<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 25, 1996
REGISTRATION STATEMENT NO.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
----------------
SHARED TECHNOLOGIES FAIRCHILD COMMUNICATIONS CORP.
(EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4890 06-1448107
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
100 GREAT MEADOW ROAD
WETHERSFIELD, CT 06109
(860) 258-2400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
CO-REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
SHARED TECHNOLOGIES FAIRCHILD INC.
(EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4890 87-0424558
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
100 GREAT MEADOW ROAD
WETHERSFIELD, CT 06109
(860) 258-2400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
CO-REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
BOSTON TELECOMMUNICATIONS GROUP, INC.
(EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 4890 04-2826562
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
100 GREAT MEADOW ROAD
WETHERSFIELD, CT 06109
(860) 258-2400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
CO-REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
MULTI-TENANT SERVICES, INC.
(EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4890 06-1297856
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
100 GREAT MEADOW ROAD
WETHERSFIELD, CT 06109
(860) 258-2400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
CO-REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
OFFICE TELEPHONE MANAGEMENT
(EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 4890 33-0180945
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
100 GREAT MEADOW ROAD
WETHERSFIELD, CT 06109
(860) 258-2400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
CO-REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
<PAGE>
STI INTERNATIONAL, INC.
(EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4890 06-1430452
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
100 GREAT MEADOW ROAD
WETHERSFIELD, CT 06109
(860) 258-2400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
CO-REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
SHARED TECHNOLOGIES FAIRCHILD TELECOM, INC.
(EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4890 52-1192851
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
100 GREAT MEADOW ROAD
WETHERSFIELD, CT 06109
(860) 258-2400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
CO-REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
----------------
ANTHONY D. AUTORINO
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
SHARED TECHNOLOGIES FAIRCHILD COMMUNICATIONS CORP.
100 GREAT MEADOW ROAD
WETHERSFIELD, CT 06109
(860) 258-2400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
HAROLD J. CARROLL, ESQ.
MARIANNE GILLERAN, ESQ.
GADSBY & HANNAH
125 SUMMER STREET
BOSTON, MA 02110-1617
(617) 345-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon the
effectiveness of this registration statement, Shared Technologies Fairchild
Communications Corp. (the "Issuer") will offer to exchange its 12 1/4% Senior
Subordinated Discount Notes Due 2006 which will have been registered under the
Securities Act of 1933, as amended, for any and all of its outstanding 12 1/4%
Senior Subordinated Discount Notes Due 2006, all as described in the enclosed
Prospectus.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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- -------------------------------------------------------------------------------------------------
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
12 1/4 Senior
Subordinated Discount
Notes Due 2006......... $114,999,174(2) 100% $114,999,174(2) $39,655
- -------------------------------------------------------------------------------------------------
Guarantees of Debt
Securities............. -- (3) -- -- --
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Reflects proceeds received by Shared Technologies Fairchild Communications
Corp. upon issuance of the 12 1/4% Senior Subordinated Discount Notes Due
2006 with original issue discount, before deductions of fees and
commissions.
(3) No separate consideration will be received for the Guaranties of the 12
1/4% Senior Subordinated Discount Notes Due 2006, which are guarantied by
Shared Technologies Fairchild Inc., Boston Telecommunications Group, Inc.,
Multi-Tenant Services, Inc., Office Telephone Management, STI
International, Inc., and Shared Technologies Fairchild Telecom, Inc.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD COMMUNICATIONS CORP.
Cross-Reference Sheet Pursuant to Rule 404(a) of Regulation C and Item 501(b)
of Regulation S-K showing the Location in the Prospectus of the Information
Required by Part I of Form S-4.
<TABLE>
<CAPTION>
LOCATION OR HEADING
ITEM OF FORM S-4 IN PROSPECTUS
---------------- -------------------
A. INFORMATION ABOUT THE TRANSACTION
<C> <S> <C>
1. Forepart of Registration Statement
and Outside Front Cover Page of Facing Page of Registration
Prospectus........................ Statement; Cross-Reference Sheet;
Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus............... Available and Additional
Information; Table of Contents
3. Risk Factors, Ratio of Earnings to
Fixed Charges and Other Outside Front Cover Page of
Information....................... Prospectus; Prospectus Summary; Risk
Factors; Ratio of Earnings to Fixed
Charges; Pro Forma Financial
Information; Selected Historical
Financial Data; Business; The
Exchange Offer; Description of the
Notes; Certain Federal Income Tax
Considerations
4. Terms of the Transaction........... Prospectus Summary; The Exchange
Offer; Description of the Notes;
Plan of Distribution
5. Pro Forma Financial Information.... Prospectus Summary; Pro Forma
Financial Information
6. Material Contacts with the Company
Being Acquired.................... *
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters......... *
8. Interests of Named Experts and
Counsel........................... Legal Matters; Experts
9. Disclosure of Commission Position
on Indemnification For Securities
Act Liabilities................... *
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3
Registrants....................... *
11. Incorporation of Certain
Information by Reference.......... *
12. Information with Respect to S-2 or
S-3 Registrants................... *
13. Incorporation of Certain
Information by Reference.......... *
14. Information with Respect to
Registrants Other Than S-3 or S-2
Registrants....................... Prospectus Summary; Risk Factors;
Pro Forma Financial Information;
Business; Management's Discussion
and Analysis of Financial Condition
and Results of Operations; Financial
Statements
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3
Companies......................... *
16. Information with Respect to S-2 or
S-3 Companies..................... *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LOCATION OR HEADING
ITEM OF FORM S-4 IN PROSPECTUS
---------------- -------------------
<C> <S> <C>
17. Information with Respect to
Companies Other Than S-2 or S-3
Companies....................... *
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents
or Authorizations are to be
Solicited....................... *
19. Information if Proxies, Consents
or Authorizations Are Not to be Additional and Available
Solicited, or in an Exchange Information; Prospectus Summary; The
Offer........................... Exchange Offer
</TABLE>
- --------
* Item is omitted because answer is negative or Item is inapplicable.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION (DATED APRIL 25, 1996)
PROSPECTUS
SHARED TECHNOLOGIES FAIRCHILD COMMUNICATIONS CORP.
OFFER TO EXCHANGE ITS 12 1/4% SENIOR SUBORDINATED DISCOUNT NOTES DUE 2006,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR
ANY AND ALL OF ITS OUTSTANDING 12 1/4% SENIOR SUBORDINATED DISCOUNT NOTES DUE
2006
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1996, UNLESS EXTENDED.
----------
Shared Technologies Fairchild Communications Corp. (the "Issuer") hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal" and together with this Prospectus, the "Exchange Offer"), to
exchange its 12 1/4% Senior Subordinated Discount Notes Due 2006 (the "New
Notes") which have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to a Registration Statement of which this
Prospectus is a part, for an equal principal amount of its outstanding 12 1/4%
Notes Senior Subordinated Discount Due 2006 (the "Old Notes"), of which
$163,637,000 aggregate principal amount ($114,999,174 aggregate initial
Accreted Value) is outstanding as of the date hereof. The New Notes and the Old
Notes are sometimes collectively referred to herein as the "Notes".
The Issuer will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 P.M., New York City time, on the
date the Exchange Offer expires (the "Expiration Date"), which will be ,
1996, unless the Exchange Offer is extended. Tenders of Old Notes may be
withdrawn at any time prior to 5:00 P.M., New York City time, on , 1996.
The Exchange Offer is not conditioned upon any minimum principal amount of Old
Notes being tendered for exchange. However, the Exchange Offer is subject to
certain customary conditions which may be waived by the Issuer. Old Notes may
be tendered only in integral multiples of $1,000. The Issuer has agreed to pay
the expenses of the Exchange Offer. See "The Exchange Offer".
The New Notes will be obligations of the Issuer evidencing the same
indebtedness as the Old Notes and will be entitled to the benefits of the same
Indenture (as defined), which governs both the Old Notes and the New Notes. The
form and terms of the New Notes are the same as the form and terms of the Old
Notes, except that the New Notes have been registered under the Securities Act
and therefore will not bear legends restricting the transfer thereof. See
"Description of the New Notes".
The Notes were issued at a substantial discount from their principal amount
and no interest is payable on the Notes before March 1, 1999. Thereafter, the
Notes will bear interest at the rate of 12 1/4% per annum from the most recent
date to which interest has been paid on the Notes or, if no interest has been
paid on the Notes, from March 1, 1999. Interest on the Notes will be payable
semi-annually on March 1 and September 1 of each year, commencing March 1,
1999. Holders of Old Notes whose Old Notes are accepted for exchange will not
receive any payment in respect of accrued and unpaid interest on such Old
Notes. See "The Exchange Offer". The Notes are not redeemable prior to March 1,
2001 except that, until March 1, 1999, the Issuer may redeem, at its option, up
to an aggregate of 25% of the principal amount of the Notes at the redemption
price set forth herein plus accrued interest to the date of redemption with the
net proceeds of one or more Public Equity Offerings (as defined) if at least
$122,727,750 of the principal amount of the Notes remain outstanding after each
such redemption. On or after March 1, 2001, the Notes are redeemable at the
option of the Issuer, in whole or in part, at the redemption prices set forth
herein plus accrued interest to the date of redemption. Upon a Change of
Control (as defined), each holder of Notes may require the Issuer to repurchase
such Notes at 101% of the Accreted Value (as defined) thereof plus accrued
interest to the date of repurchase.
Prior to this Exchange Offer, there has been no public market for the Old
Notes or New Notes. If such a market were to develop, the New Notes could trade
at prices that may be higher or lower than their principal amount. The Issuer
does not intend to apply for listing or quotation of the New Notes on any
securities exchange or stock market. Therefore, there can be no assurance as to
the liquidity of any trading market for the New Notes or that an active public
market for the New Notes will develop.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Issuer has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus available to any broker-dealer
for use in connection with any such resale. See "Plan of Distribution".
CS First Boston Corporation and Citicorp Securities, Inc. (the "Initial
Purchasers") have advised the Issuer that one or both of them presently intends
to act as market-makers for the Notes. However, the Initial Purchasers are not
obligated to so act and they may discontinue any such market-making at any time
without notice.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF
OLD NOTES WHO TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER, SEE "RISK FACTORS"
ON PAGE 15 OF THIS PROSPECTUS.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements
included elsewhere in this Prospectus. Prior to the issuance of the Old Notes,
Fairchild Industries, Inc. ("FII") completed a restructuring (the "FII
Recapitalization") pursuant to which FII transfered all of its assets to, and
caused all of its liabilities to be assumed by, RHI Holdings, Inc. ("RHI"),
FII's then immediate parent, except for (i) the assets and liabilities of its
telecommunications services business (the "FII Telecommunications Business"),
(ii) its outstanding Series A and Series C Preferred Stock (the "FII Preferred
Stock"), (iii) its 12 1/4% Senior Secured Notes due 1999 (the "12 1/4% Notes")
and (iv) certain indebtedness of FII (the "FII Indebtedness"). See "The
Transactions--FII Recapitalization". Shared Technologies Inc., RHI and RHI's
parent, The Fairchild Corporation ("Fairchild"), previously agreed that FII
will merge with and into Shared Technologies Inc. with Shared Technologies Inc.
being the surviving corporation (the "Merger"). In connection with the Merger,
Shared Technologies Inc. changed its name to Shared Technologies Fairchild Inc.
("STFI"); all references to STFI with respect to periods before the effective
date of the Merger shall refer to Shared Technologies Inc. Accordingly, unless
the context otherwise requires, "STFI" refers to Shared Technologies Fairchild
Inc. and "FII" refers to only the operations, assets and liabilities of the FII
Telecommunications Business, in each case prior to giving effect to the Merger,
and the "Company" refers to the entity resulting from the Merger, which will be
named Shared Technologies Fairchild Inc., and its consolidated subsidiaries,
including the Issuer.
Unless otherwise specified, all information contained herein with respect to
the Company and the Issuer gives effect to the Transactions.
THE COMPANY
GENERAL
The Company, formed through the merger of FII and STFI, is the largest
provider of shared telecommunications services ("STS") in the United States.
The Company also sells, installs and maintains telecommunications systems for
businesses and government agencies. As of December 31, 1995, the Company
provided shared telecommunications services across the United States servicing
approximately 9,000 customers in 448 buildings with over 100,000 lines. As of
December 31, 1995, the Company also provided maintenance and other services
through its telecommunications systems business to approximately 6,000
customers with over 400,000 lines nationwide. The Company currently provides
STS and telecommunications systems in over 36 metropolitan markets.
The Company provides shared telecommunications services to commercial tenants
in office buildings in which the Company typically has installed a dedicated
private branch exchange (PBX) switch under exclusive agreement with the
building owner, thereby permitting the Company's customers to obtain all their
telephone and telecommunications needs from a single source and a single point
of contact. Under multi-year contracts that usually extend through the term of
the tenants' leases, the Company offers its customers access to services
provided by regulated communications companies, such as local, discounted long
distance, international and "800" telephone services. The Company also provides
telephone switching equipment and telephones, as well as voice mail, telephone
calling cards, local area network wiring, voice and data cable installation.
Other services provided by the Company include audio conferencing, automatic
call distribution services and message center capability. In addition, the
Company's customers receive a convenient single monthly customized invoice for
all services provided by the Company.
The Company typically provides equipment and services at rates which are
competitive with or lower than those which customers could otherwise obtain, in
part due to discounts it can obtain as a high volume purchaser of
telecommunications services and equipment. In addition, by providing telephone
hardware and ongoing maintenance, the Company reduces the tenants' capital
costs of acquiring a modern, flexible telecommunications system. During the
term of a service contract, the Company generally provides the tenant with
technical
3
<PAGE>
assistance, services upgrades, expansions and innovations consistent with the
tenant's changing business and telecommunications needs.
Through its telecommunications systems business, the Company (i) distributes
and sells equipment, including small, medium and large capacity telephone
switches and ancillary products, (ii) offers annual maintenance agreements
under which the Company maintains installed products either for a fixed annual
fee or on a time-and-materials basis, (iii) performs systems upgrades and
expansions, and moves, adds and changes telecommunications equipment, and (iv)
provides a variety of long distance services, including basic long distance
services, "800" services, calling cards, international calling and various
other network services. The Company provides telecommunications systems to
commercial customers and government agencies with systems ranging in size from
15 to several thousand lines.
Both STFI and the FII Telecommunications Business commenced operations
following the divestiture by AT&T of its local telephone companies in 1984 and
the resulting fragmentation of the provision of telecommunications services.
The change in the competitive environment, coupled with technical innovations,
resulted in an accelerated flow of new telecommunications products and
services, stimulating user demand. However, the rapid pace of change, the
broadening range of services and products and the growing number of pricing
options resulted in a complex, confusing marketplace, particularly for small
and medium-sized businesses lacking the internal resources to effectively
evaluate their telecommunications alternatives. In addition, although the
telecommunications requirements of small and medium-sized businesses had become
more sophisticated, such businesses were not able to access new services,
obtain state-of-the-art equipment and enjoy economies of scale as readily as
larger businesses. In response to these difficulties, numerous STS providers
such as STFI and FII were established, creating a service business to provide a
simplified, one-stop solution to the complex alternatives confronting small and
medium-sized users of modern telecommunications services.
Following a period of industry consolidation during which STFI and FII
consummated over 25 acquisitions, STFI and FII emerged as two of the nation's
three largest STS providers. As a result of the acquisitions, coupled with
internal growth, the combined sales and EBITDA of STFI and FII (excluding sales
and EBITDA from STFI's subsidiary, Shared Technologies Cellular, Inc.) grew to
$174.9 million and $40.7 million, respectively, for the twelve months ended
December 31, 1995. As of December 31, 1995, STFI and FII provided shared
telecommunications services to 115 buildings with over 30,000 lines and 333
buildings with over 70,000 lines, respectively.
Management expects the Merger will result in significant operating synergies
and cost savings. The Company's increased size, national scope with operations
in over 36 metropolitan markets and improved position in those 12 markets in
which both STFI and FII had operations prior to the Merger will give the
Company a stronger market presence than either STFI or FII had on a stand-alone
basis and improve the Company's ability to obtain reduced pricing from
telecommunications services providers and equipment vendors. In addition, the
Merger will permit the Company to consolidate operations, thereby reducing
personnel costs and certain general and administrative costs. Management
believes the Company can achieve in excess of $5 million of annual cost savings
within two years following the Merger. There can be no assurance, however, that
the Company will actually achieve such savings.
BUSINESS STRATEGY
As the nation's leading STS provider, the Company believes it is well
positioned to continue to grow through the implementation of its business
strategy, the key elements of which are:
. Increased Penetration of Existing Buildings. The Company intends to
increase its focus on generating additional revenue from the 448
buildings in which it currently provides shared telecommunications
services. Although the Company may continue to make selective
acquisitions of STS providers in the
4
<PAGE>
future, its principal focus will be on marketing services within its
existing buildings, both to new customers and to existing customers.
. Significant Additions of Buildings. For the three years ended December
31, 1995, STFI and FII grew internally through the addition of 26 and 36
buildings, respectively. The Company plans to take advantage of its
improved market position to aggressively pursue opportunities to add
buildings to its portfolio, particularly through multi-building contracts
with large commercial property owners.
. Expanded Service Offerings. The Company intends to capitalize on the
growing demand for new telecommunications and information technology by
expanding its services to include high speed access to the Internet,
video teleconferencing, wireless services and the delivery of cable
programming. The Company's existing infrastructure allows for low-cost
delivery of these services at minimal incremental expense to the Company.
The Company believes that many of these services would otherwise not be
readily available or affordable to its customers.
. Cross Marketing of Services and Systems. The Company intends to leverage
its telecommunications systems business by marketing telecommunications
services to its existing systems customer base. In addition, the Company
intends to increase its marketing of telecommunications systems to its
STS customers relocating from existing rental space who continue to
require customized telecommunications solutions, including the purchase
or lease of equipment or the provision of long distance and other network
services offered by the Company.
THE MERGER TRANSACTIONS
Pursuant to an Agreement and Plan of Merger (the "Merger Agreement") among
FII, STI, RHI and Fairchild, FII merged into STFI, with the surviving
corporation having changed its name to "Shared Technologies Fairchild Inc." FII
underwent a restructuring, the FII Recapitalization, pursuant to which FII
transfered all of its assets to, and caused all of its liabilities to be
assumed by RHI, its immediate parent, except for (i) the assets and liabilities
of the FII Telecommunications Business which is conducted through Shared
Technologies Fairchild Telecom, Inc. (formerly VSI Corporation) ("STFTI"), a
wholly owned subsidiary of FII, (ii) the FII Preferred Stock, (iii) the 12 1/4%
Notes and (iv) the FII Indebtedness (collectively, the "Retained Liabilities").
Prior to the Merger, FII commenced a cash tender offer and consent solicitation
(the "Tender Offer") for all of the principal amount of the 12 1/4% Notes.
Due to the consummation of the Merger, RHI received (i) 6.0 million shares of
Common Stock of the Company, $0.004 par value per share (the "Common Stock")
(representing approximately 40.8% of the then outstanding Common Stock), (ii)
Cumulative Convertible Preferred Stock of the Company with an initial
liquidation preference of $25.0 million (the "Convertible Preferred Stock") and
(iii) Special Preferred Stock of the Company with an initial liquidation
preference of $20.0 million (the "Special Preferred Stock"). Such shares of
Common Stock, Convertible Preferred Stock and Special Preferred Stock are
herein referred to as the "RHI Consideration". As a result of the Merger,
shares of Class B preferred stock of FII owned by RHI were canceled and all
other shares of FII Preferred Stock were redeemed by the Company at the
liquidation value thereof plus accrued dividends (the "Preferred
Consideration"), aggregating approximately $39.6 million as of February 1,
1996.
In connection with the consummation of the Merger, the Issuer entered into a
new credit facility with Credit Suisse, Citicorp USA, Inc. and NationsBank,
providing for up to $145.0 million of loans. The obligations of the Issuer
under the Credit Facility was guaranteed by the Company and by all the
subsidiaries of the Issuer (collectively, the "Subsidiary Guarantors") and are
secured by substantially all the assets of the Company, the Issuer and the
Subsidiary Guarantors and a pledge by the Company of all the common stock of
the Issuer. See "Description of Certain Indebtedness--The Credit Facility". The
FII Recapitalization, the Tender Offer, the Merger, the borrowings under the
Credit Facility in connection therewith and the offering and sale of the Old
Notes (the "Offering") are herein collectively referred to as the
"Transactions".
5
<PAGE>
The following diagram sets forth a summary of the corporate structure of the
Company and its subsidiaries (including the Issuer). Unless otherwise
indicated, the Company, directly or indirectly, owns 100% of the outstanding
capital stock of such subsidiaries.
[CHART OF CORPORATE STRUCTURE APPEARS HERE]*
(a) The Series C Preferred Stock and Series D Preferred Stock represent
previously issued preferred stock of STFI that remain outstanding after
consummation of the Transactions.
(b) Shared Technologies Cellular Inc. ("STC"), a 59.3% owned affiliate, is
accounted for on the equity basis. During December 1995, STC issued
approximately $3.0 million in voting preferred stock to third parties.
While STFI's ownership percentage did not change, the voting rights
assigned to the voting preferred stock reduced STFI's voting interest in
STC to 42.7%, resulting in STFI's loss of voting control of STC.
The Issuer is a Delaware corporation with its principal executive offices
located at 100 Great Meadow Road, Wethersfield, Connecticut 06109, and its
telephone number at that address is (860) 258-2400.
- --------------------
*GRAPHICAL APPENDIX
The Company is the parent of the Issuer, which is in turn the parent of the
STFI Subsidiaries and through which the FII Telecommunications Business is
conducted. The Company is also the owner of 59.3% of the common stock of STC
(see note b).
The diagram also shows that the Company has outstanding the following
securities: Convertible Preferred Stock, Special Preferred Stock, Series C
Preferred Stock (see note a), Series D Preferred Stock (see note a), and Common
Stock. The diagram also shows that the Issuer has outstanding the indebtedness
under the Credit Facility and the Notes.
6
<PAGE>
THE EXCHANGE OFFER
Registration Rights Agreement... The Old Notes were sold by the Issuer on
March 13, 1996 to the Initial Purchasers,
which placed the Old Notes with institutional
investors. In connection therewith, the Is-
suer executed and delivered for the benefit
of the holders of the Old Notes the Registra-
tion Rights Agreement (as defined) providing,
among other things, for the Exchange Offer.
The Exchange Offer.............. The New Notes are being offered in exchange
for an equal principal amount of Old Notes.
As of the date hereof, $163,637,000 aggregate
principal amount ($114,999,174 aggregate ini-
tial Accreted Value) of Old Notes are out-
standing. Because the New Notes will be re-
corded in the Issuer's accounting records at
the same carrying value as the Old Notes, no
gain or loss will be recognized by the Issuer
upon the consummation of the Exchange Offer.
See "The Exchange Offer--Accounting Treat-
ment". Holders of the Old Notes do not have
appraisal or dissenter's rights in connection
with the Exchange Offer under the Delaware
General Corporation Law, the state of incor-
poration of the Issuer.
Generally, holders of Old Notes (other than
any holder who is an "affiliate" of the Is-
suer within the meaning of Rule 405 under the
Securities Act) who exchange their Old Notes
for New Notes pursuant to the Exchange Offer
may offer such New Notes for resale, resell
such New Notes and otherwise transfer such
New Notes without compliance with the regis-
tration and prospectus delivery provisions of
the Securities Act; provided such New Notes
are acquired in the ordinary course of the
holder's business and such holders have no
arrangement or understanding with any person
to participate in a distribution of such New
Notes. Each broker-dealer that receives New
Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by
such broker-dealer as a result of market-mak-
ing activities or other trading activities,
must acknowledge that it will deliver a pro-
spectus in connection with any resale of such
New Notes. See "Plan of Distribution". To
comply with the securities laws of certain
jurisdictions, it may be necessary to qualify
for sale or register the New Notes prior to
offering or selling such New Notes. The Is-
suer has agreed, pursuant to the Registration
Rights Agreement and subject to certain spec-
ified limitations therein, to register or
qualify the New Notes for offer or sale under
the securities or "blue sky" laws of such ju-
risdictions as may be necessary to permit the
holders of New Notes to trade the New Notes
without any restrictions or limitations under
the securities laws of the several states of
the United States. If a holder of Old Notes
does not exchange such Old Notes for New
Notes pursuant to the Exchange Offer, such
Old Notes will continue to be subject to the
restrictions on transfer contained
7
<PAGE>
in the legend thereon. In general, the Old
Notes may not be offered or sold, unless reg-
istered under the Securities Act, except pur-
suant to an exemption from, or in a transac-
tion not subject to, the Securities Act and
applicable state securities laws. See "Risk
Factors--Consequences of Failure to Exchange"
and "Description of the New Notes--Exchange
Offer--Registration Rights".
Expiration Date................. 5:00 p.m., New York City time, on ,
1996, unless the Exchange Offer is extended,
in which case the term "Expiration Date"
means the latest date and time to which the
Exchange Offer is extended.
Accrued Interest on the New
Notes and Old Notes............
The New Notes will be issued at a substantial
discount from their principal amount. The
price to investors for the Notes represents a
yield to maturity of 12 1/4% per annum (com-
puted on a semiannual bond equivalent basis).
The Notes will begin to accrue interest at a
rate of 12 1/4% per annum commencing March 1,
1999, and interest will be payable thereafter
on March 1 and September 1 of each year. The
Notes are not redeemable prior to March 1,
2001 except that, until March 1, 1999, the
Issuer may redeem, at its option, up to an
aggregate of 25% of the principal amount of
the Notes at the redemption price set forth
herein plus accrued interest to the date of
redemption with the net proceeds of one or
more Public Equity Offerings if at least
$122,727,750 of the principal amount of the
Notes remain outstanding after each such re-
demption. On or after March 1, 2001, the
Notes are redeemable at the option of the Is-
suer, in whole or in part, at the redemption
prices set forth herein plus accrued interest
to the date of redemption. Upon a Change of
Control, each holder of Notes may require the
Issuer to repurchase such Notes at 101% of
the Accreted Value thereof plus accrued in-
terest to the date of repurchase. See "The
Exchange Offer--Acceptance of Old Notes for
Exchange; Delivery of New Notes".
Conditions to the Exchange The Exchange Offer is subject to certain cus-
Offer.......................... tomary conditions, which may be waived by the
Issuer. See "The Exchange Offer--Conditions".
Except for the requirements of applicable
Federal and state securities laws, there are
no Federal or state regulatory requirements
or approvals to be complied with or obtained
by the Issuer in connection with the Exchange
Offer. NO VOTE OF THE ISSUER'S SECURITY HOLD-
ERS IS REQUIRED TO EFFECT THE EXCHANGE OFFER,
AND NO SUCH VOTE (OR PROXY THEREFOR) IS BEING
SOUGHT HEREBY.
Procedures for Tendering Old Each holder of Old Notes wishing to accept
Notes.......................... the Exchange Offer must complete, sign and
date the Letter of Transmittal, or a facsim-
ile thereof, in accordance with the instruc-
tions contained herein and therein, and mail
or otherwise deliver such
8
<PAGE>
Letter of Transmittal, or such facsimile, to-
gether with the Old Notes to be exchanged and
any other required documentation to the Ex-
change Agent (as defined) at the address set
forth herein and therein. See "The Exchange
Offer--Procedures for Tendering".
Withdrawal Rights............... Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on ,
1996. To withdraw a tender of Old Notes, a
written or facsimile transmission notice of
withdrawal must be received by the Exchange
Agent at its address set forth below under
"Exchange Agent" prior to 5:00 p.m., New York
City time, on , 1996.
Acceptance of Old Notes and
Delivery of New Notes..........
Subject to certain conditions, the Issuer
will accept for exchange any and all Old
Notes which are properly tendered in the Ex-
change Offer prior to 5:00 p.m., New York
City time, on the Expiration Date. The New
Notes issued pursuant to the Exchange Offer
will be delivered promptly following the Ex-
piration Date. See "The Exchange Offer--Terms
of the Exchange Offer".
Certain Tax Considerations...... The exchange of New Notes for Old Notes
should not be a sale or exchange or otherwise
a taxable event for Federal income tax pur-
poses. See "Certain Federal Income Tax
Considerations".
Exchange Agent.................. United States Trust Company of New York is
serving as exchange agent (the "Exchange
Agent") in connection with the Exchange Of-
fer.
Use of Proceeds................. There will be no proceeds to the Issuer from
the Exchange Offer. The net proceeds to the
Issuer from the sale of the Old Notes were
approximately $111.0 million. Those proceeds,
together with approximately $125.0 million of
initial borrowings under the Credit Facility,
were distributed to the Issuer and used to
(i) consummate the Tender Offer ($137.1
million), (ii) pay the Preferred
Consideration ($40.6 million), (iii) repay
the STFI Indebtedness and the FII
Indebtedness ($50.0 million) and (iv) pay
related fees and expenses ($8.3 million). See
"Use of Proceeds" and "Management's
Discussion and Analysis of Financial
Condition and Results of Operations--
Liquidity and Sources of Capital".
SUMMARY OF TERMS OF NEW NOTES
The Exchange Offer relates to the exchange of up to $163,637,000 aggregate
principal amount ($114,999,174 aggregate initial Accreted Value) of Old Notes
for up to an equal aggregate principal amount of New Notes. The New Notes will
be obligations of the Issuer evidencing the same indebtedness as the Old Notes,
and will be entitled to the benefits of the same Indenture. The form and terms
of the New Notes are the same as the form and terms of the Old Notes, except
that the New Notes have been registered under the Securities Act and therefore
will not bear legends restricting the transfer thereof. See "Description of the
New Notes".
9
<PAGE>
COMPARISON WITH OLD NOTES
Freely Transferable............. Generally, the New Notes will be freely
transferable under the Securities Act by
holders who are not affiliates of the Issuer.
The New Notes otherwise will be substantially
identical in all material respects (including
interest rate and maturity) to the Old Notes.
See "The Exchange Offer--Terms of the
Exchange Offer".
Registration Rights............. The holders of Old Notes currently are enti-
tled to certain registration rights pursuant
to an Exchange Registration Rights Agreement
(the "Registration Rights Agreement") dated
as of March 13, 1996, among the Issuer, the
Company, certain subsidiaries of the Issuer
and CS First Boston Corporation and Citicorp
Securities, Inc. However, upon consummation
of the Exchange Offer, subject to certain ex-
ceptions, holders of Old Notes who do not ex-
change their Old Notes for New Notes in the
Exchange Offer will no longer be entitled to
registration rights and will not be able to
offer or sell their Old Notes, unless such
Old Notes are subsequently registered under
the Securities Act (which, subject to certain
limited exceptions, the Issuer will have no
obligation to do), except pursuant to an ex-
emption from, or in a transaction not subject
to, the Securities Act and applicable state
securities laws. See "Risk Factors--Conse-
quences of Failure to Exchange".
TERMS OF THE NEW NOTES
Interest Rate................... 12 1/4% per annum.
Maturity Date................... March 1, 2006.
Interest Payment Dates.......... March 1 and September 1 of each year, com-
mencing September 1, 1999. The Notes will be-
gin to accrue interest at a rate of 12 1/4%
per annum commencing March 1, 1999. A holder
of the Notes will be required to include
amounts in gross income for federal tax pur-
poses in advance of the receipt of the cash
payments to which the income is attributable.
Optional Redemption............. The Notes are not redeemable prior to March
1, 2001 except that, until 1999, the Issuer
may redeem, at its option, up to an aggregate
of 25% of the principal amount of the Notes
at the redemption price set forth herein plus
accrued interest to the date of redemption
with the net proceeds of one or more Public
Equity Offerings if at least $122,727,750
principal amount of the Notes remain out-
standing after each such redemption. On or
after March 1, 2001, the Notes are redeemable
at the option of the Issuer, in whole or in
part, at the redemption prices set forth
herein plus accrued interest to the date of
redemption. See "Description of the Notes--
Optional Redemption".
10
<PAGE>
Change of Control............... Upon a Change of Control, each holder of
Notes (a "Holder") may require the Issuer to
repurchase the Notes held by such Holder at
101% of the Accreted Value thereof plus ac-
crued interest to the date of repurchase. See
"Description of the Notes--Change of Con-
trol".
Ranking and Guarantees.......... The Notes are subordinated to all existing
and future Senior Indebtedness (as defined)
of the Issuer. After giving pro forma effect
to the Transactions, as of December 31, 1995,
the Issuer would have had approximately
$125.0 million of Senior Indebtedness out-
standing. The Notes are fully and uncondi-
tionally guaranteed on an unsecured senior
subordinated basis by the Company. The
Company's guarantee is subordinated to all
existing and future Senior Indebtedness of
the Company. The Company is a holding compa-
ny, the principal asset of which is the capi-
tal stock of the Issuer, all of which is
pledged to secure Senior Indebtedness of the
Company, including the Company's senior guar-
antee of all indebtedness of the Issuer out-
standing under the Credit Facility. The Notes
are also guaranteed to the maximum extent
permitted by law, jointly and severally, on a
senior subordinated basis, by all the Subsid-
iary Guarantors. After giving pro forma ef-
fect to the Transactions, as of December 31,
1995, the Guarantors would have had Senior
Indebtedness of approximately $128.3 million,
$125.0 million of which would have repre-
sented guarantees of Senior Indebtedness of
the Issuer under the Credit Facility. The
Notes rank pari passu in right of payment
with all existing and future senior subordi-
nated indebtedness of the Issuer and senior
to any other subordinated indebtedness of the
Issuer issued after the Offering. See "De-
scription of the Notes--Ranking".
Restrictive Covenants........... The indenture under which the Notes were is-
sued (the "Indenture") limits (i) the issu-
ance of additional debt by the Issuer, (ii)
the issuance of debt and preferred stock by
the Issuer's subsidiaries, (iii) the payment
of dividends on capital stock of the Issuer
and its subsidiaries and the purchase, re-
demption or retirement of capital stock or
indebtedness, (iv) investments, (v) certain
transactions with affiliates, (vi) sales of
assets, including capital stock of subsidiar-
ies, and (vii) certain consolidations, merg-
ers and transfers of assets. The Indenture
also prohibits certain restrictions on dis-
tributions from subsidiaries. However, all of
these limitations and prohibitions are sub-
ject to a number of important qualifications.
See "Description of the Notes--Certain Cove-
nants".
11
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
The following table sets forth summary pro forma financial data of the
Company, which data are derived from the Pro Forma Financial Statements (as
defined). See "Pro Forma Financial Information". The Pro Forma Financial
Statements are based on the historical financial statements of STFI and FII
included elsewhere in this Prospectus, adjusted to give effect to the following
(collectively, the "Specified Events"): (i) certain acquisitions by STFI and
FII since January 1, 1995 (the "Prior Acquisitions"), (ii) the issuance of
certain preferred stock of STC in December 1995 and the resulting loss of
voting control (the "STC Equity Issuance"), (iii) the adjustment to FII's
historical consolidated statements of operations to present FII on a calendar
year basis and (iv) the Transactions. The pro forma statement of operations
data give effect to the Specified Events as if they had occurred as of January
1, 1995, and the pro forma balance sheet data give effect to the Specified
Events (other than the Prior Acquisitions) as if they had occurred as of
December 31, 1995. The data do not purport to represent what the Company's
results of operations or financial condition would actually have been had the
Specified Events in fact occurred on such dates or to project the Company's
results of operations for any future period or financial condition at any
future date. For a description of all the pro forma adjustments, see the Notes
to the Pro Forma Financial Statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------
PRO PRO
FORMA FORMA PRO FORMA COMBINED
STFI(A) FII(B) ADJUSTMENTS COMPANY
------- -------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................ $49,044 $125,808 $ -- $174,852
Gross margin........................ 18,939 58,746 806 78,491
Operating income (loss)............. 2,060 19,387 (2,364) 19,083
Interest expense, net............... 901 21,478 4,468 26,847
Net income (loss)................... (145) (2,091) (6,792) (9,028)
OTHER DATA:
Depreciation and amortization....... $ 4,118 $ 11,844 $ 5,616 $ 21,578
EBITDA(c)........................... 6,178 31,231 3,310 40,661
Capital expenditures................ 3,689 11,285 -- 14,974
Cash interest expense(d)............ 11,342
Ratio of EBITDA to interest expense,
net................................ 1.54x
Ratio of EBITDA to cash interest
expense, net....................... 3.58x
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
---------------------------------------
PRO PRO
FORMA FORMA PRO FORMA COMBINED
STFI(A) FII(B) ADJUSTMENTS COMPANY
------- --------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets......................... $42,863 $ 104,163 $228,207 $375,233
Long-term debt and capital lease
obligations, including current
portion............................. 6,998 171,083 65,187 243,268
Stockholders' equity (deficit)....... 22,844 (104,842) 132,592 50,594
</TABLE>
- --------
(a) See Unaudited Pro Forma Consolidated Financial Statements of STFI.
(b) See Unaudited Pro Forma Consolidated Financial Statements of FII.
12
<PAGE>
(c) EBITDA is defined as net income plus income taxes, interest expense,
depreciation and amortization. However, EBITDA excludes (i) income (or
loss) from discontinued operations, (ii) the net income of subsidiaries
accounted for on the equity basis (other than distributions or dividends
actually received from such subsidiaries but only to the extent of the
equity held in such subsidiaries) and (iii) for the year ended December 31,
1995, the $1.4 million gain on sale of subsidiary stock. EBITDA is
presented because it is a widely accepted financial indicator of a
company's ability to incur and service debt. EBITDA should not be
considered by an investor as an alternative to net income, as an indicator
of the operating performance of the Company, STFI or FII or as an
alternative to cash flow as a measure of liquidity.
(d) Excludes amortization of debt issuance costs, the costs of interest rate
protection agreements and accretion of the Notes.
13
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
The following tables set forth a summary of selected financial data of (i)
STFI for each of the fiscal years indicated in the five-year period ended
December 31, 1995, which were derived from the audited consolidated financial
statements of STFI for each of the fiscal years in the five-year period ended
December 31, 1995 and (ii) FII for each of the fiscal years indicated in the
five-year period ended June 30, 1995 and for the six months ended December 31,
1994 and December 31, 1995, which were derived from the audited consolidated
financial statements of FII for each of the fiscal years in the five-year
period ended June 30, 1995 and from the unaudited consolidated financial
statements of FII for the six months ended December 31, 1994 and December 31,
1995.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------------
STFI 1991 1992 1993 1994 1995
- ---- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................... $23,172 $24,076 $25,426 $45,367 $47,086
Gross margin....................... 6,358 9,254 10,912 19,195 18,214
Operating income (loss)............ (4,359) (705) 810 2,286 2,026
Net income (loss) before
extraordinary item................ (5,623) (1,032) 290 2,286 927
OTHER DATA:
Depreciation and amortization...... $ 3,423 $ 2,448 $ 2,562 $ 3,702 $ 3,967
EBITDA............................. (936) 1,743 3,372 5,925 5,993
Capital expenditures............... 2,430 2,014 2,035 3,223 3,679
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, SIX MONTHS ENDED
-------------------------------------------- -------------------------
DECEMBER 31, DECEMBER 31,
FII 1991 1992 1993 1994 1995 1994 1995
- --- ------- ------- -------- -------- -------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues............... $48,405 $58,662 $ 68,639 $ 74,897 $109,741 $48,514 $64,631
Gross margin........... 25,386 31,158 34,904 37,918 51,381 22,799 30,164
Operating income....... 9,489 12,539 14,420 16,082 18,253 8,318 9,452
Net income (loss)
before dividends...... 17,890 14,255 (12,257) (33,987) (12,359) (1,599) (107)
OTHER DATA:
Depreciation and
amortization.......... $ 4,632 $ 6,377 $ 7,935 $ 8,947 $ 10,330 $ 4,113 $ 5,627
EBITDA................. 14,121 18,916 22,355 25,029 28,583 12,431 15,079
Capital expenditures... 5,396 5,601 5,769 7,775 10,349 4,540 5,476
</TABLE>
14
<PAGE>
RISK FACTORS
Holders of Old Notes should carefully consider the following risk factors,
as well as other information set forth in this Prospectus, before tendering
their Old Notes in the Exchange Offer. The risk factors set forth below (other
than "Consequences of Failure to Exchange") are generally applicable to the
Old Notes as well as the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Issuer does not
currently anticipate that it will register the Old Notes under the Securities
Act. Based on interpretations by the staff of the SEC, New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold or otherwise transferred by holders thereof (other than any
such holder which is an "affiliate" of the issuer within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such New
Notes are acquired in the ordinary course of such holders' business and such
holders have no arrangement with any person to participate in the distribution
of such New Notes. Each broker-dealer that receives New Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Issuer has agreed that, for a
period of 180 days after the Expiration Date, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution". However, to comply with the securities laws of certain
jurisdictions, if applicable, the New Notes may not be offered or sold unless
they have been registered or qualified for sale in such jurisdictions or an
exemption from registration or qualification is available and is complied
with. To the extent that Old Notes are tendered and accepted in the Exchange
Offer, the trading market for untendered and tendered but unaccepted Old Notes
could be adversely affected.
LACK OF PUBLIC MARKET FOR THE NEW NOTES
The New Notes are being offered to the holders of the Old Notes. The Old
Notes were issued in March 1996 to a small number of institutional investors
and are eligible for trading in the Private Offerings, Resales and Trading
through Automatic Linkages (PORTAL) Market, the National Association of
Securities Dealers' screen-based, automated market for trading of securities
eligible for resale under Rule 144A of the Securities Act. There is no
existing trading market for the New Notes, and there can be no assurance
regarding the future development of such a market for the New Notes or the
ability of holders of the New Notes to sell their New Notes or the price at
which such holders may be able to sell their New Notes. If such a market were
to develop, the New Notes could trade at prices that may be higher or lower
than their principal amount depending on many factors, including prevailing
interest rates, the Issuer's operating results and the market for similar
securities. The Initial Purchasers have agreed that one or more of them will
act as market-makers for the New Notes. However, the Initial Purchasers are
not obligated to so act and they may discontinue any such market-making at any
time without notice. There can be no assurance as to the liquidity of any
trading market for the New Notes or that an active public market for the New
Notes will develop. The Issuer does not intend to apply for listing or
quotation of the New Notes on any securities exchange or stock market.
Historically, the market for noninvestment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of
15
<PAGE>
such securities. There can be no assurance that the market for the New Notes
will not be subject to similar disruptions. Any such disruptions may have an
adverse effect on holders of the New Notes.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
After giving effect to the Transactions, the Issuer and the Company have
substantial indebtedness and the Issuer has significant debt service
requirements. As of December 31, 1995, after giving effect to the
Transactions, the Issuer and its subsidiaries would have had outstanding on a
pro forma basis indebtedness of approximately $243.3 million and the Company
would have had outstanding on a pro forma basis indebtedness of approximately
$243.3 million (consisting primarily of guarantees of the Issuer's
indebtedness under the Credit Facility and the Notes), redeemable preferred
stock with an aggregate liquidation preference of approximately $45.0 million
and shareholders' equity of approximately $50.6 million and a debt and
redeemable preferred stock to stockholders' equity ratio of 5.7 to 1.0. This
substantial indebtedness will have important consequences to holders of the
Notes, including the following: (i) a substantial portion of the Issuer's cash
flow from operations must be dedicated to the payment of principal and
interest on its indebtedness (including interest on the aggregate principal
amount of the Notes beginning in 1999), thereby reducing the funds available
to the Issuer for other purposes; (ii) the Issuer's ability to obtain
additional financing in the future, whether for working capital, capital
expenditures or other purposes may be impaired; (iii) the Issuer's leveraged
position and the covenants contained in its debt instruments could limit the
Issuer's ability to compete, as well as its ability to expand and make capital
improvements; (iv) the Issuer's substantial leverage may make it more
vulnerable to economic downturns, limit its ability to withstand competitive
pressures and reduce its flexibility in responding to changing business and
economic conditions; (v) the Issuer may be unable to comply with certain
operating or other covenants which could result in defaults under such
indebtedness; (vi) to the extent that the Issuer incurs any indebtedness under
the Credit Facility, which indebtedness will be at variable rates, the Issuer
will be vulnerable to increases in interest rates; and (vii) the indebtedness
outstanding under the Credit Facility will mature prior to the Notes and will
be secured by substantially all the assets of the Company, the Issuer and each
Subsidiary Guarantor and a pledge by the Company of all the shares of common
stock of the Issuer.
For the year ended December 31, 1995, on a pro forma basis after giving
effect to the Transactions, the Company's ratio of earnings to fixed charges
would have been 0.74 to 1.0, the Company's ratio of earnings to fixed charges
plus preferred stock dividends would have been 0.66 to 1.0, earnings would
have been insufficient to cover fixed charges by $7.3 million, and earnings
would have been insufficient to cover fixed charges and preferred stock
dividends by $11.1 million.
The Notes do not bear interest until March 1, 1999, and the Issuer will not
be obligated to pay cash interest on the Notes until September 1, 1999. In
order for the Issuer to meet its debt service obligations after March 1, 1999,
with respect to the Notes, the Issuer will need to substantially improve its
operating results. However, there can be no assurance that the Issuer's
operating results will improve or improve in a sufficient degree to enable the
Issuer to meet its debt service obligations. The Credit Facility and the
Indenture restrict the Issuer's ability to sell assets and use the proceeds
therefrom. See "Description of Certain Indebtedness of the Company and the
Issuer" and "Description of the Notes". In the absence of such improvement,
the Issuer could face liquidity problems and might be required to reduce its
capital expenditures and overhead expenses or dispose of material assets or
operations to meet its debt service and other obligations. There can be no
assurance as to the ability of the Issuer to consummate such sales or the
proceeds which the Issuer could realize therefrom or that such proceeds would
be adequate to meet the obligations then due.
If the Issuer is unable to generate sufficient cash flow or otherwise obtain
funds necessary to make required payments on its indebtedness or, if the
Issuer otherwise fails to comply with the various covenants in such
indebtedness (including covenants in the Credit Facility), it would be in
default under the terms thereof, which would permit the holders of such
indebtedness to accelerate the maturity of such indebtedness and could cause
defaults under other indebtedness of the Issuer or result in a bankruptcy of
the Issuer. Such defaults or any bankruptcy of the Issuer resulting therefrom
could result in a default on the Notes and could delay or preclude payment of
principal of, or interest on, the Notes. See "--Ranking of the Notes and
Guaranties". The ability of
16
<PAGE>
the Issuer to meet its obligations will be dependent upon the future
performance of the Issuer, which will be subject to prevailing economic
conditions and to financial, business and other factors, including factors
beyond the control of the Issuer.
RANKING OF THE NOTES AND GUARANTIES
The indebtedness evidenced by the Notes and the guaranties of the Notes (the
"Guaranties") by the Company and the Subsidiary Guarantors (the "Guarantors")
are senior subordinated obligations of the Issuer and the Guarantors, as the
case may be. The payment of the principal of, premium (if any), and interest
on the Notes and the payment of any Guaranty is subordinate in right of
payment, as set forth in the Indenture, to the prior payment in full of all
Senior Indebtedness of the Issuer or the relevant Guarantor, as the case may
be, including the obligations of the Issuer under, and such Guarantor's
guarantee of the Issuer's obligations with respect to, the Credit Facility.
As of December 31, 1995, after giving pro forma effect to the Transactions,
(i) the Senior Indebtedness of the Issuer would have been approximately $125.0
million, all of which would have been secured and (ii) the Senior Indebtedness
of the Guarantors would have been approximately $128.3 million, $125.0 million
of which would have represented guarantees of Senior Indebtedness of the
Issuer under the Credit Facility. Although the Indenture contains limitations
on the amount of additional Indebtedness that the Issuer and the Subsidiary
Guarantors may incur, under certain circumstances the amount of such
Indebtedness could be substantial and, in any case, such Indebtedness may be
Senior Indebtedness. See "--Certain Covenants--Limitation on Indebtedness" and
"--Limitation on Indebtedness and Preferred Stock of Restricted Subsidiaries".
After consummation of the Transactions, including the borrowings under the
Credit Facility, approximately $18.5 million of additional borrowings was
available under the Credit Facility for general corporate purposes, which
amounts will constitute Senior Indebtedness of the Issuer and the Guarantors
if and when incurred.
The Company is a holding company that derives all of its operating income
and cash flow from its subsidiaries, including primarily the Issuer, the
common stock of which is pledged to secure the Company's senior guarantee of
all indebtedness of the Issuer outstanding under the Credit Facility. The
Issuer is a holding company that derives all of its operating income and cash
flow from its subsidiaries, the common stock of which will constitute the
Issuer's only material assets, all of which is pledged to secure all
indebtedness of the Issuer outstanding under the Credit Facility. Generally,
claims of creditors of a subsidiary, including trade creditors, secured
creditors and creditors holding indebtedness and guarantees issued by such
subsidiary, and claims of preferred stockholders (if any) of such subsidiary
will have priority with respect to the assets and earnings of such subsidiary
over the claims of creditors of its parent company, except to the extent the
claims of creditors of the parent company are guaranteed by such subsidiary.
The Notes therefore will be effectively subordinated to creditors (including
trade creditors) and preferred stockholders (if any) of any subsidiaries of
the Issuer that are not Subsidiary Guarantors. However, on the date the Notes
were issued, the Issuer did not have any subsidiaries other than the
Subsidiary Guarantors. Although the Indenture limits the incurrence of
Indebtedness and preferred stock of certain of the Issuer's subsidiaries, such
limitation is subject to a number of significant qualifications. Moreover, the
Indenture does not impose any limitation on the incurrence by such
subsidiaries of liabilities that are not considered Indebtedness under the
Indenture. See "--Certain Covenants--Limitation on Indebtedness and Preferred
Stock of Restricted Subsidiaries". In addition, the Guaranty of each
Subsidiary Guarantor is expressly subordinated to all Senior Indebtedness of
such Subsidiary Guarantor and limited to the amount permitted by law. See "--
Fraudulent Conveyance Concerns".
In the event of the bankruptcy, liquidation or reorganization of the Issuer
or a Guarantor, the assets of the Issuer or such Guarantor, as the case may
be, will be available to pay the Notes or the related Guaranty only after all
Senior Indebtedness of the Issuer or such Guarantor, as the case may be, has
been paid in full. Sufficient funds may not exist to pay amounts due on the
Notes in such event. In addition, the subordination provisions of the
Indenture provide that no cash payment may be made with respect to the Notes
during the continuance of a payment default under any Senior Indebtedness of
the Issuer. Furthermore, if certain non-payment defaults exist
17
<PAGE>
with respect to certain Senior Indebtedness of the Issuer, the holders of such
Senior Indebtedness will be able to prevent payments on the Notes for certain
periods of time. See "Description of the Notes--Ranking".
FII RECAPITALIZATION, LIABILITIES AND INDEMNIFICATION
As a result of the Merger, the Company became liable for all liabilities of
FII with respect to the operations of the former businesses of FII, including
the FII Telecommunications Business and its aerospace and industrial fasteners
business up to the effective date of the Merger as well as operations of FII
disposed of prior to the Merger, including its injection molding business. As
a matter of law, the Company will not be released from FII's obligations with
respect to such liabilities.
As a pre-condition of the Merger: (a) FII, its parent RHI, and RHI's parent,
Fairchild and certain other subsidiaries of Fairchild underwent a
recapitalization pursuant to which FII divested itself of all assets unrelated
to the FII Telecommunications Business; (b) RHI assumed all liabilities of FII
unrelated to the FII Telecommunications Business (other than the Retained
Liabilities), including but not limited to the following (collectively, the
"Non-communications Liabilities"): (i) contingent liabilities related to a
dispute with the United States Government under Government Contract Accounts
rules concerning potential liability arising out of the use of and accounting
for approximately $50.0 million in excess pension funds relating to certain
government contracts in the discontinued aerospace business of FII (see
"Business--Description of the Business--Legal Proceedings"); (ii) all
environmental liabilities except those related to the FII Telecommunications
Business; (iii) approximately $50.0 million (at June 30, 1995) of costs
associated with post-retirement healthcare benefits; and (iv) all other
accrued liabilities and any and all other unasserted liabilities unrelated to
the FII Telecommunications Business; and (c) pursuant to certain
indemnification agreements (the "Indemnification Agreements"), the Company is
indemnified (i) by Fairchild and RHI jointly and severally with respect to all
Non-communications Liabilities and all tax liability of FII and STFTI
resulting from the FII Recapitalization or otherwise attributable to periods
prior to the Merger and (ii) by Fairchild Holding Corp. (a company formed in
connection with the FII Recapitalization) with respect to the liabilities of
the aerospace and industrial fasteners business previously conducted by FII
(all the liabilities that are indemnified for being herein collectively
referred to as the "Indemnified Liabilities"). Although the Company believes
that the FII Recapitalization, and in particular the distribution of stock to
RHI, will not cause FII or any of its affiliates to recognize income or gain,
FII did not obtain either an Internal Revenue Service ruling or an opinion
from its outside counsel regarding the tax consequences of the FII
Recapitalization.
The obligations of Fairchild, RHI and Fairchild Holding Corp. (the
"Indemnifying Parties") to indemnify the Company for the Indemnified
Liabilities will be secured by all of the shares of Convertible Preferred
Stock (other than shares having an initial liquidation preference of $1.5
million) and the Special Preferred Stock issued to RHI in the Merger. However,
all such securities will be released from the pledge upon the later to occur
of (i) the third anniversary of the Merger and (ii) the date on which the
consolidated net worth of Fairchild is at least (x) $25.0 million greater than
its net worth at September 30, 1995 (excluding for such purpose the pledged
securities) or (y) $225.0 million (including for such purpose the pledged
securities). The Company believes that Fairchild has already achieved the net
worth criteria of clause (ii) of the preceding sentence. Therefore, all
securities subject to the pledge shall be released therefrom on the third
anniversary of the Merger. Any adverse developments, financial or otherwise,
affecting any of Fairchild, RHI or Fairchild Holding Corp. could affect the
ability of the Indemnifying Parties to comply with their obligations to
indemnify the Company for the Indemnified Liabilities. The Company would be
required to satisfy in full all the Indemnified Liabilities to the extent the
Indemnifying Parties are unable or unwilling to honor their respective
obligations to the Company pursuant to the Indemnification Agreements. There
can be no assurance that, in the event that the Company is required to pay any
Indemnified Liabilities, the Indemnifying Parties will be able to satisfy
their obligations to indemnify the Company therefor.
With respect to the environmental liabilities unrelated to the FII
Telecommunications Business, based on a review of engineering studies
conducted for FII of claims for known contamination, the Company estimates
that it is reasonably possible that the costs resulting from such claims could
range from $8.0 million to $30.0 million,
18
<PAGE>
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 this potential liability. The Company
estimates did not include any claims for unknown liabilities for properties
not yet surveyed for environmental contamination which could have occurred up
to 30 years ago.
EFFECTIVE CONTROL BY PRINCIPAL STOCKHOLDERS
After giving effect to the Transactions, RHI beneficially owns 6.0 million
shares of Common Stock (approximately 40.8% of the then issued and outstanding
shares of Common Stock) and 250,000 shares of Convertible Preferred Stock
which are convertible into 3,921,568 shares of Common Stock (which, if
immediately converted, would represent approximately 21.0% of the then issued
and outstanding shares of Common Stock), in each case, of the Company which in
turn owns all the outstanding shares of common stock of the Issuer.
Accordingly, RHI has the ability to increase its ownership percentage of the
Company to 53.3% (42.8% on a fully diluted basis). If options are issued to
officers and directors of the Company under the 1996 Equity Incentive Plan,
this would, on a beneficial ownership basis, effectively increase RHI's
ownership position of the Company. Approximately 73% of the total voting power
of RHI's capital stock is beneficially owned by Jeffrey J. Steiner, the
Chairman, President and Chief Executive Officer of RHI and the Vice-Chairman
of each of the Company and the Issuer. As a consequence of such ownership, Mr.
Steiner effectively controls RHI and its subsidiaries and has the ability to
exert significant influence over the Company and the Issuer. Additionally, in
connection with the Merger, RHI and Anthony D. Autorino, Chairman and Chief
Executive Officer of the Company and the Issuer, entered into a Shareholders
Agreement pursuant to which each party agrees to (i) vote for four nominees of
RHI (provided, as long as Mel D. Borer is President of the Company, he will 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 as long as he is President) and (iii) cause to be
established an Executive Committee of the Board of Directors, which may act
only by unanimous consent, to consist of Mr. Autorino, the Chairman and Chief
Executive Officer of the Company, Mr. Borer, the President and Chief Operating
Officer of the Company and Jeffrey J. Steiner (or another person designated by
RHI), the Vice-Chairman of the Company. The Shareholders Agreement will
terminate at such time as either Mr. Autorino or RHI (or their respective
affiliates) own less than 25% of the shares of common stock of the Company
owned respectively by them on the date of the Merger or Mr. Autorino ceases to
be Chief Executive Officer of the Company. See "The Transactions--Additional
Agreements--Shareholders Agreement".
INABILITY TO REALIZE BENEFITS FROM THE MERGER
Management expects to realize operating synergies and cost savings as a
result of the Merger. There can be no assurance that the Company will achieve
all of the benefits that management expects to realize in connection with the
Merger or that such benefits will occur within the time frame contemplated.
Realization of operating synergies and cost savings could be affected by a
number of factors beyond the Company's control, such as general economic
conditions, increased operating costs, the response of competitors or
customers, regulatory developments and delays in implementation. In addition,
certain benefits are dependent upon the Company taking certain actions which
will result in one-time charges or expenses.
BUSINESS INTEGRATION
The Merger requires the integration of the administrative, finance, sales
and marketing organizations of STFI and FII. This requires substantial
attention from the Company's management team, which includes FII employees who
have not previously worked with STFI. Also, both the Company's and FII's
customers will need to be reassured that their services will continue
uninterrupted. The diversion of management attention and any other
difficulties encountered in the transition process could have an adverse
impact on its business, operating results or financial condition.
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<PAGE>
COMPETITION
The telecommunications industry is highly competitive. The Company believes
its success in competing with other providers of telecommunications services
and systems depends primarily on (i) its long term contractual relationships
with owners and contracts with tenants, (ii) its technical, operational and
marketing skills, (iii) the price, quality and reliability of its systems and
services and (iv) its delivery and customer service capabilities. The Company
also believes that technological developments, continuing regulatory change,
industry consolidation and new entrants will continue to cause rapid evolution
in the competitive environment of the telecommunications services and systems
market, the full scope and nature of which is impossible to predict. Many of
the Company's competitors have more extensive resources than those of the
Company. There can be no assurance that the Company will be able to compete
successfully with its existing or any new competitors or that competitive
pressures faced by the Company will not materially and adversely affect its
business, operating results or financial condition. See "Business--
Competitors".
OPERATIONAL DEMANDS RESULTING FROM GROWTH
The Company services over 15,000 customers located in over 36 metropolitan
markets. The increased size of the Company, coupled with the rapid growth that
STFI and FII experienced prior to the Merger in the number of employees, the
scope of their respective operating and financial systems and the geographic
area of their respective operations, will increase the operating complexity of
the Company, as well as increase the level of responsibility for both existing
and new management personnel. To manage its growth effectively, the Company
must continue to develop and improve its operating and financial systems in
order to monitor and control its geographically diverse business. The Company
will also need to continue to expand, train and manage its employee base, and
its management personnel will be required to assume greater levels of
responsibility. If the Company is not able to manage its growth effectively,
the Company's business and results of operations could be materially adversely
affected.
GOVERNMENT REGULATION
The Company is subject to specific regulations in several states. Within
various states, such regulations may include limitations on the number of
lines or PBX switches per system, limitations of shared telecommunications
systems to single buildings or building complexes, requirements that such
building complexes be under common ownership or common ownership, management
and control and the imposition of local exchange access rates that may be
higher than those for similar single-user PBX systems. The Transactions may
require permissions or consents from certain state regulatory agencies. There
can be no assurance that the Company can obtain such permissions or consents,
or if they can be obtained, that the process can be completed on a timely
basis.
Rates for telecommunications services are governed by tariffs filed by
certified carriers with various regulatory agencies. Future changes in the
regulatory structure under which such tariffs are filed, or material changes
in the tariffs themselves, could have a material adverse effect on the
Company's business. In addition, various state regulatory agencies are engaged
in fact gathering to examine competition and the rules which govern the
provision of intrastate services. Although the Company intends to monitor
these developments, the likelihood of any changes in such rules cannot be
predicted.
The Company's systems business is generally exempt from governmental
regulation from the standpoint of marketing and sales. However, various
regulatory bodies, including the Federal Communications Commission (the
"FCC"), require that manufacturers of equipment obtain certain certifications.
On February 8, 1996, the Telecommunications Act of 1996 ("Telecommunications
Act") was enacted as Federal law. The Telecommunications Act makes certain
changes in the regulatory environment in which the Company operates by: (i)
pre-empting any State or local law or regulation that prohibits, or has the
effect of prohibiting, the ability of any entity to provide any interstate or
intrastate telecommunications service which may
20
<PAGE>
result in the removal of regulatory barriers that have heretofore discouraged
the Company from expanding its business in certain States; (ii) prohibiting
local exchange telephone companies from prohibiting, or imposing unreasonable
or discriminatory conditions on, the resale of those companies'
telecommunications services which may result in the removal or relaxation of
some of the restrictions on shared telecommunications systems referred to
above, and reduces the risk that telephone companies could modify their
tariffs to impose more restrictive terms and conditions on such systems; (iii)
authorizing the FCC to forebear from applying any regulation to a
telecommunications carrier or class of telecommunications carriers under
certain conditions, which may result in a relaxation of the FCC's regulatory
supervision of over the Company's operations; and (iv) authorizing the
Regional Bell Operating Companies, upon satisfying certain conditions, to
apply for, and the FCC to grant, authority to offer long-distance services to
customers within the States in which they offer local telephone service. This
may result in more intense competition within the markets in which the Company
operates. Other provisions of the Telecommunications Act direct the FCC to
conduct rulemaking proceedings on a variety of subjects, including
interconnection, resale and universal service, which may affect the Company.
It is not possible, however, to predict the outcome of any such proceedings.
The Telecommunications Act may greatly affect government regulation of
telecommunications, both at the state and federal level. Although the long
term goal of the legislation is deregulatory, federal and state government
regulatory agencies may create new rules to govern competition in the local
exchange market that, in the short term, could subject the Company's shared
telecommunications services to greater regulation than in the past.
RELIANCE ON THIRD PARTIES FOR EQUIPMENT
The Company supplies its customers with equipment obtained primarily from
Northern Telecom, Inc., AT&T, NEC, Centigram Communications Corporation, Octel
Communications Corporation, Active Voice Corporation and other leading
manufacturers of telecommunications equipment. The Company typically obtains
this equipment under distributor agreements that specify the types of products
the Company can provide to customers and the geographic areas in which the
Company may operate as a distributor. These agreements generally are for a
minimum term of one year and provide for successive one year renewals unless
either party objects to such renewal during a specified period of time prior
to the scheduled termination date. There can be no assurance that these
agreements will remain in effect beyond their current terms or, if extended,
that the same provisions with respect to types of products and geographic
areas would continue to apply. Other manufacturers provide similar
telecommunications equipment. If the Company's distributor agreements are not
extended on the same or similar terms as those currently in effect, there can
be no assurance that the Company would be able to secure distributor
agreements with other manufacturers or that the equipment available from those
manufacturers would be suitable for the customers served by the Company.
DEPENDENCE ON KEY PERSONNEL
The Company believes the continued implementation of its business strategy
is dependent on the services of Messrs. Autorino, Borer, Vincent DiVincenzo
and Steiner, each of whom has an employment contract with the Company. See
"Management--Executive Compensation--Employment Agreements". In addition, the
Company's operations depend, in part, upon certain other key employees, most
of whom have employment contracts with the Issuer's operating subsidiaries.
The loss of Messrs. Autorino, Borer, DiVincenzo or Steiner or such key
employees could have an adverse impact on the Company.
RESTRICTIONS IMPOSED BY INDEBTEDNESS
The terms of the Indenture and the Credit Facility contain a number of
significant covenants that, among other things, restrict the ability of the
Issuer to dispose of assets or merge, incur debt, pay dividends, repurchase or
redeem capital stock and indebtedness, create liens, make capital
expenditures, make certain investments or acquisitions or otherwise restrict
corporate activities. In addition, the Credit Facility contains, among other
covenants, requirements that the Issuer comply with specified financial ratios
and tests, including a limitation on capital expenditures, a minimum EBITDA, a
fixed charge coverage ratio, an interest coverage ratio, a leverage
21
<PAGE>
ratio and a minimum net worth test. The ability of the Issuer to comply with
such provisions may be affected by events beyond the Issuer's control. In
order to comply with certain of these covenants, the Issuer will be required
to achieve financial and operating results which are significantly better than
those achieved historically. There can be no assurance that such results will
be achieved. The breach of any of these covenants would result in a default
under the Credit Facility. In the event of any such default, depending on the
actions taken by the lenders party to the Credit Facility (the "Lenders"), the
Lenders could elect to declare all amounts borrowed under the Credit Facility,
together with accrued interest and other fees, to be due and payable, apply
all the available cash of the Issuer to repay such borrowings or to
collateralize letters of credit (in which event cash would not be available to
the Issuer for other purposes) or prevent the Issuer from making debt service
payments on the Notes. If the Issuer were unable to repay any such borrowings
when due, the Lenders could proceed against their collateral. If the
indebtedness under the Credit Facility or the Notes were to be accelerated,
there can be no assurance that the assets of the Issuer would be sufficient to
repay such indebtedness in full. See "Description of Certain Indebtedness of
the Company and the Issuer" and "Description of the Notes".
