PRELIMINARY COPY
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. 2)
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|x| Preliminary Proxy Statement |_| Confidential for Use of the Com-
mission Only (as permitted by
Rule 14a-6(e)(2))
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
SHARED TECHNOLOGIES INC.
(Name of Registrant as Specified in Its Charter)
-----------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|_| $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1),
or 14a-6(i)(2) or Item 22(a) of Schedule 14A.
|_| $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
|X| Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, Cumulative Convertible Preferred Stock, Special
Preferred Stock.
(2) Aggregate number of securities to which transaction applies:
<PAGE>
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
<TABLE>
<CAPTION>
<S> <C>
Common stock (6,000,000 shares at $3.44 per share*) = $20,640,000
------------------------------------------------- ---------------------------------
Cumulative Convertible Preferred Stock = $25,000,000 (liquidation value)
-------------------------------------------------------------------------------------------------------
Special Preferred Stock = $20,000,000 (liquidation value)
Payment for preferred stock and assumed debt = $223,500,000
-----------------------------------------------------------------------------------
</TABLE>
(4) Proposed maximum aggregate value of transaction:
$289,140,000
(5) Total fee paid:
$57,828.00
|X| Fee paid previously with preliminary materials.
|X| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$57,828.00
(2) Form, Schedule or Registration Statement No.:
Schedule 14A
(3) Filing Party:
Shared Technologies Inc.
(4) Date Filed:
December 1, 1995
- --------
* Average of the high ($3.62) and low ($3.25) prices as reported on November
24, 1995, a date which is within five (5) business days prior to the date
of filing.
<PAGE>
SHARED TECHNOLOGIES INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
March 4, 1996 at 2:00 p.m.
Notice is hereby given that a Special Meeting of Stockholders of Shared
Technologies Inc. ("STI") will be held on March 4, 1996, at 2:00 p.m., at the
offices of S.G. Warburg & Co., Inc., 277 Park Avenue, New York, New York (the
"Meeting"), to consider and act upon the following matter:
Approval of Merger and Amendments to Restated Certificate of
Incorporation. Approval of (i) the merger of Fairchild
Industries, Inc. ("FII") with and into STI with STI as the
surviving corporation (the "Merger") pursuant to the terms of
an Agreement and Plan of Merger, dated as of November 9, 1995,
as amended pursuant to that certain Amendment dated February 2,
1996 (the "Merger Agreement"), as a result of which STI will
issue to RHI Holdings, Inc., the sole holder of FII common
stock ("RHI"), upon delivery to STI by RHI of its stock
certificates evidencing the common stock of FII 6,000,000
shares of Common Stock and shares of STI Cumulative Convertible
Preferred Stock and Special Preferred Stock having an aggregate
initial liquidation preference of $45,000,000 (together the
"Preferred Stock") and holders of preferred stock of FII will
be paid approximately $40,000,000 (the terms of the Merger
Agreement and Preferred Stock are described in, and a copy of
the Merger Agreement is attached as Exhibit A to, the attached
Proxy Statement, which the Board of Directors of STI encourages
each stockholder to review carefully), and (ii) amendments to
the Restated Certificate of Incorporation of STI as required by
the Merger Agreement as a condition to the Merger to:
a) increase the authorized Common Stock, $.004 par value per share of STI
from 20,000,000 to 50,000,000 shares;
b) increase the authorized shares of preferred stock, $.01 par value per
share from 10,000,000 to 25,000,000; and
c) change the name of STI to "Shared Technologies Fairchild Inc."
Only holders of record of Common Stock at the close of business on
February 1, 1996, are entitled to notice of and to vote at the Meeting.
By Order of the
Board of Directors,
Kenneth M. Dorros, Secretary
Dated: February 12, 1996
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE
AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE IN
ORDER TO ASSURE REPRESENTATION OF YOUR SHARES AT THE MEETING. NO POSTAGE NEED BE
AFFIXED IF THE PROXY IS MAILED IN THE UNITED STATES. THE GIVING OF SUCH PROXY
DOES NOT AFFECT YOUR RIGHT TO VOTE IN PERSON. YOU MAY REVOKE YOUR PROXY AT
ANYTIME BEFORE IT IS VOTED. PROPERLY EXECUTED PROXIES WILL BE VOTED IN THE
MANNER DIRECTED BY THE STOCKHOLDER. IF NO DIRECTION IS MADE, THE PROXY WILL BE
VOTED "FOR" THE MERGER AND THE AMENDMENTS TO THE RESTATED CERTIFICATE OF
INCORPORATION. STOCKHOLDERS WHO VOTE AGAINST OR DO NOT VOTE FOR THE MERGER WILL
HAVE NO APPRAISAL RIGHTS IF THE MERGER IS APPROVED AND CONSUMMATED.
<PAGE>
PRELIMINARY COPY
SHARED TECHNOLOGIES INC.
100 Great Meadow Road
Wethersfield, CT 06109
PROXY STATEMENT FOR A SPECIAL MEETING
OF STOCKHOLDERS
TO BE HELD ON March 4, 1996.
INTRODUCTION
This Proxy Statement is being furnished on behalf of Shared
Technologies Inc., a Delaware corporation ("STI"), in connection with the
solicitation of proxies to be voted at a Special Meeting (together with any
adjournment(s) thereof, the "Meeting") of Stockholders of STI (the
"Stockholders"). The Meeting is to be held at 2:00 p.m., Eastern Time, on March
4, 1996, at the offices of S.G. Warburg & Co., Inc., 277 Park Avenue, New York,
New York. This Proxy Statement and the Proxy are first being mailed to
Stockholders on or about February 12, 1996.
The Board of Directors of STI (the "Board") is soliciting the proxies
of the Stockholders who were known on STI's records as holders of issued and
outstanding shares of common stock, par value $.004 per share (the "Common
Stock") of STI as of the close of business on February 1, 1996 (the "Record
Date") to consider and vote upon approval of a merger by and between STI and
Fairchild Industries, Inc., a Delaware corporation ("FII") with STI as the
Surviving Corporation (the "Merger"), pursuant to an Agreement and Plan of
Merger dated as of November 9, 1995, as amended pursuant to that certain
Amendment dated February 2, 1996 (the "Merger Agreement") and, as required by
the Merger Agreement as a condition of the Merger, amendments to the Restated
Certificate of Incorporation to (a) increase the authorized Common Stock to
50,000,000 shares, (b) increase the authorized preferred stock to 25,000,000
shares and (c) change the name of STI to "Shared Technologies Fairchild Inc."
(the "Amendments").
The Merger will be effected subject to the terms and conditions of the
Merger Agreement which are summarized in this Proxy Statement. A copy of the
Merger Agreement is attached as Exhibit A to this Proxy Statement. All
Stockholders are encouraged to review the Merger Agreement in its entirety.
Upon consummation of the Merger, the Amendments will become effective
and RHI Holdings, Inc. ("RHI"), the sole holder of all outstanding shares of FII
common stock, will receive, (i) 6,000,000 shares of STI Common Stock, (ii)
shares of STI Cumulative Convertible Preferred Stock bearing a six percent
initial annual dividend and having an aggregate liquidation preference of
$25,000,000 plus an amount equal to the total amount of dividends the holders
would have received if dividends had been paid at the rate of ten percent, less
the amount of dividends actually paid, and (iii) shares of STI Special Preferred
Stock having an aggregate initial liquidation preference of $20,000,000 (the
"Common Consideration"). In connection with the Merger, all shares of Series A
Convertible Preferred Stock and Series C Cumulative Preferred Stock of FII will
be cancelled in consideration of the payment of the full liquidation value
thereof together with accrued dividends aggregating approximately $40,000,000
(the "Preferred Consideration"). All shares of Series B Preferred Stock of FII
will be contributed to STI as the entity surviving the Merger (the "Surviving
Corporation") and cancelled. See "Information about STI - Description of
Securities".
<PAGE>
Upon consummation of the Merger, all shares of FII capital stock shall
no longer be outstanding, shall automatically be cancelled and retired and shall
cease to exist, and each holder of a certificate representing any shares of FII
common stock and FII preferred stock shall cease to have any rights with respect
thereto, except, as to holders of FII common stock, the right to receive the
Common Consideration and, as to holders of FII preferred stock, the right to
receive the Preferred Consideration, each upon the surrender of their respective
stock certificates.
In connection with the Merger, STI has agreed that it will be
responsible for certain FII liabilities as hereinafter described. STI will,
however, be indemnified by RHI and its parent, The Fairchild Corporation and
certain other FII affiliates with respect to all non-telecommunications
liabilities not specifically assumed (as described in the next paragraph). As
the result of the structure of the transaction as a merger with FII, STI will
become liable for all obligations arising out of FII's operations predating the
Merger, including those which are unrelated to FII's telecommunications
business. Prior to the Merger, FII and its affiliates will undergo a
recapitalization designed to leave in FII only telecommunications assets and
liabilities (and the liabilities specified in the next paragraph) and to divest
FII of assets and liabilities associated with its Aerospace Fasteners and
Industrial Products businesses and discontinued operations. See "Special Factors
- - FII Recapitalization, Liabilities and Indemnification".
STI intends to use funds obtained from bank loans and the sale of debt
securities of the Surviving Corporation (the "Financing") (i) to pay the
Preferred Consideration, (ii) to repay all principal and accrued interest owed
to the holders of FII's outstanding 12 1/4% Senior Secured Notes Due 1999 (the
"FII Senior Notes") to the extent that such holders elect to be repaid pursuant
to a tender offer initiated by FII preceding the Merger ($125,000,000
outstanding; the aggregate amount so repaid is hereafter referred to as the
"Note Purchase Amount"), (iii) to pay approximately $183,500,000 (less the Note
Purchase Amount) in indebtedness of FII, (iv) to repay State Street Bank and
Trust Company for all amounts outstanding as of the consummation of the Merger
with respect to STI's current loan facility and (v) to fund fees and expenses
incurred in connection with the Merger, and it is a condition to the
consummation of the Merger that net proceeds from the financing be sufficient to
pay all of the foregoing. STI and FII have retained CS First Boston Corporation
to raise the required funds and have received a "highly confident" letter from
CS First Boston Corporation with respect to its ability to secure $260,000,000
in debt, which includes a $25,000,000 working capital line of credit. See
"Special Factors - Required Financing and Effects Thereof".
Approval of the Merger and Amendments will require the favorable vote
of the holders of a majority of all outstanding shares of Common Stock. As of
the Record Date, there were 8,506,448 issued and outstanding shares of Common
Stock held of record and beneficially by 1,856 Stockholders. As of the Record
Date, the members of the Board and the executive officers of STI owned an
aggregate of 2,220,236 shares (approximately 23.6% of the total shares of Common
Stock outstanding). Anthony D. Autorino, Chief Executive Officer, President and
Chairman of STI and owner of 13.6% of the outstanding shares of Common Stock has
delivered an irrevocable proxy to FII in favor of the Merger and Amendments. For
additional information concerning the beneficial ownership of shares of Common
Stock, see "Information About STI - Security Ownership of Certain Beneficial
Owners and Management."
The Board believes that the Merger is fair to the Stockholders and in the
best interest of STI and its Stockholders, and the Board of Directors recommends
that the Stockholders vote for approval of the Merger and Amendments. In making
this recommendation, the Board is relying upon, among other things, the opinion
of S.G. Warburg & Co. Inc. ("S.G. Warburg"), which STI retained to determine the
fairness, from a financial point of view, of the consideration offered by STI in
the Merger. See "Special Factors - Board of Directors Determination of Fairness
of the Proposal" and "Special Factors - Opinion of S.G. Warburg."
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<PAGE>
No persons have been authorized to give any information or to make any
representation other than those contained in this Proxy Statement in connection
with the solicitation of proxies and, if given or made, such information or
representation must not be relied upon as having been authorized by STI, FII or
any other person. This Proxy Statement does not constitute the solicitation of a
proxy, in any jurisdiction to or from any person to whom it is not lawful to
make any such solicitation in such jurisdiction. The delivery of this Proxy
Statement shall not under any circumstances create an implication that there has
been no change in the affairs of STI or FII since the date hereof or that the
information herein is correct as of any time subsequent to its date.
AVAILABLE INFORMATION
STI is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files periodic reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the Commission's
public reference facilities located at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549 and the public reference facilities in the Commission's
New York Regional Office, 7 World Trade Center, Suite 1300, New York, New York
10048 and Chicago Regional Office, Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be
obtained at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549.
A COPY OF STI'S ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1994 MAY BE OBTAINED WITHOUT CHARGE
TO ANY STOCKHOLDER AS OF THE RECORD DATE UPON WRITTEN REQUEST TO THE SECRETARY,
SHARED TECHNOLOGIES INC., 100 GREAT MEADOW ROAD, WETHERSFIELD, CONNECTICUT
06109.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR
MERITS OF SUCH TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
The date of this Proxy Statement is February 12,1996.
-3-
<PAGE>
SHARED TECHNOLOGIES INC.
PROXY STATEMENT
Table of Contents
INTRODUCTION.................................................................. 1
AVAILABLE INFORMATION......................................................... 3
SUMMARY OF PROXY STATEMENT.................................................... 7
Business of the Companies.............................................. 7
The Meeting and Proxy Information...................................... 8
The Merger and Amendments.............................................. 8
Security Ownership of Management and Certain Other Persons.............12
Special Factors........................................................12
Interests of Certain Persons In the Merger.............................12
No Appraisal Rights for Stockholders...................................12
Material Federal Income Tax Consequences...............................13
Regulatory Requirements................................................13
Summary Financial Information - STI....................................14
Summary Financial Information - FII....................................15
Summary Pro Forma Financial Information
- STI and FII Combined...............................................16
THE MEETING...................................................................17
General................................................................17
Matters To Be Considered at the Meeting................................17
Board of Directors Recommendation......................................17
Voting at the Meeting; Record Date.....................................17
Proxies................................................................18
SPECIAL FACTORS...............................................................19
Background of the Merger...............................................19
Reasons for the Merger and Amendments; Recommendations
of the Board of Directors............................................24
Required Financing and Effects Thereof.................................25
Opinion of S.G. Warburg................................................25
The Proposed Merger....................................................27
Pro Forma Impact Analysis..............................................29
FII Recapitalization, Liabilities and Indemnification..................31
Material Federal Income Tax Consequences...............................32
Accounting Treatment of the Merger.....................................33
Interests of Certain Persons in the Merger.............................33
Effect if the Merger and Amendments are Not Approved...................34
PROPOSAL TO APPROVE THE MERGER AND AMENDMENTS.................................35
General................................................................35
Certain Effects Of The Merger..........................................35
Effective Time.........................................................36
Other Terms and Conditions.............................................37
Additional Agreements..................................................37
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<PAGE>
Changes to Bylaws......................................................39
Rights of Dissenting Stockholders......................................39
Fees and Expenses......................................................39
Regulatory Requirements................................................40
Amendment; Termination ................................................40
PRO FORMA FINANCIAL INFORMATION...............................................42
Pro Forma Combined Balance Sheet
September 30, 1995...................................................43
Pro Forma Combined Statement of Operations
for the nine months September 30, 1995...............................45
Pro Forma Combined Statement of
Operations for the year ended December 31, 1994......................46
Notes to Pro Forma
Combined Financial Statements........................................47
STI Unaudited Pro Forma Consolidated
Financial Statements.................................................51
STI Pro Forma Consolidated Balance Sheet
September 30, 1995...................................................52
STI Pro Forma Consolidated Statement
of Operations for the nine months ended September 30, 1995...........53
STI Pro Forma Consolidated Statement
of Operations for the year ended December 31, 1994...................54
STI Notes to Pro Forma Consolidated Financial Statements...............55
FII Unaudited Pro Forma Consolidated
Financial Statements.................................................57
FII Pro Forma Consolidated Balance Sheet
September 30, 1995...................................................58
FII Pro Forma Consolidated Statement
of Operations for the nine months ended September 30, 1995...........59
FII Pro Forma Consolidated Statement
of Operations for the year ended December 31, 1994...................60
FII Notes to Pro Forma Consolidated Financial Statements...............61
INFORMATION ABOUT STI.........................................................62
Business...............................................................62
Price Range of Common Stock............................................62
Selected Financial Data................................................63
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................65
Liquidity Capital Resources............................................68
Pro Forma Liquidity and Capital Resources..............................69
Experts................................................................69
Description of Securities..............................................70
Security Ownership of Certain Beneficial Owners
and Management.......................................................73
INFORMATION ABOUT FII.........................................................76
Formation, Historical Operations and Recapitalization..................76
Communications Services Business.......................................77
FII Senior Notes.......................................................77
Legal Matters..........................................................77
Selected Financial Data................................................78
Management's Discussion and Analysis of Financial
-5-
<PAGE>
Condition and Results of Operations................................. 80
Experts............................................................... 84
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF STI............................F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF FII..........................F-105
EXHIBITS
Merger Agreement...................................................... A
First Amendment to Agreement and Plan of Merger.......................A-1
Opinion of S.G. Warburg & Co., Inc.................................... B
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<PAGE>
SUMMARY OF PROXY STATEMENT
The following is a summary of certain information contained elsewhere
in this Proxy Statement. Reference is made to, and this summary is qualified in
its entirety by, the more detailed information contained in this Proxy Statement
and the Exhibits hereto. Unless otherwise defined herein, capitalized terms used
in this summary have the respective meaning ascribed to them elsewhere in this
Proxy Statement. Stockholders are urged to read carefully this Proxy Statement
and the Exhibits hereto in their entirety.
Business of the Companies
Shared Technologies
Inc. ("STI")....... STI was originally incorporated in Delaware on
January 30, 1986. By a Plan and Agreement of Merger
dated March 8, 1988, STI effected a statutory merger
with and into Balcon, Inc., a Delaware corporation
(incorporated September 23, 1987), which survived
the merger and changed its name to Shared
Technologies Inc. Since such time, STI's primary
business has been to provide shared tenant
telecommunications services to tenants of modern,
multi-tenant office buildings. The principal
executive offices of STI are located at 100 Great
Meadow Road, Wethersfield, Connecticut 06109.
Fairchild Industries,
Inc. ("FII").......... FII is incorporated in Delaware and is the successor
corporation to Fairchild Industries, Inc., a
corporation incorporated in Maryland in 1936,
pursuant to a merger effective on May 4, 1987. FII
has historically operated a number of businesses
which have been discontinued but is currently
operating through its wholly owned subsidiary VSI
Corporation ("VSI") in its three business segments:
Aerospace Fasteners, Industrial Products and
Communications Services, the latter through
Fairchild Communications Services Company. Prior to
and as a condition of the Merger which is the
subject of this Proxy Statement, FII, VSI and FII's
parent, RHI, will undergo a recapitalization (the
"FII Recapitalization") to transfer from FII and VSI
to RHI all assets other than those related to its
Communications Services business which furnishes
telecommunications services and equipment to tenants
of commercial office buildings. All references to
FII in this Proxy Statement, unless stated to the
contrary, are to FII following the FII
Recapitalization. The principal executive offices of
FII are located at 300 West Service Road, Chantilly,
Virginia 22021-0804. See "Information About FII -
Formation, Historical Operations and
Recapitalization."
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<PAGE>
The Meeting and Proxy Information
Time, Date and Place.... The Meeting will be held on March 4, 1996, at the
offices of S.G. Warburg & Co., Inc., 277 Park
Avenue, New York, New York, commencing at 2:00 p.m.,
local time, and at any adjournment or postponement
thereof.
Record Date; Shares
Entitled to Vote....... Holders of record of shares of Common Stock on the
close of business on February 1, 1996, are entitled
to notice of and to vote at the Meeting. At such
date, there were 8,506,448 shares of Common Stock
outstanding, each of which will be entitled to one
vote on each matter to be acted upon or which may
properly come
before the Meeting.
Vote Required.......... The approval of the Merger and Amendments will
require the affirmative vote of the holders of a
majority of the shares of Common Stock outstanding
as of the record date for the Meeting and entitled
to vote.
The proxy set forth on the proxy card which is
enclosed with this Proxy Statement contains a space
where each Stockholder may indicate whether such
Stockholder chooses to vote such Stockholder's
shares of Common Stock in favor of or against the
Merger and Amendments or to abstain from voting. If
the proxy is duly completed and returned to the
Transfer Agent, the proxy will be voted in
accordance with the instructions thereon. If a
Stockholder returns the proxy duly executed, but
does not indicate the manner in which the proxy will
be voted, the proxy will be voted FOR the Merger and
Amendments.
The Merger and Amendments
Purpose of the Meeting;
The Merger............ The purpose of the Meeting is to consider and vote
upon approval of (i) a merger (the "Merger") by and
between STI and FII, pursuant to an Agreement and
Plan of Merger dated as of November 9, 1995, as
amended pursuant to that certain Amendment dated
February 2, 1996 (the "Merger Agreement") as a
result of which RHI, the sole holder of FII common
stock, will receive "Common Consideration" of
6,000,000 shares of Common Stock and shares of
Cumulative Convertible Preferred Stock and Special
Preferred Stock (together hereinafter referred to as
the "Preferred Stock") and holders of preferred
stock of FII will be paid in the aggregate
"Preferred Consideration" of approximately
$40,000,000 (the terms of the Merger Agreement and
Preferred Stock are described in, and a copy of the
Merger Agreement is attached as Exhibit A to, this
Proxy Statement, which the Board of Directors of STI
encourages each Stockholder to review carefully),
and, (ii) as required by the Merger Agreement as a
condition of the Merger, amendments to the
Certificate of Incorporation of STI to (a) increase
the authorized Common Stock from 20,000,000 to
50,000,000 shares, (b) increase the authorized
preferred stock
-8-
<PAGE>
from 10,000,000 to 25,000,000 and (c) change the
name of STI to "Shared Technologies FairchildInc."
(the "Amendments").
Certain Effects of
the Merger and
Amendments........... Upon issuance of the Common Consideration, an
additional 6,000,000 shares of Common Stock will be
outstanding and based upon the capitalization of STI
as of January 1, 1996, the sole common stockholder
of FII, RHI, will own approximately 41% of the
outstanding shares of STI Common Stock immediately
following consummation of the Merger, and the
holders of currently outstanding shares of Common
Stock will decrease their ownership position to 59%.
