171,069) (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)
Deferred registration costs (182,135)
--------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 3,877,016 (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
========= ========= ===========
See accompanying notes to consolidated
financial statements.
</TABLE>
<PAGE>
F-22
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>
F-38
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
operations if the offering is unsuccessful. 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 obligations to issue common
stock and preferred stock which is considered a common stock
equivalent and the effect of options and warrants 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.
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECLASSIFICATIONS - Certain reclassifications to prior years
financial statements were made in order to conform to the 1994
presentation.
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 (Note 9).
<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:
CAPITAL LEASE
YEAR ENDING DECEMBER 31: LONG-TERM DEBT OBLIGATIONS
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
==========
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, the expected term of the loan.
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.
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
<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.
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. The valuation allowance was decreased by $1,418,000
and $211,000, respectively, for the years ended December 31, 1994
and 1993.
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, results of operations and cash
flows.
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>
F-39
FAIRCHILD INDUSTRIES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Post-Recapitalization/Merger Financials
Report of Arthur Andersen LLP, Independent Public Accountants.......................F-40
Consolidated Balance Sheets as of June 30, 1995 and 1994
and October 1, 1995 (unaudited)................................................F-41
Consolidated Statements of Income for the Years Ended June 30, 1995,
1994 and 1993 and the three months ended
October 1, 1995 and October 2, 1994 (unaudited)................................F-43
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended June 30, 1995, 1994, 1993 and 1992 and the three
months ended October 1, 1995 (unaudited).......................................F-44
Consolidated Statements of Cash Flows for the Years Ended June 30,
1995, 1994 and 1993 and the three months ended
October 1, 1995 and October 2, 1994 (unaudited)................................F-45
Notes to Consolidated Financial Statements .........................................F-46
Pre-Recapitalization/Merger Financials
Consolidated Balance Sheets as of June 30, 1995 and 1994............................F-
Consolidated Statements of Earnings - The Three Years Ended
June 30, 1995, 1994, and 1993..................................................F-
Consolidated Statements of Stockholders' Equity - The Three
Years Ended June 30, 1995, 1994, and 1993......................................F-
Consolidated Statements of Cash Flows - The Three Years
Ended June 30, 1995, 1994, and 1993............................................F-
Notes to Consolidated Financial Statements..........................................F-
Report of Independent Public Accountants............................................F-
</TABLE>
<PAGE>
AFTER THE REORGANIZATION TRANSACTIONS DISCUSSED IN NOTE 1 TO FAIRCHILD
INDUSTRIES, INC.'S CONSOLIDATED FINANCIAL STATEMENTS IS EFFECTED, WE
EXPECT TO BE IN A POSITION TO RENDER THE FOLLOWING AUDIT REPORT.
ARTHUR ANDERSEN LLP
JANUARY 9, 1996
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Fairchild Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Fairchild
Industries, Inc. (a Delaware Corporation) as of June 30, 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.
Washington, D.C.,
November 28, 1995
<PAGE>
F-41
FAIRCHILD INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
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 184,422 180,926 220,266
------- ------- -------
Total assets $352,326 $351,309 $331,318
======== ======== ========
The accompanying notes are an integral
part of these financial statements.
</TABLE>
<PAGE>
F-42
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)
--------- --------- ---------
Total stockholders' equity 104,218 102,347 93,175
------- ------- ------
Total liabilities and stockholders' equity $352,326 $351,309 $331,318
======== ======== ========
The accompanying notes are an integral
part of these financial statements.
</TABLE>
<PAGE>
F-43
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 5,206 4,672
Goodwill amortization 176 146 624 578 540
--- --- --- --- ---
OPERATING INCOME 4,741 4,350 18,253 16,082 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) (3,456) (5,613)
Taxes - - - - -
Operating results of operations
transferred to RHI 1,143 1,387 (9,332) (30,531) (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>
F-44
FAIRCHILD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES B
PREFERRED PAID-IN ACCUMULATED
COMMON STOCK STOCK CAPITAL DEFICIT TOTAL
------------ ----- ------- ------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1992 $140 $192,600 $2,230 $ (6,985) $187,985
Net loss - - - (12,257) (12,257)
Issuance of Series B Preferred Stock to parent - 5,000 - - 5,000
Cash dividends to preferred stockholders - - - (3,873) (3,873)
Cash dividends to parent - - - (50,000) (50,000)
BALANCE, June 30, 1993 140 197,600 2,230 (73,115) 126,855
Net loss - - - (33,987) (33,987)
Issuance of Series B Preferred Stock to parent - 4,900 143 - 5,043
Transfer of subsidiary from parent - - 17 (851) (834)
Cash dividends to preferred stockholders - - - (3,902) (3,902)
BALANCE, June 30, 1994 140 202,500 2,390 (111,855) 93,175
Net loss - - - (12,359) (12,359)
Issuance of Series B Preferred Stock to parent - 25,300 88 - 25,388
Transfer of pension plan from parent - - 45 - 45
Cash dividends to preferred stockholders - - - (3,902) (3,902)
BALANCE, June 30, 1995 140 227,800 2,523 (128,116) 102,347
Net Income - - - 394 394
Issuance of Series B Preferred Stock to parent - 2,400 - - 2,400
Cash dividends to preferred stockholders - - - (975) (975)
Paid in capital from parent - - 52 - 52
BALANCE, October 1, 1995 (unaudited) $140 $230,200 $2,575 $(128,697) $104,128
===== ========== ========= ============= ===========
The accompanying notes are an
integral part of these financial statements.
</TABLE>
F-44
<PAGE>
F-45
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 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 (3,925) 1,752 17,748 10,655 17,337
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)
Decrease (increase) in deferred loan cost 164 338 1,399 1,008 (3,703)
Operations transferred to RHI (5,165) (8,030) (8,750) 6,127 59,070
------ ------ ------ ----- ------
Net cash provided by financing 6,569 2,339 11,285 4,258 2,274
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 $ - $ - $ - $ - $ -
===== ===== ====== ====== ======
The accompanying notes are an
integral part of these financial statements.
</TABLE>
<PAGE>
F-60
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 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 Telecommunications Business has no operations or sales
outside of the United States of America.
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.
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:
<TABLE>
<CAPTION>
USEFUL
1995 1994 LIVES
---- ---- -----
(In Thousands)
<S> <C> <C> <C>
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
======= =======
</TABLE>
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).
<TABLE>
<CAPTION>
JUNE 30,
--------
1995 1994
---- ----
<S> <C> <C>
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)
Cumulative Translation Adjustment (8,172) (3,146)
------ ------
Net assets to be transferred $237,802 $246,026
======== ========
</TABLE>
<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) costs upon the closing of segments of the Company's
business. The ACO has directed the Company to prepare cost impact proposals
relating to such plan terminations and segment closings and following receipt of
such cost impact proposals, may seek adjustments to contract prices. The ACO
alleges that substantial amounts will be due if such adjustments are made. The
Company believes it has properly accounted for the asset reversions in
accordance with applicable accounting standards. The Company has had discussions
with the government to attempt to resolve these pension accounting issues.
To date, the stringent Federal, state and local environmental laws and
regulations, which apply to the Company and other aerospace fastener and
industrial product manufacturers, concerning, among other things, the discharge
of materials into the environment and the generation, handling, storage,
transportation and disposal of waste and hazardous materials, have not had a
material effect on the financial condition of the Company.
In connection with its plans to dispose of certain real estate, the
Company must investigate environmental conditions and may be required to take
certain corrective action prior or pursuant to any such disposition. In
addition, management has identified several areas of potential contamination at
or from other facilities owned, or previously owned, by the Company, that may
require the Company to take corrective action or to contribute to a cleanup. The
Company is also a defendant in certain lawsuits and proceedings seeking to
require the Company to pay for investigation or remediation of environmental
matters and has been alleged to be a potentially responsible party at various
"Superfund" sites. Management of the Company believes that it has recorded
adequate reserves in its financial statements to complete such investigations
and take any necessary corrective actions or make any necessary contributions.
None of the amounts estimated for FII's environmental liabilities is related to
the Communications Services Business. No amounts have been recorded as due from
third parties, including insurers, or set off against, any liability of the
Company, unless such parties are contractually obligated to contribute and are
not disputing such liability. The reserves recorded by the Company related to
the litigation discussed above have been included in operations transferred to
RHI.
4. LONG-TERM OBLIGATIONS:
The Company maintains a credit agreement (the "Credit Agreement") with a
consortium of banks, which provides a revolving credit facility and term loans
(collectively the "Credit Facilities"). The Credit Facilities generally bear
interest at 3.75% over the London Interbank Offer Rate ("LIBOR") for the
revolving credit facility and Term Loan VIII, and at 2.75% over LIBOR for Term
Loan VII, respectively. The LIBOR was approximately 6% as of June 30, 1995. The
commitment fee on the unused portion of the revolving credit facility was 1.0%
at June 30, 1995. The Credit Facilities mature March 31, 1997 and are secured by
substantially all the Company's assets. RHI has assumed $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.
The Company is party to several capital leases with interest rates ranging from
5.85% to 15.50%. (See Note 11 for additional capital lease disclosures.)
Annual maturities of long-term debt obligations (exclusive of capital lease
obligations) for each of the five years following June 30, 1995 are as follows:
$14,338,000 for 1996, $121,231,000 for 1997, $1,001,000 for 1998, $125,051,000
for 1999 and $56,000 for 2000.
5. PENSIONS AND POSTRETIREMENT BENEFITS:
PENSIONS
The Company has established defined benefit pension plans covering substantially
all employees. The Company's funding policy for the plans is to contribute each
year the minimum amount required under the Employee Retirement Income Security
Act of 1974. A portion of the Company's pension cost and prepaid pension cost
have been included in operations transferred to RHI.
The following table provides a summary of the components of net periodic pension
cost for the plans:
<TABLE>
<CAPTION>
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 $60,000
which was included in general and administrative expenses. A portion of the
Company's net periodic postretirement benefit cost and accrued postretirement
benefit cost have been included in operations transferred to RHI.
The components of expense for continuing operations in 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%, 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)
Effect of net operating loss 1,610
------
$ -
======
In the opinion of management, adequate provision has been made for all income
taxes and interest, and any tax liability that may arise for prior periods will
not have a material effect on the financial condition or results of operations
of the Company.
The Company has entered into a tax sharing agreement with its parent whereby the
Company is included in the consolidated federal income tax return of TFC. The
Company makes payments to TFC based on the amount of federal income taxes, if
any, it would have paid had it filed a separate federal income tax return.
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. Financial
instruments are defined as cash, evidence of an ownership interest in an entity
or a contract that imposes a contractual obligation to deliver cash or other
financial instruments to the second party. In cases where quoted market prices
are not available, fair values are based on estimates of future cash flows. In
that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. SFAS 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments.