FRAUDULENT CONVEYANCE CONCERNS
The Subsidiary Guarantors have guaranteed the Issuer's obligations with
respect to the Notes. Under federal and state fraudulent transfer laws, if a
court were to find, in a lawsuit by an unpaid creditor of a Subsidiary
Guarantor or a representative of such creditors, such as a trustee in
bankruptcy, that such Subsidiary Guarantor incurred the indebtedness
represented by its Guaranty with the intent to hinder, delay or defraud
present or future creditors, or received less than a reasonably equivalent
value or fair consideration for any such indebtedness and at the time of such
incurrence (i) was insolvent, (ii) was rendered insolvent by reason of such
incurrence, (iii) was engaged or about to engage in a business or transaction
for which its remaining assets constituted unreasonably small capital to carry
on its business or (iv) intended to incur, or believed or reasonably should
have believed that it would incur debts beyond its ability to pay as such
debts matured, such court could avoid such Subsidiary Guarantor's obligations
under its Guaranty, subordinate such Guaranty to all other indebtedness of
such Subsidiary Guarantor or take other action detrimental to the holders of
the Notes. In that event, there can be no assurance that any repayment on such
Guaranty could ever be recovered by the holders of the Notes.
The Issuer believes that the Guaranties of the Subsidiary Guarantors have
been issued without the intent to hinder, defraud or delay creditors of the
Subsidiary Guarantors and for proper purposes and in good faith, that each
such Subsidiary Guarantor was and will continue to be solvent under the
applicable standards and that each such Subsidiary Guarantor has and will have
sufficient capital for carrying on its business and is and will be able to pay
its debts as they mature. There can be no assurance, however, that a court
would reach the same conclusion. See "Description of the Notes--Guaranties".
CONSEQUENCES OF ORIGINAL ISSUE DISCOUNT
The Notes have been issued at a substantial discount from their principal
amount. Consequently, purchasers of the Notes generally will be required to
include amounts in gross income for federal income tax purposes in advance of
receipt of the cash payments to which the income is attributable. See "Certain
Federal Income Tax Consequences" for a more detailed discussion of the federal
income tax consequences to holders of the Notes and to holders who exchange
Old Notes for New Notes.
LIMITATIONS ON CHANGE OF CONTROL
The Indenture requires the Issuer, in the event of a Change of Control, to
make an offer to purchase the Notes at 101% of the Accreted Value thereof,
plus accrued interest to the purchase date. Certain events involving a Change
of Control may be an event of default under the Credit Facility or
indebtedness of the Issuer that may be incurred in the future. Moreover, the
exercise by the holders of the Notes of their right to require the Issuer to
purchase the Notes may cause a default under the Credit Facility or such other
indebtedness, even if the Change of Control does not. Finally, there can be no
assurance that the Issuer will have the financial resources necessary to
repurchase the Notes upon a Change of Control. See "Description of Notes--
Change of Control".
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<PAGE>
USE OF PROCEEDS
There will be no proceeds to the Issuer from the Exchange Offer. The net
proceeds from the sale of the Old Notes were approximately $111.0 million.
Those proceeds, together with approximately $125.0 million of initial
borrowings under the Credit Facility, were used to (i) consummate the Tender
Offer, (ii) pay the Preferred Consideration, (iii) repay the STFI Indebtedness
and the FII Indebtedness and (iv) pay related fees and expenses.
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<PAGE>
CAPITALIZATION
The following table sets forth as of December 31, 1995 the capitalization of
(i) STFI on an historical basis, (ii) FII on an historical basis (after giving
effect to the FII Recapitalization) and (iii) the Company on a pro forma basis
after giving effect to the Transactions. See "Use of Proceeds", "Pro Forma
Financial Information" and the Consolidated Financial Statements of STFI and
FII included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
---------------------------
PRO
HISTORICAL FORMA
----------------- --------
COMBINED
STFI FII COMPANY
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term indebtedness (including current
maturities):
Indebtedness of FII
12 1/4% Notes................................. $ -- $125,000 $ --
Existing credit facility...................... -- 57,794 --
Capital lease obligations (a)................. -- 389 389
Indebtedness of STFI
Existing credit facility...................... 4,119 -- --
Capital lease obligations (a)................. 1,544 -- 1,544
Promissory notes (a).......................... 1,335 -- 1,335
Issuer
12 1/4% Senior Subordinated Discount Notes Due
2006......................................... -- -- 114,999
Credit Facility (b)........................... -- -- 125,000
------- -------- --------
Total long-term indebtedness................ 6,998 183,183 243,267
------- -------- --------
Redeemable preferred stock:
FII Series A preferred stock.................... -- 16,691 --
Convertible preferred stock..................... -- -- 25,000
Special preferred stock......................... -- -- 20,000
------- -------- --------
Total redeemable preferred stock............ -- 16,691 45,000
------- -------- --------
Stockholders' equity:
FII Series B preferred stock.................... -- 230,200 --
FII Series C preferred stock.................... -- 24,015 --
STFI Series C preferred stock................... 9 -- 9
STFI Series D preferred stock................... 5 -- 5
Common stock.................................... 34 140 58
Additional paid-in capital...................... 44,777 2,925 68,753
Accumulated deficit............................. (21,981) (130,124) (21,981)
------- -------- --------
Total stockholders' equity.................. 22,844 127,156 46,844
------- -------- --------
Total capitalization...................... $29,842 $327,030 $335,111
======= ======== ========
</TABLE>
- --------
(a) These obligations and notes are liabilities of subsidiaries of the Issuer.
(b) Contemporaneously with the closing of the Offering, the Issuer, the
Company and each subsidiary of the Issuer will enter into the Credit
Facility providing for up to $120.0 million in term loans and a $25.0
million revolving credit facility. On a pro forma basis, the Company would
have the ability to borrow up to an additional $18.5 million pursuant to
the revolving credit facility contained in the Credit Facility after
giving effect to approximately $1.5 million of letters of credit.
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<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined financial statements (the "Pro
Forma Combined Financial Statements") are based on the historical financial
statements of STFI and FII included elsewhere in this Prospectus, adjusted to
give effect to the following (collectively, the "Specified Events"): (i)
certain acquisitions by STFI and FII since January 1, 1995 (the "Prior
Acquisitions"), (ii) the issuance of certain preferred stock of STC in
December 1995 resulting in STFI's loss of voting control of STC (the "STC
Equity Issuance"), (iii) the adjustment to FII's historical consolidated
statements of operations data to present FII on a calendar year basis and (iv)
the Transactions, including (A) the FII Recapitalization, (B) the Tender
Offer, (C) the Merger, (D) borrowings under the Credit Facility in connection
with the foregoing and (E) the Offering. The Unaudited Pro Forma Combined
Statements of Operations give effect to the Prior Acquisitions, the STC Equity
Issuance and the Transactions as if they had occurred as of January 1, 1995,
and the Unaudited Pro Forma Combined Balance Sheet gives effect to the STC
Equity Issuance and the Transactions as if they had occurred as of December
31, 1995. The Specified Events and the related adjustments are described in
the accompanying notes. The pro forma adjustments are based upon available
information and certain assumptions that management believes are reasonable.
The Pro Forma Combined Financial Statements do not purport to represent what
the Company's results of operations or financial condition would actually have
been had the applicable Specified Events in fact occurred on such dates or to
project the Company's results of operations for any future period or the
Company's financial condition at any future date. The Pro Forma Combined
Financial Statements should be read in conjunction with the historical
financial statements of STFI and FII including elsewhere in this Prospectus
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations".
The Merger was accounted for using the purchase method of accounting. The
total purchase consideration for the acquisition of FII has been allocated to
the tangible and intangible assets and liabilities of FII based upon their
respective fair values. The allocation of the aggregate purchase price
included in the Pro Forma Combined Financial Statements is preliminary as the
Company believes further refinement is impractical to perform at this time.
However, the Company does not expect the final allocation of the purchase
price will materially differ from the preliminary allocation set forth herein.
25
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC.
PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA COMBINED
STFI* FII** ADJUSTMENTS COMPANY
--------- --------- ----------- --------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash........................... $ 476 $ 905 $ -- $ 1,381
Accounts receivable, less
allowance for doubtful
accounts...................... 9,855 13,184 23,039
Advances to subsidiaries....... 985 -- 985
Other current assets........... 754 3,272 4,026
-------- -------- -------- --------
Total current assets......... 12,070 17,361 -- 29,431
-------- -------- -------- --------
Equipment, at cost:
Telecommunications
equipment................... 28,904 80,821 (35,872)(a) 73,853
Office and data processing
equipment................... 6,049 5,231 11,280
-------- -------- -------- --------
34,953 86,052 (35,872) 85,133
Less--accumulated
depreciation.................. (18,305) (35,872) 35,872 (a) (18,305)
-------- -------- -------- --------
16,648 50,180 -- 66,828
-------- -------- -------- --------
Other assets................... 12,564 36,622 (30,622)(a) 277,393
251,329 (a)
7,500 (b)
Investment in subsidiary....... 1,581 -- 1,581
-------- -------- -------- --------
Total assets............... $ 42,863 $104,163 $228,207 $375,233
======== ======== ======== ========
</TABLE>
- --------
*See Unaudited Pro Forma Consolidated Financial Statements of STFI
**See Unaudited Pro Forma Consolidated Financial Statements of FII
See accompanying notes to these pro forma combined financial statements.
26
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC.
PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA COMBINED
STFI* FII** ADJUSTMENTS COMPANY
--------- --------- ----------- --------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Notes payable and current portion
of long-term debt and capital
lease obligations............... $ 2,870 $ 303 $ (1,600)(b) $ 17,955
16,382 (b)
Accounts payable................. 9,035 11,268 20,303
Accrued expenses................. 2,221 6,157 7,000 (a) 10,497
7,500 (b)
(12,381)(b)
Advanced billings................ 1,337 3,694 5,031
-------- --------- --------- --------
Total current liabilities...... 15,463 21,422 16,901 53,786
-------- --------- --------- --------
Long-term debt and capital lease
obligations,
less current portion............ 4,128 170,780 12,100 (a) 225,313
(182,794)(b)
(2,519)(b)
115,000 (b)
125,000 (b)
(16,382)(b)
-------- --------- --------- --------
Post retirement benefits......... 112 112
-------- --------- --------- --------
Redeemable put warrant........... 428 428
-------- --------- --------- --------
FII Series A preferred stock..... -- 16,691 (16,691)(b) --
-------- --------- --------- --------
STFI Cumulative preferred stock,
250,000 shares outstanding...... -- -- 25,000 (a) 25,000
-------- --------- --------- --------
STFI Special preferred stock,
20,0000 shares outstanding...... -- -- 20,000 (a) 20,000
-------- --------- --------- --------
STOCKHOLDERS' EQUITY:
STFI Series C preferred stock.... 9 9
STFI Series D preferred stock.... 5 5
FII Series C preferred stock..... 24,015 (24,015)(b) --
FII Series B preferred stock..... 230,200 (230,200)(a) --
Common stock, 14,698 STFI shares
outstanding..................... 34 140 (140)(a) 58
24 (a)
Additional paid-in capital....... 44,777 2,925 (2,925)(a) 72,503
27,726 (a)
Accumulated deficit.............. (21,981) (362,122) 362,122 (a) (21,981)
-------- --------- --------- --------
Total stockholders' equity..... 22,844 (104,842) 132,592 50,594
-------- --------- --------- --------
Total liabilities and
stockholders' equity........ $ 42,863 $ 104,163 $ 228,207 $375,233
======== ========= ========= ========
</TABLE>
- --------
*See Unaudited Pro Forma Consolidated Financial Statements of STFI
**See Unaudited Pro Forma Consolidated Financial Statements of FII
See accompanying notes to these pro forma combined financial statements.
27
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA COMBINED
STFI* FII** ADJUSTMENTS COMPANY
--------- --------- ----------- --------
<S> <C> <C> <C> <C>
Revenues........................... $49,044 $125,808 $ -- $174,852
Cost of revenue.................... 30,105 67,062 (806)(f) 96,361
------- -------- ------- --------
Gross margin....................... 18,939 58,746 806 78,491
Selling general & administrative
expenses.......................... 16,879 39,359 5,616(d) 59,408
(2,446)(f)
------- -------- ------- --------
Operating income (loss)............ 2,060 19,387 (2,364) 19,083
Gain on sale of subsidiary stock... 1,375 1,375
Equity in loss of subsidiary....... (2,634) (2,634)
Interest expense................... (1,106) (21,478) (3,051)(e) (26,552)
(917)(c)
Interest income.................... 205 205
------- -------- ------- --------
Income before income tax........... (100) (2,091) (6,332) (8,523)
Income tax......................... (45) -- 40 (h) (5)
------- -------- ------- --------
Net income......................... (145) (2,091) (6,292) (8,528)
Preferred stock dividends.......... (398) (3,852) 352(g) (3,898)
------- -------- ------- --------
Net income (loss) applicable to
common stock...................... $ (543) $ (5,943) $(5,940) $(12,426)
======= ======== ======= ========
Income (loss) per common share..... $ (0.06) $ (0.86)
======= ========
Weighted average number of common
shares outstanding................ 8,482 6,000 14,482
======= ======= ========
Other data:
Depreciation & amortization........ 4,118 11,844 5,616 21,578
EBITDA(i).......................... 6,178 31,231 3,252 40,661
Capital expenditures............... 3,689 11,285 -- 14,974
Cash interest expense, net(j)...... 11,342
Ratio of EBITDA to interest ex-
pense, net........................ 1.54
Ratio of EBITDA to cash interest
expense, net...................... 3.58
Ratio of earnings to fixed
charges(k)........................ .74
Ratio of earnings to fixed charges
and preferred stock
dividends......................... .66
</TABLE>
- --------
* See Unaudited Pro Forma Consolidated Financial Statements of STFI.
** See Unaudited Pro Forma Consolidated Financial Statements of FII.
See accompanying notes to these pro forma combined financial statements.
28
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(a) The pro forma combined balance sheet gives effect to the merger of FII,
after the FII recapitalization, into STFI by combining the respective balance
sheets of the two companies at December 31, 1995. The Merger was accounted for
using the "purchase" method of accounting in accordance with generally
accepted accounting principles. Therefore the aggregate consideration paid in
connection with the merger will be allocated to FII's assets and liabilities
based on their fair market values and any excess has been treated as goodwill.
The purchase was paid with the issuance of $72,750,000 in STFI equity to the
former shareholders of FII. The STFI equity consisted of 6 million shares of
common stock at a market value of $4.625 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. Both issues of preferred stock have a
mandatory redemption feature. The following schedule details the calculation
of adjustments to record the transaction at fair market value (FMV), accrue
acquisition costs and record the issuance of $72,750,000 in STFI equity.
<TABLE>
<CAPTION>
FMV
PRO FORMA ADJUSTED
FII * FII ADJUSTMENT
--------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Cash........................................... $ 905 $ 905 $ --
Accounts receivable, less allowance for
doubtful accounts............................. 13,184 13,184 --
Other current assets........................... 3,272 3,272 --
Telecommunications equipment................... 80,821 44,949 (35,872)
Office and data processing equipment........... 5,231 5,231 --
Accumulated depreciation....................... (35,872) -- 35,872
Other assets................................... 36,622 6,000 (30,622)
New goodwill................................... 251,329 251,329
--------- -------- ---------
Total assets................................. $ 104,163 $324,870 $ 220,707
========= ======== =========
LIABILITIES:
Notes payable and current portion of long-term
debt and capital lease obligations............ $ 303 $ 303 --
Accounts payable............................... 11,268 11,268 --
Accrued expenses............................... 6,157 6,157 --
Accrued acquisition costs...................... 7,000 7,000
Advanced billings.............................. 3,694 3,694 --
Long-term debt and capital lease obligations,
less current portion.......................... 170,780 182,880 12,100
Post retirement benefits....................... 112 112 --
--------- -------- ---------
Total liabilities............................ 192,314 211,414 19,100
--------- -------- ---------
FII Series A preferred stock................... 16,691 16,691 --
--------- -------- ---------
STFI cumulative preferred stock................ 25,000 25,000
--------- -------- ---------
STFI special preferred stock................... 20,000 20,000
--------- -------- ---------
STOCKHOLDERS' EQUITY:
FII Series C preferred stock................... 24,015 24,015 --
FII Series B preferred stock................... 230,200 -- (230,200)
Common stock................................... 140 -- (140)
New common stock............................... 24 24
Additional paid-in capital..................... 2,925 -- (2,925)
Additional paid-in capital..................... 27,726 27,726
Accumulated deficit............................ (362,122) -- 362,122
--------- -------- ---------
Total stockholders' equity................... (104,842) 51,765 156,607
--------- -------- ---------
Total liabilities and stockholders'
equity.................................... $ 104,163 $324,870 $ 220,707
========= ======== =========
</TABLE>
- --------
* See unaudited pro forma consolidated financial statements of FII
29
<PAGE>
(b) An adjustment was recorded in the pro forma combined balance sheet to
reflect the issuance of $240,000,000 in new debt; $115,000,000 in 12 1/4% zero
coupon bonds and $125,000,000 in term loans from the Credit Facility. Proceeds
from these borrowings is expected to be used as follows:
<TABLE>
<CAPTION>
(AMOUNTS IN
THOUSANDS)
<S> <C>
Repurchase of FII series A preferred stock..................... $ 16,691
Repurchase of FII series C preferred stock..................... 24,015
Retirement of 12 1/4% Notes.................................... 125,000
Estimated premium on retirement of 12 1/4% Notes............... 12,100
Retirement of FII indebtedness................................. 45,694
Retirement of current portion State Street debt................ 1,600
Retirement of long term portion State Street debt.............. 2,519
Payment of bank finance fees................................... 7,500
Payment of certain acquisition costs........................... 4,881
--------
Total proceeds............................................... $240,000
========
</TABLE>
The pro forma combined balance sheet assumes all these events took place
with the Merger. $7,000,000 in acquisition costs were accrued related to the
merger, approximately $4,881,000 are expected to be paid immediately with the
remaining $2,000,000 to be paid over the course of the first year of
operations. All interest expense related to retired debt and all preferred
stock dividends related to retired preferred stock were eliminated in the pro
forma combined statement of operations. See footnotes (e) and (g).
Scheduled aggregate payments on long-term debt and capital lease obligations
are as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
<S> <C>
1996.............................................................. 17,955
1997.............................................................. 12,936
1998.............................................................. 12,626
1999.............................................................. 12,211
2000.............................................................. 7,097
Thereafter........................................................ 180,443
-------
243,268
=======
</TABLE>
(c) $7,500,000 in financing fees associated with the assumption of
$240,000,000 in new debt were capitalized. See footnote (b). Additional
interest expense was recorded based on an amortization period of 10 years for
$3,600,000 of the fees and 7 years for the remaining $3,900,000. The
allocation of fees is based on the respective amounts of zero coupon bonds and
bank debt issued and the respective lives of each. The adjustment resulted in
additional interest expense of $917,000 for the year ended December 31, 1995.
(d) The purchase accounting for the merger resulted in $251,329,000 of
goodwill which will be amortized over 40 years. See footnote (a). Certain
intangible assets acquired from FII were given zero value and the
corresponding goodwill amortization was eliminated from the pro forma combined
statements of operations. The pro forma combined statement of operations
reflect a net adjustment to goodwill amortization of $5,616,000 for the year
ended December 31, 1995. The following table details the calculation of the
adjustment (amounts in thousands):
<TABLE>
<CAPTION>
1995
------
<S> <C>
New goodwill amortization.......................................... $6,283
FII goodwill amortization eliminated............................... (667)
------
Net adjustment................................................... $5,616
======
</TABLE>
30
<PAGE>
(e) Interest expense, in the pro forma combined statement of operations, has
been adjusted to reflect the net effect of the change in outstanding debt
described in Note (b) as if it had occurred on January 1, 1995. The following
table details the calculation of the adjustment by period (amounts in
thousands).
<TABLE>
<CAPTION>
1995
--------
<S> <C>
$115 million in zero coupon bonds 12 1/4% interest............... $ 14,088
$125 million in bank debt estimated 8.6% interest................ 10,750
Retirement of 12 1/4% Notes...................................... (15,312)
Retirement of FII indebtedness................................... (6,116)
Retirement of STFI indebtedness.................................. (359)
--------
Net adjustment................................................. $ 3,051
========
</TABLE>
A 1/8% change in the estimated interest rates for the $125 million in bank
debt would result in a change in interest expense of $156,250 on a yearly
basis.
(f) The pro forma combined statement of operations include the estimated
effect of certain cost savings and increases associated with the consolidation
of the operations of STFI and FII. The following table details the components
of the adjustment (amounts in thousands).
<TABLE>
<CAPTION>
1995
------
<S> <C>
Net S,G & A savings................................................. $2,446
Network savings..................................................... 806
------
Total adjustment.................................................. $3,252
======
</TABLE>
(g) Preferred stock dividends in the pro forma combined statement of
operations were adjusted to reflect the change in outstanding preferred stock
described in notes (a) and (b). The net effect was to decrease preferred stock
dividends by approximately $352,000 for the year ended December 31, 1995. The
following table details the components of the adjustment (amounts in
thousands).
<TABLE>
<CAPTION>
1995
-------
<S> <C>
Preferred stock dividends added (footnote a):
STFI cumulative preferred stock dividend....................... $(2,500)
STFI special preferred stock dividends......................... (1,000)
Preferred stock dividends eliminated (footnote b)
FII series A preferred stock dividend.......................... 1,479
FII series C preferred stock dividend.......................... 2,373
-------
Total adjustment............................................. $ 352
=======
</TABLE>
(h) STFI incurred certain state income taxes for 1995. The pro forma
combined statement of operations have been adjusted to reduce state income
taxes to an estimated minimum required amount. This resulted in a reduction of
income taxes of $40,000 for the year ended December 31, 1995.
(i) EBITDA. EBITDA is defined as net income plus income taxes, interest
expense, depreciation and amortization. However, EBITDA excludes (i) income
(or loss) from discontinued operations, (ii) the net income of subsidiaries
accounted for on the equity basis (other than distributions or dividends
actually received from such subsidiaries but only to the extent of the equity
held in such subsidiaries) and (iii) for the year ended December 31, 1995, the
$1.4 million gain on sale of subsidiary stock. EBITDA is presented because it
is a widely accepted financial indicator of a company's ability to incur and
service debt. EBITDA should not be considered by an investor as an alternative
to net income, as an indicator of the operating performance of the Company,
STFI or FII or as an alternative to cash flow as a measure of liquidity.
31
<PAGE>
(j) Cash Interest Expense, Net. Excludes amortization of debt issuance
costs, the cost of interest rate protection agreements and accretion of the
Notes.
(k) Ratio of Earnings to Fixed Charges. For purposes of computing the ratio
of earnings to fixed charges, earnings consist of earnings from continuing
operations before income taxes and fixed charges. Fixed charges include
interest expense and that proportion of rental expense considered to be
representative of the interest component of lease expense.
32
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma Shared Technologies Fairchild Inc.
("STFI") consolidated financial statements give effect, on a purchase
accounting basis, to the acquisition of Office Telephone Management (OTM). The
unaudited pro forma STFI financial statements also reflect the STC Equity
Adjustment.
The unaudited pro forma STFI consolidated financial statements are not
necessarily indicative of the results or financial position which actually
would have occurred if the acquisition of OTM and the STC Equity Adjustment
had been in effect since January 1, 1995, nor are they necessarily indicative
of future results or financial position.
The unaudited pro forma STFI consolidated statements of operations gives
effect to the acquisition of OTM and the STC Equity Adjustment as if they had
occurred on January 1, 1995, and the unaudited pro forma STFI consolidated
balance sheet gives effect to these items as if they had occurred on December
31, 1995 for the purpose of presenting the unaudited pro forma STFI
consolidated financial statements.
33
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
STFI ADJUSTMENTS STFI
-------- ----------- ---------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash.......................................... $ 476 $ -- $ 476
Accounts receivable, less allowance for
doubtful accounts............................ 9,855 9,855
Advances to subsidiaries...................... 985 985
Other current assets.......................... 754 754
-------- ----- --------
Total current assets........................ 12,070 -- 12,070
-------- ----- --------
Equipment, at cost:
Telecommunications equipment................ 28,904 28,904
Office and data processing equipment........ 6,049 6,049
-------- ----- --------
34,953 -- 34,953
Less--Accumulated depreciation................ (18,305) (18,305)
-------- ----- --------
16,648 -- 16,648
-------- ----- --------
Other assets.................................. 12,564 12,564
Investment in subsidiary...................... 1,581 1,581
-------- ----- --------
Total assets.............................. $ 42,863 $ -- $ 42,863
======== ===== ========
CURRENT LIABILITIES:
Notes payable and current portion of long-term
debt and capital lease obligations........... $ 2,870 $ -- $ 2,870
Accounts payable.............................. 9,035 9,035
Accrued expenses.............................. 2,221 2,221
Advanced billings............................. 1,337 1,337
-------- ----- --------
Total current liabilities................... 15,463 -- 15,463
-------- ----- --------
Long-term debt and capital lease obligations,
less current portion......................... 4,128 4,128
-------- ----- --------
Redeemable put warrant........................ 428 428
-------- ----- --------
STOCKHOLDERS' EQUITY
STFI Series C preferred stock................. 9 9
STFI Series D preferred stock................. 5 5
Common stock.................................. 34 34
Additional paid-in capital.................... 44,777 44,777
Accumulated deficit........................... (21,981) (21,981)
-------- ----- --------
Total stockholders' equity.................. 22,844 -- 22,844
-------- ----- --------
Total liabilities and stockholders'
equity................................... $ 42,863 $ -- $ 42,863
======== ===== ========
</TABLE>
See accompanying notes to these pro forma consolidated financial statements
34
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
(2)
OTM PRO FORMA PRO FORMA
STFI ACQUISITION ADJUSTMENTS STFI
------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues......................... $47,086 $1,958 $49,044
Cost of revenue.................. 28,872 1,233 30,105
------- ------ ------- -------
Gross margin..................... 18,214 725 18,939
Selling, general & administration
expenses........................ 16,188 627 64 (2) 16,879
------- ------ ------- -------
Operating income (loss) 2,026 98 (64) 2,060
Gain on sale of subsidiary
stock........................... 1,375 1,375
Equity in (loss) of subsidiary... (1,752) (882)(1) (2,634)
Interest expense................. (882) (119) (34)(2) (1,106)
(71)(2)
Interest income.................. 205 205
------- ------ ------- -------
Income before income taxes....... 972 (21) (1,051) (100)
Income taxes..................... (45) (45)
------- ------ ------- -------
Net income....................... 927 (21) (1,051) (145)
Preferred stock dividends........ (398) (398)
------- ------ ------- -------
Net income (loss) applicable to
common stock.................... $ 529 $ (21) $(1,051) $ (543)
======= ====== ======= =======
</TABLE>
See accompanying notes to these pro forma consolidated financial statements
35
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) STFI owns approximately 59% of the outstanding common stock of STC;
formerly a consolidated subsidiary of STFI. During December 1995 STC issued
approximately $3,000,000 in voting preferred stock to third parties. While
STFI's ownership percentage did not change, the voting rights assigned to the
voting preferred stock reduced STFI's voting interest in STC to 42.7%,
resulting in STFI's loss of voting control of STC. In November 1995 STC
completed its purchase of certain assets and liabilities of PTC Cellular Inc.
In May and June 1995 STC completed its purchase of Cellular Hotline Inc. for
$617,000. The $617,000 was comprised of $367,000 in cash and the issuance of
50,000 shares of STC common stock. An adjustment of $882,000 was recorded to
reflect the effect of these acquisitions on the equity in loss for the year
ended December 31, 1995.
(2) In June 1995, STFI purchased all the outstanding capital stock of OTM
for an aggregate purchase price of $2,135,000. OTM provides telecommunications
management services primarily to businesses located in executive office
suites. The purchase was paid with $1,335,000 in cash and the issuance of a
$800,000 note payable in quarterly installments of $30,000 including interest
at 8.59% over ten years. The acquisition was recorded as a purchase and the
unallocated purchase price over fair market value of assets acquired was
$1,915,000 which is being amortized over 15 years. The unaudited pro forma
consolidated statement of operations for the year ended December 31, 1995
includes adjustments to record OTM operations for the period prior to the
acquisition in June 1995; $64,000 was recorded for additional goodwill
amortization; $34,000 for additional interest expense related to the $800,000
note; and $71,000 for additional interest expense related to the estimated
interest cost at 10.5% on additional borrowings of $1,355,000 required to
obtain the cash paid to acquire OTM.
36
<PAGE>
FAIRCHILD INDUSTRIES INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma Fairchild Industries Inc. ("FII")
consolidated financial statements reflect the adjustment to a December 31 year
end basis from a June 30 year end basis and a recapitalization (the
Recapitalization) which transfers certain non telecommunications assets to
FII's parent company RHI prior to the merger.
The unaudited pro forma FII financial statements are not necessarily
indicative of the results or financial position which actually would have
occurred if the change to a December 31 year end and the Recapitalization had
been in effect since January 1, 1995 nor are they necessarily indicative of
future results or financial position.
The unaudited pro forma FII consolidated statements of operations gives
effect to the Recapitalization as if it had occurred on January 1, 1995, and
the unaudited pro forma FII consolidated balance sheet gives effect to the
Recapitalization as if it had occurred on December 31, 1995 for the purpose of
presenting the unaudited pro forma FII consolidated financial statements.
37
<PAGE>
FAIRCHILD INDUSTRIES, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
(1), (3)
RECAPITALIZE PRO FORMA
FII FII FII
--------- ------------ ---------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash....................................... $ 905 $ -- $ 905
Accounts receivable, less allowance for
doubtful accounts......................... 22,184 (9,000) 13,184
Other current assets....................... 3,272 3,272
Net current assets of operations
transferred to RHI........................ 65,220 (65,220) --
--------- --------- ---------
Total current assets..................... 91,581 (74,220) 17,361
--------- --------- ---------
Equipment, at cost:
Telecommunications equipment............. 80,821 80,821
Office and data processing equipment..... 5,231 5,231
--------- --------- ---------
86,052 86,052
Less--Accumulated depreciation............. (35,872) (35,872)
--------- --------- ---------
50,180 -- 50,180
--------- --------- ---------
Other assets............................... 36,622 36,622
Net non-current assets transferred to RHI.. 169,878 (169,878) --
--------- --------- ---------
Total assets........................... $ 348,261 $(244,098) $ 104,163
========= ========= =========
CURRENT LIABILITIES:
Notes payable and current portion of long-
term debt and capital lease obligations... $ 303 $ -- $ 303
Accounts payable........................... 11,268 11,268
Accrued expenses........................... 6,157 6,157
Advanced billings.......................... 3,694 3,694
--------- --------- ---------
Total current liabilities................ 21,422 -- 21,422
--------- --------- ---------
Long-term debt and capital lease
obligations, less current portion......... 182,880 (12,100) 170,780
--------- --------- ---------
Post retirement benefits................... 112 112
--------- --------- ---------
FII Series A preferred stock............... 16,691 16,691
STOCKHOLDERS' EQUITY:
FII Series C preferred stock............... 24,015 24,015
FII Series B preferred stock............... 230,200 230,200
Common stock............................... 140 140
Additional paid-in capital................. 2,925 2,925
Accumulated deficit........................ (130,124) (231,998) (362,122)
--------- --------- ---------
Total stockholders' equity............... 127,156 (231,998) (104,842)
--------- --------- ---------
Total liabilities and stockholders'
equity................................ $ 348,261 $(244,098) $ 104,163
========= ========= =========
</TABLE>
See accompanying notes to these pro forma consolidated financial statements.
38
<PAGE>
FAIRCHILD INDUSTRIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FII (2)
SIX MONTHS ADJUST FII TO PRO FORMA PRO FORMA
ENDED 12/31/95 CALENDAR YEAR ADJUSTMENTS FII
-------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues.................. $ 64,631 $ 61,177 $ -- $125,808
Cost of revenue........... 34,467 32,595 67,062
-------- -------- ------ --------
Gross margin.............. 30,164 28,582 -- 58,746
Selling, general &
administrative expenses.. 20,712 18,647 39,359
-------- -------- ------ --------
Operating income.......... 9,452 9,935 -- 19,387
Interest expense.......... (10,952) (10,526) (21,478)
-------- -------- ------ --------
Net income................ (1,500) (591) -- (2,091)
Operating results of
operations transferred to
RHI...................... 1,393 (10,169) 8,776(1) --
Preferred stock
dividends................ (1,901) (1,951) (3,852)
-------- -------- ------ --------
Net income applicable to
common stock............. $ (2,008) $(12,711) $8,776 $ (5,943)
======== ======== ====== ========
</TABLE>
See accompanying notes to these pro forma consolidated financial statements
39
<PAGE>
FAIRCHILD INDUSTRIES INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) The unaudited pro forma FII consolidated financial statements were
adjusted to reflect a recapitalization of FII prior to the merger. Subsequent
to June 30, 1995, FII and its immediate parent RHI announced plans to
recapitalize FII in order to improve its financial and operating flexibility
and strengthen its financial position. Concurrent with the merger, and as part
of the recapitalization, FII is transferring to RHI, all of its assets and
liabilities except those expressly related to FII's telecommunications
business, $125,000,000 principal amount of 12 1/4% Senior Secured Notes Due
1999, the Series A and Series C Preferred Stock of FII, an estimated
$12,100,000 in accrued premium on early retirement of the 12 1/4% Senior
Secured Notes Due 1999 and approximately $45,694,000 of existing bank
indebtedness.
(2) The FII historical consolidated 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, in order
to conform to STFI's fiscal year.
(3) The sale of DME on January 26, 1996 only affects the businesses
transferred to RHI in the recapitalization.
40
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
STFI
The following table sets forth selected historical data of STFI for each of
the periods indicated in the five-year period ended December 31, 1995, which
were derived from the audited Consolidated Financial Statements of STFI for
each such period in the five-year period ended December 31, 1995. The audited
Consolidated Financial Statements of STFI for each of the periods in the
three-year period ended December 31, 1995 are included elsewhere in this
Prospectus. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
STFI", the audited Consolidated Financial Statements of STFI included
elsewhere in this Prospectus, the independent auditors' reports of Rothstein,
Kass & Company, P.C. included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1991 1992 1993 1994 1995
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.............. $23,172 $24,076 $25,426 $45,367 $47,086
Gross margin.......... 6,358 9,254 10,912 19,195 18,214
Operating income
(loss)............... (4,359) (705) 810 2,286 2,026
Interest expense,
net.................. 1,268 290 438 359 677
Minority interest in
net losses (income)
of subsidiaries...... 4 (37) (82) (128) --
Loss on settlement
agreement............ -- -- -- -- --
Gain on sale of
subsidiary stock..... -- -- -- -- 1,375
Equity in loss of
subsidiary........... -- -- -- -- (1,752)
Extraordinary item--
gain (loss) on
restructuring........ -- 3,756 (150) -- --
Income tax (expense)
benefit.............. -- -- -- 550 (45)
Net income (loss)..... (5,623) 2,724 140 2,286 927
Preferred stock
dividends............ 301 334 345 478 398
Net income (loss)
applicable to common
stock................ (5,924) 2,390 (205) 1,808 529
BALANCE SHEET DATA (AT
PERIOD END):
Total assets.......... $18,436 $18,752 $20,601 $37,925 $42,863
Total long-term debt,
including current
portion.............. 10,030 4,745 3,719 4,726 6,998
Stockholders' equity
(deficit)............ (3,148) 6,034 9,302 20,881 22,844
OTHER DATA:
Ratios of earnings to
fixed charges........ (2.06)x (0.17)x 1.37x 2.99x 1.96x
</TABLE>
41
<PAGE>
FII
The following table sets forth selected historical data of FII for each of
the periods indicated in the five-year period ended June 30, 1995, which were
derived from the audited Consolidated Financial Statements of FII for each
such period in the five-year period ended June 30, 1995. The audited
Consolidated Financial Statements of FII for each of the periods in the three-
year period ended June 30, 1995 are included elsewhere in this Prospectus. The
table also sets forth selected historical data for the three-month periods
ended September 30, 1994 and 1995, which were derived from the unaudited
Consolidated Financial Statements of FII included elsewhere in this Prospectus
and which, in the Company's opinion, reflect all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
financial position and results of operations for such periods. The results for
the six months ended December 31, 1995 are not necessarily indicative of the
results to be expected for the full year. This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations--FII", the audited Consolidated Financial Statements
of FII included elsewhere in this Prospectus, the independent auditors' report
of Arthur Andersen LLP included elsewhere in this Prospectus and the unaudited
Consolidated Financial Statements of FII, included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, SIX MONTHS ENDED
------------------------------------------------ -------------------------
DECEMBER 31, DECEMBER 31,
1991 1992 1993 1994 1995 1994 1995
-------- -------- -------- -------- -------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.............. $ 48,405 $ 58,662 $ 68,639 $ 74,897 $109,741 $ 48,564 $ 64,631
Gross margin.......... 25,386 31,158 34,904 37,918 51,381 22,799 30,164
Operating income...... 9,489 12,539 14,420 16,082 18,253 8,718 9,452
Interest expense...... 19,621 16,049 20,033 19,538 21,280 10,754 10,952
Loss from continuing
operations........... (10,132) (3,510) (5,613) (3,456) (3,027) (2,436) (1,500)
Operating results of
operations
transferred to RHI... -- -- -- -- -- 837 1,393
Net income (loss)..... 17,890 14,255 (12,257) (33,987) (12,359) (1,599) (107)
Preferred stock
dividends............ 4,302 3,724 3,873 3,902 3,902 1,951 1,901
Net income (loss)
after preferred stock
dividends............ 13,588 10,531 (16,130) (37,889) (16,261) (3,550) (2,008)
BALANCE SHEET DATA
(AT PERIOD END):
Total assets.......... $418,047 $432,841 $368,084 $331,318 $351,309 $360,093 $348,261
Total long-term debt,
including current
portion.............. 192,858 189,577 186,377 183,259 181,309 182,088 183,183
Series A redeemable
preferred stock...... 50,848 44,238 19,112 19,112 19,112 19,112 16,691
Stockholders' equity.. 164,557 187,985 150,870 117,190 126,362 136,740 127,156
</TABLE>
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
OVERVIEW AND RECENT DEVELOPMENTS
STFI is a national provider of shared telecommunications services ("STS")
and telecommunications systems ("Systems") to tenants of multi-tenant
commercial office buildings. STC is a provider of cellular telephone equipment
and services.
In December 1995, STC issued approximately $3.0 million in voting preferred
stock to third parties. While STFI's ownership percentage did not change,
STFI's voting interest in STC was reduced to 42.7%, resulting in STFI's loss
of voting control. Accordingly, subsequent to this stock issuance, STC was
accounted for under the equity method; all assets and all liabilities of STC
were eliminated from STFI's consolidated balance sheet and a non-current asset
was recorded to reflect STFI's investment in STC on the equity basis. STC
results of operations adjusted for STFI's ownership interest, are reflected on
the statement of operations for the year ended December 31, 1995 per the
equity method as a one line item below operating income.
In March 1996 STFI's stockholders approved and STFI completed a merger with
Fairchild Industries, Inc. ("FII") following a reorganization transferring all
non-communications assets to its parent, RHI Holding, Inc. Management believes
this merger will significantly strengthen the Company's strategic position in
the telecommunications market. In addition the merger will present
opportunities to realize significant operational and financial cost savings.
The merger makes STFI the largest provider of STS in the United States. On a
pro forma basis STFI generated $175 million in sales and $19 million in
operating income for the year ended December 31, 1995. In conjunction with the
merger STFI raised approximately $111 million after offering expenses through
the issuance of 12 1/4% Senior Subordinated Notes Due 2006 and $125 million
(of an available $145 million) from a credit facility with Credit Suisse,
Citicorp USA, Inc. and NationsBank. The Company anticipates repaying these
borrowings over the next ten years with cash provided by operations.
RESULTS OF OPERATIONS
The following table sets forth various components of STFI's statements of
operations expressed as a percentage of revenues:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Revenues........................................... 100.00% 100.00% 100.00%
Cost of revenues................................... 61.32 57.69 57.08
------ ------ ------
Gross margin....................................... 38.68 42.31 42.92
Selling, general and administrative expenses....... 34.38 37.27 39.73
------ ------ ------
Operating income................................... 4.30 5.04 3.19
Interest expense (net)............................. (1.44) (0.79) (1.72)
Minority interest.................................. -- (0.28) (0.32)
Gain on sale of subsidiary stock................... 2.92 -- --
Equity in loss of subsidiaries..................... (3.72) -- --
Income tax (expense) benefit ...................... (0.10) 1.07 --
Extraordinary item................................. -- -- (0.59)
------ ------ ------
Net income......................................... 1.96% 5.04% 0.56%
====== ====== ======
</TABLE>
Year Ended December 31, 1995 compared to Year Ended December 31, 1994
Revenues. STFI's revenues rose to a record $47.1 million in 1995 an increase
of $1.7 million or 3.7% over 1994 revenues of $45.4 million. This increase
occurred despite the loss of STC revenue as STC results
43
<PAGE>
were recorded per the equity method in 1995; STC accounted for $10.2 million
of 1994 revenue. STS revenue increased $6.5 million or 22.7% and Systems $5.4
million or 83.1% in 1995 over 1994 levels. Approximately $2.9 million of the
growth in revenue for STS was attributable to a full year of service at
locations acquired in June 1994 with the acquisition of Access
Telecommunications Group, L.P. (Access), $1.6 million was attributable to the
June 1995 acquisition of Office Telephone Management (OTM), the remaining
increase of approximately $2.0 million was generated through internal growth
at existing and new locations. Approximately $4.7 million of the growth in
Systems revenues is attributable to a full year of activity at accounts
acquired with the June 1994 acquisition of Access, the remaining increase of
$0.7 million was generated internally.
Gross margin. Gross margin ("GM") dropped to 38.7% of revenues for 1995 from
42.3% for 1994, a reduction of 3.6%. The following table sets forth the
components of the Company's overall gross margin for 1995 as a factor of sales
percentage and gross margin percentage per line of business:
<TABLE>
<CAPTION>
OVERALL
DIVISION SALES GM GM
-------- ----- ---- -------
<S> <C> <C> <C>
STS................................................... 74.7% 44.6% 33.3%
Systems............................................... 25.3 21.1 5.4
----- ----
Company Total....................................... 100.0% 38.7%
===== ====
</TABLE>
As shown above, the 1995 gross margin was a mix of STS gross margin of 44.6%
and Systems gross margin of 21.1%. In 1994 the Company's gross margin was a
combination of STS gross margin of 45.2%, Systems gross margin of 20.4% and
STC gross margin of 48.2%. STS produced slightly reduced gross margin from the
1994 level mainly due to the acquisition of OTM operations which produced
gross margin of approximately 30%. Systems experienced slightly improved gross
margin mainly due to a full year of operations obtained with the Access
acquisition. The overall decrease in the Company's gross margin was
principally the result of changes in sales mix. The change in accounting to
the equity method for STC results of operations created an overall drop in
gross margin of approximately 1.7% for 1995. The drop in STS gross margin for
1995 contributed 0.4% to the overall reduction in gross margin for 1995. The
remainder of the decrease in gross margin was generated by Systems. As noted
above, Systems revenues grew at a faster rate than STS revenues in 1995. Since
Systems produces significantly lower gross margin compared to STS, the growth
in Systems sales depressed overall gross margin for the Company 1.5%.
Selling, general and administrative expenses. Selling, general and
administrative expenses ("SG&A") as a percentage of revenues decreased to
34.4% for 1995 compared to 37.3% for 1994. The Company has reduced SG&A as a
percentage of revenues by increasing revenues without adding a comparable
percentage of SG&A costs. Certain SG&A costs are essentially fixed and do not
increase significantly with revenue growth. In addition the Company has
carefully chosen to expand in locations with existing management
infrastructures already in place.
Operating income. Operating income decreased by $0.3 million or 13.0% to
$2.0 million in 1995 from $2.3 million in 1994. The decrease was partially the
result of STC no longer a part of the STFI consolidated group in 1995. STC
contributed approximately $0.7 million to operating income in 1994. This was
offset by improved STS and Systems contribution of $0.4 million in 1995 over
1994 levels.
Gain on sale of subsidiary stock. In April 1995 the Company successfully
completed a public offering of STC stock. Following the offering the Company's
percentage of ownership decreased from approximately 86% to 60%. The
accounting treatment of the sale required the Company to record a gain of $1.4
million for the year ended December 31, 1995.
Equity in loss of subsidiary. In December 1995, STC issued approximately
$3.0 million in voting preferred stock to third parties. While STFI's
ownership percentage did not change, STFI's voting interest in STC was reduced
to 42.7%, resulting in STFI's loss of voting control. Accordingly, subsequent
to this stock issuance, STC
44
<PAGE>
was accounted for under the equity method, The Company recorded an equity loss
of $1.7 million as a result of STC losses of $2.8 million for the year ended
December 31, 1995.
Interest expense. Interest expense net of interest income increased by $0.3
million for the year ended December 31, 1995 over the year ended December 31,
1994. This is attributable to the addition of approximately $4.4 million in
interest bearing debt during 1995. Approximately $0.3 million in non interest
bearing debts were repaid during 1995.
Income tax (expense) benefit. The Company recorded an insignificant amount
of income tax expense for the year ended December 31, 1995 compared to a net
benefit of $0.5 million for the year ended December 31, 1994. Income tax
expense for 1995 was mainly the result of state income taxes. During 1994 STFI
adjusted the deferred tax asset valuation reserve per Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"). This
adjustment resulted in a deferred tax asset of $8.0 million, a corresponding
valuation reserve of $7.4 million and a $0.6 million tax benefit for the year
ended December 31, 1994. This benefit was partially offset by state income
taxes resulting in a net benefit of $0.5 million for 1994. The source of the
deferred tax asset is principally the expected future utilization on a
conservative basis of net operating losses ("NOL") generated in prior years.
Based on the requirements of SFAS 109 the Company recalculated the deferred
tax asset and adjusted the valuation reserve for the year ended December 31,
1995. This adjustment resulted in no significant impact to the Company's
results of operations for the year ended December 31, 1995. At December 31,
1995 the Company's NOL carryforward for federal income tax purposes was
approximately $21.8 million.
Net income. As a result of the factors listed above, net income for the year
ended December 31, 1995 decreased by $1.4 million or 60.9% to $0.9 million
from $2.3 million for 1994.
Year Ended December 31, 1994 compared to Year Ended December 31, 1993
Revenues. STFI's revenues for the year ended December 31, 1994 increased by
$20.0 million, or 78.7%, to $45.4 million compared to $25.4 million for the
year ended December 31, 1993. Acquisitions were the major contributors to
revenue growth in 1994. Approximately $8.9 million of the revenue increase was
attributable to the acquisition of Access. Another $8.0 million was due to the
expanded activity of STC created with the 1993 acquisitions of Road and Show
East and Road and Show South nationwide rental phone businesses ("Road &
Show"). The remaining revenue increase of $3.1 million was achieved through
internal growth.
Gross margin. Gross margin dipped slightly in 1994 to 42.3% of revenue from
42.9% of revenues in 1993. The following table sets forth the components of
the Company's overall gross margin for 1994 as a factor of sales percentage
and gross margin percentage per line of business:
<TABLE>
<CAPTION>
OVERALL
DIVISION SALES GM GM
-------- ----- ---- -------
<S> <C> <C> <C>
STS................................................... 63.2% 45.2% 28.6%
Systems............................................... 14.3 20.4 2.9
STC................................................... 22.5 48.2 10.8
----- ----
Company Total....................................... 100.0% 42.3%
===== ====
</TABLE>
In 1994 the Company's gross margin was a combination of STS gross margin of
45.2%, Systems gross margin of 20.4% and STC gross margin of 48.2%. In 1993
the Company's gross margin was a combination of STS gross margin of 46.4%,
Systems gross margin of 16.9% and STC gross margin of 27.1%. STS achieved
slightly reduced gross margin from the 1993 level mainly due to the
acquisition of Access which added several new buildings which historically
have produced gross margins of approximately 44% which is slightly lower than
those at existing STS locations. Systems experienced slightly improved gross
margin mainly due to a half year of operations obtained with the Access
acquisition. STC gross margin increased dramatically due to a full year of
Road & Show operations which historically have produced gross margins of
approximately 50%. The
45
<PAGE>
overall decrease in the Company's gross margin was largely the result of
changes in sales mix and the resulting effect on the Company's overall gross
margin. STS accounted for 63.2% of total revenues in 1994 versus 85.4% in
1993; Systems revenues accounted for 14.3% of total revenues in 1994 versus
5.9% in 1993; and STC generated 22.5% of total revenue for 1994 versus 8.7%
for 1993.
Selling, general and administrative expenses. Selling, general and
administrative expenses as a percentage of revenue decreased to 37.3% for 1994
compared to 39.7% for 1993. This improvement was generated mainly through the
synergy's associated with the acquisition of Access. In addition the Company
has carefully chosen to grow internally only at locations with existing
management infrastructures already in place.
Operating income. Operating income increased by $1.5 million or 187.5% to
$2.3 million in 1994 from $0.8 million in 1993. The increase was mainly due to
the growth in overall sales combined with a reduction in SG&A as a percentage
of revenue.
Interest expense. Interest expense net of interest income decreased by $0.1
million to $0.3 million for 1994 compared to $0.4 million in 1993. The
majority of the interest expense for 1994 was generated from the addition of
$2.3 million in interest bearing debts. The bulk of the 1993 interest expense
was generated through accruals for interest and penalty payments to taxing
authorities that may arise from late payments.
Extraordinary item-Loss on restructuring. An extraordinary loss of $0.2
million for 1993 was recorded to reflect the settlement of certain obligations
to lenders and other creditors related to the 1992 restructuring. No
extraordinary items were recorded for 1994.
Income tax benefit. Effective January 1, 1993, STFI implemented SFAS 109
requiring the adoption of an asset and liability approach to accounting for
income taxes. As a result, STFI recorded a deferred tax asset of $8.0 million,
a corresponding valuation reserve of $7.4 million and a $0.6 million tax
benefit for the year ended December 31, 1994. This benefit was partially
offset by state income taxes resulting in a net benefit of $0.5 million for
1994. The source of the deferred tax asset is principally the expected future
utilization on a conservative basis of net operating losses generated in prior
years.
Net income. As a result of the factors listed above, net income for the year
ended December 31, 1994 increased by $2.2 million to $2.3 million from $0.1
million for 1993.
FII
Overview and Recent Developments
The FII Telecommunications Business was formed in 1985 as a provider of
shared telecommunications services to commercial occupants of multi-tenant
office buildings. FII focused on a strategy of growing both internally and
through acquisitions. From July 1986 to July 1994, FII completed 17 STS
acquisitions, which added approximately $48.0 million of aggregate annual
revenues (calculated at the time of acquisition).
The largest acquisition during this period was the September 1990
acquisition of Amerisystems Partnership. The purchase consideration for
Amerisystems was $28.2 million, consisting of $13.1 million in cash and the
assumption of $15.1 million in debt. Amerisystems had approximately $23.0
million of revenue in its most recently completed fiscal year prior to the
acquisition and enabled FII to enter 10 metropolitan markets.
In December 1992, FII acquired the assets of Office Networks, Inc. ("ONI")
for an aggregate purchase consideration of $7.3 million cash. ONI had
approximately $6.7 million of revenue in its most recently completed fiscal
year prior to the acquisition and enabled FII to enter the Indianapolis
market. Shortly thereafter, FII completed two additional acquisitions in
Indianapolis, which made this metropolitan market one of FII's most
profitable.
In November 1994, FII entered the telecommunications systems business by
acquiring the assets of JWP Telecom, for an aggregate purchase consideration
of $15.0 million consisting of $11.0 million in cash and the
46
<PAGE>
assumption of $4.0 million of liabilities. JWP Telecom had approximately $50.0
million of revenue in its most recently completed fiscal year prior to the
acquisition.
Results of Operations
The following table sets forth various components of FII's statements of
operations expressed as a percentage of revenues:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, -------------------------
------------------------------ DECEMBER 31, DECEMBER 31,
1993 1994 1995 1994 1995
-------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 49.1 49.4 53.2 53.1 53.3
-------- -------- -------- ----- -----
Gross margin.......... 50.9 50.6 46.8 46.9 46.7
General and
administrative
expense................ 29.9 29.0 30.2 29.8 32.1
-------- -------- -------- ----- -----
Operating income...... 21.0 21.6 16.6 17.1 14.6
Interest expense........ 29.2 26.1 19.4 22.1 16.9
-------- -------- -------- ----- -----
Net loss from continuing
operations before
taxes.................. (8.2)% (4.5)% (2.8)% (5.0)% (2.3)%
======== ======== ======== ===== =====
</TABLE>
Six Months Ended December 31, 1995 Compared to Six Months Ended December 31,
1994
Revenues. Revenues for the six months ended December 31, 1995 increased by
$16.0 million, or 32.9%, to $64.6 million compared to the six months ended
January 1, 1995 primarily as a result of the acquisition of JWP Telecom.
Services revenues for the six months ended December 31, 1995 remained
comparable to the same period in the prior year because sales to tenants in
newly contracted office buildings offset the decrease in revenues associated
with the loss of four major customers.
Gross margin. Gross margin during the six months ended December 31, 1995
decreased to 46.7% from 46.9% for the six months ended December 31, 1994
primarily due to the lower margins associated with the JWP Telecom Systems
business acquired during 1994. Services gross margin during the six months
ended December 31, 1995, which was 51.5%, increased primarily due to a new
long distance contract with Worldcom Communications Inc.
General and administrative expense. General and administrative expense as a
percentage of revenues for the six months ended December 31, 1995 increased to
32.1% from 29.8% for the six months ended December 31, 1994. The increase was
due primarily to the acquisition of JWP Telecom.
Operating income. As a result of the above factors, operating income for the
six months ended December 31, 1995 increased by $1.2 million, or 14.5%, to
$9.5 million compared to the six months ended December 31, 1994.
Interest expense. Interest expense during the six months ended December 31,
1995 increased by $0.2 million, or 1.9%, to $11.0 million compared to the six
months ended December 31, 1994. There were no significant changes in rates or
borrowing between the two periods.
Net loss from continuing operations before taxes. As a result of the above
factors, net loss from continuing operations before taxes for the six months
ended December 31, 1995 increased by $0.9 million, or 37.5%, to $(1.5) million
compared to the six months ended December 31, 1994.
Effective July 1, 1993, FII changed its method of accounting for income
taxes from the deferred method to the liability method as required by 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
47
<PAGE>
differences are expected to reverse. There was no provision or benefit for
current or deferred income taxes from continuing operations for the six months
ended December 31, 1995 and December 31, 1994 due to historical losses from
continuing operations.
Fiscal Year Ended June 30, 1995 compared to Fiscal Year Ended June 30, 1994
Revenues. Revenues for the fiscal year ended June 30, 1995 increased by
$34.8 million, or 46.5%, to $109.7 million compared to the prior fiscal year
primarily due to the JWP Telecom acquisition, which contributed $31.0 million
in Systems revenues. The remaining increase was a result of an additional $1.7
million in sales to tenants in newly contracted office buildings, an increase
of $1.6 million in sales to tenants in office buildings already under Services
contracts and other revenue increases of $0.5 million.
Gross margin. Gross margin for the fiscal year ended June 30, 1995 decreased
to 46.8% from 50.6% for the prior fiscal year primarily due to the lower
margins associated with the JWP Telecom Systems business.
General and administrative expense. General and administrative expense as a
percentage of revenues for the fiscal year ended June 30, 1995 increased to
30.2% from 29.0% in the prior fiscal year due primarily to the acquisition of
JWP Telecom.
Operating income. As a result of the above factors, operating income for the
fiscal year ended June 30, 1995 increased by $2.2 million, or 13.7%, to $18.3
million compared to the fiscal year ended June 30, 1994.
Interest expense. Interest expense for the fiscal year ended June 30, 1995
increased by $1.7 million, or 8.6%, to $21.3 million compared to the prior
fiscal year due primarily to higher interest rates on variable rate debt.
Net loss from continuing operations before taxes. As a result of the above
factors, net loss from continuing operations before taxes for the fiscal year
ended June 30, 1995 decreased by $0.4 million, or 11.8%, to $(3.0) million
compared to the fiscal year ended June 30, 1994.
There was no provision or benefit for current or deferred income taxes
during the fiscal years ended June 30, 1995 and June 30, 1994, due to
historical losses from continuing operations.
Fiscal Year Ended June 30, 1994 compared to Fiscal Year Ended June 30, 1993
Revenues. Revenues for the fiscal year ended June 30, 1994 increased by $6.3
million, or 9.1%, to $74.9 million compared to the prior fiscal year. This
increase was primarily due to increased sales of $1.3 million to customers in
newly contracted office buildings, $4.9 million in additional sales in
buildings already under contract and other increases of $0.1 million.
Gross margin. Gross margin for the fiscal year ended June 30, 1994, which
was 50.6%, did not change significantly compared to the prior fiscal year.
General and administrative expense. General and administrative expense as a
percentage of revenue for the fiscal year ended June 30, 1994 decreased to
29.0% from 29.9% for the prior fiscal year primarily as a result of an
increase in revenues without a corresponding increase in general and
administrative costs.
Operating income. As a result of the foregoing, operating income for the
fiscal year ended June 30, 1994 increased by $1.7 million, or 11.8%, to $16.1
million compared to the fiscal year ended June 30, 1993.
Interest expense. Interest expense for the fiscal year ended June 30, 1994
decreased by $0.5 million, or 2.5%, to $19.5 million compared to the prior
fiscal year due primarily to lower rates on borrowings for the fiscal year
ended June 30, 1993.
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Net loss from continuing operations before taxes. As a result of the above
factors, net loss from continuing operations before taxes during the fiscal
year ended June 30, 1994 decreased by $2.2 million, or 39.3%, to $(3.4)
million compared to the fiscal year ended June 30, 1993.
There was no provision or benefit for current or deferred income taxes
during the fiscal years ended June 30, 1994 and June 30, 1993, due to losses
from continuing operations.
LIQUIDITY AND CAPITAL RESOURCES
STFI
During 1995 STFI continued to effectively manage a working capital deficit
and produce record earnings from operations. Net cash provided by operations
reached a record $4.9 million in 1995 compared to $3.1 million in 1994 and
$2.2 million in 1993. This helped reduce the working capital deficit to $3.4
million at December 31, 1995 compared to $3.7 million and $3.9 million for
December 31, 1994 and 1993 respectively.
The Company continued to invest significant capital towards growth
internally and through acquisition. In addition the Company has continued to
invest in upgrading telecommunication equipment at existing locations. Over
the past three years STFI has invested $8.9 million on equipment purchases.
Over the same period, the Company invested $0.8 million towards a merger with
FII completed in 1996 and $5.3 million to complete two other major
acquisitions; OTM in June 1995 and Access in June 1994.
Financing activities were focused primarily on raising capital to provide
cash for investing activities. During 1995 the Company borrowed $2.7 million
and raised $1.2 million from sales of common stock to help finance the current
year's equipment purchases and the acquisition of OTM. During 1994 and 1993
approximately $6.4 million was raised from sales of common and preferred stock
to help the Company fund operations. Over the past three years the Company
spent $6.5 million to repay notes, long-term debt and capital lease
obligations.
Cash requirements for 1996 will be significant due to the merger with FII
mentioned earlier. This merger was financed through a credit facility and the
sale of Senior Subordinated Notes mentioned earlier. The Company anticipates
repaying these borrowings and providing cash for operations and capital
expenditures through cash from operations. As of March 1996 the Company has a
credit facility available of approximately $18.5 million.
FII
General. Historically, FII grew rapidly both internally and through
acquisitions. Although FII grew rapidly, cash requirements for working capital
have been minimal. This is primarily due to the ability of FII to negotiate
favorable payment terms with its vendors.
Six months ended December 31, 1995. Net cash used for investing activities
during the six months ended December 31, 1995 was $8.0 million compared to
$19.9 million for the six months ended December 31, 1994 of which $5.5 million
and $4.5 million, respectively, was used primarily to purchase
telecommunication assets for office buildings. In the six months ended
December 31, 1994 $11.6 million was used for acquisitions of which $11.0
million was for the purchase of the JWP Telecom operating assets.
Net cash provided by operations for the six months ended December 31, 1995
was $2.4 million. In comparison, net cash provided by operations for the six
months ended December 31, 1994 was $10.5 million.
Fiscal years ended June 30, 1995, 1994 and 1993. For the fiscal years ended
June 30, 1995, 1994 and 1993, net cash provided by operating activities was
$17.8 million, $10.7 million, and $17.3 million, respectively. Primarily
because of the JWP Telecom acquisition, receivables increased by $10.8 million
and inventory increased by $1.2 million for the year ended June 30, 1995.
These increases were significantly offset by an $9.1 million increase in
accounts payable and accrued liabilities.
For the fiscal years ended June 30, 1995, 1994 and 1993, net cash used in
investing activities was $27.6 million, $14.8 million, and $19.6 million,
respectively. Cash used in acquisitions was $11.6 million for the year
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ended June 30, 1995, primarily for the JWP Telecom acquisition, and $7.3
million for fiscal year 1993, primarily for the ONI acquisition. For the
fiscal years ended June 30, 1995, 1994 and 1993, cash used primarily for
purchasing telecommunication assets for office buildings was $10.3 million,
$7.8 million, and $5.8 million, respectively.
The Company
The Company expects to satisfy its future cash requirements through cash
from operations and borrowings under the Credit Facility. The Company expects
that its working capital requirements will remain manageable primarily due to
the minimal capital requirements of the Systems business and, with respect to
the Services business, its ability to negotiate favorable payment terms with
its vendors and to bill its customers in advance for many recurring services.
Due to the consummation of the Transactions, the Company has approximately
$18.5 million available under the Credit Facility to fund working capital
requirements. The Credit Facility contains, among other things, affirmative
and negative covenants which are usual and customary with respect to senior
secured indebtedness. See "Description of Certain Indebtedness of the Company
and the Issuer--The Credit Facility".
The Company is highly leveraged with an estimated cash interest expense of
$11.3 million on an annualized basis. The Company expects that cash from
operations will be the principal source of funds to meet cash interest
expenses. For the year ended December 31, 1995 the Company on a pro forma
basis would have had $40.7 million of EBITDA, which would have represented
3.58 times pro forma cash interest expense. See "Pro Forma Financial
Information" The Company will have principal obligations requiring funding of
approximately $18.0 million for the year ended December 31, 1996 and $12.9
million for the year ended December 31, 1997.
The initial cost of capital equipment to establish shared telecommunications
services in a building typically ranges from $50,000 to $80,000 with
additional start-up working capital requirements of less than $50,000. The
Company currently anticipates that capital expenditures for 1996 will be $12.5
million. The Company has based its anticipated capital expenditures for 1996
on the following assumptions: (a) maintenance of existing lines at $40 per
line; (b) installation of new lines at $535 per line; and (c) entry into new
buildings at $65,000 per building.
Due to the Company's net operating loss carryforwards, the Company currently
anticipates minimal federal income tax payments during 1996.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
General
In connection with the sale of the Old Notes pursuant to a Purchase
Agreement dated as of March 8, 1996 (the "Purchase Agreement"), among the
Issuer, the Company, certain subsidiaries of the Issuer and CS First Boston
Corporation and Citicorp Securities, Inc. (the "Initial Purchasers"), the
Initial Purchasers and their assignees became entitled to the benefits of the
Registration Rights Agreement.
Under the Registration Rights Agreement, the Issuer is obligated to (i) file
the Registration Statement of which this Prospectus is a part for a registered
exchange offer with respect to an issue of new notes identical in all material
respects to the Old Notes within 45 days after March 13, 1996, the date the
Old Notes were issued (the "Issue Date"), and (ii) use its best efforts to
cause the Registration Statement to become effective within 120 days after the
Issue Date. The Exchange Offer being made hereby if commenced and consummated
within such applicable time periods will satisfy those requirements under the
Registration Rights Agreement. See "Description of the New Notes--Exchange
Offer--Registration Rights".
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal (which together constitute the Exchange
Offer), the Issuer will accept for exchange all Old Notes properly tendered
and not withdrawn prior to 5:00 p.m., New York City time, on the Expiration
Date. The Issuer will issue New Notes in exchange for an equal principal
amount of outstanding Old Notes accepted in the Exchange Offer.
As of the date of this Prospectus, $163,637,000 aggregate principal amount
($114,999,174 aggregate initial Accreted Value) of Old Notes was outstanding.
This Prospectus, together with the Letter of Transmittal, is being sent to all
registered holders as of , 1996. The Issuer's obligation to accept Old
Notes for exchange pursuant to the Exchange Offer is subject to certain
conditions as set forth herein under "--Conditions".
The Issuer shall be deemed to have accepted validly tendered Old Notes when,
as and if the Issuer has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders of Old
Notes for the purposes of receiving the New Notes from the Issuer and
delivering New Notes to such holders.
In the event the Exchange Offer is consummated, subject to certain limited
exceptions, the Issuer will not be required to register the Old Notes. In such
event, holders of Old Notes seeking liquidity in their investment would have
to rely on exemptions to registration requirements under the United States
securities laws. See "Risk Factors--Consequences of Failure to Exchange".
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean , 1996, unless the Issuer, in its
sole discretion, extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date to which the Exchange Offer is
extended.
In order to extend the Expiration Date, the Issuer will notify the Exchange
Agent of any extension by oral or written notice and will mail to the record
holders of Old Notes an announcement thereof, each prior to 9:00 a.m., New
York City time, on the next business day after the previously scheduled
Expiration Date. Such announcement may state that the Issuer is extending the
Exchange Offer for a specified period of time.