The Cumulative Convertible Preferred Stock, also
issued as part of the Common Consideration, will be,
at the time of issuance, convertible into 3,921,568
shares of Common Stock. On a fully diluted basis
(assuming the issuance and exercise of all options
reserved (1,500,000) under STI's 1996 Equity
Incentive Plan), RHI will own approximately 39% and
all other holders will own approximately 61%. If any
officer or director of RHI is issued any options
under the 1996 Equity Incentive Plan, RHI's and such
individuals' aggregate beneficial ownership position
could be increased. The Merger in and of itself,
therefore, will not result in RHI having voting
control of the Surviving Corporation. The fact that
RHI does not attain voting control notwithstanding,
RHI will nevertheless be able to exert considerable
control over the Surviving Corporation in light of
the fact that it will own 41% of the outstanding
shares of Common Stock, and in light of the terms of
the Shareholders' Agreement as described below.
The Cumulative Convertible Preferred Stock pays
dividends of 6% annually and will have an aggregate
liquidation preference (and a mandatory redemption
price at the end of 12 years) of $25,000,000 plus an
amount equal to the total amount of dividends the
holders would have received if dividends had been
paid at the rate of 10%, less the amount of
dividends actually paid. The Special Preferred Stock
pays no dividends but has an initial liquidation
preference of $20,000,000 which increases by
$1,000,000 each year to a maximum of $30,000,000.
The rights of the Preferred Stock will be junior to
the rights of the Series C Preferred Stock of STI
and on parity with the rights of all other
outstanding preferred stock of STI. See "Proposal to
Approve the Merger Agreement and Amendments -
General", "Proposal to Approve the Merger and
Amendments - Additional Agreements" and "Information
about STI - Description of Securities".
In connection with the Merger, STI has agreed to
indemnify FII for losses incurred by FII in
connection with a breach of STI's representations
and warranties as set forth in the Merger Agreement.
In the event of any such breach and liability by STI
therefor, STI has the option, in lieu of paying
cash, to issue shares of Common Stock to RHI equal
in value to the amount of any such loss. If STI
should choose to issue shares of Common Stock to
-9-
<PAGE>
satisfy its indemnification obligations for a
breach, such issuance will result in a dilution of
the interests of the STI Stockholders.
As a result of the Merger, the Surviving Corporation
shall repay an aggregate of approximately
$183,500,000 in indebtedness of FII and shall become
liable for other liabilities of FII's
telecommunications business and potentially, as a
matter of law, liabilities of FII's former
businesses and pre-Merger tax liabilities of FII and
VSI. RHI and TFC will indemnify STI for pre-Merger
tax liabilities of FII and VSI. See "Special Factors
- FII Recapitalization, Liabilities and
Indemnification". STI intends to use funds obtained
from bank financing and the private placement of
debt securities of the Surviving Corporation (the
"Financing") (i) to pay the Preferred Consideration,
(ii) to repay the $183,500,000 of indebtedness of
FII, (iii) to refinance STI's current loan
facilities and (iv) to pay the fees and expenses
incurred in connection with the Merger, and it is a
condition to the consummation of the Merger that net
proceeds from the Financing be sufficient to pay all
of the foregoing. STI and FII have retained CS First
Boston Corporation to raise the needed funds and to
secure a $25,000,000 working capital line of credit
and have received a "highly confident" letter from
CS First Boston Corporation, dated November 15, 1995
with respect to its ability to secure $260,000,000
in debt, which includes the $25,000,000 line of
credit. See "Special Factors - Required Financing
and the Effects Thereof" and "FII Recapitalization,
Liabilities and Indemnification".
Concurrently with the Merger, FII's Chief Operating
Officer Mel D. Borer will become President, Chief
Operating Officer and a Director of the Surviving
Corporation and RHI shall have the right to nominate
three additional members of the Board of Directors
who shall then be elected to the Board, with Anthony
D. Autorino, STI's Chairman and Chief Executive
Officer, having the right to nominate seven Board
members. Additionally, if four consecutive dividend
payments are missed with respect to the Cumulative
Convertible Preferred Stock, FII shall have the
right to nominate one additional director and if
eight consecutive dividend payments are missed, FII
shall have the right to nominate a second additional
director (with such additional director(s) to be
added in lieu of existing non-RHI directors). Mr.
Autorino and RHI have agreed to vote all of their
respective shares of Common Stock in favor of each
other's nominees. See "Proposal to Approve the
Merger and Amendments - Certain Effects of the
Merger; Additional Agreements; Description of
Securities; Changes to Bylaws".
FII has disclosed to STI that it has entered into
two year employment agreements with 10 employees,
each with annual base salaries exceeding $100,000
and with aggregate annual base salaries aggregating
approximately $1,300,000. The Shareholders'
Agreement to be entered into among STI, Mr. Autorino
and RHI concurrently with the Merger provides that
Jeffrey J. Steiner, Chairman of the Board, Chief
Executive Officer and President of FII, RHI, and The
Fairchild Corporation will be Vice Chairman of
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<PAGE>
the Surviving Corporation. Effective with the
Merger, Mr. Steiner and Mr. Borer will each enter
into an employment agreement with the Surviving
Corporation. Their respective salaries under such
employment agreements will be $350,000 and $250,000.
See "Proposal to Approve the Merger and Amendments -
Interests of Certain Persons in the Merger".
Termination of the Merger
Agreement; Amendments... The Merger Agreement may be terminated at any time
before or after action thereon by the Stockholders
at the Meeting upon certain events. If the Merger
Agreement is terminated due to action by a party's
Board of Directors to withdraw, modify or amend in
an adverse manner its recommendation of the Merger
as a result of the exercise of its fiduciary duties,
such party shall be required to pay the other
$5,000,000. The Merger Agreement may be amended by a
writing executed by all parties to the Merger
Agreement. See "Proposal to Approve the Merger and
Amendments - Amendment, Termination"; and "Fees and
Expenses".
Opinion of the
Financial Advisor...... The Board of Directors retained the services of S.G.
Warburg & Co., Inc. ("S.G. Warburg") as financial
advisor to assist in the consideration of and
negotiation of the Merger and to deliver a fairness
opinion with respect to the Merger. By letter dated
November 9, 1995, and addressed to the Board, S.G.
Warburg rendered its opinion that from a financial
point of view the financial consideration to be paid
by STI in the Merger upon the terms and conditions
set forth in the Merger Agreement is fair to STI.
See "Special Factors - Opinion of S.G. Warburg".
S.G. Warburg did not address the matter of
indemnification to be provided to STI by FII's
affiliates. See "Special Factors - FII
Recapitalization, Liabilities and Indemnifications."
Reasons for the Merger... The Board of Directors of STI believes that the
terms of the Merger are fair to, and in the best
interests of, STI and its Stockholders. STI's Board
of Directors believes that the business combination
with FII will further STI's long-term strategic
objective of increasing shareholder value by
achieving economies of scale, expanding geographic
coverage and adding products, thereby increasing its
overall business base for further internal growth
and acquisitions. See "The Meeting - Board of
Directors Recommendations; Special Factors - Reasons
for the Merger and Amendments."
Reasons for the
Amendments............ The Merger Agreement requires that the authorized
Common Stock be increased to 50,000,000 from
20,000,000 and that the authorized preferred stock
be increased to 25,000,000 from 10,000,000. As of
the record date, STI had 8,506,448 shares of Common
Stock outstanding with commitments to reserve
5,625,824 additional shares. As of the record date,
STI had 10,000,000 shares of authorized preferred
stock and the Board has authorized series or classes
thereof aggregating 6,700,000 shares. An aggregate
of 1,363,772 shares of preferred stock of all
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<PAGE>
designated series are issued and outstanding. The
Board has approved the increases in order to provide
for the issuance of the Common Consideration,
including the potential conversion of the Cumulative
Convertible Preferred Stock, to provide available
Common Stock for the 1996 Equity Incentive Plan and
to provide future flexibility in connection with
acquisitions, stock options and capital raising. See
"Information about STI- Description of Securities".
Recommendation of the
Board of Directors.... The directors of STI approved the Merger and
Amendments pursuant to the Merger Agreement at a
meeting on November 9, 1995, and declared it
advisable and recommended a vote in favor of
approval by the holders of Common Stock of STI. See
"Special Factors - Reasons for the Merger and
Amendments; Recommendations of the Board of
Directors."
Security Ownership of
Management and Certain
Other Persons........... As of September 30, 1995, directors and executive
officers of STI and their affiliates may be deemed
to be beneficial owners of approximately 23.0% of
the outstanding shares of Common Stock at such date.
Anthony D. Autorino, Chief Executive Officer,
President and Chairman of the Board of STI has
delivered to FII his irrevocable proxy to vote in
favor of the Merger. See "Information About STI -
Security Ownership of Certain Beneficial Owners and
Management" and "The Meeting- Voting at the Meeting;
Record Date".
Special Factors........ STI stockholders should consider carefully, before
determining how to vote their shares at the Meeting,
certain risks associated with merging with FII. See
"Special Factors - FII Recapitalization, Liabilities
and Indemnification."
Interests of Certain Persons
In the Merger.............In considering the recommendations of STI's Board of
Directors, Stockholders should be aware that certain
members of management and the Board of Directors of
STI have certain interests in the Merger that are in
addition to the interests of Stockholders of STI
generally. Prior to the Effective Time, the
Surviving Corporation shall enter into a two-year
employment agreement with Anthony D. Autorino as
Chief Executive Officer and Chairman of the
Surviving Corporation providing for an annual base
salary of $500,000 and payments upon a change of
control and shall enter into a two-year employment
agreement with Vincent DiVincenzo as Senior Vice
President and Chief Financial Officer of the
Surviving Corporation providing for an annual base
salary of $150,000 and payments upon a change of
control. Additionally, the Board has approved the
adoption of the 1996 Equity Incentive Plan and has
authorized and reserved 1,500,000 shares of Common
Stock therefor. See "Special Factors - Interests of
Certain Persons in the Merger".
No Appraisal Rights for
Stockholders........... Stockholders of STI who are opposed to the Merger
and vote against or do not vote for the Merger at
the Meeting will have no
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<PAGE>
appraisal rights if the Merger is approved and
consummated. See "Proposal to Approve the Merger and
Amendments; Rights of Dissenting Stockholders".
Material Federal Income
Tax Consequences....... Assuming that (i) the Merger is structured as
described in this Proxy Statement, (ii) RHI enters
into the Shareholders' Agreement restricting resale
of the securities received by RHI in the Merger and
(iii) RHI has no plan or intention of disposing of
the shares of Common Stock and Preferred Stock of
STI received pursuant to the Merger, the Merger
should be treated as a reorganization under section
368(a)(1)(A) of the Internal Revenue Code of 1986,
as amended (the "Code") (a so-called "Type A
reorganization"). If the Merger is treated as a Type
A reorganization, FII will not recognize any gain or
loss as a result of the Merger, and the tax basis of
the assets of FII in the hands of STI will be the
same as the tax basis of such assets in the hands of
FII immediately prior to the Merger. Notwithstanding
whether the Merger is treated as a Type A
reorganization, neither STI nor the current
shareholders of STI will recognize any gain or loss
as a result of the Merger. RHI and TFC will
indemnify the Surviving Corporation for pre-Merger
tax liabilities of FII and VSI. See "Special Factors
- Material Federal Income Tax Consequences".
Regulatory
Requirements............ No federal or state filing requirements must be made
or regulatory approvals obtained in connection with
the Merger and Amendments other than (i) the filing
of notification, and the receipt of consents or
approvals, required by applicable provisions of the
Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and regulations promulgated
pursuant thereto (which pre-merger approval was
received on January 5, 1996) and (ii) the
application for various state regulatory approvals
to transfer from Fairchild Communications Services
Company to the Surviving Corporation the applicable
certificates of public convenience and necessity (or
similar certificates) authorizing the Surviving
Corporation to resell intrastate telecommunications
services in such states. However, the Certificate of
Merger including the Amendments will be required to
be filed with the Secretary of State of Delaware in
order for the Merger and Amendments to be effective
and a Certificate of Designations, Preferences and
Rights with respect to each of the Cumulative
Convertible Preferred Stock and Special Preferred
Stock must be filed with the Secretary of State of
Delaware to establish the Preferred Stock.
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<PAGE>
SUMMARY FINANCIAL INFORMATION - STI
The summary information set forth below is derived from, and should be read in
conjunction with, the selected financial data and consolidated financial
statements and notes thereto of STI and its subsidiaries appearing elsewhere in
this Proxy Statement. (In thousands, except per share data.)
<TABLE>
<CAPTION>
For the nine months For the nine months
Fiscal year ended December 31 ended September 30, 1994 ended September 30, 1995
-------------------------------------------- ------------------------ ------------------------
1992 1993 1994
---- ---- ----
<S> <C> <C> <C> <C> <C>
Statements of
Operations Data:
Net revenues $ 24,077 $ 25,426 $ 45,367 $ 31,514 $ 43,675
Net income 2,724 140 2,286 1,563 2,074
Net income (loss)
per common share .59 (.04) .27 .21 .20
Weighted average
common shares 4,062,710 5,132,296 6,792,277 5,699,483 8,698,207
</TABLE>
<TABLE>
<CAPTION>
December 31
1992 1993 1994 September 30, 1995
---- ---- ---- ------------------
(unaudited)
Balance Sheet Data:
<S> <C> <C> <C> <C>
Working capital (deficit) $ (4,506) $ (3,874) $ (3,691) $(2,124)
Total assets 18,752 20,601 37,925 47,079
Long Term Debt 2,282 1,777 2,886 4,012
Stockholders' equity 6,034 9,302 20,881 23,971
</TABLE>
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<PAGE>
SUMMARY FINANCIAL INFORMATION - FII
The summary information set forth below is derived from, and should be
read in conjunction with, the selected financial data and consolidated financial
statements and notes thereto of FII and its subsidiaries appearing elsewhere in
this Proxy Statement.
<TABLE>
(in thousands)
Year ended June 30 Three Months Ended
-------------------- -------------------
October 2, October 1,
1994 1995
(unaudited)
1993 1994 1995
---- ---- ----
Statements of
Operations Data:
<S> <C> <C> <C> <C> <C>
Sales 68,639 74,897 109,741 20,124 33,138
Net loss after
preferred dividends (16,130) (37,889) (16,261) (668) (581)
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data:
June 30 October 1, 1995
--------- ---------------
1993 1994 1995 (unaudited)
---- ---- ----
<S> <C> <C> <C> <C>
Working capital 32,279 23,373 57,342 54,824
Total assets 368,084 331,318 351,309 352,326
Total long-term
debt and
obligations
under capital
leases 186,377 183,259 181,309 181,015
Stockholders'
equity 126,855 93,175 102,347 104,128
</TABLE>
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<PAGE>
SUMMARY PRO FORMA FINANCIAL INFORMATION - STI AND FII COMBINED
The following summary pro forma financial information is derived from,
and should be read in conjunction with, the separate consolidated financial
statements of each of STI and FII and the notes thereto and the more detailed
pro forma financial information and notes thereto included elsewhere in this
Proxy Statement. All figures are in thousands except for per share information.
<TABLE>
<CAPTION>
Statements of Operations Data:
Combined
fiscal year Combined nine months
ended ended
Dec. 31, 1994 September 30, 1995
------------- ------------------
<S> <C> <C>
Revenues $175,247 $136,400
Net income
(loss) (9,783) (6,695)
Net income
(loss) per
common share $(1.08) $(0.31)
Weighted average
common shares 12,792 14,698
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data:
Combined
Sept. 30, 1995
<S> <C>
Working capital deficit $(2,885)
Total assets 373,217
Long-term debt 239,739
Stockholders'
equity 47,972
</TABLE>
(1) See Notes to Unaudited Pro forma Financial Statements.
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<PAGE>
THE MEETING
GENERAL
This Proxy Statement is being furnished to holders of Common Stock in
connection with the solicitation of proxies by the STI Board of Directors for
use at the Meeting to be held on March 4, 1996, at the offices of S.G. Warburg &
Co., Inc., 277 Park Avenue, New York, New York, commencing at 2:00 p.m., local
time, and at any adjournment or postponement thereof.
This Proxy Statement and the accompanying form of proxy are first being
mailed to Stockholders of STI on or about February 12, 1996.
MATTERS TO BE CONSIDERED AT THE MEETING
At the Meeting, holders of STI Common Stock will consider and vote upon
(i) the merger of FII with and into STI, with STI as the surviving corporation
(the "Merger") pursuant to the terms of an Agreement and Plan of Merger dated as
of November 9, 1995, as amended pursuant to a certain Amendment dated February
2, 1996, as a result of which RHI Holdings, Inc., the sole holder of FII common
stock, will receive 6,000,000 shares of STI Common Stock and shares of
Cumulative Convertible Preferred Stock and Special Preferred Stock and (ii)
amendments to the Certificate of Incorporation of STI as required by the Merger
Agreement as a condition to the Merger to: a) increase the authorized Common
Stock, $.004 par value per share of STI to 50,000,000 shares; b) increase the
authorized shares of preferred stock, $.01 par value per share of STI to
25,000,000 shares; and c) change the name of STI to "Shared Technologies
Fairchild Inc." (the "Amendments").
BOARD OF DIRECTORS RECOMMENDATION
The directors of STI have approved the Merger Agreement and recommended
a vote FOR approval of the Merger and Amendments.
VOTING AT THE MEETING; RECORD DATE
The Board of Directors has fixed February 1, 1996 as the record date
(the "Record Date") for the determination of the Stockholders entitled to notice
of and to vote at the Meeting. Accordingly, only holders of record of Common
Stock on the Record Date will be entitled to notice of and to vote at the
Meeting. As of the Record Date there were 8,506,448 shares of Common Stock
outstanding, and entitled to vote at the Meeting held of record and beneficially
by 1,856 Stockholders. Each Stockholder on the Record Date is entitled to cast
one vote per share on the approval of the Merger and Amendments, exercisable in
person or by properly executed proxy, at the Meeting. On matters upon which the
holders of shares of Common Stock vote, the presence, in person or by properly
executed proxy, of the holders of a majority of the outstanding shares of Common
Stock entitled to vote at the Meeting, is necessary to constitute a quorum at
the Meeting.
The affirmative vote of the holders of a majority of all outstanding
shares of Common Stock and entitled to vote, is required to approve the Merger
and Amendments.
In certain circumstances, a stockholder will be considered to be
present at the Meeting for quorum purposes but will not be deemed to have cast a
vote on a matter. Such circumstances exist when a stockholder is present but
specifically abstains from voting on a matter or when shares are represented at
the Meeting by a proxy conferring authority to vote only on certain matters. In
conformity with Delaware law, shares abstaining from voting or not voted on
certain matters will not be treated as votes cast with respect to those matters,
and therefore will not affect the outcome of any such matter.
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<PAGE>
As of September 30, 1995, directors and executive officers of STI and
their affiliates may be deemed to be beneficial owners of approximately 23.0% of
the outstanding shares of STI Common Stock. Anthony D. Autorino, Chief Executive
Officer, President and Chairman of the Board of STI has delivered to FII his
irrevocable proxy to vote for the Merger.
As of the date of this Proxy Statement, FII owned no outstanding shares
of STI Common Stock.
PROXIES
This Proxy Statement is being furnished to STI Stockholders in
connection with the solicitation of proxies by and on behalf of the Board of
Directors of STI for use at the Meeting.
All shares of STI Common Stock which are entitled to vote and are
represented at the Meeting by properly executed proxies received prior to or at
the Meeting, and not revoked, will be voted at such Meeting in accordance with
the instructions indicated on such proxies. If no instructions are indicated,
such proxies will be voted:
FOR approval and adoption of the Merger and Amendments.
If any other matters are properly presented at the Meeting for
consideration, including, among other things, consideration of a motion to
adjourn the Meeting to another time and/or place (including, without limitation,
for the purpose of soliciting additional proxies), the persons named in the
enclosed form of proxy and acting thereunder will have discretion to vote on
such matters in accordance with their best judgment insofar as they are not
otherwise instructed and insofar as they are not voting proxies which have voted
against the Merger to adjourn the Meeting for the purpose of soliciting
additional proxies or otherwise in contravention of a vote against the Merger.
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before it is voted. Proxies may be revoked by (i)
filing with the Secretary of STI, at or before the taking of the vote at the
Meeting, a written notice of revocation bearing a later date than the proxy,
(ii) duly executing a later dated proxy relating to the same shares and
delivering it to the Secretary of STI before the taking of the vote at the
Meeting, or (iii) attending the Meeting and voting in person (although
attendance at the Meeting will not in and of itself constitute a revocation of a
proxy). Any written notice of revocation or subsequent proxy should be sent so
as to be delivered to Shared Technologies Inc., 100 Great Meadow Road,
Wethersfield, CT 06109, Attention: Secretary, or hand delivered to the Secretary
of STI before the taking of the vote at the Meeting.
All expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement, will be borne by STI. In addition to solicitation
by use of the mails, proxies may be solicited by directors, officers and
employees of STI in person or by telephone, telegram or other means of
communication. Such directors, officers and employees will not be additionally
compensated, but may be reimbursed for reasonable out-of-pocket expenses in
connection with such solicitation. Arrangements will also be made with
custodians, nominees and fiduciaries for forwarding of proxy solicitation
materials to beneficial owners of shares held of record by such custodians,
nominees and fiduciaries. STI will reimburse such custodians, nominees and
fiduciaries for reasonable expenses incurred in connection therewith.
A representative of Rothstein, Kass & Company, P.C., STI's principal
accountants for the current year and the most recently completed fiscal year, is
expected to be present at the Meeting and to be available to respond to
appropriate questions.
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<PAGE>
SPECIAL FACTORS
BACKGROUND OF THE MERGER
The terms of the Merger are set forth elsewhere in this Proxy
Statement, and the following is a description only of the background and context
of the Board's decision to approve the Merger Agreement. References to terms of
the agreements in this context are not intended to be definitive and
Stockholders should carefully study the particular terms of the Merger as set
forth in other parts of this Proxy Statement.