The carrying amount reported in the balance sheet approximates the fair value
for cash and cash equivalents, accounts receivable, accounts payable, advanced
billings, deferred revenue, accrued liabilities and capital lease obligations.
Fair values of Series A and Series C preferred stock of the Company are based on
quoted market prices.
There is no active market for the Company's long-term debt. Therefore, the fair
value for the Company's fixed rate long-term debt is estimated using discounted
cash flow analysis, based on the Company's current incremental borrowing rates
for similar types of borrowing arrangements.
Fair values for the Company's off-balance-sheet instruments, lease guarantees,
are based on fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the counter parties'
credit standing. The fair value of the Company's off-balance-sheet instruments
at June 30, 1995, is not material.
The carrying amounts and fair values of the Company's financial instruments at
June 30, 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.
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>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, June 30,
ASSETS 1995 1994
- ------ -------- --------
Current Assets:
Cash and cash equivalents..................... $ 71,182 $ 102,368
(of which $5,968 and $4,745 is restricted)
Short-term investments........................ 4,116 6,649
Accounts receivable-trade, less allowances
of $5,610 and $3,468........................ 93,607 74,196
Inventories:
Finished goods............................. 53,771 47,120
Work-in-process............................ 27,704 30,907
Raw materials.............................. 23,434 11,988
--------- ---------
104,909 90,015
Prepaid expenses and other current assets..... 18,116 20,128
--------- ---------
Total Current Assets.......................... 291,930 293,356
Property, plant and equipment, net............ 170,926 174,147
Net assets held for sale...................... 51,573 36,375
Cost in excess of net assets acquired,
(Goodwill) less accumulated amortization of
$35,779 and $29,622.......................... 209,959 205,395
Investments and advances - affiliated
companies.................................... 73,670 71,532
Deferred loan costs........................... 12,013 15,952
Prepaid pension assets........................ 59,567 61,628
Long-term investments......................... 838 15,458
Notes receivable and other assets............. 11,406 39,686
--------- ---------
$ 881,882 $ 913,529
========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
- 31 -
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
- ------------------------------------ -------- --------
Current Liabilities:
Bank notes payable and current maturities
of long-term debt........................... $ 40,989 $ 14,978
Accounts payable............................. 48,100 35,271
Accrued liabilities:
Salaries, wages and commissions........... 16,466 14,932
Employee benefit plan costs............... 1,481 2,120
Insurance................................. 16,802 15,014
Interest.................................. 16,309 16,936
Other..................................... 39,189 35,620
--------- ---------
90,247 84,622
Income taxes payable......................... -- 12,713
--------- ---------
Total Current Liabilities.................... 179,336 147,584
Long-term debt............................... 509,715 522,406
Other long-term liabilities.................. 19,435 25,116
Retiree health care liabilities.............. 49,474 51,189
Noncurrent income taxes...................... 38,004 53,162
Minority interest in subsidiaries............ 24,533 24,552
Redeemable preferred stock of subsidiary..... 16,342 17,552
------- -------
Total liabilities............................ 836,839 841,561
Stockholders' Equity:
Class A common stock, 10 cents par value; authorized 40,000,000 shares,
19,647,705 shares issued and 13,406,109 shares
outstanding................................ 1,965 1,965
Class B common stock, 10 cents par value;
authorized 20,000,000 shares, 2,696,886
shares issued and outstanding.............. 270 270
Paid-in capital.............................. 67,011 66,775
Retained earnings............................ 18,912 52,736
Cumulative translation adjustment............ 8,724 3,346
Additional minimum liability for pensions,
net of tax................................. -- (1,405)
Net unrealized holding loss on available-for-
sale securities............................ (120) --
Treasury Stock, at cost, 6,241,596 shares of
Class A common stock....................... (51,719) (51,719)
--------- ---------
Total Stockholders' Equity................... 45,043 71,968
--------- ---------
Total Liabilities and Stockholders' Equity... $ 881,882 $ 913,529
========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
- 32 -
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
For the Years Ended June 30,
--------------------------------
1995 1994 1993
-------- -------- --------
Revenue:
Sales................................. $546,323 $444,145 $463,567
Other income.......................... 656 5,742 6,889
------- ------- -------
546,979 449,887 470,456
Costs and Expenses:
Cost of sales......................... 419,290 337,881 351,001
Selling, general & administrative..... 107,226 85,831 90,485
Research and development.............. 4,100 3,940 3,262
Amortization of goodwill.............. 6,157 6,020 6,065
Restructuring......................... -- 18,860 15,469
Unusual items......................... -- 6,693 --
------- ------- -------
536,773 459,225 466,282
Operating income (loss)................. 10,206 (9,338) 4,174
Interest expense........................ 71,159 73,071 72,110
Interest income......................... (3,389) (3,388) (1,692)
------- ------- -------
Net interest expense.................... 67,770 69,683 70,418
Investment income, net.................. 5,705 6,165 2,696
Equity in earnings (loss) of affiliates. 2,369 (882) 11,196
Minority interest....................... (2,449) (2,552) (2,289)
Non-recurring income.................... -- 129,082 --
------- ------- -------
Earnings (loss) from continuing
operations before taxes............... (51,939) 52,792 (54,641)
Income tax (benefit) provision.......... (18,019) 25,009 (11,176)
------- ------- -------
Earnings (loss) from continuing
operations............................ (33,920) 27,783 (43,465)
Loss on disposal of discontinued
operations, net....................... (259) (368) (25)
------- ------- -------
Earnings (loss) before extraordinary
items and cumulative effect of
accounting changes.................... (34,179) 27,415 (43,490)
Extraordinary items, net................ 355 (643) (12,614)
Cumulative effect of change in
accounting for postretirement
benefits, net......................... -- (8,015) --
Cumulative effect of change in
accounting for income taxes, net..... -- (2,935) --
------- ------- -------
Net earnings (loss)..................... $(33,824) $ 15,822 $(56,104)
======= ======= =======
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
- 33 -
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
For the Years Ended June 30,
--------------------------------
1995 1994 1993
-------- -------- --------
Earnings (Loss) per Common Share:
Primary and Fully Diluted:
Earnings (loss) from continuing
operations........................... $ (2.11) $ 1.72 $ (2.70)
Loss from discontinued operations, net. (.01) (.02) --
Earnings (loss) before extraordinary
items and cumulative effect of
accounting changes................... (2.12) 1.70 (2.70)
Extraordinary items, net............... .02 (.04) (.78)
Cumulative effect of change in
accounting for postretirement
benefits, net........................ -- (.50) --
Cumulative effect of change in
accounting for income taxes, net..... -- (.18) --
------- ------- -------
Net earnings (loss) per share.......... $ (2.10) $ .98 $ (3.48)
======= ======= =======
Weighted Average Number of Shares used
in Computing Earnings Per Share:
Primary.................................. 16,103 16,103 16,113
Fully diluted............................ 16,103 16,103 16,113
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
- 34 -
<PAGE>
<TABLE>
<CAPTION>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Class A Class B Cumulative
Common Common Paid-in Retained Translation Treasury
Stock Stock Capital Earnings Adjustment Stock Other Total
----- ----- ------- -------- ----------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, July 1, 1992 $1,964 $271 $65,658 $93,018 $6,169 $(51,475) $ - $115,605
- ----------------------
Net loss.............. - - - (56,104) - - - (56,104)
Cumulative translation
adjustment, net...... - - - - (3,471) - - (3,471)
Exchange of Class B
for Class A common
stock................ 1 (1) - - - - - -
Purchase of treasury
stock................ - - - - - (244) - (244)
Gain on Initial Public
Offering of Rexnord
Corporation.......... - - 1,079 - - - - 1,079
----- ---- ------ ------ ----- ------- ------ ------
BALANCE, June 30, 1993 1,965 270 66,737 36,914 2,698 (51,719) - 56,865
- ----------------------
Net earnings.......... - - - 15,822 - - - 15,822
Cumulative translation
adjustment, net...... - - - - 648 - - 648
Gain on purchase of
preferred stock of
subsidiary........... - - 38 - - - - 38
Additional minimum
liability for
pensions............. - - - - - - (1,405) (1,405)
----- ---- ------ ------ ----- ------- ------ ------
BALANCE, June 30, 1994 1,965 270 66,775 52,736 3,346 (51,719) (1,405) 71,968
- ----------------------
Net loss.............. - - - (33,824) - - - (33,824)
Cumulative translation
adjustment, net...... - - - - 5,378 - - 5,378
Gain on purchase of
preferred stock of
subsidiary........... - - 236 - - - - 236
Reduction of minimum
liability for pensions - - - - - - 1,405 1,405
Net unrealized holding
loss on available-for-
sale securities...... - - - - - - (120) (120)
----- ---- ------ ------ ----- ------- ------ ------
BALANCE, June 30, 1995 $1,965 $ 270 $67,011 $18,912 $8,724 $(51,719) $ (120) $45,043
===== ==== ====== ====== ===== ======= ====== ======
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</TABLE>
- 35 -
<PAGE>
<TABLE>
<CAPTION>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended June 30,
--------------------------------
1995 1994 1993
<S> <C> <C> <C>
Cash flows from operating activities: -------- -------- --------
Net earnings (loss)............................... $ (33,824) $ 15,822 $ (56,104)
Adjustments to reconcile net earnings (loss) to net cash used for operating
activities:
Cumulative effect of accounting changes, net.. -- 10,950 --
Extraordinary loss on recapitalization of
Rexnord Corporation......................... -- -- 11,808
Depreciation and amortization................. 38,170 36,227 33,955
Accretion of discount on long-term
liabilities................................. 4,773 4,453 3,355
Net gain on sale of Rexnord investment........ -- (129,082) --
Provision for restructuring and unusual items
(excluding cash payments of $6,020 in 1994
and $7,896 in 1993)......................... -- 19,533 7,573
Loss on sale of property, plant and equipment. 713 214 2,294
Undistributed (earnings) loss of affiliates... (950) 1,193 (10,945)
Minority interest............................. 2,449 2,552 2,289
Change in trading securities.................. 1,879 -- --
Change in receivables......................... (16,165) (2,803) 7,252
Change in inventories......................... (14,000) 4,246 9,444
Change in other current assets................ (3,517) (4,498) 30,092
Change in other non-current assets............ 6,022 (3,366) (8,637)
Change in accounts payable, accrued
liabilities, and other long-term liabilities (10,958) 11,288 (53,496)
-------- -------- --------
Net cash used for operating activities............ (25,408) (33,271) (21,120)
Cash flows from investing activities:
Change in investments............................. 12,281 1,574 31,845
Purchase of property, plant and equipment......... (20,700) (16,279) (15,596)
Proceeds from sale of property, plant and
equipment....................................... 1,243 7,982 1,301
Equity investments in affiliates.................. (1,264) (3,393) (19,527)
Acquisition of subsidiaries, net of cash acquired. (12,157) (1,905) (7,313)
Net proceeds from sale of Rexnord Corporation..... -- 178,089 --
-------- -------- --------
Net cash (used for) provided by investing
activities...................................... (20,597) 166,068 (9,290)
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In thousands)
For the Years Ended June 30,
--------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of debt.................... $ 71,712 $ 68,558 $ 223,038
Debt repayments and repurchase of debentures, net. (59,367) (169,948) (165,363)
Purchases of treasury shares...................... -- -- (244)
-------- -------- --------
Net cash provided by (used for) financing
activities...................................... 12,345 (101,390) 57,431
Effect of exchange rate changes on cash........... 2,474 862 (2,868)
Net (decrease) increase in cash and cash
equivalents..................................... (31,186) 32,269 24,153
Cash and cash equivalents, beginning of the year.. 102,368 70,099 45,946
-------- -------- --------
Cash and cash equivalents, end of the year........ $ 71,182 $ 102,368 $ 70,099
======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
- 37 -
<PAGE>
THE FAIRCHILD CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Corporate Structure: The Fairchild Corporation (the "Company") was
incorporated under the laws of the State of Delaware in October, 1969. RHI
Holdings, Inc. ("RHI") is a direct subsidiary of the Company. RHI is the
owner of all of the common stock of Fairchild Industries, Inc. ("FII") which,
in turn, is the 100% owner of VSI Corporation ("VSI"). The Company's
operations are conducted through VSI and RHI. The Company also holds
significant equity interests in Banner Aerospace, Inc. ("Banner") and Nacanco
Paketleme ("Nacanco").