The Issuer reserves the right (i) to delay accepting any Old Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and not accept
Old Notes not previously accepted if any of the conditions set forth herein
under "--Conditions" shall have occurred and shall not have been waived by the
Issuer, by giving oral
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or written notice of such delay, extension or termination to the Exchange
Agent, or (ii) to amend the terms of the Exchange Offer in any manner deemed
by it to be advantageous to the holders of the Old Notes. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly
as practicable by oral or written notice thereof. If the Exchange Offer is
amended in a manner determined by the Issuer to constitute a material change,
the Issuer will promptly disclose such amendment in a manner reasonably
calculated to inform the holders of the Old Notes of such amendment and the
Issuer will extend the Exchange Offer for a period of five to 10 business
days, depending upon the significance of the amendment and the manner of
disclosure to holders of the Old Notes, if the Exchange Offer would otherwise
expire during such five to 10 business day period.
Without limiting the manner in which the Issuer may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Issuer shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely
release to the Dow Jones News Service.
NO VOTE OF THE ISSUER'S SECURITY HOLDERS IS REQUIRED UNDER APPLICABLE LAW TO
EFFECT THE EXCHANGE OFFER AND NO SUCH VOTE (OR PROXY THEREFOR) IS BEING SOUGHT
HEREBY.
Holders of Old Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer under the Delaware General Corporation Law,
the state in which the Issuer is incorporated.
INTEREST ON THE NEW NOTES
The Old Notes were issued at a substantial discount from their principal
amount and no interest is payable on the Notes before March 1, 1999.
Thereafter, the Notes will bear interest at the rate of 12 1/4% per annum from
the most recent date to which interest has been paid on the Notes or, if no
interest has been paid on the Notes, from March 1, 1999. Interest on the Notes
will be payable semi-annually on March 1 and September 1 of each year,
commencing March 1, 1999. Holders of Old Notes whose Old Notes are accepted
for exchange will not receive any payment in respect of accrued and unpaid
interest on such Old Notes. The Notes are not redeemable prior to March 1,
2001 except that, until March 1, 1999, the Issuer may redeem, at its option,
up to an aggregate of 25% of the principal amount of the Notes at the
redemption price set forth herein plus accrued interest to the date of
redemption with the net proceeds of one or more Public Equity Offerings if at
least $122,727,750 of the principal amount of the Notes remain outstanding
after each such redemption. On or after March 1, 2001, the Notes are
redeemable at the option of the Issuer, in whole or in part, at the redemption
prices set forth herein plus accrued interest to the date of redemption. Upon
a Change of Control, each holder of Notes may require the Issuer to repurchase
such Notes at 101% of the Accreted Value thereof plus accrued interest to the
date of repurchase.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. In addition, either (i) certificates for such
Old Notes must be received by the Exchange Agent along with the Letter of
Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book-
Entry Confirmation") of such Old Notes, if such procedure is available, into
the Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the procedure for book-entry transfer
described below, must be received by the Exchange Agent prior to the
Expiration Date or (iii) the holder must comply with the guaranteed delivery
procedures described below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF
THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT
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REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO
LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE ISSUER. To be
tendered effectively, the Old Notes, Letter of Transmittal and all other
required documents must be received by the Exchange Agent prior to 5:00 p.m.,
New York City time, on the Expiration Date. Delivery of all documents must be
made to the Exchange Agent at its address set forth below. Holders may also
request their respective brokers, dealers, commercial banks, trust companies
or nominees to effect such tender for such holders.
The tender by a holder of Old Notes will constitute an agreement between
such holder and the Issuer in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Issuer or any other person
who has obtained a properly completed bond power from the registered holder.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial owner wishes to
tender on his own behalf, such beneficial owner must, prior to completing and
executing the Letter of Transmittal and delivering his Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such
owner's name or obtain a properly completed bond power from the registered
holder. The transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.
or a commercial bank or trust company having an office or correspondent in the
United States (an "Eligible Institution") unless the Old Notes tendered
pursuant thereto are tendered (i) by a registered holder who has not completed
the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution. In the event that signatures on a Letter of Transmittal
or a notice of withdrawal, as the case may be, are required to be guaranteed,
such guarantee must be by an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by bond powers and a proxy which authorizes such person to tender
the Old Notes on behalf of the registered holder, in each case as the name of
the registered holder or holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
person should so indicate when signing, and unless waived by the Issuer,
evidence satisfactory to the Issuer of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal of the tendered Old Notes will be determined by the
Issuer in its sole discretion, which determination will be final and binding.
The Issuer reserves the absolute right to reject any and all Old Notes not
properly tendered or any Old Notes which, if accepted by the Issuer, would, in
the opinion of counsel for the Issuer, be unlawful. The Issuer also reserves
the right to waive any irregularities or conditions of tender as to particular
Old Notes. The Issuer's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letter of Transmittal) will
be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes must be cured within
such time as the Issuer shall determine. None of the Issuer, the Exchange
Agent or any other person shall be under any duty to give notification of
defects or irregularities with respect to tenders of Old Notes, nor shall any
of them incur any liability for failure to give such notification. Tenders of
Old Notes will not be deemed to have been made until such irregularities have
been cured or waived.
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Any Old Notes received by the Exchange Agent that are not properly tendered
and as to which the defects or irregularities have not been cured or waived
will be returned without cost to such holder by the Exchange Agent to the
tendering holders of Old Notes, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In addition, the Issuer reserves the right in its sole discretion to (i)
purchase or make offers for any Old Notes that remain outstanding subsequent
to the Expiration Date or, as set forth under "--Conditions", to terminate the
Exchange Offer in accordance with the terms of the Registration Rights
Agreement and (ii) to the extent permitted by applicable law, purchase Old
Notes in the open market, in privately negotiated transactions or otherwise.
The terms of any such purchases or offers could differ from the terms of the
Exchange Offer.
By tendering, each holder will represent to the Issuer that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of such holder's business, that such holder
has no arrangement or understanding with any person to participate in the
distribution of such New Notes and that such holder is not an "affiliate," as
defined under Rule 405 of the Securities Act, of the Issuer or, if such holder
is an affiliate of the Issuer, that such holder will comply with the
prospectus delivery requirements of the Securities Act. Each broker or dealer
that receives New Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker or dealer as a result of market-
making activities, or other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution".
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Issuer will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of
the Old Notes. See "--Conditions" below. For purposes of the Exchange Offer,
the Issuer shall be deemed to have accepted properly tendered Old Notes for
exchange when, as and if the Issuer has given oral or written notice thereof
to the Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. Holders of Old Notes accepted for exchange will not receive any
payment in respect of accrued and unpaid interest on such Old Notes.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely book-
entry confirmation of such Old Notes into the Exchange Agent's account at a
designated facility (the "Book-Entry Transfer Facility"), a properly completed
and duly executed Letter of Transmittal and all other required documents. If
any tendered Old Notes are not accepted for any reason set forth in the terms
and conditions of the Exchange Offer or if Old Notes are submitted for a
greater principal amount than the holder desires to exchange, such unaccepted
or nonexchanged Old Notes will be returned without expense to the tendering
holder thereof (or, in the case of Old Notes tendered by book-entry transfer
procedures described below, such nonexchanged Old Notes will be credited to an
account maintained with such Book-Entry Transfer Facility) as promptly as
practicable after the expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may book-entry deliver Old Notes by causing the Book-Entry
Transfer Facility to transfer such Old Notes into the Exchange Agent's account
at the Book-Entry Transfer Facility in accordance with such Book-Entry
Transfer Facility's procedures for transfer. However, although delivery of Old
Notes may be effected through book-entry transfer at the Book-Entry Transfer
Facility, the Letter of Transmittal or facsimile thereof with any required
signature
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guarantees and any other required documents must, in any case, be transmitted
to and received by the Exchange Agent at one of the addresses set forth below
under "--Exchange Agent" on or prior to the Expiration Date or the guaranteed
delivery procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes,
and the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is
made through an Eligible Institution, (ii) prior to the Expiration Date, the
Exchange Agent received from such Eligible Institution a properly completed
and duly executed Letter of Transmittal (or a facsimile thereof) and Notice of
Guaranteed Delivery, substantially in the form provided by the Issuer (by
facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of Old Notes and the amount of Old Notes tendered,
stating that the tender is being made thereby and guaranteeing that within
five New York Stock Exchange ("NYSE") trading days after the date of execution
of the Notice of Guaranteed Delivery, the certificates for all physically
tendered Old Notes, in proper form for transfer, or a Book-Entry Confirmation,
as the case may be, and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent and (iii) the certificates for all physically tendered Old Notes, in
proper form for transfer, or a Book-Entry Confirmation, as the case may be,
and all other documents required by the Letter of Transmittal are received by
the Exchange Agent within five NYSE trading days after the date of execution
of the Notice of Guaranteed Delivery.
WITHDRAWAL OF TENDERS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time on , 1996.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent". Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes
to be withdrawn (including the principal amount of such Old Notes) and (where
certificates for Old Notes have been transmitted) specify the name in which
such Old Notes are registered, if different from that of the withdrawing
holder. If certificates for Old Notes have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of such
certificates, the withdrawing holder must also submit the serial numbers of
the particular certificates to be withdrawn and a signed notice of withdrawal
with signatures guaranteed by an Eligible Institution unless such holder is an
Eligible Institution. If Old Notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal
must specify the name and number of the account at the Book-Entry Transfer
Facility to be credited with the withdrawn Old Notes and otherwise comply with
the procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Issuer, whose determination shall be final and binding on all parties. Any
Old Notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Old Notes will be credited to an account
maintained with such Book-Entry Transfer Facility for the Old Notes) as soon
as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following
one of the procedures described under "--Procedures for Tendering" above at
any time on or prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Issuer will not be
required to accept for exchange, or to issue New Notes in exchange for, any
Old Notes and may terminate or amend the Exchange
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Offer as provided herein before the acceptance of such Old Notes, if because
of any change in law, or applicable interpretations thereof by the Securities
and Exchange Commission, the Issuer determines that it is not permitted to
effect the Exchange Offer, and the Issuer has no obligation to, and will not
knowingly, accept tenders of Old Notes from affiliates of the Issuer (within
the meaning of Rule 405 under the Securities Act) or from any other holder or
holders who are not eligible to participate in the Exchange Offer under
applicable law or interpretations thereof by the SEC, or if the New Notes to
be received by such holder or holders of Old Notes in the Exchange Offer, upon
receipt, will not be tradeable by such holder without restriction under the
Securities Act and the Exchange Act and without material restrictions under
the "blue sky" or securities laws of substantially all of the states.
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. See "Plan of Distribution".
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
By Mail: Facsimile Transmission: By Hand:
United States Trust (212) 420-6152 United States Trust
Company Company of New York
of New York Confirm by Telephone: 111 Broadway, Lower
P.O. Box 844 Level
Cooper Station, (800) 548-656 New York, New York 10006
New York, New York Attn: Corporate Trust
10216-0844 Services
Attn: Corporate Trust
Services
(Registered or certified
mail recommended)
By Overnight Delivery:
United States Trust
Company of New York
770 Broadway-13th Floor
New York, New York 10003
Attn: Corporate Trust
Services
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Issuer. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone, telecopy or in person by officers and regular
employees of the Issuer.
The Issuer will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Issuer, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse the Exchange Agent for its reasonable out-of-pocket expenses in
connection therewith. The Issuer may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of the Prospectus and related documents
to the beneficial owners of the Old Notes, and in handling or forwarding
tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Issuer, and are estimated in the aggregate to be $150,000,
including fees and expenses of the Exchange Agent and Trustee (as defined) and
accounting, legal, printing and related fees and expenses.
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The Issuer will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be registered or
issued in the name of, any person other than the registered holder of the Old
Notes tendered, or if tendered Old Notes are registered in the name of any
person other than the person signing the Letter of Transmittal, or if a
transfer tax is imposed for any reason other than the exchange of Old Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holder.
ACCOUNTING TREATMENT
The New Notes will be recorded in the Issuer's accounting records at the
same carrying value as the Old Notes as reflected in the Issuer's accounting
records on the date of the exchange. Accordingly, no gain or loss for
accounting purposes will be recognized upon the consummation of the Exchange
Offer. The expenses of the Exchange Offer will be amortized by the Issuer over
the term of the New Notes in accordance with generally accepted accounting
principles.
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BUSINESS
GENERAL
The Company, formed through the merger of FII and STFI, is the largest
provider of shared telecommunications services ("STS") in the United States.
The Company also sells, installs and maintains telecommunications systems for
businesses and government agencies. As of December 31, 1995, the Company
provided shared telecommunications services across the United States servicing
approximately 9,000 customers in 448 buildings with over of 100,000 lines. As
of December 31, 1995, the Company also provided maintenance and other services
through its telecommunications systems business to approximately 6,000
customers with over 400,000 lines nationwide. The Company currently provides
STS and telecommunications systems in over 36 metropolitan markets. The Issuer
is a direct wholly-owned subsidiary of the Company and an intermediate holding
company for certain operating entities through which the Company operates,
including the Subsidiary Guarantors.
The Company provides STS to commercial tenants in office buildings in which
the Company typically has installed a dedicated private branch exchange (PBX)
switch under exclusive agreement with the building owner, thereby permitting
the Company's customers to obtain all their telephone and telecommunications
needs from a single source and a single point of contact. Under multi-year
contracts that usually extend through the term of the tenants' leases, the
Company offers its customers access to services provided by regulated
communications companies, such as local, discounted long distance,
international and "800" telephone services. The Company also provides
telephone switching equipment and telephones, as well as voice mail, telephone
calling cards, local area network wiring and voice and data cable
installation. Other services provided by the Company include audio
conferencing, automatic call distribution services and message center
capability. In addition, the Company's customers receive a convenient single
monthly customized invoice for all services provided by the Company.
The Company typically provides equipment and services at rates which are
competitive with or lower than those which customers could otherwise obtain,
in part due to discounts it can obtain as a high volume purchaser of
telecommunications services and equipment. In addition, by providing telephone
hardware and ongoing maintenance, the Company reduces the tenants' capital
costs of acquiring a modern, flexible telecommunications system. During the
term of a service contract, the Company generally provides the tenant with
technical assistance, services upgrades, expansions and innovations consistent
with the tenant's changing business and telecommunications needs.
Through its telecommunications systems business, the Company (i) distributes
and sells equipment, including small, medium and large capacity switches and
ancillary products, (ii) offers annual maintenance agreements under which the
Company maintains installed products either for a fixed annual fee or on a
time- and-materials basis, (iii) performs systems upgrades and expansions, and
moves, adds and changes telecommunications equipment and (iv) provides a
variety of long distance services, including basic long distance services,
"800" services, calling cards, international calling and various other network
services. The Company provides telecommunications systems to commercial
customers and government agencies with systems ranging in size from 15 to
several thousand lines.
Both STFI and FII Telecommunications Business commenced operations in the
mid 1980s, following the break-up of AT&T and the resulting fragmentation of
the provision of telecommunications services, to provide comprehensive
telecommunications services no longer available to business customers from a
single source. Following a period of industry consolidation, FII and STFI
emerged as two of the nation's three largest STS providers. As of December 31,
1995, STFI and FII provided shared telecommunications services to 115
buildings with in-excess of 30,000 lines and to 333 buildings with in-excess
of 70,000 lines, respectively. During 1994, both STFI and FII made strategic
acquisitions that significantly expanded their participation in the
telecommunications systems business, which each company had determined to be
complementary to its core STS business. While generating lower gross margin
than the STS business, the telecommunications systems business is generally
less capital intensive, requiring a relatively small investment in
inventories.
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Management expects the Merger will result in significant operating synergies
and cost savings. The Company's increased size, national scope with operations
in over 36 metropolitan markets and improved position in those 12 markets
where both STFI and FII had operations prior to the Merger will give the
Company a stronger market presence than either STFI or FII had on a stand-
alone basis and improve the Company's ability to obtain reduced pricing from
telecommunications providers and equipment vendors. In addition, the Merger
will permit the Company to consolidate operations, thereby reducing personnel
costs and certain general and administrative costs. Management believes the
Company can achieve in excess of $5 million of annual cost savings within two
years following the Merger. There can be no assurance, however, that the
Company will actually achieve such savings.
BUSINESS STRATEGY
As the nation's leading STS provider, the Company believes it is well
positioned to continue to grow through the continued implementation of its
business strategy, the key elements of which are:
. Increased Penetration of Existing Buildings. The Company intends to
increase its focus on generating additional revenue from the 448 buildings
in which it currently provides shared telecommunications services. Although
the Company may continue to make selective acquisitions of STS providers in
the future, its principal focus will be on marketing services within its
existing buildings, both to new customers and to existing customers.
. Significant Additions of Buildings. For the three years ended December
31, 1995, STFI and FII grew internally through the addition of 26 and 36
buildings, respectively. The Company plans to take advantage of its
improved market position to aggressively pursue opportunities to add
buildings to its portfolio, in particular, through multi-building contracts
with large commercial property owners.
. Expanded Service Offerings. The Company intends to capitalize on the
growing demand for new telecommunications and information technology by
expanding its services to include high speed access to the Internet, video
teleconferencing, wireless services and the delivery of cable programming.
The Company's existing infrastructure allows for low-cost delivery of these
services at minimal incremental expense to the Company. The Company
believes that many of these services would otherwise not be readily
available or affordable to its customers.
. Cross Marketing of Services and Systems. The Company intends to
leverage its telecommunications systems business by marketing
telecommunications services to its existing systems customer base. In
addition, the Company intends increasingly to market telecommunications
systems to its STS customers relocating from existing rental space who
continue to require customized telecommunications solutions, including the
purchase or lease of equipment or the provision of long distance and other
network services offered by the Company.
HISTORICAL INFORMATION REGARDING STFI AND FII
STFI
Since its incorporation on January 30, 1986, STFI expanded primarily through
nine acquisitions of similar or complementary businesses. In February 1989,
STFI gained market access to nine strategic metropolitan areas through the
acquisition of STS provider Multi-Tenant Services, Inc., a former division of
BellSouth Corporation with revenues of $5.7 million for its most recently
completed fiscal year prior to such acquisition. In May 1989, STFI acquired
interests in four STS entities from Shared Services, Inc. and I.S.E., Inc.,
giving STFI geographic penetration in the greater Chicago area. STFI entered
the Boston area as an STS provider in May 1991 through the acquisition of
Boston Telecommunications Company, which had revenues of $3.7 million for its
most recently completed fiscal year prior to such acquisition.
In 1994, STFI purchased Access, which had revenues of approximately $18.7
million for its most recently completed fiscal year and which gave STFI access
to 18 buildings in Dallas and a nationwide systems management business.
Through the Access acquisition, STFI entered the telecommunications systems
business
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and was provided with long distance capabilities that significantly broadened
its existing product line and substantially increased its installed customer
base. The telecommunications systems business of Access had approximate
revenues of $11.4 million for its most recently completed fiscal year. The
acquisition substantially increased STFI's revenues and added depth to its
management team.
In June 1995, STFI acquired OTM, an STS provider which had revenues of $3.5
million for its most recently completed fiscal year. OTM primarily serves
businesses located in executive office suites.
STC was incorporated in 1989 as a consolidated subsidiary of STFI. STC is a
provider of cellular telephone equipment and services throughout the United
States. STC markets its cellular telephone services principally through car
rental agencies, airlines, hotels and telephone companies. In addition, STC
markets its cellular telephone services at conventions and sporting events.
On December 29, 1995, STC issued 300,000 shares of preferred stock in
exchange for $3.0 million which resulted in both STFI's loss of voting control
of STC, and STFI accounting for STC on the equity basis. Prior to such stock
issuance, STC was a consolidated subsidiary of STFI. STFI will continue to
provide certain management and administrative services to STC pursuant to a
Management Agreement through 1996. STC is required to pay a fee of $25,000
(not exceeding $200,000 for the year) to STFI each month unless in any such
month STC has a pre-tax loss for such month or the amount of such fee would
exceed pre-tax profit for such month prior to the payment of such fee. STC is
not currently paying any fees to STFI pursuant to the Management Agreement.
The following chart sets forth as of December 31, 1995, for each of STFI's
markets, (i) the location of such market, (ii) the total number of buildings
in which STFI provides shared telecommunications services, (iii) the aggregate
leasable square feet of such buildings and (iv) the total number of lines in
service:
<TABLE>
<CAPTION>
TOTAL LEASABLE TOTAL LINES
LOCATION BUILDINGS SQ. FT. IN SERVICE
-------- --------- -------- -----------
<S> <C> <C> <C>
Atlanta 14 3,822,030 3,453
Birmingham 2 1,291,500 1,144
Boston 12 4,361,400 2,939
Chicago 10 3,210,300 3,322
Dallas 13 9,252,270 5,368
Hartford 6 1,624,500 1,425
Indianapolis 7 939,600 1,147
Los Angeles 10 1,674,000 622
Myrtle Beach 1 125,820 20
New Jersey 2 562,500 1,130
New Orleans 7 2,903,400 4,022
Phoenix 14 2,235,600 2,690
Seattle 8 4,033,800 3,376
Stamford 4 969,300 827
Nashville 5 1,217,340 1,342
--- ---------- ------
Totals 115 38,223,360 32,827
=== ========== ======
</TABLE>
FII
Formed in 1985 as an STS provider to commercial occupants of multi-tenant
office buildings, the communications services division of FII significantly
expanded its business operations through strategic acquisitions and internal
growth to become the largest STS provider in the United States prior to its
acquisition by STFI. From July 1986 to July 1994, FII successfully completed
17 acquisitions in the STS business.
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FII made its first acquisition in 1986 when it purchased the assets of
Integrated Business Systems Company for approximately $3.3 million. This
acquisition enabled FII to enter the Atlanta, Georgia market and added
approximately $0.7 million in annual revenue. At the time of acquisition, this
transaction more than doubled FII's annual revenues. In 1987 and 1988, FII
completed six acquisitions for an aggregate purchase consideration of
approximately $5.7 million, resulting in an increase in revenues of
approximately $5.8 million. In 1989, FII completed two acquisitions from Wang
Information Services Company for a total of approximately $2.3 million. These
acquisitions included over twenty buildings in the metropolitan Washington, DC
area and six buildings in Dallas.
The acquisition of Amerisystems Partnership in September 1990 was the
largest of such acquisitions, with approximately $23.0 million in annual
revenue for its most recently completed fiscal year, and allowed FII to add to
its portfolio access to ten additional markets including Chicago and Houston.
Following the Amerisystems Partnership acquisition, FII completed seven
additional acquisitions with purchase consideration ranging from $0.1 million
to $7.3 million, which was the amount paid for ONI in December 1992. The ONI
acquisition enabled FII to enter the Indianapolis market with access to twenty
three additional buildings.
FII gained entry to the telecommunications systems business through the
acquisition of the assets of JWP Telecom, which provided FII with the
opportunity to leverage its existing STS business through the marketing of
shared telecommunications services to pre-acquisition customers of JWP Telecom
Inc.
The following chart sets forth as of December 31, 1995, for each of FII's
markets (i) the location of such markets, (ii) the total number of buildings
in which FII provides shared telecommunications services, (iii) the aggregate
leasable square feet of such buildings and (iv) the total number of lines in
service:
<TABLE>
<CAPTION>
LEASABLE
TOTAL SQ. TOTAL LINES
LOCATION BUILDINGS FT. IN SERVICE
-------- --------- -------- -----------
<S> <C> <C> <C>
Atlanta 28 9,917,383 8,229
Austin 5 810,000 2,503
Baltimore 1 414,000 133
Chicago 30 14,197,298 7,241
Dallas 22 8,476,169 9,513
Ft. Lauderdale 2 501,811 898
Houston 20 11,317,500 3,292
Indianapolis 48 5,585,583 6,614
Los Angeles 18 6,171,108 2,934
Miami 4 2,079,999 2,054
Milwaukee 1 177,300 166
Minneapolis 26 4,255,708 5,852
New Orleans 3 1,613,318 2,725
Orlando 1 391,500 801
Philadelphia 39 6,371,640 5,296
Pittsburgh 17 5,604,519 1,758
Salt Lake City 13 1,035,000 2,425
Stamford 5 1,962,000 450
Tampa 7 3,498,170 3,998
Washington D.C. 43 14,084,100 6,151
--- ---------- ------
Totals 333 98,464,106 73,033
=== ========== ======
</TABLE>
61
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INDUSTRY BACKGROUND
The telecommunications services and equipment industry has undergone rapid
and substantial change during the past 12 years, in large part as a result of
the divestiture by AT&T of its local telephone companies in 1984 and the
resulting fragmentation of the provision of telecommunications services.
Following the break-up of AT&T, the change in the competitive environment,
coupled with technical innovations, resulted in an accelerated flow of new
telecommunications products and services, stimulating user demand. However,
the rapid pace of change, the broadening range of services and products and
the growing number of pricing options resulted in a complex, confusing
marketplace, particularly for small and medium-sized businesses lacking the
internal resources to effectively evaluate their telecommunications
alternatives. In addition, although the telecommunications requirements of
small and medium-sized businesses have become more sophisticated, such
businesses have not readily been able to access new services, obtain state of
the art equipment and enjoy economies of scale.
In response to the difficulties faced by small and medium-sized businesses,
numerous STS providers such as STFI and FII were established and created a
service business designed to provide a simplified, one-stop solution to the
complex alternatives confronting small and medium-sized users of modern
telecommunications services. By utilizing an STS provider, a customer can
contract for its telecommunication needs from a single source and reduce the
logistical requirements and costs that would be incurred if the same
telecommunications services were obtained from multiple contractors. In
addition to tailoring telecommunications solutions to their customers' needs,
STS providers are able to offer services that would otherwise not be cost-
effective for, or readily available to, smaller businesses, including custom
billing, call detail accounting, system redundancy and voice mail.
The growing competition among long distance carriers has resulted in
dramatic reductions in rates and increased usage of long distance services.
Those companies able to purchase long distance services in significant volume,
such as the Company, have become particularly attractive customers to long
distance providers and enjoy greater reductions in rates than retail
consumers. The competitive pressure for rate reductions is still apparent in
the market, despite some selected upward adjustments, and the Company has been
active in seeking out the most advantageous overall rate structures. At the
local exchange level, competition among providers of transmission services
also has increased as various state authorities have begun to eliminate
monopoly franchises and carriers have responded by beginning to offer
competitive access to local telephone exchange customers. With deregulation
and increasing competition in the local exchange markets, management believes
that the Company's high volume of local traffic will enable the Company to
aggressively pursue more favorable local network access rates.
DESCRIPTION OF THE BUSINESS
Shared Telecommunications Services
The Company offers customers access to services provided by regulated
communications companies, such as local, discounted long distance,
international and "800" telephone services. The Company also provides
telephone switching equipment and telephones, as well as voice mail, telephone
calling cards, and local area network wiring, voice and data cable
installation. Other services provided by the Company include audio
conferencing, automatic call distribution services and message center
capability. The Company typically provides equipment and services at rates
which are competitive with or lower than those which customers could otherwise
obtain, in part due to discounts it can obtain as a high volume purchaser of
telecommunications services and equipment. In addition, the Company's
customers receive a convenient single monthly customized invoice for all
services provided by the Company.
Historically, the Company has marketed its services to small and medium-
sized (fewer than 250 lines) business customers who are not otherwise able to
take advantage of economies of scale in procuring their telecommunications
services. "One-stop shopping" is provided for these customers'
telecommunications needs without the substantial initial capital costs that
would be incurred with the purchase of the same telecommunications system from
multiple suppliers. The Company offers its customers (i) services that would
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otherwise not be cost-effective for, or readily available to, such customers
due to the size of their business; (ii) reduced capital expenditures and space
requirements by allowing its customers to utilize the Company's existing
infrastructure and centrally located hardware; and (iii) comprehensive
maintenance programs. Additional services are available as the customer's
business and telecommunications needs grow. The Company also provides its
customers with the benefits of responsive on-site service and a single
itemized invoice for all services provided.
STS providers, such as the Company, negotiate and enter into long-term
telecommunications agreements with owners and developers of office buildings.
Under these agreements, the STS provider typically has the right for a period
of up to ten or more years to install switching equipment, wiring and
telephones capable of serving all of the tenants in an office building.
Typically, the right to install a dedicated PBX switch is exclusive. Such
agreements provide for the owners to assist the STS provider by identifying
potential tenant customers. Generally, an STS provider leases and pays rent to
the owner for switch room space in the building and, under certain
circumstances, may agree to provide an incentive to the owner. By contracting
with an STS provider, an owner will have the benefit of a state-of-the-art
telecommunications infrastructure in its building and be able to offer its
tenants the ability to access sophisticated telecommunications services.
Telecommunications Systems
The Company's telecommunications systems business provides end users with a
wide variety of telecommunications products and services and offers its
customers the flexibility to expand or enhance their telecommunications
systems as their businesses change. Through its telecommunication systems
business, the Company is also able to provide customized telecommunications
solutions to those of its customers choosing to purchase, rather than lease,
equipment. Under the trade name Telecom 2000(R), the Company sells directly to
end- users a wide selection of telecommunications equipment produced by
leading manufacturers, including Northern Telecom, Inc., AT&T, NEC, Octel
Communications Corporation, Centigram Communication Corporation and Active
Voice Corporation. Through a staff of field and other engineers, the Company
designs and installs all of its customers' telecommunications infrastructure
needs in a complete turn-key telecommunications system including post-
installation maintenance. Post-installation maintenance consists of complete
maintenance of the customer's entire telecommunications system, including
warranty and post-warranty maintenance contracts, upgrades and adds, moves and
changes. Telecommunications systems installations include PBX and key
telephone systems, voice mail, automated call distribution systems and entire
call centers. The Company also provides a variety of long distance services
including basic services, "800" services, calling cards, international calling
and various other network services. The Company provides telecommunications
systems to commercial customers and government agencies with systems ranging
in size from 15 to several thousand lines.
Customer service options range from nine-to-five coverage to 24-hours a day,
365-days a year maintenance contracts. The Company also contracts with
customers to staff their facilities with dedicated service personnel under
long term contracts. As of December 31, 1995, the Company provided
telecommunications systems nationwide, including maintenance and other
services covering in excess of 400,000 customer lines.
Sales and Marketing
The Company markets its services and products through a direct sales force
which is segmented into distinct geographic markets. Typically, under
agreements with the Company, the owner identifies prospective and existing
tenants to the Company's local sales force. After establishing contact with
the potential customer and obtaining an understanding of the prospective
customer's telecommunications needs, the Company's local sales representative
arranges for a presentation of the Company's products and services and the
cost of potential solutions meeting the customer's requirements. After
securing a sale, members of the Company's sales force follow up with customers
by offering them new value-added services. Management believes that direct
sales activities are more effective than advertising for securing and
maintaining the businesses of small to medium-sized services customers. A
significant percentage of new systems sales result from upgrading, enlarging
or replacing systems currently used by the Company's existing customers. As of
December 31, 1995, the Company
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had approximately 55 employees in its direct sales force. No single customer
of the Company accounted for more than 2.5% of the Company's total revenues
for the year ended December 31, 1995.
Customer Service
The Company strives to provide superior customer service and believes that
personal contact with potential and existing customers is a significant factor
in securing and retaining customers. Each new customer account is processed
locally at the site location that was responsible for obtaining the account.
The Company's customer service staff is dedicated to providing new customers
with a smooth transition to its services and systems. All customers' calls for
repair, moves, adds, and changes are handled and processed at the local site.
Management believes that this personal and local handling of the customer
service function is very important to the customers, creating strong alliances
for the Company and encouraging repeat business. The Company's local offices
retain total responsibility for all aspects of their respective customers'
services (including equipment, local service and long distance). As a result,
the customer only needs to place one call to inquire about any aspect of its
service. The management of each local office site is evaluated quarterly for
the quality of its customer service and the Company's field service
representatives conduct periodic audits of all of its customers to assess
their satisfaction with all aspects of service. The Company's service
contracts with STS customers are typically for a duration of five years (or
expire earlier upon termination of a customer's building lease). Service
contracts with the Company's telecommunications systems customers are
typically for one to three years duration and generally provide for automatic
extensions of such term.
Management Information Systems (MIS)
Providing accurate and customized billing for customers is an integral
component of the Company's business. The Company's MIS systems process
millions of call records a month for the telecommunications services business
and combine this information with other recurring and nonrecurring customer
charges to produce monthly invoices. Tenants are quoted a monthly charge for
leased equipment which includes a rental fee for equipment, a charge for
access to the PBX owned by the Company and installed in the buildings where
such tenants are located, and a local access charge based on the cost of the
trunk lines which connect the building to the central office of the local
telephone company. In addition, tenants are charged for special services and
usage, including "800" service, dedicated circuits, directory listings, local
message units, directory assistance, calling card services, third-party
billing calls, and long-distance at a discount from the standard rates charged
by long-distance providers. The Company believes that its detailed billing
reports provide a unique service to small and medium-sized customers allowing
customers to understand and control their telecommunications costs.
The MIS systems also track telecommunications installations and customer
requests from initial request to final collection. Each customer request is
entered into the job order system to monitor the progress of the work as well
as keep track of the time and material requisitioned for the job.
The Company's MIS systems can be expanded with minimal incremental cost to
accommodate substantially more volume. Such systems feature backup processors
and short-time response maintenance agreements and are designed to respond to
customer needs as well as support the Company's operations.
Canadian Operations
In August 1995, a wholly-owned subsidiary of STFI, STI International, Inc.,
entered into a joint venture with O&Y Telecom, Inc. ("OYTI"), a principal
stockholder of which is also a principal stockholder of O&Y Properties, Inc.,
a major property management company which currently manages in excess of 12
million square feet of mixed use properties across Canada. The joint venture
entity, Shared Technologies of Canada, will provide shared telecommunications
services throughout Canada, combining STFI's telecommunications services
expertise with OYTI's extensive property management resources and expertise.
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Acquisitions
Both FII and STFI grew historically through acquisitions. The Company may
continue to acquire selectively services and systems companies to increase the
Company's critical mass in a market or to provide additional services or
products which can be marketed to the Company's existing customers.
Personnel
As of December 31, 1995, STFI and FII on a combined basis had approximately
800 employees, of whom approximately 8.1% were covered by two collective
bargaining agreements. One agreement expires in 1998 and the other expires in
1999. Management believes that the Company's relations with its employees are
satisfactory.
Competitors
The Company's STS business competes with regulated major carriers that may
provide a portion of the services that the Company provides, but are typically
not structured to provide all of a customer's telecommunications requirements.
The Company also competes with small independent operators serving regional or
local markets and with other STS providers, including the Realcom unit of MFS
Communications Inc. ("MFS"). The Company also competes with equipment
manufacturers and distributors and long distance companies for the provision
of telephone and other telecommunications equipment and services to tenants in
buildings under franchise with the Company. Within the past five years,
competition has expanded to include a group of companies known as alternate
access providers, including MFS, TCG, Inc. and others. The major competitive
factors in the STS market are technology, price and service. The Company's
principal competitive advantages are its ability to provide "one-stop
shopping" for telecommunications services and site-based technical service.
The principal competitors of the Company's telecommunications systems
business and, once a building franchise has been obtained, the Company's STS
business, include the direct sales channels of manufacturers such as AT&T's
Network Systems division, Northern Telecom, Inc., NEC, other distributors of
equipment manufactured by such companies, as well as the Regional Bell
Operating Companies ("RBOCs").
On February 8, 1996, the Telecommunications Act was enacted as Federal Law.
The Telecommunications Act makes certain changes in the regulatory environment
in which the Company operates by: (i) pre-empting any State or local law or
regulation that prohibits, or has the effect of prohibiting, the ability of
any entity to provide any interstate or intrastate telecommunications service
which may result in the removal of regulatory barriers that have heretofore
discouraged the Company from expanding its business in certain States; (ii)
prohibiting local exchange telephone companies from prohibiting, or imposing
unreasonable or discriminatory conditions on, the resale of those companies'
telecommunications services which may result in the removal or relaxation of
some of the restrictions on shared telecommunications systems referred to in
the preceding paragraph, and reduces the risk that telephone companies could
modify their tariffs to impose more restrictive terms and conditions on such
systems; (iii) authorizing the FCC to forebear from applying any regulation to
a telecommunications carrier or class of telecommunications carriers under
certain conditions, which may result in a relaxation of the FCC's regulatory
oversight over the Company's operations; (iv) authorizing the RBOCs, upon
satisfying certain conditions, to apply for, and the FCC to grant, authority
to offer long-distance services to customers within the States in which they
offer local telephone service. This may result in more intense competition
within the markets in which the Company operates. Other provisions of the
Telecommunications Act direct the FCC to conduct rulemaking proceedings on a
variety of subjects, including interconnection, resale, and universal service,
which may affect the Company, but it is not possible to predict the outcome of
any such proceedings.
The Telecommunications Act may result in greater competition for the
Company. The RBOCs are free immediately to seek authority to offer long
distance service outside their current operating areas. They will be
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free to offer long distance services to customers within their current
operating regions after satisfying the law's requirements for opening their
local exchange markets to competition. GTE and other local exchange carriers
are free immediately to seek authority to offer long distance services both
within and outside their regions.
Long distance carriers also are permitted to seek authority to offer local
exchange services. The major carriers (AT&T, MCI and Sprint) will be subject,
on an interim basis, to restrictions on joint marketing of local and long
distance services.
To date, one of the Company's main competitive advantages has been its
ability to provide "one stop shopping" for telecommunications services. This
advantage may erode as the RBOCs and other local exchange carriers begin to
offer long distance service and as long distance carriers begin to offer local
exchange service.
Suppliers
The Company purchases over 90% of its long distance service from AT&T,
WorldCom, Inc. and MCI Telecommunications Corporation. These services are
obtained pursuant to multiyear contracts. The Company supplies its customers
with equipment obtained from Northern Telecom, Inc., AT&T, NEC, Octel
Communications Corporation, Centigram Communications Corporation, Active Voice
Corporation and other leading manufacturers. The Company typically obtains
such equipment under distributor agreements that specify the types of products
the Company can provide to customers and the geographic areas in which the
Company may operate as a distributor. These agreements generally are for a
minimum term of one year and provide for successive one year renewals unless
either party objects to such renewal. There can be no assurance that these
agreements will remain in effect beyond their current terms or, if extended,
that the same provisions with respect to types of products and geographic
areas would continue to apply. Other manufacturers provide similar
telecommunications equipment. If the Company's distributor agreements are not
extended on the same or similar terms as those currently in effect, there can
be no assurance that the Company would be able to secure distributor
agreements with other manufacturers or that the equipment available from those
manufacturers would be suitable for the customers served by the Company.
Properties
As of December 31, 1995, FII leased real property totalling approximately
280,000 square feet and STFI leased real property totalling approximately
60,000 square feet. Neither company owned any real property. Each of the
leased properties is, in management's opinion, generally well maintained, is
suitable to support the Company's business and is adequate for the Company's
present needs.
The Company leases from RHI, on an arm's-length basis, office space at
Washington-Dulles International Airport. See "Certain Relationships and
Related Transactions."
Environmental Matters
In connection with its plans to dispose of certain real estate, the former
aerospace fastener division of FII, now owned by RHI, must investigate
environmental conditions and may be required to take certain corrective action
prior or pursuant to any such disposition. In addition, FII management has
identified several areas of potential contamination at or from other
facilities owned, or previously owned, by FII, that may require FII either to
take corrective action or to contribute to a clean-up. FII is also a defendant
in certain lawsuits and proceedings seeking to require FII to pay for
investigation or remediation of environmental matters and has been alleged to
be a potentially responsible party at various "Superfund" sites. Management of
FII believes that it has recorded adequate reserves in its financial
statements to complete such investigation and take any necessary corrective
actions or make any necessary contributions. No amounts have been recorded as
due from third parties, including insurers, or set off against, any liability
of FII, unless such parties are contractually obligated to contribute and are
not disputing such liability.
66
<PAGE>
As of June 30, 1995, the consolidated total recorded liabilities of FII
(prior to the FII Recapitalization) for environmental matters referred to
above totaled $8.6 million. Based on a review of engineering studies conducted
for FII of claims for known contamination, STFI estimates that it is
reasonably possible that the costs resulting from such claims could range from
$8.0 million to $30.0 million, 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. STFI'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.
Legal Proceedings
The Federal 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
approximately $50.0 million in excess pension funds in connection with the
termination of 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. See Note 13 to FII's Consolidated Financial Statements included
elsewhere in this Prospectus.
In December 1995, Gerard Klauer Mattison & Co., LLC ("GKM"), filed suit
against STFI alleging breach of a letter agreement and seeking an amount in
excess of $2.25 million for a commission allegedly owed to GKM as a result of
GKM initiating negotiations between STFI and FII and negotiating the Merger.
GKM has alleged that the Company entered into a fee agreement, whereby the
Company agreed to pay to GKM 0.75% of the value of the transaction as a fee.
Jeffrey J. Steiner has denied that FII at any time engaged GKM for this
transaction. The Company filed an Answer in January, 1996, denying that any
commission is owed. This litigation is in the discovery process.
The Company is a party to other lawsuits and administrative proceedings that
arose in the ordinary course of its business. Although the final results in
all suits and proceedings cannot be predicted, the Company presently believes
that the ultimate resolution of all such other lawsuits and proceedings, after
taking into account the liabilities accrued with respect to such matters, will
not have a material adverse effect on the Company's financial condition or
results of operations. See Note 15 to STFI's Consolidated Financial Statements
included elsewhere in this Prospectus.
67
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company (ages as of April 23, 1996):
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Anthony D.
Autorino 57 Chairman, Chief Executive Officer and Director
Paul R.
Barry 31 Senior Vice President Business Development
Mel D.
Borer 52 President, Chief Operating Officer and Director
Vincent 46 Senior Vice President--Administration and
DiVincenzo Finance, Chief Financial Officer, Treasurer and Director
Kenneth M.
Dorros 36 Senior Vice President, General Counsel and Secretary
Thomas E.
Dupont,
Jr. 34 Controller
Jeffrey J.
Steiner 59 Vice Chairman and Director
Thomas H.
Decker 55 Director
William A.
DiBella 52 Director
Natalia
Hercot 30 Director
Ajit G.
Hutheesing 60 Director
Edward J.
McCormack,
Jr. 72 Director
Jo McKenzie 64 Director
Herbert L.
Oakes, Jr. 49 Director
</TABLE>
The directors and executive officers of the Issuer are the same as those of
the Company. The directors and officers of the Subsidiary Guarantors are
certain of the directors and officers of the Issuer.
The bylaws of each of the Company and the Issuer provide that the Board of
Directors consists of eleven members, divided into two classes of four
directors each and one class of three directors, with the terms of each class
staggered so that the term of one class expires at each annual meeting of
stockholders.
Anthony D. Autorino is the Chairman of the Board, Chief Executive Office,
and Director. Mr. Autorino had been Chairman, President and Chief Executive
Officer of STFI since January 1986. From January 1985 to January 1986, he was
Chairman and Chief Executive Officer of ShareTech, a joint venture between
United Technologies Corporation and AT&T. He was President of United
Technologies Building System Company from 1981 to 1984 and was its Chairman
and Chief Executive Officer from 1984 to 1985. Mr. Autorino joined the
Hamilton Standard Division of United Technologies in 1960, holding the
positions of Vice President, Executive Vice President and President of the
Division. Mr. Autorino was Chairman of the firearms manufacturer Colt's
Manufacturing Company, Inc. and of its parent company, CF Holding Corp. from
March 1990 to March 1992. He also served as Acting Chief Executive Officer
from September 1991 to December 1991. Mr. Autorino is also a director of
FiberVision Corporation. Mr. Autorino serves on the board of directors of the
Connecticut Children's Medical Center.
Paul R. Barry is Senior Vice President--Business Development. Mr. Barry had
been Vice President--Business Development of STFI since November 1995. Mr.
Barry joined STFI in October 1989 as Manager--Investor Relations. From June
1990 to December 1990 he served as a Regional Director. He then served as a
Vice President until November 1992, then became Vice President--Operations
until January 1995, and held the position of President of the FMS Division
from January 1995 until November 1995. Mr. Barry is a graduate of
Massachusetts College of Pharmacy and received an M.B.A. from Rensselaer
Polytechnic Institute. Mr. Barry is the son-in-law of Mr. Autorino.
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<PAGE>
Mel D. Borer is President, Chief Operating Officer and Director. He had been
Vice President of FII since 1991 and President of Fairchild Communications
Services Company since 1989. Mr. Borer had served as Vice President of
Fairchild since September 1993.
Vincent DiVincenzo is Senior Vice President--Administration and Finance,
Chief Financial Officer, Treasurer and Director. He had been a director of
STFI since May 1992 and Senior Vice President--Administration and Finance,
Treasurer and Chief Financial Officer since September 1993. Mr. DiVincenzo
joined STFI in July 1988 and served as its Vice President--Finance, Treasurer
and Chief Financial Officer until September 1993. From 1987 to 1988, Mr.
DiVincenzo was Controller of KCR Technology, Inc. From 1982 to 1986, he was
employed by Lorlin Test Systems (formerly Eaton Corporation) serving as
controller in his last capacity. Prior to 1982, Mr. DiVincenzo served as
Manager of General Accounting for Interrad Corporation and for the ConDiesel
Mobile Equipment Division of Condec Corporation.
Kenneth M. Dorros is Senior Vice President, General Counsel and Secretary.
He had been General Counsel of STFI since June 1986. Mr. Dorros became
Secretary in 1987 and he was named a Vice President in 1992 and a Senior Vice
President in February, 1996. Prior thereto, he was Assistant General Counsel
of ShareTech since 1985. A graduate of Lehigh University, Mr. Dorros received
his law degree from the Fordham University School of Law. He is admitted to
the bars of New York and Connecticut.
Thomas E. Dupont, Jr. is Controller. He had been Controller of STFI since
May 1994. From June 1990 to April 1994, Mr. Dupont was a Senior Associate at
Coopers & Lybrand. From June 1989 to May 1990 he was associated with the
accounting firm of John W. Clegg & Co. Mr. Dupont holds a B.A. degree from the
University of Connecticut and an M.B.A. from Bryant College.
Jeffrey J. Steiner is Vice Chairman of the Board and a Director. He had been
Chairman of the Board and Chief Executive Officer of Fairchild since December
1985, and President of Fairchild since July 1, 1991. Mr. Steiner also served
as President of Fairchild from November 1988 until January 1990. He had served
as Chairman of the Board, Chief Executive Officer and President of Banner
Aerospace since September 1993. He served as Vice Chairman of the Board of
Rexnord Corporation from July 1992 to December 1993. He had served as
Chairman, President and Chief Executive Officer of FII since July 1991 and of
RHI since 1988. Mr. Steiner is and for the past five years has been President
of Cedco Holdings Ltd. He serves as a director of The Franklin Corporation,
The Copley Fund and Fairchild.
Thomas H. Decker is a Director. He had been a director of STFI since May
1992. Since September 1992, Mr. Decker has served as a Senior Vice President
of Investments at Prudential Securities. From 1981 to September 1992 he served
as a Senior Vice President at Tucker Anthony Incorporated. Mr. Decker also
serves as a director of FiberVision Corporation.
William A. DiBella is a Director. He had been a director of STFI since April
1986. Since 1981, Mr. DiBella has been a Connecticut State Senator and is
currently Senate Minority Leader and was Senate Majority leader from 1992 to
1994. Prior thereto, he served as Chairman of the Finance, Revenue and Bonding
Committee. Mr. DiBella was Chairman of the Metropolitan District Commission
1977 to 1981, was a member of the Hartford City Council from 1971 to 1979 and
Deputy Mayor from 1975 to 1977.
Natalia Hercot is a Director. She had been a Director of FII since 1989.
Since 1991, she has served in various capacities at both Fairchild and FII,
and currently serves as International Coordinator and Translator of Fairchild.
Ms. Hercot is the daughter of Jeffrey J. Steiner.
Ajit G. Hutheesing is a Director. He had been a director of STFI since June
1994. Mr. Hutheesing is the founder, Chairman and Chief Executive Officer of
International Capital Partners, Inc. ("ICP"). Prior to starting ICP in 1988,
he was Chairman of the Board and Director of Corporate Finance of The Sherwood
Group. Before joining Sherwood, Mr. Hutheesing was with the J. Henry Schroder
Corporation from 1975 to 1986 and held the position of Vice Chairman from
1982. Prior to that time, Mr. Hutheesing spent ten years with the
International Finance Corporation, a private sector investment banking arm of
the World Bank. Mr. Hutheesing is Chairman
69
<PAGE>
of Age Wave, Inc. He also serves as a director of Counsel Corporation and
Cryenco Sciences Inc. He was educated at Cambridge University in England where
he received a B.S. degree in chemistry, physics and mathematics and an M.A.
degree in chemical engineering. Mr. Hutheesing holds an M.B.A. degree from
Columbia University.
Edward J. McCormack, Jr. is a Director. He had been a director of STFI since
June 1991. Mr. McCormack is a former three-term Attorney General of The
Commonwealth of Massachusetts. Mr. McCormack is a lawyer with the law firm of
Goldstein & Manello, P.C., Boston, Massachusetts. From 1988 until September
1991, Mr. McCormack was a senior partner of the law firm of McCormack &
Putziger in Boston. He is a former three-term Boston City Council member,
having served as President of the Council and Acting Mayor of the City of
Boston.
Jo McKenzie is a Director. She had been a director of STFI since June 1991.
Mrs. McKenzie is a former Republican State Chairwoman of Connecticut and has
held a wide variety of Republican Party leadership positions at the federal,
state and local levels. Recently, Mrs. McKenzie served as a Republican
National Committeewoman from Connecticut. From 1993, Mrs. McKenzie has been a
consultant to businesses providing hospitality services.
Herbert L. Oakes, Jr. is a Director. He had been a director of STFI since
July 1988. Since April 1988, Mr. Oakes has been a managing director of Oakes,
Fitzwilliams & Co. Limited, a member of The Securities Association and The
International Stock Exchange. In 1982, Mr. Oakes founded and became President
of H.L. Oakes & Co., Inc. Prior to forming that firm, he was manager of the
London bank of Dillon, Read & Co., Inc. Mr. Oakes is also a director of a
number of other companies, including California Energy Company, Inc., Harcor
Energy, Inc. and The New World Power Corporation.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company or the Issuer receive cash
compensation of $750 per meeting of the Board of Directors of the Company or
the Issuer, as applicable, attended ($400 if attended by teleconference) and
$500 for each committee meeting attended ($400 if attended by teleconference),
plus reimbursement of out-of-pocket expenses for attendance at each Board or
committee meeting.
A formula-based stock option plan for independent directors (the "Directors'
Plan"), was adopted by STFI's Board of Directors on September 22, 1994, and
approved by the stockholders of STFI in May 1995. Under the Directors' Plan,
an "independent director" is a director of the Company who is neither an
employee nor a principal stockholder of the Company. The Directors' Plan
provides for a one-time grant of an option to purchase 15,000 shares of Common
Stock to all independent directors who served during the 1994-95 term (namely,
Messrs. Decker, DiBella, Hutheesing, McCormack and Oakes and Mrs. McKenzie),
issuable as of September 22, 1994. The Directors' plan further provides for
the grant of an option to purchase 15,000 shares of Common Stock to each
independent director first elected after September 22, 1994.
Each independent director who received a one-time option grant on September
22, 1994 and who was elected to a new term as a director in 1995 or is
reelected in 1996, shall receive upon such reelection a grant of an option for
5,000 or 10,000 options, respectively. Reelection after 1996 of any
independent director in service as of September 22, 1994 shall entitle such
director to a grant of 15,000 options.
All options issued under the Directors' Plan are exercisable at the closing
bid price for the date preceding the date of grant on which there was a sale
of Common Stock on the principal national securities exchange on which the
Common Stock is then listed or admitted to trading. Options will vest at the
rate of one-third per year of service completed as a director, and are
exercisable for so long as the optionee continues as an independent director
of the Company and for a period of 90 days after the optionee ceases to be a
director of the Company. The options will in no event be exercisable for a
period in excess of ten years following the grant date. The maximum number of
shares of Common Stock which may be issued under the Directors' Plan is
250,000. To date, options to purchase 115,000 shares of Common Stock of the
Company are outstanding.
70
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation awarded
or paid to or earned by each of the Company's and the Issuer's Chief Executive
Officer and each of the Company's and the Issuer's other four most highly paid
executive officers (collectively, the "Named Executive Officers") for the
fiscal years ended 1995, 1994 and 1993:
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION LONG-TERM COMPENSATION AWARDS
-------------- ------------------------------------
SECURITIES
RESTRICTED UNDERWRITING ALL OTHER
PRINCIPAL SALARY BONUS OTHER ANNUAL STOCK OPTIONS COMPENSATION
NAME POSITION YEAR ($) ($) COMPENSATION AWARDS (#)(A) ($)
---- --------- ---- ------- ------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Anthony D. Autorino 1995 330,000 50,000 -- -- -- 55,944(b)
.................. Chairman, President 1994 325,808 15,000 -- 120,000 57,528(c)
and Chief Executive Officer 1993 269,280 12,500 -- 50,000 4,947(d)
Ronald E. Scott.... Vice Chairman, 1995 211,955 -- -- -- -- 63,298(e)
Executive Vice President
and Chief Operating
Officer
Vincent DiVincenzo 1995 112,000 25,000 -- -- 10,000 9,374(f)
.................. Senior Vice President--
Administration, Chief Financial
Officer and Treasurer
James D. 1995 102,000 15,000 -- -- -- 4,870(h)
Rivette(g)........ President--STS Division
Paul R. Barry ..... Senior Vice President-- 1995 82,917 20,000 -- -- 10,000 2,599(i)
Business Development
</TABLE>
- --------
(a) Represents options granted pursuant to the Company's 1987 Stock Option
Plan.
(b) Represents the market value of 1,045 shares of the Company's Common Stock
contributed to Mr. Autorino's account under the Company's Savings and
Retirement Plan. Also includes $450 paid by the Company for Mr. Autorino's
benefit for life insurance through the Company's group life insurance
policy and $47,448 for additional life insurance. Also includes $4,028 for
automobile lease expenses and $4,018 for supplemental disability
insurance. Also includes options granted to Mr. Autorino on December 26,
1995 to purchase 60,000 shares of Shared Technologies Cellular, Inc.
common stock owned by the Company at a purchase price equal to $2.50 per
share.
(c) Represents the market value of 1,351 shares of the Company's Common Stock
contributed to Mr. Autorino's account under the Company's Savings and
Retirement Plan. Also includes $450 paid by the Company for Mr. Autorino's
benefit for life insurance through the Company's group life insurance
policy.
(d) Represents the market value of 886 shares of the Company's Common Stock
contributed to Mr. Autorino's account under the Company's Savings and
Retirement Plan. Under this plan, the Company makes contributions in
Company Common Stock equal in value to 50% of an employee's contributions.
The employee contribution may not exceed 20% of the employee's salary, and
the Company contribution may not exceed 5% of the employee's salary.
Company contributions are made monthly and the Common Stock is valued at
the closing (bid) price on the last day of the month in which a
contribution is made. Also includes $450 paid by the Company for Mr.
Autorino's benefit for life insurance through the Company's group life
insurance policy.
(e) Represents the market value of 1,035 shares of the Company's Common Stock
contributed to Mr. Scott's account under the Company's Savings and
Retirement Plan. Also includes $174 paid by the Company for Mr. Scott's
benefit for life insurance through the Company's group life insurance
policy and $22,554 for additional life insurance for Mr. Scott's benefit
paid for by the Company. Also includes $6,000 for automobile lease
expenses, $3,227 for supplemental disability insurance and a moving
allowance of $31,344. As of February 7, 1996, Mr. Scott ceased to be an
officer and director of the Company.
(f) Represents the market value of 973 shares of the Company's Common Stock
contributed to Mr. DiVincenzo's account under the Company's Savings and
Retirement Plan. Also includes $174 paid by the Company for Mr.
DiVincenzo's benefit for life insurance through the Company's group life
insurance policy and $4,370 for additional life insurance for Mr.
DiVincenzo's benefit paid for by the Company. Also includes $4,269 for
automobile lease expenses and $561 for supplemental disability insurance.
Also includes options granted to Mr. DiVincenzo on December 26, 1995 to
purchase 50,000 shares of Shared Technologies Cellular, Inc. common stock
owned by the Company at a purchase price equal to $2.50 per share.
(g) Mr. Rivette ceased to be an officer of the Company on March 13, 1996.
(h) Represents the market value of 759 shares of the Company's Common Stock
contributed to Mr. Rivette's account under the Company's Savings and
Retirement Plan. Also includes $174 paid by the Company for Mr. Rivette's
benefit for life insurance through the Company's group life insurance
policy and $2,430 for additional life insurance for Mr. Rivette's benefit
paid for by the Company. Also includes $1,598 for automobile lease
expenses and $668 for supplemental disability insurance,.
(i) Represents the market value of 713 shares of the Company's Common Stock
contributed to Mr. Barry's account under the Company's Savings and
Retirement Plan. Also includes $54 paid by the Company for Mr. Barry's
benefit for life insurance through the Company's group life insurance
policy and $775 for additional life insurance for Mr. Barry's benefit paid
for by the Company. Also includes $1,548 for automobile lease expenses and
$221 for supplemental disability insurance.
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<PAGE>
Employment Agreements. Concurrently with the Merger, the Issuer will enter
into two year Employment Agreements with Messrs. Autorino, Borer, DiVincenzo
and Steiner providing for base salaries of $500,000, $250,000, $150,000 and
$350,000, respectively. Prior to the Merger, each of the foregoing individuals
was not party to an employment agreement with the Issuer but was paid an
annual base salary of $330,000, $178,000, $115,000 and $1,550,011,
respectively.
In connection with the Merger, subject to the approval of the Compensation
Committee (as hereinafter defined), the Company may also enter into employment
agreements with up to 20 employees providing for severance payments including
(i) up to two years of base pay and bonus, and (ii) with respect to up to ten
members of senior management, payments amounting in the aggregate to up to $5
million to be made in the event of a change of control of the Company.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth for each of the Named Executive Officers each
grant of stock options made during the fiscal year ended December 31, 1995:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
-------------------------------------------- ---------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES EXERCISE OR
GRANTED IN FISCAL BASE PRICE EXPIRATION
NAME (#)(A) YEAR (B) ($/SH) DATE 5% ($) 10% ($)
- ---- ---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Anthony D. Autorino -- -- % $ -- -- -- --
Vincent DiVincenzo 10,000 25 4.125 8/31/05 25,942 65,742
Ronald E. Scott -- -- -- -- -- --
Paul R. Barry 10,000 25 4.125 8/31/05 25,942 65,742
James D. Rivette -- -- -- -- -- --
</TABLE>
- --------
(a) Options to acquire shares of Common Stock of the Company granted pursuant
to the Company's 1987 Stock Option Plan. All options are exercisable at a
price equal to the fair market value of the Common Stock of the Company on
the date of grant.
(b) Based on a total of 40,000 options granted during the fiscal year ended
December 31, 1995.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
No options were exercised during the fiscal year ended December 31, 1995.
The following table presents information concerning the value of unexercised
stock options at the end of the fiscal year ended December 31, 1995 with
respect to the named executive officers.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCIED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FISCAL YEAR- AT FISCAL YEAR-
END END
(EXERCISABLE/ (EXERCISABLE/
NAME UNEXERCISABLE) UNEXERCISABLE)
---- --------------- ----------------
<S> <C> <C>
Anthony D. Autorino......................... 214,584/46,666 $161,417/$18,333
Vincent DiVincenzo.......................... 36,667/45,833 7,083/14,167
Ronald E. Scott............................. --/-- --/--
Paul R. Barry............................... 22,917/33,333 5,833/11,667
James D. Rivette............................ 24,167/18,333 5,000/10,000
</TABLE>
STOCK OPTION PLANS
1996 Equity Incentive Plan. In connection with the Offering, the Company has
adopted, subject to stockholder approval, the 1996 Equity Incentive Plan (the
"1996 Plan"), pursuant to which the Company will
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<PAGE>
offer shares, and share-based compensation, to key employees. The 1996 Plan
provides for the grant to eligible employees of stock options, stock
appreciation rights, restricted stock, performance shares, and performance
units (the "Awards"). The 1996 Plan is administered by the Compensation
Committee of the Company's Board of Directors (the "Compensation Committee"),
which is entitled to make all determinations with respect to selection of
participants and the Awards to be granted. Officers and full-time salaried
employees of the Company who, in the judgment of the Compensation Committee,
are in a position to make a substantial contribution to the management, growth
and success of the Company will be eligible to receive Awards.
The 1996 Plan provides that not more than 1.5 million shares of Common Stock
will be granted under the 1996 Plan. However, the number of shares is subject
to adjustment to reflect certain dilutive changes in the number of outstanding
shares of Common Stock. Any shares subject to an Award, which are not issued
or are forfeited because the terms and conditions of the Award are not met,
may again be used for an Award under the 1996 Plan. However, the exercise of a
stock appreciation right will result in the cancellation of the related stock
option, and options so cancelled shall not be available for future Awards.
Prior to being earned (or exercised, in the case of stock options), no rights
under any Award may be transferred except by will or the laws of descent and
distribution or by a valid beneficiary designation taking effect at death.
A grant of a stock option will entitle a participant to purchase from the
Company a specified number of shares of Common Stock at a specified price per
share. In the discretion of the Compensation Committee, stock options may be
granted as non-qualified stock options or incentive stock options. The
purchase price per share of Common Stock subject to an option shall be fixed
by the Compensation Committee at the time such option is granted, but shall
not be less than 100% of the fair market value per share of Common Stock at
the time the option is granted in the case of incentive stock options. Payment
for shares of Common Stock acquired on exercise of a stock option may be made
in cash, in shares of Common Stock having a fair market value as of the date
of exercise equal to the exercise price, or a combination thereof. However,
the Compensation Committee will be able to impose limitations on the use of
shares of Common Stock to exercise stock options, as it deems appropriate.
Stock options may be exercised during such periods of time fixed by the
Compensation Committee (except that no incentive stock option may be exercised
later than ten years after the date of grant).
Stock appreciation rights ("SARs") may be granted only in tandem with stock
options. Each SAR will entitle the participant, in general, to receive upon
exercise the excess of a share's fair market value at date of exercise over
the exercise price of the related stock option. An SAR granted in tandem with
an option will be exercisable only to the extent the option is exercisable. To
the extent the option is exercised, the accompanying SAR will cease to be
exercisable, and vice versa.
A grant of restricted stock will consist of a specified number of shares of
Common Stock which will be contingently awarded in amounts to be determined by
the Compensation Committee to those participants selected by the Compensation
Committee and will be subject to forfeiture to the Company under such
conditions and for such a period of time as the Compensation Committee may
determine. A participant may vote and receive dividends on restricted stock,
but may not sell, assign, transfer, pledge or otherwise encumber the
restricted stock during the restricted period. The purchase price, if any, to
be paid for the restricted stock will be determined at the time of grant by
the Compensation Committee.
Awards of performance shares will entitle the participant to receive shares
of Common Stock based upon the degree of achievement of pre-established
performance goals over a period as determined by the Compensation Committee in
its discretion. Performance goals will be fixed by the Compensation Committee
in its discretion on the basis of such criteria and to accomplish such goals
as the Compensation Committee may select. The Compensation Committee will have
discretion to determine the employees eligible for performance shares, the
duration of each performance period, and the number of shares to be earned on
the basis of the Company's performance relative to the established goals. At
the end of the performance period, the Compensation Committee will determine
the number of performance shares which have been earned on the basis of the
Company's performance in relation to the performance goals.
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<PAGE>
Awards of performance units will entitle the participant to receive cash
based upon the degree of achievement of pre-established performance goals over
a performance period as determined by the Compensation Committee. Performance
unit awards and performance goals for each performance period will be
recommended by the Chief Executive Officer of the Company (other than with
respect to awards and goals applicable to the Chief Executive Officer, which
are determined by the Board of Directors) and submitted to the Compensation
Committee for approval. At the time of grant, a performance valuation schedule
(other than for the Chief Executive Officer) will be recommended by the Chief
Executive Officer of the Company, subject to approval by the Compensation
Committee in its discretion, which schedule will set ultimate performance
units values which correspond to various levels of performance of the Company
in relation to the performance goals. The performance valuation schedule for
the Chief Executive Officer will be recommended by the Compensation Committee
and approved by the Board of Directors of the Company. At the end of a
performance period the Compensation Committee will review the actual
performance of the Company and determine the amount of award payouts, if any.
In the event of a participant's termination of employment prior to the
exercise of share options granted under the 1996 Plan, in general, if such
termination is for cause, the outstanding stock options will be cancelled. If
the termination is other than for cause, in general, the stock options will
expire on the later of 90 days following the termination of employment.
Notwithstanding the general rules described above, the Compensation Committee
may rescind the right to exercise stock options following termination of
employment if the participant engages in competition with or otherwise engages
in activity which is adverse to the Company. In addition, the exercise period
for incentive stock options may not extent beyond the period allowed by the
Internal Revenue Code of 1986, as amended.
In the event of a participant's termination of employment prior to
satisfaction of conditions related to outstanding performance share awards,
restricted stock awards and performance units awards for reasons other than
discharge or resignation, a participant or his estate or beneficiary, in the
sole discretion of the Compensation Committee, may be entitled to receive a
pro rata number of shares (or amount of cash in the case of performance units)
with respect to the Award or such larger portion of the Award as the
Compensation Committee shall determine. In the event of a termination of
employment due to resignation or discharge, the Award will be cancelled
without consideration, subject to the discretion of the Compensation Committee
to release restrictions on all or any part of an Award.
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 the other directors and executive officers of the
Company following the Offering which would increase the ownership by such
individuals of the Company.
1987 Stock Option Plan. Under the 1987 Stock Option Plan (the "1987 Plan"),
the Company is authorized to issue options to purchase an aggregate of
1,200,000 shares of Common Stock of the Company. As of December 31, 1995,
options to purchase 733,136 shares of Common Stock of the Company were issued
under the 1987 Plan.