In June, 1994, the Board appointed an ad hoc committee consisting of
Messrs. Autorino, DiVincenzo, Hutheesing and Decker as a Strategic Steering
Committee to review, analyze and present to the Board strategic alternatives for
STI. Mr. Oakes was subsequently appointed to the Steering Committee in May 1995.
The Steering Committee was charged with reporting back to the Board with
proposals to enhance shareholder value.
The Steering Committee generally reviewed possible acquisition targets
and possible acquirors of STI. STI representatives conducted discussions with
respect to such possibilities with a competitive access provider between June,
1994 and September, 1995 and also with a long-distance telecommunications
company between October, 1994 and March, 1995. These discussions, which were
sporadic during such periods, did not result in any definitive offers by STI or
other companies but provided the Steering Committee with the opportunity to
learn more about other businesses in the industry.
Upon recommendation of the Steering Committee, on July 11, 1995 Mr.
Autorino and Mr. Hutheesing initiated contact with S.G. Warburg and on September
5, 1995 STI engaged S.G. Warburg to work with the Steering Committee in
developing strategic alternatives. S.G. Warburg met with the management of STI
and with members of the Steering Committee on August 4, September 13, and
October 11, 1995 to discuss STI's business evolution, acquisition history,
strategy and operational performance measures and objectives. As a result of
these discussions, an analysis of recent telecommunications and shared tenant
services industry trends (e.g., announced financial results and recent
acquisitions by industry participants including MFS Communications Co. Inc.,
Frontier Corp. and WorldCom Inc.), and S.G. Warburg's experience in executing
other acquisitions and strategic advisory assignments for telecommunications
companies, S.G. Warburg and the Steering Committee proposed the following four
alternative courses available to STI: 1) continue to build shareholder value
through organic growth; 2) acquire an existing business for cash or stock or
both; 3) seek a purchaser for STI; or 4) seek a business combination. S.G.
Warburg presented these four alternative courses to the full Board on October
19-20, 1995. The proposed Merger between STI and FII was recommended by S.G.
Warburg as the most viable alternative because: (a) it represented the most
effective means to improve the share price performance of STI; (b) the Surviving
Corporation would represent the largest player in the shared tenant services
industry; (c) the proposed Merger would enhance the management depth of STI; and
(d) financial analysis indicated that, at the value range proposed by FII, the
Merger could be expected to have a favorable financial impact on STI. S.G.
Warburg further discussed the terms of a proposed business combination with FII
and presented analyses, described below, to address the proposed amount of
consideration put forth by FII.
The Board determined that although STI did have the option to continue
to grow organically in its core businesses, given the increasing competition in
the telecommunications field by highly capitalized market participants, reliance
on growth without acquisitions did not appear to be a practical way in an
appropriate time frame to improve the valuation of STI in the marketplace. Any
increase in the scale of business from organic growth was viewed as gradual and
less certain than alternatives discussed below.
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<PAGE>
The Board determined that the most direct way for STI to grow
dramatically and constructively would be to acquire existing businesses. STI's
management believed that this strategy was hampered by the current
undervaluation of STI's shares in the market relative to companies in the
industry and prices paid for comparable companies in acquisitions, which would
make acquisitions strictly through issuance of shares more expensive. STI
regularly uses its available cash for operations and investment in equipment for
expansion of operations, leaving relatively little cash available for
significant acquisitions. Another obstacle was the scarcity of available
acquisition candidates of appropriate size and market position.
Although a sale of STI's business or of STI itself would be an
alternative in that STI's assets, experience, and market position are attractive
to a range of communications companies for a variety of reasons, due to the
deemed undervaluation of the shares of STI, and because other alternatives
appeared to be more promising, the Steering Committee and the Board concluded
that it would not be prudent in the interest of building shareholder value in
the near term to pursue a sale of STI or its assets at this time.
On September 20, 1995, The Fairchild Corporation ("TFC") made a public
announcement that it was either going to sell the telecommunications business of
FII or conduct an initial public offering of the stock of a newly reorganized
FII consisting only of the telecommunications business. As a result of such
announcement, STI's Chairman, Anthony D. Autorino initiated contact with Jeffrey
J. Steiner, Chairman of TFC, on September 29, 1995 regarding a possible
acquisition by STI of the telecommunications business of FII and they agreed to
hold a meeting on October 3, 1995. In addition to Mr. Autorino and Mr. Steiner,
James Crystal of S.G. Warburg and Vincent DiVincenzo and Paul Barry of STI
attended the October 3rd meeting. At such meeting, the parties discussed the
acquisition of FII by STI. Mr. Steiner informed STI that FII was very shortly
thereafter expected to file a registration statement in connection with its
initial public offering, that the investment bankers handling the initial public
offering had valued the telecommunications business at $300,000,000 and that a
purchase price for the telecommunications business would have to approximate
that amount. Additionally, due to the significant adverse tax impact on TFC of
an outright sale of FII's communications assets, Mr. Steiner advised STI that
the only acceptable approach to an acquisition by STI was a merger without
recognition of gain by TFC for tax purposes.
On October 5, 1995, Messrs. Autorino and Steiner met with Richard
Ivers, Michael Johnson and Robin Rankin of CS First Boston Corporation ("First
Boston") to discuss financing the transaction. First Boston concluded from such
meeting that First Boston would examine whether it was willing to raise the
financing for the transaction and whether it could provide a "highly confident"
letter to STI in connection therewith.
Between October 5 and October 10, 1995, Mr. Autorino and Mr. Steiner
had numerous telephone conversations in which they discussed the potential
synergies of the combined companies, the general structure of the merged entity
and the consideration to be paid in the Merger. On October 10, 1995, Mr.
Autorino, Vincent DiVincenzo and Paul Barry met with Richard Ivers and Michael
Johnson of First Boston and S.G. Warburg to discuss deal structure, components
of the purchase price and financing. Between October 10 and October 16, 1995,
Mr. Autorino and Mr. DiVincenzo conducted numerous discussions with Messrs.
Ivers and Johnson of First Boston and with David Cohen, James Stewart, John
Schiavone and James Crystal of S.G. Warburg to work out more specific terms. On
October 16, 1995, Mr. Autorino conversed with Mr. Steiner to finalize the
specifics of the transaction for presentation to their respective Boards, at
which time they agreed on the
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<PAGE>
transaction structure and a payment structure involving the issuance of
securities and the assumption of certain liabilities. Although the basic terms
of the transaction were established as of such time, Messrs. Autorino and
Steiner continued discussions and had meetings on October 26 and 30 and November
7, 1995 relative to addressing specific issues up to the time the Merger
Agreement was executed. The issues discussed at the meetings on October 25,
October 26, October 30, November 2, and November 7, 1995 were the composition of
the equity components of the Merger consideration, including the terms of the
proposed preferred stock, and the terms of the Shareholders' Agreement,
specifically the standstill agreement, lockup periods and board of directors
representation by FII. See "Proposal to Approve the Merger and Amendments
Additional Agreements."
At a special meeting of the Board held on October 19 and 20, 1995, S.G.
Warburg presented a summary of strategic alternatives and an evaluation of the
four courses examined by the Steering Committee as described above. For the
reasons set forth above, S.G. Warburg recommended that STI attempt to pursue a
merger with a strategically appropriate candidate. As part of its report to the
Board, S.G. Warburg presented and analyzed the possible structure of a
transaction in which STI could acquire the FII telecommunications business, an
enterprise significantly larger than STI's own operations. Management believed
that a combination with FII could circumvent, to some extent, the pricing issues
created by the undervaluation of STI, due to FII's perceived willingness to
remain a significant shareholder in STI and the perceived ability of the
Surviving Corporation to leverage the combined operations to generate cash
payable in the Merger. Therefore, the Board discussed with S.G. Warburg
structuring an offer which included merger consideration of (i) Common Stock,
(ii) preferred stock with a conversion feature at a price in excess of STI's
current trading price, (iii) cash to FII preferred stockholders and (iv) assumed
debt, the latter two components to be funded by borrowings of the Surviving
Corporation. In the course of the meeting, S.G. Warburg presented:
o A review of the four alternatives described above.
o An overview of the nature of FII's business, its strategy and its recent
financial performance.
o A preliminary valuation of FII consisting of an analysis of comparable
companies, precedent transactions, and discounted cash flow.
o An overview of the key elements of the Merger.
o An overview of the aggregate consideration of the Merger being provided to
RHI at face value and at approximate trading value.
o A summary of the sources of financing for the Merger.
o An analysis of the pro forma impact of the Merger on STI's capital structure
o A summary of the advantages and issues of the Merger.
A merger with FII was discussed as a unique opportunity for STI. FII is
the largest provider of shared telecommunications services in the country, with
revenues nearly double those of STI. FII is in the same business as STI, located
in 25 cities in the United States including many locations where STI has no
presence. FII recently acquired JWP Telecom, Inc. with its complementary
"systems" business, through which it sells and services telecommunications
equipment, and this would give STI improved access to potential customers. In
addition, a merger with FII would bring to STI a pool of experienced managers
who could be instrumental in the growth of STI.
Finally, according to the analysis conducted by STI, a combination with
such a closely related business would result in significant economies of scale,
or synergies, in terms of bulk purchasing of long distance services, sharing of
infrastructure, management combinations and marketing efficiencies.
In a merger, however, the surviving corporation, STI in this case,
inherits all of the liabilities of the acquired company as well as its assets.
STI thus reviewed the potential liabilities arising as a result of a merger, and
identified three primary areas of concern. These are liabilities outside of
FII's communications business for which STI would become legally responsible and
include: (i) approximately $50,000,000 present value in unfunded post-retirement
health benefits payable on behalf
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of former FII employees, (ii) a dispute with the United States Government under
Government Contract Accounting rules concerning potential liability of FII
arising out of the use of and accounting for approximately $50,000,000 in excess
pension funds relating to certain government contracts in the discontinued
aircraft production business of FII, and (iii) certain claims relating to
remediation of environmental damage resulting from discontinued FII operations.
Based on a review of engineering studies conducted for FII of claims for known
contamination, STI estimates that it is reasonably possible that the costs
resulting from such claims could range from $8,000,000 to $30,000,000, although
further investigation could result in either a lower or higher estimated cost
level. There may be off-sets from third-party claims or insurance recoveries
which would reduce potential liability. STI's estimates did not include any
claims for unknown liabilities for properties not yet surveyed for environmental
contamination which could have occurred as long ago as thirty years.
A principal subject of negotiations between STI and FII was the matter
of handling the liabilities of FII arising from non-communications activities.
The negotiated result, as described in further detail elsewhere in this Proxy
Statement (see "FII Recapitalization, Liabilities and Indemnification"), was to
have TFC and RHI indemnify STI for all such liabilities whether existing at the
time of the Merger or arising thereafter pursuant to a certain Indemnification
Agreement, which liabilities are any and all losses, liabilities and damages or
actions or claims (or actions or proceedings, whether commenced or threatened)
in respect thereof ("Losses") resulting from any liability or claims (including
without limitation counsel fees and expenses of STI in the event RHI and TFC
fail to assume the defense thereof) which related to the operations of FII or
any of its subsidiaries prior to the consummation of the Merger except for
Losses related to FII telecommunications business and the liabilities
specifically assumed by STI pursuant to the Merger Agreement. In addition, two
TFC affiliates are to indemnify STI indefinitely for liabilities arising out of
the respective aircraft fasteners and industrial mold businesses pursuant to
certain Indemnification Agreements, which liabilities are any and all Losses
resulting from any liability or claims (including without limitation counsel
fees and expenses of STI in the event the TFC affiliates fail to assume the
defense thereof) which related to the aerospace and industrial fasteners
business as previously owned and conducted by FII prior to the consummation of
the Merger. Notwithstanding such Indemnification Agreements, STI will not be
released from its obligations with respect to the Non-communications Liabilities
as a matter of law. Accordingly, to the extent RHI is unable to meet its
obligations under the Indemnification Agreement, STI will be required to satisfy
in full any of the Non-communications Liabilities not satisfied by RHI. RHI is
primarily a holding company and, therefore, any claim by STI pursuant to the
Indemnification Agreement will be effectively subordinated to the creditors of
RHI's subsidiaries. As further security, it was agreed that the Preferred Stock
to be delivered as part of the Common Consideration for the Merger (excluding
cumulative Convertible Preferred Stock with a face liquidation preference of
$1,500,000) would be pledged by RHI as security for the indemnification
agreements for not less than three years and until such time as TFC's audited
balance sheet reflected a GAAP net worth of at least $225,000,000, including for
such purpose the value of the Preferred Stock, and until such net worth had
grown at least $25,000,000 from September 30, 1995, not including for such
purpose any net worth attributable to investments in the Preferred Stock in STI.
See "FII Recapitalization, Liabilities and Indemnification", "Proposal to
Approve the Merger and Amendments - Additional Agreements", and "Consolidated
Financial Statements of FII" (Pre-FII Recapitalization).
STI and FII representatives negotiated the terms of a merger agreement
for presentation to the two companies' boards of directors during the period
between October 19, 1995 and November 9, 1995. Contemporaneously, STI's
management conferred with representatives of First Boston and engaged that firm
to seek approximately $260,000,000 in debt financing to be incurred by the
corporation which would survive the merger. The proceeds of the debt financing
would be used primarily to issue cash consideration to the holders of preferred
stock of FII, and to retire certain debt of FII, all as part of the Merger.
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On November 9, 1995, STI's Board of Directors held a meeting at which
S.G. Warburg made a presentation updating its presentation to the Board on
October 19, 1995. S.G. Warburg stated that the proposed Merger Agreement
reflected in substance the transaction structure discussed at the October 19,
1995 meeting, and S.G. Warburg highlighted modifications concerning certain
financial aspects which had been agreed between STI and FII and the financial
implications of such modifications on the combined company. S.G. Warburg further
stated that its continuing analysis, based on information provided by STI's
management, had, in fact, increased the estimate of the financial benefits of
the synergies arising from a merger with FII. In the period from the October
19-20 Board Meeting, the management of STI and FII continued to conduct a
detailed review of personnel and rental office requirements, the terms of
existing long-distance contracts of the two companies and consolidation of
advertising/marketing and employee benefits programs. In connection with the
combination of the STI and FII businesses, management believes the Company can
eliminate in excess of $5,000,000 of costs within two years following the
Merger, and, thereafter $3,000,000 of annual costs. Of these figures,
approximately $1,000,000 relates to savings from the purchase of network
services and the balance relates to SG&A cost reductions. The effect of this
review, and a discussion of these revised estimates with the management, was to
increase the previously-forecast estimated annual synergies included in S.G.
Warburg's analysis by approximately $1 million per annum in the period 1997
through 2000. S.G. Warburg also presented its letter concluding that the
consideration paid by STI for the Merger was fair from a financial point of view
to STI. In addition to discussing the analysis conducted relative to the
rendering of its fairness opinion, S.G. Warburg presented to the Board the
following analyses for consideration by the Board:
o An estimated pro forma combined income statement of the combined
company for the five-year period following the consummation of the Merger.
o A pro forma earnings per share dilution analysis for the combined
company for the five-year period following the consummation of the Merger.
o An analysis of pro forma cash flow for the combined company for the
five-year period following the consummation of the Merger.
o A pro forma EBITDA analysis (including projected synergies), income
tax calculations (including projected utilization of net operating loss carry
forwards) and a pro forma combined cash flow statement and a debt amortization
schedule, all estimated for the five-year period following the consummation of
the Merger.
o An analysis of relative credit ratios including total debt to EBITDA,
total debt and preferred stock to EBITDA, EBITDA to net interest, EBITDA to net
interest and preferred dividends and EBITDA less capital expenditures to gross
interest.
o An analysis of the share ownership of STI by STI's management and
shareholders and FII's shareholders, both on a stand-alone basis and pro forma
giving effect to the Merger.
o A pro forma debt paydown and interest expense table of the combined
company, estimated for the five-year period following the consummation of the
Merger and a pro forma balance sheet for the combined company.
The Board of Directors discussed certain elements of the transaction,
in particular the potential impact on the price of the shares of Common Stock
and the scope of the exposure to pre-merger liabilities of FII. The Board then
voted to approve the Merger Agreement and to recommend its approval to the
Stockholders.
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REASONS FOR THE MERGER AND AMENDMENTS; RECOMMENDATIONS OF THE BOARD OF DIRECTORS
The Board of Directors of STI believes that the terms of the Merger
Agreement are fair to, and in the best interests of, STI and its stockholders.
Accordingly, the Board of Directors of STI has approved the Merger Agreement,
declared it advisable and recommended the approval by STI Stockholders of the
Merger and Amendments. STI's Board of Directors believes that the business
combination with FII will further STI's long-term strategic objective to
maximize shareholder value.
In reaching its determinations and recommendations described above, the
Board of Directors of STI considered the factors described below:
(i) The opinion of S.G. Warburg;
(ii) Information with respect to the financial condition,
business, operations and prospects of both STI and
FII, on both an historical and prospective basis;
(iii) Information with respect to the terms and structure
of the Merger including the business, financial and
tax aspects to STI;
(iv) That significant benefits will inure to STI from the
integration of the operations, management,
capabilities and purchasing power of the operations
of the two companies and the increase in the
geographic scope of operations;
(v) That STI would require significant infusions of
capital or an affiliation with another entity to
preserve and expand its current business and thereby
increase its competitiveness and profitability;
(vi) That after considering a range of possible
alternative transactions, there was substantial
uncertainty as to STI's ability to consummate an
alternative transaction or series of transactions on
satisfactory terms within a reasonable time; and
(vii) That increasing the authorized Common Stock and
preferred stock will provide the Surviving
Corporation with an increased ability to consider and
consummate acquisitions and to raise capital.
In view of the wide variety of factors considered by the STI Board of
Directors in connection with its evaluation of the Merger and Amendments, the
STI Board of Directors did not find it practicable to, and did not, quantify or
otherwise assign relative values to the individual factors considered in
reaching its determination and recommendation with respect to the Merger,
although the factors identified in subsections (i), (ii), (iii) and (iv) above
were particularly significant to the deliberations of the STI Board of
Directors. Factor (i) was particularly significant to the Board's recommendation
because of the intense level of analysis that S.G. Warburg performed with
respect to the valuation of FII, the liabilities of FII and the prospective
earnings that could be achieved by such a merger. Factors (ii), (iii) and (iv)
were particularly significant because these were items that could directly
affect shareholder value.
The STI Board believes that the terms of the Merger are fair to the STI
stockholders, and THE STI BOARD OF DIRECTORS RECOMMENDS THAT STI STOCKHOLDERS
APPROVE THE MERGER AND AMENDMENTS. The STI Board has authorized consummation of
the Merger subject to the approval of the STI Stockholders and certain other
conditions. See "Proposal to Approve the Merger and Amendments - Other Terms and
Conditions."
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REQUIRED FINANCING AND EFFECTS THEREOF
In order to pay the Preferred Consideration (approximately
$40,000,000), repay $125,000,000 in face principal amount of the FII Senior
Notes and interest and premiums thereon and pay an amount of bank and other
indebtedness of FII equal to approximately $58,500,000 and to refinance STI's
current borrowing facilities, STI plans to borrow the requisite funds through
bank financing and the issuance of senior unsecured debt instruments
concurrently with the Merger (the "Financing"). STI has received a letter from
CS First Boston Corporation ("First Boston"), dated November 15, 1995 stating
that it is "highly confident" that it can raise $260,000,000 in debt in
connection with the Merger, which would include a $25,000,000 working capital
line of credit. STI intends to raise the $260,000,000 through the private
placement of debt securities, the closing of which will occur concurrently with
the Merger, which is currently anticipated to take place mid to late February
1996. STI and FII have retained First Boston and have paid it $1,000,000 for the
letter which is creditable against the $7,500,000 payable to First Boston upon
consummation of the Financing in connection with the Merger. There can be no
assurance that First Boston will be able to raise, or that STI will be able to
borrow, sufficient funds to meet its obligations under the Merger on acceptable
terms, in which case the Merger Agreement will be terminated. See "Proposal to
Approve the Merger and Amendments - Fees and Expenses" and "Proposal to Approve
the Merger and Amendments - Amendment, Termination."
The terms of the Financing will contain a number of significant
covenants that will, among other things, restrict the ability of STI to dispose
of assets or merge, incur debt, pay dividends, repurchase or redeem capital
stock and indebtedness, create liens, make capital expenditures and make certain
investments or acquisitions and otherwise restrict corporate activities. The
bank indebtedness will be secured primarily by the cash, cash equivalents,
inventory, accounts receivable, equipment, intangibles (to the extent necessary
to realize on such inventory and accounts receivable) and bank accounts of STI.
In addition, the terms of the Financing will contain, among other covenants,
requirements that STI maintain specified financial ratios, including maximum
leverage and minimum interest coverage, and minimum working capital.
The breach of any of these covenants would result in a default under
the bank indebtedness. In the event of any such default, depending on the
actions taken by the lenders, the lenders could elect to declare all amounts
borrowed under the bank indebtedness, together with accrued interest and other
fees, to be due and payable or apply all the available cash of STI to repay such
borrowings or to collateralize letters of credit (in which event cash would not
be available to STI for other purposes). If STI were unable to repay any such
borrowings when due, the lenders could proceed against all the collateral.
OPINION OF S.G. WARBURG
The Board of Directors of STI initially engaged S.G. Warburg & Co. Inc.