Fiscal Year: The fiscal year ("Fiscal") of the Company ends June 30. All
references herein to "1995", "1994", and "1993" mean the fiscal years ended June
30, 1995, 1994 and 1993, respectively.
Principles of Consolidation: The consolidated financial statements are
prepared in accordance with generally accepted accounting principles and include
the accounts of the Company and its majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Investments in companies owned between 20 percent and 50 percent are recorded
using the equity method (see Note 6).
Cash Equivalents/Statements of Cash Flows: For purposes of the statements
of cash flows, the Company considers all highly liquid investments with original
maturity dates of three months or less as cash equivalents. Total net cash
disbursements (receipts) made by the Company for income taxes and interest were
as follows:
(In thousands) 1995 1994 1993
-------- -------- --------
Interest....................... $ 66,334 $ 66,788 $ 63,567
Income Taxes................... (3,056) (16) (23,171)
Restricted Cash: On June 30, 1995 and 1994, the Company had restricted cash
of $5,968,000 and $4,745,000, respectively, all of which is maintained as
collateral for certain debt facilities. Cash investments are in high grade,
short-term certificates of deposit.
Investments: On July 1, 1994, the Company adopted Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). There was no cumulative effect as
the result of adopting SFAS 115 in Fiscal 1995.
Management determines the appropriate classification of its investments at
the time of acquisition and reevaluates such determination at each balance
- 38 -
<PAGE>
sheet date. Trading securities are carried at fair value, with unrealized
holding gains and losses included in earnings. Available-for-sale securities are
carried at fair value, with unrealized holding gains and losses, net of tax,
reported as a separate component of shareholders' equity. Investments in equity
securities and limited partnerships that do not have readily determinable fair
values are stated at cost, adjusted for impairments, and categorized as other
investments. At June 30, 1994, the Company used the lower of cost or market
method for its investments. In determining realized gains and losses, the cost
of securities sold is based on the specific identification method. Interest on
corporate obligations, as well as dividends on preferred stock are accrued at
the balance sheet date.
Inventories: Inventories are stated at the lower of cost or market.
Cost is determined primarily using the last-in, first-out (LIFO) method.
Inventories from continuing operations are valued as follows:
June 30, June 30,
(In thousands) 1995 1994
-------- --------
Last-in, first-out (LIFO).................. $ 69,211 $ 69,829
First-in, first-out (FIFO)................. 35,698 20,186
-------- --------
Total inventories.......................... $ 104,909 $ 90,015
======== ========
For inventories valued on the LIFO method, the excess of current FIFO value
over stated LIFO value was approximately $7,447,000 and $7,924,000 at June 30,
1995 and 1994, respectively. The LIFO decrement was immaterial for Fiscal 1995.
Properties and Depreciation: Properties are stated at cost and depreciated
over estimated useful lives, generally on a straight-line basis. For Federal
income tax purposes, accelerated depreciation methods are used. No interest
costs were capitalized in any of the years presented. Property, plant and
equipment consisted of the following:
June 30, June 30,
(In thousands) 1995 1994
-------- --------
Land....................................... $ 14,022 $ 17,811
Buildings and improvements................. 47,397 47,376
Machinery and equipment.................... 208,970 184,171
Transportation vehicles.................... 649 618
Furniture and fixtures..................... 10,965 7,501
Construction in progress................... 4,582 6,358
------- -------
286,585 263,835
Less: Accumulated depreciation............ (115,659) (89,688)
------- -------
Net property, plant and equipment.......... $170,926 $174,147
======= =======
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<PAGE>
Amortization of Goodwill: The excess of the cost of purchased businesses
over the fair value of their net assets at acquisition dates (goodwill) is being
amortized on a straight-line basis over 40 years.
Deferred Loan Costs: Deferred loan costs associated with various debt
issues are being amortized over the terms of the related debt, based on the
amount of outstanding debt, using the effective interest method. Amortization
expense for these loan costs for Fiscal 1995, 1994 and 1993 was $3,794,000,
$4,253,000 and $3,355,000, respectively.
Impairment of Long-Lived Assets: The Company reviews its long-lived assets,
including property, plant and equipment, identifiable intangibles and goodwill,
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be 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.
Despite three consecutive years of operating losses in the Company's
Aerospace Fasteners segment, the Company believes that future net cash flows
from this segment will be sufficient to permit recovery of the segment's
long-lived assets, including the remaining goodwill.
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. (For further discussion see "Impact of Future Accounting
Changes" included in Item 7, Management Discussion and Analysis of Results of
Operations and Financial Condition).
Foreign Currency Translation: All balance sheet accounts of foreign
subsidiaries are translated at current exchange rates at the end of the
accounting period. Income statement items are translated at average exchange
rates during the period. The resulting translation adjustment is recorded as a
separate component of stockholders' equity. Foreign transaction gains and losses
are included in other income and were insignificant in Fiscal 1995, 1994 and
1993.
Research and Development: Company-sponsored research and development
expenditures are expensed as incurred.
Non-Recurring Items: Non-recurring income for Fiscal 1994 consists of
the net pretax gain of $129,082,000 on the sale of Rexnord Corporation
("Rexnord") stock (see Note 6).
- 40 -
<PAGE>
Earnings Per Share: Primary and fully diluted earnings per share are
computed by dividing net income available to common shareholders by the weighted
average number of shares and share equivalents outstanding during the period. To
compute the incremental shares resulting from stock options and warrants for
primary earnings per share, the average market price of the Company's stock
during the period is used. To compute the incremental shares resulting from
stock options and warrants for fully diluted earnings per share, the greater of
the ending market price or the average market price of the Company's stock is
used. In computing earnings per share for Fiscal 1995, 1994 and 1993, the
conversion of options and warrants was not assumed, as the effect was
anti-dilutive.
Reclassifications: Certain amounts in prior years' financial statements
have been reclassified to conform to the 1995 presentation.
In October 1994, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 119 ("SFAS 119"), "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments". SFAS
119, which is effective for the Company's Fiscal 1995 financial statements,
requires certain disclosure about all derivative financial instruments.
Management has determined that the requirements of SFAS 119 are immaterial to
the Company's Fiscal 1995 financial statements.
2. ACQUISITIONS
------------
On June 10, 1994, the Company acquired 100% of the Common Stock of Convac
GmbH ("Convac")for approximately $4,700,000. Convac is a leading designer and
manufacturer of high precision state-of-the-art wet processing tools, equipment
and systems required for the manufacture of semiconductor chips and related
products, compact and optical storage discs and liquid crystal displays. The
Company reports the results of Convac as part of its Industrial Products
segment.
On September 9, 1994, the Company acquired all of the outstanding Common
Stock of Scandinavian Bellyloading Company AB ("SBC"). SBC is the designer and
manufacturer of patented cargo loading systems, which are installed in the cargo
area of commercial aircraft. Several major airlines are expected to equip
existing fleets with the SBC system over the next three to four years. The
Company reports the results of SBC as part of its Industrial Products segment.
On November 28, 1994, Fairchild Communications Services Company ("Fairchild
Communications"), a partnership whose partners are indirect subsidiaries of 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. 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, Fairchild Communications acquired all the shared
telecommunications assets of Eaton & Lauth Co., Inc., for approximately
$550,000.
- 41 -
<PAGE>
In Fiscal 1993, Fairchild Communications acquired all the telecommunication
assets of Office Networks, Inc., for approximately $7,300,000.
Proforma statements are not required for these acquisitions on an
individual basis.
3. DISCONTINUED OPERATIONS AND NET ASSETS HELD FOR SALE
----------------------------------------------------
The Company recorded after tax losses on the disposal of discontinued
operations, of $259,000, $368,000 and $25,000 in 1995, 1994 and 1993,
respectively. These losses related primarily to (i) liability insurance premiums
paid for properties of discontinued operations, and workers' compensation claims
for employees of operations which were previously discontinued.
The Company has decided not to sell Fairchild Data Corporation ("Data"),
which previously was included in net assets held for sale. The Company is
recording the Fiscal 1995 and 1994 results from Data with the Company's
Industrial Products Segment. Sales from Data formerly included in net assets
held for sale, and not included in results of operations, were $15,432,000 for
the twelve months ended June 30, 1993. The impact of Data's earnings on the
Fiscal 1993 period was immaterial.
Net assets held for sale at June 30, 1995, includes two parcels of real
estate in California, an 88 acre parcel of real estate located in Farmingdale,
New York, and several other parcels of real estate located primarily throughout
the continental United States, which the Company plans to sell, lease or
develop, subject to the resolution of certain environmental matters and market
conditions. Also included in net assets held for sale are limited partnership
interests in (i) a real estate development joint venture, and (ii) a landfill
development partnership.
Net assets held for sale are stated at the lower of cost or at estimated
net realizable value, which reflect anticipated sales proceeds, and other
carrying costs to be incurred during the holding period. Interest is not
allocated to net assets held for sale.