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SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 13, 1996 with
respect to the Common Stock owned by (a) each director of the Company, (b) the
Named Officers, (c) all directors and executive officers of the Company as a
group, and (d) each person who is known by the Company to own beneficially
more than 5% of the 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 OF SHARES PERCENTAGE OF
BENEFICIALLY COMMON STOCK
NAMES AND ADDRESSES(A) OWNED(B) OUTSTANDING
---------------------- ---------------- -------------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Anthony D. Autorino....................... 1,158,279(c) 7.8%
Chairman, Chief Executive Officer and
Director
Paul R. Barry............................. 100,281(d) *
Senior Vice President, Business
Development
Mel D. Borer.............................. 0 *
President, Chief Operating Officer and
Director
Thomas H. Decker.......................... 14,750(e) *
Director
William A. DiBella........................ 51,663(f) *
Director
Vincent DiVincenzo........................ 39,363(g) *
Senior Vice President--Administration and
Finance, Treasurer, Chief Financial
Officer and Director
Natalia Hercot............................ 0 *
Director
Ajit G. Hutheesing........................ 309,957(h) 2.1%
Director
Edward J. McCormack, Jr................... 107,677(i) *
Director
Jo McKenzie............................... 9,575(j) *
Director
Herbert L. Oakes, Jr...................... 27,886(k) *
Director
Jeffrey J. Steiner........................ 3,838,176(l) 20.8%
Vice Chairman and Director
All directors and executive officers as a
group
(14 persons)............................. 5,681,096(m) 37.3%
PRINCIPAL STOCKHOLDERS
RHI....................................... 9,921,569(l) 53.8%
300 West Service Road
Chantilly, VA 22021
Zesiger Capital Group LLC................. 1,792,325(n) 11.8%
320 Park Avenue
New York, NY 10022
Access Trust and Stuart M. Crow, Trustee 1,068,805(o) 7.27%
.........................................
2001 Ross Avenue, Suite 3200
Dallas, TX 75201
</TABLE>
- --------
*Less than 1%
(a) The address of each of the Company's directors and executive officers is
c/o Shared Technologies Fairchild Inc., 100 Great Meadow Road, Suite 104,
Wethersfield, Connecticut 06109.
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(b) 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.
(c) Includes 214,584 shares currently issuable upon exercise of options. Also
includes 93,750 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 the Company's Savings and Retirement
Plan. Also includes 11,500 shares of Series D Preferred Stock, which are
convertible into 11,500 shares of Common Stock, and 11,500 Common Stock
Purchase Warrants, which are convertible into an additional 11,500 shares
of Common Stock. Also includes 17,500 shares of Series D Preferred Stock
owned of record by Mr. Autorino's spouse and 17,500 Common Stock Purchase
Warrants also owned by her, as to which shares and warrants Mr. Autorino
disclaims beneficial ownership.
(d) Includes 22,917 shares currently issuable upon exercise of options. Also
includes 60,000 shares owned of record by Mr. Barry's spouse and 11,050
shares owned by Mr. Barry's children as to which Mr. Barry disclaims
beneficial ownership. Also includes 1,600 shares owned through the
Company's Savings and Retirement Plan. Mr. Barry is the son-in-law of Mr.
Autorino, the Chairman, Chief Executive Officer and Director of the
Company. Mr. Autorino disclaims beneficial ownership of any shares owned
of record by Mr. Barry, his spouse or his children.
(e) Includes 8,750 shares currently issuable upon exercise of options.
(f) Includes 22,913 shares currently issuable upon exercise of options. Also
includes 28,750 shares owned of record by Mr. DiBella's spouse, as to
which Mr. DiBella disclaims beneficial ownership.
(g) Includes 36,667 shares currently issuable upon exercise of options. Also
includes 2,244 shares owned by Mr. DiVincenzo through the Company's
Savings and Retirement Plan.
(h) Includes 5,000 shares currently issuable upon exercise of options. Also
includes a Common Stock Purchase Warrant which is convertible into 298,957
shares of Common Stock which is owned of record by International Capital
Partners, Inc., of which Mr. Hutheesing is the Chairman, Chief Executive
Officer and a stockholder.
(i) Includes 9,500 shares currently issuable upon exercise of options. Also
includes 65,135 shares owned of record by Mr. McCormack's spouse, as to
which Mr. McCormack disclaims beneficial ownership.
(j) Includes 9,575 shares currently issuable upon exercise of options.
(k) Includes 14,575 shares currently issuable upon exercise of options. 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.
(l) Mr. Steiner owns Class A shares and Class B shares of the common stock of
Fairchild. Class A shares are entitled to one vote per share and Class B
shares are entitled to ten votes per share. Each Class B share is
immediately convertible into one Class A share. Mr. Steiner owns both
Class A shares and Class B shares and, accordingly, his voting power in
Fairchild is greater than his economic ownership in Fairchild. As of
December 31, 1995, Mr. Steiner beneficially owned 3,687,388 Class A shares
(27.4% of the outstanding Class A shares) and 2,569,996 shares of Class B
shares (95.3% of the outstanding Class B shares). Such Class A shares and
Class B shares represents 38.7% of the Class A and Class B shares and
72.7% of the combined voting power of all outstanding capital stock at
Fairchild as of December 31, 1995. Such amounts exclude options and
warrants of Fairchild held by Mr. Steiner. Fairchild owns all the issued
and outstanding capital stock of RHI, which owns 6.0 million shares of
Common Stock and 250,000 shares of Convertible Preferred Stock which are
convertible into 3,921,569 shares of Common Stock. For purposes of Mr.
Steiner's beneficial ownership of the Company, beneficial ownership
represents Mr. Steiner's economic
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ownership of Fairchild. However, through his ownership of Fairchild Class B
stock and his positions with Fairchild and RHI, Mr. Steiner may be deemed
to beneficially own all of the Common Stock owned by RHI.
(m) Includes a total of 361,564 shares which officers and directors of the
Company have the right to acquire under outstanding stock options. 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 (c) above. Also includes 298,957 shares
of Common Stock issuable upon conversion of a Common Stock Purchase
Warrant, as set forth in footnote (h) above. Also includes 12,606 shares
owned by officers and directors through the Company's Savings and
Retirement Plan.
(n) Includes 746,325 shares of Common Stock issuable upon exercise of Common
Stock Purchase Warrants.
(o) Includes 197,500 shares issuable upon exercise of Common Stock Purchase
Warrants.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF THE COMPANY
As of December 31, 1995, approximately $288,000 had been paid for life
insurance premium payments made on behalf of Anthony D. Autorino, STFI's
President. The amount was to be repaid from the proceeds of a $2,500,000 face-
value life insurance policy which was owned by Mr. Autorino and whose estate
was the beneficiary. In January 1994, the beneficiary on the policy was
changed from Mr. Autorino's estate to STFI in order to reduce the premium
payments required by STFI. As of December 31, 1995, the amount due to STFI
related to premiums paid exceeded the cash surrender value of the policy by
$130,000. Accordingly, Mr. Autorino has agreed to reimburse STFI for this
amount.
In January 1995, STFI sold 300,000 shares of its common stock through a
private placement offering with the assistance of Oakes, Fitzwilliams & Co.
Limited, ("O&F"), of which Herbert L. Oakes, Jr., a director of STFI, is a
managing director. O&F received compensation from STFI for such assistance in
the amount of $102,000 and a warrant to purchase 30,000 shares of STFI's
common stock for $5.00 per share. STFI believes that these fees are comparable
to fees that would be charged by an unrelated third party providing similar
services.
In December 1995, STFI granted options to Messrs. Autorino and DiVincenzo to
purchase 60,000 and 50,000 shares, respectively, of Shared Technologies
Cellular, Inc. common stock owned by STFI at a purchase price equal to $2.50
per share.
On December 29, 1995, STFI's majority-owned subsidiary, Shared Technologies
Cellular, Inc. ("STC"), effected a $3 million private placement of certain
shares of STC preferred stock. The shares were sold to certain investors
represented by ICP Investments, Inc. ("ICP"), an affiliate of International
Capital Partners, Inc. ("Partners"). Ajit G. Hutheesing, a Director of STFI,
is Chairman and Chief Executive Officer of Partners. In connection with the
offering, ICP received a fee of $300,000 and a warrant to purchase 150,000
shares of STC common stock at an exercise price of $2.50 per share, subject to
certain adjustments.
In connection with the Merger, STFI entered into (a) the Shareholders
Agreement among the Company, RHI and Anthony D. Autorino, (b) the
Indemnification Agreements and (c) the Registration Rights Agreement (as
defined) with RHI. See "The Transactions--Additional Agreements".
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<PAGE>
THE TRANSACTIONS
THE FII RECAPITALIZATION
FII historically conducted three businesses: the FII Telecommunications
Business, an aerospace fasteners business and an industrial products business.
The aerospace fasteners business designs, manufactures and markets high
performance, specialty fastening systems, primarily for aerospace
applications. The industrial products business designs, manufactures and
markets tooling and electronic control systems for the plastic injection
molding and die casting industries. Prior to the Merger, the FII
Recapitalization was consummated pursuant to which FII divested itself of its
aerospace fasteners business and its industrial products business and retained
only its telecommunications business. The FII Telecommunications Business
represented 21.4% of FII sales during its fiscal year ended June 30, 1995.
As part of the FII Recapitalization, RHI assumed all of FII's assets and
liabilities except those expressly related to FII's telecommunications
business and the Retained Liabilities, which included (i) the FII Preferred
Stock, (ii) the 12 1/4% Notes and (iii) the FII Indebtedness. As part of the
FII Recapitalization, RHI transferred to FII, as a contribution to its
capital, all of the outstanding shares of the Series B Preferred Stock of FII.
On January 26, 1996, FII sold its industrial products business to Cincinnati
Milacron, Inc. ("CM") pursuant to an asset purchase agreement dated as of
January 23, 1996 for approximately $245.0 million (the "D-M-E Asset Sale"),
comprised of approximately $62.3 million in cash and three 8% promissory notes
of CM. One note, in the amount of $11.7 million, will be payable upon the
receipt of required regulatory clearance in Belgium, and will be canceled and
the corresponding Belgium assets reconveyed, in the event such clearance is
not obtained. Of the other two notes, one is in the aggregate principal amount
of approximately $166 million, which note is collateralized by a letter of
credit issued by Bankers Trust Company in the amount equal to the principal of
such promissory note (the "Collateralized D-M-E Note"), and the other is
unsecured and is in the aggregate principal amount of approximately $5.0
million (the "Unsecured D-M-E Note" and, collectively with the Collateralized
D-M-E Note, the "D-M-E Term Notes"). Each of the D-M-E Term Notes is due and
payable one year following the consummation of the D-M-E Asset Sale, except
that upon 30 days' prior notice, Fairchild may require prepayment of, or CM
may prepay, each D-M-E Note at any time beginning on or after July 29, 1996.
THE MERGER
General
On November 9, 1995, STI and FII entered into the Merger Agreement. Pursuant
to the Merger Agreement, FII merged into STI, with the surviving corporation
now named "Shared Technologies Fairchild Inc." In connection with the Merger,
RHI (the sole common stockholder of FII) received (i) 6,000,000 shares of
Common Stock (representing approximately 40.8% of the then outstanding Common
Stock), (ii) the Convertible Preferred Stock with an initial liquidation
preference of $25.0 million and (iii) the Special Preferred Stock with an
initial liquidation preference of $20.0 million. As a result of the Merger,
the holders of the shares of preferred stock of FII (excluding the shares
owned by RHI which were transferred in the FII Recapitalization) received the
Preferred Consideration, aggregating approximately $38.9 million as of
February 1, 1996.
The Merger Agreement
Representations and Warranties. The Merger Agreement contained customary
representations and warranties from FII and STFI, including with respect to
corporate organization and qualifications of each company and its
subsidiaries; the authorization, execution, delivery, performance and
enforceability of the Merger Agreement (subject to stockholder approval in the
case of STFI); capitalization; the accuracy of the historical financial
statements of the companies; the conduct of business; the absence of
undisclosed material
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<PAGE>
litigation; compliance with applicable laws; the absence of undisclosed
liabilities; the employee benefit plans; environmental matters; and certain
tax matters and intellectual property rights.
Indemnification. In connection with the Merger, STFI agreed to indemnify FII
for losses incurred by FII in connection with a breach of STFI's
representations and warranties as set forth in the Merger Agreement. In the
event of any such breach and liability by STFI therefor, STFI 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 STFI 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 STFI Stockholders.
CERTAIN EFFECTS OF THE MERGER
As a result of the Merger, the holders of the shares of Common Stock
outstanding prior to the merger decreased their ownership position from 100%
to 59.2%. A single stockholder, RHI, owns 40.8% of the outstanding Common
Stock. The Convertible Preferred Stock are convertible into 3,921,568 shares
of Common Stock, thereby providing RHI with the immediate potential for an
increased Common Stock ownership position to 53.3% (42.8% on a fully diluted
basis).
Concurrently with the Merger, the President of FII's Telecommunications
Business, Mel D. Borer, will become President and a Director of the Company
and RHI shall have the right to nominate three members of the Board of
Directors with Mr. Autorino having the right to nominate seven Board members.
As a result of the FII Recapitalization and the Merger, certain agreements
may require the consent of the building owners. To the extent the Company does
not obtain such consents, management does not believe that its business,
operations or financial performance will be affected in a materially adverse
manner.
ADDITIONAL AGREEMENTS
The following is a summary of the material terms and conditions of each of
the Shareholders Agreement, the Indemnification Agreements, the Pledge
Agreement and the Registration Rights Agreement. This summary does not purport
to be a complete description of any such agreement and each is subject to its
detailed provisions and the various related documents entered into in
connection therewith. A copy of a form of each agreement is available upon
request from the Issuer.
Shareholders Agreement. RHI, Mr. Autorino (who owns 8.36% of the outstanding
Common Stock) and the Company are parties to a Shareholders Agreement pursuant
to which they have agreed to cause the Board of Directors to consist at all
times of eleven directors, with RHI having the ability to nominate three (four
at such time as Mr. Borer is not also a director) and Mr. Autorino having the
ability to nominate seven. Each party agrees to vote for the other party's
nominees. Under the terms of the Shareholders Agreement, Mr. Autorino and RHI
have agreed to certain restrictions with respect to the resale of securities
of the Company owned by them as of the date of the Merger other than the
Special Preferred Stock. Mr. Autorino and RHI have agreed 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 in such securities as of the date of the Merger Agreement without the
consent of 80% of the Board of Directors. Following the two year "lock-up,"
each shareholder may transfer such securities provided that it grants the
other parties the first right to negotiate the purchase of such securities for
a 30 day period. If a shareholder desires to transfer more than 50% of his or
its holdings to a non-affiliated purchaser (other than through underwriters in
a public offering or otherwise in the securities markets generally), then such
shareholder must offer the other shareholder "take-along" rights to sell a
proportional amount of its shares to the same purchaser in the same
transaction. Furthermore, if a shareholder receives an offer which it desires
to accept from a person or related group of persons to purchase shares of the
Company securities representing 10% or more of the outstanding shares of the
Company, then the selling shareholder shall offer the other shareholder a
right of first refusal to purchase such shares on the same terms and
conditions before accepting such offer to purchase.
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The Shareholders Agreement also subjects the parties to a voting agreement
with respect to the election of Directors. Among other things, each party
agrees to (i) vote for four nominees of RHI; provided, that so long as Mr.
Borer shall be President of the Company 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 or Mr.
Autorino ceases to be Chief Executive Officer of the Company.
Indemnification Agreements. Fairchild, RHI and certain affiliates entered
into Indemnification Agreements pursuant to which the Company will be
indemnified (a) by Fairchild and RHI jointly and severally with respect to all
Non-communications Liabilities, including, but not limited to, (i) contingent
liabilities related to a dispute with the United States Government under
Government Contract Accounts rules concerning potential liability arising out
of the use of and accounting for approximately $50.0 million in excess pension
funds relating to certain government contracts in the discontinued aerospace
business of FII, (ii) all environmental liabilities except those related to
the FII Telecommunications Business, (iii) approximately $50.0 million (at
June 30, 1995) of costs associated with post-retirement healthcare benefits
and (iv) all other accrued liabilities and any and all other unasserted
liabilities unrelated to the FII Telecommunications Business and (b) by
Fairchild Holding Corp. (a company formed in connection with the FII
Recapitalization) with respect to the liabilities of the aerospace and
industrial fasteners business and the plastic injection molding business
previously conducted by FII. Pursuant to an amendment to the Merger Agreement
dated as of February 2, 1996, the Indemnification Agreements were amended to
include all taxes including but not limited to taxes related to the FII
Recapitalization. The Indemnification obligations under the Indemnification
Agreements will be secured by all of the shares of Convertible Preferred Stock
(other than shares having an initial liquidation preference of $1.5 million)
and the Special Preferred Stock issued to RHI in the Merger. However, all such
securities will be released from the pledge upon the later to occur of (i) the
third anniversary of the Merger or (ii) the date on which the consolidated net
worth of Fairchild is at least (x) $25.0 million greater than its net worth at
September 30, 1995 (excluding for such purpose the pledged securities) and (y)
$225.0 million (including for such purpose the pledged securities). The
Company believes that Fairchild has already achieved the net worth criteria of
clause (ii) of the preceding sentence. Therefore, all securities subject to
the pledge shall be released therefrom on the third anniversary of the Merger.
Pledge Agreement. As security for the obligations under the Indemnification
Agreements, RHI pledged to the Company all shares of the Preferred Stock
issued to RHI in the Merger, other than Convertible Preferred Stock having an
aggregate face liquidation preference of $1.5 million. The Pledge Agreement
will terminate upon the later to occur of (i) the third anniversary of the
Merger or (ii) the date on which the consolidated net worth of Fairchild is at
least (x) $25.0 million greater than its net worth at September 30, 1995
(excluding for such purpose the pledged securities) and (y) $225.0 million
(including for such purpose the pledged securities). The Company believes that
Fairchild has already achieved the net worth criteria of clause (ii) of the
preceding sentence. Therefore, all securities subject to the pledge shall be
released therefrom on the third anniversary of the Merger.
Registration Rights Agreement. Pursuant to the Registration Rights Agreement
STFI granted to RHI certain demand and piggy-back registration rights with
respect to the Common Stock and Preferred Stock (i) issued to RHI pursuant to
the Merger Agreement, (ii) to be issued in the future to satisfy
indemnification obligations, and (iii) issuable and issued upon conversion of
shares of the Convertible Preferred Stock. Any exercise of such registration
rights may result in dilution of the interest of STFI's stockholders, hinder
STFI's efforts to arrange future financings and/or have an adverse effect on
the market price of the Common Stock. 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
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demand that STFI 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 STFI for its own account or the account of other
Stockholders (subject to underwriter restrictions in the event of a
registration for the account of STFI and subject to the existing rights of such
other Stockholders).
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DESCRIPTION OF CERTAIN INDEBTEDNESS OF THE COMPANY AND THE ISSUER
THE CREDIT FACILITY
The following is a summary of the material terms and conditions of the
Credit Facility. This summary does not purport to be a complete description of
the Credit Facility and is subject to its detailed provisions and various
related documents entered into in connection with the Credit Facility.
The Credit Facility consists of (a) a Tranche A Senior Secured Term Loan
Facility providing for term loans to the Company in a principal amount not to
exceed $50.0 million (the "Tranche A Term Facility"); (b) a Tranche B Senior
Secured Term Loan Facility providing for term loans to the Company in a
principal amount not to exceed $70.0 million (the "Tranche B Term Facility"
and, together with the Tranche A Term Facility, the "Term Facilities"); and
(c) a Senior Secured Revolving Credit Facility providing for revolving loans
to the Company in an aggregate principal amount at any time not to exceed $25
million (the "Revolving Facility").
The full amount of each Term Facility must be drawn in a single drawing upon
consummation of the Merger and amounts repaid or prepaid under any Term
Facility may not be reborrowed. The Tranche A Term Facility will amortize
quarterly over 5 years under a schedule to be agreed upon. The Tranche B Term
Facility will amortize over 7 years under a schedule to be agreed upon
providing for nominal quarterly installments during the first 5 years of such
Facility and quarterly installments during the final year thereof.
The Issuer will be required to make mandatory prepayments of loans in
amounts, at times and subject to exceptions to be agreed upon, (a) in respect
of 75% (subject to step-down based upon a leverage ratio test) of consolidated
excess cash flow of the Issuer and its subsidiaries, (b) in respect of 100% of
the net proceeds of certain dispositions of assets or the stock of
subsidiaries or the incurrence of certain indebtedness by the Issuer or any of
its subsidiaries and (c) in respect of 100% (subject to step-down based upon a
leverage ratio test) of the net proceeds of the issuance of any equity
securities by the Issuer or any of its subsidiaries. At the Issuer's option,
loans may be prepaid, and revolving credit commitments may be permanently
reduced, in whole or in part, at any time in minimum amounts to be agreed. Any
optional prepayment of fixed rate loans, other than at the end of an interest
period, will be subject to reimbursement of redeployment costs.
The obligations of the Issuer under the Credit Facility will be
unconditionally and irrevocably guaranteed by the Company and the Subsidiary
Guarantors. In addition, the Credit Facility will be secured by first priority
security interests in all the capital stock and the tangible and intangible
assets of the Company, the Issuer and the Guarantors, including all the
capital stock of, or other equity interests in, the Issuer and each direct or
indirect domestic subsidiary of the Issuer.
At the Issuer's option, the interest rates per annum applicable to the
Credit Facility will be either Adjusted LIBOR plus a margin ranging from 2.75%
to 3.50%, or the Adjusted Base Rate plus a margin ranging from 1.75% to 2.50%.
The Alternate Base Rate is the higher of Credit Suisse's Prime Rate and the
Federal Funds Effective Rate plus 0.5%.
The Credit Facility contains a number of significant covenants that, among
other things, will restrict the ability of the Issuer to dispose of assets,
incur additional indebtedness, repay other indebtedness or amend other debt
instruments, pay dividends, create liens on assets, enter into leases,
investments or acquisitions, engage in mergers or consolidations, make capital
expenditures, or engage in certain transactions with subsidiaries and
affiliates and otherwise restrict corporate activities. In addition, under the
Credit Facility, the Issuer is required to comply with specified financial
ratios and tests, including a limitation on capital expenditures, a minimum
EBITDA test, a fixed charge coverage ratio, an interest coverage ratio, a
leverage ratio and a minimum net worth test.
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DESCRIPTION OF PREFERRED STOCK OF THE COMPANY
The Company has authorized (a) 250,000 shares of Convertible Preferred
Stock, all of which is issued and outstanding; (b) 20,000 shares of Special
Preferred Stock, all of which is issued and outstanding; (c) 5 million shares,
par value $0.01 per share, of Series C Preferred Stock, 777,480 shares of
which is issued and outstanding; and (d) 1.0 million shares of Series D
Preferred Stock, par value $0.01 per share, 456,842 shares of which is issued
and outstanding.
Set forth below is a summary of the material terms and conditions of each
such class of the Company's Preferred Stock. This summary does not purport to
be a complete description of the terms and conditions of such Preferred Stock
and each is subject to its more detailed provisions contained in the
certificate of designation relating to such class. A copy of each certificate
of designation is available upon request from the Company or the Issuer.
GENERAL
The Preferred Stock is issuable in one or more series, as determined by the
Board of Directors. The Board of Directors is authorized to determine, among
other things, with respect to each series which may be issued: (i) whether
dividends are payable on such series, and the dividend rate and conditions and
the dividend preferences, if any; (ii) whether dividends would be cumulative
and, if so, the date from which dividends on such series would accumulate;
(iii) whether, and to what extent, the holders of such series would enjoy
voting rights in addition to those prescribed by law; (iv) whether, and upon
what terms, such series would be convertible into or exchangeable for shares
of any other class of capital stock or other series of Preferred Stock; (v)
whether, and upon what terms, such series would be redeemable; (vi) whether or
not a sinking fund would be provided for the redemption of such series and, if
so, the terms and conditions thereof; and (vii) the preference, if any, to
which such series would be entitled in the event of voluntary or involuntary
liquidation, dissolution or winding up of the Company. With regard to
dividends, redemption and liquidation preference, any particular series of
Preferred Stock may rank junior to, on a parity with or senior to any other
series of Preferred Stock.
CONVERTIBLE PREFERRED STOCK
In connection with the Merger, the Company has issued Convertible Preferred
Stock to RHI with an initial liquidation preference of $25.0 million.
Dividends. Dividends on the 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 Convertible Preferred Stock has a liquidation
preference of $25.0 million in the aggregate plus an additional amount (the
"Additional Amount") equal to the total amount of dividends the holder of the
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 Convertible Preferred Stock is convertible at any
time 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 $6.375. The conversion price is subject to adjustment upon occurrence
of customary adjustment events including, but not limited to, stock dividends,
stock subdivisions and reclassifications or combinations.
Optional Redemption. The Convertible Preferred Stock is not redeemable at
the Company's option during the first three years after issuance, but
thereafter, upon 30 days' prior written notice, is redeemable at the Company's
option at a redemption price of 100% of the Liquidation Preference.
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Mandatory Redemption. On the 12th anniversary date of original issuance of
the Convertible Preferred Stock, the Company is required to redeem 100% of the
outstanding shares of Convertible Preferred Stock at the Liquidation
Preference.
Ranking. The Company is not permitted to issue preferred stock ranking
senior to the 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 Convertible Preferred
Stock. The Convertible Preferred Stock will rank junior to the Series C
Preferred Stock of the Company 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 the Company.
Voting Rights. The holder is entitled to appoint two directors in the
aggregate to the Board of Directors in addition to other directors to which
such holder is entitled (with such additional director(s) to be added in lieu
of existing non-holder directors) in the following circumstances: in the event
that the Company fails to make four consecutive dividend payments on the
Convertible Preferred Stock, the holder will be entitled to elect one such
additional director, and if eight consecutive such dividend payments fail to
be made, the holder 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 the Company has failed to pay in full
all accrued dividends or failed to satisfy its mandatory redemption obligation
at maturity with respect to the Convertible Preferred Stock. No redemptions or
repurchases of junior or parity equity securities (other than the Special
Preferred Stock) shall be permitted while the Convertible Preferred Stock is
in arrears or in default. The Company 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 Convertible Preferred Stock or
the Series C Preferred Stock of the Company.
SPECIAL PREFERRED STOCK
In connection with the Merger, the Company has issued Special Preferred
Stock to RHI with an initial liquidation preference of $20.0 million.
Dividends. There will be no dividends payable on the Special Preferred Stock
until 2007 when the outstanding Special Preferred Stock will receive a
dividend at a rate equal to the interest rate applicable to the Notes and
calculated on the then outstanding liquidation preference.
Liquidation Preference. The Special Preferred Stock has an initial
liquidation preference of $20.0 million, increasing by $1.0 million each year
after 1996 to a maximum liquidation preference of $30.0 million in 2007.
Optional Redemption. The Special Preferred Stock is redeemable at the
Company'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 is mandatorily
redeemable in its entirety at 100% of liquidation preference upon a Change of
Control of the Company and, in any event, in 2008. In addition, on March 31 of
each year, commencing with March 31, 1997, the Company is required to 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 the
Company and its subsidiaries exceeds the Threshold Amount (as described below)
for the immediately preceding year ended on December 31.
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The Threshold Amount for each year shall be as follows:
<TABLE>
<CAPTION>
YEAR ENDED THRESHOLD
DECEMBER 31, AMOUNT(A)
------------ -----------
<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>
- --------
(a) In the event that the Company or any subsidiary sells or disposes of any
material asset or business, the Threshold Amount for each year thereafter
shall be reduced by the amount of EBITDA attributable to such asset or
business for the four fiscal quarters immediately preceding such sale or
disposition.
Ranking. The Company 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 the Company 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 the
Company.
Certain Restrictions. No dividends, distributions, redemptions or
repurchases on junior or parity equity securities shall be permitted if the
Company has failed to satisfy its mandatory redemption obligations with
respect to the Special Preferred Stock. The Company will not be permitted to
create or permit to exist any contracted restriction which would restrict in
any way the Company's payment obligations with respect to the Special
Preferred Stock or the Series C Preferred Stock.
SERIES C PREFERRED STOCK
Dividends. The holders of the Series C Preferred Stock are entitled to
receive dividends in cash at the annual rate of $0.32 per share (subject to
appropriate adjustment) payable in equal quarterly payments in arrears on the
last day of each calendar quarter in each year. Such dividend is senior in
preference and priority to any payment of any cash dividend on the Common
Stock or any other capital stock of the Company and no dividend can be
declared, paid or set aside for payment on any other capital stock of the
Company unless all cumulative dividends on the Series C Preferred Stock have
been declared and paid. The dividend is cumulative and accrues, without
interest, from the first day of the quarter in which the dividend was payable.
Liquidation Preference. Upon liquidation, dissolution or winding up of the
Company, the Series C Preferred Stock is entitled to be paid a liquidation
preference of $4.00 per share.
Optional Redemption. The Company may, at the option of the Board of
Directors, redeem the Series C Preferred Stock, in whole or in part by paying
$6.00 per share (subject to appropriate adjustments for stock splits, stock
dividends, combinations or other similar recapitalizations affecting the
Series C Preferred Stock) in cash for each share of Series C Preferred Stock
redeemed.
Voting Rights. The Series C Preferred Stock is not entitled to vote, except
on issues which amend, alter or repeal the preferences, special rights or
other powers of the Series C Preferred Stock, for which the affirmative vote
of a majority of the then outstanding Series C Preferred Stock voting as a
class is required.
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Conversion. Each share of Series C Preferred Stock is convertible, at the
option of the holder, at any time, into such number of shares of Common Stock
as is determined by dividing $4.00 by the Conversion Price in effect at the
time of conversion. The "Conversion Price" at which shares of Common Stock are
deliverable upon conversion, without the payment of additional consideration
by the holder thereof, was initially $8.00. The Conversion Price is subject to
adjustment upon the occurrence of customary adjustment events including, but
not limited to, stock dividends, stock subdivisions and reclassifications,
mergers or combinations. In addition, the Conversion Price shall also be
adjusted upon the issuance of any additional shares of Common Stock, which may
include the issuance of options or other convertible securities, without
consideration or for a consideration per share less than the applicable
Conversion Price in effect on the date of and immediately prior to such issue.
As a result of the issuance of additional shares of Common Stock without
consideration or for a consideration per share less than the then-current
Conversion Price, the current Conversion Price is $6.09 per share.
Ranking. With respect to dividend rights and rights on liquidation, winding
up and dissolution, ranks senior and prior to the Common Stock and to any
other class or series of capital stock of the Company subsequently issued.
SERIES D PREFERRED STOCK
Dividends. The holders of the Series D Preferred Stock are entitled to
receive dividends in cash at the annual rate of $0.2375 per share (subject to
appropriate adjustment) payable in equal quarterly payments in arrears on the
last day of each calendar quarter in each year. Such dividend is payable in
preference and priority to any payment of any cash dividend on the Common
Stock or any other capital stock of the Company, except the Series C Preferred
Stock, and no dividend can be declared, paid or set aside for payment on any
other capital stock of the Company junior to the Series D Preferred Stock
unless all cumulative dividends on the Series D Preferred Stock have been
declared and paid. The dividend is cumulative and accrues, without interest,
from the date of issue of the Series D Preferred Stock.
Liquidation Preference. Upon the liquidation, dissolution or winding up of
the Company, the Series D Preferred Stock is entitled to be paid a liquidation
preference of $4.75 per share, before any payment is made to the holders of
junior securities.
Voting Rights. The Series D Preferred Stock is not entitled to vote, except
on issues which amend, alter or repeal the preferences, special rights or
other powers of the Series D Preferred Stock, for which the affirmative vote
of a majority of the then outstanding Series D Preferred Stock voting as a
class is required.
Conversion. Each share of Series D Preferred Stock is convertible, at the
option of the holder, at any time, into one share of Common Stock (subject to
appropriate adjustments for stock splits, stock dividends, combinations or
other similar recapitalizations affecting the Series D Preferred Stock). The
conversion rate is subject to adjustment upon the occurrence of customary
adjustment events including, but not limited to, stock dividends, stock
subdivisions and reclassification, mergers or combinations.
Optional Redemption. The Company may, at the option of its board of
directors, redeem the Series D Preferred Stock, in whole or in part by paying
$7.00 per share (subject to appropriate adjustments for stock splits, stock
dividends, combinations or other similar recapitalizations affecting the
Series D Preferred Stock) in cash for each share of Series D Preferred Stock
redeemed.
Ranking. With respect to dividend rights and rights on liquidation, winding
up and dissolution, ranks senior and prior to the Common Stock and junior to
the Series C Preferred Stock.
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DESCRIPTION OF THE NOTES
The Old Notes were issued and the New Notes are to be issued under an
Indenture dated as of March 1, 1996, between the Issuer, the Company, certain
subsidiaries of the Issuer, and United States Trust Company of New York, as
Trustee (the "Trustee"), as supplemented by the First Supplemental Indenture
dated as of March 13, 1996 among the Issuer, the Company, certain subsidiaries
of the Issuer, and the Trustee, and as further supplemented or amended from
time to time (collectively, the "Indenture"). Upon the effectiveness of a
registration statement with respect to the New Notes, the Indenture governing
the New Notes will be subject to and governed by the Trust Indenture Act of
1939, as amended. The following summaries of certain provisions of the
Indenture do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, all of the provisions of the Indenture,
including the definitions therein of certain terms, a copy of which is filed
(or incorporated by reference) as an exhibit to the Registration Statement of
which this Prospectus is a part. Whenever particular provisions of or terms
defined in the Indenture are referred to, such provisions and defined terms
are incorporated by reference as part of the statement made.
GENERAL
The New Notes will be issued solely in exchange for an equal principal
amount of outstanding Old Notes pursuant to the Exchange Offer. The terms of
the New Notes will be substantially identical to the Old Notes, except that
the New Notes have been registered under the Securities Act and therefore will
not bear legends restricting their transfer. ALL REFERENCES HEREIN TO THE
NOTES SHALL BE DEEMED TO BE REFERENCES TO THE OLD NOTES AND/OR THE NEW NOTES,
WHICHEVER ARE OUTSTANDING.
The Notes, which mature on March 1, 2006, are limited to $162,637,000 in
aggregate principal amount under the Indenture. The Old Notes were issued at a
substantial discount from their principal amount and no interest is payable on
the Notes until March 1, 1999. The Notes will begin to accrue interest at a
rate of 12 1/4% per annum commencing March 1, 1999, and interest will be
payable thereafter on March 1 and September 1 of each year. The Notes are not
redeemable prior to March 1, 2001 except that, until March 1, 1999, the Issuer
may redeem, at its option, up to an aggregate of 25% of the principal amount
of the Notes at the redemption price set forth herein plus accrued interest to
the date of redemption with the net proceeds of one or more Public Equity
Offerings if at least $122,727,750 of the principal amount of the Notes remain
outstanding after each such redemption. On or after March 1, 2001, the Notes
are redeemable at the option of the Issuer, in whole or in part, at the
redemption prices set forth under "Description of the New Notes--Optional
Redemption" below. Upon a Change of Control, each holder of Notes may require
the Issuer to repurchase such Notes at 101% of the Accreted Value thereof plus
accrued interest to the date of repurchase, as described under "Description of
the New Notes--Change of Control" below.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Issuer in the Borough of Manhattan, The City of New York (which initially
shall be the corporate trust office of the Trustee, at 114 West 47th Street,
New York, New York 10036-1532), except that, at the option of the Issuer,
payment of interest may be made by check mailed to the address of the Holders
as such address appears in the Note register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
shall be made for any registration of transfer or exchange of Notes, but the
Issuer may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
TERMS OF THE NOTES
The Notes will be unsecured senior subordinated obligations of the Issuer,
limited to $163,637,000 aggregate principal amount at maturity, and will
mature on March 1, 2006. Except as described below under "Registered Exchange
Offer; Registration Rights", no interest will accrue on the Notes prior to
March 1, 1999.
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From and after March 1, 1999, interest on the Notes will accrue at 12 1/4% per
annum from such date or from the most recent date to which interest has been
paid or provided for, and will be payable semiannually to Holders of record at
the close of business on the February 15 or August 15 immediately preceding
the interest payment date on March 1 and September 1 of each year, commencing
September 1, 1999. The Issuer will pay interest on overdue principal at 1% per
annum in excess of such rate, and it shall pay interest on overdue
installments of interest at such higher rate to the extent lawful. Interest on
the Notes will be computed on the basis of a 360-day year of twelve 30-day
months.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Notes will not be
redeemable at the option of the Issuer prior to March 1, 2001. Thereafter, the
Notes will be redeemable, at the Issuer's option, in whole or in part, at any
time or from time to time, upon not less than 30 nor more than 60 days' prior
notice mailed by first-class mail to each Holder's registered address, at the
following redemption prices (expressed in percentages of principal amount),
plus accrued interest to the redemption date (subject to the right of Holders
of record on the relevant record date to receive interest due on the relevant
interest payment date), if redeemed during the 12-month period commencing on
or after March 1 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2001.......................... 106.125%
2002.......................... 104.083
2003.......................... 102.042
2004 and thereafter........... 100.000
</TABLE>
In addition, at any time and from time to time prior to March 1, 1999, the
Issuer may redeem in the aggregate up to 25.0% of the original principal
amount at maturity of Notes with the proceeds of one or more Public Equity
Offerings to the extent the net cash proceeds thereof are contributed to the
equity capital of the Issuer and so long as there is a Public Market at the
time of such redemption, at a redemption price (expressed as a percentage of
Accreted Value as of the redemption date) of 112.25% plus accrued interest to
the redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date);
provided, however, that at least $122,727,750 aggregate principal amount at
maturity of the Notes remain outstanding after each such redemption.
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee on a pro rata basis, by lot or by such other
method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal
to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note.
GUARANTIES
The obligations of the Issuer pursuant to the Notes, including the
repurchase obligation resulting from a Change of Control, will be
unconditionally guaranteed, jointly and severally, on a senior subordinated
basis, by the Company and each of the Subsidiary Guarantors (collectively, the
"Guarantors"). The Company is a holding company that will derive all of its
operating income and cash flow from its subsidiaries, including primarily the
Issuer, the common stock of which will be pledged to secure the Company's
senior guarantee of all Indebtedness of the Issuer outstanding under the
Credit Facility. Each Subsidiary Guaranty will be limited in amount to an
amount not to exceed the maximum amount that can be guaranteed by the
applicable Subsidiary Guarantor without rendering the Subsidiary Guaranty, as
it relates to such Subsidiary Guarantor, voidable under applicable law
relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally. If a Subsidiary Guaranty were to
be rendered voidable, it could be subordinated by a court to all other
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indebtedness (including guarantees and other contingent liabilities) of the
applicable Subsidiary Guarantor, and, depending on the amount of such
indebtedness, a Subsidiary Guarantor's liability on its Subsidiary Guaranty
could be reduced to zero. See "Risk Factors--Fraudulent Conveyance Concerns".
Pursuant to the Indenture, a Guarantor may consolidate with, merge with or
into, or transfer all or substantially all its assets to any other Person to
the extent described below under "--Certain Covenants--Merger and
Consolidation"; provided, however, that if such other Person is not the
Issuer, such Guarantor's obligations under its Guaranty must be expressly
assumed by such other Person. However, upon the sale or other disposition
(including by way of consolidation or merger) of a Subsidiary Guarantor or the
sale or disposition of all or substantially all the assets of a Subsidiary
Guarantor (in each case other than to the Issuer or an Affiliate of the
Issuer), such Subsidiary Guarantor will be released and relieved from all its
obligations under its Subsidiary Guaranty.
RANKING
The indebtedness evidenced by the Notes and the Guaranties will be senior
subordinated obligations of the Issuer and the Guarantors, as the case may be.
The payment of the principal of, premium (if any) and interest on the Notes
and the payment of any Guaranty is subordinate in right of payment, as set
forth in the Indenture, to the prior payment in full of all Senior
Indebtedness of the Issuer or the relevant Guarantor, as the case may be,
whether outstanding on the Issue Date or thereafter incurred, including the
obligations of the Issuer under, and such Guarantor's Guarantee of the
Issuer's obligations with respect to, the Credit Facility.
As of December 31, 1995, after giving pro forma effect to the Transactions,
(i) the Senior Indebtedness of the Issuer would have been approximately $125.0
million, all of which would have been secured indebtedness and (ii) the Senior
Indebtedness of the Guarantors would have been approximately $128.3 million,
of which $125.0 million would have represented guarantees of Senior
Indebtedness of the Issuer under the Credit Facility. Although the Indenture
contains limitations on the amount of additional Indebtedness that the Issuer
and the Subsidiary Guarantors may incur, under certain circumstances the
amount of such Indebtedness could be substantial and, in any case, such
Indebtedness may be Senior Indebtedness. See "--Certain Covenants--Limitation
on Indebtedness" and "--Limitation on Indebtedness and Preferred Stock of
Restricted Subsidiaries".
The Issuer is a holding company that will derive all of its operating income
and cash flow from its subsidiaries, the common stock of which will constitute
the Issuer's only material asset, all of which will be pledged to secure all
indebtedness of the Issuer outstanding under the Credit Facility. Generally,
claims of creditors of a subsidiary, including trade creditors, secured
creditors and creditors holding indebtedness and guarantees issued by such
subsidiary, and claims of preferred stockholders (if any) of such subsidiary
generally will have priority with respect to the assets and earnings of such
subsidiary over the claims of creditors of its parent company, except to the
extent the claims of creditors of the parent company are guaranteed by such
subsidiary. The Notes and each Subsidiary Guaranty, therefore, will be
effectively subordinated to creditors (including trade creditors) and
preferred stockholders (if any) of any subsidiaries of the Issuer that are not
Subsidiary Guarantors. However, on the Issue Date, the Issuer will not have
any subsidiaries other than the Subsidiary Guarantors. Although the Indenture
limits the incurrence of Indebtedness and preferred stock of certain of the
Issuer's subsidiaries, such limitation is subject to a number of significant
qualifications. Moreover, the Indenture does not impose any limitation on the
incurrence by such subsidiaries of liabilities that are not considered
Indebtedness under the Indenture. See "--Certain Covenants--Limitation on
Indebtedness and Preferred Stock of Subsidiaries".
Only Indebtedness of the Issuer or a Guarantor that is Senior Indebtedness
will rank senior to the Notes and the relevant Guaranty in accordance with the
provisions of the Indenture. The Notes and each Guaranty will in all respects
rank pari passu with all other Senior Subordinated Indebtedness of the Issuer
and the relevant Guarantor, respectively. The Issuer and each Guarantor has
agreed in the Indenture that it will not Incur, directly or indirectly, any
Indebtedness that is subordinate or junior in ranking in right of payment to
its Senior
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Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness or
is expressly subordinated in right of payment to Senior Subordinated
Indebtedness. Unsecured Indebtedness is not deemed to be subordinated or
junior to Secured Indebtedness merely because it is unsecured.
The Issuer may not pay principal of, premium (if any) or interest on, the
Notes or make any deposit pursuant to the provisions described under
"Defeasance" below and may not repurchase, redeem or otherwise retire or
defease any Notes (collectively, "pay the Notes") if (i) any Designated Senior
Indebtedness is not paid when due or (ii) any other default on Designated
Senior Indebtedness occurs and the maturity of such Designated Senior
Indebtedness is accelerated in accordance with its terms unless, in either
case, the default has been cured or waived and any such acceleration has been
rescinded or such Designated Senior Indebtedness has been paid in full.
However, the Issuer may pay the Notes without regard to the foregoing if the
Issuer and the Trustee receive written notice approving such payment from the
Representative of the Designated Senior Indebtedness with respect to which
either of the events set forth in clause (i) or (ii) of the immediately
preceding sentence has occurred and is continuing. During the continuance of
any default (other than a default described in clause (i) or (ii) of the
second preceding sentence) with respect to any Designated Senior Indebtedness
pursuant to which the maturity thereof may be accelerated immediately without
further notice (except such notice as may be required to effect such
acceleration) or the expiration of any applicable grace periods, the Issuer
may not pay the Notes for a period (a "Payment Blockage Period") commencing
upon the receipt by the Trustee (with a copy to the Issuer) of written notice
(a "Blockage Notice") of such default from the Representative of the holders
of such Designated Senior Indebtedness specifying an election to effect a
Payment Blockage Period and ending 179 days thereafter (or earlier if such
Payment Blockage Period is terminated (i) by written notice to the Trustee and
the Issuer from the Person or Persons who gave such Blockage Notice, (ii)
because the default giving rise to such Blockage Notice is no longer
continuing or (iii) because such Designated Senior Indebtedness has been
repaid in full). Notwithstanding the provisions described in the immediately
preceding sentence, unless the holders of such Designated Senior Indebtedness
or the Representative of such holders have accelerated the maturity of such
Designated Senior Indebtedness, the Issuer may resume payments on the Notes
after the end of such Payment Blockage Period. The Notes shall not be subject
to more than one Payment Blockage Period in any consecutive 360-day period,
irrespective of the number of defaults with respect to Designated Senior
Indebtedness during such period.
Upon any payment or distribution of the assets of the Issuer upon a total or
partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Issuer or its property, the holders of Senior Indebtedness of
the Issuer will be entitled to receive payment in full of such Senior
Indebtedness in cash or cash equivalents before the Noteholders are entitled
to receive any payment, and until such Senior Indebtedness is paid in full,
any payment or distribution to which Noteholders would be entitled but for the
subordination provisions of the Indenture will be made to holders of such
Senior Indebtedness as their interests may appear. If a distribution is made
to Noteholders that, due to the subordination provisions, should not have been
made to them, such Noteholders are required to hold it in trust for the
holders of Senior Indebtedness and pay it over to them as their interests may
appear.
If payment of the Notes is accelerated because of an Event of Default, as
described under "Defaults" below, the Issuer or the Trustee shall promptly
notify the holders of Designated Senior Indebtedness or the Representative of
such holders of the acceleration. If any Designated Senior Indebtedness is
outstanding, neither the Issuer nor any Guarantor may pay the Notes until five
Business Days after the Representatives of all the issues of Designated Senior
Indebtedness receive notice of such acceleration and, thereafter, may pay the
Notes only if the Indenture otherwise permits payment at that time.
The obligations of a Guarantor under its Guaranty are senior subordinated
obligations. As such, the rights of Noteholders to receive payment by a
Guarantor pursuant to its Guaranty will be subordinated in right of payment to
the rights of holders of Senior Indebtedness of such Guarantor. The terms of
the subordination provisions described above with respect to the Issuer's
obligations under the Notes apply equally to a Guarantor and the obligations
of such Guarantor under its Guaranty.
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By reason of the subordination provisions contained in the Indenture, in the
event of insolvency, creditors of the Issuer or a Guarantor who are holders of
Senior Indebtedness of the Issuer or a Guarantor, as the case may be, may
recover more, ratably, than the Noteholders, and creditors of the Issuer or a
Guarantor who are not holders of Senior Indebtedness of the Issuer or such
Guarantor may recover less, ratably, than holders of Senior Indebtedness of
the Issuer or such Guarantor, as the case may be, and may recover more,
ratably, than the Noteholders.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the Notes will be issued in the
form of a Global Note. The Global Note will be deposited with, or on behalf
of, the Depository and registered in the name of the Depository or its
nominee. Except as set forth below, the Global Note may be transferred, in
whole and not in part, only to the Depository or another nominee of the
Depository. Investors may hold their beneficial interests in the Global Note
directly through the Depository if they have an account with the Depository or
indirectly through organizations which have accounts with the Depository.
Notes that were (i) transferred to institutional "accredited investors" (as
defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) who are
not qualified institutional buyers ("QIBs") or (ii) issued as described below
under "--Certificated Notes" will be issued in definitive form. Upon the
transfer of a Note in definitive form, such Note will, unless the Global Note
has previously been exchanged for notes in definitive form, be exchanged for
an interest in the Global Note representing the principal amount of Notes
being transferred.
The Depository has advised the Issuer as follows: The Depository is a
limited-purpose trust company and organized under the laws of the State of New
York, a member of the Federal Reserve System, a "clearing corporation" within
the meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depository was created to hold securities of institutions that have accounts
with the Depository ("participants") and to facilitate the clearance and
settlement of securities transactions among its participants in such
securities through electronic book-entry changes in the accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. The Depository's participants include securities brokers and
dealers (which may include the Initial Purchasers (as defined)), banks, trust
companies, clearing corporations and certain other organizations. Access to
the Depository's book-entry system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, whether directly or indirectly.
Upon the issuance of the Global Note, the Depository will credit, on its
book-entry registration and transfer system, the principal amount of the Notes
represented by the Global Note to the accounts of participants. The accounts
to be credited shall be designated by the Initial Purchasers of such Notes.
Ownership of beneficial interests in the Global Note will be limited to
participants or persons that may hold interests through participants.
Ownership of beneficial interests in the Global Note will be shown on, and the
transfer of those ownership interests will be effected only through, records
maintained by the Depository (with respect to participants' interests) and
such participants (with respect to the owners of beneficial interests in the
Global Note other than participants). The laws of some jurisdictions may
require that certain purchasers of securities take physical delivery of such
securities in definitive form. Such limits and laws may impair the ability to
transfer or pledge beneficial interests in the Global Note.
So long as the Depository, or its nominee, is the registered holder and
owner of the Global Note, the Depository or such nominee, as the case may be,
will be considered the sole legal owner and holder of the related Notes for
all purposes of such Notes and the Indenture. Except as set forth below,
owners of beneficial interests in the Global Note will not be entitled to have
the Notes represented by the Global Note registered in their names, will not
receive or be entitled to receive physical delivery of certificated Notes in
definitive form and will not be considered to be the owners or holders of any
Notes under the Global Note. Accordingly, each person owning a beneficial
interest in the Global Note must rely on the procedures of the Depository and,
if such person is not a participant, on the procedures of the participant
through which such person owns its interests, to exercise any
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right of a holder of Notes under the Global Note. The Issuer understands that
under existing industry practice, in the event an owner of a beneficial
interest in the Global Note desires to take any action that the Depository, as
the Holder of the Global Note, is entitled to take, the Depositary would
authorize the participants to take such action, and that the participants
would authorize beneficial owners owning through such participants to take
such action or would otherwise act upon the instructions of beneficial owners
owning through them.
Payment of principal of and interest on Notes represented by the Global Note
registered in the name of and held by the Depository or its nominee will be
made to the Depository or its nominee, as the case may be, as the registered
owner and holder of the Global Note.
The Issuer expects that the Depository or its nominee, upon receipt of any
payment of principal of or interest on the Global Note, will credit
participants' accounts with payment in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of the Depository or its nominee. The Issuer also expects
that payments by participants to owners of beneficial interests in the Global
Note held through such participants will be governed by standing instructions
and customary practices and will be the responsibility of such participants.
The Issuer will not have any responsibility or liability for any aspect of the
records relating to, or payments made on account of, beneficial ownership
interests in the Global Note for any Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests or for
other aspects of the relationship between the Depositor and its participants
or the relationship between such participants and the owners of beneficial
interests in the Global Note owning through such participants.
Unless and until it is exchanged in whole or in part for certificated Notes
in definitive form, the Global Note may not be transferred except as a whole
by the Depository to a nominee of such Depository or by a nominee of such
Depository to such Depository or another nominee of such Depository.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of the
Depository, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor the Issuer will have any responsibility for the performance by the
Depository or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
CERTIFICATED NOTES
In addition to transfers to QIBs as described above, the Notes represented
by the Global Note are exchangeable for certificated Notes in definitive form
of like tenor as such Notes in denominations of U.S. $1,000 and integral
multiples thereof if (i) the Depository notifies the Issuer that it is
unwilling or unable to continue as Depository for the Global Note or if at any
time the Depository ceases to be a clearing agency registered under the
Exchange Act, (ii) the Issuer in its discretion at any time determines not to
have any of the Notes represented by the Global Note or (iii) a default
entitling the holders of the Notes to accelerate the maturity thereof has
occurred and is continuing. Any Note that is exchangeable pursuant to the
preceding sentence is exchangeable for certificated Notes issuable in
authorized denominations and registered in such names as the Depository shall
direct. Subject to the foregoing, the Global Note is not exchangeable, except
for a Global Note of the same aggregate denomination to be registered in the
name of the Depository or its nominee. In addition, such certificates will
bear the legend referred to under "Transfer Restrictions" (unless the Issuer
determines otherwise in accordance with applicable law) subject, with respect
to such Notes, to the provisions of such legend. Holders of certificated Notes
may only transfer their Notes (i) to the Issuer or (ii) to a QIB; provided,
however, that the agreement of such holder is subject to any requirement of
law that the disposition of such holder's property shall at all times be and
remain within its control.
EXCHANGE OFFER; REGISTRATION RIGHTS
In connection with the initial issuance and sale of the Old Notes, the
Initial Purchasers and their assignees became entitled to the benefits of the
Registration Rights Agreement. The Issuer is obligated pursuant to the
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terms of the Registration Rights Agreement, for the benefit of the holders of
the Old Notes, at its cost, (i) to file the Registration Statement of which
this Prospectus is a part with the SEC with respect to a registered offer to
exchange the Old Notes for the New Notes, which will have terms substantially
identical in all material respects to the Old Notes (except that the New Notes
will not contain terms with respect to transfer restrictions), on or before
, 1996, and (ii) to use its best efforts to cause the Registration
Statement to be declared effective under the Securities Act on or before
, 1996. The Issuer has agreed to keep the Exchange Offer open for not
less than 30 days (or longer if required by applicable law) after the date
notice of the Exchange Offer is mailed to the holders of the Old Notes. The
Issuer is entitled to close the Exchange Offer 30 days after the commencement
thereof, provided that it has accepted all Old Notes theretofore validly
tendered in accordance with the terms of the Exchange Offer. For each Old Note
surrendered to the Issuer pursuant to the Exchange Offer, the holder of such
Old Note will receive a Exchange Note having a principal amount equal to that
of the surrendered Old Note.
Under existing SEC interpretations, the Exchange Notes would be freely
transferable by holders other than affiliates of the Issuer after the
Registered Exchange Offer without further registration under the Securities
Act if the holder of the Exchange Notes represents that it is acquiring the
Exchange Notes in the ordinary course of its business, that it has no
arrangement or understanding with any person to participate in the
distribution of the Exchange Notes and that it is not an affiliate of the
Issuer, as such terms are interpreted by the SEC; provided, however, that
broker-dealers ("Participating Broker-Dealers") receiving Exchange Notes in
the Registered Exchange Offer will have a prospectus delivery requirement with
respect to resales of such Exchange Notes. The SEC has taken the position that
Participating Broker-Dealers may fulfill their prospectus delivery
requirements with respect to Exchange Notes (other than a resale of an unsold
allotment from the original sale of the Notes) with the prospectus contained
in the Exchange Offer Registration Statement. Under the Registration Rights
Agreement, the Issuer is required to allow Participating Broker-Dealers and
other persons, if any, with similar prospectus delivery requirements to use
the prospectus contained in the Exchange Offer Registration Statement in
connection with the resale of such Exchange Notes.
A holder of Notes (other than certain specified holders) who wishes to
exchange such Notes for Exchange Notes in the Registered Exchange Offer will
be required to represent that any Exchange Notes to be received by it will be
acquired in the ordinary course of its business and that at the time of the
commencement of the Registered Exchange Offer it has no arrangement or
understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes and that it is not an
"affiliate" of the Issuer, as defined in Rule 405 of the Securities Act, or if
it is an affiliate, it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable.
In the event that applicable interpretations of the staff of the SEC do not
permit the Issuer to effect such a Registered Exchange Offer, or if for any
other reason the Registered Exchange Offer is not consummated within 150 days
of the Issue Date, or if the Initial Purchasers so request with respect to
Notes not eligible to be exchanged for Exchange Notes in the Registered
Exchange Offer, or if any holder of Notes is not eligible to participate in
the Registered Exchange Offer or does not receive freely tradeable Exchange
Notes in the Registered Exchange Offer, the Issuer will, at its cost, (a) as
promptly as practicable, file a shelf registration statement (the "Shelf
Registration Statement") with the SEC covering resales of the Notes or the
Exchange Notes, as the case may be, (b) use its best efforts to cause the
Shelf Registration Statement to be declared effective under the Securities Act
and (c) keep the Shelf Registration Statement effective until the earlier of
(i) the time when the Notes covered by the Shelf Registration Statement can be
sold pursuant to Rule 144 without any limitations under clauses (c), (e), (f)
and (h) of Rule 144 and (ii) three years from the Issue Date. The Issuer will,
in the event a Shelf Registration Statement is filed, among other things,
provide to each holder for whom such Shelf Registration Statement was filed
copies of the prospectus which is a part of the Shelf Registration Statement,
notify each such holder when the Shelf Registration Statement has become
effective and take certain other actions as are required to permit
unrestricted resales of the Notes or the Exchange Notes, as the case may be. A
holder selling such Notes or Exchange Notes pursuant to the Shelf Registration
Statement generally would be required to be named as a selling security holder
in the related prospectus and to deliver a prospectus to
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purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such
holder (including certain indemnification obligations).
If (i) by April 27, 1996, neither the Exchange Offer Registration Statement
nor the Shelf Registration Statement has been filed with the SEC; (ii) by
August 10, 1996, neither the Registered Exchange Offer is consummated nor the
Shelf Registration Statement is declared effective; or (iii) after either the
Exchange Offer Registration Statement or the Shelf Registration Statement is
declared effective, such Registration Statement thereafter ceases to be
effective or usable (subject to certain exceptions) in connection with resales
of Notes or Exchange Notes in accordance with and during the periods specified
in the Registration Rights Agreement (each such event referred to in clause
(i) through (iii) being herein called a "Registration Default"), additional
cash interest will accrue on the Notes and the Exchange Notes at the rate of
0.50% per annum from and including the date on which any such Registration
Default shall occur to but excluding the date on which all Registration
Defaults have been cured, calculated on the Accreted Value of the Notes as of
the Specified Date as defined, on which such interest is payable. Such
interest is payable in addition to any other interest payable from time to
time with respect to the Notes.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is available upon request to the Issuer.
CHANGE OF CONTROL
The occurrence of any of the following events will constitute a "Change of
Control" under the Indenture:
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than one or more Permitted Holders or STFI, is or
becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act except that for purposes of this clause (i) such person shall
be deemed to have "beneficial ownership" of all shares that any such person
has the right to acquire, whether such right is exercisable immediately or
only after the passage of time), directly or indirectly, of more than 30%
of the total voting power of the Voting Stock of the Issuer; provided,
however, that the Permitted Holders beneficially own (as defined in Rules
13d-3 and 13d-5 under the Exchange Act), directly or indirectly, in the
aggregate a lesser percentage of the total voting power of the Voting Stock
of the Issuer than such other person and do not have the right or ability
by voting power, contract or otherwise to elect or designate for election a
majority of the Board of Directors (for the purposes of this clause (i), a
person shall be deemed to beneficially own any Voting Stock of a specified
corporation held by a another corporation (the "parent corporation"), if
such other person is the beneficial owner (as defined in this clause (i)),
directly or indirectly, of more than 30% of the voting power of the Voting
Stock of such parent corporation and the Permitted Holders beneficially own
(as defined in this clause (i) above), directly or indirectly, in the
aggregate a lesser percentage of the voting power of the Voting Stock of
such parent corporation and do not have the right or ability by voting
power, contract or otherwise to elect or designate for election a majority
of the board of directors of such parent corporation);
(ii) one or more Permitted Holders collectively own beneficially,
directly or indirectly, shares representing more than 49% of the total
voting power of the outstanding Voting Stock of the Issuer or STFI;
provided, however, a Person shall be deemed to beneficially own any Voting
Stock of a specified corporation or other entity held by another
corporation or other entity (the "parent entity") if such Person ownes
beneficially more than 49% of the total voting power of the Voting Stock of
such parent entity;
(iii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (together with
any new directors whose election by such Board of Directors or whose
nomination for election by the shareholders of the Issuer was approved by a
vote of 60% of the directors of the Issuer then still in office who were
either directors at the beginning of such
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period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors then in office; or
(iv) the merger or consolidation of the Issuer with or into another
Person or the merger of another Person with or into the Issuer, or the sale
of all or substantially all the assets of the Issuer to another Person
(other than a Person that is controlled by the Permitted Holders) and, in
the case of any such merger or consolidation, the securities of the Issuer
that are outstanding immediately prior to such transaction and which
represent 100% of the aggregate voting power of the Voting Stock of the
Issuer are changed into or exchanged for cash, securities or property,
unless pursuant to such transaction such securities are changed into or
exchanged for, in addition to any other consideration, securities of the
surviving corporation that represent immediately after such transaction, at
least a majority of the aggregate voting power of the Voting Stock of the
surviving corporation.
Upon the occurrence of a Change of Control, each Holder shall have the right
to require that the Issuer repurchase such Holder's Notes at a purchase price
in cash equal to 101% of the Accreted Value thereof plus accrued and unpaid
interest, if any, to the date of purchase (subject to the right of holders of
record on the relevant record date to receive interest on the relevant
interest payment date), in accordance with the terms contemplated in the
immediately succeeding paragraph.
Within 30 days following any Change of Control, the Issuer shall mail a
notice to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the right to require the Issuer
to purchase such Holder's Notes at a purchase price in cash equal to 101% of
the Accreted Value thereof plus accrued and unpaid interest, if any, to the
date of purchase (subject to the right of holders of record on the relevant
record date to receive interest on the relevant interest payment date); (2)
the circumstances and relevant facts regarding such Change of Control
(including information with respect to pro forma historical income, cash flow
and capitalization after giving effect to such Change of Control); (3) the
repurchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (4) the instructions determined by
the Issuer, consistent with the covenant described hereunder, that a Holder
must follow in order to have its Notes purchased.
The Issuer shall comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant described
hereunder. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
the Issuer shall comply with the applicable securities laws and regulations
and shall not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
The provisions relative to the Issuer's obligation to make an offer to
repurchase the Notes as a result of a Change of Control may be waived or
modified with the consent of the Holders of a majority in principal amount of
the Notes.
The Change of Control purchase feature is a result of negotiations between
the Issuer and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Issuer would decide to do so in the future. Subject to the
limitations discussed below, the Issuer could, in the future, enter into
certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect the Issuer's capital structure or credit
ratings. Restrictions on the ability of the Issuer to incur additional
Indebtedness are contained in the covenants described under "--Limitation on
Indebtedness" and "--Limitation on Indebtedness and Preferred Stock of
Restricted Subsidiaries". Such restrictions can only be waived with the
consent of the holders of a majority in principal amount of the Notes then
outstanding. Except for the limitations contained in such covenants, however,
the Indenture will not contain any covenants or provisions that may afford
holders of the Notes protection in the event of a highly leveraged
transaction.
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The Credit Facility will prohibit the Issuer from purchasing any Notes prior
to March 31, 2003, and will also provide that the occurrence of certain change
of control events with respect to the Issuer would constitute a default
thereunder. In the event a Change of Control occurs at a time when the Issuer
is prohibited from purchasing Notes, the Issuer could seek the consent of its
lenders to the purchase of Notes or could attempt to refinance the borrowings
that contain such prohibition. If the Issuer does not obtain such a consent or
repay such borrowings, the Issuer will remain prohibited from purchasing
Notes. In such case, the Issuer's failure to purchase tendered Notes would
constitute an Event of Default under the Indenture which would, in turn,
constitute a default under the Credit Facility. In such circumstances, the
subordination provisions in the Indenture would likely restrict payments to
the Holders of Notes.
Future senior indebtedness of the Issuer may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require such senior indebtedness to be repurchased upon a Change of Control.
Moreover, the exercise by the holders of their right to require the Issuer to
repurchase the Notes could cause a default under such senior indebtedness,
even if the Change of Control itself does not, due to the financial effect of
such repurchase on the Issuer. Finally, the Issuer's ability to pay cash to
the holders of Notes following the occurrence of a Change of Control may be
limited by the Issuer's then existing financial resources. There can be no
assurance that sufficient funds will be available when necessary to make any
required repurchases.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness. (a) The Issuer shall not Incur, directly or
indirectly, any Indebtedness unless, on the date of such Incurrence, the
Consolidated Coverage Ratio would be equal to or greater than 2.0 to 1.0 if
such Indebtedness is Incurred prior to March 1, 1998 or 2.25 to 1.0 if such
Indebtedness is Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Issuer may Incur any or
all of the following Indebtedness: (1) Indebtedness Incurred pursuant to the
Revolving Credit Provisions of the Credit Facility or any other revolving
credit facility in a principal amount which, when taken together with the
principal amount of all other Indebtedness Incurred pursuant to this clause
(1) and then outstanding, does not exceed $25.0 million; (2) Indebtedness
Incurred pursuant to the Term Loan Provisions of the Credit Facility or any
other credit or loan agreement or indenture in an aggregate principal amount
which, when taken together with the principal amount of all other Indebtedness
Incurred pursuant to this clause (2) and then outstanding, does not exceed (A)
$120.0 million less (B) the aggregate amount of all principal repayments of
any such Indebtedness made after the Issue Date (other than any such principal
repayments made as a result of the Refinancing of any such Indebtedness); (3)
Indebtedness owed to and held by a Wholly Owned Subsidiary; provided, however,
that any subsequent issuance or transfer of any Capital Stock which results in
any such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or
any subsequent transfer of such Indebtedness (other than to another Wholly
Owned Subsidiary) shall be deemed, in each case, to constitute the Incurrence
of such Indebtedness by the Issuer; (4) the Notes; (5) Indebtedness
outstanding on the Issue Date (other than Indebtedness described in clause
(1), (2), (3) or (4) of this covenant); (6) Refinancing Indebtedness in
respect of Indebtedness Incurred pursuant to paragraph (a) or pursuant to
clause (4) or (5) or this paragraph (6); (7) Hedging Obligations consisting of
Interest Rate Agreements directly related to Indebtedness permitted to be
Incurred by the Issuer pursuant to the Indenture; and (8) Indebtedness in an
aggregate principal amount which, together with all other Indebtedness of the
Issuer outstanding on the date of such Incurrence (other than Indebtedness
permitted by clauses (1) through (7) above or paragraph (a)), when aggregated
with all Indebtedness then outstanding pursuant to clause (a)(v) of the
covenant described under "--Limitations on Indebtedness and Preferred Stock of
Restricted Subsidiaries," does not exceed $5.0 million.