("S.G. Warburg") to act as financial advisor with respect to the examination of
various strategic options available to STI. As part of that engagement, the
Board of STI requested that S.G. Warburg assist it in preparing for, considering
and negotiating a merger between STI and FII. S.G. Warburg has delivered its
written opinion to the Board of Directors of STI that, as of November 9, 1995,
the financial consideration to be paid upon the terms and conditions set forth
in the Merger Agreement dated November 9, 1995 between STI and FII is fair, from
a financial point of view, to STI. STI STOCKHOLDERS ARE URGED TO READ THIS
OPINION IN ITS ENTIRETY FOR ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS OF
REVIEW BY S.G. WARBURG. S.G. Warburg did not make or seek to obtain an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of STI or FII, nor did S.G. Warburg make any physical inspection of
the properties or assets of STI or FII. STI discussed the liabilities of FII and
the risks associated therewith with its legal and financial advisors. However,
the opinion of S.G. Warburg
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does not address the indemnification to be provided to STI by TFC, RHI and their
respective affiliates. See "Special Factors - FII Recapitalization, Liabilities
and Indemnification" and "Reasons for the Merger and Amendments; Recommendations
of the Board of Directors". No limitations were imposed by the STI Board upon
S.G. Warburg with respect to the investigations made or procedures followed by
it in rendering its opinion. S.G. Warburg has not been requested to update its
opinion to the date of this Proxy Statement.
THE FULL TEXT OF THE OPINION OF S.G. WARBURG, WHICH SETS FORTH
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN BY S.G.
WARBURG, IS ALSO ATTACHED HERETO AS EXHIBIT B TO THIS PROXY STATEMENT. S.G.
WARBURG'S OPINION IS DIRECTED ONLY TO THE FINANCIAL TERMS OF THE MERGER AND DOES
NOT CONSTITUTE A RECOMMENDATION TO ANY STI STOCKHOLDER AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE MEETING. THE SUMMARY OF THE OPINION OF S.G.
WARBURG SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In arriving at its opinion, S.G. Warburg (i) reviewed the consolidated
financial statements for the three years ended June 30, 1995 of The Fairchild
Corporation and Fairchild Industries, Inc. as filed with the Securities and
Exchange Commission; (ii) reviewed certain audited financial statements for STI
for the three years ending December 31, 1994 and more recent unaudited financial
information (including that for the six months ended June 30, 1995); (iii)
reviewed certain internal financial statements relating to STI prepared by the
management of STI and certain internal financial statements relating to FII
prepared by the management of FII; (iv) reviewed financial projections prepared
by the respective managements of STI and FII of revenue, gross profit, operating
expenses, depreciation, capital expenditure, existing amortization, net
operating loss utilization as well as estimated working capital measures (days'
receivable, inventory turn, prepaid expenses, accrued expenses and days'
payable); (v) discussed the past and current operations and financial condition
and prospects of STI and FII with their respective senior management; (vi)
analyzed the pro forma impact of the merger on STI; (vii) reviewed certain
financial and stock market information of certain companies S.G. Warburg deemed
appropriate in analyzing STI and FII, as well as the financial terms of certain
other related transactions as described in detail below, See "The Proposed
Merger, Valuation Analyses -- Introduction to Comparable Companies and Precedent
Transaction Analysis"; "The Proposed Merger -- Valuation Analyses, Analysis of
Public Trading Valuation of Selected Comparable Companies" and "The Proposed
Merger -- Valuation Analyses, Analysis of Selected Precedent Transactions";
(viii) participated in selected discussions and negotiations among
representatives of STI and FII and their respective advisors; (ix) reviewed the
Merger Agreement, the Shareholders' Agreement, the Registration Rights Agreement
and other relevant documentation concerning the transaction; and (x) performed a
discounted cash flow analysis on the pro forma combined company's financial
projections for the period 1995 through 2000 and calculated the expected rate of
return which STI Shareholders might realize, assuming Management's projections
for the pro forma combined company were achieved.
In arriving at its opinion, S.G. Warburg relied, without independent
verification, upon the accuracy and completeness of all financial and other
information publicly available or furnished to or otherwise discussed with it,
including information prepared by STI management. With respect to financial
forecasts and other information provided to or otherwise discussed with it, S.G.
Warburg assumed that such forecasts and other information were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the respective senior managements of STI and FII as to the expected
future financial performance of STI and FII. S.G. Warburg also relied upon the
views of the management of STI and FII in assuming that certain long-term
strategic benefits, both operational and financial, will result from the Merger.
S.G. Warburg expressed no opinion as to the price at which the Common Stock and
preferred stock of the Surviving Corporation will trade subsequent to the
Merger. S.G. Warburg's opinion was based upon financial, stock market and other
conditions and circumstances existing and disclosed to it as of the date of its
opinion.
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In delivering its opinion and discussing the proposed transaction with
the Board of Directors of STI, S.G. Warburg presented certain of the foregoing
information in the form of analyses and valuation summaries to the Board. The
initial meeting with the Board was held on October 19-20, 1995, and an update
concerning the financial aspects relating to the Merger was provided to the
Board on November 9, 1995.
October 19-20, 1995 STI Board Presentation
At the October 19-20, 1995 meeting of the STI Board of Directors, S.G.
Warburg presented information concerning discussions which had commenced between
STI and FII and reviewed materials relating to the following matters: (i) the
four strategic alternatives described above (See "Background of the Merger")
available to STI, including the proposed Merger, (ii) a valuation of FII and
potential synergies made possible by the proposed Merger, (iii) the pro forma
impact to STI of the Merger, and (iv) quantitative analysis relating to the
foregoing matters. At the October 19-20, 1995 meeting, S.G. Warburg recommended
that STI attempt to pursue a merger with a strategically appropriate candidate.
STI's Chairman, Anthony D. Autorino, had by that date engaged in preliminary
discussions with Jeffrey J. Steiner, Chairman of The Fairchild Corporation,
about a possible acquisition by STI of the telecommunications business of FII.
This action was deemed by S.G. Warburg to be the most effective means to
increase shareholder value and address issues concerning STI management depth.
The proposed Merger between STI and FII was recommended by S.G. Warburg as the
most viable alternative because: (a) it represented the most effective means to
improve the share price performance of STI; (b) the Surviving Corporation would
represent the largest player in the shared tenant services industry; (c) the
proposed Merger would enhance the management depth of STI; and (d) financial
analysis indicated that, at the value range proposed by FII, the Merger could be
expected to have a favorable financial impact on STI.
November 9, 1995 STI Board Presentation
At the November 9, 1995 meeting of the STI Board of Directors, S.G.
Warburg made a presentation concerning material changes to the financial terms
of the Merger since the October 19, 1995 meeting. S.G. Warburg also reviewed the
conclusions of its fairness opinion as outlined below.
THE PROPOSED MERGER
Valuation Analyses
S.G. Warburg reviewed with the STI Board the analyses discussed below
relating to the valuation of FII. Several valuation techniques were applied to
determine value.
Introduction to Comparable Companies and Precedent Transactions Analysis
In the absence of companies publicly traded in directly comparable
lines of business, S.G. Warburg analyzed the U.S. long-distance reseller
industry and the U.S. business and government telecommunications systems
industry.
Analysis of Public Trading Valuation of Selected Comparable Companies
The market multiples analysis which S.G. Warburg applied in its
valuation performs two functions: (i) it compares how the selected comparable
companies are valued by the stock market, and (ii) it calculates an implied
value of the target company by assuming that the target trades in the public
market with multiples similar to those of other publicly traded companies in its
industry.
S.G. Warburg presented to the STI Board an analysis of the public
trading valuation of selected comparable companies, including share price,
market value, adjusted market value, multiples of market
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value and multiples of adjusted market value. All earnings per share figures for
the comparable companies were based on the consensus net income estimates of
selected investment banking firms and all earnings per share estimates for STI
were based on internal estimates.
Such comparable companies that S.G. Warburg examined included: ACC
Corp.; AmeriConnect, Inc.; Frontier Corp.; Incomnet, Inc.; LCI International,
Inc.; MFS Communications Company, Inc.; Network Long Distance, Inc.; Phoenix
Network, Inc.; Total-Tel USA Communications, Inc.; UStel, Inc.; U.S. Long
Distance Corp.; US Wats, Inc.; WinStar Communications, Inc.; and WorldCom Inc.
S.G. Warburg compared adjusted market capitalization to latest 12
months sales, earnings before interest, taxes, depreciation and amortization
("EBITDA"), the sum of (x) EBITDA and (y) selling, general and administrative
("SG&A") expenses, and earnings before interest and taxes ("EBIT") as well as
market values as multiples to latest 12 months net income and estimated fiscal
1995 and 1996 net income for both industries. These were deemed to comprise all
material comparable company valuation parameters. S.G. Warburg compared market
values as multiples to latest 12 months and estimated fiscal 1995 and 1996 net
income for comparable companies in both industries. The respective multiples of
the long-distance reseller companies were between the following ranges: (i)
latest 12 months net income: 6.3x to 63.3x (with a mean of 34.3x and a median of
30.6x) and (ii) estimated 1995 net income: 4.1x to 13.9x (with a mean of 10.5x
and a median of 13.7x). The respective multiples of the telecommunications
systems companies were between the following ranges: (i) latest 12 months net
income: 15.6x to 61.4x (with a mean of 29.2x and a median of 20.0x); (ii)
estimated 1995 net income: 15.9x to 24.7x (with a mean of 18.8x and a median of
17.3x); and (iii) estimated 1996 net income: 11.8x to 19.5x (with a mean of
14.9x and a median of 14.2x).
S.G. Warburg compared adjusted market capitalization to latest twelve
months revenues, EBITDA and the sum of (x) EBITDA and (y) SG&A expenses. The
respective multiples of the long-distance reseller companies were between the
following ranges: (i) latest 12 months net revenue: 0.60x to 1.26x (with a mean
of 0.92x and a median of 0.81x); (ii) latest 12 months EBITDA: 6.7x to 49.0x
(with a mean of 26.2x and a median of 24.4x); and (iii) latest twelve months
EBITDA+SG&A: 0.6x to 6.4x (with a mean of 2.8x and a median of 2.6x). The
respective multiples of the telecommunications systems companies were between
the following ranges: (i) latest 12 months net revenue: 1.0x and 3.1x (with a
mean of 1.7x and a median of 1.3x); (ii) latest 12 months EBITDA: 5.2x to 15.2x
(with a mean of 8.8x and a median of 7.3x); and (iii) latest 12 months
EBITDA+SG&A: 3.1x to 7.8x (with a mean of 4.7x and a median of 3.3x).
S.G. Warburg also presented an analysis of operating statistics of the
comparable companies including, among other things, operating margins (in
relation to EBITDA, EBIT and net income) and estimated five-year earnings per
share growth rates.
The multiples applied to FII result in an implied enterprise value
range, excluding any acquisition premium, of approximately $230,000,000 to
$250,000,000.
Analysis of Selected Precedent Transactions
The precedent transactions analysis examines various financial
multiples that were paid in selected merger and acquisition transactions
involving companies in the same industry as the target. These multiples are then
applied to the financial statistics of the target company to arrive at a value
range for the target company in the context of an arms-length negotiated
transaction.
S.G. Warburg analyzed the implied multiples paid in relation to
revenues, EBITDA, the sum of (x) EBITDA and (y) SG&A expenses of the selected
mergers and acquisitions, EBIT and net income. S.G. Warburg compared these
multiples with the implied multiples under the terms of the Merger.
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S.G. Warburg deemed the only material precedent transaction valuation parameters
to be implied multiples paid in relation to revenues, EBITDA and the sum of (x)
EBITDA and (y) SG&A expenses.
Among the precedent transactions that S.G. Warburg reviewed were the
acquisition of ITC, Inc. by U.S. Long Distance Corp., the acquisition of
Corporate Telemanagement Group by LCI International Inc., the acquisition of
Enhanced Telemanagement, Inc. by Frontier Corp., the acquisition of WCT
Communications, Inc. by Rochester Telephone Corp., the acquisition of RealCom
Office Communications by MFS Communications Company, Inc., the acquisition of
Centex Telemanagement Inc. by MFS Communications Company, Inc., the acquisition
of Advanced Telecommunications Corp. by LDDS Communications Inc., and the
acquisition of Telecom USA, Inc. by MCI Communications Corporation.
The multiples of revenues, EBITDA, and EBITDA+SG&A were between the
following ranges: (i) revenues: 0.7x to 2.2x (with a mean of 1.3x and a median
of 1.2x); (ii) EBITDA: 9.3x to 13.0x (with a mean of 11.3x and a median of
11.6x); and (iii) EBITDA+SG&A: 1.6x to 4.8x (with a mean of 3.3x and a median of
3.3x).
The multiples applied to FII result in an implied enterprise value
range of approximately $245,000,000 to $300,000,000.
No company, transaction or business used in the comparable company and
selected merger and acquisition transactions analyses as a comparison is
identical to STI or FII or the Merger. Accordingly, an analysis of the results
of the foregoing is not entirely mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies being compared, macroeconomic factors and
securities market performance at the time of valuation that can affect the
acquisition or public trading value of the comparable companies or the business
segment or company to which they are being compared.
Discounted Cash Flow Analysis
The discounted cash flow ("DCF") analysis performed by S.G. Warburg
calculated the present value of the target company based on the combination of
two components: (i) the present value of projected future cash flows from
operations for the five-year period commencing in 1996, and (ii) the present
value of an estimated terminal value based on a range of multiples of EBITDA at
some future point in time.
In its DCF analysis, S.G. Warburg applied discount rates ranging
between 12% and 16%, and applied terminal value multiples ranging between 7.0x
and 8.0x EBITDA. This analysis resulted in an implied enterprise value range of
approximately $230,000,000 to $260,000,000.
Additionally, S.G. Warburg discussed with the STI Board a DCF analysis
including forecast increases in pro forma combined operating profit resulting
from the combination of the businesses ("synergies") as estimated by the
managements of STI and FII. Utilizing the same discount rate and terminal value
multiples as above, this analysis resulted in an implied enterprise value range
of approximately $255,000,000 to $290,000,000. Accordingly, on a DCF basis, this
analysis resulted in an implied value range of the synergies of approximately
$25,000,000 to $30,000,000.
PRO FORMA IMPACT ANALYSIS
S.G. Warburg presented to the STI Board information concerning the pro
forma impact of the Merger based upon the detailed quantitative analysis
discussed below.
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S.G. Warburg presented to the STI Board an analysis of the transaction
structure and Merger setting forth the kind and amount of securities to be
issued and the sources and uses of funds in the Merger. S.G. Warburg also
discussed the impact of the use of preferred stock as part of the consideration
in the Merger.
S.G. Warburg also presented an analysis of the pro forma impact of the
Merger to STI on a stand-alone basis, including estimated revenue, EBITDA, cash
flow and net income, as well as leverage, estimated earnings per share, cash
flow per share and EBITDA per share for 1995 (pro forma for the transaction) and
1996. S.G. Warburg noted that the impact of the Merger for 1996 when compared
against STI on a stand-alone basis is significantly dilutive as to estimated
earnings per share but accretive as to both estimated cash flow per share and
EBITDA per share. The pro forma analysis assumed a certain level of long-term
strategic benefits which were based upon the views of STI's management.
In arriving at its opinion, S.G. Warburg performed a variety of
financial analyses, the material portions of which are summarized above. The
summary set forth above does not purport to be a complete description of the
analyses performed by S.G. Warburg. In addition, S.G. Warburg believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all such
factors and analyses, could create a misleading view of the process underlying
its analyses set forth in its opinion. The matters considered by S.G. Warburg in
arriving at its opinion are based on numerous macroeconomic, operating and
financial assumptions with respect to industry performance, general business and
economic conditions and securities market performance at the time of the
valuation, many of which are beyond STI's or FII's control. Any estimates
incorporated in the analyses performed by S.G. Warburg are not necessarily
indicative of actual past or future results or values, which may be
significantly more or less favorable than such estimates. Estimated values do
not purport to be appraisals and do not necessarily reflect the prices at which
businesses or companies may be sold in the future, and such estimates are
inherently subject to uncertainty. Arriving at a fairness opinion is a complex
process, not necessarily susceptible to partial or summary description. No
company utilized as a comparison is identical to STI or FII. Accordingly, an
analysis of comparable companies and comparable business combinations resulting
from the transactions is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the comparable companies and other factors that could affect
the value of the comparable companies or company to which they are being
compared.
The STI Board selected S.G. Warburg as its financial advisor because it
is an internationally recognized investment banking firm and S.G. Warburg has
substantial experience in transactions similar to the Merger and is familiar
with STI and its business. S.G. Warburg is an investment banking firm engaged,
among other things, in the valuation of businesses and their securities in
connection with mergers and acquisitions. Prior to its engagement to act as
financial advisor with respect to the examination of various strategic options
available to STI in July 1995, S.G. Warburg had not rendered any investment
banking services to STI.
Pursuant to the terms of an engagement letter amended November 8, 1995,
STI has paid S.G. Warburg monthly retainers aggregating $150,000 in relation to
the examination of various strategic options available to STI. Additionally,
S.G. Warburg will receive a fee of $1,100,000 for acting as financial advisor in
connection with the Merger, including rendering its opinion. In addition, STI
has agreed to retain S.G. Warburg (and any successor firm) as its financial
advisor for the next three years for which S.G. Warburg will receive an annual
retainer of $250,000. Whether or not the Merger is consummated, STI has also
agreed to reimburse S.G. Warburg for its reasonable out-of-pocket expenses,
including all reasonable fees and disbursements of counsel, and to indemnify
S.G. Warburg and certain related persons against certain liabilities relating to
or arising out of its engagement, including certain liabilities under the
federal securities laws.
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FII RECAPITALIZATION, LIABILITIES AND INDEMNIFICATION
In order to provide for favorable tax treatment to the FII
stockholders, the transaction between STI and FII was structured as a merger. As
a result of this structure, the Surviving Corporation will be liable for all
liabilities of FII with respect to its operations prior to the Effective Time.
Prior to the Merger, and as a precondition of the Merger, FII, its parent and
RHI's parent, The Fairchild Corporation ("TFC") and certain other subsidiaries
of TFC will undergo a recapitalization pursuant to which FII will divest itself
of all assets unrelated to the communications business (the "Communications
Business"). RHI will assume all liabilities of FII unrelated to the
Communications Business, including but not limited to: (i) contingent
liabilities related to the alleged failure by FII to comply with certain Federal
Acquisition Regulations and Cost Accounting Standards in accounting for (x) the
1985 reversion to FII of certain assets of terminated defined benefit pension
plans and (y) pension costs upon the closing of segments of FII's business; (ii)
all environmental liabilities except those related to FII's Communications
Business; (iii) approximately $50,000,000 (at June 30, 1995) of costs associated
with post-retirement healthcare benefits; (iv) a secured note payable in an
aggregate principal amount of approximately $3,300,000 at September 30, 1995;
and (v) all other accrued liabilities and any and all other unasserted
liabilities unrelated to FII's Communications Business (the "Non-communications
Liabilities"). See "Special Factors - Background of the Merger" and "Information
About FII - Legal Proceedings".
In the Merger Agreement, TFC, RHI and FII make representations and
warranties with respect to the Communications Business and the Merger Agreement
provides that STI and TFC on the one hand and RHI on the other shall indemnify
each other from losses arising out of any breaches of their respective
representations and warranties in the Merger Agreement to the extent that losses
to a party exceed $4,000,000. Each party's right to bring claims for indemnity
under the Merger Agreement expires on March 31, 1997. STI may meet its
indemnification obligations by issuing Common Stock having a fair market value
equal to the loss to the party it must indemnify.
While TFC and RHI, as a precondition to the Merger, will enter into a
joint and several Indemnification Agreement with respect to all
Non-communications Liabilities including but not limited to any tax liabilities
of FII and VSI arising prior to the Merger, including all tax liabilities of FII
and VSI arising out of the FII Recapitalization, TFC, RHI and Fairchild Holding
Corp., a company to be formed in the FII Recapitalization ("FHC"), will enter
into an Indemnification Agreement with respect to the businesses formerly
operated by FII and VSI, pursuant to which they will indemnify the Surviving
Corporation for the aforesaid liabilities, as a matter of law the Surviving
Corporation will not be released from FII's obligations with respect to such
liabilities whether arising before or after the Merger. Concurrently with the
Merger, RHI and TFC will also enter into a Tax Sharing Agreement with the
Surviving Corporation pursuant to which they will agree to indemnify the
Surviving Corporation for all taxes payable by FII or VSI or their predecessors
relative to periods prior to the Merger, including any tax liabilities of FII
and VSI arising as a result of the FII Recapitalization. To the extent RHI, TFC
and FHC are unable to meet their obligations under the Indemnification
Agreements, or, as to TFC and RHI, under the Tax Sharing Agreement, STI will be
required to satisfy in full any liabilities not satisfied by TFC, RHI or FHC.
RHI is primarily a holding company and, therefore, any claim by STI pursuant to
the Indemnification Agreement will be effectively subordinated to the creditors
of RHI's subsidiaries. There is no expiration date with respect to the
Indemnification Agreements or Tax Sharing Agreement indemnification. All
indemnification obligations under the Indemnification Agreements are secured by
all of the shares of Cumulative Convertible Preferred Stock (other than an
amount equal to $1,500,000 in initial liquidation preference) and the Special
Preferred Stock issued to RHI in the Merger.
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See FII's Consolidated Financial Statements (pre-FII Recapitalization) for a
description of liabilities as of the dates thereof.
While the pledge of shares of Preferred Stock permits the Surviving
Corporation to foreclose upon and cancel such stock as to which the liquidation
value equals the obligation of an indemnifying party, this right will not in
fact provide the Surviving Corporation with cash reimbursement for liabilities
paid. The Surviving Corporation may demand cash payment in lieu of foreclosing
upon the Preferred Stock or for any amount owed in excess of the liquidation
value of such Preferred Stock. The pledge of stock expires on that date which is
the later to occur of the third anniversary of the pledge agreement and the date
as of which the consolidated net worth of TFC is at least (x) $25,000,000
greater than such net worth at September 30, 1995 and (y) $225,000,000
(including the value of the Convertible Preferred Stock).
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Neither STI nor its current Stockholders (the "Current Stockholders")
will recognize any gain or loss as a result of the Merger. Assuming that (i) the
Merger is structured as described in this Proxy Statement, (ii) RHI enters into
the Shareholders' Agreement including a lock-up provision with respect to the
resale of STI stock (as described below) and (iii) at the time of the Merger RHI
will have no plan or intention of disposing of the shares of Common Stock and
Preferred Stock of STI received pursuant to the Merger, the Merger should be
treated as a reorganization under section 368(a)(1)(A) of the Internal Revenue
Code of 1986, as amended (the "Code") (a so-called "Type A reorganization"). If
the Merger is treated as a Type A reorganization, FII will not recognize any
gain or loss as a result of the Merger, and the tax basis of the assets of FII
in the hands of STI will be the same as the tax basis of such assets in the
hands of FII immediately prior to the Merger.