4. EXTRAORDINARY ITEMS
-------------------
The Company recognized extraordinary gains and losses from the early
extinguishment of debt resulting from repurchases of its debentures on the open
market or in negotiated transactions, and the write-offs of certain deferred
costs associated with the issuance of securities repurchased. Total repurchases
executed by the Company were: $13,600,000 face value purchased for $12,541,000
in Fiscal 1995, $33,658,000 face value purchased for $34,016,000 in Fiscal 1994,
and $559,000 face value purchased for $495,000 in Fiscal 1993. In Fiscal 1993,
FII wrote-off $1,262,000 of deferred loan costs in association with certain
amendments to the Company's credit agreement. Early extinguishment of the
Company's debt resulted in extraordinary income
- 42 -
<PAGE>
(loss) of $355,000, net of a $191,000 tax provision, $(643,000), net of a
$347,000 tax benefit, and $(810,000), net of a $435,000 tax benefit in Fiscal
1995, 1994 and 1993, respectively.
In Fiscal 1993, in conjunction with an initial public offering and
recapitalization of Rexnord Corporation ("Rexnord"), the Company recorded an
extraordinary charge of $11,804,000, relating to 42.0% (its previous ownership
percentage share) of Rexnord's extraordinary charge relating to premiums paid to
repurchase debt and write off deferred loan costs.
5. INVESTMENTS
-----------
Short-term investments at June 30, 1995, primarily consist of common stock
investments in public corporations, which are classified as trading securities.
All other short-term investments and all long-term investments do not have
readily determinable fair values and consist of investments in limited
partnerships and certain preferred and common stocks. A summary of investments
held by the Company consist of the following:
(In thousands) 1995 1994
------------------- ------------------
Aggregate Aggregate
Name of Issuer or Fair Cost Market Cost
Type of Each Issue Value Basis Value Basis
- ------------------- ---------- -------- ---------- --------
Short-term investments:
- -----------------------
Trading Securities:
Common Stock.................... $ 3,968 $ 5,088 $ 2,969 $ 4,053
Other Investments................. 148 148 3,680 3,920
------ ------ ------ ------
$ 4,116 $ 5,236 $ 6,649 $ 7,973
====== ====== ====== ======
Other long-term investments:
- ----------------------------
Preferred Stock................... $ 492 $ 492 $ 2,748 $ 2,748
Real Estate Development Joint
Venture Limited Partnership (a). -- -- 3,396 3,396
Bidermann Industries USA, Inc (b). -- -- 9,314 9,314
Other Investments................. 346 346 -- --
------ ------ ------ ------
$ 838 $ 838 $15,458 $15,458
====== ====== ====== ======
(a) Represents a former plant site in Redondo Beach, California, which was
contributed to a joint venture with a developer that has built and partially
leased a retail center. This investment was reclassified to net assets held for
sale in 1995. (b) The Company received proceeds of approximately $12,000,000
relating to the sale of collateral and liquidation of the assets attached in the
Maurice
- 43 -
<PAGE>
Bidermann litigation. (See Note 18).
Investment income is summarized as follows:
(In thousands)
1995 1994 1993
------- ------- -------
Gross realized gains from sales...... $ 3,948 $ 4,320 $ 962
Change in unrealized holdings loss on
trading securities................. (36) -- --
Lower of cost or market valuation
adjustment......................... -- (1,084) 288
Gross realized loss from impairments. (652) (426) (320)
Dividend income...................... 2,445 3,355 1,502
Interest income...................... -- -- 264
------- ------- -------
$ 5,705 $ 6,165 $ 2,696
======= ======= =======
6. INVESTMENTS AND ADVANCES - AFFILIATED COMPANIES
-----------------------------------------------
The following table presents summarized financial information on a combined
100% basis of Banner and Nacanco, the Company's principal investments, which are
accounted for using the equity method.
(In thousands)
Statement of Earnings: 1995 1994 1993
------- ------- -------
Net sales.................... $313,888 $283,055 $313,594
Gross profit................. 100,644 98,689 81,352
Earnings from continuing
operations................. 9,623 17,231 281
Discontinued operations, net. -- (12,996) (712)
Net earnings (loss).......... 9,623 4,235 (431)
Balance Sheet at June 30,:
Current assets................ $257,314 $280,144
Non-current assets............ 61,348 57,881
Total assets.................. 318,662 338,025
Current liabilities........... 61,174 60,753
Non-current liabilities....... 101,256 126,920
On June 30, 1995, the Company owned approximately 47.2% of Banner common
stock, which is included in investments and advances - affiliated companies. The
Company recorded equity earnings (loss) of $138,000, $(5,697,000) and
$(1,380,000) on its investment in Banner for Fiscal 1995, 1994 and 1993,
respectively. At the close of trading on June 30, 1995, Banner stock was quoted
at $5.00 per share. Based on this price, the Company's equity investment in
Banner had an approximate market value of $42,500,000 versus a carrying value of
$51,146,000. The Company does not believe that this
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<PAGE>
decline in market value is a permanent impairment.
On June 30, 1995, the Company owned approximately 31.9% of Nacanco common
stock. The Company recorded equity earnings of $2,859,000, $5,429,000 and
$820,000 from this investment for Fiscal 1995, 1994 and 1993, respectively.
On December 23, 1993, the Company completed a sale of its 43.9% stock
interest in Rexnord to BTR Dunlop Holdings, Inc. ("BTR"). Accordingly, the
Company received $181,873,000 in gross proceeds and realized a pre-tax gain on
the sale of $129,082,000 in Fiscal 1994. Prior to the sale of Rexnord, the
Company recorded equity earnings (loss) of $(905,000) and $10,828,000 from this
investment for Fiscal 1994 and 1993, respectively. The net earnings for Fiscal
1994, were decreased by recording the Company's 43.9% share of the cumulative
charge which resulted from the adoption of SFAS No. 106 and SFAS No. 109 at
Rexnord. (See Notes 8 and 9).
The Company is accounting for an investment in a public fund, which is
controlled by an affiliated investment group of the Company, at market value.
Accordingly, the amortized cost basis of the investment was $923,000 and had
been written down by $185,000, before tax, to market value. The Company's gross
unrealized loss was $120,000, net of tax from this investment in 1995.
The Company's share of equity in earnings (loss) of all unconsolidated
affiliates for 1995, 1994 and 1993 was $2,369,000, $(882,000) and $11,196,000,
respectively. The carrying value of investments and advances affiliated
companies consists of the following:
(In thousands) June 30, June 30,
1995 1994
-------- --------
Banner Aerospace................... $ 51,146 $ 51,008
Nacanco............................ 16,312 14,598
Other.............................. 6,212 5,926
------- -------
$ 73,670 $ 71,532
======= =======
On June 30, 1995, approximately $12,766,000 of the Company's $18,912,000
consolidated retained earnings was from undistributed earnings of 50 percent or
less currently owned affiliates accounted for by the equity method.
In connection with the sale of its interest in Rexnord, the Company has
placed shares of Banner, with a fair market value of $25,000,000, in escrow to
secure the Company's indemnification of BTR against a contingent liability. Once
the contingent liability is resolved, the shares will be released.
7. NOTES PAYABLE AND LONG-TERM DEBT
--------------------------------
At June 30, 1995 and 1994, notes payable and long-term debt consisted of
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<PAGE>
the following:
(In thousands, except for percents) June 30, June 30,
1995 1994
-------- --------
Short-term notes payable (weighted
average interest rates of 8.32% and
8.89% in 1995 and 1994, respectively).. $ 5,489 $ 3,974
======= =======
Bank credit agreement.................... $126,396 $ 97,315
12.25% Senior secured notes due 1999..... 125,000 125,000
Subordinated notes and debentures
interest from 9.75% to 13.125%......... 286,279 300,016
10.65% Industrial revenue bonds.......... 1,500 1,500
Capital lease obligations interest from
5.85% to 15.50% (See Note 18).......... 1,253 3,302
Other notes payable, collateralized
by property, plant and equipment,
interest from 5.5% to 10.65%........... 4,787 6,277
------- -------
545,215 533,410
Less: Current maturities................ (35,500) (11,004)
------- -------
Net long-term debt....................... $509,715 $522,406
======= =======
The Company maintains a credit agreement (the "Credit Agreement") with a
consortium of banks, which provides a revolving credit facility and two term
loans to FII, and a revolving credit facility to RHI (collectively the "Credit
Facilities"). The revolving credit facility provided to RHI generally bears
interest at 1.0% over the prime rate, and matures February 28, 1996. The
revolving credit facility and Term Loan VIII, provided to FII, generally bears
interest at 3.75% over the London Interbank Offered Rate ("LIBOR") and at 2.75%
over LIBOR for Term Loan VII, respectively. The Credit Facilities provided to
FII mature on March 31, 1997. The commitment fee on the unused portion of the
revolving credit facilities was 1.0% at June 30, 1995. The Credit Facilities are
secured by substantially all of FII's assets.
The following table summarizes the credit facilities under the credit
agreement at June 30, 1995:
- 46 -
<PAGE>
(In thousands) Outstanding Total
as of Available
June 30, 1995 Facilities
RHI Holdings, Inc. ------------- ----------
Revolving credit facility (a)....... $ 100 $ 5,000
Fairchild Industries, Inc ======= =======
Revolving credit facility (b)....... $ 34,700 $ 50,250
Term Loan VII....................... 49,696 49,696
Term Loan VIII...................... 42,000 42,000
------- -------
$126,396 $141,946
======= =======
Total
Revolving credit facilities......... $ 34,800 $ 55,250
Term loans.......................... 91,696 91,696
------- -------
$126,496 $146,946
======= =======
(a) This amount is included in short-term notes payable.
(b) In the first quarter of Fiscal 1995, the revolving credit facility at FII
was reduced by $9,250,000 to $50,250,000. In addition, the borrowing rate
increased by 1.0% to generally bear interest at 3.75% over LIBOR and the
commitment fee increased by 0.5% to 1.0%.
At June 30, 1995, the Company had outstanding letters of credit of
$11,598,000, which were supported by the Credit Agreement and other bank
facilities on an unsecured basis. At June 30, 1995, the Company had unused
short-term bank lines of credit aggregating $8,852,000 at interest rates
slightly higher than the prime rate. The Company also has short-term lines of
credit relating to foreign operations aggregating $9,529,000 against which the
Company owed $5,349,000 at June 30, 1995.