(c) Notwithstanding the foregoing, the Issuer shall not Incur any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof
are used, directly or indirectly, to Refinance any Subordinated Obligations
unless such Indebtedness shall be subordinated to the Notes to at least the
same extent as such Subordinated Obligations.
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(d) Notwithstanding paragraphs (a) and (b) above, (i) the Issuer shall not
Incur any Indebtedness if such Indebtedness is subordinate or junior in
ranking in any respect to any Senior Indebtedness unless such Indebtedness is
Senior Subordinated Indebtedness or is expressly subordinated in right of
payment to Senior Subordinated Indebtedness and (ii) the Issuer shall not
Incur any Secured Indebtedness which is not Senior Indebtedness unless
contemporaneously therewith effective provision is made to secure the Notes
equally and ratably with such Secured Indebtedness for so long as such Secured
Indebtedness is secured by a Lien.
(e) For purposes of determining compliance with the foregoing covenant, (i)
in the event that an item of Indebtedness meets the criteria of more than one
of the types of Indebtedness described above, the Issuer, in its sole
discretion, will classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of the above clauses
and (ii) an item of Indebtedness may be divided and classified in more than
one of the types of Indebtedness described above.
Limitation on Indebtedness and Preferred Stock of Restricted Subsidiaries.
(a) The Issuer shall not permit any Restricted Subsidiary to Incur, directly
or indirectly, any Indebtedness or Preferred Stock except:
(i) Indebtedness or Preferred Stock issued to and held by the Issuer or a
Wholly Owned Subsidiary; provided, however, that any subsequent issuance or
transfer of any Capital Stock which results in any such Wholly Owned
Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent
transfer of such Indebtedness or Preferred Stock (other than to the Issuer
or a Wholly Owned Subsidiary) shall be deemed, in each case, to constitute
the Incurrence of such Indebtedness or Preferred Stock by the issuer
thereof;
(ii) Indebtedness or Preferred Stock of a Subsidiary Incurred and
outstanding on or prior to the date on which such Subsidiary was acquired
by the Issuer (other than Indebtedness or Preferred Stock Incurred in
connection with, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Subsidiary became a Subsidiary or was
acquired by the Issuer) and Refinancing Indebtedness Incurred in respect
thereof; provided, however, that such Refinancing Indebtedness shall only
be permitted under this clause (ii) to the extent Incurred by the
Subsidiary that originally Incurred such Indebtedness;
(iii) in the case of a Subsidiary Guarantor, (A) any Guarantee of
Indebtedness of the Issuer and (B) any Indebtedness consisting of Liens
securing any Guarantee permitted pursuant to this clause (iii);
(iv) Indebtedness or Preferred Stock outstanding on the Issue Date (other
than Indebtedness described in clause (i) or (ii) of this paragraph (a));
(v) Indebtedness represented by Capital Lease Obligations Incurred for
the purpose of financing all or any part of the purchase price of equipment
used in a Related Business or Incurred to Refinance any such purchase
price; provided, however, that the amount of Indebtedness outstanding at
any time pursuant to this clause (v), when aggregated with all Indebtedness
then outstanding pursuant to clause (b)(8) of the covenant described under
"--Limitation on Indebtedness," shall not exceed $5.0 million; and
(vi) Refinancing Indebtedness Incurred in respect of Indebtedness or
Preferred Stock referred to in the foregoing clause (iv) or this clause
(vi).
(b) Notwithstanding the foregoing, the Issuer shall not permit any
Subsidiary Guarantor to Incur any Indebtedness pursuant to the foregoing
paragraph (a) if the proceeds thereof are used, directly or indirectly, to
Refinance any Subordinated Obligations of such Subsidiary Guarantor unless
such Indebtedness shall be subordinated to the Subsidiary Guaranty of such
Subsidiary Guarantor to at least the same extent as such Subordinated
Obligations.
(c) For purposes of determining compliance with the foregoing covenant, (i)
in the event that an item of Indebtedness meets the criteria of more than one
of the types of Indebtedness described above, the Issuer, in its sole
discretion, will classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of the above clauses
and (ii) an item of Indebtedness may be divided and classified in more than
one of the types of Indebtedness described above.
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(d) Notwithstanding paragraphs (a) and (b) above, the Issuer shall not
permit any Subsidiary Guarantor to Incur (i) any Indebtedness if such
Indebtedness is subordinate or junior in ranking in any respect to any Senior
Indebtedness of such Subsidiary Guarantor, unless such Indebtedness is Senior
Subordinated Indebtedness of such Subsidiary Guarantor or is expressly
subordinated in right of payment to Senior Subordinated Indebtedness of such
Subsidiary Guarantor or (ii) any Secured Indebtedness that is not Senior
Indebtedness of such Subsidiary Guarantor unless contemporaneously therewith
effective provision is made to secure such Subsidiary Guarantor's Guarantee of
the Notes equally and ratably with such Secured Indebtedness for so long as
such Secured Indebtedness is secured by a Lien.
Limitation on Restricted Payments. (a) The Issuer shall not, and shall not
permit any Restricted Subsidiary, directly or indirectly, to make a Restricted
Payment if at the time the Issuer or such Restricted Subsidiary makes such
Restricted Payment: (1) a Default shall have occurred and be continuing (or
would result therefrom); or (2) the Issuer is not able to Incur an additional
$1.00 of Indebtedness pursuant to paragraph (a) of the covenant described
under "--Limitation on Indebtedness"; or (3) the aggregate amount of such
Restricted Payment and all other Restricted Payments since the Issue Date
would exceed the sum of: (A) 50% of the Adjusted Consolidated Net Income
accrued during the period (treated as one accounting period) from the
beginning of the fiscal quarter immediately following the Issue Date to the
end of the most recent fiscal quarter ending at least 45 days prior to the
date of such Restricted Payment (or, in case such Adjusted Consolidated Net
Income shall be a deficit, minus 100% of such deficit); (B) the aggregate Net
Cash Proceeds received by the Issuer from the issuance or sale of its Capital
Stock (other than Disqualified Stock) subsequent to the Issue Date (other than
an issuance or sale to a Subsidiary of the Issuer and other than an issuance
or sale to an employee stock ownership plan or to a trust established by the
Issuer or any of its Subsidiaries for the benefit of their employees) plus the
aggregate cash capital contributions received by the Issuer subsequent to the
Issue Date; (C) the amount by which Indebtedness of the Issuer is reduced on
the Issuer's balance sheet upon the conversion or exchange (other than by a
Subsidiary of the Issuer) subsequent to the Issue Date, of any Indebtedness of
the Issuer convertible or exchangeable for Capital Stock (other than
Disqualified Stock) of the Issuer (less the amount of any cash, or the fair
value of any other property, distributed by the Issuer upon such conversion or
exchange); and (D) an amount equal to the sum of (i) the net reduction in
Investments in Unrestricted Subsidiaries resulting from dividends, repayments
of loans or advances or other transfers of assets, in each case to the Issuer
or any Restricted Subsidiary from Unrestricted Subsidiaries, and (ii) the
portion (proportionate to the Issuer's equity interest in such Subsidiary) of
the fair market value of the net assets of an Unrestricted Subsidiary at the
time such Unrestricted Subsidiary is designated a Restricted Subsidiary;
provided, however, that the foregoing sum shall not exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously made (and
treated as a Restricted Payment) by the Issuer or any Restricted Subsidiary in
such Unrestricted Subsidiary.
(b) The provisions of the foregoing paragraph (a) shall not prohibit: (i)
any purchase or redemption of Capital Stock or Subordinated Obligations of the
Issuer made by exchange for, or out of the proceeds of the substantially
concurrent sale of or cash capital contribution in respect of Capital Stock of
the Issuer (other than Disqualified Stock and other than Capital Stock issued
or sold to a Subsidiary of the Issuer or an employee stock ownership plan or
to a trust established by the Issuer or any of its Subsidiaries for the
benefit of their employees); provided, however, that (A) such purchase or
redemption shall be excluded in the calculation of the amount of Restricted
Payments and (B) the Net Cash Proceeds from such sale and any such cash
capital contribution shall be excluded from the calculation of amounts under
clause (3)(B) of paragraph (a) above; (ii) any purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value of
Subordinated Obligations of the Issuer made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Indebtedness of the Issuer
which is permitted to be Incurred pursuant to the covenant described under "--
Limitation on Indebtedness"; provided, however, that such purchase,
repurchase, redemption, defeasance or other acquisition or retirement for
value shall be excluded in the calculation of the amount of Restricted
Payments; (iii) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have complied with
this covenant; provided, however, that at the time of payment of such
dividend, no other Default shall have occurred and be continuing (or result
therefrom); provided further, however, that such dividend shall be included in
the calculation of the amount of Restricted Payments; (iv) the declaration and
payment of a
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dividend or other distribution by the Issuer to STFI the proceeds of which are
to be used promptly by STFI for (A) the payment of cash dividends on the
Designated Preferred Stock at a rate not in excess of 6% per annum of the
liquidation preference of the Designated Preferred Stock or (B) the payment of
cash dividends on the Company's Series C Preferred Stock and Series D
Preferred Stock; provided, however, that the maximum amount of cash dividends
on such Series C Preferred Stock and Series D Preferred Stock in any calendar
year shall not exceed $0.5 million; provided further, however, that the
payments of all such dividends and distributions made pursuant to this clause
(iv) shall be included in the calculation of the amount of Restricted
Payments; or (v) the declaration and payment of a dividend or other
distribution by the Issuer to STFI the proceeds of which are to be used for
(A) legal, accounting and other professional fees incurred by STFI and any
fees and expenses payable by STFI that are associated with registration
statements and periodic reports filed with the SEC or (B) the dividends,
redemptions and other payments to be made by STFI on the Issue Date in
connection with the Acquisition; provided, however, that the payments of all
such dividends and distributions made pursuant to this clause (v) shall be
excluded in the calculation of the amount of Restricted Payments.
Limitation on Restrictions on Distributions from Restricted Subsidiaries.
The Issuer shall not, and shall not permit any Restricted Subsidiary to,
create or otherwise cause or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary (a) to pay dividends or make any other distributions on its Capital
Stock to the Issuer or a Restricted Subsidiary or pay any Indebtedness owed to
the Issuer, (b) to make any loans or advances to the Issuer or (c) transfer
any of its property or assets to the Issuer, except: (i) any encumbrance or
restriction pursuant to an agreement in effect at or entered into on the Issue
Date; (ii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness Incurred by
such Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by the Issuer (other than Indebtedness Incurred as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Issuer) and outstanding on such date; (iii)
any encumbrance or restriction pursuant to an agreement effecting a
Refinancing of Indebtedness Incurred pursuant to an agreement referred to in
clause (i) or (ii) of this covenant or this clause (iii) or contained in any
amendment to an agreement referred to in clause (i) or (ii) of this covenant
or this clause (iii); provided, however, that the encumbrances and
restrictions with respect to such Restricted Subsidiary contained in any such
refinancing agreement or amendment are no less favorable to the Noteholders
than encumbrances and restrictions with respect to such Restricted Subsidiary
contained in such agreements; (iv) any such encumbrance or restriction
consisting of customary nonassignment provisions in leases governing leasehold
interests to the extent such provisions restrict the transfer of the lease or
the property leased thereunder; (v) in the case of clause (c) above,
restrictions contained in security agreements or mortgages securing
Indebtedness of a Restricted Subsidiary to the extent such restrictions
restrict the transfer of the property subject to such security agreements or
mortgages; and (vi) any restriction with respect to a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or disposition of
all or substantially all the Capital Stock or assets of such Restricted
Subsidiary pending the closing of such sale or disposition.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Issuer shall
not, and shall not permit any Restricted Subsidiary to, directly or
indirectly, consummate any Asset Disposition unless (i) the Issuer or such
Restricted Subsidiary receives consideration at the time of such Asset
Disposition at least equal to the fair market value (including as to the value
of all non-cash consideration), as determined in good faith by the Board of
Directors, of the shares and assets subject to such Asset Disposition and at
least 85% of the consideration thereof
received by the Issuer or such Restricted Subsidiary is in the form of cash or
cash equivalents and (ii) an amount equal to 100% of the Net Available Cash
from such Asset Disposition is applied by the Issuer (or such Restricted
Subsidiary, as the case may be) (A) first, to the extent the Issuer elects (or
is required by the terms of any Senior Indebtedness of the Issuer), to prepay,
repay, redeem or purchase Senior Indebtedness of the Issuer or Indebtedness
(other than any Disqualified Stock or, in the case of a Subsidiary Guarantor,
any Subordinated Obligations) of a Wholly Owned Subsidiary (in each case other
than Indebtedness owed to the Issuer or an Affiliate of the Issuer) within one
year from the later of the date of such Asset Disposition or the receipt of
such Net Available Cash; (B) second, to the extent of the balance of such Net
Available Cash after application in
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accordance with clause (A), to the extent the Issuer elects, to invest in
Additional Assets within one year from the later of the date of such Asset
Disposition or the receipt of such Net Available Cash; (C) third, to the
extent of the balance of such Net Available Cash in excess of $250,000 in any
fiscal year after application in accordance with clauses (A) and (B), to make
an offer to the holders of the Notes (and to holders of other Senior
Subordinated Indebtedness of the Issuer designated by the Issuer) to purchase
Notes (and such other Senior Subordinated Indebtedness) pursuant to and
subject the conditions contained in the Indenture; and (D) fourth, to the
extent of the balance of such Net Available Cash after application in
accordance with clauses (A), (B) and (C) to (x) the acquisition by the Issuer
or any Wholly Owned Subsidiary of Additional Assets or (y) the prepayment,
repayment or purchase of Indebtedness (other than any Disqualified Stock) of
the Issuer (other than Indebtedness owed to an Affiliate of the Issuer) or
Indebtedness of any Subsidiary (other than Indebtedness owed to the Issuer or
an Affiliate of the Issuer), in each case within one year from the later of
the receipt of such Net Available Cash and the date the offer described in
clause (b) below is consummated; provided, however, that in connection with
any prepayment, repayment or purchase of Indebtedness pursuant to clause (A),
(C) or (D) above, the Issuer or such Restricted Subsidiary shall retire such
Indebtedness and shall cause the related loan commitment (if any) to be
permanently reduced in an amount equal to the principal amount so prepaid,
repaid or purchased. Notwithstanding the foregoing provisions of this
paragraph, the Issuer and the Restricted Subsidiaries shall not be required to
apply any Net Available Cash in accordance with this paragraph except to the
extent that the aggregate Net Available Cash from all Asset Dispositions which
are not applied in accordance with this paragraph exceeds $5.0 million.
Pending application of Net Available Cash pursuant to this covenant, such Net
Available Cash shall be invested in Permitted Investments.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents: (x) the assumption of Indebtedness of the Issuer or any
Restricted Subsidiary and the release of the Issuer or such Restricted
Subsidiary from all liability on such Indebtedness in connection with such
Asset Disposition and (y) securities received by the Issuer or any Restricted
Subsidiary from the transferee that are promptly converted by the Issuer or
such Restricted Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of the
Notes (and other Senior Subordinated Indebtedness) pursuant to clause
(a)(ii)(C) above, the Issuer will be required to purchase Notes tendered
pursuant to an offer by the Issuer for the Notes (and other Senior
Subordinated Indebtedness) at a purchase price of 100% of their Accreted Value
plus accrued but unpaid interest (or, in respect of such other Senior
Subordinated Indebtedness, such lesser price, if any, as may be provided for
by the terms of such Senior Subordinated Indebtedness) in accordance with the
procedures (including prorating in the event of oversubscription) set forth in
the Indenture. If the aggregate purchase price of Notes (and any other Senior
Subordinated Indebtedness) tendered pursuant to such offer is less than the
Net Available Cash allotted to the purchase thereof, the Issuer will be
required to apply the remaining Net Available Cash in accordance with clause
(a)(ii)(D) above. The Issuer shall not be required to make such an offer to
purchase Notes (and other Senior Subordinated Indebtedness) pursuant to this
covenant if the Net Available Cash available therefor is less than $5.0
million (which lesser amount shall be carried forward for purposes of
determining whether such an offer is required with respect to any subsequent
Asset Disposition).
(c) The Issuer shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Issuer shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this clause by virtue thereof.
Limitation on Affiliate Transactions. (a) The Issuer shall not, and shall
not permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of any property,
employee compensation arrangements or the rendering of any service) with any
Affiliate of the Issuer (an "Affiliate Transaction") unless the terms thereof
(1) are no less favorable to the Issuer or such Restricted Subsidiary than
those that could be obtained at the time of such transaction in arm's-length
dealings with a Person who is not such an Affiliate, (2) if such Affiliate
Transaction involves an amount in excess of $1.0 million,
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(i) are set forth in writing and (ii) have been approved by a majority of the
members of the Board of Directors having no personal stake in such Affiliate
Transaction and (3) if such Affiliate Transaction involves an amount in excess
of $5.0 million, have been determined by nationally recognized investment
banking firm to be fair, from a financial standpoint to the Issuer and its
Restricted Subsidiaries.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any
Restricted Payment permitted to be paid pursuant to the covenant described
under "--Limitation on Restricted Payments", (ii) any issuance of securities,
or other payments, awards or grants in cash, securities or otherwise pursuant
to, or the funding of, employment arrangements, stock options and stock
ownership plans approved by the Board of Directors, (iii) the grant of stock
options or similar rights to employees and directors of the Issuer pursuant to
plans approved by the Board of Directors, (iv) loans or advances to employees
in the ordinary course of business in accordance with the past practices of
the Issuer or its Restricted Subsidiaries, but in any event not to exceed $1.0
million in the aggregate outstanding at any one time; (v) the payment of
reasonable fees to directors of the Issuer and its Restricted Subsidiaries who
are not employees of the Issuer or its Restricted Subsidiaries; and (vi) any
Affiliate Transaction between the Issuer and a Wholly Owned Subsidiary or
between Wholly Owned Subsidiaries.
Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries. The Issuer shall not sell or otherwise dispose of any shares of
Capital Stock of a Restricted Subsidiary, and shall not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of
any shares of its Capital Stock except (i) to the Issuer or a Wholly Owned
Subsidiary or (ii) if, immediately after giving effect to such issuance, sale
or other disposition, such Restricted Subsidiary would no longer constitute a
Restricted Subsidiary.
Merger and Consolidation. The Issuer shall not consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all its assets to, any Person, unless: (i)
the resulting, surviving or transferee Person (the "Successor Issuer") shall
be a Person organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and the Successor
Issuer (if not the Issuer) shall expressly assume, by an indenture
supplemental thereto, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Issuer under the Notes
and the Indenture; (ii) immediately after giving effect to such transaction
(and treating any Indebtedness which becomes an obligation of the Successor
Issuer or any Subsidiary as a result of such transaction as having been
Incurred by such Successor Issuer or such Subsidiary at the time of such
transaction), no Default shall have occurred and be continuing, (iii)
immediately after giving effect to such transaction, the Successor Issuer
would be able to Incur an additional $1.00 of Indebtedness pursuant to
paragraph (a) of the covenant described under "--Limitation on Indebtedness";
(iv) immediately after giving effect to such transaction, the Successor Issuer
shall have Consolidated Net Worth in an amount that is not less than the
Consolidated Net Worth of the Issuer prior to such transaction; and (v) the
Issuer shall have delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that such consolidation, merger or transfer
and such supplemental indenture (if any) comply with the Indenture.
The Successor Issuer shall be the successor to the Issuer and shall succeed
to, and be substituted for, and may exercise every right and power of, the
Issuer under the Indenture, but the predecessor Issuer in the case of a
conveyance, transfer or lease shall not be released from the obligation to pay
the principal of and interest on the Notes.
The Company shall not, and the Issuer will not permit any Subsidiary
Guarantor to, consolidate with or merge with or into, or convey, transfer or
lease, in one transaction or a series of transactions, all or substantially
all of its assets to any Person unless: (i) in the case of the Company, such
Person is not the Issuer or any Restricted Subsidiary; (ii) the resulting,
surviving or transferee Person (if not the Company or such Subsidiary, as the
case may be) shall be a Person organized and existing under the laws of the
jurisdiction under which the Company or such Subsidiary, as applicable, was
organized or under the laws of the United States of America, or any State
thereof or the District of Columbia, and such Person shall expressly assume,
by an amendment to the Indenture, in a form satisfactory to the Trustee, all
the obligations of the Company or such Subsidiary (as applicable) under its
Guaranty; and (iii) immediately after giving effect to such transaction or
transactions on a
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pro forma basis (and treating any Indebtedness which becomes an obligation of
the resulting, surviving or transferee Person as a result of such transaction
as having been issued by such Person at the time of such transaction), no
Default shall have occurred and be continuing.
Unrestricted Subsidiaries. The Issuer shall not permit any Unrestricted
Subsidiary to engage in the business of shared telecommunications services in
commercial office buildings.
Future Guarantors. The Issuer shall cause each Subsidiary that Guarantees
any Indebtedness of the Issuer to become a Subsidiary Guarantor under the
Indenture and thereby Guarantee the Notes on the terms and conditions set
forth in the Indenture.
SEC Reports. Notwithstanding that the Issuer may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Issuer shall file with the SEC and provide the Trustee and
Noteholders with such annual reports and such information, documents and other
reports as are specified in Sections 13 and 15(d) of the Exchange Act and
applicable to a U.S. corporation subject to such Sections, such information,
documents and other reports to be so filed and provided at the times specified
for the filing of such information, documents and reports under such Sections.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in the
payment of interest on the Notes when due, continued for 30 days, (ii) a
default in the payment of principal of any Note when due at its Stated
Maturity, upon optional redemption, upon required repurchase, upon declaration
or otherwise, (iii) the failure by the Issuer to comply with its obligations
under "--Certain Covenants--Merger and Consolidation" above, (iv) the failure
by the Issuer or STFI, as applicable, to comply for 30 days after notice with
any of its obligations in the covenants described above under "--Change of
Control" (other than a failure to purchase Notes) or under "--Certain
Covenants" under "--Limitation on Indebtedness", "--Limitation on Indebtedness
and Preferred Stock of Restricted Subsidiaries", "--Limitation on Restricted
Payments", "--Limitation on Restrictions on Distributions from Restricted
Subsidiaries", "--Limitation on Sales of Assets and Subsidiary Stock" (other
than a failure to purchase Notes), "--Limitation on Affiliate Transactions",
"--Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries", "--Unrestricted Subsidiaries", "--Future Guarantors" or "--SEC
Reports", (v) the failure by the Issuer or any Guarantor to comply for 60 days
after notice with its other agreements contained in the Indenture, (vi)
Indebtedness of the Issuer, STFI or any Significant Subsidiary is not paid
within any applicable grace period after final maturity or is accelerated by
the holders thereof because of a default and the total amount of such
Indebtedness unpaid or accelerated exceeds $5.0 million (the "cross
acceleration provision"), (vii) certain events of bankruptcy, insolvency or
reorganization of the Issuer, STFI or a Significant Subsidiary (the
"bankruptcy provisions"), (viii) any judgment or decree for the payment of
money in excess of $5.0 million is rendered against the Issuer, STFI or a
Significant Subsidiary, remains outstanding for a period of 60 days following
such judgment and is not discharged, waived or stayed within 10 days after
notice (the "judgment default provision") or (ix) a Guaranty ceases to be in
full force and effect (other than in accordance with the terms of such
Guaranty) or a Guarantor denies or disaffirms its obligations under its
Guaranty. However, a default under clauses (iv), (v) and (viii) will not
constitute an Event of Default until the Trustee or the holders of 25% in
principal amount of the outstanding Notes notify the Issuer of the default and
the Issuer does not cure such default within the time specified after receipt
of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding Notes may declare the
Accreted Value of and accrued but unpaid interest on all the Notes to be due
and payable (collectively, the "Default Amount"). Upon such a declaration, the
Default Amount shall be due and payable immediately. If an Event of Default
relating to certain events of bankruptcy, insolvency or reorganization of the
Issuer occurs and is continuing, the Default Amount on all the Notes will ipso
facto become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any holders of the Notes. Under
certain circumstances, the holders of a majority in principal amount of the
outstanding Notes may rescind any such acceleration with respect to the Notes
and its consequences.
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Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee
will be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Notes
unless such holders have offered to the Trustee reasonable indemnity or
security against any loss, liability or expense. Except to enforce the right
to receive payment of principal, premium (if any) or interest when due, no
holder of a Note may pursue any remedy with respect to the Indenture or the
Notes unless (i) such holder has previously given the Trustee notice that an
Event of Default is continuing, (ii) holders of at least 25% in principal
amount of the outstanding Notes have requested the Trustee to pursue the
remedy, (iii) such holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense, (iv) the Trustee has not
complied with such request within 60 days after the receipt thereof and the
offer of security or indemnity and (v) the holders of a majority in principal
amount of the outstanding Notes have not given the Trustee a direction
inconsistent with such request within such 60-day period. Subject to certain
restrictions, the holders of a majority in principal amount of the outstanding
Notes are given the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or of exercising any
trust or power conferred on the Trustee. The Trustee, however, may refuse to
follow any direction that conflicts with law or the Indenture or that the
Trustee determines is unduly prejudicial to the rights of any other holder of
a Note or that would involve the Trustee in personal liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder of the Notes notice
of the Default within 90 days after it occurs. Except in the case of a Default
in the payment of principal (or Accreted Value) of or interest on any Note,
the Trustee may withhold notice if and so long as a committee of its trust
officers determines that withholding notice is not opposed to the interest of
the holders of the Notes. In addition, the Issuer is required to deliver to
the Trustee, within 120 days after the end of each fiscal year, a certificate
indicating whether the signers thereof know of any Default that occurred
during the previous year. The Issuer also is required to deliver to the
Trustee, within 30 days after the occurrence thereof, written notice of any
event which would constitute certain Defaults, their status and what action
the Issuer is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the holders of a majority in principal amount of the Notes then outstanding
(including consents obtained in connection with a tender offer or exchange for
the Notes) and any past default or compliance with any provisions may also be
waived with the consent of the holders of a majority in principal amount of
the Notes then outstanding. However, without the consent of each holder of an
outstanding Note, no amendment may, among other things, (i) reduce the amount
of Notes whose holders must consent to an amendment, (ii) reduce the rate of
or extend the time for payment of interest on any Note, (iii) reduce the
principal or Accreted Value of or extend the Stated Maturity of any Note, (iv)
reduce the premium payable upon the redemption of any Note or change the time
at which any Note may be redeemed as described under "--Optional Redemption"
above, (v) make any Note payable in money other than that stated in the Note,
(vi) impair the right of any holder of the Notes to receive payment of
principal of and interest on such holder's Notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such holder's Notes, (vii) make any change in the amendment
provisions which require each holder's consent or in the waiver provisions,
(viii) make any change to the subordination provisions of the Indenture that
would adversely affect the Noteholders or (ix) make any change in any Guaranty
that would adversely affect the Noteholders.
Without the consent of any holder of the Notes, the Issuer and Trustee may
amend the Indenture to cure any ambiguity, omission, defect or inconsistency,
to provide for the assumption by a successor corporation of the obligations of
the Issuer under the Indenture, to provide for uncertificated Notes in
addition to or in place of certificated Notes (provided that the
uncertificated Notes are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated Notes are
described in Section 163(f)(2)(B) of the Code), to add guarantees with respect
to the Notes including any new Subsidiary Guarantors, to secure the Notes,
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to add to the covenants of the Issuer for the benefit of the holders of the
Notes or to surrender any right or power conferred upon the Issuer, to make
any change that does not adversely affect the rights of any holder of the
Notes or to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act. However, no
amendment may be made to the subordination provisions of the Indenture that
adversely affects the rights of any holder of Senior Indebtedness then
outstanding unless the holders of such Senior Indebtedness (or their
Representative) consents to such change.
The consent of the holders of the Notes is not necessary under the Indenture
to approve the particular form of any proposed amendment. It is sufficient if
such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Issuer is
required to mail to holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the
Notes, or any defect therein, will not impair or affect the validity of the
amendment.
TRANSFER
The Notes will be issued in registered form and will be transferable only
upon the surrender of the Notes being transferred for registration of
transfer. The Issuer may require payment of a sum sufficient to cover any tax,
assessment or other governmental charge payable in connection with certain
transfers and exchanges.
DEFEASANCE
The Issuer at any time may terminate all its obligations under the Notes and
the Indenture ("legal defeasance"), except for certain obligations, including
those respecting the defeasance trust (as defined) and obligations to register
the transfer or exchange of the Notes, to replace mutilated, destroyed, lost
or stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Issuer at any time may terminate its obligations under the
covenants described under "--Certain Covenants" (other than the covenant
described under "--Merger and Consolidation"), the operation of the cross
acceleration provision, the bankruptcy provisions with respect to Significant
Subsidiaries and the judgment default provision described under "--Defaults"
above and the limitations contained in clauses (iii) and (iv) of the first
paragraph and clause (iii) of the third paragraph under "--Certain Covenants--
Merger and Consolidation" above ("covenant defeasance").
The Issuer may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Issuer exercises its
legal defeasance option, payment of the Notes may not be accelerated because
of an Event of Default with respect thereto. If the Issuer exercises its
covenant defeasance option, payment of the Notes may not be accelerated
because of an Event of Default specified in clause (iv), (vi), (vii) (with
respect only to Significant Subsidiaries) or (viii) under "--Defaults" above
or because of the failure of the Issuer to comply with clause (iii) or (iv) of
the first paragraph or the Company or the Issuer to comply with clause (iii)
of the third paragraph under "--Certain Covenants--Merger and Consolidation"
above. If the Issuer exercises its legal defeasance option or its covenant
defeasance option, each Guarantor will be released from all of its obligations
with respect to its Guaranty.
In order to exercise either defeasance option, the Issuer must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the Notes
to redemption or maturity, as the case may be, and must comply with certain
other conditions, including delivery to the Trustee of an Opinion of Counsel
to the effect that holders of the Notes will not recognize income, gain or
loss for Federal income tax purposes as a result of such deposit and
defeasance and will be subject to Federal income tax on the same amount and in
the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal
Revenue Service or other change in applicable Federal income tax law).
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CONCERNING THE TRUSTEE
U.S. Trust Company of New York is to be the Trustee under the Indenture and
has been appointed by the Issuer as Registrar and Paying Agent with regard to
the Notes.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that if an Event of Default occurs
(and is not cured), the Trustee will be required, in the exercise of its
power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the Trustee will be under no obligation
to exercise any of its rights or powers under the Indenture at the request of
any Holder of Notes, unless such Holder shall have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or
expense and then only to the extent required by the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Accreted Value" as of any date (the "Specified Date") means, with respect
to each $1,000 principal amount at maturity of Notes:
(i) if the Specified Date is one of the following dates (each a "Semi-
Annual Accrual Date"), the amount set forth opposite such date below:
<TABLE>
<CAPTION>
ACCRETED
SEMI-ANNUAL ACCRUAL DATE VALUE
------------------------ ---------
<S> <C>
March 13, 1996................................................ $ 702.77
September 1, 1996............................................. 742.87
March 1, 1997................................................. 788.37
September 1, 1997............................................. 836.66
March 1, 1998................................................. 887.90
September 1, 1998............................................. 942.29
March 1, 1999................................................. 1,000.00
</TABLE>
(ii) if the Specified Date occurs between two Semi-Annual Accrual Dates,
the sum of (A) the Accreted Value for the Semi-Annual Accrual Date
immediately preceding the Specified Date and (B) an amount equal to the
product of (i) the Accreted Value for the immediately following Semi-Annual
Accrual Date less the Accreted Value for the immediately preceding Semi-
Annual Accrual Date and (ii) a fraction, the numerator of which is the
number of days from the immediately preceding Semi-Annual Accrual Date to
the Specified Date, using a 360-day year of twelve 30-day months, and the
denominator of which is 180 (or, if the Semi-Annual Accrual Date
immediately preceding the Specified Date is March 13, 1996, the denominator
of which is 169); and
(iii) if the Specified Date occurs after the last Semi-Annual Accrual Date,
$1,000.
"Acquisition" means the merger of Fairchild Industries Inc. with and into
Shared Technologies Inc. as described in this Prospectus.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock
of a Person that becomes a Restricted Subsidiary as a result of the
acquisition of such Capital Stock by the Issuer or another Restricted
Subsidiary or (iii) Capital Stock constituting
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a minority interest in any Person that at such time is a Restricted
Subsidiary; provided, however, that any such Restricted Subsidiary described
in clauses (ii) or (iii) above is primarily engaged in a Related Business.
"Adjusted Consolidated Net Income" means, for any period, the Consolidated
Net Income for such period plus, to the extent deducted therefrom, the
consolidated amortization of goodwill of the Issuer and its consolidated
Subsidiaries for such period related to the Acquisition.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing. For purposes of the provisions described under "--Certain
Covenants--Limitation on Restricted Payments", "--Certain Covenants--
Limitation on Affiliate Transactions" and "--Certain Covenants--Limitations on
Sales of Assets and Subsidiary Stock" only, "Affiliate" shall also mean any
beneficial owner of Capital Stock representing 5% or more of the total voting
power of the Voting Stock (on a fully diluted basis) of the Issuer or of
rights or warrants to purchase such Capital Stock (whether or not currently
exercisable) and any Person who would be an Affiliate of any such beneficial
owner pursuant to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) by the Issuer or
any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of
this definition as a "disposition"), of (i) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares or shares
required by applicable law to be held by a Person other than the Issuer or a
Restricted Subsidiary), (ii) all or substantially all the assets of any
division or line of business of the Issuer or any Restricted Subsidiary or
(iii) any other assets of the Issuer or any Restricted Subsidiary outside of
the ordinary course of business of the Issuer or such Restricted Subsidiary
(other than, in the case of (i), (ii) and (iii) above, (y) a disposition by a
Restricted Subsidiary to the Issuer or by the Issuer or a Restricted
Subsidiary to a Wholly Owned Subsidiary and (z) for purposes of the covenant
described under "--Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock" only, a disposition that constitutes a Restricted Payment
permitted by the covenant described under "--Certain Covenants--Limitation on
Restricted Payments").
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at an interest rate
which would be applicable to Capital Lease Obligations with a like term in
accordance with GAAP) of the total obligations of the lessee for rental
payments during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has been
extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied
by the amount of such payment by (ii) the sum of all such payments.
"Bank Indebtedness" means any and all amounts payable by the Issuer or any
Subsidiary Guarantor under or in respect of the Credit Facility or any
facility that refinances or replaces the Credit Facility, in each case, as
amended, refinanced or replaced from time to time, including principal,
premium (if any), interest (including interest accruing on or after the filing
of any petition in bankruptcy or for reorganization relating to the Issuer
whether or not a claim for post filing interest is allowed in such
proceedings), fees, charges, expenses, reimbursement obligations, Guarantees
and all other amounts payable thereunder or in respect thereof.
"Banks" has the meaning specified in the Credit Facility.
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"Board of Directors" means the Board of Directors of the Issuer or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented
by such obligation shall be the capitalized amount of such obligation
determined in accordance with GAAP; and the Stated Maturity thereof shall be
the date of the last payment of rent or any other amount due under such lease
prior to the first date upon which such lease may be terminated by the lessee
without payment of a penalty.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any
Preferred Stock, but excluding any debt securities convertible into such
equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days prior to the date of
such determination to (ii) Consolidated Interest Expense for such four fiscal
quarters; provided, however, that (1) if the Issuer or any Restricted
Subsidiary has Incurred any Indebtedness since the beginning of such period
that remains outstanding or if the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or
both, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving effect on a pro forma basis to such Indebtedness as if
such Indebtedness has been Incurred on the first day of such period and the
discharge of any other Indebtedness repaid, repurchased, defeased or otherwise
discharged with the proceeds of such new Indebtedness as if such discharge had
occurred on the first day of such period, (2) if since the beginning of such
period the Issuer or any Restricted Subsidiary shall have made any Asset
Disposition, the EBITDA for such period shall be reduced by an amount equal to
the EBITDA (if positive) directly attributable to the assets which are the
subject of such Asset Disposition for such period, or increased by an amount
equal to the EBITDA (if negative), directly attributable thereto for such
period and Consolidated Interest Expense for such period shall be reduced by
an amount equal to the Consolidated Interest Expense directly attributable to
any Indebtedness of the Issuer or any Restricted Subsidiary repaid,
repurchased, defeased or otherwise discharged with respect to the Issuer and
its continuing Restricted Subsidiaries in connection with such Asset
Disposition for such period (or, if the Capital Stock of any Restricted
Subsidiary is sold, the Consolidated Interest Expense for such period directly
attributable to the Indebtedness of such Restricted Subsidiary to the extent
the Issuer and its continuing Restricted Subsidiaries are no longer liable for
such Indebtedness after such sale), (3) if since the beginning of such period
the Issuer or any Restricted Subsidiary (by merger or otherwise) shall have
made an Investment in any Restricted Subsidiary (or any person which becomes a
Restricted Subsidiary) or an acquisition of assets, including any acquisition
of assets occurring in connection with a transaction causing a calculation to
be made hereunder, which constitutes all or substantially all of an operating
unit of a business, EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving pro forma effect thereto (including the
Incurrence of any Indebtedness) as if such Investment or acquisition occurred
on the first day of such period and (4) if since the beginning of such period
any Person (that subsequently became a Restricted Subsidiary or was merged
with or into the Issuer or any Restricted Subsidiary since the beginning of
such period) shall have made any Asset Disposition, any Investment or
acquisition of assets that would have required an adjustment pursuant to
clause (2) or (3) above if made by the Issuer or a Restricted Subsidiary
during such period, EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving pro forma effect thereto as if such Asset
Disposition, Investment or acquisition occurred on the first day of such
period. For purposes of this definition, whenever pro forma effect is to be
given to an acquisition of assets, the amount of income or earnings relating
thereto, and the amount of Consolidated Interest Expense associated with any
Indebtedness Incurred in connection therewith, the pro forma calculations
shall be determined in good faith by a responsible financial or accounting
Officer of the Issuer. If
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any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest of such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the applicable rate for
the entire period (taking into account any Interest Rate Protection Agreement
applicable to such Indebtedness if such Interest Rate Protection Agreement has
a remaining term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Issuer and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
incurred by the Issuer or its Restricted Subsidiaries, (i) interest expense
attributable to capital leases and one-third of the rental expense
attributable to operating leases, (ii) amortization of debt discount and debt
issuance cost, (iii) capitalized interest, (iv) non-cash interest expenses,
(v) commissions, discounts and other fees and charges owed with respect to
letters of credit and bankers' acceptance financing, (vi) net costs associated
with Hedging Obligations (including amortization of fees), (vii) Preferred
Stock dividends in respect of all Preferred Stock held by Persons other than
the Issuer or a Wholly Owned Subsidiary, (viii) interest incurred in
connection with Investments in discontinued operations, (ix) interest accruing
on any Indebtedness of any other Person to the extent such Indebtedness is
Guaranteed by the Issuer or any Restricted Subsidiary and (x) the cash
contributions to any employee stock ownership plan or similar trust to the
extent such contributions are used by such plan or trust to pay interest or
fees to any Person (other than the Issuer) in connection with Indebtedness
Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income of the
Issuer and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income: (i) any net income of any
Person if such Person is not a Restricted Subsidiary, except that (A) subject
to the exclusion contained in clause (iv) below, the Issuer's equity in the
net income of any such Person for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Person during such period to the Issuer or a Restricted
Subsidiary as a dividend or other distribution (subject, in the case of a
dividend or other distribution paid to a Restricted Subsidiary, to the
limitations contained in clause (iii) below) and (B) the Issuer's equity in a
net loss of any such Person for such period shall be included in determining
such Consolidated Net Income; (ii) any net income (or loss) of any Person
acquired by the Issuer or a Subsidiary in a pooling of interests transaction
for any period prior to the date of such acquisition; (iii) any net income of
any Restricted Subsidiary if such Restricted Subsidiary is subject to
restrictions, directly or indirectly, on the payment of dividends or the
making of distributions by such Restricted Subsidiary, directly or indirectly,
to the Issuer, except that (A) subject to the exclusion contained in clause
(iv) below, the Issuer's equity in the net income of any such Restricted
Subsidiary for such period shall be included in such Consolidated Net Income
up to the aggregate amount of cash actually distributed by such Restricted
Subsidiary during such period to the Issuer or another Restricted Subsidiary
as a dividend or other distribution (subject, in the case of a dividend or
other distribution paid to another Restricted Subsidiary, to the limitation
contained in this clause) and (B) the Issuer's equity in a net loss of any
such Restricted Subsidiary for such period shall be included in determining
such Consolidated Net Income; (iv) any gain (but not loss) realized upon the
sale or other disposition of any assets of the Issuer or its consolidated
Subsidiaries (including pursuant to any sale-and-leaseback arrangement) which
is not sold or otherwise disposed of in the ordinary course of business and
any gain (but not loss) realized upon the sale or other disposition of any
Capital Stock of any Person; (v) extraordinary gains or losses; and (vi) the
cumulative effect of a change in accounting principles. Notwithstanding the
foregoing, for the purposes of the covenant described under "Certain
Covenants--Limitation on Restricted Payments" only, there shall be excluded
from Consolidated Net Income any dividends, repayments of loans or advances or
other transfers of assets from Unrestricted Subsidiaries to the Issuer or a
Restricted Subsidiary to the extent such dividends, repayments or transfers
increase the amount of Restricted Payments permitted under such covenant
pursuant to clause (a)(3)(D) thereof.
"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Issuer and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Issuer ending at least 45 days prior to the taking of
any action for the purpose of which the determination is being made, as (i)
the par or stated value of all outstanding Capital Stock of the Issuer
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plus (ii) paid-in capital or capital surplus relating to such Capital Stock
plus (iii) any retained earnings or earned surplus less (A) any accumulated
deficit and (B) any amounts attributable to Disqualified Stock.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or a beneficiary.
"Credit Facility" means the Credit Agreement dated as of March 12, 1996, as
amended from time to time, among the Company, the Issuer, the Lenders referred
to therein and the Banks referred to therein, Credit Suisse, as Administrative
Agent and Collateral Agent, Citicorp USA, Inc. and NationsBank, N.A., as
Documentation Agent.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Preferred Stock" means the 6% Cumulative Convertible Preferred
Stock issued by the Company in connection with the Acquisition.
"Designated Senior Indebtedness" means (i) the Bank Indebtedness and (ii)
any other Senior Indebtedness of the Issuer which, at the date of
determination, has an aggregate principal amount outstanding of, or under
which, at the date of determination, the holders thereof are committed to lend
up to, at least $10 million and is specifically designated by the Issuer in
the instrument evidencing or governing such Senior Indebtedness as "Designated
Senior Indebtedness" for purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable) or upon the happening of any
event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness
or Disqualified Stock or (iii) is redeemable at the option of the holder
thereof, in whole or in part, in each case on or prior to the first
anniversary of the Stated Maturity of the Notes; provided, however, that any
Capital Stock that would not constitute Disqualified Stock but for provisions
thereof giving holders thereof the right to require such Person to repurchase
or redeem such Capital Stock upon the occurrence of an "asset sale" or "change
of control" occurring prior to the first anniversary of the Stated Maturity of
the Notes shall not constitute Disqualified Stock if the "asset sale" or
"change of control" provisions applicable to such Capital Stock are not more
favorable to the holders of such Capital Stock than the provisions described
under "--Certain Covenants--Limitation on Sales of Assets and Subsidiary
Stock" and "--Change of Control".
"EBITDA" for any period means the sum of Consolidated Net Income plus the
following to the extent deducted in calculating such Consolidated Net Income:
(a) all income tax expense of the Issuer, (b) Consolidated Interest Expense,
(c) depreciation expense, (d) amortization expense and (e) all other non-cash
items reducing such Consolidated Net Income (excluding any non-cash item to
the extent it represents an accrual of, or reserve for, cash disbursement for
any subsequent period) less all non-cash items increasing such Consolidated
Net Income (such amount calculated pursuant to this clause (e) not to be less
than zero), in each case for such period. Notwithstanding the foregoing, the
provision for taxes based on the income or profits of, and the depreciation
and amortization of, and other non-cash items with respect to, a Subsidiary of
the Issuer shall be added to Consolidated Net Income to compute EBITDA only to
the extent (and in the same proportion) that the net income of such Subsidiary
was included in calculating Consolidated Net Income and only if a
corresponding amount would be permitted at the date of determination to be
dividended to the Issuer by such Subsidiary without prior approval (that has
not been obtained), pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statuses, rules and governmental
regulations applicable to such Subsidiary or its stockholders.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
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"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth (i) in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants (ii) statements and
pronouncements of the Financial Accounting Standards Board (iii) in such other
statements by such other entity as approved by a significant segment of the
accounting profession, and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial
statements) in periodic reports required to be filed pursuant to Section 13 of
the Exchange Act, including opinions and pronouncements in staff accounting
bulletins and similar written statements from the accounting staff of the SEC.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of
any Person and any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Indebtedness or other obligation of such Person
(whether arising by virtue of partnership arrangements, or by agreements to
keep-well, to purchase assets, goods, securities or services, to take-or-pay
or to maintain financial statement conditions or otherwise) or (ii) entered
into for the purpose of assuring in any other manner the obligee of such
Indebtedness or other obligation of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part); provided,
however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning. The term "Guarantor" shall mean
any Person Guaranteeing any obligation.
"Guarantors" means STFI and the Subsidiary Guarantors.
"Guaranty" means the Guarantee of the Notes by STFI and the Subsidiary
Guarantors pursuant to the Indenture.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is registered
on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by
such Subsidiary at the time it becomes a Subsidiary. The term "Incurrence"
when used as a noun shall have a correlative meaning. The accretion of
principal of a non-interest bearing or other discount security shall be deemed
the Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar
instruments for the payment of which such Person is responsible or liable;
(ii) all Capital Lease Obligations of such Person and all Attributable Debt in
respect of Sale/Leaseback Transactions entered into by such Person; (iii) all
obligations of such Person issued or assumed as the deferred purchase price of
property, all conditional sale obligations of such Person and all obligations
of such Person under any title retention agreement (but excluding trade
accounts payable arising in the ordinary course of business); (iv) all
obligations of such Person for the reimbursement of any obligor on any letter
of credit, banker's acceptance or similar credit transaction (other than
obligations with respect to letters of credit securing obligations (other than
obligations described in (i) through (iii) above) entered into in the ordinary
course of business of such Person to the extent such letters of credit are not
drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no
later than the third Business Day following receipt by such Person of a demand
for reimbursement following payment on the letter of credit); (v) the amount
of all obligations of such Person with respect to the redemption, repayment or
other repurchase of any Disqualified Stock or, with respect to any Subsidiary
of such Person, any Preferred Stock (but excluding, in each case, any accrued
dividends); (vi) all obligations of the type referred to in clauses (i)
through (v) of other Persons and all dividends
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of other Persons for the payment of which, in either case, such Person is
responsible or liable, directly or indirectly, as obligor, Guarantor or
otherwise, including by means of any Guarantee; (vii) all obligations of the
type referred to in clauses (i) through (vi) of other Persons secured by any
Lien on any property or asset of such Person (whether or not such obligation
is assumed by such Person), the amount of such obligation being deemed to be
the lesser of the value of such property or assets or the amount of the
obligation so secured and (viii) to the extent not otherwise included in this
definition, Hedging Obligations of such Person. The amount of Indebtedness of
any Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and the maximum liability, upon
the occurrence of the contingency giving rise to the obligation, of any
contingent obligations at such date.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement designed to
protect the Issuer or any Restricted Subsidiary against fluctuations in
interest rates.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of such Person) or other
extensions of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or
other similar instruments issued by such Person. For purposes of the
definition of "Unrestricted Subsidiary", the definition of "Restricted
Payment" and the covenant described under "--Certain Covenants--Limitation on
Restricted Payments", (i) "Investment" shall include the portion
(proportionate to the Issuer's equity interest in such Subsidiary) of the fair
market value of the net assets of any Subsidiary of the Issuer at the time
that such Subsidiary is designated an Unrestricted Subsidiary; provided,
however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Issuer shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary equal to an amount (if positive)
equal to (x) the Issuer's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Issuer's equity
interest in such Subsidiary) of the fair market value of the net assets of
such Subsidiary at the time of such redesignation; and (ii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer, in each case as determined in good
faith by the Board of Directors.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only
as and when received, but excluding any other consideration received in the
form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
noncash form) in each case net of all legal, title and recording tax expenses,
commissions and other fees and expenses incurred, and all Federal, state,
provincial, foreign and local taxes required to be accrued as a liability
under GAAP, as a consequence of such Asset Disposition, and in each case net
of all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any Lien
upon or other security agreement of any kind with respect to such assets, or
which must by its terms, or in order to obtain a necessary consent to such
Asset Disposition, or by applicable law be, repaid out of the proceeds from
such Asset Disposition, and net of all distributions and other payments
required to be made to minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts
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or commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Permitted Holders" means Jeffrey J. Steiner and his "associates" (as
defined in Rule 12b-2 under the Exchange Act as in effect on the Issue Date,
except that a person shall not be an "associate" for purposes of the Indenture
solely because such person comes within the definition of such term in clause
(a) of such Rule) and his Affiliates.
"Permitted Investment" means an Investment by the Issuer or any Restricted
Subsidiary in (i) a Restricted Subsidiary or a Person that will, upon the
making of such Investment, become a Restricted Subsidiary; provided, however,
that the primary business of such Restricted Subsidiary is a Related Business;
(ii) another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Issuer or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Related Business;
(iii) Temporary Cash Investments; (iv) receivables owing to the Issuer or any
Restricted Subsidiary if created or acquired in the ordinary course of
business and payable or dischargeable in accordance with customary trade
terms; provided, however, that such trade terms may include such consessionary
trade terms as the Issuer or any such Restricted Subsidiary deems reasonable
under the circumstances; (v) payroll, travel and similar advances to cover
matters that are expected at the time of such advances ultimately to be
treated as expenses for accounting purposes and that are made in the ordinary
course of business; (vi) loans or advances to employees made in the ordinary
course of business consistent with past practices of the Issuer or such
Restricted Subsidiary; and (vii) stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to
the Issuer or any Restricted Subsidiary or in satisfaction of judgments.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Public Equity Offering" means an underwritten primary public offering of
common stock of STFI pursuant to an effective registration statement under the
Securities Act.
"Public Market" means any time after (x) a Public Equity Offering has been
consummated and (y) at least 15% of the total issued and outstanding common
stock of STFI has been distributed by means of an effective registration
statement under the Securities Act or sales pursuant to Rule 144 under the
Securities Act.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such indebtedness. "Refinanced"
and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Issuer or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue
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price) that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced; provided further,
however, that Refinancing Indebtedness shall not include (x) Indebtedness of a
Subsidiary that Refinances Indebtedness of the Issuer or (y) Indebtedness of
the Issuer or a Restricted Subsidiary that Refinances Indebtedness of an
Unrestricted Subsidiary.
"Related Business" means any business related, ancillary or complementary to
the businesses of the Issuer and the Restricted Subsidiaries on the Issue
Date.
"Representative" means any trustee, agent or representative (if any) for an
issue of Senior Indebtedness of the Issuer.
"Restricted Payment" with respect to any Person means (i) the declaration or
payment of any dividends or any other distributions of any sort in respect of
its Capital Stock (including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the direct or
indirect holders of its Capital Stock (other than dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock) and
dividends or distributions payable solely to the Issuer or a Restricted
Subsidiary, and other than pro rata dividends or other distributions made by a
Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders (or
owners of an equivalent interest in the case of a Subsidiary that is an entity
other than a corporation)), (ii) the purchase, redemption or other acquisition
or retirement for value of any Capital Stock of the Issuer held by any Person
or of any Capital Stock of a Restricted Subsidiary held by any Affiliate of
the Issuer (other than a Restricted Subsidiary), including the exercise of any
option to exchange any Capital Stock (other than into Capital Stock of the
Issuer that is not Disqualified Stock), (iii) the purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value, prior to
scheduled maturity, scheduled repayment or scheduled sinking fund payment of
any Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity,
in each case due within one year of the date of acquisition) or (iv) the
making of any Investment in any Person (other than a Permitted Investment).
"Restricted Subsidiary" means any Subsidiary of the Issuer that is not an
Unrestricted Subsidiary.
"Revolving Credit Provisions" means the provisions in the Credit Facility
pursuant to which the lenders have committed to make available to the Issuer a
revolving credit facility in a maximum principal amount of $25.0 million.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Issuer or a Restricted Subsidiary
transfers such property to a Person and the Issuer or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Issuer secured by a
Lien.
"Senior Indebtedness" with respect to any Person means (i) the Bank
Indebtedness, (ii) Indebtedness of such Person, whether outstanding on the
Issue Date or thereafter Incurred and (iii) accrued and unpaid interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to such Person whether or not post-
filing interest is allowed in such proceeding) in respect of (A) indebtedness
of such Person for money borrowed and (B) indebtedness evidenced by notes,
debentures, bonds or other similar instruments for the payment of which such
Person is responsible or liable unless, in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is
provided that such obligations are subordinate in right of payment to the
Notes or the applicable Guaranty, as the case may be; provided, however, that
Senior Indebtedness shall not include (1) any obligation of such Person to any
Subsidiary or such Person, (2) any liability for Federal, state, local or
other taxes owed or owing by such Person, (3) any accounts payable
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or other liability to trade creditors arising in the ordinary course of
business (including guarantees thereof or instruments evidencing such
liabilities), (4) any Indebtedness of such Person (and any accrued and unpaid
interest in respect thereof) which by its terms is subordinate or junior in
any respect to any other Indebtedness or other obligation of such Person or
(5) that portion of any Indebtedness which at the time of Incurrence is
Incurred in violation of the Indenture, it being understood that, in the case
of this clause (5), all Bank Indebtedness shall at all times constitute Senior
Indebtedness.
"Senior Subordinated Indebtedness" with respect to any Person means the
Notes (in the case of the Issuer) or the Guaranty of such Person (in the case
of a Guarantor) and, in each case, any other Indebtedness of such Person that
specifically provides that such Indebtedness is to rank pari passu with the
Notes or such Guaranty, as the case may be, in right of payment and is not
subordinated by its terms in right of payment to any Indebtedness or other
obligation of the Issuer or such Guarantor, respectively, which is not Senior
Indebtedness of such Person.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Issuer within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory
redemption provision (but excluding any provision providing for the repurchase
of such security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"STFI" means Shared Technologies Fairchild Inc., a Delaware corporation.
"STFC Guarantors" means each of STFI and the Subsidiary Guarantors.
"Subordinated Obligation" means any Indebtedness of the Issuer (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement to
that effect.
"Subsidiary" means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total
voting power of shares of Capital Stock or other interests (including
partnership interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by (i)
such Person, (ii) such Person and one or more Subsidiaries of such Person or
(iii) one or more Subsidiaries of such Person.
"Subsidiary Guarantor" means each Subsidiary of the Issuer that guarantees
any Indebtedness of the Issuer.
"Subsidiary Guaranty" means the Guaranty by a Subsidiary Guarantor of the
Issuer's obligations with respect to the Notes.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized
by the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50,000,000 (or the foreign
currency equivalent thereof) and has outstanding debt which is rated "A" (or
such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by any registered broker
dealer or mutual fund distributor, (iii) repurchase obligations with a term of
not more than 30 days for underlying securities of the types described in
clause (i) above entered into with a bank meeting the qualifications described
in clause (ii) above, (iv) investments in commercial paper, maturing not more
than 90 days after the date of acquisition,
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issued by a corporation (other than an Affiliate of the Issuer) organized and
in existence under the laws of the United States of America or any foreign
country recognized by the United States of America with a rating at the time
as of which any investment therein is made of "P-1" (or higher) according to
Moody's Investors Service, Inc. or "A-1" (or higher) according to Standard and
Poor's Ratings Group, and (v) investments in securities with maturities of six
months or less from the date of acquisition issued or fully guaranteed by any
state, commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A" by
Standard & Poor's Ratings Group or "A" by Moody's Investors Service, Inc.
"Term Loan Provisions" means the provisions in the Credit Facility pursuant
to which the lenders commit to make available to the Issuer $120.0 million of
credit facilities in the form of either amortizing term loans or letters of
credit.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Issuer that at the
time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary
of the Issuer (including any newly acquired or newly formed Subsidiary) to be
an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries
owns any Capital Stock or Indebtedness of, or holds any Lien on any property
of, the Issuer or any other Subsidiary of the Issuer that is not a Subsidiary
of the Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if
such Subsidiary has assets greater than $1,000, such designation would be
permitted under the covenant described under "--Certain Covenants--Limitation
on Restricted Payments". The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation (x) the Issuer could Incur $1.00 of
additional Indebtedness under paragraph (a) of the covenant described under
"--Certain Covenants--Limitation on Indebtedness" and (y) no Default shall
have occurred and be continuing. Any such designation by the Board of
Directors shall be by the Issuer to the Trustee by promptly filing with the
Trustee a copy of the board resolution giving effect to such designation and
an Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States
of America (including any agency or instrumentality thereof) for the payment
of which the full faith and credit of the United States of America is pledged
and which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding
and normally entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares and shares held by
other Persons to the extent such shares are required by applicable law to be
held by a Person other than the Issuer or a Restricted Subsidiary) is owned by
the Issuer or one or more Wholly Owned Subsidiaries.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
ORIGINAL ISSUE DISCOUNT
This summary addresses the material U.S. federal income tax consequences
involving or related to original issue discount for holders of the Notes who
are U.S. domestic corporations, citizens or residents of the United States, or
are otherwise subject to U.S. net income tax with respect to ownership and
disposition of the Notes ("U.S. Holders"). This summary is based on the
Internal Revenue Code of 1986 as amended to the date hereof, administrative
pronouncements, judicial decisions and existing and proposed U.S. Treasury
Regulations, changes to any of which subsequent to the date hereof may affect
the tax consequences described herein. This summary applies only to U.S.
Holders who hold the Notes as capital assets. It does not discuss all of the
tax consequences that may be relevant to a holder of the Notes in light of
such person's particular circumstances or to holders
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subject to special rules, such as certain financial institutions, regulated
investment companies, insurance companies, dealers in securities and other
holders who are not U.S. Holders or whose functional currency is not the U.S.
dollar. All prospective purchasers of the Notes should consult their own tax
advisors regarding the federal, state, local and foreign tax consequences of
the purchase, ownership and disposition of the Notes.
Original Issue Discount Generally. The Notes will be issued with original
issue discount for U.S. federal income tax purposes. The amount of original
issue discount ("OID") on a Note is the excess of its "stated redemption price
at maturity" (the sum of all payments to be made on the Note, whether
denominated as interest or principal), over its "issue price" (the initial
price at which a substantial portion of the Notes are sold, not including
sales to bond houses, brokers or similar persons or organizations acting as
underwriters). Accordingly, each holder of the Notes generally will be
required to include such OID in income as it accrues under a constant yield
method in advance of cash payments attributable to such income (regardless of
whether the holder is a cash or accrual basis taxpayer). The Company will
report annually to the Internal Revenue Service ("IRS") and to record holders
of the Notes information with respect to OID accruing during the calendar
year. The amount of OID includible in income by an initial holder of the Notes
is equal to the sum of the daily portions of OID for each day during the
taxable year or portion of taxable year on which such holder held such Notes
("accrued OID"). The daily portion is determined by allocating to each day in
any "accrual period" a pro rata portion of the OID allocable to that accrual
period. The accrual periods for the Notes will be March 13, 1996 to August 31,
1996 and September 1, 1996 to February 28, 1997, and thereafter, the
semiannual period commencing on March 1 and September 1 of each year that the
Notes are outstanding. The amount of OID that is allocable to an accrual
period is generally equal to the product of the adjusted issue price of the
Notes at the beginning of the accrual period (the issue price of the Notes,
generally increased by all prior accruals of OID and reduced by any prior cash
payments on the Notes) and the yield-to-maturity of the Notes (the discount
rate, which, when applied to all payments under the Notes, results in a
present value equal to the issue price of the Notes). In the case of the final
accrual period, the allocable OID is the difference between the amount payable
at maturity and the adjusted issue price of the Notes at the beginning of the
accrual period. Each payment made under a Note (except for any payments of
qualified stated interest and certain early redemption payments) will be
treated first as a payment of any accrued OID that has not been allocated to
prior payments and second as a payment of principal (which is not includible
in income).
Deductibility of Original Issue Discount and Related Consequences to
Corporate Holders of the Notes. It is possible that the Notes will constitute
applicable high yield discount obligations ("HYDOs") if their yield to
maturity is equal to or greater than the sum of the applicable federal rate
("AFR") for debt instruments issued in March 1996 (namely 5.98%), plus five
percentage points, and the Notes are issued with significant OID. If the Notes
are HYDOs, the Company will not be entitled to deduct OID that accrues with
respect to the Notes until amounts attributable to such OID are paid. In
addition, if the yield to maturity of the Notes exceeds the sum of the
relevant AFR plus six percentage points (the "excess yield"), the Company's
deduction for the "disqualified portion" of the OID accruing on the Notes will
be disallowed. In general, the "disqualified portion" of the OID for any
accrual period will be equal to the product of (i) the excess yield divided by
the yield to maturity on the Notes, and (ii) the OID for the accrual period.
Holders that are U.S. corporations will generally be entitled to a dividend
received deduction (generally at a 70% rate) with respect to any disqualified
portion of the accrued OID to the extent that the Company has sufficient
current or accumulated earnings and profits. If the disqualified portion
exceeds the Company's current and accumulated earnings and profits, the excess
will continue to be taxed to Holders as OID income in accordance with rules
described above under "Original Issue Discount Generally".
Sale, Redemption or Other Taxable Disposition of the Notes. Generally, any
sale, redemption or other taxable disposition of Notes by a holder will result
in taxable gain or loss equal to the difference between (i) the sum of the
amount of cash and the fair market value of other property received with
respect to such taxable sale, redemption or other disposition and (ii) the
holder's adjusted tax basis in the Notes. An initial holder's adjusted tax
basis in the Notes will generally equal the issue price of the Notes,
increased by any accrued OID includible in such holder's gross income and
decreased by any cash payments received by such holder with respect to the
Notes. Any gain or loss upon a sale or other disposition of the Notes will
generally be capital gain or loss, and
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will be long term if the Notes have been held by the holder for more than one
year. As described below, an exchange of New Notes for Old Notes should not be
a sale or exchange or otherwise a taxable event. See "The Exchange Offer".
Election to Treat All Interest as Original Issue Discount. A Holder may
elect to treat all "interest" on any Notes as original issue discount and
calculate the amount includible in gross income under the method described
above. For this purpose, "interest" includes stated and unstated interest,
original issue discount, acquisition discount, market discount and de minimis
market discount, as adjusted by any acquisition premium. The election is made
for the taxable year in which the Holder acquired the Note and may not be
revoked without the consent of the Internal Revenue Service.
Acquisition Premium. A Holder that purchases a Note at a purchase price
greater than the adjusted issue price of the Note but less than its stated
redemption price at maturity will be considered to have purchased the Note at
an "acquisition premium" equal to such excess. A Holder is permitted to reduce
the original issue discount otherwise includible for each accrual period by an
amount equal to the product of (i) the amount of such original issue discount
otherwise includible for such period, and (ii) a fraction, the numerator of
which is the acquisition premium and denominator of which is the excess of the
amounts payable on the Note after the purchase date over the adjusted issue
price of the Note.
Market Discount. A Holder (other than an initial holder) that purchases a
Note at a purchase price less than the adjusted issue price will be considered
to have purchased the Note at a "market discount" equal to such difference.
Market discount, however, will be considered to be zero if such market
discount is less than 0.25% of the stated redemption price at maturity of a
Note multiplied by the number of complete years to maturity remaining after
the date of its purchase. Any principal payment or gain realized by a Holder
on disposition or retirement of a Note will be treated as ordinary income to
the extent that there is accrued market discount on the Note. Unless a Holder
elects to accrue market discount under a constant-interest method, a Holder's
accrued market discount on any date will equal the total market discount
multiplied by a fraction, the numerator of which is the number of days the
Holder has held the obligation and the denominator of which is the number of
days from the date of the Holder acquired the obligation until its maturity. A
Holder generally will be required to defer a portion of its interest
deductions for the taxable year attributable to any indebtedness incurred or
continued to purchase or carry a Note purchased with market discount, unless
the Holder elects to include accrued market discount in income currently on
all market discount instruments acquired by the Holder in the taxable year or
thereafter. Any such deferred interest expense would not exceed the market
discount that accrues during such taxable year and, in general, is allowed as
a deduction not later than the year in which such market discount is
includible in income.
Backup Withholding. Under certain circumstances, an individual holder may be
subject to backup withholding at a 31% rate on payments received with respect
to the Notes. This withholding generally applies only if the holder (i) fails
to furnish his or her taxpayer identification number ("TIN"), (ii) furnishes
an incorrect TIN, (iii) is notified by the IRS that the holder has failed to
properly report payments of interest and dividends and the IRS has notified
the Company that he or she is subject to backup withholding, or (iv) fails,
under certain circumstances, to provide a certified statement, signed under
penalty of perjury, that the TIN provided is his or her correct number and
that he or she is not subject to backup withholding. Any amount withheld from
a payment to a holder under the backup withholding rules is generally
allowable as a credit against such holder's federal income tax liability,
provided that the required information is timely furnished to the IRS. Holders
should consult their own tax advisors as to their qualification for exemption
from backup withholding and the procedure for obtaining such an exemption.
THE EXCHANGE OFFER
This summary addresses the material U.S. federal income tax consequences
involving or related to the exchange of Old Notes for New Notes for U.S.