The following is a summary of the material federal income tax
consequences to STI and the Current Stockholders as a consequence of the Merger,
based upon the advice of Gadsby & Hannah, as tax advisor to STI. This discussion
is based upon the laws, regulations and reported rulings and decisions in effect
as of the date of this Proxy Statement (or, in the case of certain regulations,
proposed as of such date), all of which are subject to change, retroactively or
prospectively, and to possibly differing interpretations.
No ruling on the federal income tax consequences of the Merger has been
or will be requested from the Internal Revenue Service or from any other tax
authority. Moreover, this discussion does not address any foreign, state or
local income or other tax consequences of the Merger.
ACCORDINGLY, EACH CURRENT STOCKHOLDER IS STRONGLY URGED TO CONSULT SUCH
CURRENT STOCKHOLDER'S OWN TAX ADVISOR REGARDING ANY SPECIFIC TAX CONSEQUENCES OF
THE MERGER, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, INCOME AND OTHER TAX
CONSEQUENCES OF THE MERGER AND POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
Federal Income Tax Consequences for STI and FII. STI will not recognize
any gain or loss as a result of the Merger.
The federal income tax consequences of the Merger for FII will depend
upon whether or not the Merger is treated as a reorganization under section
368(a)(1)(A) of the Code (a so-called "Type A reorganization") for federal
income tax purposes.
In order to qualify as a Type A reorganization, the Merger must satisfy
four requirements. First, the Merger must qualify as a merger or consolidation
under state law. Second, the Merger must have a bona fide business purpose
(other than tax avoidance). Third, after the Merger, STI must
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continue FII's communications business or use a significant portion of FII's
"historic business assets" in its business. Fourth, the shareholders of FII
immediately before the Merger must, in the aggregate, maintain a significant
continuing equity interest in the Surviving Corporation after the Merger (the
"Continuity of Interest Test"). It is the judgment of Gadsby & Hannah that the
fact that RHI is the only pre-Merger FII shareholder that receives an equity
interest in STI pursuant to the Merger notwithstanding, the Continuity of
Interest Test will be met if the value of the Common Stock and Preferred Stock
of STI received by RHI pursuant to the Merger has a value equal to at least 50
percent of the value (measured at the time of the Merger) of the total
consideration paid by STI to the shareholders of FII, and RHI actually retains
ownership of such stock for at least two years (assuming that at the time of the
Merger, RHI has no plan or intention to dispose of the Common Stock and
Preferred Stock of STI received by RHI in the Merger). Therefore, if (i) the
Merger is structured as described in this Proxy Statement, (ii) RHI enters into
a Shareholders' Agreement (as defined below) and (iii) at the time of the Merger
RHI will have no plan or intention of disposing of the shares of Common Stock
and Preferred Stock of STI, then the Merger should qualify as a Type A
reorganization for federal income tax purposes.
If the Merger qualifies as a Type A reorganization, FII will not
recognize any gain or loss as a result of the Merger and the tax basis of the
assets of FII in the hands of STI will be the same as the tax basis of such
assets in the hands of FII immediately prior to the Merger. The holding period
of the assets of FII received by STI will include the period during which such
assets were held by FII.
STI will succeed to all tax liabilities of FII and VSI, including any
tax liabilities of FII and VSI as a result of the FII Recapitalization. TFC and
RHI have indemnified STI for such tax liability pursuant to an Indemnification
Agreement and the Tax Sharing Agreement. However, the Surviving Corporation will
be required to satisfy any such tax liabilities which arise and which are not
satisfied by the indemnifying parties.
If the Merger does not qualify as a Type A reorganization, it most
likely will be treated as a taxable exchange of FII's assets for shares of
Common Stock and Preferred Stock of STI and cash, followed by a liquidation of
FII in which the shareholders of FII immediately before the Merger receive the
Merger consideration. Under such treatment, STI's tax basis of the assets of FII
in the hands of STI would be the fair market value of the Merger consideration
(which includes the value of the Common Stock and Preferred Stock of STI, the
cash consideration and the amount of FII's liabilities assumed by STI), and the
holding period of the assets of FII received by STI would begin on the date of
the Merger.
Federal Income Tax Consequences for the Current Stockholders. Whether
or not the Merger qualifies as a Type A reorganization, the Current Stockholders
will not recognize any gain or loss as a result of the Merger.
ACCOUNTING TREATMENT OF THE MERGER
The Merger is intended to qualify as purchase accounting for financial
reporting purposes. Under the purchase method of accounting, the assets and
liabilities of FII will be recorded on the books of STI at their fair market
values. STI will allocate the excess cost of purchasing FII over the fair value
of FII's net tangible assets at acquisition to identifiable intangible assets to
the extent possible. The residual will be treated as goodwill and will be
amortized on a straight-line basis over 40 years.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of STI's Board of Directors,
Stockholders should be aware that certain members of management and the Board of
Directors of STI have certain interests in the Merger that are in addition to
the interests of Stockholders of STI generally. Prior to the Effective Time, the
Surviving Corporation shall enter into a two-year employment agreement with each
of Mr.
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Autorino and Mr. DiVincenzo as Chief Executive Officer and Chairman, and Senior
Vice President and Chief Financial Officer, respectively, of the Surviving
Corporation, providing for annual base salaries of $500,000 and $150,000,
respectively, and payments upon a change of control. Neither Mr. Autorino nor
Mr. DiVincenzo currently has an employment agreement but are paid annual
salaries of $330,000 and $115,000, respectively. Additionally, the Board adopted
the 1996 Equity Incentive Plan (the "1996 Plan") providing for issuance of
options to employees and directors to purchase up to 1,500,000 shares of Common
Stock as determined by the Compensation Committee. Although the Compensation
Committee has not approved specific issuances under the 1996 Plan, the
Compensation Committee could grant options to Mr. Autorino, Mr. Steiner and
other directors and executive officers of the Surviving Corporation after the
Effective Date of the Merger which could increase the ownership of such
individuals.
EFFECT IF THE MERGER AND AMENDMENTS ARE NOT APPROVED
If the Merger and Amendments are not approved as required by the Merger
Agreement, each party bears its own fees and expenses and shares the $1,000,000
"highly confident" letter fee of First Boston. STI will most likely continue to
pursue additional acquisitions or business combinations to further its long term
objective to maximize shareholder value. See "Fees and Expenses".
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PROPOSAL TO APPROVE THE MERGER AND AMENDMENTS
The following information is not intended to be a complete description
of all information relating to the Merger and Amendments and is qualified in its
entirety by reference to more detailed information contained elsewhere in this
Proxy Statement, including the Exhibits hereto. A copy of the Merger Agreement
is attached as Exhibit A and is incorporated herein by reference. All of the
material terms of the Merger Agreement have been described and/or summarized in
this Proxy Statement and there are no other terms of the Merger or the Merger
Agreement which have not been described in this Proxy Statement or the Exhibits
hereto which are material to a Stockholder's understanding of the Merger.
GENERAL
The Merger Agreement provides for the merger of FII with STI, with STI
surviving the Merger with the new name "Shared Technologies Fairchild Inc."
(hereinafter sometimes referred to as the "Surviving Corporation"). As a result
of the Merger, RHI, the sole holder of FII common stock will receive (i)
6,000,000 shares of Common Stock, (ii) shares of Cumulative Convertible
Preferred Stock paying a 6% initial annual dividend and having an aggregate
liquidation preference (and a mandatory redemption price at the end of 12 years)
of $25,000,000 plus an amount equal to the total amount of dividends the holders
would have received if dividends had been paid at the rate of 10% less the
amount of dividends actually paid and (iii) shares of Special Preferred Stock
having an initial aggregate liquidation preference of $20,000,000, which
increases $1,000,000 each year after 1996 to a maximum liquidation preference of
$30,000,000. The Special Preferred Stock also features certain mandatory
redemption provisions. In the Merger, certain shares of preferred stock of FII
owned by RHI will be canceled and all other holders of preferred stock of FII
will be paid cash by STI aggregating approximately $40,000,000 (which equals the
aggregate liquidation preference of such securities) plus dividends accrued to
the date of payment. See "Information about STI - Description of Securities".
Upon the filing of the Certificate of Merger the Amendments will become
effective to cause the name change and to increase the authorized Common Stock,
$.004 par value per share from 20,000,000 to 50,000,000 shares and to increase
the authorized shares of preferred stock from 10,000,000 to 25,000,000. See
"Information About STI - Description of Securities".
CERTAIN EFFECTS OF THE MERGER
As a result of the Merger, the holders of the currently outstanding
shares of Common Stock will decrease their ownership position from 100% to 59%.
A single stockholder, RHI, will own 41% of the outstanding Common Stock of the
Surviving Corporation. The Cumulative Convertible Preferred Stock, also issued
as part of the Common Consideration, will be, at the time of issuance,
convertible into 3,921,568 shares of Common Stock. On a fully diluted basis
(assuming the issuance and exercise of all options reserved (1,500,000) under
STI's 1996 Equity Incentive Plan), RHI will own approximately 39% and all other
holders will own approximately 61%. If any officer or director of RHI is issued
any options under the 1996 Equity Incentive Plan, RHI's and such individual's
aggregate beneficial ownership position could be increased. The Merger in and of
itself, therefore, will not result in RHI having voting control of the Surviving
Corporation. The fact that RHI does not attain voting control notwithstanding,
RHI will nevertheless be able to exert considerable control over the Surviving
Corporation in light of the fact that it will own 41% of the outstanding shares
of Common Stock, and in light of the terms of the Shareholders' Agreement. See
"Additional Agreements" and "Interests of Certain Persons in the Merger".
RHI, Mr. Autorino (who, upon the Merger will own 8.36% of the
outstanding Common Stock of the Surviving Corporation) and STI shall, as a
precondition to the Merger, enter into a Shareholders' Agreement pursuant to
which they agree to cause the Board of Directors to consist at all times of
eleven directors, with RHI having the ability to nominate three (four at such
time as Mr. Borer is not
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also a director) and Mr. Autorino having the ability to nominate seven. Each
party agrees to vote for the other party's nominees. The issuance of the Special
Preferred Stock and Cumulative Convertible Preferred Stock will not have an
effect on the voting rights of current holders of Common Stock, as each is
non-voting, except as may be required by law, and except, in the case of the
Cumulative Convertible Preferred Stock, certain rights to elect up to two
directors as to which Mr. Autorino had nomination rights upon payment defaults
as described below. See, "Information About STI - Description of Securities". By
their respective terms, the Special Preferred Stock and Cumulative Convertible
Preferred Stock will rank junior to the rights on liquidation and as to payment
of dividends with respect to the Series C Preferred Stock, and on parity with
each of the Series D and Series F classes of preferred stock.
Concurrently with the Merger, FII's Chief Operating Officer Mel D.
Borer will become President and a Director of the Surviving Corporation and FII
shall have the right to nominate three additional members of the Board of
Directors who shall then be elected to the Board, with Mr. Autorino having the
right to nominate seven Board members. Additionally, if four consecutive
dividend payments are missed with respect to the Convertible Preferred Stock,
FII shall have the right to nominate one additional director and if eight
consecutive dividend payments are missed, FII shall have the right to nominate a
second additional director. See "Information About STI - Description of
Securities". FII has disclosed to STI that it has entered into two year
employment agreements with 10 employees, each with annual base salaries
exceeding $100,000 and with aggregate annual base salaries aggregating
approximately $1,300,000. The Shareholders' Agreement to be entered into among
STI, Mr. Autorino and RHI concurrently with the Merger provides that Jeffrey J.
Steiner, Chairman of the Board, Chief Executive Officer and President of FII,
RHI and TFC will be Vice Chairman of the Surviving Corporation. Concurrently
with the Merger, Mr. Steiner and Mr. Borer will enter into employment agreements
with the Surviving Corporation. Their base salaries under the aforesaid
employment agreements will be $350,000 and $250,000 respectively.
In connection with the Merger, STI has agreed to indemnify FII for
losses incurred by FII in connection with a breach of STI's representations and
warranties as set forth in the Merger Agreement. In the event of any such breach
and liability by STI therefor, STI has the option, in lieu of paying cash, to
issue shares of Common Stock to RHI equal in value to the amount of any such
loss. If STI should choose to issue shares of Common Stock to satisfy its
indemnification obligations for a breach, such issuance will result in a
dilution of the interests of the STI Stockholders.
Upon consummation of the Merger and the issuance of 6,000,000 shares of
Common Stock to RHI, the sole stockholder of FII, with a current market value of
approximately $4.00 per share, the holders of the STI Series C Preferred Stock
will be entitled to a downward adjustment in the applicable conversion price of
the Series C Preferred Stock, which adjustment will entitle the such holders to
approximately 75,000 additional shares of Common Stock upon conversion of the
Series C Preferred Stock. Any such conversion of the Series C Preferred Stock
will result in the further dilution of the interests of the STI Stockholders.
In connection with the Merger, STI has granted to RHI certain demand
and piggy-back registration rights with respect to the Common Stock and
Preferred Stock issued to RHI (i) pursuant to the Merger Agreement, (ii) in the
future to satisfy indemnification obligations, and (iii) issuable and issued
upon conversion of shares of the Cumulative Convertible Preferred Stock. Any
exercise of such registration rights may result in dilution of the interest of
STI's stockholders, hinder STI's efforts to arrange future financings and/or
have an adverse effect on the market price of the Common Stock.
EFFECTIVE TIME
The Merger will be effective upon the issuance of a Certificate of
Merger by the Secretary of State of Delaware (the "Effective Time").
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OTHER TERMS AND CONDITIONS
The respective obligations of STI and FII to consummate the Merger are
subject to the fulfillment or written waiver of the following conditions: (i)
approval of the Merger and Amendments by Stockholders of STI owning a majority
of the outstanding Common Stock, (ii) the waiting period applicable to the
consummation of the Merger under the Hart-Scott-Rodino Act shall have expired or
been terminated (which waiting period has been terminated), (iii) the absence of
any order, statute, rule, regulation, executive order, injunction, stay, decree
or restraining order prohibiting the consummation of the Merger and transactions
contemplated by the Merger Agreement, (iv) all necessary consents of third
parties shall have been obtained, (v) the FII Recapitalization shall have been
effected, (vi) FII shall have made a cash tender offer to purchase all of the
FII Senior Notes and in connection therewith shall have obtained the acceptance
of such offer by Noteholders representing at least 51% of the outstanding
principal amount of the FII Senior Notes and such Noteholders consent to the
transfer by FII of all assets of FII (other than the stock of VSI) to RHI and to
amend the indenture under which the FII Senior Notes were issued to remove all
covenants which can be amended or deleted by majority vote and release all
collateral held as security for the indebtedness under the FII Senior Notes,
(vii) the parties shall have received the opinion of Donaldson, Lufkin &
Jenrette Securities Corporation or another investment banking firm of nationally
recognized standing that the fair market value of the Preferred Stock is at
least equal to the positive difference between $43,500,000 and the value of the
Common Stock received as part of the Common Consideration (based upon the
closing price thereof on the date preceding the Effective Time), (viii) Mel
Borer shall have been offered an employment agreement acceptable to STI and FII,
(ix) there shall not have occurred since December 31, 1994 (as to STI) or June
30, 1995 (as to FII), any material adverse change in their respective
businesses, operations, assets, financial condition or results of operations on
a consolidated basis (it being understood that no such material adverse change
shall be deemed to have occurred with respect to FII if the pro forma
consolidated net worth of FII is at least $80,000,000, (x) STI's and FII's
representations and warranties contained in the Merger Agreement shall be true
in all material respects, (xi) Shared Technologies Cellular, Inc. shall have
executed a non-competition agreement with STI acceptable to FII and (xii) the
Indemnification Agreements, Shareholders' Agreement, Pledge Agreement and Tax
Sharing Agreement shall have been executed and delivered.
Any condition to consummation of the Merger, other than approval by the
Stockholders of STI and any required regulatory approvals, may be waived in
writing by the party to the Merger Agreement entitled to the benefit of the
condition. See Exhibit A.
The Merger Agreement provides that the Merger and Amendments will
become effective upon the filing and recordation of the Certificate of Merger
and Certificates of Designations, Preferences and Rights with respect to the
Preferred Stock with the Secretary of State of the State of Delaware (i.e., the
Effective Time). STI intends to make such filing promptly after the satisfaction
or written waiver, where permissible, of the conditions contained in the Merger
Agreement.
ADDITIONAL AGREEMENTS
Shareholders' Agreement. The Merger Agreement provides that as a
pre-condition to the Merger, Anthony D. Autorino, RHI and STI enter into a
Shareholders' Agreement pursuant to which Mr. Autorino and RHI agree to certain
restrictions with respect to the resale of securities of STI owned by them. Mr.
Autorino and RHI will agree not to sell, within the two year period beginning
with the date of the Merger, other than to affiliates or certain family members,
more than 10% of their respective holdings as of the date of the Merger
Agreement in securities of STI without the consent of 80% of the Board of
Directors. Following the two year "lock-up," each party may transfer the
securities provided that such party grants the other party the first right to
negotiate the purchase of such securities for a 30 day period. If either party
to the Shareholders' Agreement desires to transfer more
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than 50% of his or its holdings to a single party or to an affiliated group
(other than through underwriters in a public offering or otherwise in the
securities markets generally), then such party must offer the other party
"take-along" rights by which the other party shall have the right to sell a
proportional amount of its shares to the same purchaser in the same transaction.
Furthermore, if one of the parties receives an offer which it desires to accept
from a person or related group of persons to purchase shares of STI securities
representing 10% or more of the outstanding shares of STI, then such party shall
offer the other party a right of first refusal to purchase such shares on the
same terms and conditions before accepting such offer to purchase.
The Shareholders' Agreement also subjects the parties to a voting
agreement with respect to the election of Directors. Among other things, each
party agrees to (i) vote for four nominees of RHI; provided, that so long as Mr.
Borer shall be President of STI they agree that he shall be a member of the
Board of Directors and RHI may only nominate three directors, and seven nominees
of Mr. Autorino, (ii) vote for the nominees of the other and for Mr. Borer so
long as he is President, and (iii) cause to be established an Executive
Committee of the Board of Directors which may act by unanimous consent only, to
consist of Mr. Autorino, who shall be Chairman and Chief Executive Officer of
the Surviving Corporation, Mr. Borer, the President and Chief Operating Officer
of the Surviving Corporation and Jeffrey J. Steiner (or another person
designated by RHI), who shall be Vice-Chairman of the Surviving Corporation. The
Shareholders' Agreement terminates at such time as either Mr. Autorino or RHI
owns less than 25% of the shares of Common Stock owned respectively by such
Stockholders on the date of the Merger.
The reason for the Shareholders' Agreement is to achieve the resulting
effects thereof which are to blend the perceived complementary talents of the
two management groups for an extended period and to maintain the continued
interest, through continuity of ownership, of RHI and its owners and Mr.
Autorino in the operational and financial success of the Surviving Corporation.
STI and FII managements believe that these results will assist in sustaining and
improving shareholder value in the Surviving Corporation.
Indemnification Agreements. Concurrently with the Merger TFC, RHI and
certain affiliates will enter into Indemnification Agreements with respect to
the historical non-telecommunications business liabilities of FII. See "Special
Factors - FII Recapitalization, Liabilities and Indemnification".
Pledge Agreement. As security for the obligations under the
Indemnification Agreements, RHI will, concurrently with the Merger, pledge to
the Surviving Corporation all shares of the Preferred Stock included in the
Common Consideration issued to RHI in the Merger (other than Cumulative
Convertible Preferred Stock having an aggregate face liquidation preference of
$1,500,000), for not less than three years and until such time as TFC's audited
balance sheet reflects a GAAP net worth of at least $225,000,000, including for
such purpose the value of the Preferred Stock, and until such net worth has
grown at least $25,000,000 from September 30, 1995, not including for such
purpose any net worth attributable to investments in the Preferred Stock in STI.
Tax Sharing Agreement. Concurrently with the Merger, STI and RHI shall
enter into a Tax Sharing Agreement. Pursuant to the Tax Sharing Agreement, STI
will pay to RHI fifty percent of any reduction of STI tax which results either
from STI utilization of pre-Merger net operating loss carryforwards or tax
credit carryforwards of FII and VSI or from STI payment of premiums, interest
and deferred financing fees associated with retirement of FII's 12 1/4% Senior
Notes and VSI's bank indebtedness existing at the time of the Merger. The Tax
Sharing Agreement also will provide for payments between STI and RHI in the
event that amended tax returns or audit adjustments shift FII income or
deductions between the pre-Merger and post-Merger periods.
Registration Rights Agreement. In connection with the Merger, the
Surviving Corporation will enter into a Registration Rights Agreement with
respect to the Common Stock, Cumulative Convertible Preferred Stock and Special
Preferred Stock issued to RHI. RHI has agreed not to sell any such stock
-38-
<PAGE>
during the two year period following the date of the Merger. After such time,
RHI may demand that STI register the sale of any or all of such stock on three
separate occasions, and it may also elect to "piggyback" upon a registration
otherwise effected by STI for its own account or the account of other
Stockholders (subject to underwriter restrictions in the event of a registration
for the account of STI and subject to the existing rights of such other
Stockholders).
CHANGES TO BYLAWS
The Merger Agreement provides for certain changes in the bylaws (the
"Bylaw Amendments") of STI relative to (i) the requirement for a Stockholder
meeting in any instance where Stockholder approval is required, (ii) rights to
elect Board of Directors members consistent with the Shareholders' Agreement,
(iii) restrictions upon the issuance of options or other rights to acquire
Common Stock without majority Stockholder approval, (iv) the establishment of an
Executive Committee, (v) amending provisions relative to the Executive Officers
of the Surviving Corporation, (vi) amending the provisions relative to amending
the bylaws to require that in any instance where amendments are to be effected
by the Board, and such amendments adversely affect the rights of TFC relative to
the Bylaw Amendments, a vote of 80% of the Board be obtained, (vii) the
requirement that for the issuance of any preferred or special class of shares
which are entitled to more than one vote per share or the issuance of any
additional shares of Series C Preferred Stock, a vote of 80% of the Board must
be obtained, and (viii) to add the office of Vice Chairman.