Summarized below are certain items and other information relating to the
debt outstanding at June 30, 1995:
- 47 -
<PAGE>
12.25% 12% 13%
(In thousands) Senior 13.125% Intermediate Junior
Subordinated Subordinated Subordinated Subordinated
Notes Debentures Debentures Debentures
------------ ------------ ------------ ------------
Date Issued March 1986 March 1986 Oct. 1986 March 1987
Face Value $ 60,000 $ 75,000 $160,000 $102,000
Balance, June 30,
1995 $ 24,146 $ 34,943 $113,735 $ 24,769
Percent Issued at 95.864 95.769 93.470 98.230
Bond Discount $ 2,482 $ 3,173 $ 10,448 $ 1,805
Amortization 1995 $ 171 $ 103 $ 687 $ 27
1994 $ 279 $ 90 $ 621 $ 23
1993 $ 265 $ 79 $ 547 $ 20
Yield to Maturity 13.00% 13.800% 13.06% 13.27%
Interest Payments Semi-Annual Semi-Annual Semi-Annual Semi-Annual
Sinking Fund Start
Date N/A 3/15/97 10/15/97 3/1/98
Sinking Fund
Installments N/A $ 7,500 $ 32,000 $ 10,200
Fiscal Year Maturity 1996 2006 2002 2007
Redeemable by the
Company after 3/15/89 3/15/89 10/15/89 3/1/92
11.875% 12.25% 9.75%
RHI Senior FII FII
Subordinated Senior Subordinated
Debentures Notes Debentures
------------ ----------- ------------
Date Issued March 1987 Aug. 1992 Jan. 1978
Face Value $126,000 $125,000 $ 16,082
Balance, June 30,
1995 $ 85,687 $125,000 $ 2,999
Percent Issued at 99.214 100.0 95.784
Bond Discount $ 990 N/A $ 678
Amortization 1995 $ 94 -- $ 6
1994 $ 80 -- $ 6
1993 $ 43 -- $ 11
Yield to Maturity 12.01% 12.25% 9.75%
Interest Payments Semi-Annual Semi-Annual Annual
Sinking Fund Start
Date 3/1/97 N/A 4/1/83
Sinking Fund
Installments $ 31,500 N/A $1,005
Fiscal Year Maturity 1999 1999 1998
Redeemable by the
Company after 3/1/92 7/31/97 1/1/98
Under the most restrictive covenants of the above indentures, the Company's
consolidated net worth, as defined, must not be less than $35,000,000. However,
the Company believes that computation of consolidated
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<PAGE>
net worth under the indentures would be undertaken in accordance with Generally
Accepted Accounting Principles in effect at the date of the execution and
delivery of each indenture by the Company. Such computation would yield a
consolidated net worth for the Company approximately $2,946,000 higher than
presented above, as a result of changes in accounting principles, primarily
Statement of Financial Accounting Standards Nos. 106 and 109, which were adopted
subsequent to the Company's execution and delivery of the indenture. RHI's
consolidated net worth must not be less than $125,000,000. At the present time,
none of the Company's consolidated retained earnings are available for capital
distributions due to a cumulative earnings restriction. The indentures also
provide restrictions on the amount of additional borrowings by the Company.
The 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,
including a requirement for the Company and RHI to maintain unrestricted holding
company cash and cash equivalent balances of $30,000,000 for the quarter ended
December 31, 1995, and $10,000,000 at the end of each fiscal quarter thereafter
(including any non-restricted VSI directed reduction amounts contributed). The
Company was in compliance with the Credit Agreement, as amended, at June 30,
1995. To comply with the minimum EBITDA Covenant requirements (as amended), the
Company's subsidiary, VSI, must earn for the cumulative total of the trailing
four quarters, EBITDA as follows: $60,000,000 for the first quarter of Fiscal
1996, $65,000,000 for the second quarter of Fiscal 1996, $70,000,000 for the
third quarter of Fiscal 1996, and $80,000,000 for the fourth quarter of Fiscal
1996. VSI's ability to meet the minimum requirements under the EBITDA Covenant
in Fiscal 1996 is uncertain, and there can be no assurance that the Company will
be able in the future to comply with the minimum requirements under the EBITDA
Covenant and other financial covenants under the Credit Agreement. Noncompliance
with any of the financial covenants, without cure or waiver, would constitute an
event of default under the Credit Agreement. An event of default resulting from
a breach of a financial covenant may result, at the option of lenders holding a
majority of the loans, in an acceleration of the principal and interest
outstanding, and a termination of the revolving credit line. However, if
necessary, management believes a waiver can be obtained.
For FII's operating subsidiary, VSI, capital expenditures are limited
during the remaining term of the Credit Agreement to the lower of (i) an annual
ceiling of $25,200,000 to $26,500,000 per year, or (ii) 30% of the prior fiscal
year's earnings before interest, taxes, depreciation and amortization. Capital
expenditure reductions can be offset by cash contributions from the Company.
Capital expenditures can also be increased if cash proceeds are received from
the sale of other property, subject to approval by the senior lenders under the
Credit Agreement. FII's sale of property, plant, and equipment is limited during
the remaining term of the Credit Agreement.
- 49 -
<PAGE>
The Company's subsidiaries may transfer available cash as dividends to the
Company if the purpose of such dividends is to provide the Company with funds
necessary to meet its debt service requirements under specified notes and
debentures. However, all other dividends from FII to RHI are subject to certain
limitations under the Credit Agreement. As of June 30, 1995, FII was unable to
provide dividends to RHI. The Credit Agreement also restricts FII from
additional borrowings under the Credit Facilities for the payment of any
dividends.
Annual maturities of long-term debt obligations (exclusive of capital lease
obligations) for each of the five years following June 30, 1995, are as follows:
$39,975,000 for 1996, $122,506,000 for 1997, $23,723,000 for 1998, $206,605,000
for 1999, and $31,551,000 for 2000.
8. PENSIONS AND POSTRETIREMENT BENEFITS
------------------------------------
Pensions
--------
The Company and its subsidiaries have defined benefit pension plans
covering substantially all employees. Employees in foreign subsidiaries may
participate in local pension plans, which are in the aggregate insignificant and
are not included in the following disclosures. The Company's funding policy is
to make the minimum annual contribution required by applicable regulations.
The following table provides a summary of the components of net periodic
pension expense (income) for the plans:
(In thousands)
1995 1994 1993
Service cost of benefits earned -------- -------- --------
during the period...................... $ 3,917 $ 3,827 $ 4,184
Interest cost of projected benefit
obligation............................. 14,860 14,552 14,166
Return on plan assets.................... (14,526) (5,051) (31,490)
Amortization of prior service cost....... 81 126 111
Net amortization and deferral............ (4,341) (15,007) 13,488
------- ------- -------
(9) (1,553) 459
Net periodic pension expense (income) for
other plans including foreign plans.... 78 (745) (1,654)
------- ------- -------
Net periodic pension expense (income).... $ 69 $ (2,298) $ (1,195)
======= ======= =======
- 50 -
<PAGE>
Assumptions used in accounting for the plans were:
1995 1994 1993
-------- -------- --------
Discount Rate............................ 8.5% 8.5% 8.5%
Expected rate of increase in salaries.... 4.5% 4.5% 4.5%
Expected long-term rate of return on
plan assets............................ 9.0% 9.0% 9.0%
The following table sets forth the funded status and amounts recognized in
the Company's consolidated balance sheets at June 30, 1995, and 1994 for the
plans:
(In thousands) June 30, June 30,
1995 1994
Projected benefit obligation: -------- --------
Vested benefit obligation................. $168,843 $183,120
Non-vested benefits....................... 6,488 10,684
------- -------
Accumulated benefit obligation............ 175,331 193,804
Effect of projected future compensation
levels.................................. 5,815 4,418
------- -------
181,146 198,222
Plan assets at fair value................... 212,477 239,756
------- -------
Plan assets in excess of projected benefit
obligations............................... 31,331 41,534
Unrecognized net loss....................... 42,720 35,843
Unrecognized prior service cost............. 329 411
Unrecognized net transition assets.......... (190) (594)
Additional minimum liability for one defined
plan...................................... -- (2,166)
------- -------
Prepaid pension cost prior to SFAS 109
implementation............................ 74,190 75,028
Effect of SFAS 109 implementation........... (14,623) (13,400)
------- -------
Prepaid pension cost (a).................... $ 59,567 $ 61,628
======= =======
(a) Does not include excess liabilities over plan assets of $1,405,000, net of
tax, at June 30, 1994.
Plan assets include Class A Common Stock of the Company valued at
$2,763,000 and $3,172,000 at June 30, 1995 and 1994, respectively. Substantially
all of the plan assets are invested in listed stocks and bonds.
- 51 -
<PAGE>
Postretirement Health Care Benefits
-----------------------------------
Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106 ("SFAS 106"), "Employers' Accounting for
Postretirement Benefits Other than Pensions". The standard requires that the
expected cost of postretirement benefits be accrued and charged to expense
during the years the employees render the service. This is a significant change
from the Company's previous policy of expensing these costs for active employees
when paid.
The Company elected the immediate recognition method of adoption of SFAS
106. The unamortized portion of the overstated liability for discontinued
operations was $10,370,000, net of tax, which substantially offset a
$10,904,000, net of tax, charge relating to the transition obligation for active
employees and retirees of continuing operations. The charge to net earnings as
the cumulative effect of this accounting change was $534,000, net of tax. For
the Fiscal year ended June 30, 1994, the effect of the changes on pretax income
from continuing operations was not material.
As a result of Rexnord's adoption of SFAS 106, effective July 1, 1993, the
Company recorded an after-tax charge of $7,481,000 to net earnings, which
represented the Company's share of Rexnord's cumulative effect of this change in
accounting, net of the related tax benefits from the charge.
The Company provides health care benefits for most retired employees.
Postretirement health care expense from continuing operations totaled
$1,388,000, $1,948,000 and $1,366,000 for the years ended June 30, 1995, 1994
and 1993, respectively. The Company has accrued approximately $33,778,000 and
$35,386,000 as of June 30, 1995 and 1994, respectively, for postretirement
health care benefits related to discontinued operations. This represents the
cumulative discounted value of the long-term obligation and includes interest
expense of $3,185,000, $3,011,000 and $4,866,000 for the years ended June 30,
1995, 1994 and 1993, respectively. The components of expense in Fiscal 1995 and
1994 are as follows:
(In thousands)
1995 1994
------- -------
Service cost of benefits earned...................$ 321 $ 437
Interest cost on liabilities...................... 4,385 4,526
Net amortization and deferral..................... (133) (4)
------- -------
Net periodic postretirement benefit cost..........$ 4,573 $ 4,959
======= =======
The following table sets forth the funded status for the Company's
postretirement health care benefit plans at June 30, 1995:
- 52 -
<PAGE>
(In thousands) 1995 1994
------- -------
Accumulated postretirement benefit obligations:
Retirees........................................$ 45,970 $ 48,556
Fully eligible active participants.............. 531 497
Other active participants....................... 5,741 4,962
------- -------
Accumulated postretirement benefit obligation..... 52,242 54,015
Unrecognized net loss............................. 223 113
------- -------
Accrued postretirement benefit liability..........$ 52,019 $ 53,902
======= =======
The accumulated postretirement benefit obligation was determined using a
discount rate of 8.5%, and a health care cost trend rate of 8.0% and 7.5% for
pre-age-65 and post-age-65 employees, respectively, gradually decreasing to 4.5%
and 4.5%, respectively, in the year 2003 and thereafter.