Holders. This summary is based on the Internal Revenue Code of 1986 as amended
to the date hereof, administrative pronouncements, judicial decisions and
existing and
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proposed U.S. Treasury Regulations, changes to any of which subsequent to the
date hereof may affect the tax consequences described herein. As with the
discussion of "Original Issue Discount Generally", above, this summary applies
only to U.S. Holders who hold the Notes as capital assets and it does not
discuss all of the tax consequences that may be relevant to a holder of the
Notes in light of such persons's particular circumstances or to holders
subject to special rules, such as certain financial institutions, regulated
investment companies, insurance companies, dealers in securities and other
holders who are not U.S. Holders or whose functional currency is not the U.S.
dollar. All Holders of the Old Notes should consult their own tax advisors
regarding the federal, state, local and foreign tax consequences of the
exchange of Old Notes for New Notes.
The exchange of Old Notes for New Notes should not be a sale or exchange or
otherwise a taxable event for Federal income tax purposes. Accordingly, the
New Notes should have the same issue price as the Old Notes, and a holder
should have the same adjusted basis and holding period in the New Notes as it
had in the Old Notes immediately before the exchange.
HOLDERS OF THE OLD NOTES ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING
THE PARTICULAR TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING AND DISPOSING OF
THE OLD NOTES AND THE NEW NOTES, INCLUDING THE APPLICATION OF FEDERAL, STATE,
LOCAL AND FOREIGN TAX LAWS AND POSSIBLE FUTURE CHANGES IN SUCH TAX LAWS.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Issuer has agreed that, for a period of 180 days after
the Expiration Date, it will make this prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until , 1996, all dealers effecting transactions in the New Notes
may be required to deliver a prospectus.
The Issuer will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer or the purchasers of any such New Notes. Any broker-
dealer that resells New Notes that were received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such New Notes may be deemed to be an "underwriter" within the
meaning of the Securities Act and any profit on any such resale of New Notes
and any commission or concessions received by any such persons may be deemed
to be underwriting compensation under the Securities Act. The Letter of
Transmittal states that, by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date the Issuer will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the
Letter of Transmittal. The Issuer has agreed to pay all expenses incident to
the Exchange Offer (including the expenses of one counsel for the Holders of
the Notes) other than commissions or concessions of any brokers or dealers and
will indemnify the Holders of the Securities (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
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LEGAL MATTERS
Certain legal matters with respect to the New Notes offered hereby will be
passed upon for the Company and the Issuer by Gadsby & Hannah, 125 Summer
Street, Boston, Massachusetts 02110.
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements of STFI for the years ended December
31, 1994 and 1995 included in this Prospectus 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 Rothstein, Kass & Company, P.C. as experts in giving such
reports.
The consolidated financial statements of FII included in this Prospectus
have been audited by Arthur Andersen LLP, independent public accountants, and
are included herein in reliance upon the authority of Arthur Andersen LLP firm
as experts in giving such reports.
ADDITIONAL AND AVAILABLE INFORMATION
The Issuer has filed with the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549, a Registration Statement on Form S-4 under the Securities Act and the
rules and regulation promulgated thereunder, with respect to the exchange of
the Old Notes for the New Notes offered pursuant to this Prospectus. This
Prospectus, which is part of the Registration Statement, does not contain all
of the information set forth in the Registration Statement and the exhibits
and financial statement schedules thereto. For further information with
respect to the Issuer and the New Notes, reference is made to the Registration
Statement and such exhibits and financial statement schedules, copies of which
may be examined without charge at, or obtained upon payment of prescribed fees
from, the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and will also be available for inspection
and copying at the regional offices of the SEC located at 13th Floor, 7 World
Trade Center, New York, New York 10048 and at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511.
Statements contained in this Prospectus as to the contents of any contract
or other document that is filed as an exhibit to the Registration Statement
are not necessarily complete, and each such statement is qualified in its
entirety by reference to the full text of such contract or document.
The Issuer will be required to file reports and other information with the
SEC pursuant to the Exchange Act. In addition to applicable legal
requirements, if any, holders of the Notes will receive annual reports
containing audited financial statements with a report thereon by the Issuer's
independent certified public accountants, and quarterly reports containing
unaudited financial information for each of the first three quarters of each
fiscal year.
The Company is subject to the informational requirements of the Exchange Act
and in accordance therewith files reports and other information with the SEC.
The Company is also required to file proxy statements with the SEC. Such
reports and other information filed by the Company with the SEC in accordance
with the Exchange Act may be inspected, without charge, at the Public
Reference Section of the SEC located at 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the SEC located at Seven World Trade
Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661. Copies of all or any portion of the
material may be obtained from the Public Reference Section of the SEC upon
payment of the prescribed fees. The Company's Common Stock is listed on the
Nasdaq National Market. Copies of such reports and other information can also
be inspected at the offices of the Nasdaq National Market, 1735 K Street,
N.W., Washington, D.C. 20006.
119
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Rothstein, Kass & Company, P.C., Independent Auditors........... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994.............. F-3
Consolidated Statements of Operations--The Years Ended December 31, 1995,
1994 and 1993............................................................ F-4
Consolidated Statements of Stockholders' Equity--The Years Ended December
31, 1995, 1994 and 1993.................................................. F-5
Consolidated Statements of Cash Flows--The Years Ended December 31, 1995,
1994 and 1993............................................................ F-6
Notes to Consolidated Financial Statements--The Years Ended December 31,
1995, 1994 and 1993...................................................... F-8
FAIRCHILD INDUSTRIES, INC. AND SUBSIDIARY
Pre-Recapitalization/Merger Financials
Report of Arthur Andersen LLP, Independent Public Accountants........... F-21
Consolidated Balance Sheets as of June 30, 1994 and 1995................ F-22
Consolidated Statements of Earnings--The Three Years Ended June 3, 1993,
1994 and 1995.......................................................... F-24
Consolidated Statements of Stockholders' Equity--The Three Years Ended
June 30, 1993, 1994,
and 1995............................................................... F-25
Consolidated Statements of Cash Flows--The Three Years Ended June 30,
1993, 1994 and 1995.................................................... F-26
Notes to Consolidated Financial Statements.............................. F-27
Condensed Consolidated Balance Sheets as of June 30, 1995 and December
31, 1995 (unaudited)................................................... F-44
Condensed Consolidated Statements of Earnings for the six months ended
December 31, 1994 and 1995 (unaudited)................................. F-46
Condensed Consolidated Statements of Cash Flows for the six months ended
December 31, 1994 and 1995 (unaudited)................................. F-47
Notes to Condensed Consolidated Financial Statements.................... F-48
Post-Recapitalization/Merger Financials
Report of Arthur Andersen LLP, Independent Public Accountants........... F-53
Consolidated Balance Sheets as of June 30, 1994 and 1995 and December
31, 1995 (unaudited)................................................... F-55
Consolidated Statements of Income for the Years Ended June 30, 1993,
1994 and 1995 and the six months ended December 31, 1994 and 1995 (un-
audited)............................................................... F-57
Consolidated Statements of Changes in Stockholders' Equity--The Three
Years Ended June 30, 1993, 1994 and 1995 and the six months ended De-
cember 31, 1995 (unaudited)............................................ F-58
Consolidated Statements of Cash Flows for the Years Ended June 30, 1993,
1994 and 1995 and the six months ended December 31, 1994 and 1995 (un-
audited)............................................................... F-59
Notes to Consolidated Financial Statements............................... F-60
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Shared Technologies Fairchild
Inc.
We have audited the accompanying consolidated balance sheets of Shared
Technologies Fairchild Inc. and Subsidiaries as of December 31, 1995 and 1994
and the related consolidated statements of operations, stockholders' equity
and cash flows for the three year period 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 Fairchild Inc. and Subsidiaries as of December 31, 1995 and 1994,
and the results of their operations and their cash flows for the three year
period then ended in conformity with generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting for its investment in one of its
subsidiaries.
Rothstein, Kass & Company, P.C.
Roseland, New Jersey
March 1, 1996, except for Notes 1, 7 and 18, as to which the date is March 13,
1996
F-2
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 476 $ 172
Accounts receivable, less allowance for doubtful accounts
and discounts of
$410 in 1995 and $584 in 1994........................... 9,855 8,533
Advances to subsidiary................................... 985
Other current assets..................................... 754 727
Deferred income taxes.................................... 550
-------- --------
Total current assets................................. 12,070 9,982
-------- --------
Equipment:
Telecommunications....................................... 28,904 26,223
Office and data processing............................... 6,049 4,995
-------- --------
34,953 31,218
Less accumulated depreciation and amortization........... 18,305 15,473
-------- --------
16,648 15,745
-------- --------
Other assets:
Investment in subsidiary................................. 1,581
Intangible assets........................................ 11,543 11,198
Deferred income taxes.................................... 560
Other.................................................... 461 1,000
-------- --------
14,145 12,198
-------- --------
$ 42,863 $ 37,925
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease
obligations............................................. $ 2,870 $ 1,840
Accounts payable......................................... 9,035 8,191
Accrued expenses......................................... 2,221 2,382
Advance billings......................................... 1,337 1,260
-------- --------
Total current liabilities............................ 15,463 13,673
-------- --------
Long-term debt and capital lease obligations, less current
portion................................................... 4,128 2,886
-------- --------
Minority interests in net assets of subsidiaries........... 102
-------- --------
Redeemable put warrant..................................... 428 383
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value:
Series C, authorized 1,500 shares, outstanding 907
shares in 1995 and 1994............................... 9 9
Series D, authorized 1,000 shares, outstanding 457
shares in 1995 and 1994............................... 5 5
Series E, authorized 400 shares, outstanding no shares
in 1995 and 400 shares in 1994........................ 4
Series F, authorized 700 shares, outstanding no shares
in 1995 and 700 shares in 1994........................ 7
Common stock, $.004 par value, authorized 20,000 shares,
outstanding 8,506 shares in 1995 and 6,628 in 1994...... 34 27
Capital in excess of par value........................... 44,777 41,488
Accumulated deficit...................................... (21,981) (22,465)
Obligations to issue common stock........................ 1,806
-------- --------
Total stockholders' equity........................... 22,844 20,881
-------- --------
$ 42,863 $ 37,925
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Revenues:
Shared telecommunications services............... $35,176 $28,667 $21,683
Telecommunications systems....................... 11,910 6,483 1,543
Cellular services................................ 10,217 2,200
------- ------- -------
Total revenues................................. 47,086 45,367 25,426
------- ------- -------
Cost of revenues:
Shared telecommunications services............... 19,473 15,717 11,628
Telecommunications systems....................... 9,399 5,161 1,282
Cellular services................................ 5,294 1,604
------- ------- -------
Total cost of revenues......................... 28,872 26,172 14,514
------- ------- -------
Gross margin....................................... 18,214 19,195 10,912
Operating expenses, selling, general and
administrative.................................... 16,188 16,909 10,102
------- ------- -------
Operating income................................... 2,026 2,286 810
------- ------- -------
Other income (expense):
Gain on sale of subsidiary stock................. 1,375
Equity in loss of subsidiary..................... (1,752)
Interest expense................................. (882) (522) (530)
Interest income.................................. 205 163 92
Minority interest in net income of subsidiaries.. (128) (82)
------- ------- -------
(1,054) (487) (520)
------- ------- -------
Income before income tax (expense) benefit and
extraordinary item................................ 972 1,799 290
Income tax (expense) benefit....................... (45) 487
------- ------- -------
Income before extraordinary item................... 927 2,286 290
Extraordinary item, loss on restructuring.......... (150)
------- ------- -------
Net income......................................... 927 2,286 140
Preferred stock dividends.......................... (398) (478) (345)
------- ------- -------
Net income (loss) applicable to common stock....... $ 529 $ 1,808 $ (205)
======= ======= =======
Income (loss) per common share:
Income (loss) before extraordinary item.......... $ .06 $ .27 $ (.01)
Extraordinary item............................... (.03)
------- ------- -------
Net income (loss)................................ $ .06 $ .27 $ (.04)
======= ======= =======
Weighted average number of common shares
outstanding....................................... 8,482 6,792 5,132
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES C SERIES D SERIES E SERIES F
PREFERRED PREFERRED PREFERRED PREFERRED CAPITAL OBLIGATIONS
STOCK STOCK STOCK STOCK COMMON STOCK IN EXCESS TO ISSUE
-------------- ------------- ------------- ------------- ------------- OF ACCUMULATED COMMON
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT PAR VALUE DEFICIT STOCK
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January
1, 1993......... 1,107 $11 $ $ $ 5,092 $21 $30,047 $(24,043) $
Preferred stock
dividends....... (345)
Proceeds from
sale of Series D
preferred stock,
net of expenses
of $412......... 453 5 1,737
Redemption of
Series C
preferred
stock........... (119) (1) (385)
Common stock to
be issued for
acquisitions.... 1,756
Common stock
issued in lieu
of
compensation.... 49 228
Common stock
issued in lieu
of deferred
financing fees.. 14 50
Exercise of
common stock
options......... 35 82
Net income...... 140
----- --- --- --- ---- --- ---- --- ----- --- ------- -------- ------
Balance,
December 31,
1993............ 988 10 453 5 5,190 21 31,759 (24,248) 1,756
Preferred stock
dividends....... (478)
Dividend
accretion of
redeemable put
warrant......... (25)
Exercise of
common stock
options and
warrants........ 26 71
Proceeds from
sale of Series D
preferred
stock........... 4 (1)
Issuances for
acquisitions.... 400 4 700 7 4,989
Proceeds from
sale of common
stock, net of
expenses of
$371............ 1,329 6 4,556
Common stock
issued in lieu
of compensation
and conversion
of Series C
preferred stock
and other....... (81) (1) 83 114 50
Net income...... 2,286
----- --- --- --- ---- --- ---- --- ----- --- ------- -------- ------
Balance,
December 31,
1994............ 907 9 457 5 400 4 700 7 6,628 27 41,488 (22,465) 1,806
Preferred stock
dividends....... (398)
Dividend
accretion of
redeemable put
warrant......... (45)
Exercise of
common stock
options and
warrants........ 17 70
Issuance of
common stock.... 405 2 1,804 (1,806)
Conversion of
preferred
stock........... (400) (4) (700) (7) 1,100 4 7
Proceeds from
sale of common
stock, net of
expenses of
$112............ 300 1 1,162
Common stock
issued in lieu
of compensation
and payment of
accrued
expenses........ 56 246
Net income...... 927
----- --- --- --- ---- --- ---- --- ----- --- ------- -------- ------
Balance,
December 31,
1995............ 907 $ 9 457 $5 0 $ 0 0 $ 0 8,506 $34 $44,777 $(21,981) $ 0
===== === === === ==== === ==== === ===== === ======= ======== ======
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance, January
1, 1993......... $ 6,036
Preferred stock
dividends....... (345)
Proceeds from
sale of Series D
preferred stock,
net of expenses
of $412......... 1,742
Redemption of
Series C
preferred
stock........... (386)
Common stock to
be issued for
acquisitions.... 1,756
Common stock
issued in lieu
of
compensation.... 228
Common stock
issued in lieu
of deferred
financing fees.. 50
Exercise of
common stock
options......... 82
Net income...... 140
-------------
Balance,
December 31,
1993............ 9,303
Preferred stock
dividends....... (478)
Dividend
accretion of
redeemable put
warrant......... (25)
Exercise of
common stock
options and
warrants........ 71
Proceeds from
sale of Series D
preferred
stock........... (1)
Issuances for
acquisitions.... 5,000
Proceeds from
sale of common
stock, net of
expenses of
$371............ 4,562
Common stock
issued in lieu
of compensation
and conversion
of Series C
preferred stock
and other....... 163
Net income...... 2,286
-------------
Balance,
December 31,
1994............ 20,881
Preferred stock
dividends....... (398)
Dividend
accretion of
redeemable put
warrant......... (45)
Exercise of
common stock
options and
warrants........ 70
Issuance of
common stock....
Conversion of
preferred
stock...........
Proceeds from
sale of common
stock, net of
expenses of
$112............ 1,163
Common stock
issued in lieu
of compensation
and payment of
accrued
expenses........ 246
Net income...... 927
-------------
Balance,
December 31,
1995............ $22,844
=============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 927 $ 2,286 $ 140
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on restructuring............................ 150
Depreciation and amortization.................... 3,967 3,702 2,562
Provision for doubtful accounts.................. 321 413 253
Gain on sale of subsidiary stock................. (1,375)
Equity in loss of subsidiary..................... 1,752
Common stock of subsidiary issued for services... 16
Stock options and common stock issued in lieu of
compensation and other.......................... 177 114 278
Minority interests............................... 128 82
Gain on sale of franchise........................ (202)
Deferred income taxes............................ (10) (550)
Amortization of discount on note................. 90 52
Change in assets and liabilities, net of effect
of acquisitions:
Accounts receivable............................ (2,639) (2,147) (990)
Other current assets........................... (52) (179) 132
Other assets................................... (430) (244)
Accounts payable............................... 2,208 1,629 964
Accrued expenses............................... (556) (1,707) (1,212)
Advance billings............................... 68 (67) 91
------- ------- -------
Net cash provided by operating activities........... 4,878 3,058 2,206
------- ------- -------
Cash flows from investing activities:
Purchases of equipment............................ (3,679) (3,223) (2,035)
Acquisitions, net of cash acquired................ (1,382) (3,948) (255)
Deferred merger costs............................. (750)
Other investments................................. (106)
Long-term deposits................................ (10) (2)
------- ------- -------
Net cash used in investing activities............... (5,927) (7,171) (2,292)
------- ------- -------
Cash flows from financing activities:
Repayments of long-term debt and capital lease
obligations...................................... (2,226) (2,409) (1,895)
Proceeds from borrowings.......................... 2,684 2,315
Proceeds from sales of common and preferred
stock............................................ 1,233 4,631 1,824
Redemption of preferred stock..................... (386)
Preferred stock dividends paid.................... (398) (478) (345)
Cash of subsidiary previously consolidated........ (10)
Repayment of advances to subsidiary............... 70
Deferred registration costs....................... (182)
------- ------- -------
Net cash provided by (used in) financing
activities......................................... 1,353 3,877 (802)
------- ------- -------
Net increase (decrease) in cash................... 304 (236) (888)
Cash, beginning of year........................... 172 408 1,296
------- ------- -------
Cash, end of year................................. $ 476 $ 172 $ 408
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash interest paid during the years for:
Interest.............................................. $ 856 $ 441 $ 386
Income taxes.......................................... 84 -- --
Supplemental disclosures of noncash investing and
financing activities:
Conversion of accrued expenses to note payable in
connection with litigation settlement.................. -- -- 460
Obligations to issue common stock in connection with
acquisitions........................................... -- 50 1,756
Issuance of preferred stock in connection with
acquisition............................................ -- 5,000 --
Redeemable put warrant issued in connection with bank
financing.............................................. -- 358 --
Capital lease obligations incurred for lease of new
equipment.............................................. 355 64 --
Dividend accretion on redeemable put warrant............ 45 25 --
Costs of intangible assets included in accounts
payable................................................ -- 203 --
Note received for sale of franchise..................... -- 202 --
Issuance of note relating to acquisition................ 800 -- --
Issuance of common stock to settle accrued expenses..... 69 -- --
Deferred merger costs included in accounts payable...... 513 -- --
Reclassification of advance to subsidiary to investment
in subsidiary.......................................... 1,184 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
NOTE 1-BUSINESS AND ORGANIZATIONS:
On March 13, 1996, Shared Technologies Inc. merged with Fairchild
Industries, Inc. and changed its name to Shared Technologies Fairchild Inc.
(STFI) (Note 18)
STFI, together with its subsidiaries (collectively the Company) is in the
shared telecommunications services (STS) and telecommunications systems
(Systems) 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.
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation-The consolidated financial statements include
the accounts of the Company and its wholly-owned and majority owned
subsidiaries in which the Company has a controlling interest. Investments in
companies in which the Company exercises significant influence (greater than
20%), but not a controlling interest, are carried at equity. The effects of
all significant intercompany transactions have been eliminated.
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.
Investment in Unconsolidated Subsidiary-The Company's investment in its
unconsolidated subsidiary, STC, is accounted for under the equity method in
1995. Prior to 1995, the majority owned subsidiary was included on a
consolidated basis (Note 3).
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. Systems and equipment sales are recognized at the time of
shipment.
Use of Estimates-The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Equipment-Equipment is stated at cost. Depreciation and amortization is
provided using the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Telecommunications................................................. 8 years
Office and data processing......................................... 3-8 years
</TABLE>
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.
Fair Value of Financial Instruments-The fair value of the Company's assets
and liabilities which qualify as financial instruments under Statement of
Financial Accounting Standards No. 107 approximate the carrying amounts
presented in the balance sheets.
F-8
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
INTANGIBLE ASSETS:
Goodwill-Goodwill represents the excess of the purchase price over the
fair value 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 Financing and Merger Costs-The Company has deferred certain
costs incurred in connection with the merger and related financing (Note
18). These costs will be amortized over their respective lives upon the
completion of the merger and financing. At December 31, 1995, approximately
$1,263 of these costs are included in intangible assets.
Other Intangible Assets-Other intangible assets are being amortized over
5 years.
Income Taxes-The Company complies with Statement of Financial Accounting
Standards No. 109 (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. The adoption of SFAS No. 109 had no material
impact on the Company's financial statements since the Company fully reserved
the tax benefits flowing from its net operating losses (Note 14).
Income (Loss) Per Common Share-Primary income (loss) per common share is
computed by deducting preferred stock dividends and the accretion of the
redeemable put warrant from net income. The resulting net income is applicable
to common stock, which is then divided by the weighted average number of
common shares outstanding, including the effect of options, warrants and
obligations to issue common stock, if dilutive.
Fully diluted income (loss) per common share is computed by dividing net
income applicable to common stock by the weighted average number of common and
common equivalent shares and the effect of preferred stock conversions, if
dilutive. Fully diluted income (loss) per common share is substantially the
same as primary income (loss) per common share for the years ended December
31, 1995, 1994 and 1993.
Newly Issued Accounting Standards-In March 1995, Statement of Financial
Accounting Standards No. 121 (SFAS No. 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of" was issued. The
Company will adopt SFAS No. 121 in the first quarter of 1996. The impact on
the Company's financial position and results of operations is not expected to
be material.
Reclassifications-Certain reclassifications to prior years financial
statements were made in order to conform to the 1995 presentation.
NOTE 3-INVESTMENT IN UNCONSOLIDATED SUBSIDIARY:
During December 1995, STC issued approximately $3,000 in voting preferred
stock to third parties. Although the Company's ownership percentage of 59.3%
did not change, the voting rights assigned to the preferred stock reduced the
Company's voting interest in STC to approximately 42.7%, resulting in the
Company's loss of voting control of STC. Accordingly, STC has been accounted
for on the equity method for
F-9
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
1995. Summarized balance sheet of STC as of December 31, 1995 and the related
summarized statement of operations of STC for the year then ended, is as
follows:
<TABLE>
<S> <C>
Summarized Balance Sheet
Current assets.................................................... $ 5,824
Telecommunications and office equipment, net...................... 2,158
Other assets...................................................... 6,396
-------
Total assets.................................................... $14,378
=======
Current liabilities............................................... $ 7,676
Note payable...................................................... 1,600
-------
Total liabilities............................................... 9,276
Stockholders' equity.............................................. 5,102
-------
Total liabilities and stockholders' equity...................... $14,378
=======
Summarized Statement of Operations
Revenues.......................................................... $13,613
Gross margin...................................................... 5,026
Operating loss.................................................... 2,989
Net loss.......................................................... 2,848
</TABLE>
NOTE 4-ACQUISITIONS:
In December 1993, STC completed its acquisition of 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 $1,262, of which $46 was paid in cash and the balance through the issuance
of 221 shares of the Company's common stock valued at $1,216. The purchase
price for East was $750 of which $209 was paid in cash and the balance through
the issuance, upon demand, of 108 shares of the Company's common stock valued
at $541. 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 65 additional shares were issued
which had no effect on the purchase price of the net assets previously
recorded. The shares in connection with the South acquisition have been
issued, however only 197 shares of the Company's common stock have been
delivered by STC pending the outcome of certain claims against, and by, the
former owners of South.
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 of which $4,252 was paid
in cash and the balance through the issuance of 400 shares of Series E
Preferred Stock valued at $3.75 per share and 700 shares of Series F Preferred
Stock valued at $5.00 per share (Note 9).
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 was $2,135 of which $1,335 was paid in cash and the
balance through the issuance of a $800 note, (discounted at 8.59%) payable
through June 30, 2005.
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 cost over fair value of the net assets of businesses acquired
is recorded as goodwill in the accompanying consolidated financial statements.
Amortization of goodwill approximated $364, $181 and $15 in 1995, 1994 and
1993, respectively.
F-10
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
The following unaudited pro forma statements of operations for 1995 and 1994
give effect to the acquisitions and the change in reporting of STC to the
equity method (Note 3) and the pro forma effect of STC acquisitions, as if they
occurred on January 1 in each year:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Revenues.................................................. $49,044 $47,785
Cost of revenues.......................................... 30,105 29,573
------- -------
Gross margin.............................................. 18,939 18,212
Selling, general and administrative expenses.............. 16,879 16,579
------- -------
Operating income.......................................... 2,060 1,633
Gain on sale of subsidiary stock.......................... 1,375
Equity in loss of subsidiary.............................. (2,634) (2,801)
Interest income (expense), net............................ (901) (643)
Minority interest in net income of subsidiaries........... (43)
------- -------
Loss before income tax (expense) benefit.................. (100) (1,854)
Income tax (expense) benefit.............................. (45) 487
------- -------
Net loss.................................................. (145) (1,367)
Preferred stock dividends................................. (398) (538)
------- -------
Loss applicable to common stock........................... $ (543) $(1,905)
======= =======
Net loss per common share................................. $ (.06) $ (.25)
======= =======
Weighted average number of common shares outstanding...... 8,482 7,753
======= =======
</TABLE>
NOTE 5-INTANGIBLE ASSETS:
Intangible assets consist of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Goodwill.................................................... $10,989 $11,186
Deferred financing and merger costs......................... 1,263
Software development costs.................................. 186
Other....................................................... 83 689
------- -------
12,335 12,061
Accumulated amortization.................................... 792 863
------- -------
$11,543 $11,198
======= =======
</TABLE>
NOTE 6-ACCRUED EXPENSES:
Accrued expenses at December 31, 1995 and 1994 consist of the following:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
State sales and excise taxes.................................. $1,040 $ 861
Deferred lease obligations.................................... 222 150
Property taxes................................................ 150 140
Concession fees............................................... 176 102
Other......................................................... 633 1,129
------ ------
$2,221 $2,382
====== ======
</TABLE>
F-11
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
NOTE 7-LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
Long-term debt and capital lease obligations at December 31, 1995 and 1994
consist of the following:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Revolving $4,000 credit line due in May 1997 and bearing
interest at 2% above prime rate (10.5% at December 31, 1995)
(Note 8).................................................... $2,174 $1,009
Initial term loan due in quarterly installments of $50
commencing November 24, 1994, with final payment of $700 due
May 1996 and bearing interest at 2% above prime rate........ 750 950
Term loan due in 36 monthly installments of $37 commencing
March 1995 and bearing interest at 2% above prime rate...... 950
Term loan due in 36 monthly installments of $8 commencing
July 1995 and bearing interest at 2% above prime rate....... 245
Notes payable to vendors, non-interest bearing due in
aggregate quarterly installments of approximately $249
through June 1995........................................... 498
Promissory note payable in semi-annual installments and
bearing interest at 10% per annum........................... 268
Promissory note, $550 original face amount discounted at
7.75%, payable in quarterly installments of $25 through
March 31, 1999, collateralized by commitment to issue 88
shares of Series C Preferred Stock.......................... 304 359
Promissory note, $450 original face amount, non-interest
bearing, payable in quarterly installments of $16 through
June 30, 1999............................................... 225 289
Promissory note, $1,200 original face amount discounted at
8.59%, payable in quarterly installments of $30 through June
2005 and collateralized by standby letter of credit......... 774
Promissory note, $50 original face amount bearing interest at
7.18% per annum, payable in monthly installments of $2
through October 1997........................................ 32
Capital lease obligations, collateralized by related
telecommunications and data processing equipment and all
assets acquired from Access (Note 4)........................ 1,544 1,353
------ ------
6,998 4,726
Less current portion......................................... 2,870 1,840
------ ------
$4,128 $2,886
====== ======
</TABLE>
In May 1994, the Company entered into a $5,000 financing agreement with a
bank collateralized by certain assets of the Company. The agreement provides
for a revolving credit line for a maximum, as defined, of $4,000 to be used
for expansion in the shared telecommunications services business and a $1,000
term loan. Aggregate drawings on the line convert semi-annually, through May
1996, to three year term loans. The agreement provides for, among other
things, the Company to maintain certain financial covenants. As of December
31, 1995, the Company was in violation of certain of these covenants and on
March 13, 1996, the Company replaced this financing agreement with a long term
facility (Note 18), and therefore continues to classify the debt on a long-
term basis.
F-12
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
Scheduled aggregate payments on long-term debt and capital lease obligations
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING LONG-TERM CAPITAL LEASE
DECEMBER 31 DEBT OBLIGATIONS
----------- --------- -------------
<S> <C> <C>
1996.............................................. $2,230 $ 754
1997.............................................. 1,470 540
1998.............................................. 1,105 349
1999.............................................. 128 88
2000.............................................. 77 20
------ ------
$5,010 1,751
======
Less amount representing interest.................. 206
------
Present value of future payments, including current
portion of $640................................... $1,545
======
</TABLE>
Telecommunications and data processing equipment includes assets acquired
under capital leases with a net book value of approximately $2,333 and $1,534
as of December 31, 1995 and 1994, 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 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 anticipated term of the loan at
inception.
NOTE 9-STOCKHOLDERS' EQUITY:
The Company is authorized to issue 10,000 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.
In 1992, the Company issued Series C Preferred Stock, which is non-voting
and entitled to a liquidation value of $4 per share and dividends of $.32 per
share per annum, payable quarterly in arrears. 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,
1995, the Company had sold 457 units for net proceeds of $1,740, after
deducting expenses of $430. 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,
F-13
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
the investment banking firm received warrants to purchase 16 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, 1995, no warrants had
been exercised.
In May and June 1994, the Company sold, through a private placement to
certain investors, 1,329 shares of common stock and an equal number of
warrants, for net proceeds of $4,562, after deducting expenses of $371. 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, 1995, 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 shares of Series E Preferred Stock,
$.01 par value, and 700 shares of Series F Preferred Stock, $.01 par value, in
connection with the Access acquisition.
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
Series E Preferred Stock previously issued was converted into 400 shares of
common stock in January 1995. In addition, the holders received warrants,
which expire on December 31, 1999, to purchase 175 shares of the Company's
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. These shares were converted on August 1, 1995 into 700
shares of common stock. On March 1, 1996, an additional 111 shares of the
Company's common stock was issued in connection with the provisions of
conversion of the Series F Preferred Stock, as defined.
Additionally, the Company issued warrants to the sellers of Access to
purchase 225 shares of the Company's common stock at an exercise price of
$4.25 per share, subject to certain anti-dilution adjustments.
During January 1995, the Company completed a private placement to sell to a
certain investor 300 shares of common stock at $4.25 per share, pursuant to
Regulation S of the Securities Act of 1933. The Company received $1,163, after
deducting expenses of $112, including an underwriter commission of $102 paid
to a firm in which one of the principals is a director and stockholder of the
Company. In addition, the underwriter was granted a five year common stock
purchase warrant to acquire 30 shares of the Company's common stock for $5.00
per share.
The following table summarizes the number of common shares reserved for
issuance as of December 31, 1995. There were no preferred shares reserved for
issuance.
<TABLE>
<S> <C>
Common stock purchase warrants......................................... 2,958
Preferred stock conversions............................................ 1,165
-----
4,123
=====
</TABLE>
NOTE 10-GAIN ON SALE OF SUBSIDIARY COMMON STOCK:
In April 1995, STC completed its SB-2 filing with the Securities and
Exchange Commission and became a public company. Prior to this date, STC was
approximately an 86% owned subsidiary of the Company. STC sold 950 shares of
common stock at $5.25 per share, which generated net proceeds of approximately
$3,274 after underwriters' commissions and offering expenses. The net effect
of the public offering on the consolidated financial statements was a gain of
approximately $1,375.
F-14
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
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, with a term of five
to ten years and are exercisable in accordance with vesting schedules set
individually by the Committee. As of December 31, 1995, approximately 1,000
shares of common stock are available for options. 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, 1993.... 354 $ 1.72-12.00 $ 3.77
Granted............................... 174 4.00- 5.50 5.32
Expired............................... (29) 2.84-12.00 10.19
Exercised............................. (35) 1.72- 2.84 2.36
--- --------------- ---------
Balance outstanding, December 31, 1993.. 464 1.72-11.00 4.06
Granted............................... 317 3.25- 4.50 3.60
Expired............................... (59) 4.00- 5.50 5.43
Exercised............................. (25) 2.84 2.84
--- --------------- ---------
Balance outstanding, December 31, 1994.. 697 1.72-11.00 3.78
Granted............................... 40 4.13 4.13
Expired............................... (2) 5.00- 5.72 5.16
Exercised............................. (2) 2.28- 2.84 2.58
--- --------------- ---------
Balance outstanding, December 31, 1995.. 733 $ 1.72-11.00 $ 3.79
=== =============== =========
</TABLE>
At December 31, 1995, options to purchase 449 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 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
shares of common stock at an exercise price equal to the fair market value of
such shares at the date of 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, 1995, options to purchase an
aggregate of 115 shares of common stock have been granted at an exercise price
range of $4.13 to $4.38.
NOTE 12-RETIREMENT AND SAVINGS PLAN:
On March 3, 1989, the Company adopted a savings and retirement plan (the
Plan), which covers substantially all of the Company's employees. 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 contributions, up to 5% of the
participant's compensation. Matching contributions may be made in the form of
the Company's common stock and are vested at the rate of 33% per year. The
Company's expense relating to the matching contributions was approximately
$199, $163, and $116 for 1995, 1994 and 1993, respectively. At December 31,
1995, and 1994, the plan owned 134 and 93 shares, respectively of the
Company's common stock.
F-15
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
NOTE 13-EXTRAORDINARY ITEM:
At December 31, 1993, the Company recorded a loss relating to the settlement
of a $600 promissory note (Note 7), in connection with its 1992 restructuring,
by issuance of a $750 promissory note.
NOTE 14-INCOME TAXES:
Income tax (expense) benefit consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
----- ---- ----
<S> <C> <C> <C>
Current:
Federal.................................................. $ (10) $ $
State and local.......................................... (45) (63)
----- ---- ---
(55) (63)
----- ---- ---
Deferred
Federal.................................................. 10 550
----- ---- ---
State and local.......................................... 10 550
----- ---- ---
Total (expense) benefit.................................... $ (45) $487 $
===== ==== ===
</TABLE>
For the years ended December 31, 1995, 1994 and 1993, income taxes computed
at the statutory federal rate differ from the Company's effective rate
primarily due to the availability of net operating losses (NOL).
The components of deferred income tax assets (liabilities) as of December
31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Tax effect of net operating loss carryforwards............. $ 8,641 $ 9,011
Equity in loss of subsidiary............................... 104
Financial reserves not yet tax deductible.................. 164 233
Equipment.................................................. (1,218) (1,200)
Goodwill................................................... (183) (107)
------- -------
Deferred income tax asset.................................. 7,508 7,937
Valuation allowance........................................ (6,948) (7,387)
------- -------
Net deferred tax asset..................................... $ 560 $ 550
======= =======
</TABLE>
At December 31, 1995 and 1994, the Company recorded deferred tax assets of
$7,508 and $7,937, respectively, and corresponding valuation allowances of
$6,948 and $7,387, respectively. The valuation allowances were decreased by
$439, $1,418 and $211 respectively, for the years ended December 31, 1995,
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.
While management believes that the total deferred tax asset will be fully
realized by future operating results, together with tax planning
opportunities, the uncertainty relating to the future tax effects of the
merger (Note 18), and a desire to be conservative make it appropriate to
record a valuation allowance.
F-16
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
At December 31, 1995, the Company's NOL carryforward for federal income tax
purposes is approximately $21,800, expiring between 2001 and 2007. NOL's
available for state income tax purposes are less than those for federal
purposes and generally expire earlier. Limitations will apply to the use of
NOL's in the event certain changes in Company ownership occur in the future
(Note 18).
NOTE 15-COMMITMENTS AND CONTINGENCIES:
Contingencies-The Company had been the provider of telecommunications
services at the Jacob K. Javitts 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. 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 in damages for which no
amounts have been provided in the accompanying consolidated financial
statements. Tel-A-Booth is in the process of liquidation in bankruptcy, and
its counsel has withdrawn without replacement. The Company has filed, and the
Court has issued, an order for dismissal of this case, which is expected to be
signed prior to April 15, 1996.
In December 1995, a suit was filed against the Company alleging a breach of
a letter agreement and seeking an amount in excess of $2,250 for a commission
allegedly owed in connection with the merger with FII (Note 18). The Company
denies that the claimant at any time was engaged in connection with the
merger. The Company filed an answer in January 1996, denying that any
commission is owed. This litigation is in the discovery process. While any
litigation contains an element of uncertainty, management is of the opinion
that the ultimate resolution of this matter should not have a material adverse
effect upon 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.
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 results of operations, cash flows or financial
position of the Company.
Commitments-The Company has entered into operating leases for the use of
office facilities and equipment, which expire through 2005. Certain of the
leases are subject to escalations for increases in real estate taxes and other
operating expenses. Rent expense amounted to approximately $2,200, $1,856 and
$1,700 for the years ended December 31, 1995, 1994 and 1993, respectively.
Aggregate approximate future minimum rental payments under these operating
leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
------------------------
<S> <C>
1996................................................................ $1,631
1997................................................................ 1,349
1998................................................................ 1,232
1999................................................................ 1,027
2000................................................................ 622
Thereafter.......................................................... 1,349
------
$7,210
======
</TABLE>
F-17
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
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 upon signing, $6 per
month retainer, and $150 upon the attainment of a specific financial ratio,
which as of December 31, 1995 had been attained. In addition, the consultant
was issued a three year warrant to purchase 300 shares of the Company's common
stock at a purchase price of $5.75 per share and a five year warrant to
purchase 250 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.
In connection with the Access acquisition, the Company assumed a certain
contract for telecommunications services requiring annual minimal usage of
approximately $4.5 million through October 1998.
In connection with the OTM acquisition, a standby letter of credit was
issued collateralizing a promissory note of $821 at December 31, 1995.
In November 1995, the Company entered into a three year consulting agreement
with a financial advisor requiring annual compensation of $250.
In December 1995, the Company granted options to employees of the Company,
STC, and certain members of the Board of Directors of the Company and STC, to
purchase an aggregate of 350 shares of STC common stock, held by the Company.
The options are exercisable for five years, at $2.50 per share.
NOTE 16-RELATED PARTY TRANSACTIONS:
As of December 31, 1993, the company paid approximately $288 of life
insurance premiums on behalf of the Company's president, which was to be
repaid from the proceeds of a $2,500 face value life insurance policy 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, 1995, the amount due to the Company for premiums paid
exceeded the cash surrender value of the policy by approximately $130.
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 17-UNAUDITED QUARTERLY INFORMATION:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1995
Revenues(A)...................... $10,816 $11,604 $12,095 $12,571
Gross margin(A).................. 4,131 4,458 4,827 4,798
Net income (loss)................ 285 1,597 192 (1,147)
Net income (loss) per common
share........................... 0.02 0.17 0.01 (0.14)
1994
Revenues......................... $ 7,896 $ 9,125 $14,493 $13,853
Gross margin..................... 3,469 4,222 5,833 5,671
Net income....................... 257 703 603 723
Net income per common share...... 0.03 0.11 0.07 0.06
</TABLE>
- --------
(A) Quarterly amounts adjusted to reflect equity method reporting for STC
F-18
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
NOTE 18-SUBSEQUENT EVENTS:
On March 13, 1996, the Company increased its authorized number of shares of
preferred stock $.01 par value and common stock $.004 par value, to 25,000 and
50,000, respectively.
On March 13, 1996, the Company's stockholders approved and the Company
consummated its merger with Fairchild Industries, Inc. ("FII"), following a
reorganization transferring all non-communication assets to its parent, RHI
Holding, Inc. ("RHI"). The Company changed its name to Shared Technologies
Fairchild Inc. ("STFI"). Under the merger agreement, STFI issued to RHI, 6,000
shares of common stock, 250 shares of convertible preferred stock with a
$25,000 liquidation preference and 20 shares of special preferred stock with a
$20,000 initial liquidation preference. In addition the Company raised in the
capital market approximately $111,000, after offering expenses, through the
issuance of 12 1/4% Senior Subordinated Notes Due 2006 and approximately
$125,000 (of an available $145,000) in loans from a credit facility with
financial institutions. The funds were used primarily for the retirement of
certain liabilities assumed from FII in connection with the merger, and the
retirement of the Company's existing credit facility. In connection with the
merger, the Company entered into two year employment agreements with key
employees for annual compensation aggregating $1,250, and adopted the 1996
Equity Incentive Plan. The merger will be accounted for using the purchase
method of accounting. The total purchase consideration of approximately
$69,000, will be allocated to the net tangible and intangible assets of FII
based upon their respective fair values. The allocation of the aggregate
purchase price included in the following pro forma financial statements is
preliminary, and does not reflect the immediate retirement of FII long-term
debt, FII Series A Preferred Stock, and FII Series C Preferred Stock, however,
the Company does not expect that the final allocation of the purchase price
will materially differ from the preliminary allocation that follows:
<TABLE>
<S> <C>
Assets
Accounts receivable.............................................. $ 23,036
Other current assets............................................. 2,773
Equipment........................................................ 51,010
Other assets..................................................... 7,184
Goodwill......................................................... 240,105
--------
Total Assets................................................... $324,108
========
Liabilities and stockholders' equity
Notes payable, current........................................... $ 514
Accounts payable................................................. 14,068
Accrued expenses................................................. 6,213
Accrued acquisition costs........................................ 7,000
Advance billings................................................. 3,581
Long term debt, less current portion............................. 180,501
Post retirement benefits......................................... 104
Stockholders' equity
FII Series A preferred stock..................................... 19,112
STFI Convertible preferred stock................................. 25,000
STFI special preferred stock..................................... 20,000
FII Series C preferred stock..................................... 24,015
STFI common stock................................................ 24,000
--------
Total liabilities and stockholders equity...................... $324,108
========
</TABLE>
F-19
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
The following unaudited pro forma statements of operations for 1995 and 1994
give effect to the merger, acquisitions of STI and FII prior to the merger,
the change of reporting of STC to the equity method and the pro forma effect
of STC acquisitions, as if they occurred on January 1 in each year:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Revenues................................................ $174,852 $175,247
Gross margin............................................ 78,491 71,185
Operating income........................................ 19,367 16,443
Gain on sale of subsidiary stock........................ 1,375
Equity in loss of subsidiary............................ (2,634) (1,696)
Interest expense, net................................... (26,983) (27,110)
Net loss................................................ $ (8,875) $(11,813)
======== ========
Net loss applicable to common stock..................... $(12,778) $(15,851)
======== ========
Net loss per share...................................... $ (.88) $ (1.15)
======== ========
Weighted average number of common shares outstanding.... 14,482 13,753
======== ========
</TABLE>
F-20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Fairchild Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Fairchild
Industries, Inc. (a Delaware corporation) and subsidiaries as of June 30, 1994
and 1995, and the related consolidated statements of earnings, stockholders'
equity and cash flows for the years ended June 30, 1993, 1994 and 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fairchild Industries, Inc.
and subsidiaries as of June 30, 1994 and 1995 and the results of their
operations and their cash flows for the years ended June 30, 1993, 1994, and
1995, in conformity with generally accepted accounting principles.
As discussed in Notes 5 and 6 to the consolidated financial statements,
effective July 1, 1993, the Company changed its method of accounting for
postretirement benefits other than pensions, and income taxes.
ARTHUR ANDERSEN LLP
Washington, D.C.
September 15, 1995
F-21
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1994 1995
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 2,468 $ 2,412
Accounts receivable-trade, less allowances of $2,135 and
$4,478..................................................... 68,364 84,927
Inventories:
Finished goods............................................ 46,358 50,963
Work-in-process........................................... 28,418 19,976
Raw materials............................................. 10,120 17,866
-------- --------
84,896 88,805
Prepaid expenses and other current assets................... 29,353 15,239
-------- --------
Total Current Assets.................................... 185,081 191,383
Property, plant and equipment, net.......................... 157,301 158,191
Net assets held for sale.................................... 34,515 34,811
Cost in excess of net assets acquired, (goodwill) less
accumulated amortization of $28,864 and $34,707............ 195,929 195,986
Deferred loan costs......................................... 7,820 5,648
Prepaid pension assets...................................... 17,795 15,336
Other assets................................................ 19,035 14,433
-------- --------
Total Assets............................................ $617,476 $615,788
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-22
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1994 1995
--------- ---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank notes payable and current maturities of long-term
debt.................................................... $ 12,735 $ 15,352
Accounts payable......................................... 32,372 39,124
Due to affiliated companies.............................. 52,250 13,759
Accrued liabilities:
Wages, salaries and commissions........................ 13,527 14,655
Employee benefit plans................................. 2,015 1,352
Insurance.............................................. 13,662 15,150
Interest............................................... 6,836 6,647
Other.................................................. 28,311 28,002
--------- ---------
64,351 65,806
Total Current Liabilities............................ 161,708 134,041
Long-term debt........................................... 224,132 249,306
Retiree health care liabilities.......................... 49,200 47,567
Noncurrent income taxes.................................. 26,576 18,049
Other long-term liabilities.............................. 16,412 13,179
--------- ---------
Total liabilities.................................... 478,028 462,142
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
Stockholders' Equity:
Series B Preferred Stock, without par value, 3,000 shares
authorized, 2,025 and 2,278 issued and outstanding;
liquidation value of $100,000 per share................. 202,500 227,800
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
Common Stockholder's Equity:
Common stock, par value of $100.00 per share, 1,400
shares authorized, issued, and outstanding.............. 140 140
Paid-in capital.......................................... 2,390 2,523
Accumulated deficit...................................... (111,855) (128,116)
Cumulative translation adjustment........................ 3,146 8,172
--------- ---------
Total Common Stockholder's Deficit................... (106,179) (117,281)
--------- ---------
Total Stockholders' Equity........................... 120,336 134,534
--------- ---------
Total Liabilities and Stockholders' Equity........... $ 617,476 $ 615,788
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-23
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Sales...................................... $ 463,567 $ 444,145 $ 508,612
Other income, net.......................... 5,666 544 2,908
--------- --------- ---------
469,233 444,689 511,520
Costs and Expenses:
Cost of sales.............................. 351,074 337,881 392,802
Selling, general & administrative.......... 74,228 72,601 85,383
Research and development................... 3,262 3,940 4,100
Amortization of goodwill................... 5,838 5,806 5,842
Restructuring.............................. 15,469 18,860 --
Unusual items.............................. -- 6,000 --
--------- --------- ---------
449,871 445,088 488,127
Operating income (loss)...................... 19,362 (399) 23,393
Interest expense............................. 32,821 30,667 35,284
Interest income.............................. (459) (311) (184)
--------- --------- ---------
Net interest expense......................... 32,362 30,356 35,100
Investment income............................ 1,424 3,354 924
Equity in earnings of affiliates............. 522 541 762
Minority interest............................ (129) (181) (121)
--------- --------- ---------
Loss from continuing operations before
taxes....................................... (11,183) (27,041) (10,142)
Income tax provision (benefit)............... 264 (4,792) 2,017
--------- --------- ---------
Net loss from continuing operations.......... (11,447) (22,249) (12,159)
Loss on disposal of discontinued operations,
net......................................... -- -- (200)
--------- --------- ---------
Net loss before extraordinary items and
changes in accounting principles............ (11,447) (22,249) (12,359)
Extraordinary items, net..................... (810) -- --
Cumulative effect of change in accounting for
postretirement benefits, net................ -- (252) --
Cumulative effect of change in accounting for
income taxes, net........................... -- (11,486) --
--------- --------- ---------
Net loss..................................... $ (12,257) $ (33,987) $ (12,359)
========= ========= =========
Series A preferred dividends................. $ 1,713 $ 1,529 $ 1,529
Series C preferred dividends................. 2,160 2,373 2,373
--------- --------- ---------
Loss after preferred dividends............... $ (16,130) $ (37,889) $ (16,261)
========= ========= =========
Dividends to RHI Holdings, Inc. (Parent)..... $ 50,000 $ -- $ --
========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-24
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES B SERIES C CUMULATIVE
COMMON PREFERRED PREFERRED PAID-IN ACCUMULATED TRANSLATION
STOCK STOCK STOCK CAPITAL DEFICIT ADJUSTMENT TOTAL
------ --------- --------- ------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1992.. $140 $192,600 $ -- $2,230 $ (6,985) $ 6,169 $194,154
Net loss................ -- -- -- -- (12,257) -- (12,257)
Issuance of Series B
preferred stock to
parent................. -- 5,000 -- -- -- -- 5,000
Exchange of Series A
preferred stock for
issuance of Series C
preferred stock........ -- -- 24,015 -- -- -- 24,015
Cash dividends to
preferred
stockholders........... -- -- -- -- (3,873) -- (3,873)
Cash dividends to
parent................. -- -- -- -- (50,000) -- (50,000)
Cumulative translation
adjustment, net........ -- -- -- -- -- (3,503) (3,503)
---- -------- ------- ------ --------- ------- --------
BALANCE, June 30, 1993.. $140 $197,600 $24,015 $2,230 $ (73,115) $ 2,666 $153,536
Net loss................ -- -- -- -- (33,987) -- (33,987)
Issuance of Series B
preferred stock to
parent................. -- 4,900 -- 143 -- -- 5,043
Transfer of subsidiary
from parent............ -- -- -- 17 (851) -- (834)
Cash dividends to
preferred
stockholders........... -- -- -- -- (3,902) -- (3,902)
Cumulative translation
adjustment, net........ -- -- -- -- -- 480 480
---- -------- ------- ------ --------- ------- --------
BALANCE, June 30, 1994.. $140 $202,500 $24,015 $2,390 $(111,855) $ 3,146 $120,336
Net loss................ -- -- -- -- (12,359) -- (12,359)
Issuance of Series B
preferred stock to
parent................. -- 25,300 -- 88 -- -- 25,388
Transfer of pension plan
from parent............ -- -- -- 45 -- -- 45
Cash dividends to
preferred
stockholders........... -- -- -- -- (3,902) -- (3,902)
Cumulative translation
adjustment, net........ -- -- -- -- -- 5,026 5,026
---- -------- ------- ------ --------- ------- --------
BALANCE, June 30, 1995.. $140 $227,800 $24,015 $2,523 $(128,116) $ 8,172 $134,534
==== ======== ======= ====== ========= ======= ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-25
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
------------------------------
1993 1994 1995
--------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $ (12,257) $ (33,987) $(12,359)
Adjustments to reconcile net loss:
Cumulative effect of accounting changes,
net......................................... -- 11,738 --
Depreciation and amortization................ 30,477 32,295 35,172
Accretion of discount on long-term
liabilities................................. 2,205 3,070 3,311
Undistributed earnings of affiliates......... (266) (230) (450)
Provision for restructuring and unusual items
(excluding cash payments of $7,896 in 1993
and $6,020 in 1994)......................... 7,573 18,840 --
Minority interest............................ 129 181 121
Loss on sale of property, plant and
equipment................................... 2,364 583 726
Change in accounts receivable................ 6,942 (2,114) (16,563)
Change in inventories........................ 9,444 4,246 (3,696)
Change in other current assets............... (11,896) (10,063) 9,545
Change in other non-current assets........... (5,899) 387 3,538
Change in accounts payable, accrued and other
liabilities................................. (17,295) (11,772) (4,062)
--------- --------- --------
Net cash provided by operating activities...... 11,521 13,174 15,283
--------- --------- --------
Cash flows from investing activities:
Acquisitions, net of cash acquired........... (7,313) -- (11,550)
Collections on notes and other receivables
related to operations sold.................. 218 1,183 --
Purchases of property, plant and equipment... (15,508) (16,092) (19,779)
Proceeds from sales of property, plant and
equipment................................... 975 1,351 1,787
Change in net assets held for sale........... 2,015 (1,291) 1,914
--------- --------- --------
Net cash used for investing activities......... (19,613) (14,849) (27,628)
--------- --------- --------
Cash flows from financing activities:
Proceeds from issuance of debt............... 180,942 106,960 72,117
Debt repayments and repurchase of debentures,
net......................................... (125,072) (103,951) (82,817)
Issuance of Series B preferred stock......... 5,000 4,000 24,400
Issuance of Series C preferred stock......... 24,015 -- --
Purchase/exchange of Series A preferred
stock....................................... (25,126) -- --
Paid-in capital contribution................. -- 143 88
Payment of dividends......................... (53,782) (3,902) (3,902)
--------- --------- --------
Net cash provided by financing activities...... 5,977 3,250 9,886
--------- --------- --------
Effect of exchange rate changes on cash........ (2,900) 893 2,403
Net increase (decrease) in cash and cash
equivalents................................... (5,015) 2,468 (56)
Cash and cash equivalents, beginning of year... 5,015 -- 2,468
--------- --------- --------
Cash and cash equivalents, end of year......... $ -- $ 2,468 $ 2,412
========= ========= ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-26
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Corporate Structure: Fairchild Industries, Inc. is incorporated in the State
of Delaware. As used herein, the term "Company" refers to Fairchild
Industries, Inc. and its subsidiaries unless otherwise indicated. The Company
is a subsidiary of RHI Holdings, Inc. ("RHI") which is in turn a wholly-owned
subsidiary of The Fairchild Corporation ("TFC"). The Company conducts its
operations through its wholly-owned subsidiary VSI Corporation ("VSI").
Fiscal Year: The fiscal year ("Fiscal") of the Company ends on June 30. All
references herein to "1993", "1994", and "1995" mean the fiscal years ended
June 30, 1993, 1994 and 1995, 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. On June 30, 1995, approximately
$1,620,000 of the Company's $(128,116,000) accumulated deficit were from
undistributed earnings of 50 percent or less owned affiliates.
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. Total cash disbursements
made by the Company for income taxes and interest were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest............................................. $19,129 $25,050 $29,898
Income taxes......................................... 1,171 270 1,867
</TABLE>
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:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Last-in, first-out (LIFO).................................. $69,828 $69,211
First-in, first-out (FIFO)................................. 15,068 19,594
------- -------
Total inventories.......................................... $84,896 $88,805
======= =======
</TABLE>
For inventories valued on the LIFO method, the excess of current FIFO value
over stated LIFO value was approximately $7,924,000 and $7,447,000 at June 30,
1994 and 1995, respectively. The LIFO decrement was immaterial for Fiscal
1995.
F-27
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Properties and Depreciation: Properties are stated at cost and depreciated
over estimated useful lives, generally on a straight-line basis. For Federal
income tax purposes, accelerated depreciation methods are used. No interest
costs were capitalized in any of the years presented. Property, plant, and
equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1994 1995
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land.................................................... $ 14,229 $ 14,022
Buildings and improvements.............................. 32,937 33,353
Machinery and equipment................................. 183,693 208,475
Transportation vehicles................................. 529 513
Furniture and fixtures.................................. 5,118 8,025
Construction in progress................................ 6,358 4,419
-------- ---------
242,864 268,807
Less: Accumulated depreciation.......................... (85,563) (110,616)
-------- ---------
Net property, plant, and equipment...................... $157,301 $ 158,191
======== =========
</TABLE>
Amortization of Goodwill: The excess of 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 was $1,895,000, $2,201,000 and $2,259,000, for Fiscal
1993, 1994 and 1995, 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
F-28
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 1993,
1994 and 1995.
Research and Development: Company-sponsored research and development
expenditures are expensed as incurred.
Reclassification: Certain amounts in prior years' financial statements have
been reclassified to conform to the Fiscal 1995 presentation.
2. ACQUISITIONS
In Fiscal 1993, Fairchild Communications Services Company ("Fairchild
Communications"), a partnership whose partners are indirect subsidiaries of
the Company, acquired all the telecommunication assets of Office Networks,
Inc. for approximately $7,300,000.
On November 28, 1994, Fairchild Communications 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.
Pro forma financial statements are not required for these acquisitions on an
individual basis.
3. NET ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
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 1994 and Fiscal 1995 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 and an 88 acre parcel of real estate located in
Farmingdale, New York, which the Company plans to sell, lease or develop,
subject to the resolution of certain environmental matters and market
conditions, and a limited partnership interest in a real estate development
joint venture.
Net assets held for sale are recorded at estimated net realizable values,
which reflect anticipated sales proceeds and other carrying costs to be
incurred during the holding period. Interest is not allocated to net assets
held for sale.
The Company recorded a $200,000 after tax loss on disposal of discontinued
operations, relating to workers' compensation claims from employees of
operations which were previously discontinued.
F-29
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. NOTES PAYABLE AND LONG-TERM DEBT
At June 30, 1994 and 1995, notes payable and long-term debt consisted of the
following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Short-term notes payable (weighted average interest rates
of 8.5% and 8.2% in 1994 and 1995, respectively)......... $ 3,592 $ 5,348
======== ========
Bank credit agreement..................................... $ 97,315 $126,396
9.75% Subordinated Debentures, due annually 1996 through
1998..................................................... 3,998 2,999
12.25% Senior secured notes due 1999...................... 125,000 125,000
10.65% Industrial revenue bonds........................... 1,500 1,500
Capital lease obligations, interest from 5.85% to 15.50%
(see Note 13)............................................ 3,302 1,253
Other notes payable, collateralized by property or
equipment, interest from 5.50% to 10.65%................. 2,160 2,162
-------- --------
233,275 259,310
Less: Current maturities.................................. 9,143 10,004
-------- --------
$224,132 $249,306
======== ========
</TABLE>
The Company maintains a credit agreement (the "Credit Agreement") with a
consortium of banks, which provides a revolving credit facility and term loans
(collectively the "Credit Facilities"). The Credit Facilities generally bear
interest at 3.75% over the London Interbank Offer Rate ("LIBOR") for the
revolving credit facility and Term Loan VIII, and at 2.75% over LIBOR for Term
Loan VII, respectively. The commitment fee on the unused portion of the
revolving credit facility was 1.0% at June 30, 1995. The Credit Facilities
mature March 31, 1997 and are secured by substantially all the Company's
assets.
The following table summarizes the Credit Facilities under the Credit
Agreement.
<TABLE>
<CAPTION>
OUTSTANDING TOTAL
AS OF AVAILABLE
JUNE 30, 1995 FACILITIES
------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Revolving Credit Facility(a)........................ $ 34,700 $ 50,250
Term Loan VII....................................... 49,696 49,696
Term Loan VIII...................................... 42,000 42,000
-------- --------
$126,396 $141,946
======== ========
</TABLE>
- --------
(a) In the first quarter of Fiscal 1995, the revolving credit facility 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%.
On June 30, 1995, the Company had outstanding letters of credit of
$7,554,000 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 $7,996,000 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.
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.
F-30
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. To
comply with the minimum EBITDA Covenant requirements (as amended), the
Company's subsidiary, VSI Corporation ("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 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, 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.
VSI's 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 RHI. 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. The
Company's sale of property, plant, and equipment is limited during the
remaining term of the Credit Agreement.
Any available cash may be paid as dividends to RHI if the purpose of such
dividends is to provide TFC with funds necessary to meet its debt service
requirements under specified notes and debentures. All other dividends to RHI
are subject to certain limitations under the Credit Agreement. As of June 30,
1995, the Company was unable to provide dividends to RHI. The Credit Agreement
also restricts all additional borrowings under the Credit Facilities for the
payment of any dividends.
The indenture, covering the Company's 9.75% subordinated debentures, places
restrictions on payment of dividends and the creation of additional debt of
equal priority with the debentures. The Company is in compliance with these
restrictions at June 30, 1995.
Annual maturities of long-term debt obligations (exclusive of capital lease
obligations) for each of the five years following June 30, 1995 are as
follows: $14,338,000 for 1996, $121,231,000 for 1997, $1,001,000 for 1998,
$125,056,000 for 1999, and $56,000 for 2000.
5. PENSIONS AND POSTRETIREMENT BENEFITS
Pensions
The Company has established defined benefit pension plans covering
substantially all employees. 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 for the
plans is to contribute each year the minimum amount required under the
Employee Retirement Income Security Act of 1974.
F-31
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table provides a summary of the components of net periodic
pension cost for the plans:
<TABLE>
<CAPTION>
1993 1994 1995
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost of benefits earned during the
period...................................... $ 4,183 $ 3,827 $ 3,917
Interest cost of projected benefit
obligation.................................. 5,479 5,665 5,784
Return on plan assets........................ (13,397) (41) (10,102)
Net amortization and deferral................ 6,939 (7,407) 3,248
Amortization of prior service cost........... 111 125 81
-------- ------- --------
Net periodic pension cost.................... 3,315 2,169 2,928
Early retirement payout...................... 817 758 414
-------- ------- --------
Total pension cost......................... $ 4,132 $ 2,927 $ 3,342
======== ======= ========
</TABLE>
Assumptions used in accounting for the plans were:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Discount Rate.............................................. 8.5% 8.5% 8.5%
Expected rate of increase in salaries...................... 4.5% 4.5% 4.5%
Expected long term rate of return on plan assets........... 9.0% 9.0% 9.0%
</TABLE>
The following table sets forth the funded status and amounts recognized in
the Company's consolidated balance sheets at June 30, 1994 and 1995 for its
defined benefit pension plans:
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Projected benefit obligation:
Vested benefit obligation............................... $60,372 $72,636
Non-vested benefits..................................... 4,908 3,880
------- -------
Accumulated benefit obligation.......................... $65,280 $76,516
======= =======
Projected benefit obligation............................ $69,697 $82,331
Plan assets at fair value............................... 75,904 86,916
------- -------
Plan assets in excess of projected benefit obligations.... 6,207 4,585
Unrecognized net loss..................................... 16,823 16,310
Unrecognized prior service cost........................... 406 329
------- -------
Prepaid pension cost prior to SFAS 109 implementation..... $23,436 $21,224
Effect of SFAS 109 implementation......................... (5,641) (5,888)
------- -------
Prepaid pension cost...................................... $17,795 $15,336
======= =======
</TABLE>
All of the Company's defined benefit plans have assets in excess of
accumulated benefit obligations.
Plan assets include Class A common stock of The Fairchild Corporation of
$3,172,000 and $2,763,000 at June 30, 1994 and 1995, respectively.
Substantially all of the plan assets are invested in listed stocks and bonds.
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
F-32
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 No.
106. The unamortized portion of the overstated liability for discontinued
operations was $10,652,000, 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 from the cumulative effect of this accounting change was $252,000,
net of tax.
The Company provides health care benefits for most retired employees.
Postretirement health care expense from continuing operations totaled
$1,366,000, $1,948,000, and $1,385,000 for the years ended June 30, 1993, 1994
and 1995, respectively. The Company has accrued approximately $33,397,000 and
$31,998,000 as of June 30, 1994 and 1995, 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 $4,866,000, $2,849,000 and $3,068,000 for the years ended June 30,
1993, 1994 and 1995, respectively. The components of expense for continuing
operations and discontinued operations combined in 1994 and 1995 are as
follows:
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Service cost of benefits earned............................ $ 437 $ 318
Interest cost on liabilities............................... 4,364 4,258
Net amortization and deferral.............................. (4) (123)
------- -------
Net periodic postretirement benefit cost................... $ 4,797 $ 4,453
======= =======
</TABLE>
The following table sets forth the funded status for the Company's
postretirement health care benefit plan at June 30, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligations:
Retirees................................................. $46,881 $44,494
Fully eligible active participants....................... 497 531
Other active participants................................ 4,962 5,738
------- -------
Accumulated postretirement benefit obligation.............. 52,340 50,763
Unrecognized net loss...................................... (427) (527)
------- -------
Accrued postretirement benefit cost........................ $51,913 $50,236
======= =======
</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 $2,353,000, and increase net periodic postretirement benefit
cost by approximately $260,000 for Fiscal 1995.
F-33
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 have not
been restated. The Company elected the immediate recognition method and
recorded a $11,486,000 charge, in Fiscal 1994, representing the prior years'
cumulative effect. This charge represents deferred taxes that had to be
recorded related primarily to fixed assets, prepaid pension expense, and
inventory basis differences.