RIGHTS OF DISSENTING STOCKHOLDERS
Stockholders of STI who are opposed to the Merger and vote against or
do not vote for the Merger at the Meeting will have no appraisal or similar
rights if the Merger is approved and consummated.
FEES AND EXPENSES
If the Merger is effected, the Merger Agreement requires that the
Surviving Corporation pay 1) the fees and expenses incurred by FII in connection
therewith up to a maximum of $800,000, 2) First Boston $7,500,000 ($1,000,000 of
which, the "Letter Fee", in payment for the "highly confident" letter, has been
paid $500,000 by each of FII and STI), and 3) approximately $1,500,000 of
miscellaneous expenses and nonrecurring charges related to the Merger. STI has
already paid fees of $150,000 to S.G. Warburg and is required to pay $1,100,000
for acting as financial advisor in connection with the Merger. See "Special
Factors - Opinion of S.G. Warburg". If the Merger is not consummated due to no
fault of either party, each party will pay its own fees in connection with the
transaction and will share the Letter Fee. If the Merger Agreement is terminated
because (i) the Stockholders fail to approve the Merger and Amendments, (ii) STI
fails to perform in any material respect any of its obligations under the Merger
Agreement, or (iii) STI's Board shall have withdrawn, modified or amended in an
adverse manner its recommendation of the Merger as a result of the exercise of
its fiduciary duties, STI shall reimburse FII for all of its expenses incurred
in connection with the transaction and shall, if such termination is due to the
event described in (iii), pay FII a fee of $5,000,000. If the Merger Agreement
is terminated because (i) FII fails to perform in any material respect any of
its obligations under the Merger Agreement or (ii) FII's Board of Directors
shall have withdrawn, modified or amended in an adverse manner its
recommendation of the Merger as a result of the exercise of its fiduciary
duties, FII shall reimburse STI for all of its expenses incurred in connection
with the transaction and shall, if such termination is due to the event
described in (ii), pay STI a fee of $5,000,000.
STI has also agreed to pay First Boston an engagement fee of $500,000
as an advisor on general financial matters for a period of one year following
the Merger. In addition, STI has retained S.G. Warburg (and any successor firm)
as its financial advisor for the next three years for which S.G. Warburg will
receive an annual retainer of $250,000.
-39-
<PAGE>
REGULATORY REQUIREMENTS
No federal or state filing requirements must be made or regulatory
approvals obtained in connection with the Merger and Amendments other than (i)
the filing of notification, and the receipt of consents or approvals, required
by applicable provisions of, the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and regulations promulgated pursuant thereto and (ii) the
application for various state regulatory approvals to transfer from Fairchild
Communications Services Company to the Surviving Corporation the applicable
certificates of public convenience and necessity (or similar certificates)
authorizing the Surviving Corporation to resell intrastate telecommunications
services in such states. However, the Certificate of Merger including the
Amendments will be required to be filed with the Secretary of State of Delaware
in order for the Merger and Amendments to be effective and a Certificate of
Designations, Preferences and Rights with respect to each of the Cumulative
Convertible Preferred Stock and Special Preferred Stock must be filed with the
Secretary of State of Delaware to establish the Preferred Stock.
AMENDMENT, TERMINATION
The Merger Agreement may be amended or supplemented at any time, before
or after the Meeting, by an instrument in writing duly executed by the parties
to the Merger Agreement. However, no change which materially and adversely
affects the right of the STI Stockholders can be made after the Meeting without
the approval of the STI Stockholders. If the conditions to the Merger set forth
in the Merger Agreement are not met on or before January 31, 1996, the Merger
Agreement may be terminated by FII or STI, unless due to the failure to receive
the Tax Ruling or the failure of the Commission to give timely approval to the
proxy materials of STI, in which case the applicable date is March 8, 1996. See
"Proposal to Approve the Merger and Amendments - Other Terms and Conditions".
The Merger Agreement may also be terminated, and the Merger abandoned,
at any time before or after approval by either or both of the FII and STI
stockholders and at any time prior to the closing under the Merger Agreement:
(a) By agreement of the Boards of Directors of FII and STI;
(b) By mutual written agreement of FII and STI;
(c) By FII or STI if STI or FII, respectively, fails to
perform in any material respect any of its obligations
under the Merger Agreement;
(d) By FII or STI if a court of competent jurisdiction or
a governmental, regulatory or administrative agency
or commission shall have issued an order, decree, or
ruling or taken any other action, in each case
permanently restraining, enjoining or otherwise
prohibiting the transaction contemplated by the
Merger Agreement and such order, decree, ruling or
other action shall have become final and
nonappealable;
(e) By STI if the Board shall have withdrawn, modified
or amended in an adverse manner its recommendation
of the Merger as a result of the exercise of its fiduci-
ary duties;
(f) By FII if its Board of Directors shall have
withdrawn, modified or amended in an adverse manner
its recommendation of the Merger as a result of the
exercise of its fiduciary duties; or
-40-
<PAGE>
(g) By either STI or FII if either of their respective
Boards of Directors reasonably determines that market
conditions will not permit the completion of the
financing required to effect the transactions
contemplated by the Merger Agreement in a timely
manner or on acceptable terms or it becomes obvious
that the necessary marketing activities or filings
necessary for such financing have not been completed
in a timely manner necessary to complete the Merger.
Upon termination, the Merger Agreement shall be void and have no
effect, without any liability on the part of any party or its directors,
officers or stockholders, except that the parties are not relieved of liability
for any breach of the Merger Agreement. In certain instances a party shall be
responsible for the fees of the other party and if the termination is due to
paragraphs (e) and (f) above (unless such termination is later than March 8,
1996), the party terminating shall pay the other $5,000,000. See Exhibit A; see
also "Proposal to Approve the Merger and Amendments Fees and Expenses."
-41-
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial
statements (the "Pro Forma Financial Statements") are based on the historical
financial statements of STI and FII included elsewhere in this Proxy, adjusted
to give effect to the following (collectively, the "Specified Events") (i)
certain acquisitions by STI and FII since January 1, 1994 (the "Prior
Acquisitions"), (ii) the reclassification of Shared Technologies Cellular, Inc.
("STC") in the financial statements of STI to an investment accounted for under
the equity method, due to the issuance of its preferred stock in December 1995
and the resulting loss of voting control (the "STC Equity Adjustment") (iii) 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 gives effect to the Specified Events as if they had occurred as of
January 1, 1994, and the Unaudited Pro Forma Combined Balanced Sheet gives
effect to the Specified Events (other than the Prior Acquisitions) as if they
had occurred as of September 30, 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 Financial Statements do not purport to
represent what STI's results of operations or financial condition would actually
have been had the Specified Events in fact occurred on such dates or to project
STI's results of operations or financial condition for any future period or
date. The Pro Forma Financial Statements should be read in conjunction with the
historical financial statements of STI and FII included elsewhere in this Proxy
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Merger will be accounted for using the purchase method of
accounting. After the Merger, the total purchase cost of the acquisition of FII
will be 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 Financial Statements is preliminary as
STI believes further refinement is impractical to perform at this time. However,
STI does not expect the final allocation of the purchase price will materially
differ from the preliminary allocation set forth herein.
-42-
<PAGE>
Shared Technologies Fairchild Inc.
Pro Forma Combined Balance Sheet
September 30, 1995
(unaudited)
<TABLE>
<CAPTION>
Pro Forma Pro Forma Pro Forma Combined
STI * FII ** Adjustments Company
In thousands CURRENT ASSETS:
<S> <C> <C> <C> <C>
Cash $ 530 $ - $ - $530
Accounts receivable, less allowance for doubtful accounts 9,347 23,036 32,383
Other current assets 1,415 2,773 4,188
------ ------ - ------
Total current assets 11,292 25,809 - 37,101
------- ------- --- -------
Equipment, at cost:
Telecommunications equipment 28,186 77,289 A (33,513) 71,962
Office and data processing equipment 5,692 7,234 - 12,926
------ ------ --- -------
33,878 84,523 (33,513) 84,888
Less - Accumulated depreciation (17,471) (33,513) A 33,513 (17,471)
--------- --------- ------- ---------
16,407 51,010 - 67,417
------- ------- --- -------
Other Assets 11,007 37,694 A (30,510) 265,796
A 240,105
B 7,500
Investment in STC 2,903 - 2,903
------ ------ ------ ------
Total Assets $ 41,609 $ 114,513 $ 217,095 $ 373,217
======== ========= =========== =========
CURRENT LIABILITIES:
Notes payable and current portion of long-term
debt and capital lease obligations $ 2,431 $ 514 B $ (1,600) $ 16,005
B 14,660
Accounts payable 6,894 14,068 20,962
Accrued expenses 2,666 6,213 A 7,000 12,879
B 7,500
B (10,500)
Advanced billings 1,219 3,581 4,800
------ ------ - ------
Total current liabilities 13,210 24,376 17,060 54,646
------- ------- ------ -------
Long-Term Debt and Capital Lease Obligations,
less current portion 4,011 171,001 A 9,500
B (180,373) 225,079
B (2,400)
B 100,000
B 138,000
B (14,660)
Post retirement benefits 104 104
----- ---- ------ ----
Redeemable Put Warrant 416 416
---- - - ----
FII Series A preferred stock 19,112 B (19,112) -
STFI cumulative preferred stock, 250,000 shares outstanding A 25,000 25,000
STFI Special preferred stock, 20,000 shares outstanding A 20,000 20,000
STOCKHOLDERS' EQUITY:
FII Series C preferred stock 24,015 B (24,015) -
STI Series C preferred stock 9 9
STI Series D preferred stock 5 5
FII Series B preferred stock 230,200 A (230,200) -
Common Stock, 14,698 STFI shares outstanding 34 140 A (140) 58
A 24
- ----------------------------
* See Unaudited Pro Forma Consolidated Financial Statements of STI.
** See Unaudited Pro Forma Consolidated Financial Statements of FII.
-43-
<PAGE>
Additional paid-in capital 44,647 2,575 A (2,575) 68,623
A 23,976
Accumulated deficit (20,723) (357,010) A 357,010 (20,723)
--------- ---------- -------- ---------
Total stockholders' equity 23,972 (100,080) 124,080 47,972
------- ---------- -------- -------
Total liabilities and stockholders' equity $ 41,609 $ 114,513 $ 217,095 $ 373,217
========== ========== ========== ==========
See accompanying notes to these pro forma combined financial statements.
</TABLE>
-44-
<PAGE>
Shared Technologies Fairchild Inc.
Pro Forma Combined Statement of Operations
For the Nine Months Ended
September 30, 1995
<TABLE>
<CAPTION>
(unaudited) Pro Forma Pro Forma Pro Forma Combined
In thousands STI * FII ** Adjustments Company
<S> <C> <C> <C> <C>
Revenues $ 36,472 $ 99,928 $ - $136,400
Cost of Revenue 22,330 54,039 F (605) 75,764
------- ------- -------- -------
Gross Margin 14,142 45,889 605 60,636
Selling, General & Administrative Expenses 12,575 31,069 D 2,678 44,419
F (1,835)
H (68)
Operating Income (Loss) 1,567 14,820 (170) 16,217
Gain on sale of subsidiary stock 1,375 1,375
Equity in STC (Loss) (1003) (1003)
Interest Expense (774) (16,064) E (2,895) (20,424)
C (691)
Interest Income 128 128
---- - - ----
Net Income (Loss) 1,293 (1,244) (3,756) (3,707)
Preferred Stock Dividends (299) (2,925) G 300 (2,924)
------ -------- ---- ---------
Net Income (Loss) Applicable to Common Stock $ 994 $ (4,169) $ (3,456) $ (6,631)
==== ========= ========= =========
Income (Loss) per Common Share $0.11 ($0.45)
====== ========
Weighted Average Number of Common
Shares Outstanding 8,698 6,000 14,698
====== ====== =======
See accompanying notes to these pro forma combined financial statements.
</TABLE>
- ----------------------------
* See Unaudited Pro Forma Consolidated Financial Statements of STI.
** See Unaudited Pro Forma Consolidated Financial Statements of FII.
-45-
<PAGE>
<TABLE>
<CAPTION>
Shared Technologies Fairchild Inc.
Pro Forma Combined Statement of Operations
For the Year Ended
December 31, 1994
(unaudited) Pro Forma Pro Forma Pro Forma Combined
In thousands STI * FII ** Adjustments Company
<S> <C> <C> <C> <C>
Revenues $ 47,785 $ 127,462 $ - $175,247
Cost of Revenue 29,573 75,295 F (806) 104,062
------- ------- ------ --------
Gross Margin 18,212 52,167 806 71,185
Selling, General & Administrative Expenses 16,642 36,593 D 4,011 54,742
F (2,446)
H (58)
Operating Income (Loss) 1,570 15,574 (701) 16,443
Minority interest in net income of subsidiary (43) (43)
Equity in STC Income (1,653) (1,653)
Interest Expense (817) (21,470) E (5,017) (28,225)
C (921)
Interest Income 174 174
---- - - ----
Net Income (Loss) before taxes (769) (5,896) (6,639) (13,304)
Income tax credit 550 550
---- ---- - ----
Net income (loss) before preferred dividends 219 (5,896) (6,639) (12,754)
Preferred Stock Dividends (538) (3,902) G 402 (4,038)
------ -------- ---- ---------
Net Income (Loss) Applicable to Common Stock $ (757) $ (9,798) $ (6,237) $ (16,792)
====== ========= ========= ==========
Income (Loss) per Common Share $0.11 ($1.31)
====== ========
Weighted Average Number of Common
Shares Outstanding 6,792 6,000 12,792
====== ====== =======
See accompanying notes to these pro forma combined financial statements
</TABLE>
- ----------------------
* See Unaudited Pro Forma Consolidated Financial Statements of STI.
** See Unaudited Pro Forma Consolidated Financial Statements of FII.
-46-
<PAGE>
SHARED TECHNOLOGIES FAIRCHILD INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(A) The pro forma combined balance sheet gives effect to the proposed Merger of
FII, after the FII Recapitalization, into STI by combining the respective
balance sheets of the two companies at September 30, 1995. 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 proposed merger will be allocated to FII's assets
and liabilities based on their fair market values any excess treated as
goodwill. The purchase was paid with the issuance of $69,000,000 in STI equity
to the former shareholders of FII. The STI equity consisted of 6 million shares
of Common Stock at an estimated market value of $4 per share, shares of 10%
Cumulative Convertible Preferred Stock with a 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 $69,000,000 in STI equity.
<TABLE>
<CAPTION>
FMV
Pro forma Adjusted
In thousands FII ** FII Adjustment
------------ --------------- ------------
ASSETS:
Cash
<S> <C> <C> <C>
$ - $ - $ -
Accounts receivable, less allowance for
doubtful accounts 23,036 23,036 -
Other current assets 2,773 2,773 -
Telecommunications equipment 77,289 43,776 (33,513)
Office and data processing equipment 7,234 7,234 -
Accumulated depreciation (33,513) - 33,513
Other Assets 37,694 7,184 (30,510)
New Goodwill 240,105 240,105
------------ --------------- ------------
Total assets $ 114,513 $ 324,108 $ 209,595
============ =============== ============
LIABILITIES:
Notes payable and current portion of long-term
debt and capital lease obligations $ 514 $ 514 $ -
Accounts payable 14,068 14,068 -
Accrued expenses 6,213 6,213
Accrued acquisition costs 7,000 7,000
Advanced billings 3,581 3,581 -
Long-Term Debt and Capital Lease Obligations,
less current portion 171,001 180,501 9,500
Post retirement benefits 104 104 -
------------ --------------- ------------
Total liabilities 195,481 211,981 16,500
FII Series A preferred stock 19,112 19,112 -
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 2,575 - (2,575)
Additional paid-in capital 23,976 23,976
Accumulated deficit (357,010) - 357,010
------------ --------------- ------------
Total stockholders' equity (100,080) 48,015 148,095
------------ --------------- ------------
Total liabilities and
stockholders' equity $ 114,513 $ 324,108 $ 209,595
============ =============== ============
** See unaudited pro forma consolidated financial statements of FII
</TABLE>
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<PAGE>
(B) An adjustment was recorded in the pro forma combined balance sheet to
reflect the issuance of $238,000,000 in new debt; $100,000,000 in 13% zero
coupon bonds and $138,000,000 in term loans from the Credit Facility. Proceeds
from these borrowings are expected to be used as follows: (amounts in thousands)
<TABLE>
<S> <C>
Repurchase of FII series A preferred stock $ 19,112
Repurchase of FII series C preferred stock 24,015
Retirement of 12 1/4 % Notes 125,000
Estimated premium on retirement of 12 1/4% Notes 9,500
Retirement of FII indebtedness 45,873
Retirement of current portion State Street debt 1,600
Retirement of long term portion State Street debt 2,400
Payment of bank finance fees 7,500
Payment of certain acquisition costs 3,000
-----------
Total proceeds $ 238,000
=========
</TABLE>
The pro forma combined balance sheet assumes all these events will take place
with the Merger. $7,000,000 in acquisition costs were accrued related to the
Merger, $3,000,000 are expected to be paid immediately with the remaining
$4,000,000 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
statements 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> <C>
1996 16,005
1997 23,088
1998 26,676
1999 15,211
2000 15,097
Thereafter 145,007
-------
241,084
</TABLE>
(C) $7,500,000 in financing fees associated with the assumption of $238,000,000
in new debt were capitalized. See footnote (B). Additional interest expense was
recorded for each period presented based on an amortization period of 10 years
for $3,500,000 of the fees and 7 years for the remaining $4,000,000. The
allocation of fees is based on the respective amounts of zero coupon bonds and
bank debt issued and the respective lives of each. The adjustments resulted in
additional interest expense of $921,000 and $691,000 for the year ended December
31, 1994 and the nine months ended September 30, 1995 respectively.
-48-
<PAGE>
(D) The purchase accounting for the Merger resulted in $240,105,000 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 statements of operations reflect a net
adjustment to goodwill amortization of $4,011,000 and $2,678,000 for the year
ended December 31, 1994 and the nine months ended September 30, 1995
respectively. The following table details the calculation of the adjustment by
period (amounts in thousands):
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
New goodwill amortization $ 6,000 $ 4,500
FII goodwill amortization eliminated (1,989) (1,822)
-----------------
Net adjustment $ 4,011 $ 2,678
======== ========
</TABLE>
(E) Interest expense, in the pro forma combined statements 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, 1994. The following
table details the calculation of the adjustment by period (amounts in
thousands).
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C> <C> <C>
$100 million in zero coupon bonds estimated 13% interest $ 13,000 $ 9,750
$138 million in bank debt estimated 9% interest 12,420 9,315
Retirement of 12 1/4% Notes (15,312) (11,484)
Retirement of FII indebtedness ( 4,975) ( 4,422)
Retirement of STI indebtedness ( 116) ( 264)
--------- ----------
Net adjustment $ 5,017 $ 2,895
========= ========
</TABLE>
A 1/8% change in the estimated interest rates for the $100 million in zero
coupon bonds and the $138 million in bank debt ($238 million in new debt) would
result in a change in interest expense of $297,500 on a yearly basis.
(F) The pro forma combined statements of operations include the estimated effect
of certain cost savings and increases associated with the consolidation of the
operations of STI and FII. The following table details the components of the
adjustment by period (amounts in thousands).
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Net S,G & A savings $ 2,446 $ 1,835
Network savings 806 605
--------- ---------
Total adjustment $ 3,252 $ 2,440
======== =======
</TABLE>
(G) Preferred stock dividends in the pro forma combined statements 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 $402,000 and $300,000 for the year ended
-49-
<PAGE>
December 31, 1994 and the nine months ended September 30, 1995 respectively. The
following table details the components of the adjustment by period (amounts in
thousands).
<TABLE>
<CAPTION>
1994 1995
---- ----
Preferred stock dividends added (footnote A):
<S> <C> <C>
STFI cumulative preferred stock dividend $ 2,500 $ 1,875
STFI special preferred stock dividends 1,000 750
Preferred stock dividends eliminated (footnote B)
FII series A preferred stock dividend (1,529) (1,147)
FII series C preferred stock dividend (2,373) (1,778)
--------- ---------
Total adjustment $ 402 $ 300
========= =======
</TABLE>
(H) STI incurred federal alternative minimum tax for both 1994 and 1995. Income
tax expense was adjusted to eliminate the federal alternative minimum income tax
as net losses before net operating loss carryforwards were generated for each of
the pro forma combined statements of operations presented. The pro forma
combined statements of operations have also been adjusted to reduce state income
taxes to an estimated minimum required amount. This resulted in a reduction of
income taxes of $58,000 and $68,000 for the year ended December 31, 1994 and the
nine months ended September 30, 1995 respectively.
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<PAGE>
SHARED TECHNOLOGIES INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma Shared Technologies Inc. consolidated
financial statements give effect, on a purchase accounting basis, to the
acquisitions of Office Telephone Management Inc. (OTM) and Access
Telecommunications Group, L.P. and Access Telemanagement, Inc. (collectively
"Access"). The unaudited pro forma Shared Technologies Inc.
financial statements also reflect the STC Equity Adjustment.
The unaudited pro forma Shared Technologies Inc. consolidated financial
statements are not necessarily indicative of the results or financial position
which actually would have occurred if the acquisitions of OTM and Access and the
STC Equity Adjustment had been in effect since January 1, 1994, nor are they
necessarily indicative of future results or financial position.
The unaudited pro forma Shared Technologies Inc. consolidated statements of
operations gives effect to the acquisitions of OTM and Access and the STC Equity
Adjustment as if they had occurred on January 1, 1994, and the unaudited pro
forma Shared Technologies Inc. consolidated balance sheet gives effect to these
items as if they had occurred on September 30, 1995 for the purpose of
presenting the unaudited pro forma Shared Technologies Inc. consolidated
financial statements.