Increasing the assumed health care cost trend rates by 1% would increase
the accumulated postretirement benefit obligation as of June 30, 1995, by
approximately $2,385,000, and increase the net periodic postretirement benefit
cost by approximately $263,000 for Fiscal 1995.
9. INCOME TAXES
------------
Effective July 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by
Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting
for Income Taxes".
Under the liability method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities, and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Prior to
the adoption of SFAS 109, income tax expense was determined using the deferred
method. Deferred tax expense was based on items of income and expense that were
reported in different years in the financial statements and tax returns and were
measured at the tax rate in effect in the year the difference originated.
As permitted under SFAS 109, prior years' financial statements have not
been restated. The Company elected the immediate recognition method and recorded
a $2,412,000 charge representing the prior years' cumulative effect. This charge
represents deferred taxes that had to be recorded related primarily to fixed
assets, prepaid pension expenses, and inventory basis differences.
As a result of Rexnord's adoption of SFAS 109 effective July 1, 1993, the
Company recorded an after-tax charge to net earnings of $523,000, which
represented the Company's share of Rexnord's cumulative effect for this change
in accounting.
- 53 -
<PAGE>
The provision (benefit) for income taxes from continuing operations is
summarized as follows (in thousands):
1995 1994 1993
-------- -------- --------
Current:
Federal.......................... $ (45) $ 4,976 $ (12,823)
State............................ 1,720 735 2,031
Foreign.......................... 1,808 204 1,152
-------- -------- --------
3,483 5,915 (9,640)
Deferred:
Federal......................... (19,450) 18,851 (533)
State........................... (2,052) 243 (1,003)
-------- -------- --------
(21,502) 19,094 (1,536)
-------- -------- --------
Net tax provision (benefit)........ $ (18,019) $ 25,009 $ (11,176)
======== ======== ========
The income tax provision (benefit) for continuing operations differs from
that computed using the statutory Federal income tax rate of 35% in Fiscal 1995
and 1994 and 34% in Fiscal 1993 for the following reasons (in thousands):
1995 1994 1993
-------- -------- --------
Computed statutory amount......... $ (18,179) $ 18,477 $ (18,578)
State income taxes, net of
applicable federal tax benefit.. (934) 720 679
Foreign Sales Corporation benefit. -- (228) (222)
Nondeductible acquisition
valuation items................. 1,993 4,431 2,053
Equity income and dividends....... -- -- (2,979)
Tax on foreign earnings, net of
tax credits..................... 3,234 352 3,337
Difference between book and tax
basis of assets acquired and
liabilities assumed............. 1,366 1,366 582
Tax benefit of operating losses
not currently recognizable...... -- -- 4,964
Revision of estimate for tax
accruals........................ (5,000) -- --
Other............................. (499) (109) (1,012)
--------- --------- --------
Net tax provision(benefit)........ $ (18,019) $ 25,009 $ (11,176)
========= ========= ========
The following table is a summary of the significant components of the
Company's deferred tax assets and liabilities as of June 30, 1995 and 1994.
- 54 -
<PAGE>
<TABLE>
<CAPTION>
(In thousands) 1995 1994
Deferred Deferred
June 30, (Provision) June 30, (Provision)
1995 Benefit 1994 Benefit
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Deferred tax assets:
Accrued expenses..................... $ 7,579 $ (2,218) $ 9,797 $ 1,960
Asset basis differences.............. 277 (7,292) 7,569 (8,428)
Employee compensation and benefits... 5,434 106 5,328 (859)
Environmental reserves............... 5,249 (1,202) 6,451 (267)
Loss and credit carryforwards........ 32,025 17,991 14,034 2,499
Postretirement benefits.............. 20,607 514 20,093 (124)
Other................................ 3,333 1,530 1,803 (4,145)
------- ------- ------- -------
74,504 9,429 65,075 (9,364)
Deferred tax liabilities:
Asset basis differences.............. (39,167) 4,129 (43,296) 1,638
Inventory............................ (6,694) 3,176 (9,870) 1,310
Pensions............................. (19,759) 1,074 (20,833) 20
Other................................ (11,982) 3,694 (15,676) (11,411)
------- ------- ------- -------
(77,602) 12,073 (89,675) (8,443)
------- ------- ------- -------
(3,098) 21,502 (24,600) (17,807)
Less amount related to accounting change -- -- -- 1,287
------- ------- ------- -------
Net deferred tax liability............. $ (3,098) $ 21,502 $(24,600) $(19,094)
======= ======= ======= =======
The amounts included in the balance sheet are as follows:
</TABLE>
Prepaid expenses and other current assets:
Current deferred..................... $ 7,117 $ --
Taxes receivable (payable)........... (1,849) 1,922
------- -------
$ 5,268 $ 1,922
======= =======
Notes receivable and other assets:
Tax receivable....................... $ -- $ 16,982
======= =======
Income taxes (receivable) payable:
Current deferred..................... $ -- $ (4,976)
Taxes payable........................ -- 17,689
------- -------
$ -- $ 12,713
======= =======
Noncurrent income tax liabilities:
Noncurrent deferred.................. $ 10,215 $ 29,576
Other noncurrent..................... 27,789 23,586
------- -------
$ 38,004 $ 53,162
======= =======
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:
- 55 -
<PAGE>
(In thousands) 1993
-------
Pension expense and employee benefits...... $ 9,062
Depreciation............................... (17,549)
Investment earnings (loss)................. (880)
Various reserves and accruals.............. 6,078
Other...................................... 1,753
-------
$ (1,536)
=======
The 1995 net tax benefit includes the result of reversing $5,000,000 of
federal income taxes previously provided due to a change in the estimate of
required tax accruals.
For tax purposes, the Company had available, at June 30, 1995, net
operating loss ("NOL") carryforwards for regular Federal income tax purposes of
approximately $91,500,000, which will expire as follows: $45,600,000 in year
2008 and $45,900,000 in year 2010.
Domestic income taxes, less available credits, are provided on the
unremitted income of foreign subsidiaries and affiliated companies, to the
extent that such earnings are intended to be repatriated. No domestic income
taxes or foreign withholding taxes are provided on the undistributed earnings of
foreign subsidiaries and affiliates, which are considered permanently invested,
or which would be offset by allowable foreign tax credits. At June 30, 1995, the
amount of domestic taxes payable upon distribution of such earnings was not
significant.
In the opinion of management, adequate provision has been made for all
income taxes and interest, and any liability that may arise for prior periods
will not have a material effect on the financial condition or results of
operations of the Company.
10. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
----------------------------------------------
The Company includes $23,804,000 and $23,981,000 of minority interest on
its balance sheet at June 30, 1995 and 1994, respectively, represented by the
Series C Preferred Stock of FII. The Series C Preferred Stock of FII has an
annual dividend requirement of $4.25 per share through July 21, 1999, and $7.00
per share thereafter. The Company purchased 4,100 and 800 shares of FII's Series
C Preferred Stock in Fiscal 1995 and 1994, respectively. There were 553,460 and
557,560 shares outstanding at June 30, 1995 and 1994, respectively. Series C
Preferred Stock is listed on the New York Stock Exchange ("NYSE").
11. REDEEMABLE PREFERRED STOCK OF SUBSIDIARY
----------------------------------------
The Company has classified the outstanding shares of Series A Preferred
Stock of FII as a long-term liability. The Series A Preferred Stock has a
- 56 -
<PAGE>
mandatory redemption value of $45.00 per share and an annual dividend
requirement of $3.60 per share. Annual mandatory redemptions of 165,564 shares
at $45.00 per share plus any dividend in arrears began in January 1989. FII has
the option of redeeming any or all of its shares, at $45.00 per share. Due to
the merger of FII in August 1989 with a subsidiary of the Company, holders of
the Series A Preferred Stock are entitled, at their option, but subject to
compliance with certain covenants under FII's Credit Agreement, to redeem their
shares for $27.18 in cash.
The Company purchased 26,900 and 4,000 shares of FII's Series A Preferred
Stock in Fiscal 1995 and 1994, respectively. Effectively, there were 393,801 and
420,701 shares outstanding at June 30, 1995 and June 30, 1994, respectively.
Series A Preferred Stock is listed on the NYSE.
Annual maturity redemption requirements for redeemable preferred stock, as
of June 30, 1995, are as follows: $2,820,000 for 1996, $7,450,000 for 1997, and
$7,450,000 for 1998.
12. EQUITY SECURITIES
-----------------
The Company had 13,406,109 shares of Class A common stock and 2,696,886
shares of Class B common stock outstanding at June 30, 1995. Class A common
stock is traded on both the New York and Pacific Stock Exchanges. There is no
public market for the Class B common stock. Shares of Class A common stock are
entitled to one vote per share and cannot presently be exchanged for shares of
Class B common stock. Shares of Class B common stock are entitled to ten votes
per share and can be exchanged, at any time, for shares of Class A common stock
on a share-for-share basis. Shareholders did not convert any shares of Class B
common stock into Class A common stock during Fiscal 1995.
RHI holds an investment in the Company's Class A common stock of
approximately $44,606,000. The Company accounts for the Class A common stock
held by RHI as Treasury Stock.
13. STOCK OPTIONS, WARRANTS, AND DEFERRED PERFORMANCE INCENTIVE PLAN
----------------------------------------------------------------
The Company has reserved 4,320,000 shares of Class A common stock for issue
to key employees under the Company's 1986 Stock Option Plan. This plan
authorizes the granting of options over a ten-year period at not less than the
market value of the common stock at the time of the grant. The option price is
payable in cash or, with the approval of the stock option committee of the Board
of Directors, in shares of common stock, valued at fair market value at the time
of exercise. The options normally terminate five years from their date of grant,
subject to extension of up to 10 years or for a stipulated period of time after
an employee's death or termination of employment.
- 57 -
<PAGE>
Stock Options Granted to Directors
----------------------------------
On May 19, 1988, the Board of Directors approved the grant of 180,000
shares of stock options to six outside Directors of the Company at an exercise
price of $6.04 per share. In Fiscal 1990 and 1991, the Company granted and
approved 75,000 and 60,000 options, respectively, to certain Directors. These
stock options expire five years from the date of the grant. On November 17,
1994, shareholders approved the grant of stock options of 190,000 shares to
outside Directors of the Company to replace expired stock options.