The provision (benefit) for income taxes from continuing operations is
summarized as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Continuing operations:
Current:
Federal......................................... $(3,059) $(9,355) $ 4,443
State........................................... 1,002 635 1,588
Foreign......................................... 1,335 158 1,767
------- ------- -------
(722) (8,562) 7,798
Deferred:
Federal......................................... 960 3,528 (5,947)
State........................................... 26 242 166
------- ------- -------
986 3,770 (5,781)
------- ------- -------
Net tax provision (benefit)....................... $ 264 $(4,792) $ 2,017
======= ======= =======
</TABLE>
The income tax provision for continuing operations differs from that
computed using the statutory Federal income tax rate of 34.0% in 1993 and
35.0% in 1994 and 1995 for the following reasons:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed statutory amount....................... $(3,802) $(9,465) $(3,549)
State income taxes, net of applicable Federal
tax benefit.................................... 678 655 1,199
Foreign Sales Corporation benefits.............. (340) (350) --
Nondeductible acquisition valuation items....... 1,136 4,356 1,918
Tax on foreign earnings, net of tax credits..... 2,956 138 2,638
Other........................................... (364) (126) (189)
------- ------- -------
$ 264 $(4,792) $ 2,017
======= ======= =======
</TABLE>
F-34
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table is a summary of the significant components of the
Company's deferred tax assets and liabilities as of June 30, 1994 and 1995:
<TABLE>
<CAPTION>
1995 1995
DEFERRED DEFERRED
JUNE 30, (PROVISION) JUNE 30, (PROVISION)
1994 BENEFIT 1995 BENEFIT
-------- ----------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deferred tax assets:
Accrued expenses............. $ 8,774 $ 1,454 $ 5,914 $(2,860)
Asset basis differences...... 64 (1,133) 10 (54)
Employee compensation and
benefits.................... 4,985 (837) 5,200 215
Environmental reserves....... 4,239 (464) 3,329 (910)
Credit carryforwards......... 2,891 -- 2,891 --
Postretirement benefits...... 19,160 (231) 19,712 552
Other........................ 1,518 (3,789) 2,061 543
-------- ------- -------- -------
41,631 (5,000) 39,117 (2,514)
Deferred tax liabilities:
Asset basis differences...... (42,186) (8) (38,148) 4,038
Inventory.................... (9,870) 1,310 (6,473) 3,397
Pensions..................... (5,169) 1,184 (4,230) 939
Other........................ (1,609) (121) (1,688) (79)
-------- ------- -------- -------
(58,834) 2,365 (50,539) 8,295
-------- ------- -------- -------
(17,203) (2,635) (11,422) 5,781
Less amount related to
accounting change............. -- 1,135 -- --
-------- ------- -------- -------
Net deferred tax liability..... $(17,203) $(3,770) $(11,422) $ 5,781
======== ======= ======== =======
The amounts included in the
balance sheet are as follows:
Prepaid expenses and other
current assets:
Current deferred............. $ 5,367 $ 7,642
Taxes receivable (payable)... 6,419 (1,438)
-------- --------
$ 11,786 $ 6,204
======== ========
Other assets:
Taxes receivable............. $ 2,873 $ --
======== ========
Noncurrent income tax
liabilities (assets):
Noncurrent deferred.......... $ 22,570 $ 19,064
Other noncurrent............. 4,006 (1,015)
-------- --------
$ 26,576 $ 18,049
======== ========
</TABLE>
F-35
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For Fiscal 1993 prior to the change in the method of accounting for taxes,
the deferred income tax component of the income tax provision for continuing
operations consists of the effect of timing differences related to:
<TABLE>
<CAPTION>
1993
--------------
(IN THOUSANDS)
<S> <C>
Compensation and other wage related........................... $ 813
Pension expense and reversion................................. 200
Depreciation.................................................. 2,839
Other......................................................... (2,866)
-------
$ 986
=======
</TABLE>
Domestic income taxes, less allowable 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 that 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 is not significant.
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.
7. REDEEMABLE PREFERRED STOCK
The Series A Preferred Stock is subject to annual mandatory redemptions of
165,564 shares per annum at $45.00 per share and annual dividend payments of
$3.60 per share. In addition, the Company has the option of redeeming any or
all shares at $45.00 per share. The Company announced on August 30, 1989, that
the Board of Directors authorized expenditure of up to $25,000,000 for
additional early redemption of these shares as market conditions permit. 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
3,000 shares of Series B Preferred Stock were authorized, 2,025 and 2,278
shares were issued and outstanding at June 30, 1994 and 1995, respectively.
All of which is owned by the Company's parent, RHI.
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
F-36
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 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 redeemable preferred stock of the Company, 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, 1994 and June 30, 1995 are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1994 JUNE 30, 1995
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents.............. $ 2,468 $ 2,468 $ 2,412 $ 2,412
Investment Securities:
Long-term limited partnership........ 3,396 4,299 -- --
Notes receivable-current............... 1,275 1,229 -- --
Short-term debt........................ 3,592 3,592 5,348 5,348
Long-term debt:
Bank Credit Agreement................ 97,315 97,315 126,396 126,396
Subordinated debentures and senior
notes............................... 128,998 128,428 127,999 128,681
Industrial revenue bonds............. 1,500 1,500 1,500 1,500
Capitalized leases................... 3,302 3,302 1,253 1,253
Other................................ 2,160 2,160 2,162 2,162
Redeemable preferred stock............. 19,112 15,608 19,112 15,714
</TABLE>
F-37
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. RESTRUCTURING CHARGES
In Fiscal 1993 and 1994, 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.
<TABLE>
<CAPTION>
SIGNIFICANT COMPONENTS 1993 1994
---------------------- ------- -------
(IN THOUSANDS)
<S> <C> <C>
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)............................. 540 2,634
Write down of fixed assets related to discontinued product
lines..................................................... 3,465 3,000
Severance benefits for terminated employees (substantially
all paid within twelve months)............................ 4,213 471
Plant closings facility costs(b)........................... 3,164 851
Relocation of business from closed plant in New Jersey to
California(c)............................................. 1,884 1,795
Contract termination claims................................ -- 128
Lease penalty for closed plant............................. 388 --
Other(d)................................................... 1,815 3,022
------- -------
$15,469 $18,860
======= =======
</TABLE>
- --------
(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.
11. 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 Fiscal 1994, and
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 in the Aerospace Fasteners segment 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 the damaged real estate which is included in net
assets held for sale.
F-38
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. RELATED PARTY TRANSACTIONS
The Company's corporate staff performs work for each of the three corporate
entities. Corporate administrative expense incurred by the Company is invoiced
to RHI and to TFC on a monthly basis and represents the estimated cost of
services performed on behalf of such companies by the Company. The estimated
cost is based primarily on estimated hours spent by corporate employees on
functions related to RHI and to TFC. In addition, TFC bills the Company for
services performed by TFC on behalf 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 the
parent. The Company makes payments to the parent based on the amounts of
federal income taxes, if any, it would have paid had it filed a separate
federal income tax return.
The Aerospace Fasteners segment had sales to Banner Aerospace, Inc. a 47.2%
affiliate of RHI, of $8,750,000, $5,680,000 and $5,494,000 for the years ended
June 30, 1993, 1994 and 1995, respectively.
13. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain of its facilities and equipment under capital and
operating leases. The following is an analysis of the assets under capital
leases included in property, plant and equipment:
<TABLE>
<CAPTION>
JUNE 30,
DESCRIPTION 1995
----------- --------------
(IN THOUSANDS)
<S> <C>
Buildings and improvements.................................... $ 422
Machinery and equipment....................................... 12,688
Furniture and fixtures........................................ 297
Less: Accumulated depreciation................................ (7,167)
-------
$ 6,240
=======
</TABLE>
Future minimum lease payments:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
1996.................................................. $ 8,131 $1,109
1997.................................................. 7,302 244
1998.................................................. 7,278 8
1999.................................................. 6,771 --
2000.................................................. 7,253 --
------- ------
$36,735 1,361
======
Less: Amount representing interest.................... (108)
------
Present value of capital lease obligations............ $1,253
======
</TABLE>
Rental expense under all leases amounted to $9,575,000, $7,193,000 and
$10,811,000 for the years ended June 30, 1993, 1994 and 1995, 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
F-39
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 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
pension plans, and (ii) pension costs upon the closing of segments of the
Company's business. The ACO has directed the Company to prepare cost impact
proposals relating to such plan terminations and segment closings and,
following receipt of such cost impact proposals, may seek adjustments to
contract prices. The ACO alleges that substantial amounts will be due if such
adjustments are made. The Company believes it has properly accounted for the
asset reversions in accordance with applicable accounting standards. The
Company has entered into discussions with the government to attempt to resolve
these pension accounting issues.
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 referred to above totalled $8,601,000. As of
June 30, 1995, the estimated probable exposures for these matters was
$8,580,000. It is reasonalby possible the Company's total exposure for these
matters could be approximately $15,778,000.
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.
F-40
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. BUSINESS SEGMENTS
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
primarily engaged in the manufacture of tooling and injection control systems
for the plastic injection molding and die casting industries and the supply of
modems for use in high speed digitized voice and data communications. 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 and short-term investments, notes receivable, assets held for sale, and
property maintained for general corporate purposes.
The Company's financial data by business segment is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales by Business Segment:
Aerospace Fasteners........................ $247,080 $203,456 $219,129
Industrial Products(a)..................... 148,449 166,499 180,773
Communications Services.................... 68,038 74,190 108,710
-------- -------- --------
Total Segment Sales...................... $463,567 $444,145 $508,612
======== ======== ========
Operating Income (Loss) Segment:
Aerospace Fasteners(b)..................... $(15,398) $(32,208) $(14,073)
Industrial Products(a)..................... 19,081 21,024 23,625
Communications Services.................... 14,688 16,483 18,498
-------- -------- --------
Total Segment Operating Income........... 18,371 5,299 28,050
Corporate administrative expense........... (3,260) (3,638) (5,203)
Other corporate income (expense)........... 4,251 (2,060) 546
-------- -------- --------
Total Consolidated Operating Income
(loss).................................. $ 19,362 $ (399) $ 23,393
======== ======== ========
Capital Expenditures:
Aerospace Fasteners........................ $ 5,711 $ 4,320 $ 4,974
Industrial Products........................ 4,002 3,997 4,440
Communications Services.................... 5,792 7,775 10,349
Corporate and Other........................ 3 -- 16
-------- -------- --------
Total Capital Expenditures............... $ 15,508 $ 16,092 $ 19,779
======== ======== ========
Depreciation and Amortization:
Aerospace Fasteners........................ $ 14,280 $ 14,373 $ 15,619
Industrial Products........................ 6,154 6,765 6,962
Communications Services.................... 7,936 8,948 10,329
Corporate and Other........................ 2,107 2,209 2,262
-------- -------- --------
Total Depreciation and Amortization...... $ 30,477 $ 32,295 $ 35,172
======== ======== ========
</TABLE>
F-41
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Identifiable Assets at June 30,:
Aerospace Fasteners............................ $337,185 $306,008 $290,465
Industrial Products............................ 146,754 147,910 152,697
Communications Services........................ 78,752 79,087 108,666
Corporate and Other............................ 77,319 84,471 63,960
-------- -------- --------
Total Identifiable Assets.................... $640,010 $617,476 $615,788
======== ======== ========
</TABLE>
- --------
(a) Included in Fiscal 1994 and 1995 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 results was immaterial.
(b) Includes charges to reflect the cost of restructuring of $15,469,000 and
$18,860,000 in Fiscal 1993 and 1994, respectively, and an unusual loss
from earthquake damage and related business interruption of $4,000,000 in
Fiscal 1994.
15. FOREIGN OPERATIONS AND EXPORT SALES
The Company's operations are located primarily in the United States and
Europe. Interarea sales are not significant to the total sales of any
geographic area. The Company's financial data by geographic area is as
follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales by Geographic Area
United States................................ $369,343 $358,614 $402,414
Europe....................................... 85,479 76,366 95,420
Other........................................ 8,745 9,165 10,778
-------- -------- --------
Total Sales................................ $463,567 $444,145 $508,612
======== ======== ========
Operating Income by Geographic Area
United States................................ $ 15,390 $ (1,011) $ 24,639
Europe....................................... 2,034 5,847 2,107
Other........................................ 947 463 1,304
-------- -------- --------
Total Segment Operating Income............. $ 18,371 $ 5,299 $ 28,050
======== ======== ========
Identifiable Assets by Geographic Area at June
30:
United States................................ $479,751 $454,635 $473,269
Europe....................................... 78,176 73,809 79,029
Other........................................ 4,764 4,561 9,465
Corporate and Other.......................... 77,319 84,471 54,025
-------- -------- --------
Total Identifiable Assets.................. $640,010 $617,476 $615,788
======== ======== ========
</TABLE>
F-42
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Export sales are defined as sales to customers in foreign countries by the
Company's domestic operations. Export sales amounted to the following:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Export Sales
Europe............................................. $15,297 $12,692 $16,547
Other.............................................. 13,546 16,593 17,031
------- ------- -------
Total Export Sales............................... $28,843 $29,285 $33,578
======= ======= =======
</TABLE>
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1994:
Sales............................ $110,491 $108,830 $112,836 $111,988
Gross profit..................... 22,962 25,875 27,138 30,289
Loss from continuing operations.. (4,528) (5,960) (2,416) (9,345)
Cumulative effect of change in
accounting for postretirement
benefits, net................... (252) -- -- --
Cumulative effect of change in
accounting for income taxes,
net............................. (11,486) -- -- --
Net loss......................... (16,266) (5,960) (2,416) (9,345)
1995:
Sales............................ $114,562 $119,921 $138,912 $135,217
Gross profit..................... 30,176 26,800 31,994 26,840
Earnings (loss) from continuing
operations...................... 307 (1,906) (2,439) (8,121)
Loss on disposal of discontinued
operations...................... -- -- (200) --
Net earnings (loss).............. 307 (1,906) (2,639) (8,121)
</TABLE>
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 quarters of Fiscal 1994, of $3,200,000 and $2,800,000, 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. Net earnings (loss) from continuing operations in the fourth quarter
of Fiscal 1995, include adjustments to inventories and receivables of the
Company's Aerospace Fasteners Segment, to reflect required valuation
allowances against these assets.
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.
F-43
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1995
------------ --------
(UNAUDITED) (*)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................ $ 6,329 $ 2,412
Accounts receivable-trade, less allowances of $2,322 and
$2,839.................................................. 60,425 56,766
Inventories:
Finished goods......................................... 41,170 35,975
Work-in-process........................................ 13,130 12,222
Raw materials.......................................... 13,667 13,963
-------- --------
67,967 62,160
Prepaid expenses and other current assets................ 8,136 13,874
Net current assets of discontinued operations............ 34,609 34,626
-------- --------
Total Current Assets................................. 177,466 169,838
Property, plant and equipment, net of accumulated
depreciation of $93,372 and $84,331..................... 116,427 120,205
Net assets held for sale................................. 35,697 34,811
Net noncurrent assets of discontinued operations......... 85,577 88,209
Cost in excess of net assets acquired, (Goodwill) less
accumulated amortization of $27,179 and $25,047......... 138,456 140,322
Prepaid pension assets................................... 13,615 15,336
Other assets............................................. 15,524 15,479
-------- --------
Total Assets......................................... $582,762 $584,200
======== ========
</TABLE>
- --------
* Condensed and restated for discontinued operations (see Note 3) from audited
financial statements.
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
F-44
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1995
------------ ---------
(UNAUDITED) (*)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank notes payable and current maturities of long-term
debt.................................................. $ 74,598 $ 15,352
Accounts payable....................................... 26,444 29,322
Due to affiliated companies............................ 23,405 13,759
Other accrued liabilities.............................. 50,962 54,062
--------- ---------
Total Current Liabilities.......................... 175,409 112,496
Long-term debt, less current maturities................ 188,427 249,306
Other long-term liabilities............................ 12,241 12,763
Retiree health care liabilities........................ 42,310 42,803
Noncurrent income taxes................................ 17,884 18,049
--------- ---------
Total Liabilities.................................. 436,271 435,417
Redeemable Preferred Stock: $3.60
Cumulative Series A Convertible preferred stock,
without par value, 370,901 and 424,701 shares
authorized, issued and outstanding at redemption value
of $45.00 per share................................... 16,691 19,112
Stockholders' Equity:
Series B preferred stock, without par value, 3,000
shares authorized, 2,302 and 2,278 issued and
outstanding; liquidation value of $100,000 per share.. 230,200 227,800
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
Common stock, par value of $100.00 per share, 1,400
shares authorized, issued, and outstanding............ 140 140
Paid-in capital........................................ 2,925 2,523
Accumulated deficit.................................... (130,124) (128,116)
Cumulative translation adjustment...................... 2,644 3,308
--------- ---------
Total Stockholders' Equity......................... 129,800 129,671
--------- ---------
Total Liabilities and Stockholders' Equity......... $ 582,762 $ 584,200
========= =========
</TABLE>
- --------
* Condensed and restated for discontinued operations (see Note 3) from audited
financial statements.
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
F-45
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1995 1994
------------ ------------ ------------ ------------
(*) (*)
<S> <C> <C> <C> <C>
Revenue:
Net sales of products.... $62,241 $55,433 $121,454 $107,124
Revenues from services... 26,636 20,408 53,743 40,791
Other income, net........ 44 987 350 1,639
------- ------- -------- --------
88,921 76,828 175,547 149,554
Costs and Expenses:
Cost of goods sold....... 50,664 48,857 98,871 89,947
Cost of services......... 19,239 14,765 39,177 29,723
Selling, general &
administrative.......... 12,977 11,905 26,364 22,433
Research and
development............. 23 288 44 584
Amortization of
goodwill................ 1,070 1,065 2,132 2,120
Restructuring............ 285 -- 285 --
------- ------- -------- --------
84,258 76,880 166,873 144,807
Operating income (loss).. 4,663 (52) 8,674 4,747
Interest expense......... 8,744 8,466 17,889 16,933
Interest income.......... (131) (50) (172) (72)
------- ------- -------- --------
Net interest expense..... 8,613 8,416 17,717 16,861
Investment income........ -- -- -- 278
Equity in earnings of
affiliates.............. -- (73) -- --
Minority interest........ 1 (1) 20 (34)
------- ------- -------- --------
Loss from continuing
operations before
taxes................... (3,949) (8,542) (9,023) (11,870)
Income tax benefit....... (28) (3,443) (1,626) (4,081)
------- ------- -------- --------
Loss from continuing
operations.............. (3,921) (5,099) (7,397) (7,789)
Earnings from
discontinued operations,
net..................... 3,420 3,193 7,290 6,190
------- ------- -------- --------
Net loss................. (501) (1,906) (107) (1,599)
Series A preferred
dividends............... 332 382 714 764
Series C preferred
dividends............... 594 594 1,187 1,187
------- ------- -------- --------
Net loss after preferred
dividends............... $(1,427) $(2,882) $ (2,008) $ (3,550)
======= ======= ======== ========
</TABLE>
- --------
* Condensed and restated for discontinued operations. (See Note 3).
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
F-46
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
*
<S> <C> <C>
Cash flows provided by (used for) Operations:
Net loss........................................... $ (107) $ (1,599)
Depreciation and amortization...................... 14,580 12,959
Accretion of discount on long-term liabilities..... 1,701 1,567
Minority interest.................................. (20) 99
Loss on sale of fixed assets....................... 95 169
Changes in assets and liabilities.................. (12,426) (7,468)
Non-cash charges and working capital changes of
discontinued operations........................... 3,524 6,998
-------- --------
Net cash provided by operations.................... 7,347 12,725
Investments:
Purchase of property, plant and equipment.......... (6,222) (6,831)
Acquisitions, net of cash acquired................. -- (11,550)
Other changes, net................................. (904) (263)
Investing activities of discontinued operations.... (875) (1,233)
-------- --------
Net cash used for investments...................... (8,001) (19,877)
Financing:
Proceeds from issuance of debt..................... 28,568 2,607
Debt repayments, net............................... (21,975) (14,458)
Issuance of Series B preferred stock............... 2,400 23,100
Repurchase of Series A preferred stock............. (2,072) --
Payment of dividends............................... (1,951) (1,951)
Paid in capital contribution....................... 53 --
-------- --------
Net cash provided by financing..................... 5,023 9,298
Effect of exchange rate changes on cash.............. (452) (18)
Net increase in cash................................. 3,917 2,128
Cash and cash equivalents, beginning of period....... 2,412 2,468
-------- --------
Cash and cash equivalents, end of period............. $ 6,329 $ 4,596
======== ========
</TABLE>
- --------
* Condensed and restated for discontinued operations. (see Note 3).
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
F-47
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--FINANCIAL STATEMENTS:
The consolidated balance sheet as of December 31, 1995, and the consolidated
statements of earnings and cash flows for the six months ended December 31,
1995 and 1994 have been prepared by the Company, without audit. In the opinion
of management, all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows at December 31, 1995, and for all periods presented, have been
made. All financial information has been restated for discontinued operations.
The balance sheet at June 30, 1995, was condensed and restated from audited
financial statements as of that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's June 30, 1995, Form 10-K. The results
of operations for the period ended December 31, 1995 are not necessarily
indicative of the operating results for the full year. Certain amounts in
prior years' quarterly financial statements have been reclassified to conform
to the current presentation.
NOTE 2--MERGER AGREEMENT:
On November 9, 1995, the Company, RHI Holdings, Inc. ("RHI", the Company's
parent), and The Fairchild Corporation ("TFC", RHI's parent), entered into an
Agreement and Plan of a Merger with Shared Technologies Inc. ("STI"), pursuant
to which STI is to acquire the Company's Fairchild Communications Services
Company ("FCSC") telecommunications systems and services business. The
acquisition is to be effected by a merger of the company into STI (the
"Merger"), with STI being the surviving corporation. Prior to the Merger, the
Company is to undergo a restructuring pursuant to which the Company will
transfer all of its assets to, and cause all of its liabilities to be assumed
by RHI, except for (i) the assets and liabilities of FCSC, (ii) the
outstanding Series A and Series C Preferred Stock of the Company (having a
liquidation value of $41,817,000 at December 31, 1995), (iii) the $125,000,000
principal amount outstanding 12 1/4% Senior Notes due 1999 (the "Senior
Notes") of the Company, and (iv) an amount of bank and other indebtedness of
approximately $56,683,000 (the "Assumed Indebtedness"). Pursuant to the
Merger, the Series A and Series C Preferred Stock of the Company will be
cancelled and converted into the right to receive an amount of cash equal to
their liquidation value ($45.00 per share plus accrued and unpaid dividends),
and the Series B Preferred Stock of the Company, all of which is owned by RHI,
will be cancelled. Prior to the Merger, the Company will make a cash tender
offer to purchase all of the outstanding Senior Notes and seek to obtain such
Noteholders' consent to amend the indenture under which the Senior Notes were
issued to remove all covenants which can be amended or deleted by majority
vote (see Note 5). The amount of the Assumed Indebtedness will be reduced, by
(i) the extent the purchase price to be paid in such offering for the Senior
Notes exceeds par, and (ii) the amount of accrued and unpaid dividends on the
Series A and Series C Preferred Stock of the Company on the date of the
Merger.
Upon the Merger, STI, as the surviving corporation, is required to (i)
purchase all Senior Notes tendered (and assume the Company's obligations with
respect to any Senior Notes not so tendered), (ii) repay the Assumed
Indebtedness in full, and (iii) deposit in escrow the funds necessary to
redeem the Series A and Series C Preferred Stock. As a result of the Merger,
RHI is to receive (i) 6,000,000 shares of Common Stock of STI (representing
approximately 41% of the outstanding shares after giving effect to such
issuance), (ii) shares of 6% Cumulative Convertible Preferred Stock of STI
having an aggregate liquidation preference of $25,000,000 (subject to upward
adjustment) and which are convertible into Common Stock of STI at a conversion
price of $6.375 per share (which, if converted, would represent, together with
the other Common Stock issued to RHI, approximately 41% of the Common Stock of
STI on a fully diluted basis), and (iii) shares of a Special Preferred Stock
having an initial liquidation preference of $20,000,000 (which could accrue up
to a maximum of
F-48
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$30,000,000 over a ten-year period if not redeemed earlier). In connection
with its stock ownership, TFC and RHI has the right to elect up to four of the
eleven members of the Board of Directors of STI and have agreed, subject to
certain exceptions, not to sell any of STI's shares, other than the Special
Preferred Stock, for a two-year period.
The closing of the Merger is subject to a number of conditions, including
(i) the approval of the Merger by the shareholders of STI, and (ii) holders of
at least 51% of the outstanding principal amount of the Senior Notes tendering
their Senior Notes and consenting to the covenant changes described above. The
Company and STI are scheduled to complete this transaction in Fiscal 1996. The
Company expects a significant gain upon consummation of this transaction.
NOTE 3--DISCONTINUED OPERATIONS:
During the Fiscal 1996 second quarter, the Company resolved to sell the D-M-
E Company ("DME"), a mold equipment manufacturer, and the Fairchild Data
Corporation ("Data"), a satellite communications company. On January 26, 1996,
the Company completed the sale of certain assets, liabilities and the business
of DME to Cincinnati Milacron Inc. ("Cincinnati Milacron") for approximately
$245,000,000 in cash and notes, subject to audit and adjustment. On January
27, 1996, the Company completed the sale of Data to SSE Telecom, Inc. ("SSE")
for book value of approximately $5,250,000 and 100,000 shares of SSE's common
stock valued at $9.0625 per share or $906,000 at January 26, 1996, and
warrants to purchase an additional 50,000 shares of SSE's common stock at
$11.09 per share. In addition, the Company has an opportunity to earn an
additional 100,000 shares based on the future performance of SSE during the
twelve months following the date of sale. The sale of DME will result in a
significant gain to the Company in the third quarter ended March 31, 1996.
Accordingly, DME and Data have been accounted for as discontinued operations
and the prior periods' financial statements have been restated to reflect the
discontinuance of these companies. The combined net sales of DME and Data
totaled $45,475,000 and $44,080,000 for the second quarter of Fiscal 1996 and
1995, respectively, and $91,342,000 and $86,568,000 for the first six months
of Fiscal 1996 and 1995, respectively. The combined net tax provision recorded
on earnings from discontinued operations amounted to $2,673,000 and $2,471,000
for the second quarter of Fiscal 1996 and 1995, respectively, and $5,050,000
and $4,829,000 for the first six months of Fiscal 1996 and 1995, respectively.
The components of net assets of discontinued operations on the consolidated
balance sheet are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1995
------------ --------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable................................. $ 28,064 $ 28,161
Inventories......................................... 26,732 26,645
Prepaid and other current assets.................... 1,098 1,365
Accounts payable.................................... (9,176) (9,801)
Other current liabilities........................... (12,109) (11,744)
-------- --------
Net current assets of discontinued operations..... $ 34,609 $ 34,626
======== ========
Property, plant and equipment, net of accumulated
depreciation....................................... $ 36,175 $ 37,986
Goodwill, net of accumulated amortization........... 54,846 55,664
Other assets........................................ 4,202 4,602
Retiree health care liabilities..................... (4,756) (4,764)
Minority interest in subsidiaries................... (504) (416)
Cumulative translation adjustment................... (4,386) (4,863)
-------- --------
Net noncurrent assets of discontinued operations.. $ 85,577 $ 88,209
======== ========
</TABLE>
F-49
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--PROPOSED SALE OF DIVISION:
During the second quarter ended December 31, 1995, the Company entered into
preliminary discussions concerning the exchange of shares of common stock of a
new subsidiary (Harco, Inc.), into which the Company would transfer
substantially all assets of, and cause Harco, Inc. to assume all liabilities
of the Company's Harco Division, for shares of common stock of, to Banner
Aerospace, Inc. ("Banner").
RHI currently owns approximately 47% of Banner common shares, and if the
exchange is consummated would become the majority shareholder of Banner. Harco
is a distributor of precision fasteners to the aerospace industry.
NOTE 5--TENDER OFFER:
On December 22, 1995, the Company commenced an offer (the "Tender Offer") to
purchase for cash, upon terms and subject to conditions set forth in an Offer
to Purchase and Consent Solicitations and related Letter of Transmittal (the
"Offer to Purchase"), all $125,000,000 of its outstanding 12 1/4% Senior
Secured Notes Due 1999 (the "Senior Notes"). The Tender Offer, as amended and
restated, provides a purchase price per $1,000 principal amount of the Senior
Notes of (i) $1,066.60 if the Tender Offer is consummated on or prior to
February 28, 1996, or (ii) $1,063.90 if the Tender Offer is consummated
between February 29, 1996 and March 31, 1996, or (iii) $1,057.50 if the Tender
Offer is consummated after March 31, 1996, and in each case, accrued and
unpaid interest up to, but not including, the payment date. Concurrently with
the Tender Offer, the Company solicited (the "Tender Offer Consent
Solicitation") consents of the holders of the Senior Notes to (i) the adoption
of the proposed amendments to the indenture pursuant to which the Senior Notes
were issued (the "Indenture"), and (ii) the release of the collateral securing
the Company's obligations under the Senior Notes and the Indenture, upon terms
set forth in the Offer to Purchase.
In addition, independent of the Tender Offer and the Tender Offer Consent
Solicitation, the Company also solicited consents to the waiver of any and all
violations of the Indenture arising out of or relating to (i) the transfer by
VSI Corporation ("VSI"), a wholly-owned subsidiary of the Company, of the
stock of Harco, Inc. to Banner (see Note 4), and (ii) the sale by VSI of DME
to Cincinnati Milacron (see Note 3).
The Company will pay to holders of Senior Notes who validly tender Senior
Notes pursuant to the Tender Offer and Consent Solicitations a consent fee of
$25.00 per $1,000 principal amount of Senior Notes so tendered. The consent
fee will be paid to holders of Senior Notes after, and subject to, the
consummation of the Tender Offer. Additionally, the Company will pay an early
consent fee of $5.00 per $1,000 principal amount to holders of Senior Notes
who on or prior to January 19, 1996, validly tender their notes, irrespective
of whether the Tender Offer is consummated. The Tender Offer and the Tender
Offer Consent Solicitations expire February 29, 1996.
The Company is to recognize an extraordinary loss, net of any related tax
benefits, in the third quarter of Fiscal 1996, reflecting the contractual
commitment to repurchase the Senior Notes at a premium and pay consent fees.
NOTE 6--ACQUISITIONS:
On November 28, 1994, FCSC 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 $5,595,000 in goodwill 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, Fairchild Communications
acquired all the shared telecommunications assets of Eaton & Lauth Co., Inc.
for approximately $550,000. Approximately $300,000 of the acquisition price
was recorded as goodwill.
F-50
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Proforma financial statements are not required for these acquisitions on an
individual basis.
NOTE 7--RESTRUCTURING CHARGES:
During the second quarter ended December 31, 1995, the Company recorded
$285,000 in restructuring charges relating to the closing of a small Aerospace
Fasteners business located in Japan.
NOTE 8--REDEEMABLE PREFERRED STOCK:
The Company's Series A Preferred Stock has a mandatory redemption value of
$45.00 per share and an annual dividend requirement of $3.60 per share. During
the six months ended December 31, 1995, the Company repurchased 55,700 shares
of Series A Preferred Stock (52,400 shares were purchased from RHI Holdings,
Inc., the Company's parent). There were 370,901 and 424,701 shares of Series A
Preferred Stock authorized, issued and outstanding at December 31, 1995 and
June 30, 1995, respectively.
NOTE 9--COMMITMENTS AND CONTINGENCIES:
Government Claims
The Corporate Administrative Contracting Officer (the "ACO"), based upon the
advice of the United States Defense Contract Audit Agency, has made a
determination that 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
pension plans, and (ii) pension 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 held discussions with the government to attempt to resolve these
pension accounting issues.
Environmental Matters
The Company and other aerospace fastener and industrial product
manufacturers are subject to stringent Federal, state and local environmental
laws and regulations concerning, among other things, the discharge of
materials into the environment and the generation, handling, storage,
transportation and disposal of waste and hazardous materials. To date, such
laws and regulations have not had a material effect on the financial
condition, results of operations, or net cash flows of the Company, although
the Company has expended, and can be expected to expend in the future,
significant amounts for investigation of environmental conditions and
installation of environmental control facilities, remediation of environmental
conditions and other similar matters, particularly in the Aerospace Fasteners
segment.
In connection with its plans to dispose of certain real estate, the Company
must investigate environmental conditions and may be required to take certain
corrective action prior or pursuant to any such disposition. In addition,
management has identified several areas of potential contamination at or from
other facilities owned, or previously owned, by the Company, that may require
the Company either to take corrective action or to contribute to a clean-up.
The Company is also a defendant in certain lawsuits and proceedings seeking to
require the Company to pay for investigation or remediation of environmental
matters and has been alleged to be a potentially responsible party at various
"Superfund" sites. Management of the Company believes that it has recorded
adequate reserves in its financial statements to complete such investigation
and take any necessary corrective actions or make any necessary contributions.
No amounts have been recorded as due from third
F-51
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
parties, including insurers, or set off against, any liability of the Company,
unless such parties are contractually obligated to contribute and are not
disputing such liability.
As of December 31, 1995, the consolidated total recorded liabilities of the
Company for environmental matters referred to above totalled $7,580,000. As of
December 31, 1995, the estimated probable exposures for these matters was
$7,559,000. It is reasonably possible that the Company's total exposure for
these matters could be approximately $14,757,000.
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, future results of operations, or net cash
flows of the Company.
NOTE 10--SUBSEQUENT EVENTS:
As of January 31, 1996, holders of approximately 93.6% of the aggregate
principal amount of Senior Notes have tendered their Senior Notes pursuant to
the Tender Offer, and have consented pursuant to the terms of the Tender Offer
Consent Solicitation. (See Note 5).
In connection with the sale of DME and Data, (see Note 3), the Company
negotiated an amendment to its bank credit agreement, effective January 22,
1996. Among other things, the amendment permits the sale of DME and Data and
amends certain financial covenants accordingly.
F-52
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Fairchild Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Fairchild
Industries, Inc. (a Delaware Corporation) as of June 30, 1994 and 1995, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for the years ended June 30, 1993, 1994 and 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fairchild Industries, Inc.
as of June 30, 1994 and 1995, and the results of its operations and its cash
flows for the years ended June 30, 1993, 1994 and 1995, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 13, 1996
F-53
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Fairchild Industries, Inc.:
We have reviewed the accompanying consolidated balance sheet of Fairchild
Industries, Inc. (a Delaware corporation, the "Company") as of December 31,
1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the six-month periods ended December
31, 1995 and 1994. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 13, 1996
F-54
<PAGE>
FAIRCHILD INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
------------------ DECEMBER 31,
1994 1995 1995
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 64 $ 1,469 $ 905
Billed accounts receivable--trade, net of
allowances of $204, $254 and $471........... 6,369 14,429 15,582
Unbilled accounts receivable................. 3,487 6,218 6,602
Inventories.................................. -- 1,246 1,064
Prepaid and other current assets............. 1,326 2,283 2,208
Net current assets of operations transferred
to RHI...................................... 25,760 56,876 65,220
-------- -------- --------
Total current assets..................... 37,006 82,521 91,581
Property, plant and equipment, at cost:
Buildings and improvements................... 3,417 3,733 3,873
Equipment and autos.......................... 59,455 73,968 80,821
Furniture and fixtures....................... 734 3,097 1,358
-------- -------- --------
63,606 80,798 86,052
Accumulated depreciation..................... (23,104) (31,239) (35,872)
-------- -------- --------
Property, plant and equipment, net....... 40,502 49,559 50,180
Goodwill, less accumulated amortization of
$2,389, $3,013 and $3,376................... 20,686 25,958 25,811
Other intangible assets, less accumulated
amortization of $4,383, $5,938 and $6,771... 6,682 7,589 6,756
Deferred loan costs.......................... 5,960 4,561 3,882
Prepaid pension cost......................... 216 195 173
Net non-current assets of operations
transferred to RHI.......................... 220,266 180,926 169,878
-------- -------- --------
Total assets............................. $331,318 $351,309 $348,261
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE>
FAIRCHILD INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
-------------------- DECEMBER 31,
1994 1995 1995
--------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................... $ 6,744 $ 12,780 $ 11,268
Advanced billings........................ -- 941 850
Deferred revenue on maintenance
contracts............................... 371 3,109 2,844
Accrued liabilities--
Salaries and wages...................... 935 1,986 775
Sales, payroll and use taxes............ 1,254 1,162 1,371
Commissions............................. 297 293 236
Dividends............................... 975 975 925
Other................................... 1,103 3,182 2,850
Current portion of capital lease
obligations............................. 1,954 751 303
--------- --------- ---------
Total current liabilities.............. 13,633 25179 21,422
12.25% senior secured notes due 1999....... 125,000 125,000 125,000
Bank credit agreement...................... 55,373 55,373 57,794
Capital lease obligations.................. 932 185 86
Post retirement benefits................... 78 98 112
Redeemable preferred stock: $3.60
cumulative Series A Convertible preferred
stock, without par value, 424,701 shares
authorized, issued and outstanding at
redemption value of $45.00 per share...... 19,112 19,112 16,691
--------- --------- ---------
Total liabilities...................... 214,128 224,947 221,105
Stockholders' equity:
Series B preferred stock: without par
value, 3,000 shares authorized, 2,025,
2,278 and 2,302 issued and outstanding;
liquidation value of $100,000 per
share................................... 202,500 227,800 230,200
Series C cumulative preferred stock:
without par value, 558,360 shares
authorized, issued and outstanding;
liquidation value of $45.00 per share... 24,015 24,015 24,015
Common stock, par value of $100.00 per
share, 1,400 shares authorized, issued
and outstanding......................... 140 140 140
Paid-in capital.......................... 2,390 2,523 2,925
Accumulated deficit...................... (111,855) (128,116) (130,124)
--------- --------- ---------
Total stockholders' equity............. 117,190 126,362 127,156
--------- --------- ---------
Total liabilities and stockholders'
equity................................ $ 331,318 $ 351,309 $ 348,261
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE>
FAIRCHILD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, SIX MONTHS ENDED
---------------------------- -------------------------
DECEMBER 31, DECEMBER 31,
1993 1994 1995 1994 1995
-------- -------- -------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 68,639 $ 74,897 $109,741 $48,564 $64,631
Cost of revenues........ 33,735 36,979 58,360 25,765 34,467
-------- -------- -------- ------- -------
Gross profit............ 34,904 37,918 51,381 22,799 30,164
General and
administrative
expenses............... 19,944 21,258 32,504 14,161 20,349
Goodwill amortization... 540 578 624 320 363
-------- -------- -------- ------- -------
Operating income.... 14,420 16,082 18,253 8,318 9,452
Interest expense........ 20,033 19,538 21,280 10,754 10,952
-------- -------- -------- ------- -------
Net loss from
continuing
operations
before taxes....... (5,613) (3,456) (3,027) (2,436) (1,500)
Taxes................... -- -- -- -- --
Operating results of
operations transferred
to RHI................. (6,644) (30,531) (9,332) 837 1,393
-------- -------- -------- ------- -------
Net earnings (loss)
before preferred
dividends.......... (12,257) (33,987) (12,359) (1,599) (107)
Series A preferred
dividends.............. 1,713 1,529 1,529 764 714
Series C preferred
dividends.............. 2,160 2,373 2,373 1,187 1,187
-------- -------- -------- ------- -------
Net loss after
preferred
dividends.......... $(16,130) $(37,889) $(16,261) $(3,550) $(2,008)
======== ======== ======== ======= =======
Dividends to RHI
Holdings, Inc.
(Parent)............... $ 50,000 $ -- $ -- $ -- $ --
======== ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE>
FAIRCHILD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES C SERIES B
COMMON PREFERRED PREFERRED PAID-IN ACCUMULATED
STOCK STOCK STOCK CAPITAL DEFICIT TOTAL
------ --------- --------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1992.. $140 $ -- $192,600 $2,230 $ (6,985) $187,985
Net loss.............. -- -- -- -- (12,257) (12,257)
Issuance of Series B
preferred stock to
parent............... -- -- 5,000 -- -- 5,000
Exchange of Series A
preferred stock for
issuance of Series C
preferred stock...... -- 24,015 -- -- -- 24,015
Cash dividends to
preferred
stockholders......... -- -- -- -- (3,873) (3,873)
Cash dividends to
parent............... -- -- -- -- (50,000) (50,000)
---- ------- -------- ------ --------- --------
BALANCE, June 30, 1993.. 140 24,015 197,600 2,230 (73,115) 150,870
Net loss.............. -- -- -- -- (33,987) (33,987)
Issuance of Series B
preferred stock to
parent............... -- -- 4,900 143 -- 5,043
Transfer of subsidiary
from parent.......... -- -- -- 17 (851) (834)
Cash dividends to
preferred
stockholders......... -- -- -- -- (3,902) (3,902)
---- ------- -------- ------ --------- --------
BALANCE, June 30, 1994.. 140 24,015 202,500 2,390 (111,855) 117,190
Net loss.............. -- -- -- -- (12,359) (12,359)
Issuance of Series B
preferred stock to
parent............... -- -- 25,300 88 -- 25,388
Transfer of pension
plan from parent..... -- -- -- 45 -- 45
Cash dividends to
preferred
stockholders......... -- -- -- -- (3,902) (3,902)
---- ------- -------- ------ --------- --------
BALANCE, June 30, 1995.. 140 24,015 227,800 2,523 (128,116) 126,362
Net Income............ -- -- -- -- (107) (107)
Issuance of Series B
preferred stock to
parent............... -- -- 2,400 -- -- 2,400
Cash dividends to
preferred
stockholders......... -- -- -- -- (1,901) (1,901)
Paid-in capital from
parent............... -- -- -- 402 -- 402
---- ------- -------- ------ --------- --------
BALANCE, December 31,
1995 (unaudited)....... $140 $24,015 $230,200 $2,925 $(130,124) $127,156
==== ======= ======== ====== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE>
FAIRCHILD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, SIX MONTHS ENDED
---------------------------- -------------------------
DECEMBER 31, DECEMBER 31,
1993 1994 1995 1994 1995
-------- -------- -------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows (used
in)/provided by operating
activities:
Net loss from continuing
operations............... $ (5,613) $ (3,396) $ (3,027) $(2,436) $(1,500)
Adjustments to reconcile
net income to net cash
(used in)/provided by
operating activities:
Amortization and
depreciation........... 7,935 8,947 10,330 4,113 5,627
(Decrease) increase in
advanced billings...... -- -- 326 352 (91)
Increase in billed
accounts receivable.... (1,086) (251) (8,060) (6,730) (1,153)
(Increase) decrease in
unbilled
accounts receivable.... (666) 277 (2,014) (4,054) (384)
(Decrease) increase in
non-current assets..... (404) (43) (536) (765) (4,625)
Increase in
inventories............ -- -- (1,033) (2,437) 182
(Decrease) increase in
prepaid and other
assets................. (20) (374) (709) (401) 75
(Decrease) increase in
accrued liabilities.... 339 406 2,716 (68) (1,441)
(Decrease) increase in
deferred revenue....... 359 (24) (162) 197 (265)
Increase (decrease) in
accounts payable....... (86) (1,325) 5,576 5,588 (1,512)
Operations transferred
to RHI................. 16,579 6,438 14,341 17,156 7,501
-------- -------- -------- ------- -------
Net cash (used
in)/provided by
operating activities.. 17,337 10,655 17,748 10,515 2,414
-------- -------- -------- ------- -------
Cash flows used in
investing activities:
Acquisitions, net of
cash acquired.......... (7,313) -- (11,550) (11,550) --
Purchases of property,
plant and equipment.... (5,769) (7,775) (10,349) (4,540) (5,476)
Proceeds from sales of
property, plant
and equipment.......... 8 31 25 --
Operations transferred
to RHI................. (6,539) (7,105) (5,754) (3,787) (2,525)
-------- -------- -------- ------- -------
Net cash used in
investing
activities........... (19,613) (14,849) (27,628) (19,877) (8,001)
-------- -------- -------- ------- -------
Cash flows provided by
financing activities:
Issuance of Series B
preferred stock........ 5,000 4,000 24,400 23,100 2,400
Issuance of Series C
preferred stock........ 24,015 -- -- -- --
Purchase/exchange of
Series A preferred
stock.................. (25,126) -- -- -- (2,072)
Payment of dividends.... (53,782) (3,902) (3,902) (1,951) (1,951)
Paid-in capital
contribution........... -- 143 88 -- 402
Repayments of capital
lease obligations...... (3,200) (3,118) (1,950) (1,171) (547)
Decrease (increase) in
deferred loan cost..... (3,703) 1,008 1,399 692 (679)
Operations transferred
to RHI................. 59,070 6,127 (8,750) (11,372) 7,470
-------- -------- -------- ------- -------
Net cash provided by
financing
activities........... 2,274 4,258 11,285 9,298 5,023
-------- -------- -------- ------- -------
Net increase (decrease) in
cash..................... (2) 64 1,405 (64) (564)
Cash, beginning of
period/year.............. 2 -- 64 64 1,469
-------- -------- -------- ------- -------
Cash, end of period/year.. $ -- $ 64 $ 1,469 $ $ 905
======== ======== ======== ======= =======
Supplementary disclosures
of cash flow information:
Cash paid during the
period/year for
interest............... $ 20,033 $ 19,538 $ 21,280 $10,754 $10,952
-------- -------- -------- ------- -------
Cash paid during the
period/year for taxes.. $ -- $ -- $ -- $ -- $ --
======== ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO DECEMBER 31, 1995 AND THE SIX MONTHS ENDED DECEMBER
31, 1995 AND 1994)
1. ORGANIZATION, MERGER AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Fairchild Industries, Inc. is incorporated in the State of Delaware. As used
herein, the term "Company" refers to Fairchild Industries, Inc. The Company is
a subsidiary of RHI Holdings, Inc. ("RHI") which is in turn a wholly-owned
subsidiary of The Fairchild Corporation ("TFC").
Subsequent to June 30, 1995, TFC announced plans to recapitalize the Company
in order to improve the financial and operating flexibility and strengthen the
financial position of TFC and its subsidiaries (the "Reorganization"). The
Company's plans to merge into Shared Technologies Inc. ("STI") (the "Merger")
are an integral part of the Reorganization. Concurrent with the Merger, and as
part of the Reorganization, the Company is transferring to its immediate
parent, RHI, all of its assets and liabilities except those expressly related
to the Company's telecommunications business (the "Telecommunications
Business"), $125 million principal amount of the Company's 12 1/4% Senior
Secured Notes Due 1999 (the "12 1/4% Notes"), and approximately $57.8 million
of existing bank indebtedness. The Merger is contingent on STI obtaining
sufficient financing.
In the Merger Agreement, TFC, RHI and FII make representations and
warranties with respect to the Telecommunications Business and the Merger
Agreement provides that 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 $41,600,000 (the
"Preferred Consideration"). RHI is transferring to the Company as a
contribution to its capital all of the outstanding shares of the Company's
Series B Preferred Stock.
Prior to the Reorganization, in addition to the Telecommunications Business,
the Company conducted two other businesses: the Aerospace Fasteners and
Industrial Products businesses. The Aerospace Fasteners business designs,
manufactures and markets high performance, specialty fastening systems,
primarily for aerospace applications. The Industrial Products business
designs, 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 reorganization pursuant to
which FII will divest itself of all assets unrelated to the Telecommunications
Business. RHI will assume all liabilities of FII unrelated to the
Telecommunications Business, including but not limited to: (i) contingent
liabilities related to the Company's alleged failure to comply
F-60
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
On January 26, 1996, FII sold its industrial products business to Cincinnati
Milacron, Inc. ("CM") pursuant to an asset purchase agreement dated as of
January 23, 1996 for approximately $245.0 million (the "D-M-E Asset Sale"),
comprised of approximately $62.3 million in cash and three 8% promissory notes
of CM. One note, in the amount of $11.7 million, will be payable upon the
receipt of required regulatory clearance in Belgium, and will be canceled and
the corresponding Belgium assets reconveyed, in the event such clearance is
not obtained. Of the other two notes, one is in the aggregate principal amount
of approximately $166 million, which note is collateralized by a letter of
credit issued by Bankers Trust Company in the amount equal to the principal of
such promissory note (the "Collateralized D-M-E Note"), and the other is
unsecured and is in the aggregate principal amount of approximately $5.0
million (the "Unsecured D-M-E Note" and, collectively with the Collateralized
D-M-E Note, the "D-M-E Term Notes"). Each of the D-M-E Term Notes is due and
payable one year following the consummation of the D-M-E Asset Sale, except
that upon 30 days' prior notice, Fairchild may require prepayment of, or CM
may prepay, each D-M-E Note at any time beginning on or after July 29, 1996.
On January 28, 1996, Fairchild sold substantially all of the assets of
Fairchild Data Corporation to SSE Datacom, Inc. ("SSED"), a wholly owned
subsidiary of SSE Telecom, Inc. ("SSET"), pursuant to an asset purchase
agreement dated as of January 26, 1996, for approximately $7 million (the
"Fairchild Data Corporation Sale"), comprised of approximately $5.2 in cash
and approximately $1.8 million (200,000 shares) of the common stock of SSET
(the "SSET Common Stock"). Fairchild's right to retain 100,000 shares of the
SSET Common Stock is subject to SSED's achieving specified profit margins
within twelve months of the Fairchild Data Corporation Sale. Also, Fairchild
was issued a three-year warrant to purchase 50,000 additional shares of the
common stock of SSET.
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.
F-61
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 "1993", "1994", and "1995" mean the fiscal years ended June 30,
1993, 1994 and 1995, 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:
<TABLE>
<S> <C>
Buildings and improvements....................................... 17-40 years
Equipment and autos.............................................. 3-10 years
Furniture and fixtures........................................... 10 years
</TABLE>
Depreciation expense related to property, plant and equipment amounted to
$6,191,000, $6,998,000 and $8,153,000 for fiscal 1993, 1994 and 1995
respectively.
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.
F-62
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Intangible Assets and Goodwill
Intangible assets as of June 30, 1994 and 1995, respectively, are comprised
of the following:
<TABLE>
<CAPTION>
USEFUL
1994 1995 LIVES
------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Noncompete contracts............................ $ 2,774 $ 3,659 5-10 years
Subscriber base................................. 6,256 6,456 10 years
Right of first refusal.......................... 700 700 10 years
Acquisition/organization costs.................. 720 1,321 5-20 years
Other........................................... 615 1,391 8-10 years
------- -------
11,065 13,527
Accumulated amortization........................ (4,383) (5,938)
------- -------
$ 6,682 $ 7,589
======= =======
</TABLE>
The intangible assets are being amortized over their expected useful lives
described above. Amortization expense related to these intangible assets
amounted to $1,203,000, $1,371,000 and $1,555,000 for the years ended June 30,
1993, 1994 and 1995, respectively.
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.
Interim Financial Statements
The accompanying interim consolidated financial statements, as of December
31, 1995 and for the six months ended December 31, 1995 and 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
F-63
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
position of the Company as of December 31, 1995 and the results of its
operations and its cash flows for the six months ended December 31, 1994 and
1995.
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 $4,000,000 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.
3. OPERATIONS BEING TRANSFERRED TO RHI:
The operations being transferred to RHI had the following operating results
and net assets (in thousands).
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Current assets......................................... $ 173,835 $ 165,738
Property, plant and equipment, net..................... 116,799 108,632
Goodwill............................................... 175,243 170,028
Net assets held for sale............................... 34,515 34,811
Other assets........................................... 31,792 23,072
Current liabilities.................................... (148,075) (108,862)
Debt to be assumed by RHI.............................. (94,393) (84,982)
Other liabilities...................................... (40,544) (62,463)
Cumulative Translation Adjustment...................... (3,146) (8,172)
--------- ---------
Net assets to be transferred......................... $ 246,026 $ 237,802
========= =========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JUNE 30,
----------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues..................................... $400,594 $369,792 $401,779
Cost of sales................................ 302,067 284,850 311,150
Selling, general and administrative.......... 69,549 67,438 76,171
Research and development..................... 3,262 3,940 4,100
Amortization of goodwill..................... 5,298 5,228 5,218
Restructuring charges........................ 15,469 18,860 --
Unusual items................................ -- 6,000 --
-------- -------- --------
Operating income (loss)...................... 4,949 (16,524) 5,140
Interest expense............................. 12,788 11,129 14,004
Other income................................. 2,269 4,008 1,549
Income tax provision (benefit)............... 264 (4,792) 2,017
Cumulative effect of accounting changes for
income taxes and postretirement benefits.... 810 11,678 --
-------- -------- --------
Net loss of transferred operations........... $ (6,644) $(30,531) $ (9,332)
======== ======== ========
</TABLE>
F-64
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The interest allocated to discontinued operations represents the interest on
the debt to be assumed by RHI. Goodwill was allocated to business segments at
the acquisition date of FII by TFC (June 1989) based on the ratio of estimated
fair value of the units to total estimated fair value. In addition, the
remaining goodwill allocated to the telecommunications business relates to
acquisitions made by the telecommunications business. The provision for income
taxes, which was calculated on a separate company basis, was allocated
entirely to discontinued operations as the continuing operations experienced
losses after interest in all historical periods. The cumulative effect from
changing accounting for income taxes has been solely allocated to operations
transferred to RHI as the telecommunications business has experienced losses
after interest in all historical periods and any tax assets could not be
realized. The cumulative effect from changing accounting for postretirement
benefits was partially allocated to continuing operations based upon actuarial
reports. See Note 5 for further discussion regarding the cumulative effect
from changing accounting for postretirement benefits. The Company's litigation
contingencies are part of the liabilities being transferred to RHI. These
contingencies include the determination by the ACO, based upon the 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 are related
to the Communications Services Business. No amounts have been recorded as due
from third parties, including insurers, or set off against, any liability of
the Company, unless such parties are contractually obligated to contribute and
are not disputing such liability. The reserves recorded by the Company related
to the litigation discussed above have been included in operations transferred
to RHI.
4. LONG-TERM OBLIGATIONS:
The Company maintains a credit agreement (the "Credit Agreement") with a
consortium of banks, which provides a revolving credit facility and term loans
(collectively the "Credit Facilities"). The Credit Facilities generally bear
interest at 3.75% over the London Interbank Offer Rate ("LIBOR") for the Term
Loan VIII, at 2.5% over the bank's prime rate for the revolving credit
facility 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
F-65
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
secured by substantially all the Company's assets. RHI has assumed $94,393,000
and $84,982,000 of this debt as of June 30, 1994 and 1995, respectively, in
connection with the Merger. The remaining debt related to the continuing
operations will be repaid as part of the Merger and there will be no further
obligation of the Company.
The Credit Agreement, as amended, contains certain covenants, including a
material adverse change clause, and restrictions on dividends, capital
expenditures, capital leases, operating leases, investments and indebtedness.
It requires the Company to comply with certain financial covenants including
achieving cumulative earnings before interest, taxes, depreciation and
amortization ("EBITDA Covenant"), and maintaining certain coverage ratios.
The Company issued the 12 1/4% Senior Secured Notes (the "Notes") in August
1992. The Notes require semi-annual interest payments and mature in 1999,
however, the Company may redeem the Notes at any time after July 31, 1997. If
the Company desires to redeem the Notes prior to July 31, 1997, a majority of
the holders must consent to the redemption. The Notes are secured by a lien on
all of the issued and outstanding common stock and Series B Preferred Stock of
the Company and all issued and outstanding common stock of its wholly-owned
subsidiary, VSI Corporation. There are no direct or contingent liabilities or
compensating balance arrangements as a result of the Notes.
The Company is party to several capital leases with interest rates ranging
from 5.85% to 15.50%. (See Note 11 for additional capital lease disclosures.)
Annual maturities of long-term debt obligations (exclusive of capital lease
obligations) for each of the five years following June 30, 1995 are as
follows: $14,338,000 for 1996, $121,231,000 for 1997, $1,001,000 for 1998,
$125,056,000 for 1999 and $56,000 for 2000.
5. PENSIONS AND POSTRETIREMENT BENEFITS:
Pensions
The Company has established defined benefit pension plans covering
substantially all employees. The Company's funding policy for the plans is to
contribute each year the minimum amount required under the Employee Retirement
Income Security Act of 1974. A portion of the Company's pension cost and
prepaid pension cost have been included in operations transferred to RHI.
The following table provides a summary of the components of net periodic
pension cost for the plans:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost of benefits earned during the period.......... $ 55 $ 97 $106
Interest cost of projected benefit obligation.............. 35 56 63
Return on plan assets...................................... (39) (57) (55)
Net amortization and deferral.............................. 8 12 5
Amortization of prior service cost......................... 4 (8) (8)
---- ---- ----
Total pension cost....................................... $ 63 $100 $111
==== ==== ====
</TABLE>
Assumptions used in accounting for the plans were:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<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>
F-66
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the funded status and amounts recognized in
the Company's balance sheets at June 30, 1994 and 1995 for the continuing
operations portion of its defined benefit pension plans:
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Vested benefit obligation................................... $ 421 $ 493
Non-vested benefit obligation............................... 27 32
------- -------
Accumulated benefit obligation............................ 448 525
------- -------
Projected benefit obligation................................ 642 758
Plan assets at fair value................................... 699 800
------- -------
Plan assets in excess of projected benefit obligation....... 57 42
Unrecognized net loss....................................... 155 150
Unrecognized prior service cost............................. 4 3
------- -------
Prepaid pension cost........................................ $ 216 $ 195
======= =======
</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 1994 and 1995 are as
follows:
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Service cost of benefits earned............................ $ 12 $ 13
Interest cost on liabilities............................... 6 7
------- -------
Net periodic postretirement benefit cost................... $ 18 $ 20
======= =======
</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, 1994 and
1995.
<TABLE>
<CAPTION>
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation.............. $ 67 $ 87
Unrecognized net gain...................................... 11 11
------- -------
Accrued postretirement benefit cost........................ $ 78 $ 98
======= =======
</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 related to the continuing
operations of the Company as of June 30, 1995, by approximately $29,000, and
increase net periodic postretirement benefit cost by approximately $7,000 for
fiscal 1995.
F-67
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 1993, 1994 and 1995 due to the historical losses of
continuing operations.
The income tax provision for continuing operations differs from that
computed using the statutory Federal income tax rate of 34.0% in 1993 and
35.0% in 1994 and 1995 and for the following reasons:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed statutory amount........................ $(1,908) $(1,189) $(1,059)
Effect of net operating losses................... 1,719 981 826
Nondeductible acquisition valuation items........ 184 202 218
Other............................................ 5 6 15
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>
The following table is a summary of the significant components of the
continuing operations portion of the Company's deferred tax assets and
liabilities as of June 30, 1994 and 1995.
<TABLE>
<CAPTION>
1994 1995
DEFERRED DEFERRED
(PROVISION) JUNE 30, (PROVISION) JUNE 30,
BENEFIT 1994 BENEFIT 1995
----------- -------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DEFERRED TAX ASSETS:
Accrued expenses.............. $ (15) $ 72 $ 17 $ 89
Employee compensation and
benefits..................... 32 192 45 237
Deferred revenue.............. (9) 130 958 1,088
NOL carryforwards............. 1,682 12,311 822 13,133
Postretirement benefits....... 41 135 27 162
Other......................... 58 40 8 48
------ ------- ------- -------
1,673 12,880 1,877 14,757
DEFERRED TAX LIABILITIES:
Asset basis differences--fixed
assets....................... (592) (5,367) -- (5,367)
Asset basis differences--
intangible assets............ (143) (1,426) (198) (1,624)
Other......................... (10) (326) -- (326)
------ ------- ------- -------
(745) (7,119) (198) (7,317)
------ ------- ------- -------
LESS--VALUATION ALLOWANCE....... (928) (5,761) (1,679) (7,440)
------ ------- ------- -------
Net deferred tax liability.... $ -- $ -- $ -- $ --
====== ======= ======= =======
</TABLE>
F-68
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
1993
--------------
(IN THOUSANDS)
<S> <C>
Deferred revenue.............................................. 122
Intangible amortization....................................... (386)
Depreciation.................................................. (1,346)
Effect of net operating loss.................................. 1,610
-------
$ --
=======
</TABLE>
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, 1994 and
1995, 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
F-69
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1994 and June 30, 1995 are as follows.
<TABLE>
<CAPTION>
JUNE 30, 1994 JUNE 30, 1995
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents.............. $ 64 $ 64 $ 1,469 $ 1,469
Accounts receivable.................... 9,856 9,856 20,647 20,647
Accounts payable....................... 6,744 6,744 12,780 12,780
Accrued liabilities.................... 3,589 3,589 6,623 6,623
Advanced billings...................... -- -- 941 941
Deferred revenue on maintenance
contracts............................. 371 371 3,109 3,109
Bank credit agreement.................. 55,373 55,373 55,373 55,373
12.25% senior secured notes............ 125,000 125,000 125,000 125,000
Redeemable preferred stock............. 19,112 15,608 19,112 15,714
Series C cumulative preferred stock.... 24,015 21,427 24,015 20,939
</TABLE>
F-70
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. RELATED PARTY TRANSACTIONS:
Corporate general and administrative expense was billed to the Company on a
monthly basis during 1993, 1994 and 1995. These costs represent the cost of
services incurred on behalf of the Company by TFC and its subsidiaries based
primarily on estimated hours spent by corporate employees. The Company has
reimbursed TFC and its subsidiaries for such services. Corporate general and
administrative expense allocated to the Company was $342,000, $441,000 and
$537,000 in fiscal 1993, 1994 and 1995, respectively.
The Company had sales to TFC and subsidiaries of TFC of $601,000, $707,000
and $1,031,000 for the years ended June 30, 1993, 1994 and 1995, respectively.
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.
<TABLE>
<CAPTION>
JUNE 30,
DESCRIPTION 1995
----------- --------------
(IN THOUSANDS)
<S> <C>
Building improvements......................................... $ 422
Equipment and autos........................................... 11,582
Furniture and fixtures........................................ 297
Less-Accumulated depreciation................................. (6,446)
-------
$ 5,855
=======
</TABLE>
Future minimum lease payments:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
(IN THOUSANDS)
<S> <C> <C>
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
======
</TABLE>
Rental expense under all leases amounted to $2,985,000, $3,023,000 and
$4,204,000 for the years ended June 30, 1993, 1994 and 1995, respectively.
Other Matters
The Company's continuing operations are involved in various claims and
lawsuits incidental to its business. The Company, either on its own or through
its insurance carriers, is contesting these matters. In the opinion of
management, the ultimate resolution of the legal proceedings will not have a
material adverse effect on the financial condition or the future operating
results of the Company. See further discussion of the Assumed Liabilities in
Note 1.
F-71
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. PRO FORMA INFORMATION (UNAUDITED):
As described in Note 2, the Company acquired substantially all of the
telecommunications assets of JWP on November 28, 1994. The following unaudited
pro forma condensed results of operations for the years ended June 30, 1994 and
1995, give effect to the JWP acquisition as if the acquisition had occurred at
the beginning of each year.
<TABLE>
<CAPTION>
UNAUDITED
-----------------------
FISCAL 1994 FISCAL 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Sales................... $122,426 $132,716
Cost of sales........... (86,860) (98,628)
Other expenses.......... (38,917) (36,926)
-------- --------
Net loss from continuing
operations............. (3,351) (2,838)
Operating results of
operations transferred
to RHI................. (30,591) (9,332)
-------- --------
Net loss before
preferred dividends.... $(33,942) $(12,170)
======== ========
</TABLE>
F-72
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of Section 145 of the General Corporation Law of Delaware
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding
if he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that such person acted
in any of the capacities set forth above against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with
the defense or settlement of such action or suit if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that
the Delaware Court of Chancery or the court in which such action or suit was
brought shall determine that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Delaware Court of
Chancery or such other court shall deem proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful on the merits or
otherwise in the defense of any action, suit or proceeding referred to in
subsections (a) and (b) of such Section 145 or in the defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith. It also provides that indemnification provided for by Section 145
shall not be deemed exclusive of any other rights to which the indemnified
party may be entitled, and it empowers a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him or incurred by him in any such capacity or arising out of
his status as such, whether or not the corporation would have the power to
indemnify him against such liability under Section 145.
Article Seventh of the Certificate of Incorporation of the Issuer provides
that, to the fullest extent that the General Corporation Law of Delaware
permits, no director shall be personally liable to the Issuer or its
stockholders for monetary damages for any breach of fiduciary duty by such
director as a director. Notwithstanding the foregoing, a director shall be
liable to the extent provided by applicable law, (i) for breach of the
director's duty of loyalty to the Issuer or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) pursuant to Section 174 of the Delaware
General Corporation Law or (iv) for any transaction from which the director
derived an improper personal benefit. No amendment to or repeal of Article
Seventh of the Certificate of Incorporation of the Issuer shall apply to or
have any effect on the liability or alleged liability of any director of the
Issuer for or with respect to any acts or omissions of such director occurring
prior to such amendment.
The Issuer has not purchased directors' and officers' liability insurance
covering liabilities incurred by its officers and directors in connection with
the performance of their duties.
II-1
<PAGE>
ITEM 21. EXHIBITS
<TABLE>
<C> <S>
1. Purchase Agreement dated March 8, 1996 among STI, the guarantors named
therein and CS First Boston Corporation and Citicorp Securities, Inc.
(incorporated by reference to the Company's Form 8-K Current Report
filed March 28, 1986 (File No. 0-17366)).
2.1 Agreement and Plan of Merger dated as of November 9, 1995 among the
Company, FII, RHI and TFC (incorporated by reference to the Company's
Form 8-K Current Report filed March 28, 1986 (File No. 0-17366)).
2.2 First Amendment to Agreement and Plan of Merger dated as of February
2, 1996 among the Company, FII, RHI and TFC (incorporated by reference
to the Company's Form 8-K Current Report filed March 28, 1986 (File
No. 0-17366)).
2.3 Second Amendment to Agreement and Plan of Merger dated as of February
24, 1996 among the Company, FII, RHI and TFC (incorporated by
reference to the Company's Form 8-K Current Report filed March 28,
1986 (File No. 0-17366)).
2.4 Third Amendment to Agreement and Plan of Merger dated as of March 1,
1996 among the Company, FII, RHI and TFC (incorporated by reference to
the Company's Form 8-K Current Report filed March 28, 1986 (File No.
0-17366)).
3(i).1 Restated Certificate of Incorporation of the Company (incorporated by
reference to the Company's Form 8-K Current Report filed March 28,
1986 (File No. 0-17366)).
3(i).2 Certificate of Merger of STI and FII (incorporated by reference to the
Company's Form 8-K Current Report filed March 28, 1986 (File No. 0-
17366)).
3(i).3 Certificate of Incorporation of the Issuer (incorporated by reference
to the Company's Form 8-K Current Report filed March 28, 1986 (File
No. 0-17366)).
3(ii).1 Amended and Restated By-laws of STI (incorporated by reference to the
Company's Form 8-K Current Report filed March 28, 1986 (File No. 0-
17366)).
3(i).2 Amendment to Amended and Restated By-laws of STI (incorporated by
reference to the Company's Form 8-K Current Report filed March 28,
1986 (File No. 0-17366)).