-51-
<PAGE>
<TABLE>
<CAPTION>
Shared Technologies Inc.
Pro Forma Consolidated Balance Sheet
September 30, 1995
(unaudited)
In thousands (1)
STC Equity Pro Forma
STI Adjustment STI
CURRENT ASSETS:
<S> <C> <C> <C>
Cash $ 1,410 $ (880) $ 530
Accounts receivable, less allowance for doubtful accounts 11,588 (2,241) 9,347
Other current assets 1,895 (480) 1,415
------ ------ ------
Total current assets 14,893 (3,601) 11,292
------- -------- -------
Equipment, at cost:
Telecommunications equipment 29,500 (1,314) 28,186
Office and data processing equipment 6,132 (440) 5,692
------ ------ ------
35,632 (1,754) 33,878
Less - Accumulated depreciation (18,063) 592 (17,471)
--------- ---- ---------
17,569 (1,162) 16,407
------- -------- -------
Other Assets 14,617 (3,610) 11,007
Investment in STC - 2,903 2,903
-------- ------ ------
Total Assets $ 47,079 $ (5,470) $ 41,609
======== ========= =============
CURRENT LIABILITIES:
Notes payable and current portion of long-term
debt and capital lease obligations $ 2,438 $ (7) $ 2,431
Accounts payable 10,664 (3,770) 6,894
Accrued expenses 2,666 2,666
Advanced billings 1,248 (29) 1,219
------ ----- ------
Total current liabilities 17,016 (3,806) 13,210
------- -------- -------
Long-Term Debt and Capital Lease Obligations,
less current portion 4,012 (1) 4,011
------ ---- ------
Minority Interest in Net Assets of subsidiaries 1,663 (1,663) -
------ -------- --
Redeemable Put Warrant 416 - 416
---- ----- ----
STOCKHOLDERS' EQUITY:
STI Series C preferred stock 9 - 9
STI Series D preferred stock 5 - 5
Common Stock 34 - 34
Additional paid-in capital 44,647 - 44,647
Accumulated deficit (20,723) - (20,723)
--------- ----- ---------
Total stockholders' equity 23,972 - 23,972
------- ----- -------
Total liabilities and stockholders' equity $ 47,079 $ (5,470) $ 41,609
=========== ========= ===========
See accompanying notes to these pro forma consolidated financial statements.
</TABLE>
-52-
<PAGE>
<TABLE>
<CAPTION>
Shared Technologies Inc.
Pro Forma Consolidated Statement of Operations
For the Nine Months Ended
September 30, 1995 (1) (5) (2)
STC Equity Pending OTM Pro Forma Pro Forma
In thousands STI Adjustment Acquisition Acquisition Adjustments STI
- ------------ -------- ---------- ----------- ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 43,674 $ (9,160) $ 1,958 $ 36,472
Cost of Revenue 26,628 (5,531) 1,233 22,330
------- -------- - ------ - -------
Gross Margin 17,046 (3,629) 725 14,142
Selling, General & Administrative Expenses 16,116 (4,231) 626 (2) 64 12,575
------- -------- - ---- --- -------
Operating Income (Loss) 930 602 99 (64) 1,567
Minority interest in net income of subsidiaries 213 (213)
Gain on sale of subsidiary stock 1,375 1,375
Equity in (loss) of STC (411) (544) (4) (48) (1,003)
Interest Expense (574) 24 (119) (2) (34) (774)
(2) (71)
Interest Income 130 (2) 128
---- ---- - - - ----
Net Income (Loss) 2,074 - (544) (20) (217) 1,293
Preferred Stock Dividends (299) (299)
------ - - - - ------
Net Income (Loss) Applicable to Common Stock $ 1,775 $ - $ (544) $ (20) $ (217) $ 994
====== ==== ======= ====== ======= =====
See accompanying notes to these pro forma consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Shared Technologies Inc.
Pro Forma Consolidated Statement
of Operations
For the Year Ended
December 31, 1994 (1) (5) (2) (3)
STC Equity Pending OTM Access Pro Forma Pro Forma
In thousands STI Adjustment Acquisition Acquisition Acquisition Adjustments STI
- ------------ -------- ---------- ----------- ----------- ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 45,367 $ (10,217) $ 3,454 $ 9,181 $ 47,785
Cost of Revenue 26,172 (5,293) 2,254 6,384 (3) 56 29,573
------- -------- - ------ ------ --- -------
Gross Margin 19,195 (4,924) 1,200 2,797 (56) 18,212
Selling, General & Administrative
Expenses 16,972 (4,274) 1,214 2,496 (2) 128 16,642
(3) 106
- - - - ----
Operating Income (Loss) 2,223 (650) (14) 301 (290) 1,570
Minority interest in net income
of subsidiaries (128) 85 (43)
Equity in earnings of STC 517 (1,905) (4) (265) (1,653)
Interest Expense (522) 65 (151) (2) (67) (817)
(2) (142)
Interest Income 163 (17) 28 174
---- ----- - - --- - ----
Net Income (Loss) before taxes 1,736 - (1,905) (165) 329 (764) (769)
Income tax credit 550 550
---- - - - - - ----
Net Income (Loss) before preferred
dividends 2,286 - (1,905) (165) 329 (764) (219)
Preferred Stock Dividends (478) (3) (60) 538
------ - - - - ----- ----
Net Income (Loss) Applicable to
Common Stock $ 1,808 $ - $(1,905) $ (165) $ 329 $ (824) $ (757)
======= ==== ======== ======= ===== ======= =======
See accompanying notes to these pro forma consolidated financial statements.
</TABLE>
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<PAGE>
SHARED TECHNOLOGIES INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) STI owns 60.28% of the outstanding common stock of STC; formerly a
consolidated subsidiary of STI. During December 1995 STC issued approximately
$3,000,000 in voting preferred stock to third parties. While STI's ownership
percentage did not change, the voting rights assigned to the voting preferred
stock reduced STI's voting interest in STC to 42.7% which resulted in a loss of
voting control over STC operations. Consequently the pro forma consolidated
balance sheet was adjusted to account for STC on the equity basis; all assets
and liabilities of STC were eliminated and a non current asset of $2,903,000 was
recorded to reflect STI's equity investment in STC at September 30, 1995. The
pro forma consolidated statements of operations were adjusted to record STC's
income or loss on the equity basis.
(2) In June 1995, STI 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 statements
of operations for the year ended December 31, 1994 and the nine months ended
September 30, 1995 include adjustments to record OTM operations for the periods
prior to the acquisition in June 1995. Adjustments of $128,000 and $64,000 were
recorded for additional goodwill amortization for the year ended December 31,
1994 and the nine months ended September 30, 1995 respectively. Adjustments for
additional interest expense were recorded of $67,000 and $34,000 for the year
ended December 31, 1994 and the nine months ended September 30, 1995
respectively related to the $800,000 note. Adjustments for additional interest
expense were recorded of $142,000 and $71,000 for the year ended December 31,
1994 and the nine months ended September 30, 1995 respectively 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.
(3) In June 1994, STI acquired all of the partnership interests in Access. The
purchase price was $9,252,000, of which $4,252,000 was paid in cash and the
balance through the issuance of 400,000 shares of Series E Preferred Stock
valued at $3.75 per share and 700,000 shares of Series F Preferred Stock valued
at $5.00 per share. The acquisition was recorded as a purchase and the
unallocated purchase price over fair market value of assets acquired was
$8,500,000, which is being amortized over 40 years. The pro forma consolidated
statements of operations for the year ended December 31, 1994 include an
adjustment to record Access operations for the first six months of 1994. An
adjustment of $106,000 was recorded to reflect additional goodwill amortization
expense for the year ended December 31, 1994. Additional depreciation expense,
related to fair market value of fixed assets acquired, of $56,000 was recorded
for the year ended December 31, 1994. Additional preferred stock dividends of
$60,000 was recorded to reflect an additional six months on 400,000 shares with
an 8% coupon and a value of $3.75 per share for the year ended December 31,
1994.
(4) In May and June 1995 STI's subsidiary 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. Adjustments were recorded to
reflect the effect of this acquisition on the equity in
-55-
<PAGE>
earnings or loss for the year ended December 31, 1994 and the nine months ended
September 30, 1995 respectively.
(5) In November 1995 STI's subsidiary STC completed its purchase of certain
assets and liabilities of PTC Cellular Inc. ("PTCC"). Although the transaction
was consummated November 13, 1995, the effective date of the asset purchase was
retroactive to November 1, 1995. The purchase price was $3,800,000, comprised of
$300,000 in cash and $1,200,000 in assumed accounts payable, a five-year
promissory note in the principal amount of $2,000,000 bearing interest at the
rate of eight percent (8%) per year, and the issuance of 100,000 shares of STC's
common stock, $.01 par value. PTCC recorded revenues of $11,580,620 and
$5,801,328 for the year ended December 31, 1994 and the nine months ended
September 30, 1995, respectively. On a pro forma basis the STC statements of
operations were negatively impacted by net losses of $3,213,293 and $917,434 due
to recording of this pending acquisition of PTCC for the year ended December 31,
1994 and the nine months ended September 30, 1995, respectively. Adjustments
were recorded to reflect the effect of this "pending acquisition" on the equity
in earnings or loss for the year ended December 31, 1994 and the nine months
ended September 30, 1995, respectively. The Financial Statements of PTCC are
unaudited as management of PTCC was unable to satisfy its auditors relative to
the amount of impairment, if any, of its long-lived assets at December 31, 1994.
STI will provide audited Financial Statements for PTCC as soon as available.
-56-
<PAGE>
FAIRCHILD INDUSTRIES INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma Fairchild Industries Inc. consolidated
financial statements give effect, on a purchase accounting basis, to the
acquisition of JWP. The unaudited pro forma Fairchild Industries Inc.
consolidated financial statements also 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 Fairchild Industries Inc. financial statements are not
necessarily indicative of the results or financial position which actually would
have occurred if the JWP acquisition, the change to a December 31 year end and
the Recapitalization been in effect since January 1, 1994 nor are they
necessarily indicative of future results or financial position.
The unaudited pro forma Fairchild Industries Inc. consolidated statements of
operations gives effect to the acquisition of JWP and the Recapitalization as if
they had occurred on January 1, 1994, and the unaudited pro forma Fairchild
Industries, Inc. consolidated balance sheet gives effect to these items as if
they had occurred on September 30, 1995 for the purpose of presenting the
unaudited pro forma Fairchild Industries Inc. consolidated financial statements.
-57-
<PAGE>
<TABLE>
<CAPTION>
Fairchild Industries, Inc.
Pro Forma Consolidated Balance Sheet
September 30, 1995
(unaudited)
(1)
Recapitalize Pro Forma
In thousands FII FII FII
CURRENT ASSETS:
<S> <C> <C> <C>
Cash $ - $ - $ -
Accounts receivable, less allowance for doubtful accounts 23,036 - 23,036
Other current assets 2,773 - 2,773
Net current assets of operations transferred to RHI 53,391 (53,391) -
------- --------- --
Total current assets 79,200 (53,391) 25,809
------- --------- -------
Equipment, at cost:
Telecommunications equipment 77,289 - 77,289
Office and data processing equipment 7,234 - 7,234
------ ------ ------
84,523 - 84,523
Less - Accumulated depreciation (33,513) - (33,513)
--------- ------ ---------
51,010 - 51,010
------- ------ -------
Other Assets 37,694 37,694
Net non-current assets transferred to RHI 184,422 (184,422)
-------- ----------
Total Assets $ 352,326 ($237,813) $ 114,513
========= =========== =========
CURRENT LIABILITIES:
Notes payable and current portion of long-term
debt and capital lease obligations $ 514 $ - $ 514
Accounts payable 14,068 - 14,068
Accrued expenses 6,213 - 6,213
Advanced billings 3,581 - 3,581
------ ----- ------
Total current liabilities 24,376 - 24,376
------- ----- -------
Long-Term Debt and Capital Lease Obligations,
less current portion 180,501 (9,500) 171,001
-------- ------- --------
Post retirement benefits 104 - 104
---- ----- ----
FII Series A preferred stock 19,112 19,112
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 2,575 2,575
Accumulated deficit (128,697) (228,313) (357,010)
---------- ---------- ----------
Total stockholders' equity 128,233 (228,313) (100,080)
-------- ---------- ----------
Total liabilities and stockholders' equity $ 352,326 $ (237,813) $ 114,513
========= =========== =========
See accompanying notes to these pro forma consolidated financial statements
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Fairchild Industries, Inc.
Pro Forma Consolidated Statement of Operations
For the Nine Months Ended
September 30, 1995
FII (2)
(unaudited) Three Months Adjust FII to Pro Forma Pro Forma
In thousands Ended 10/2/95 Calendar Year Adjustments FII
<S> <C> <C> <C> <C>
Revenues $ 33,138 $ 66,790 $ 99,928
Cost of Revenue 17,614 36,425 54,039
------- ------- -------
Gross Margin 15,524 30,365 45,889
Selling, General & Administrative Expenses 10,783 20,286 31,069
Operating Income 4,741 10,079 14,820
Interest Expense (5,490) (10,574) (16,064)
-------- --------- - ---------
Net income (749) (495) (1,244)
Operating results of operations
transferred to RHI 1,143 (1) (1,143) -
Preferred Stock Dividends (975) (1,950) (2,925)
------ -------- - --------
Net Income Applicable to Common Stock $ (581) $(2,445) $(1,143) $(4,169)
======= ======= ======== ========
See accompanying notes to these pro forma consolidated financial statements
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Fairchild Industries, Inc.
Pro Forma Consolidated Statement of Operations
For the Year Ended
December 31, 1994
FII (2) (3)
(unaudited) Year Ended Adjust FII to JWP Pro Forma Pro Forma
In thousands 6/30/95 Calendar Year Acquisition Adjustments FII
<S> <C> <C> <C> <C> <C>
Revenues 109,741 (28,778) 46,499 $127,462
Cost of Revenue 58,360 (17,468) 34,403 75,295
------- --------- ------- - -------
Gross Margin 51,381 (11,310) 12,096 52,167
Selling, General & Administrative Expenses 33,128 (9,513) 12,636 (3) 282 36,593
(3) 60
Operating Income 18,253 (1,797) (540) (342) 15,574
Interest Expense (21,280) 617 101 (3) (908) (21,470)
-------- ---- ---- ------ --------
Net income (3,027) (1,180) (439) (1,250) (5,896)
Operating results of operations
transferred to RHI (9,332) (1) 9,332 -
Preferred Stock Dividends (3,902) (3,902)
-------- - - - --------
Net Income Applicable to Common Stock $(16,261) $ (1,180) $ (439) $ 8,082 $ (9,798)
========= ========= ======= ======= =========
See accompanying notes to these pro forma consolidated financial statements
</TABLE>
-60-
<PAGE>
FAIRCHILD INDUSTRIES INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) The unaudited pro forma Fairchild Industries Inc. consolidated financial
statements were adjusted to reflect 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 $9,500,000 in accrued premium on early retirement of the 12 1/4%
Senior Secured Notes Due 1999 and approximately $45,873,000 of existing bank
indebtedness.
(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 STI's fiscal year.
(3) On November 28, 1994, FII completed the acquisition of substantially all of
the telecommunications assets of JWP a telecommunications systems integrator,
specializing in the distribution, installation and maintenance of voice and data
communications equipment for approximately $11,000,000 plus the assumption of
approximately $3,000,000 of liabilities. FII recorded $1,610,000 and $5,595,000
in identifiable intangibles and goodwill, respectively. The pro forma
consolidated statement of operations for the year ended December 31, 1994
include an adjustment to record JWP operations for the first 11 months of 1994.
An adjustment of $282,000 for additional amortization was recorded for the year
ended December 31, 1994. Additional depreciation expense, related to fair market
value of fixed assets acquired, of $60,000 was recorded for the year ended
December 31, 1994. Additional interest expense of $908,000 was recorded to
reflect the estimated interest cost at 9% on additional borrowings of
$11,000,000 required to obtain the cash paid to acquire JWP.
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<PAGE>
INFORMATION ABOUT STI
BUSINESS
STI was originally incorporated in Delaware on January 30, 1986. By a
Plan and Agreement of Merger dated March 8, 1988, STI effected a statutory
merger with and into Balcon, Inc., a Delaware corporation (incorporated
September 23, 1987), which survived the merger and changed its name to Shared
Technologies Inc. Since such time, STI's primary business has been to provide
shared tenant telecommunications services to tenants of modern, multi-tenant
office buildings. The principal executive offices of STI are located at 100
Great Meadow Road, Wethersfield, Connecticut 06109.
PRICE RANGE OF COMMON STOCK
The Common Stock is included for quotation on the Nasdaq National
Market under the symbol "STCH". On November 8, 1995, the date preceding the
public announcement of the Merger, the high and low sale price of the Common
Stock was $4.250 and $3.625, respectively, per share.
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<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth the selected financial data of STI for each of
the last five years and the nine months ended September 30, 1995 and 1994.
Financial statements for 1991 and 1990 are not presented in this Proxy
Statement. Such selected financial data were derived from audited consolidated
financial statements not included herein. The selected financial data of STI
should be read in conjunction with the Consolidated Financial Statements and
related notes appearing elsewhere in this Proxy Statement. In September 1992 STI
effected a one-for-four reverse stock split of common stock and increased the
par value of common stock from $.001 to $.004 per share. Weighted average common
shares outstanding and per share information have been retroactively adjusted to
reflect this split. All amounts, except per share amounts, are in thousands.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30,
Statement of Operations Data: 1994(1) 1993 1992 1991 1990 1995(2) 1994(1)
- ------------------------------------------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $45,367 $25,426 $24,077 $23,172 $21,804 $43,675 $31,514
Gross margin 19,195 10,912 9,254 6,358 5,786 17,046 13,524
Selling, general and
administrative expenses 16,972 10,102 9,959 10,717 10,246 16,116 11,760
Operating income (loss) 2,223 810 (705) (4,359) (4,460) 930 1,764
Interest expense, net (359) (438) (290) (1,268) (950) (444) (158)
Minority interest in net (income)
losses of subsidiaries (128) (82) (37) 4 29 213 (43)
Loss on settlement agreement - - - - (489) - -
Gain on sale of subsidiary stock - - - - - 1,375 -
Extraordinary Item -
(Loss) gain on restructuring - (150) 3,756 - - - -
Income tax benefits 550 - - - - - -
Net income (loss) 2,286 140 2,724 (5,623) (5,869) 2,074 1,563
Net income (loss) per common
share before extraordinary item - (.01) (.33) - - - -
Net income (loss) per
common share .27 (.04) .59 (1.59) (1.63) .20 .21
Weighted average common
shares outstanding 6,792 5,132 4,063 3,730 3,601 8,698 5,699
Cash dividends declared
per preferred share .29 .32 .30 .30 - .22 .22
Cash dividends paid
per preferred share .29 .32 .38 .18 - .22 .22
Cash dividends declared or
paid per common share - - - - - - -
Balance Sheet Data:
Period End Balances
Working capital deficit (3,691) ($ 3,874) ($ 4,506) ($15,615) ($ 5,751) ($2,124) ($2,199)
Total assets 37,925 20,601 18,752 18,436 14,531 47,079 36,737
Notes payable, convertible
promissory notes payable,
other long-term debt (incl.
current portion) 4,727 3,719 4,745 10,030 6,927 6,450 5,305
Stockholders' equity (deficit) 20,881 9,302 6,034 (3,148) (999) 23,971 20,414
</TABLE>
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<PAGE>
(1) The 1994 results include the acquisition of Access Telecommunications
Group, L.P. in June 1994 and the Acquisitions of Road and Show South
in December 1993 and Road and Show East in October 1993.
(2) Includes a full period of the Access Telecommunications Group, L.P.
acquisition in June 1994.
-64-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
STI's revenues rose to $43,675,000 for the nine months ended September
30, 1995, an increase of $12,161,000 or 39% over the nine months ended September
30, 1994. Revenues rose to $15,965,000 for the three month period ended
September 30, 1995 an increase of $1,471,000 or 9% over the three month period
ended September 30, 1994. Each division continued to contribute significantly to
the increase in revenue. Shared tenant services (STS) increased $4,798,000 or
23%, facility management services (FMS) grew $5,823,000 or 169% and cellular
services (STC) rose $1,540,000 or 20% for the nine months ended September 30,
1995 over the nine months ended September 30, 1994. The majority of the growth
in STS revenue was attributable to the June 1994 acquisition of Access
Telecommunications Group, L.P. (Access). Growth in FMS revenue was attributable
to the Access acquisition as well as the June 1995 acquisition of Office
Telephone Management (OTM). $876,000 of the FMS revenue growth for the nine and
three months ended September 30, 1995, was due to the addition of OTM. The
growth in STC revenues was due to expanded operations through the opening of new
locations and recent acquisitions.
STI's revenues rose to a record $45,367,000 in 1994, an increase of
$19,941,000 or 78% over 1993 revenues of $25,426,000. This was a substantial
increase over the 6% and 4% increases in 1993 and 1992 respectively.
Acquisitions were the major contributors to revenue growth in 1994 and 1993
respectively.
$8,942,000 of the 1994 revenue increase was attributable to the June
1994 acquisition of Access Telecommunication Group, L.P. ("Access"). Another
$8,017,000 was due to the expanded operations of the Cellular division. The
Cellular division was dramatically expanded in the fourth quarter of 1993
through the acquisition of Road and Show East, Inc. and Road and Show South Ltd.
nationwide rental phone businesses ("Road and Show"). STI also continued to
expand operations at existing locations. The remaining revenue increase of
$2,982,000 was achieved mainly at existing shared tenant services ("STS")
locations.
STI's revenue of $25,426,000 for the year ended December 31, 1993
represented an increase of $1,349,000, or 6%, over the year ended December 31,
1992. Of this increase, $288,000 was due to an increase in STS revenue and
$256,000 was due to an increase in FMS revenue. The remaining increase of
$805,000 was attributable to the fourth quarter acquisitions of Road and Show.