Stock option transactions are summarized below:
(In thousands Shares Shares under option plan
except per share available --------------------------
data) for grant 1986 Other Price
-----------------------------------------
July 1,1992........ 374 1,643 191 $4.625-11.00
Granted............ (291) 101 190 $4.125-4.25
Canceled........... 537 (387) (150) $5.16-9.125
---------------------------
June 30, 1993...... 620 1,357 231 $4.125-11.00
Granted............ (57) 27 30 $3.50-4.125
Canceled........... 124 (64) (60) $4.25-9.125
---------------------------
June 30, 1994...... 687 1,320 201 $3.50-11.00
Granted............ (332) 332 -- $3.50-3.875
Canceled........... 178 (148) (30) $3.50-11.00
---------------------------
June 30, 1995...... 533 1,474 171 $3.50-9.125
===========================
Warrants
--------
At June 30, 1995, the Company had outstanding warrants to purchase 375,000
shares of the Company's common stock for $7.67 per share. The warrants can be
used to purchase either Class A or B common stock and will expire on March 13,
1997.
14. 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
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including discount rate and
estimates of future cash flows. In that regard,
- 58 -
<PAGE>
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 non-financial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the underlying value
of the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
The carrying amount reported in the balance sheet approximates the fair
value for cash and cash equivalents, short-term borrowings, current maturities
of long-term debt, and all other variable rate debt (including borrowings under
the Credit Agreement).
Fair values for equity securities, long-term public debt issued by the
Company, and publicly issued preferred stock of FII are based on quoted market
prices, where available. For equity securities not actively traded, fair values
are estimated by using quoted market prices of comparable instruments or, if
there are no relevant comparables, on pricing models or formulas using current
assumptions. The fair value of limited partnerships, other investments, and
notes receivable are estimated by discounting expected future cash flows using a
current market rate applicable to the yield, considering the credit quality and
maturity of the investment.
The fair value for the Company's other fixed rate long-term debt is
estimated using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
Fair values for the Company's off-balance-sheet instruments (letters of
credit, commitments to extend credit, and lease guarantees) are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counter parties' credit standing. The
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 1994, are as follows:
- 59 -
<PAGE>
<TABLE>
<CAPTION>
June 30, 1995 June 30, 1994
---------------------- ------------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Cash and cash equivalents......... $ 71,182 $ 71,812 $102,368 $102,368
Investment Securities:
Short-term equity securities.... 3,968 3,968 2,969 2,969
Short-term limited partnerships. 12 12 2,899 2,899
Short-term other investments.... 148 182 781 874
Long-term equity securities..... 492 492 2,748 3,147
Long-term limited partnerships.. 346 346 3,396 3,508
Long-term Bidermann investment.. -- -- 9,314 9,314
Notes Receivable:
Current......................... 271 248 1,426 1,362
Long-term....................... 970 940 6,873 7,234
Short-term debt................... 5,489 5,489 3,974 3,974
Long-term debt:
Bank credit agreement........... 126,396 126,396 97,315 97,315
Senior notes and subordinated
debentures.................... 411,279 384,139 425,016 419,404
Industrial revenue bonds........ 1,500 1,500 1,500 1,500
Capitalized leases.............. 1,253 1,253 3,302 3,302
Other........................... 4,787 4,787 6,278 6,278
Minority interest in FII.......... 23,804 20,755 23,981 21,675
Redeemable preferred stock of
subsidiary...................... 16,342 14,571 17,552 15,461
</TABLE>
15. RESTRUCTURING CHARGES
---------------------
In Fiscal 1994 and 1993, the Company recorded the restructuring charges in
the Aerospace Fasteners segment in the categories shown below. Except for the
costs included in the other category (see note (d) below), all costs classified
as restructuring were the direct result of formal plans to close plants, to
terminate employees, or to exit product lines. Substantially all of these plans
have been executed. These charges were either incurred during the year shown or
shortly after each year end. Other than a reduction in the Company's existing
cost structure and manufacturing capacity, none of the restructuring charges
resulted in future increases in earnings or represented an accrual of future
costs. The costs included in restructuring were predominately non-recurring in
nature and to a large degree, non-cash charges.
- 60 -
<PAGE>
(In thousands)
SIGNIFICANT COMPONENTS 1994 1993
- ---------------------- ------ ------
Write off of goodwill related to discontinued
products lines................................ $ 6,959 $ --
Write down of inventory to net realizable value
related to discontinued product lines (a)...... 2,634 540
Write down of fixed assets related to
discontinued product lines..................... 3,000 3,465
Severance benefits for terminated employees
(substantially all paid within twelve months).. 471 4,213
Plant closings facility costs (b)............... 851 3,164
Relocation of business from closed plant in
New Jersey to California (c)................... 1,795 1,884
Contract termination claims..................... 128 --
Lease penalty for closed plant.................. -- 388
Other (d)....................................... 3,022 1,815
------ ------
$18,860 $15,469
====== ======
(a) Write down was required because product line was discontinued, otherwise
inventory would have been sold at prices in excess of book value.
(b) Includes lease settlements, write offs of leasehold improvements,
maintenance, restorations and clean up costs.
(c) Principally consists of costs to move equipment, inventory, tooling and
personnel.
(d) Includes costs associated with a requalification of product lines by a
customer, nonrecurring costs of cellularization and reengineering of
manufacturing processes and methods.
16. UNUSUAL ITEMS
-------------
On January 17, 1994, the Company's Chatsworth, California Aerospace
Fasteners manufacturing facility suffered extensive damage from the Southern
California earthquake. As a result, the Company relocated the Chatsworth
manufacturing operations to its other Southern California facilities. This
disruption caused increased costs and reduced revenues in the Fiscal 1994, and
has negatively affected Fiscal 1995 as well. While the Company carries insurance
for both business interruption and property damage caused by earthquakes, the
policy has a 5% deductible. The Company recorded an unusual pretax loss of
$4,000,000 in Fiscal 1994 to cover the estimated net cost of the damages and
related business interruption caused by the earthquake. In addition, the Company
recorded a write down of $2,000,000 in Fiscal 1994, relating to this real estate
which is now included in net assets held for sale.
- 61 -
<PAGE>
17. RELATED PARTY TRANSACTIONS
--------------------------
Corporate office administrative expense recorded by FII 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 affiliated companies. Each of these
affiliated companies has reimbursed FII for such services.
The Company and its subsidiaries are all parties to a tax sharing agreement
whereby the Company files a consolidated federal income tax return and the
subsidiaries make payments to the Company based on the amount of federal income
taxes, if any, the subsidiary would have paid if it had filed a separate tax
return.
The Aerospace Fasteners segment had sales to Banner Aerospace, Inc. a
47.2% affiliate of RHI, of $5,494,000, $5,680,000 and $8,750,000 in Fiscal
1995, 1994 and 1993, respectively.
18. 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:
(In thousands)
June 30,
Description 1995
----------- --------
Buildings and improvements......... $ 422
Machinery and equipment............ 12,688
Furniture and fixtures............. 297
Less: Accumulated depreciation.... (7,167)
-------
$ 6,240
=======
- 62 -
<PAGE>
Future minimum lease payments:
Operating Capital
(In thousands) Leases Leases
------ ------
1996.............................. $ 8,508 $ 1,109
1997.............................. 7,516 244
1998.............................. 7,428 8
1999.............................. 6,812 --
2000.............................. 7,284 --
------ ------
$37,548 1,361
======
Less: Amount representing interest............... (108)
------
Present value of capital lease obligations........ $ 1,253
======
Rental expense on operating leases for the years ended June 30, 1995, 1994,
and 1993 was $10,811,000, $7,193,000 and $9,575,000, respectively.
In connection with the sale of Metro Credit Corporation, the Company
remained contingently liable as a guarantor of the payment and performance of
obligations of third party lessees under aircraft leases, which call for
aggregate annual base lease payments of approximately $3,094,000 in 1996, and
approximately $7,942,000 over the remaining 4-year guaranty period. In each
case, the Company has been indemnified by the purchasers and lessors from any
losses related to such guaranties.
CL Motor ("CL") Freight Litigation
- ----------------------------------
The Workers Compensation Bureau of the State of Ohio is seeking
reimbursement from the Company for up to $5,400,000 for CL workers compensation
claims which were insured under a self-insured program of CL. The Company has
contested a significant portion of this claim.
Government Claims
- -----------------
The Corporate Administrative Contracting Officer (the "ACO"), based upon
the advice of the United States Defense Contract Audit Agency, has made a
determination that FII did not comply with Federal Acquisition Regulations and
Cost Accounting Standards in accounting for (i) the 1985 reversion to FII of
certain assets of terminated defined benefit pension plans, and (ii) pension
costs upon the closing of segments of FII's business. The ACO has directed FII
to prepare cost impact proposals relating to such plan terminations and segment
closings and, following receipt of such cost impact proposals, may seek
adjustments to contract prices. The ACO alleges that substantial amounts will be
due if such adjustments are made. The Company believes it has properly accounted
for the asset reversions in accordance with applicable accounting standards. The
Company had discussions with the government to attempt to resolve these pension
accounting issues.
- 63 -
<PAGE>
Civil Litigation
- ----------------
Maurice Bidermann Litigation
----------------------------
The Company obtained a judgment in the United States District for the
Southern District of New York, for $12,947,000, plus interest, against Maurice
Bidermann ("Bidermann") for breach of an agreement under which Bidermann was to
have acquired the Company's interest in Bidermann Industries USA, Inc.
("BIUSA"), for approximately $22,500,000, of which Bidermann paid $10,000,000,
and then defaulted. In June 1995, the Company settled this claim for
approximately $12,000,000, in addition to the $10,000,000 previously collected,
and transferred its interest in BIUSA to third parties.
Environmental Matters
- ---------------------
The Company and other aerospace fastener and industrial product
manufacturers are subject to stringent Federal, state and local environmental
laws and regulations concerning, among other things, the discharge of materials
into the environment and the generation, handling, storage, transportation and
disposal of waste and hazardous materials. To date, such laws and regulations
have not had a material effect on the financial condition of the Company,
although the Company has expended, and can be expected to expend in the future,
significant amounts for investigation of environmental conditions and
installation of environmental control facilities, remediation of environmental
conditions and other similar matters, particularly in the Aerospace Fasteners
segment.
In connection with its plans to dispose of certain real estate, the Company
must investigate environmental conditions and may be required to take certain
corrective action prior or pursuant to any such disposition. In addition,
management has identified several areas of potential contamination at or from
other facilities owned, or previously owned, by the Company, that may require
the Company either to take corrective action or to contribute to a clean-up. The
Company is also a defendant in certain lawsuits and proceedings seeking to
require the Company to pay for investigation or remediation of environmental
matters and has been alleged to be a potentially responsible party at various
"Superfund" sites, Management of the Company believes that it has recorded
adequate reserves in its financial statements to complete such investigation and
take any necessary corrective actions or make any necessary contributions. No
amounts have been recorded as due from third parties, including insurers, or set
off against, any liability of the Company, unless such parties are contractually
obligated to contribute and are not disputing such liability.