3(ii).3 By-laws of the Issuer (incorporated by reference to the Company's Form
8-K Current Report filed March 28, 1986 (File No. 0-17366)).
4.1 Certificate of Designations of Series G 6% Cumulative Convertible
Preferred Stock of the Company (incorporated by reference to the
Company's Form 8-K Current Report filed March 28, 1986 (File No. 0-
17366)).
4.2 Certificate of Designations of Series H Special Preferred Stock of the
Company (incorporated by reference to the Company's Form 8-K Current
Report filed March 28, 1986 (File No. 0-17366)).
4.3 Certificate of Designations of Series I 6% Cumulative Convertible
Preferred Stock of the Company (incorporated by reference to the
Company's Form 8-K Current Report filed March 28, 1986 (File No. 0-
17366)).
4.4 Certificate of Designations of Series J Special Preferred Stock of the
Company (incorporated by reference to the Company's Form 8-K Current
Report filed March 28, 1986 (File No. 0-17366)).
4.5 Indenture dated as of March 1, 1996 among the Company, the Issuer, the
guarantors named therein and United States Trust Company of New York,
as trustee (incorporated by reference to the Company's Form 8-K
Current Report filed March 28, 1986 (File No. 0-17366)).
4.6 First Supplemental Indenture dated as of March 13, 1996 among the
Company, the Issuer, the guarantors named therein and United States
Trust Company of New York, as trustee (incorporated by reference to
the Company's Form 8-K Current Report filed March 28, 1986 (File No.
0-17366)).
5.1 Opinion of Gadsby & Hannah (to be filed by amendment).
8.1 Opinion of Gadsby & Hannah with respect to tax matters (to be filed by
amendment).
10.1 Registration Rights Agreement dated March 8, 1996 among the Company,
the Issuer, the guarantors named therein and CS First Boston
Corporation and Citicorp Securities, Inc. (incorporated by reference
to the Company's Form 8-K Current Report filed March 28, 1986 (File
No. 0-17366)).
10.2 Registration Rights Agreement dated March 13, 1996 among STI, RHI and
TFC (incorporated by reference to the Company's Form 8-K Current
Report filed March 28, 1986 (File No. 0-17366)).
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.3 Credit Agreement dated as of March 12, 1996 among the Company, the
Issuer, Credit Suisse, Citicorp USA, Inc., NationsBank and the other
lenders named therein (incorporated by reference to the Company's Form
8-K Current Report filed March 28, 1986 (File No. 0-17366)).
10.4 Security Agreement dated as of March 13, 1996 among the Issuer, the
Company, each subsidiary of the Issuer named therein and Credit Suisse,
as collateral agent for the secured parties (incorporated by reference
to the Company's Form 8-K Current Report filed March 28, 1986 (File No.
0-17366)).
10.5 Pledge Agreement dated as of March 13, 1996 among the Issuer, the
Company, each subsidiary of the Issuer named therein and Credit Suisse,
as collateral agent for the secured parties (incorporated by reference
to the Company's Form 8-K Current Report filed March 28, 1986 (File No.
0-17366)).
10.6 Pledge Agreement dated as of March 13, 1996 among the Company, RHI and
Gadsby & Hannah, as interim pledge agent (incorporated by reference to
the Company's Form 8-K Current Report filed March 28, 1986 (File No. 0-
17366)).
10.7 Parent Guarantee Agreement dated as of March 12, 1996 between STI and
Credit Suisse, as collateral agent for the secured parties (incorporated
by reference to the Company's Form 8-K Current Report filed March 28,
1986 (File No. 0-17366)).
10.8 Subsidiary Guarantee Agreement dated as of March 12, 1996 among the
subsidiaries of the Issuer and the Company named therein and Credit
Suisse, as collateral agent for the secured parties (incorporated by
reference to the Company's Form 8-K Current Report filed March 28, 1986
(File No. 0-17366)).
10.9 Agreement to Exchange 6% Cumulative Convertible Preferred Stock and
Special Preferred Stock dated as of March 1, 1996 among STI, FII, RHI
and TFC (incorporated by reference to the Company's Form 8-K Current
Report filed March 28, 1986 (File No. 0-17366)).
10.10 Shareholders' Agreement dated as of March 13, 1996 among STI, RHI and
Anthony D. Autorino (incorporated by reference to the Company's Form 8-K
Current Report filed March 28, 1986 (File No. 0-17366)).
10.11 Tax Sharing Agreement dated as of March 13, 1996 between STI and RHI
(incorporated by reference to the Company's Form 8-K Current Report
filed March 28, 1986 (File No. 0-17366)).
10.12 Indemnification Agreement dated as of March 13, 1996 between STI and
Fairchild Holdings Corp. (incorporated by reference to the Company's
Form 8-K Current Report filed March 28, 1986 (File No. 0-17366)).
10.13 Indemnification Agreement dated as of March 13, 1996 among STI, TFC and
RHI (incorporated by reference to the Company's Form 8-K Current Report
filed March 28, 1986 (File No. 0-17366)).
10.14 Indemnity, Subrogation and Contribution Agreement dated as of March 12,
1996 between the Issuer and Credit Suisse, as collateral agent for the
secured parties (incorporated by reference to the Company's Form 8-K
Current Report filed March 28, 1986 (File No. 0-17366)).
23.1 Consent of Rothstein, Kass & Company, P.C. (to be filed by amendment)
23.2 Consent of Arthur Andersen LLP (to be filed by amendment)
23.3 Consent of Gadsby & Hannah (include in Exhibits 5.1 and 8.1)
25 Form T-1 Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939 (to be filed by amendment).
99.1 Form of Letter of Transmittal (filed herewith).
99.2 Form of Notice of Guaranteed Delivery (filed herewith).
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies
and Other Nominees (filed herewith).
99.4 Form of Letter to Clients (filed herewith).
</TABLE>
II-3
<PAGE>
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liablities arising under the Securities Act
may be permitted to directors, officers and controlling persons of each
Registrant pursuant to the provisions set forth in response to Item 20 above,
or otherwise, each Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilties (other than
the payment by any Registrant of expenses incurred or paid by a director,
officer or controlling person of any Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, such
Registrant will, unless in the opinion of counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-4
<PAGE>
SIGNATURES
SHARED TECHNOLOGIES FAIRCHILD COMMUNICATIONS CORP.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-4 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE TOWN OF WETHERSFIELD, STATE OF CONNECTICUT, ON THE 24TH DAY
OF APRIL, 1996.
Shared Technologies Fairchild
Communications Corp.
/s/ Anthony D. Autorino
By: _________________________________
ANTHONY D. AUTORINO, CHAIRMAN &
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED, EACH OF WHOM ALSO CONSTITUTES AND
APPOINTS ANTHONY D. AUTORINO, MEL D. BORER, VINCENT DIVINCENZO, AND KENNETH M.
DORROS AND EACH OF THEM SINGLY, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT AND
AGENT, FOR HIM, WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM
AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY AND
ALL AMENDMENTS TO THIS REGISTRATION STATEMENT AND TO FILE THE SAME AND ALL
EXHIBITS THERETO, AND ANY OTHER DOCUMENTS IN CONNECTION THEREWITH WITH THE
SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO EACH ATTORNEY-IN-FACT AND
AGENT FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING
REQUISITE AND NECESSARY TO BE DONE, AS FULLY TO ALL INTENTS AND PURPOSES AS HE
MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT EACH
ATTORNEY-IN-FACT AND AGENT OR HIS SUBSTITUTE OR SUBSTITUTES MAY LAWFULLY DO OR
CAUSE TO BE DONE BY VIRTUE HEREOF.
NAME TITLE DATE
/s/ Anthony D. Autorino Chairman, Chief April 24,1996
- ------------------------------------- Executive Officer &
ANTHONY D. AUTORINO Director
/s/ Mel D. Borer President, Chief April 24,1996
- ------------------------------------- Operating Officer &
MEL D. BORER Director
/s/ Vincent DiVincenzo Vice President-- April 24,1996
- ------------------------------------- Administration &
VINCENT DIVINCENZO Finance, Chief
Financial Officer &
Director
/s/ Jeffrey J. Steiner Vice Chairman & April 24, 1996
- ------------------------------------- Director
JEFFREY J. STEINER
/s/ Thomas H. Decker Director April 24, 1996
- -------------------------------------
THOMAS H. DECKER
/s/ William A. DiBella Director April 24, 1996
- -------------------------------------
WILLIAM A. DIBELLA
II-5
<PAGE>
NAME TITLE DATE
/s/ Natalia Hercot Director April 24,1996
- -------------------------------------
NATALIA HERCOT
/s/ Ajit G. Hutheesing Director April 24,1996
- -------------------------------------
AJIT G. HUTHEESING
Director April ,1996
- -------------------------------------
EDWARD J. MCCORMACK, JR.
Director April , 1996
- -------------------------------------
JO MCKENZIE
Director April , 1996
- -------------------------------------
HERBERT L. OAKES, JR.
II-6
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD, INC.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-4 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE TOWN OF WETHERSFIELD, STATE OF CONNECTICUT, ON THE 24TH DAY
OF APRIL, 1996.
Shared Technologies Fairchild, Inc.
/s/ Anthony D. Autorino
By: _________________________________
ANTHONY D. AUTORINO, CHAIRMAN &
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED, EACH OF WHOM ALSO CONSTITUTES AND
APPOINTS ANTHONY D. AUTORINO, MEL D. BORER, VINCENT DIVINCENZO, AND KENNETH M.
DORROS AND EACH OF THEM SINGLY, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT AND
AGENT, FOR HIM, WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM
AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY AND
ALL AMENDMENTS TO THIS REGISTRATION STATEMENT AND TO FILE THE SAME AND ALL
EXHIBITS THERETO, AND ANY OTHER DOCUMENTS IN CONNECTION THEREWITH WITH THE
SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO EACH ATTORNEY-IN-FACT AND
AGENT FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING
REQUISITE AND NECESSARY TO BE DONE, AS FULLY TO ALL INTENTS AND PURPOSES AS HE
MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT EACH
ATTORNEY-IN-FACT AND AGENT OR HIS SUBSTITUTE OR SUBSTITUTES MAY LAWFULLY DO OR
CAUSE TO BE DONE BY VIRTUE HEREOF.
NAME TITLE DATE
/s/ Anthony D. Autorino Chairman, Chief April 24,1996
- ------------------------------------- Executive Officer &
ANTHONY D. AUTORINO Director
/s/ Mel D. Borer President, Chief April 24,1996
- ------------------------------------- Operating Officer &
MEL D. BORER Director
/s/ Vincent DiVincenzo Vice President-- April 24,1996
- ------------------------------------- Administration &
VINCENT DIVINCENZO Finance, Chief
Financial Officer &
Director
/s/ Jeffrey J. Steiner Vice Chairman & April 24, 1996
- ------------------------------------- Director
JEFFREY J. STEINER
/s/ Thomas H. Decker Director April 24, 1996
- -------------------------------------
THOMAS H. DECKER
/s/ William A. DiBella Director April 24, 1996
- -------------------------------------
WILLIAM A. DIBELLA
II-7
<PAGE>
NAME TITLE DATE
/s/ Natalia Hercot Director April 24, 1996
- -------------------------------------
NATALIA HERCOT
/s/ Ajit G. Hutheesing Director April 24, 1996
- -------------------------------------
AJIT G. HUTHEESING
Director April , 1996
- -------------------------------------
EDWARD J. MCCORMACK, JR.
Director April , 1996
- -------------------------------------
JO MCKENZIE
Director April , 1996
- -------------------------------------
HERBERT L. OAKES, JR.
II-8
<PAGE>
STI INTERNATIONAL, INC.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-4 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE TOWN OF WETHERSFIELD, STATE OF CONNECTICUT, ON THE 24TH DAY
OF APRIL, 1996.
STI International, Inc.
/s/ Anthony D. Autorino
By: _________________________________
ANTHONY D. AUTORINO, CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED, EACH OF WHOM ALSO CONSTITUTES AND
APPOINTS ANTHONY D. AUTORINO, MEL D. BORER, VINCENT DIVINCENZO, AND KENNETH M.
DORROS AND EACH OF THEM SINGLY, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT AND
AGENT, FOR HIM, WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM
AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY AND
ALL AMENDMENTS TO THIS REGISTRATION STATEMENT AND TO FILE THE SAME AND ALL
EXHIBITS THERETO, AND ANY OTHER DOCUMENTS IN CONNECTION THEREWITH WITH THE
SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO EACH ATTORNEY-IN-FACT AND
AGENT FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING
REQUISITE AND NECESSARY TO BE DONE, AS FULLY TO ALL INTENTS AND PURPOSES AS HE
MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT EACH
ATTORNEY-IN-FACT AND AGENT OR HIS SUBSTITUTE OR SUBSTITUTES MAY LAWFULLY DO OR
CAUSE TO BE DONE BY VIRTUE HEREOF.
NAME TITLE DATE
/s/ Anthony D. Autorino Chief Executive April 24,1996
- ------------------------------------- Officer & Director
ANTHONY D. AUTORINO
/s/ Mel D. Borer President & Director April 24,1996
- -------------------------------------
MEL D. BORER
/s/ Vincent DiVincenzo Treasurer & Director April 24,1996
- -------------------------------------
VINCENT DIVINCENZO
II-9
<PAGE>
OFFICE TELEPHONE MANAGEMENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-4 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE TOWN OF WETHERSFIELD, STATE OF CONNECTICUT, ON THE 24TH DAY
OF APRIL, 1996.
Office Telephone Management
/s/ Anthony D. Autorino
By: _________________________________
ANTHONY D. AUTORINO, CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED, EACH OF WHOM ALSO CONSTITUTES AND
APPOINTS ANTHONY D. AUTORINO, MEL D. BORER, VINCENT DIVINCENZO, AND KENNETH M.
DORROS AND EACH OF THEM SINGLY, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT AND
AGENT, FOR HIM, WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM
AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY AND
ALL AMENDMENTS TO THIS REGISTRATION STATEMENT AND TO FILE THE SAME AND ALL
EXHIBITS THERETO, AND ANY OTHER DOCUMENTS IN CONNECTION THEREWITH WITH THE
SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO EACH ATTORNEY-IN-FACT AND
AGENT FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING
REQUISITE AND NECESSARY TO BE DONE, AS FULLY TO ALL INTENTS AND PURPOSES AS HE
MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT EACH
ATTORNEY-IN-FACT AND AGENT OR HIS SUBSTITUTE OR SUBSTITUTES MAY LAWFULLY DO OR
CAUSE TO BE DONE BY VIRTUE HEREOF.
NAME TITLE DATE
/s/ Anthony D. Autorino Chief Executive April 24,1996
- ------------------------------------- Officer & Director
ANTHONY D. AUTORINO
/s/ Mel D. Borer President & Director April 24,1996
- -------------------------------------
MEL D. BORER
/s/ Vincent DiVincenzo Treasurer & Director April 24,1996
- -------------------------------------
VINCENT DIVINCENZO
II-10
<PAGE>
BOSTON TELECOMMUNICATIONS GROUP, INC.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-4 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE TOWN OF WETHERSFIELD, STATE OF CONNECTICUT, ON THE 24TH DAY
OF APRIL, 1996.
Boston Telecommunications Group,
Inc.
/s/ Anthony D. Autorino
By: _________________________________
ANTHONY D. AUTORINO, CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED, EACH OF WHOM ALSO CONSTITUTES AND
APPOINTS ANTHONY D. AUTORINO, MEL D. BORER, VINCENT DIVINCENZO, AND KENNETH M.
DORROS AND EACH OF THEM SINGLY, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT AND
AGENT, FOR HIM, WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM
AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY AND
ALL AMENDMENTS TO THIS REGISTRATION STATEMENT AND TO FILE THE SAME AND ALL
EXHIBITS THERETO, AND ANY OTHER DOCUMENTS IN CONNECTION THEREWITH WITH THE
SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO EACH ATTORNEY-IN-FACT AND
AGENT FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING
REQUISITE AND NECESSARY TO BE DONE, AS FULLY TO ALL INTENTS AND PURPOSES AS HE
MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT EACH
ATTORNEY-IN-FACT AND AGENT OR HIS SUBSTITUTE OR SUBSTITUTES MAY LAWFULLY DO OR
CAUSE TO BE DONE BY VIRTUE HEREOF.
NAME TITLE DATE
/s/ Anthony D. Autorino Chief Executive April 24,1996
- ------------------------------------- Officer & Director
ANTHONY D. AUTORINO
/s/ Mel D. Borer President & Director April 24,1996
- -------------------------------------
MEL D. BORER
/s/ Vincent DiVincenzo Treasurer & Director April 24,1996
- -------------------------------------
VINCENT DIVINCENZO
II-11
<PAGE>
MULTI-TENANT SERVICES, INC.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-4 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE TOWN OF WETHERSFIELD, STATE OF CONNECTICUT, ON THE 24TH DAY
OF APRIL, 1996.
Multi-Tenant Services, Inc.
/s/ Anthony D. Autorino
By: _________________________________
ANTHONY D. AUTORINO, CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED, EACH OF WHOM ALSO CONSTITUTES AND
APPOINTS ANTHONY D. AUTORINO, MEL D. BORER, VINCENT DIVINCENZO, AND KENNETH M.
DORROS AND EACH OF THEM SINGLY, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT AND
AGENT, FOR HIM, WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM
AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY AND
ALL AMENDMENTS TO THIS REGISTRATION STATEMENT AND TO FILE THE SAME AND ALL
EXHIBITS THERETO, AND ANY OTHER DOCUMENTS IN CONNECTION THEREWITH WITH THE
SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO EACH ATTORNEY-IN-FACT AND
AGENT FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING
REQUISITE AND NECESSARY TO BE DONE, AS FULLY TO ALL INTENTS AND PURPOSES AS HE
MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT EACH
ATTORNEY-IN-FACT AND AGENT OR HIS SUBSTITUTE OR SUBSTITUTES MAY LAWFULLY DO OR
CAUSE TO BE DONE BY VIRTUE HEREOF.
NAME TITLE DATE
/s/ Anthony D. Autorino Chief Executive April 24, 1996
- ------------------------------------- Officer & Director
ANTHONY D. AUTORINO
/s/ Mel D. Borer President & Director April 24, 1996
- -------------------------------------
MEL D. BORER
/s/ Vincent DiVincenzo Treasurer & Director April 24, 1996
- -------------------------------------
VINCENT DIVINCENZO
II-12
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD TELECOM, INC.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-4 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE TOWN OF WETHERSFIELD, STATE OF CONNECTICUT, ON THE 24TH DAY
OF APRIL, 1996.
Shared Technologies Fairchild
Telecom, Inc.
/s/ Anthony D. Autorino
By: _________________________________
ANTHONY D. AUTORINO, CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED, EACH OF WHOM ALSO CONSTITUTES AND
APPOINTS ANTHONY D. AUTORINO, MEL D. BORER, VINCENT DIVINCENZO, AND KENNETH M.
DORROS AND EACH OF THEM SINGLY, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT AND
AGENT, FOR HIM, WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM
AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY AND
ALL AMENDMENTS TO THIS REGISTRATION STATEMENT AND TO FILE THE SAME AND ALL
EXHIBITS THERETO, AND ANY OTHER DOCUMENTS IN CONNECTION THEREWITH WITH THE
SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO EACH ATTORNEY-IN-FACT AND
AGENT FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING
REQUISITE AND NECESSARY TO BE DONE, AS FULLY TO ALL INTENTS AND PURPOSES AS HE
MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT EACH
ATTORNEY-IN-FACT AND AGENT OR HIS SUBSTITUTE OR SUBSTITUTES MAY LAWFULLY DO OR
CAUSE TO BE DONE BY VIRTUE HEREOF.
NAME TITLE DATE
/s/ Anthony D. Autorino Chief Executive April 24, 1996
- ------------------------------------- Officer & Director
ANTHONY D. AUTORINO
/s/ Mel D. Borer President & Director April 24, 1996
- -------------------------------------
MEL D. BORER
/s/ Vincent DiVincenzo Treasurer & Director April 24, 1996
- -------------------------------------
VINCENT DIVINCENZO
II-13
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<C> <S> <C>
1. Purchase Agreement dated March 8, 1996 among STI, the
guarantors named therein and CS First Boston Corporation
and Citicorp Securities, Inc. (incorporated by reference to
the Company's Form 8-K Current Report filed March 28, 1986
(File No. 0-17366)).
2.1 Agreement and Plan of Merger dated as of November 9, 1995
among the Company, FII, RHI and TFC (incorporated by
reference to the Company's Form 8-K Current Report filed
March 28, 1986 (File No. 0-17366)).
2.2 First Amendment to Agreement and Plan of Merger dated as of
February 2, 1996 among the Company, FII, RHI and TFC
(incorporated by reference to the Company's Form 8-K
Current Report filed March 28, 1986 (File No. 0-17366)).
2.3 Second Amendment to Agreement and Plan of Merger dated as
of February 24, 1996 among the Company, FII, RHI and TFC
(incorporated by reference to the Company's Form 8-K
Current Report filed March 28, 1986 (File No. 0-17366)).
2.4 Third Amendment to Agreement and Plan of Merger dated as of
March 1, 1996 among the Company, FII, RHI and TFC
(incorporated by reference to the Company's Form 8-K
Current Report filed March 28, 1986 (File No. 0-17366)).
3(i).1 Restated Certificate of Incorporation of the Company
(incorporated by reference to the Company's Form 8-K
Current Report filed March 28, 1986 (File No. 0-17366)).
3(i).2 Certificate of Merger of STI and FII (incorporated by
reference to the Company's Form 8-K Current Report filed
March 28, 1986 (File No. 0-17366)).
3(i).3 Certificate of Incorporation of the Issuer (incorporated by
reference to the Company's Form 8-K Current Report filed
March 28, 1986 (File No. 0-17366)).
3(ii).1 Amended and Restated By-laws of STI (incorporated by
reference to the Company's Form 8-K Current Report filed
March 28, 1986 (File No. 0-17366)).
3(i).2 Amendment to Amended and Restated By-laws of STI
(incorporated by reference to the Company's Form 8-K
Current Report filed March 28, 1986 (File No. 0-17366)).
3(ii).3 By-laws of the Issuer (incorporated by reference to the
Company's Form 8-K Current Report filed March 28, 1986
(File No. 0-17366)).
4.1 Certificate of Designations of Series G 6% Cumulative
Convertible Preferred Stock of the Company (incorporated by
reference to the Company's Form 8-K Current Report filed
March 28, 1986 (File No. 0-17366)).
4.2 Certificate of Designations of Series H Special Preferred
Stock of the Company (incorporated by reference to the
Company's Form 8-K Current Report filed March 28, 1986
(File No. 0-17366)).
4.3 Certificate of Designations of Series I 6% Cumulative
Convertible Preferred Stock of the Company (incorporated by
reference to the Company's Form 8-K Current Report filed
March 28, 1986 (File No. 0-17366)).
4.4 Certificate of Designations of Series J Special Preferred
Stock of the Company (incorporated by reference to the
Company's Form 8-K Current Report filed March 28, 1986
(File No. 0-17366)).
4.5 Indenture dated as of March 1, 1996 among the Company, the
Issuer, the guarantors named therein and United States
Trust Company of New York, as trustee (incorporated by
reference to the Company's Form 8-K Current Report filed
March 28, 1986 (File No. 0-17366)).
4.6 First Supplemental Indenture dated as of March 13, 1996
among the Company, the Issuer, the guarantors named therein
and United States Trust Company of New York, as trustee
(incorporated by reference to the Company's Form 8-K
Current Report filed March 28, 1986 (File No. 0-17366)).
5.1 Opinion of Gadsby & Hannah (to be filed by amendment).
8.1 Opinion of Gadsby & Hannah with respect to tax matters (to
be filed by amendment).
10.1 Registration Rights Agreement dated March 8, 1996 among the
Company, the Issuer, the guarantors named therein and CS
First Boston Corporation and Citicorp Securities, Inc.
(incorporated by reference to the Company's Form 8-K
Current Report filed March 28, 1986 (File No. 0-17366)).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<C> <S> <C>
10.2 Registration Rights Agreement dated March 13, 1996 among
STI, RHI and TFC (incorporated by reference to the
Company's Form 8-K Current Report filed March 28, 1986
(File No. 0-17366)).
10.3 Credit Agreement dated as of March 12, 1996 among the
Company, the Issuer, Credit Suisse, Citicorp USA, Inc.,
NationsBank and the other lenders named therein
(incorporated by reference to the Company's Form 8-K
Current Report filed March 28, 1986 (File No. 0-17366)).
10.4 Security Agreement dated as of March 13, 1996 among the
Issuer, the Company, each subsidiary of the Issuer named
therein and Credit Suisse, as collateral agent for the
secured parties (incorporated by reference to the Company's
Form 8-K Current Report filed March 28, 1986 (File No. 0-
17366)).
10.5 Pledge Agreement dated as of March 13, 1996 among the
Issuer, the Company, each subsidiary of the Issuer named
therein and Credit Suisse, as collateral agent for the
secured parties (incorporated by reference to the Company's
Form 8-K Current Report filed March 28, 1986 (File No. 0-
17366)).
10.6 Pledge Agreement dated as of March 13, 1996 among the
Company, RHI and Gadsby & Hannah, as interim pledge agent
(incorporated by reference to the Company's Form 8-K
Current Report filed March 28, 1986 (File No. 0-17366)).
10.7 Parent Guarantee Agreement dated as of March 12, 1996
between STI and Credit Suisse, as collateral agent for the
secured parties (incorporated by reference to the Company's
Form 8-K Current Report filed March 28, 1986 (File No. 0-
17366)).
10.8 Subsidiary Guarantee Agreement dated as of March 12, 1996
among the subsidiaries of the Issuer and the Company named
therein and Credit Suisse, as collateral agent for the
secured parties (incorporated by reference to the Company's
Form 8-K Current Report filed March 28, 1986 (File No. 0-
17366)).
10.9 Agreement to Exchange 6% Cumulative Convertible Preferred
Stock and Special Preferred Stock dated as of March 1, 1996
among STI, FII, RHI and TFC (incorporated by reference to
the Company's Form 8-K Current Report filed March 28, 1986
(File No. 0-17366)).
10.10 Shareholders' Agreement dated as of March 13, 1996 among
STI, RHI and Anthony D. Autorino (incorporated by reference
to the Company's Form 8-K Current Report filed March 28,
1986 (File No. 0-17366)).
10.11 Tax Sharing Agreement dated as of March 13, 1996 between
STI and RHI (incorporated by reference to the Company's
Form 8-K Current Report filed March 28, 1986 (File No. 0-
17366)).
10.12 Indemnification Agreement dated as of March 13, 1996
between STI and Fairchild Holdings Corp. (incorporated by
reference to the Company's Form 8-K Current Report filed
March 28, 1986 (File No. 0-17366)).
10.13 Indemnification Agreement dated as of March 13, 1996 among
STI, TFC and RHI (incorporated by reference to the
Company's Form 8-K Current Report filed March 28, 1986
(File No. 0-17366)).
10.14 Indemnity, Subrogation and Contribution Agreement dated as
of March 12, 1996 between the Issuer and Credit Suisse, as
collateral agent for the secured parties (incorporated by
reference to the Company's Form 8-K Current Report filed
March 28, 1986 (File No. 0-17366)).
23.1 Consent of Rothstein, Kass & Company, P.C. (to be filed by
amendment)
23.2 Consent of Arthur Andersen LLP (to be filed by amendment)
23.3 Consent of Gadsby & Hannah (include in Exhibits 5.1 and
8.1)
25 Form T-1 Statement of Eligibility and Qualification under
the Trust Indenture Act of 1939 (to be filed by amendment).
99.1 Form of Letter of Transmittal (filed herewith).
99.2 Form of Notice of Guaranteed Delivery (filed herewith).
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees (filed herewith).
99.4 Form of Letter to Clients (filed herewith).
</TABLE>
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
SHARED TECHNOLOGIES FAIRCHILD
COMMUNICATIONS CORP.
OFFER TO EXCHANGE ITS REGISTERED
12 1/4% SENIOR SUBORDINATED DISCOUNT NOTES DUE 2006
FOR ANY AND ALL OF ITS OUTSTANDING
12 1/4% SENIOR SUBORDINATED DISCOUNT NOTES DUE 2006
PURSUANT TO THE PROSPECTUS, DATED , 1996.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON ,
1996, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN PRIOR
TO 5:00 P.M., NEW YORK CITY TIME, ON , 1996.
By Mail: Facsimile Transmission By Hand:
Number:
United States Trust (212) 420-6152 United States Trust
Company of New York (For Eligible Company of New York
P.O. Box 844 Institutions Only) 111 Broadway, Lower
Cooper Station Level
New York, New York New York, New York 10006
10216-0844 Attn: Corporate Trust
Attn: Corporate Trust Confirm by Telephone: Services
Services
(Registered or Certified (800) 548-6565 By Overnight Courier:
Mail Recommended) United States Trust
Company of New York
770 Broadway--13th Floor
New York, New York 10003
Attn: Corporate Trust
Services
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges that he or she has received and reviewed the
Prospectus, dated , 1996 (the "Prospectus"), of Shared Technologies
Fairchild Communications Corp., a Delaware corporation (the "Issuer"), and
this Letter of Transmittal (this "Letter"), which together constitutes the
Issuer's offer (the "Exchange Offer") to exchange an aggregate principal
amount of up to $163,637,000 of 12 1/4% Senior Subordinated Discount Notes Due
2006 (the "New Notes") of the Issuer for an equal principal amount of the
Issuer's outstanding 12 1/4% Senior Subordinated Discount Notes Due 2006 (the
"Old Notes"; the Old Notes and the New Notes are sometimes referred to
collectively herein as the "Notes").
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount at maturity equal to that of the
surrendered Old Note. The Old Notes were issued at a substantial discount from
their principal amount and no interest is payable on the Notes before March 1,
1999. Thereafter, the Notes will bear interest at the rate of 12 1/4% per
annum from the most recent date to which interest has been paid on the Notes
or, if no interest has been paid on the Notes, from March 1, 1999. Interest on
the Notes will be payable semi-annually on March 1 and September 1 of each
year, commencing March 1, 1999.
<PAGE>
Holders of Old Notes whose Old Notes are accepted for exchange will not
receive any payment in respect of accrued and unpaid interest on such Old
Notes. The Notes are not redeemable prior to March 1, 2001 except that, until
March 1, 1999, the Issuer may redeem, at its option, up to an aggregate of 25%
of the principal amount of the Notes at the redemption price set forth herein
plus accrued interest to the date of redemption with the net proceeds of one
or more Public Equity Offerings if at least $122,727,750 of the principal
amount of the Notes remain outstanding after each such redemption. On or after
March 1, 2001, the Notes are redeemable at the option of the Issuer, in whole
or in part, at the redemption prices set forth herein plus accrued interest to
the date of redemption. Upon a Change of Control, each holder of Notes may
require the Issuer to repurchase such Notes at 101% of the Accreted Value
thereof plus accrued interest to the date of repurchase. The Issuer reserves
the right, at any time or from time to time, to extend the Exchange Offer at
its discretion, in which event the term "Expiration Date" shall mean the
latest time and date to which the Exchange Offer is extended. The Issuer shall
notify the holders of the Old Notes of any extension by means of a press
release or other public announcement prior to 9:00 A.M., New York City time,
on the next business day after the previously scheduled Expiration Date.
This Letter is to be completed by a holder of Old Notes either if
certificates are to be forwarded herewith or if a tender of Old Notes, if
available, is to be made by book-entry transfer to the account maintained by
the Exchange Agent at The Depository Trust Company (the "Book-Entry Transfer
Facility") pursuant to the procedures set forth in "The Exchange Offer"
section of the Prospectus. Holders of Old Notes whose certificates are not
immediately available, or who are unable to deliver their certificates or
confirmation of the book-entry tender of their Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility (a "Book-Entry
Confirmation") and all other documents required by this Letter to the Exchange
Agent on or prior to the Expiration Date, must tender their Old Notes
according to the guaranteed delivery procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures" section of the Prospectus. See
Instruction 1. Delivery of documents to the Book-Entry Transfer Facility does
not constitute delivery to the Exchange Agent.
The undersigned has completed the appropriate boxes below and signed this
Letter to indicate the action the undersigned desires to take with respect to
the Exchange Offer.
List below the Old Notes to which this Letter relates. If the space provided
below is inadequate, the certificate numbers and principal amount of Old Notes
should be listed on a separate signed schedule affixed hereto.
<TABLE>
<CAPTION>
DESCRIPTION OF OLD
NOTES 1 2 3
- -------------------------------------------------------------
NAME(S) AND
ADDRESS(ES) OF AGGREGATE
REGISTERED PRINCIPAL PRINCIPAL
HOLDER(S) (PLEASE CERTIFICATE AMOUNT OF OLD AMOUNT
FILL IN, IF BLANK) NUMBER(S)* NOTE(S) TENDERED**
- -------------------------------------------------------------
- -------------------------------------------------------------
- -------------------------------------------------------------
- -------------------------------------------------------------
- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Total
Principal Principal
Amount of Amount of
Old Old Notes
Notes: Tendered:
</TABLE>
- --------
*Need not be completed if Old Notes are being tendered by book-entry
transfer.
** Unless otherwise indicated in this column, a holder will be deemed to have
tendered ALL of the Old Notes represented by the Old Notes indicated in
column 2. See Instruction 2. Old Notes tendered hereby must be in
denominations of principal amount of $1,000 and any integral multiple
thereof. See Instruction 1.
2
<PAGE>
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE
BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution _________________________________________________
Account Number ______________________ Transaction Code Number _____________
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE
THE FOLLOWING:
Name(s) of Registered Holder(s) _______________________________________________
Window Ticket Number (if any) _________________________________________________
Date of Execution of Notes of Guaranteed Delivery _____________________________
Name of Institution which guaranteed delivery _________________________________
IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING:
Account Number ______________________ Transaction Code Number _____________
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name: _________________________________________________________________________
Address: ______________________________________________________________________
_______________________________________________________________________________
3
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Issuer the aggregate principal amount of Old
Notes indicated above. Subject to, and effective upon, the acceptance for
exchange of the Old Notes tendered hereby, the undersigned hereby sells,
assigns and transfers to, or upon the order of, the Issuer all right, title
and interest in and to such Old Notes as are being tendered hereby.
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, sell, assign and transfer the Old Notes
tendered hereby and that the Issuer will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances
and not subject to any adverse claim when the same are accepted by the Issuer.
The undersigned hereby further represents that any New Notes acquired in
exchange for Old Notes tendered hereby will have been acquired in the ordinary
course of business of the person receiving such New Notes, whether or not such
person is the undersigned, that neither the holder of such Old Notes nor any
such other person has an arrangement or understanding with any person to
participate in the distribution of such New Notes and that neither the holder
of such Old Notes nor any such other person is an "affiliate", as defined in
Rule 405 under the Securities Act of 1933, as amended (the "Securities Act"),
of the Issuer.
The undersigned also acknowledges that this Exchange Offer is being made in
reliance on an interpretation by the staff of the Securities and Exchange
Commission (the "SEC") that the New Notes issued in exchange for the Old Notes
pursuant to the Exchange Offer may be offered for resale, resold and otherwise
transferred by holders thereof (other than any such holder that is an
"affiliate" of the Issuer within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such holders' business and such holders have no
arrangement with any person to participate in the distribution of such New
Notes. If the undersigned is not a broker-dealer, the undersigned represents
that it is not engaged in, and does not intend to engage in, a distribution of
New Notes. If the undersigned is not a broker-dealer, the undersigned
represents that it is not engaged in, and does not intend to engage in, a
distribution of New Notes. If the undersigned is a broker-dealer that will
receive New Notes for its own account in exchange for Old Notes, it represents
that the Old Notes to be exchanged for the New Notes were acquired by it as a
result of market-making activities or other trading activities and
acknowledges that it will deliver a prospectus in connection with any resale
of such New Notes; however, by so acknowledging and by delivering a
prospectus, the undersigned will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Issuer to be necessary or desirable to complete the
sale, assignment and transfer of the Old Notes tendered hereby. All authority
conferred or agreed to be conferred in this Letter and every obligation of the
undersigned hereunder shall be binding upon the successors, assigns, heirs,
executors, administrators, trustees in bankruptcy and legal representatives of
the undersigned and shall not be affected by, and shall survive, the death or
incapacity of the undersigned. This tender may be withdrawn only in accordance
with the procedures set forth in the "The Exchange Offer--Withdrawal of
Tenders" section of the Prospectus.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, please deliver the New Notes (and, if applicable,
substitute certificates representing Old Notes for any Old Notes not
exchanged) in the name of the undersigned or, in the case of a book-entry
delivery of Old Notes, please credit the account indicated above maintained at
the Book-Entry Transfer Facility. Similarly, unless otherwise indicated under
the box entitled "Special Delivery Instructions" below, please send the New
Notes (and, if applicable, substitute certificates representing Old Notes for
any Old Notes not exchanged) to the undersigned at the address shown above in
the box entitled "Description of Old Notes".
4
<PAGE>
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES"
ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES
AS SET FORTH IN SUCH BOX ABOVE.
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4) (SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certif- To be completed ONLY if certif-
icates for Old Notes not ex- icates for Old Notes not ex-
changed and/or New Notes are to changed and/or New Notes are to
be issued in the name of and be sent to someone other than
sent to someone other than the the person(s) whose signature(s)
person(s) whose signature(s) ap- appear(s) on this Letter above
pear(s) on this Letter above, or or to such person(s) at an ad-
if Old Notes delivered by book- dress other than shown in the
entry transfer which are not ac- box entitled "Description of Old
cepted for exchange are to be Notes" on this Letter above.
returned by credit to an account
maintained at the Book-Entry
Transfer Facility other than the
account indicated above.
Mail New Notes and/or Old Notes
to:
Name(s): ________________________
(PLEASE TYPE OR PRINT)
Issue New Notes and/or Old Notes _________________________________
to: (PLEASE TYPE OR PRINT)
Address: ________________________
Name(s): ________________________ _________________________________
(PLEASE TYPE OR PRINT) (INCLUDING ZIP CODE)
_________________________________
(PLEASE TYPE OR PRINT)
Address: ________________________
_________________________________
(INCLUDING ZIP CODE)
(COMPLETE ACCOMPANYING
SUBSTITUTE FORM W-9)
[ ] Credit unexchanged Old
Notes delivered by book-entry
transfer to the Book-Entry
Transfer Facility account set
forth below.
_________________________________
(BOOK-ENTRY TRANSFER FACILITY
ACCOUNT NUMBER, IF APPLICABLE)
IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE CERTIFICATES
FOR OLD NOTES OR A BOOK-ENTRY CONFIRMATION AND ALL OTHER REQUIRED DOCUMENTS OR
THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY THE EXCHANGE AGENT
PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING ANY
BOX ABOVE
5
<PAGE>
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS) (COMPLETE
ACCOMPANYING SUBSTITUTE FORM W-9 ON REVERSE SIDE)
................................ Dated: .... 1996
................................ Dated: .... 1996
(SIGNATURE(S) OF OWNER)
Area Code and Telephone Number......................
If a holder is tendering any Old Notes, this Letter
must be signed by the registered holder(s) as the
name(s) appear(s) on the certificate(s) for the Old
Notes or by any person(s) authorized to become
registered holder(s) by endorsements and documents
transmitted herewith. If signature is by a trustee,
executor, administrator, guardian, officer or other
person acting in a fiduciary or representative
capacity, please set forth full title. See
Instruction 3.
Name(s).............................................
..............................................
(PLEASE TYPE OR PRINT)
Capacity............................................
Address.............................................
..............................................
(INCLUDING ZIP CODE)
SIGNATURE GUARANTEE (IF REQUIRED BY INSTRUCTION 3)
Signature(s) Guaranteed by
an Eligible Institution:
Authorized Signature................................
Print or Type Name..................................
Title...............................................
Name of Firm........................................
Dated: ........................................ 1996
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER TO EXCHANGE REGISTERED
12 1/4% SENIOR SUBORDINATED DISCOUNT NOTES DUE 2006 FOR ANY AND ALL
OUTSTANDING 12 1/4% SENIOR SUBORDINATED DISCOUNT NOTES DUE 2006 OF SHARED
TECHNOLOGIES FAIRCHILD COMMUNICATIONS CORP.
1. DELIVERY OF THIS LETTER AND OLD NOTES; GUARANTEED DELIVERY PROCEDURES.
This Letter is to be completed by holders of Old Notes either if
certificates are to be forwarded herewith or if tenders are to be made
pursuant to the procedures for delivery by book-entry transfer set forth in
"The Exchange Offer--Book-Entry Transfer" section of the Prospectus.
Certificates for all physically tendered Old Notes, or Book-Entry
Confirmation, as the case may be, as well as a properly completed and duly
executed Letter of Transmittal (or facsimile thereof) and any other documents
required by this Letter, must be received by the Exchange Agent at the address
set forth herein on or prior to the Expiration Date, or the tendering holder
must comply with the guaranteed delivery procedures set forth below. Old Notes
tendered hereby must be in denominations of principal amount of maturity of
$1,000 and any integral multiple thereof.
Holders of Old Notes whose certificates for Old Notes are not immediately
available or who cannot deliver their certificates and all other required
documents to the Exchange Agent on or prior to the Expiration Date, or who
cannot complete the procedure for book-entry transfer on a timely basis, may
tender their Old Notes pursuant to the guaranteed delivery procedures set
forth in "The Exchange Offer--Guaranteed Delivery Procedures" section of the
Prospectus. Pursuant to such procedures, (i) such tender must be made through
an Eligible Institution (as defined below), (ii) prior to the Expiration Date,
the Exchange Agent must receive from such Eligible Institution a properly
completed and duly executed Letter of Transmittal (or facsimile thereof) and
Notice of Guaranteed Delivery, substantially in the form provided by the
Issuer (by facsimile transmission, mail or hand delivery), setting forth the
name and address of the holder of Old Notes and the amount of Old Notes
tendered, stating that the tender is being made thereby and guaranteeing that
within five New York Stock Exchange ("NYSE") trading days after the date of
execution of the Notice of Guaranteed Delivery, the certificates for all
physically tendered Old Notes, or a Book-Entry Confirmation, as the case may
be, and any other documents required by this Letter will be deposited by the
Eligible Institution with the Exchange Agent, and (iii) the certificates for
all physically tendered Old Notes, in proper form for transfer, or Book-Entry
Confirmation, as the case may be, and all other documents required by this
Letter, are received by the Exchange Agent within five NYSE trading days after
the date of execution of the Notice of Guaranteed Delivery.
The method of delivery of this Letter, the Old Notes and all other required
documents is at the election and risk of the tendering holders, but the
delivery will be deemed made only when actually received or confirmed by the
Exchange Agent. If Old Notes are sent by mail, it is suggested that the
mailing be made sufficiently in advance of the Expiration Date to permit
delivery to the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date.
See "The Exchange Offer" section of the Prospectus
2. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS OF OLD NOTES WHO TENDER BY
BOOK-ENTRY TRANSFER).
If less than all of the Old Notes evidenced by a submitted certificate are
to be tendered, the tendering holder(s) should fill in the aggregate principal
amount of Old Notes to be tendered in the box above entitled "Description of
Old Notes--Principal Amount Tendered". A reissued certificate representing the
balance of nontendered Old Notes will be sent to such tendering holder, unless
otherwise provided in the appropriate box on this Letter, promptly after the
Expiration Date. ALL OF THE OLD NOTES DELIVERED TO THE EXCHANGE AGENT WILL BE
DEEMED TO HAVE BEEN TENDERED UNLESS OTHERWISE INDICATED.
7
<PAGE>
3. SIGNATURES ON THIS LETTER; BOND POWERS AND ENDORSEMENTS; GUARANTEE OF
SIGNATURES.
If this Letter is signed by the registered holder of the Old Notes tendered
hereby, the signature must correspond exactly with the name as written on the
face of the certificates without any change whatsoever.
If any tendered Old Notes are owned of record by two or more joint owners,
all such owners must sign this Letter.
If any tendered Old Notes are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many
separate copies of this Letter as there are different registrations of
certificates.
When this Letter is signed by the registered holder of the Old Notes
specified herein and tendered hereby, no endorsements of certificates or
separate bond powers are required. If, however, the New Notes are to be
issued, or any untendered Old Notes are to be reissued, to a person other than
the registered holder, then endorsements of any certificates transmitted
hereby or separate bond powers are required. Signatures on such certificates
must be guaranteed by an Eligible Institution.
If this Letter is signed by a person other than the registered holder of any
certificates specified herein, such certificates must be endorsed or
accompanied by appropriate bond powers, in either case signed exactly as the
name of the registered holder appears on the certificates and the signatures
on such certificates must be guaranteed by an Eligible Institution.
If this Letter or any certificates or bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Issuer,
proper evidence satisfactory to the Issuer of their authority to so act must
be submitted.
ENDORSEMENTS ON CERTIFICATES FOR OLD NOTES OR SIGNATURES ON BOND POWERS
REQUIRED BY THIS INSTRUCTION 3 MUST BE GUARANTEED BY A FIRM WHICH IS A MEMBER
OF A REGISTERED NATIONAL SECURITIES EXCHANGE OR A MEMBER OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. OR BY A COMMERCIAL BANK OR TRUST
COMPANY HAVING AN OFFICE OR CORRESPONDENT IN THE UNITED STATES (AN "ELIGIBLE
INSTITUTION").
SIGNATURES ON THIS LETTER NEED NOT BE GUARANTEED BY AN ELIGIBLE INSTITUTION,
PROVIDED THE OLD NOTES ARE TENDERED: (I) BY A REGISTERED HOLDER OF OLD NOTES
(WHICH TERM, FOR PURPOSES OF THE EXCHANGE OFFER, INCLUDES ANY PARTICIPANT IN
THE BOOK-ENTRY TRANSFER FACILITY SYSTEM WHOSE NAME APPEARS ON A SECURITY
POSITION LISTING AS THE HOLDER OF SUCH OLD NOTES) TENDERED WHO HAS NOT
COMPLETED THE BOX ENTITLED "SPECIAL ISSUANCE INSTRUCTIONS" OR "SPECIAL
DELIVERY INSTRUCTIONS" ON THIS LETTER, OR (II) FOR THE ACCOUNT OF AN ELIGIBLE
INSTITUTION.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS.
Tendering holders of Old Notes should indicate in the applicable box the
name and address to which New Notes issued pursuant to the Exchange Offer
and/or substitute certificates evidencing Old Notes not exchanged are to be
issued or sent, if different from the name or address of the person signing
this Letter. In the case of issuance in a different name, the employer
identification or social security number of the person named must
8
<PAGE>
also be indicated. A holder of Old Notes tendering Old Notes by book-entry
transfer may request that Old Notes not exchanged be credited to such account
maintained at the Book-Entry Transfer Facility as such holder of Old Notes may
designate hereon. If no such instructions are given, such Old Notes not
exchanged will be returned to the name or address of the person signing this
Letter.
5. TAX IDENTIFICATION NUMBER.
Federal income tax law generally requires that a tendering holder whose Old
Notes are accepted for exchange must provide the Issuer (as payor) with such
holder's correct Taxpayer Identification Number ("TIN") on Substitute Form W-9
below, which, in the case of a tendering holder who is an individual, is his
or her social security number. If the Issuer is not provided with the current
TIN or an adequate basis for an exemption, such tendering holder may be
subject to a $50 penalty imposed by the Internal Revenue Service. In addition,
delivery of New Notes to such tendering holder may be subject to backup
withholding in an amount equal to 31% of all reportable payments made after
the exchange. If withholding results in an overpayment of taxes, a refund may
be obtained.
Exempt holders of Old Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. See the enclosed Guidelines of Certification of
Taxpayer Identification Number on Substitute Form W-9 (the "W-9 Guidelines")
for additional instructions.
To prevent backup withholding, each tendering holder of Old Notes must
provide its correct TIN by completing the "Substitute Form W-9" set forth
below, certifying that the TIN provided is correct (or that such holder is
awaiting a TIN) and that (i) the holder is exempt from backup withholding,
(ii) the holder has not been notified by the Internal Revenue Service that
such holder is subject to a backup withholding as a result of a failure to
report all interest or dividends or (iii) the Internal Revenue Service has
notified the holder that such holder is no longer subject to backup
withholding. If the tendering holder of Old Notes is a nonresident alien or
foreign entity not subject to backup withholding, such holder must give the
Issuer a completed Form W-8, Certificate of Foreign Status. These forms may be
obtained from the Exchange Agent. If the Old Notes are in more than one name
or are not in the name of the actual owner, such holder should consult the W-9
Guidelines for information on which TIN to report. If such holder does not
have a TIN, such holder should consult the W-9 Guidelines for instructions on
applying for a TIN, check the box in Part 2 of the Substitute Form W-9 and
write "applied for" in lieu of its TIN. Note: checking this box and writing
"applied for" on the form means that such holder has already applied for a TIN
or that such holder intends to apply for one in the near future. If such
holder does not provide its TIN to the Issuer within 60 days, backup
withholding will begin and continue until such holder furnishes its TIN to the
Issuer.
6. TRANSFER TAXES.
The Issuer will pay all transfer taxes, if any, applicable to the transfer
of Old Notes to it or its order pursuant to the Exchange Offer. If, however,
New Notes and/or substitute Old Notes not exchanged are to be delivered to, or
are to be registered or issued in the name of, any person other than the
registered holder or the Old Notes tendered hereby, or if tendered Old Notes
are registered in the name of any person other than the person signing this
Letter, or if a transfer tax is imposed for any reason other than the transfer
of Old Notes to the Issuer or its order pursuant to the Exchange Offer, the
amount of any such transfer taxes (whether imposed on the registered holder or
any other persons) will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted
herewith, the amount of such transfer taxes will be billed directly to such
tendering holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT WILL NOT BE NECESSARY FOR
TRANSFER TAX STAMPS TO BE AFFIXED TO THE OLD NOTES SPECIFIED IN THIS LETTER.
7. WAIVER OF CONDITIONS.
The Issuer reserves the absolute right to waive satisfaction of any or all
conditions enumerated in this Prospectus.
9
<PAGE>
8. NO CONDITIONAL TENDERS.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders of Old Notes, by execution of this Letter,
shall waive any right to receive notice of the acceptance of their Old Notes
for exchange.
Neither the Issuer, the Exchange Agent nor any other person is obligated to
give notice of any defect or irregularity with respect to any tender of Old
Notes nor shall any of them incur any liability for failure to give any such
notice.
9. MUTILATED, LOST, STOLEN, OR DESTROYED OLD NOTES.
Any holder whose Old Notes have been mutilated, lost stolen or destroyed
should contract the Exchange Agent at the address indicated above for further
instructions.
10. REQUEST FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Prospectus and this Letter, may be directed to the
Exchange Agent, at the address and telephone number indicated above.
10
<PAGE>
PART 1--PLEASE PROVIDE YOUR Social Security
SUBSTITUTE TIN IN THE BOX AT RIGHT AND Number or Employer
FORM W-9 CERTIFY BY SIGNING AND DATING Identification
DEPARTMENT OF BELOW. Number
THE TREASURY PART 2--TIN APPLIED FOR. [_]
INTERNAL TIN: ____________
REVENUE SERVICE -----------------------------------------------------
-----------------------------------------------------
CERTIFICATION--UNDER THE PENALTIES OF PERJURY, I
TO BE COMPLETED BY ALL CERTIFY THAT:
TENDERING HOLDERS (1) the number shown on this form is my correct
(SEE INSTRUCTION 5) Taxpayer Identification Number (or I waiting for a
PAYOR'S NAME: SHARED number to be issued to me).
TECHNOLOGIES FAIRCHILD (2) I am not subject to backup withholding either
COMMUNICATIONS CORP. because: (a) I am exempt from backup withholding,
PAYOR'S REQUEST FOR or (b) I have not been notified by the Internal
TAXPAYER IDENTIFICATION Revenue Service (the "IRS") that I am subject to
NUMBER ("TIN") AND backup withholding as a result of a failure to re-
CERTIFICATION port all interest or dividends or (c) the IRS has
notified me that I am no longer subject to backup
withholding, and
(3) any other information provided on this form is
true and correct.
SIGNATURE: ________________ DATE: ________________
You must cross out item (2) of the above certification if you have been
notified by the IRS that you are subject to backup withholding because of
underreporting of interest or dividends on your tax return and you have not
been notified by the IRS that you are no longer subject to backup withholding.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU
CHECKED THE BOX IN PART 2 OF SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administrative Office or
(b) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number by the
time of the exchange, 31 percent of all reportable payments made to me
thereafter will be withheld until I provide a number.
___________________________________ ___________________________________
SIGNATURE DATE
11
<PAGE>
EXHIBIT 99.2
FORM OF NOTICE OF GUARANTEED DELIVERY
NOTICE OF GUARANTEED DELIVERY FOR
SHARED TECHNOLOGIES FAIRCHILD COMMUNICATIONS CORP.
This form or one substantially equivalent hereto must be used to accept the
Exchange Offer of Shared Technologies Fairchild Communications Corp. (the
"Issuer") made pursuant to the Prospectus, dated , 1996 (the
"Prospectus"), and the enclosed Letter of Transmittal (the "Letter of
Transmittal") if certificates for Old Notes of the Issuer are not immediately
available or if the procedure for book-entry transfer cannot be completed on a
timely basis or time will not permit all required documents to reach the
Issuer prior to 5:00 P.M., New York City time, on the Expiration Date of the
Exchange Offer. Such form may be delivered or transmitted by facsimile
transmission, mail or hand delivery to United States Trust Company Of New York
(the "Exchange Agent") as set forth below. In addition, in order to utilize
the guaranteed delivery procedure to tender Old Notes pursuant to the Exchange
Offer, a completed, signed and dated Letter of Transmittal (or facsimile
thereof) must also be received by the Exchange Agent prior to 5:00 P.M., New
York City time, on the Expiration Date. Capitalized terms not defined herein
are defined in the Prospectus.
UNITED STATES TRUST COMPANY OF NEW YORK, EXCHANGE AGENT
By Mail: Facsimile Transmission By Hand:
Number:
United States Trust
United States Trust
Company of New York (212) 420-6152 Company of New York
P.O. Box 844 111 Broadway, Lower
Cooper Station (For Eligible Level
New York, New York Institutions Only) New York, New York 10006
Attn: Corporate Trust
10216-0844
Attn: Corporate Confirm by Telephone: Services
Trust Services
(800) 548-6565 By Overnight Courier:
(Registered or Certified
Mail Recommended) United States Trust
Company of New York
770 Broadway--13th Floor
New York, New York 10003
Attn: Corporate Trust
Services
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
<PAGE>
Ladies and Gentlemen:
Upon the terms and conditions set forth in the Prospectus and the
accompanying Letter of Transmittal, the undersigned hereby tenders to the
Issuer the principal amount of Old Notes set forth below, pursuant to the
guaranteed delivery procedure described in "The Exchange Offer--Guaranteed
Delivery Procedures" section of the Prospectus.
Principal Amount of Old Notes If Old Notes will be delivered by
Tendered: book-entry transfer to The
$ ___________________________________ Depository Trust Company, provide
account number.
Certificate Nos. (if available): ____ Account Number: _____________________
Total Principal Amount Represented
by Old Notes Certificate(s): ________
ALL AUTHORITY HEREIN CONFERRED OR AGREED TO BE CONFERRED SHALL SURVIVE THE
DEATH OR INCAPACITY OF THE UNDERSIGNED AND EVERY OBLIGATION OF THE UNDERSIGNED
HEREUNDER SHALL BE BINDING UPON THE HEIRS, PERSONAL REPRESENTATIVES,
SUCCESSORS AND ASSIGNS OF THE UNDERSIGNED.
PLEASE SIGN HERE:
X ___________________________________ ____________
X ___________________________________ ____________
Signature(s) of Owner(s) or Date
Authorized Signatory
Area Code and Telephone Number: ______________________
Must be signed by the holder(s) of Old Notes as the name(s) of such
holder(s) appear(s) on the Old Notes certificate(s) or on a security position
listing, or by person(s) authorized to become registered holder(s) by
endorsement and documents transmitted with this Notice of Guaranteed Delivery.
If signature is by a trustee, executor, administrator, guardian, attorney-in-
fact, officer or other person acting in a fiduciary or representative
capacity, such person must set forth his or her full title below.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s):
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
Capacity:
_____________________________________________________________________
Address(es):
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
2
<PAGE>
GUARANTEE
The undersigned, a member of a registered national securities exchange, or a
member of the National Association of Securities Dealers, Inc., or a
commercial bank or Trust Company having an office or correspondent in the
United States, hereby guarantees that the certificates representing the
principal amount of Old Notes tendered hereby in proper form for transfer, or
timely confirmation of the book-entry transfer of such Old Notes into the
Exchange Agent's account at The Depository Trust Company pursuant to the
procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures"
section of the Prospectus, together with a properly completed and duly
executed Letter of Transmittal (or facsimile thereof) with any required
signature guarantee and any other documents required by the Letter of
Transmittal, will be received by the Exchange Agent at the address set forth
above, no later than five New York Stock Exchange trading days after the date
of execution hereof.
Name of Firm __________________________________________________________________
Authorized Signature
Print Name: ___________________________________________________________________
Title: ________________________________________________________________________
Address _______________________________________________________________________
Name: _________________________________________________________________________
(Please Type or Print)
Area Code and Tel. No.: _____________ Dated: ______________________________
NOTE: DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS FORM. CERTIFICATES FOR
OLD NOTES SHOULD ONLY BE SENT WITH YOUR LETTER OF TRANSMITTAL.
3
<PAGE>
EXHIBIT 99.3
SHARED TECHNOLOGIES FAIRCHILD COMMUNICATIONS CORP.
OFFER TO EXCHANGE ITS REGISTERED
12 1/4% SENIOR SUBORDINATED DISCOUNT NOTES DUE 2006
FOR ANY AND ALL OF ITS OUTSTANDING
12 1/4% SENIOR SUBORDINATED DISCOUNT NOTES DUE 2006
TO: BROKERS, DEALERS, COMMERCIAL BANKS,
TRUST COMPANIES AND OTHER NOMINEES:
Shared Technologies Fairchild Communications Corp. (the "Issuer") is
offering to exchange (the "Exchange Offer"), upon and subject to the terms and
conditions set forth in the Prospectus, dated , 1996 (the "Prospectus"),
and the enclosed Letter of Transmittal (the "Letter of Transmittal"), its
registered 12 1/4% Senior Subordinated Discount Notes Due 2006 (the "New
Notes") for any and all of its outstanding 12 1/4% Senior Subordinated
Discount Notes Due 2006 (the "Old Notes"). The Exchange Offer is being made in
order to satisfy certain obligations of the Issuer contained in the
Registration Rights Agreement dated as of March 8, 1996, between the Issuer
and the other signatories thereto.
We are requesting that you contact your clients for whom you hold Old Notes
regarding the Exchange Offer. For your information and for forwarding to your
clients for whom you hold Old Notes registered in your name or in the name of
your nominee, or who hold Old Notes registered in their own names, we are
enclosing the following documents:
1. Prospectus dated , 1996;
2. The Letter of Transmittal for your use and for the information of your
clients;
3. A Notice of Guaranteed Delivery to be used to accept the Exchange
Offer if certificates for Old Notes are not immediately available or time
will not permit all required documents to reach the Exchange Agent prior to
the Expiration Date (as defined below) or if the procedure for book-entry
transfer cannot be completed on a timely basis;
4. A form of letter which may be sent to your clients for whose account
you hold Old Notes registered in your name or the name of your nominee,
with space provided for obtaining such clients' instructions with regard to
the Exchange Offer;
5. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9; and
6. Return envelopes addressed to United States Trust Company Of New York,
the Exchange Agent for the Old Notes.
YOUR PROMPT ACTION IS REQUESTED. THE EXCHANGE OFFER WILL EXPIRE AT 5:00
P.M., NEW YORK CITY TIME, ON , 1996 (THE "EXPIRATION DATE"), UNLESS
EXTENDED BY THE ISSUER. THE OLD NOTES TENDERED PURSUANT TO THE EXCHANGE OFFER
MAY BE WITHDRAWN AT ANY TIME BEFORE , 1996.
To participate in the Exchange Offer, a duly executed and properly completed
Letter of Transmittal (or facsimile thereof), with any required signature
guarantees and any other required documents, should be sent to the Exchange
Agent and certificates representing the Old Notes should be delivered to the
Exchange Agent, all in accordance with the instructions set forth in the
Letter of Transmittal and the Prospectus.
If holders of Old Notes wish to tender, but it is impracticable for them to
forward their certificates for Old Notes prior to the expiration of the
Exchange Offer or to comply with the book-entry transfer procedures on a
timely basis, a tender may be effected by following the guaranteed delivery
procedures described in the Prospectus under "The Exchange Offer--Guaranteed
Delivery Procedures".
<PAGE>
The Issuer will, upon request, reimburse brokers, dealers, commercial banks
and trust companies for reasonable and necessary costs and expenses incurred
by them in forwarding the Prospectus and the related documents to the
beneficial owners of Old Notes held by them as nominee or in a fiduciary
capacity. The Issuer will pay or cause to be paid all stock transfer taxes
applicable to the exchange of Old Notes pursuant to the Exchange Offer, except
as set forth in Instruction 6 of the Letter of Transmittal.
Any inquiries you may have with respect to the Exchange Offer, or requests
for additional copies of the enclosed materials, should be directed to the
Exchange Agent for the Old Notes, at its address and telephone number set
forth on the front of the Letter of Transmittal.
Very truly yours,
Shared Technologies Fairchild
Communications Corp.
NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY
OTHER PERSON AS AN AGENT OF THE ISSUER OR THE EXCHANGE AGENT, OR AUTHORIZE YOU
OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF OF
EITHER OF THEM WITH RESPECT TO THE EXCHANGE OFFER, EXCEPT FOR STATEMENTS
EXPRESSLY MADE IN THE PROSPECTUS OR THE LETTER OF TRANSMITTAL.
Enclosures
2
<PAGE>
EXHIBIT 99.4
SHARED TECHNOLOGIES FAIRCHILD COMMUNICATIONS CORP.
OFFER TO EXCHANGE ITS REGISTERED
12 1/4 NOTES DUE 2006
FOR ANY AND ALL OF ITS OUTSTANDING
12 1/4 NOTES DUE 2006
TO OUR CLIENTS:
Enclosed for your consideration is a Prospectus, dated , 1996 (the
"Prospectus"), and the enclosed Letter of Transmittal (the "Letter of
Transmittal"), relating to the offer (the "Exchange Offer") of Shared
Technologies Fairchild Communications Corp. (the "Issuer") to exchange its
registered 12 1/4 Senior Subordinated Discount Notes Due 2006 (the "New
Notes") for any and all of its outstanding 12 1/4 Senior Subordinated Discount
Notes Due 2006 (the "Old Notes"), upon the terms and subject to the conditions
described in the Prospectus. The Exchange Offer is being made in order to
satisfy certain obligations of the Issuer contained in the Exchange
Registration Rights Agreement dated as of May 10, 1996, between the Issuer and
the other signatory thereto.
This material is being forwarded to you as the beneficial owner of the Old
Notes carried by us in your account but not registered in your name. A TENDER
OF SUCH OLD NOTES MAY ONLY BE MADE BY US AS THE HOLDER OF RECORD AND PURSUANT
TO YOUR INSTRUCTIONS.
Accordingly, we request instructions as to whether you wish us to tender on
your behalf the Old Notes held by us for your account, pursuant to the terms
and conditions set forth in the enclosed Prospectus and Letter of Transmittal.
Your instructions should be forwarded to us as promptly as possible in order
to permit us to tender the Old Notes on your behalf in accordance with the
provisions of the Exchange Offer. The Exchange Offer will expire at 5:00 p.m.,
New York City time, on , 1996, unless extended by the Issuer. Any Old
Notes tendered pursuant to the Exchange Offer may be withdrawn at any time
before 5:00 p.m., New York City time, on , 1996.
Your attention is directed to the following:
1. The Exchange Offer is for any and all Old Notes.
2. The Exchange Offer is subject to certain conditions set forth in the
Prospectus in the section captioned "The Exchange Offer--Conditions".
3. Any transfer taxes incident to the transfer of Old Notes from the
holder to the Issuer will be paid by the Issuer, except as otherwise
provided in the Instructions in the Letter of Transmittal.
4. The Exchange Offer expires at 5:00 p.m., New York City time, on ,
1996, unless extended by the Issuer.
If you wish to have us tender your Old Notes, please so instruct us by
completing, executing and returning to us the instruction form on the back of
this letter. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR INFORMATION
ONLY AND MAY NOT BE USED DIRECTLY BY YOU TO TENDER OLD NOTES.
<PAGE>
INSTRUCTIONS WITH RESPECT TO THE EXCHANGE OFFER
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer made by Shared
Technologies Fairchild Communications Corp. with respect to its Old Notes.
This will instruct you to tender the Old Notes held by you for the account
of the undersigned, upon and subject to the terms and conditions set forth in
the Prospectus and the related Letter of Transmittal.
Please tender the Old Notes held by you for my account as indicated below:
AGGREGATE PRINCIPAL AMOUNT OF OLD NOTES
12 1/4% Senior Subordinated Discount Notes Due 2006: $
[_] Please do not tender any Old Notes held by you for my account.
Dated: , 1996
_____________________________________
_____________________________________
Signature(s)
_____________________________________
_____________________________________
_____________________________________
Please print name(s) here
_____________________________________
_____________________________________
Address(es)
_____________________________________
Area Code(s) and Telephone Number(s)
_____________________________________
Tax Identification or Social
Security No(s).
None of the Old Notes held by us for your account will be tendered unless we
receive written instructions from you to do so. Unless a specific contrary
instruction is given in the space provided, your signature(s) hereon shall
constitute an instruction to us to tender all the Old Notes held by us for
your account.
2