As of June 30, 1995, the consolidated total recorded liabilities of the
Company for environmental matters totalled $14,087,000. As of June 30, 1995, the
estimated probable exposures for these matters was $13,918,000. It is reasonably
possible the Company's total exposure for these matters could be approximately
$22,870,000.
- 64 -
<PAGE>
Other Matters
- -------------
The Company is involved in various other claims and lawsuits incidental to
its business, some of which involve substantial amounts. The Company, either on
its own or through its insurance carriers, is contesting these matters.
In the opinion of management, the ultimate resolution of the legal
proceedings, including those discussed above, will not have a material adverse
effect on the financial condition or the future operating results of the
Company.
19. BUSINESS SEGMENT INFORMATION
----------------------------
The Company's operations are conducted in three principal business
segments. The Aerospace Fasteners segment includes the manufacture of high
performance specialty fasteners and fastening systems. The Industrial Products
segment is engaged in (i) the manufacture of tooling and injection control
systems for the plastic injection molding and die casting industries, (ii) the
supply of modems for use in high speed digitized voice and data communications,
and (iii) the designing and manufacturing of wet processing tools, equipment and
systems. The Communications Services segment provides telecommunication services
to office buildings and sells, installs and maintains telecommunications systems
for business and government customers. Intersegment sales are insignificant to
the sales of any segment.
Identifiable assets represent assets that are used in the Company's
operations in each segment at year end. Corporate assets are principally in
cash, marketable securities, prepaid pension costs, assets held for sale, and
property maintained for general corporate purposes.
The Company's financial data by business segment is as follows:
- 65 -
<PAGE>
(In thousands)
1995 1994 1993
Sales by Business Segment: --------- --------- ---------
Aerospace Fasteners.............. $ 219,129 $ 203,456 $ 247,080
Industrial Products (b).......... 218,484 166,499 148,449
Communications Services.......... 108,710 74,190 68,038
--------- --------- ---------
Total Segment Sales................ $ 546,323 $ 444,145 $ 463,567
========= ========= =========
Operating Income (Loss) by Segment:
Aerospace Fasteners (a).......... $ (14,073) $ (32,208) $ (15,398)
Industrial Products (b).......... 21,112 21,024 19,081
Communications Services.......... 18,498 16,483 14,688
--------- --------- ---------
Total Segment Operating Income..... 25,537 5,299 18,371
Corporate Administrative Expense. (13,179) (16,868) (19,506)
Other Corporate Income (expense). (2,152) 2,231 5,309
--------- --------- ---------
Total Consolidated Operating
Income (Loss).................... $ 10,206 $ (9,338) $ 4,174
========= ========= =========
Capital Expenditures:
Aerospace Fasteners.............. $ 4,974 $ 4,320 $ 5,711
Industrial Products.............. 4,931 3,997 4,002
Communications Services.......... 10,349 7,775 5,792
Corporate and Other.............. 446 187 91
--------- --------- ---------
Total Capital Expenditures......... $ 20,700 $ 16,279 $ 15,596
========= ========= =========
Depreciation and Amortization:
Aerospace Fasteners.............. $ 15,619 $ 14,373 $ 14,280
Industrial Products.............. 7,394 6,765 6,154
Communications Services.......... 10,329 8,948 7,936
Corporate and Other.............. 4,828 6,141 5,585
--------- --------- ---------
Total Depreciation and Amortization $ 38,170 $ 36,227 $ 33,955
========= ========= =========
Identifiable Assets at June 30,:
Aerospace Fasteners.............. $ 290,465 $ 306,008 $ 337,185
Industrial Products.............. 189,798 164,632 146,754
Communications Services.......... 108,666 79,087 78,752
Corporate and Other.............. 292,953 363,802 398,191
--------- --------- ---------
Total Identifiable Assets.......... $ 881,882 $ 913,529 $ 960,882
========= ========= =========
(a) - Includes charges to reflect the cost of restructuring of $18,860,000 and
$15,469,000 in Fiscal 1994 and 1993, respectively, and an unusual loss from
earthquake damage and business interruption of $4,000,000 in Fiscal 1994.
(b) - Included in Fiscal 1995 and 1994 are the results of Fairchild Data
Corporation. Sales from this division, formerly included in net assets held for
sale, and not included in the results of operations, were $15,432,000 for Fiscal
1993. The impact of this division's earnings on the Fiscal 1993 period was
immaterial.
- 66 -
<PAGE>
20. FOREIGN OPERATIONS AND EXPORT SALES
-----------------------------------
The Company's operations are located primarily in the United States and
Europe. Inter-area sales are not significant to the total sales of any
geographic area. The Company's financial data by geographic area is as follows:
(In thousands)
1995 1994 1993
Sales by Geographic Area: --------- --------- ---------
United States.................... $ 413,362 $ 358,614 $ 369,343
Europe........................... 122,182 76,366 85,479
Other............................ 10,779 9,165 8,745
--------- --------- ---------
Total Sales........................ $ 546,323 $ 444,145 $ 463,567
========= ========= =========
Operating Income by Geographic Area:
United States.................... $ 9,285 $ (1,011) $ 15,390
Europe........................... (384) 5,847 2,034
Other............................ 1,305 463 947
--------- --------- ---------
Total Segment Operating Income..... $ 10,206 $ 5,299 $ 18,371
========= ========= =========
Identifiable Assets by Geographic
Area at June 30,:
United States.................... $ 479,086 $ 458,621 $ 479,751
Europe........................... 110,768 86,545 78,176
Other............................ 9,465 4,561 4,764
Corporate and other assets....... 282,563 363,802 398,191
--------- --------- ---------
Total Identifiable Assets.......... $ 881,882 $ 913,529 $ 960,882
========= ========= =========
Export sales are defined as sales to customers in foreign countries by the
Company's domestic operations. Export sales amounted to the following:
(In thousands)
1995 1994 1993
--------- --------- ---------
Export Sales
Europe........................... $ 16,547 $ 12,692 $ 15,297
Other............................ 18,469 16,593 13,546
--------- --------- ---------
Total Export Sales................. $ 35,016 $ 29,285 $ 28,843
========= ========= =========
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
------------------------------------
The following table of quarterly financial data has been prepared from the
financial records of the Company without audit, and reflects all
- 67 -
<PAGE>
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results of operations for the interim periods presented:
<TABLE>
<CAPTION>
(In thousands, except per share data)
- ----------------------------------------------------------------------------------------------
Fiscal 1995 quarters ended Oct. 2 Jan. 1 April 2 June 30
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales.......................... $121,393 $125,929 $150,755 $148,246
Gross profit....................... 32,253 28,397 35,734 30,649
Loss from continuing operations.... (6,660) (10,665) (10,757) (5,838)
per share...................... (0.42) (0.67) (0.67) (0.36)
Loss from disposal of discontinued
operations, net.................. (25) (25) (184) (25)
per share...................... (0.00) (0.00) (0.01) (0.00)
Extraordinary items, net........... -- (23) 378 --
per share...................... -- (0.00) 0.02 --
Net loss........................... (6,685) (10,713) (10,563) (5,863)
per share...................... (0.42) (0.67) (0.66) (0.36)
Market price range of Class A Stock
High............................. 4 1/8 4 1/8 3 3/4 3 3/8
Low.............................. 3 1/8 2 5/8 2 3/8 2
- ----------------------------------------------------------------------------------------------
Fiscal 1994 quarters ended Oct. 3 Jan. 2 April 3 June 30
- ----------------------------------------------------------------------------------------------
Net sales.......................... $110,491 $108,830 $112,836 $111,988
Gross profit....................... 22,962 25,875 27,138 30,289
Earnings (loss) from continuing
operations....................... (11,151) 70,467 (11,195) (20,338)
per share...................... (0.69) 4.37 (0.69) (1.26)
Loss from disposal of discontinued
operations, net.................. (29) (29) (259) (51)
per share...................... (0.00) (0.00) (0.02) (0.01)
Extraordinary items, net........... -- -- (147) (496)
per share...................... -- -- (0.01) (0.03)
Cumulative effects of changes in
accounting principles, net....... (10,950) -- -- --
per share...................... (0.68) -- -- --
Net earnings (loss)................ (22,130) 70,438 (11,601) (20,885)
per share...................... (1.37) 4.37 (0.72) (1.30)
Market price range of Class A Stock
High............................. 4 1/8 4 1/8 4 7/8 4 5/8
Low.............................. 3 2 3/4 3 7/8 3 1/2
</TABLE>
Earnings (loss) from continuing operations in the fourth quarter of Fiscal
1995, includes adjustments to inventories and receivables of the Company's
Aerospace Fasteners Segment, to reflect required valuation allowances against
these assets. Charges to reflect the cost of restructuring the Company's
Aerospace Fasteners Segment, of $9,903,000 and $8,957,000 in the second and
fourth quarters of Fiscal 1994, respectively, are included in earnings (loss)
from continuing operations. The Company recorded an unusual loss in the third
and fourth quarter of Fiscal 1994, of $3,200,000 and $3,493,000, respectively,
to cover the estimated net cost of the damages and related business interruption
caused by an earthquake and the related write down of real estate and other
assets.
The second quarter of Fiscal 1994 includes non-recurring income of
$129,094,000, net pre-tax, from the gain on the sale of the Company's 43.9%
- 68 -
<PAGE>
stock interest in Rexnord.
Extraordinary items relate to the early extinguishment of debt by the
Company. (See Note 4).
The Fiscal 1994 first and second quarter data presented vary from the
amounts previously reported in each of their respective Form 10-Q filings due to
the Company's decision not to sell a division which was included in net assets
held for sale, and not included in the results of operations. Sales from the
division were $4,141,000 and $3,438,000 in the first and second quarters,
respectively, of Fiscal 1994. Earnings from the division had no material effect
during these periods.
- 69 -
<PAGE>
Report of Independent Public Accountants
----------------------------------------
To The Fairchild Corporation:
We have audited the accompanying consolidated balance sheets of The Fairchild
Corporation (a Delaware corporation) and subsidiaries as of June 30, 1995 and
1994, and the related consolidated statements of earnings, 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 The Fairchild Corporation and
subsidiaries as of June 30, 1995 and 1994, and the results of their operations
and their cash flows for the years ended June 30, 1995, 1994 and 1993, in
conformity with generally accepted accounting principles.
As discussed in Notes 8 and 9 to the consolidated financial statements,
effective July 1, 1993, the Company changed its methods of accounting for
postretirement benefits other than pensions, and income taxes.
Arthur Andersen LLP
Washington, D.C.
September 15, 1995
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
FEBRUARY 9, 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 February 9, 1996 or any adjournment or adjournments
thereof, upon all matters set forth in the Notice of Special Meeting of
Stockholders and Proxy Statement dated January __, 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 as amended by that certain Amendment dated January
__, 1996 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