Gross margin dropped to 39% of revenue for the nine months ended
September 30, 1995 from 43% for the nine months ended September 30, 1994. Gross
margin decreased to 39% of revenue for the three months ended September 30, 1995
compared to 40% for the three months ended September 30, 1994.
Changes in STI's gross margin were impacted by changes in sales mix and
the Company's continued growth in 1995. STS accounted for 58% and 51% of total
sales for the nine and three months ended September 30, 1995 compared to 65% and
56% for the same periods ended September 30, 1994. FMS accounted for 21% and 25%
of total sales for the nine and three months ended September 30, 1995 compared
to 11% and 19% for the same periods ended September 30, 1994. STC accounted for
21% and 24% of total sales for the nine and three months ended September 30,
1995 compared to 24% and 25% for the same periods ended September 30, 1994. For
the nine months ended September 30, 1995, STS produced a 45% gross margin and
FMS a 23% gross margin compared to 45% and 19% for the period ended September
30, 1994 For the three months ended September 30, 1995 STS produced a 47% gross
margin and FMS a 26% gross margin compared to 42% and 21% for the period ended
September 30, 1994. Several factors have impacted the swings in gross margin for
these divisions. The purchase of Access in 1994 added significantly to the
revenue bases of both divisions and caused STS gross margin to drop while FMS
gross margin increased. In the last quarter management successfully increased
STS margins through reduction in direct costs and culling non profitable
business from their revenue base. FMS margins improved over the last three
months mainly due to the addition of OTM which recorded gross margins of 35% for
the third quarter. STC gross margin dropped to 40% and 37% for the nine and
three months ended September 30, 1995 from 48% and 50% for the nine and three
months ended September 30, 1994. This drop was mainly due to the acquisition of
Cellular
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Hotline, Inc. in May 1995, which produced lower gross margin than the core
business and 1994 second quarter World Cup cellular rentals which produced
unusually high gross margins.
Gross margin dipped slightly in 1994 to 42.3% of revenues from 42.9% of
revenues in 1993. This drop was the result of significant changes in the
Company's revenue mix in 1994.
The FMS and Cellular Service divisions grew dramatically in 1994 due to
the acquisitions mentioned earlier. The FMS division revenues accounted for
14.3% of the total revenues in 1994 as compared to 6.0% in 1993, and the
Cellular division revenues were responsible for 22.5% of total revenues in 1994
as compared to 8.7% in 1993. The STS division accounted for 63.2% of total
revenues in 1994 as compared to 85.3% in 1993.
Although the change in sales mix resulted in only a small change in
overall gross margin, each division produced gross margin at a different rate.
STS cost of revenues as a percentage of revenue increased slightly in 1994
resulting in gross margin of 45.2% versus gross margin of 46.4% in 1993. The
main reason for the decrease was the addition of several STS buildings through
the acquisition of Access. These buildings historically have achieved lower
gross margins than those at existing STS locations. The FMS division produced a
gross margin of 20.4% in 1994 which is up from 16.9% in 1993. The FMS division
focuses on the sale of long distance services outside the STS buildings, and
operates in a competitive environment which prevents high gross margin. Improved
margin was achieved through increased sales volume and lower rates negotiated in
1994. The Cellular Division produced a gross margin of 48.2% in 1994, which is
up from a 27.1% gross margin produced in 1993. The rental component of the
Cellular division was greatly expanded through the acquisition of Road and Show
in the fourth quarter of 1993. Cellular rental revenues produce gross margins
near 50%.
Gross margin increased to 42.9% of revenues for the year ended December
31, 1993 compared to 38.4% of revenues for the year ended December 31, 1992.
This improvement was due almost entirely to the improved margin on long distance
and local access services as a result of increased volume which enabled STI to
negotiate better rates with its vendors.
Selling, general and administrative expenses as a percentage of revenue
were 37% and 38% for the nine and three months ended September 30, 1995 compared
to 37% and 36% for the nine and three months ended September 30, 1994. The STS
and FMS divisions have reduced cost as a percentage of revenue through synergies
created with STI's overall growth. However this has been offset by STC which has
added overhead costs related to aggressively growing the cellular business in
the wake of its April 1995 public offering. As STC revenues grow, management
expects to see a decrease in the percentage of selling, general and
administration costs to revenue.
Interest expense increased by $346,000 for the nine months ended
September 30, 1995 over the nine months ended September 30, 1994 and $143,000
for the three months ended September 30, 1995 over the three months ended
September 30, 1994. This is attributable to the addition of $3,800,000 of
interest bearing debt since June 1994. This debt was incurred as a result of
STI's bank financing in May, 1994. The financing provides for a $4,000,000
secured revolving credit line, aggregate draws converted semi-annually to three
year term loans with level monthly amortization and a $1,000,000 two year term
loan, six month interest only, with quarterly amortization and a balloon payment
of $700,000. These loans bear interest at the bank's prime rate plus 2% and are
secured by STI's assets. STI has issued a warrant to the bank for shares equal
to 2.25% of STI's outstanding common stock on a fully diluted basis. The
weighted average debt for the nine-month period ended September 30, 1995 was
approximately $5,348,000 at a weighted rate of 10.74%.
In late April 1995 STI successfully completed a public offering of its
cellular subsidiary's stock. Following the sale STI's percentage of ownership
dropped from 86% to approximately 60%. The accounting treatment of the sale
required STI to record a gain of approximately $1,375,000 for nine months ended
September 30, 1995.
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Pretax income increased by $1,466,000 or 499% to a record $1,736,000
from $290,000 in 1993. This compares to a $1,322,000 increase in 1993 from a
pretax loss of $1,032,000 in 1992.
These increases were achieved through increased sales volume and
reductions in selling, general and administrative expenses as a percentage of
revenue. Selling, general and administrative expenses as a percentage of revenue
continued to drop in 1994, down to 37% from 40% in 1993. This improvement was
made through the synergies created with the acquisition of Access and
management's ongoing efforts to contain overhead costs.
Selling, general and administrative expenses as a percentage of revenue
dropped to 40% in 1993 compared to 41% for the year ended December 31, 1992. The
decrease was achieved despite the addition of 10 new STS buildings and the
acquisition of Road and Show which added approximately $200,000 of selling,
general and administrative expenses. The improvement was principally due to a
decrease in consulting expenses associated with the settlement of certain
obligations of STI, settlement of the Javits litigation for less than previously
provided. The Javits claim of approximately $5,400,000 was filed against STI by
the New York Convention Center Operating Corporation ("CCOC"). In November 1993,
the litigation with CCOC was settled and provided for STI to pay $25,000 and
issue a $550,000 note payable over five years, with no interest.
During 1994 STI was successful in controlling interest expense despite
the addition of $2,300,000 of new, interest bearing, debt. Interest expense
decreased to $522,000 in 1994 from $529,000 in 1993. Interest expense, net of
interest income, increased $148,000 in the year ended December 31, 1993 compared
to the year ended December 31, 1992 due to approximately $292,000 accrued
related to estimated interest and penalty payments to taxing authorities that
may arise from late payments.
Effective January 1, 1993, STI implemented Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes", (SFAS 109). This
Statement requires the adoption of an asset and liability approach to accounting
for income taxes. STI's income tax provision is substantially less than the
amount derived by applying the federal statutory rates to pre-tax income,
principally due to the availability of net operating loss carryforwards from
prior years. As discussed in the Notes to STI's financial statements, for the
year ended December 31, 1994, STI had recorded a tax benefit of $550,000, and
reserved the balance of approximately $7,357,000 through a valuation allowance.
SFAS No. 109, requires that STI record a valuation allowance when it is
"more likely than not that some portion or all of the deferred tax asset will
not be realized". The ultimate realization of this deferred tax asset depends on
the ability to generate sufficient taxable income in the future. While
management believes that the total deferred tax asset may be fully realized by
future operating results, together with tax planning opportunities, the losses
in recent years and the desire to be more conservative makes it appropriate to
record a valuation allowance.
STI restated its 1993 financial statements to reflect the write-off of
certain startup costs of approximately $120,000, previously capitalized, related
to certain cellular telephone operations..
In 1992 STI settled certain obligations to its lenders and other
creditors. This resulted in an extraordinary gain for the year ended December
31, 1992 of $5,162,000 before restructuring expenses of $1,361,000 and income
taxes of $45,000 and an adjustment to the restructuring gain which resulted in
an extraordinary loss for the year ended December 31, 1993 of $150,000.
PRO FORMA RESULTS OF OPERATIONS
The pro forma consolidated statements of operations for the year ended
December 31, 1994 result in revenues of $175,200,000, operating profit of
$16,200,000 and a net loss of $14,400,000. The pro forma consolidated statements
of operations for the nine months ended September 30, 1995 result in revenues of
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$136,400,000, operating profit of $16,100,000 and a net loss of $5,900,000. The
losses are due to increases in debt and amortization of the goodwill resulting
from the acquisition.
On December 29, 1995, Shared Technologies Cellular, Inc. ("STC") sold
300,000 shares of Series A Convertible Preferred Stock to 26 purchasers. In the
transaction, ICP Investments, Inc., ("ICP") the broker in the transaction,
received a warrant to purchase 150,000 shares of common stock of STC at $2.50
per share. Mr. Ajit Hutheesing, a director of STI and STC, is a principal of
ICP. The holders of Series A Convertible Preferred Stock vote together with the
holders of common stock of STC, with each holder of Series A Convertible
Preferred Stock entitled to vote as if such holder held four shares of common
stock for each share of Series A Convertible Preferred Stock. As a result of the
sale, STI's voting control of STC was decreased from 59.3% to 42.7%. The loss of
voting control will result in the deconsolidation of STC for accounting purposes
for all periods subsequent to the issuance of the Series A Convertible Preferred
Stock.
LIQUIDITY AND CAPITAL RESOURCES
STI's working capital deficit at September 30, 1995 was $2,124,000
compared to $3,691,00 at December 31, 1994. Stockholders' equity at September
30, 1995 was $23,971,000 compared to $20,881,000 at December 31, 1994.
Net cash provided by operations decreased to $1,878,000 for the nine
months ended September 30, 1995 versus $1,959,000 for the nine months ended
September 30, 1994. STI continues to utilize cash from operations to manage its
working capital deficit.
STI continued to invest heavily in equipment at both new and existing
locations. $3,099,000 was spent on capital expenditures for the nine months
ended September 30, 1995 compared to $2,521,000 for the nine months ended
September 30, 1994. STI has also continued to expand through acquisition
investing $2,483,000 in 1995 to acquire Office Telephone Management Inc. and
Cellular Hotline Inc. During 1994 $3,780,000 was invested to acquire Access
Telecommunication Group, L.P. ("Access").
Cash to finance this growth was provided mainly from financing
activities. During the first nine months of 1995 $1,160,000 was raised from
sales of new stock, $3,274,000 from an initial public offering of STI's cellular
subsidiary, and $2,929,000 from new borrowings. A portion of these proceeds were
used to repay $1,751,000 in principal debt and repurchase $375,00 in STC stock.
During 1994 $4,785,000 was raised from financing activities, the majority of the
proceeds came from sales of stock and new borrowings. These proceeds were used
to purchase equipment, finance the purchase of Access and repay existing debt.
STI plans to continue to manage the working capital deficit and to
expand operations throughout 1995. This growth is expected to be financed with
cash from operations and new borrowings from existing credit lines.
During 1994 STI continued to effectively manage a working capital
deficit and produce record earnings from operations. Net cash provided by
operation reached a record $3,000,000 in 1994 compared to $2,700,000 in 1993 and
$571,000 in 1992. This helped reduce the working capital deficit to $3,691,000
at December 31, 1994 compared to $3,874,000 for December 31, 1993.
STI continued to focus investing activities on growth through
acquisition and on upgrading telecommunication equipment at existing locations.
Over the past three years Shared Technologies has invested $7,300,000 in
equipment purchases to increase line counts and remain competitive. At the same
time, the Company invested $4,200,000 to complete two major acquisitions; Access
in June 1994 and Road and Show in the fourth quarter of 1993. Both companies
have been integrated into STI's operations and have produced favorable results.
Financing activities were focused primarily on raising capital to
provide cash for investing activities. In 1994 STI entered an agreement with a
bank to obtain a $1,000,000 term note and a $4,000,000 revolver.
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During 1994 STI borrowed $1,300,000 against the revolver to help finance the
current year's equipment purchases. In addition STI raised $4,600,000 from sales
of common stock to help finance the acquisition of Access. During 1993 and 1992
approximately $7,500,000 was raised from sales of common and preferred stock to
help STI fund operations. During the past three years, the Company has made
$8,300,000 in repayments of notes payable, long term debt and capital lease
obligations.
Cash requirements for 1995 will include normal ongoing operations, and
capital expenditures. STI plans to invest heavily in growth through the addition
of several STS buildings and the expansion of the centrex component of the STS
division. This growth will be financed through cash from operations and the bank
agreement previously mentioned.
PRO FORMA LIQUIDITY AND CAPITAL RESOURCES
The pro forma consolidated balance sheet as of September 30, 1995 has a
working capital deficit of $2,885,000 and stockholders' equity of $47,972,000.
It is the opinion of management that the Surviving Corporation will generate
sufficient cash flow to sustain its operations for the foreseeable future.
EXPERTS
The consolidated financial statements of Shared Technologies Inc. for
the years ended December 31, 1993 and 1994 included in this Proxy Statement have
been audited by Rothstein, Kass & Company, P.C., independent public accountants,
as indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
The consolidated financial statements of Shared Technologies Inc. for
the year ended December 31, 1992 included in this Proxy Statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports. Reference is made to
said report which includes an explanatory paragraph that describes the
litigation discussed in Note 14 to the consolidated financial statements.
The financial statements of Road and Show South, Ltd. for the period
March 15, 1992 to December 31, 1992 and for the eleven months ended November 30,
1993 included in this Proxy Statement have been audited by Rothstein, Kass &
Company, P.C., independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
The financial statements of Road and Show Cellular East, Inc. for the
year ended December 31, 1992 and the nine months ended September 30, 1993 have
been audited by Rothstein, Kass & Company, P. C., independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
reports.
The financial statements of Access Telecommunications Group, L.P. for
the years ended December 31, 1991, 1992 and 1993 included in this Proxy
Statement have been audited by Ernst & Young, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
The financial statements of Cellular Hotline, Inc. for the years ended
December 31, 1993 and 1994, included in this Proxy Statement have been audited
by Rothstein, Kass & Company, P.C., independent public accountants, as indicated
in their report with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in giving said reports.
DESCRIPTION OF SECURITIES
Common Stock
STI's authorized capital stock includes 20,000,000 shares of Common
Stock, $.004 par value. If the Merger and Amendments are approved, upon filing
the Certificate of Merger with the Secretary of State of Delaware including
therein the Amendments, the authorized Common Stock will increase to 50,000,000
shares. At September 30, 1995, there were 8,504,823 shares of Common Stock
outstanding. Upon the Merger an additional 6,000,000 shares will be issued to
RHI. The holders of STI Common Stock are entitled to one vote for each share on
all matters submitted to a vote of stockholders and are entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors out
of legally available funds. The holders of Common Stock have no preemptive,
subscription, redemption or conversion rights. The outstanding shares of Common
Stock are, and the Common Stock to be issued in the Merger will be, when issued,
fully paid and non-assessable.
STI currently has reserved 5,625,824 shares of Common Stock for
issuance upon the conversion or exercise of certain outstanding securities. Of
the total of 6,845,555 shares of Common Stock reserved, (i) 1,200,000 shares
have been reserved for issuance upon exercise of options granted under STI's
1987 Stock Option Plan, (ii) 2,958,120 shares have been reserved for issuance
upon exercise of common stock purchase warrants, (iii) 596,664 shares have been
reserved for issuance upon conversion of the Series C Preferred Stock, and (iv)
456,842 shares have been reserved for issuance upon conversion of the Series D
Preferred Stock.
In connection with the Merger, STI will be required to reserve an
additional 3,921,568 shares of Common Stock (i) for issuance upon the conversion
of the Cumulative Convertible Preferred Stock and (ii) to
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satisfy its indemnification obligations to FII in the event STI elects to pay in
shares of Common Stock. See "Description of Securities - Preferred Stock" and
"Certain - Effects of the Merger".
Preferred Stock
STI currently has authorized 10,000,000 shares of "blank check"
preferred stock with $.01 par value per share and has issued and outstanding two
different series of preferred stock: (i) 906,930 shares of Series C Preferred
Stock, $.01 par value per share and (ii) 456,842 shares of Series D Preferred
Stock, $.01 par value per share.
CUMULATIVE CONVERTIBLE PREFERRED STOCK.
In connection with the Merger, STI will issue $25,000,000 of Cumulative
Convertible Preferred Stock (the "Cumulative Convertible Preferred Stock").
Dividends on the Cumulative Convertible Preferred Stock are payable quarterly at
the rate of 6% per annum in cash. If for any reason a dividend is not paid in
cash when scheduled, the amount of such dividend shall accrue interest at a rate
of 12% per annum until paid.
LIQUIDATION PREFERENCE: The Cumulative Convertible Preferred Stock will have a
liquidation preference of $25,000,000 in the aggregate plus an additional amount
(the "Additional Amount") equal to the total amount of dividends the holder of
the Cumulative Convertible Preferred Stock would have received if dividends were
paid quarterly in cash at the rate of 10% per annum for the life of the issue
minus the total amount of cash dividends actually paid (the "Liquidation
Preference").
CONVERSION: Each share of Cumulative Convertible Preferred Stock is convertible
at anytime at the option of the holder into such number of Common Shares as is
determined by dividing the liquidation preference thereof by the conversion
price of $6.3750. The conversion price is subject to adjustment upon occurrence
of customary adjustment events including, but not limited to, stock dividends,
stock subdivisions and reclassification or combinations.
OPTIONAL REDEMPTION: The Cumulative Convertible Preferred Stock is not
redeemable at STI's option during the first three years after issuance, but
thereafter, upon 30 days' prior written notice, is redeemable at STI's option at
a redemption price of 100% of the Liquidation Preference.
MANDATORY REDEMPTION: On the 12th anniversary date of original issuance of the
Cumulative Convertible Preferred Stock, STI shall redeem 100% of the outstanding
shares of Cumulative Convertible Preferred Stock for the Liquidation Preference.
RANKING: STI is not permitted to issue preferred stock ranking senior to the
Cumulative Convertible Preferred Stock as to rights on liquidation and as to
payment of dividends without the approval of the holders of at least two-thirds
of the issued and outstanding shares of the Cumulative Convertible Preferred
Stock. The Cumulative Convertible Preferred Stock will rank junior to the Series
C Preferred Stock of STI and on a parity with each of the Series D preferred
stock and the Special Preferred Stock with regard to the right to receive
dividends and amounts distributable upon liquidation, dissolution or winding up
of STI.
VOTING RIGHTS: RHI will be entitled to appoint two directors in the aggregate to
the Board of Directors in addition to other directors to which RHI is entitled
(with such additional director(s) to be added in lieu of existing non-RHI
directors) in the following circumstances: in the event that STI fails to make
four consecutive dividend payments on the Cumulative Convertible Preferred
Stock, RHI will be entitled to elect one such additional director, and if eight
consecutive such dividend payments fail to be made, RHI will be entitled to
elect a second such additional director. The Convertible Preferred Stock has no
other voting rights, except as required by law.
CERTAIN RESTRICTIONS: No dividends or distributions on junior or parity equity
securities shall be permitted if STI has failed to pay in full all accrued
dividends or failed to satisfy its mandatory redemption obligation at
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maturity with respect to the Cumulative Convertible Preferred Stock. No
redemptions or repurchases of junior or parity equity securities (other than the
Special Preferred Stock) shall be permitted while the Cumulative Convertible
Preferred Stock is in arrears or in default. STI will not be permitted to create
or permit to exist any contractual restriction which would restrict in any way
its ability to make required payments on the Cumulative Convertible Preferred
Stock or the Series C Preferred Stock of STI.
SPECIAL PREFERRED STOCK.
In connection with the Merger, STI will issue Special Preferred Stock.
The Special Preferred Stock will be issued in such denominations as is requested
by RHI. There will be no dividends payable on the Special Preferred Stock.
LIQUIDATION PREFERENCE: The Special Preferred Stock will have a liquidation
preference of $20,000,000 initially in the aggregate, increasing by $1,000,000
each year after 1996 to a maximum liquidation preference of $30,000,000 in 2007.
OPTIONAL REDEMPTION: The Special Preferred Stock is redeemable at STI's option
at any time upon 30 days' prior written notice, at a redemption price of 100% of
the liquidation preference.
MANDATORY REDEMPTION: All outstanding Special Preferred Stock will be
mandatorily redeemable in its entirety at 100% of liquidation preference upon a
Change of Control of STI and, in any event, in 2007. In addition, on March 31 of
each year, commencing with March 31, 1997, STI shall mandatorily redeem at a
price equal to 100% of the liquidation preference in effect from time to time an
amount (the "Required Redemption Amount") of Special Preferred Stock equal to
50% of the amount, if any, by which the consolidated earnings before interest
and taxes plus depreciation and amortization ("EBITDA") of STI and its
subsidiaries exceeds the Threshold Amount (as described below) for the
immediately preceding year ended on December 31. To the extent the Required
Redemption Amount exceeds 50% of the sum (the "Income Limitation") of (i) the
consolidated net income of STI and its subsidiaries for the immediately
preceding year ended on December 31 (without deducting therefrom any amounts on
account of dividends paid or payable on any preferred stock or redemptions of
any preferred stock of STI, including the Cumulative Convertible Preferred
Stock, Special Preferred Stock and Series C and Series D Classes of preferred
stock) plus (ii) amounts attributable to the amortization of goodwill for such
immediately preceding year, such excess amount shall be carried forward and be
considered a Required Redemption Amount for the next succeeding year and for
each year thereafter until paid.
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The Threshold Amount for each year shall be as follows:
<TABLE>
<CAPTION>
Year Ended Threshold
December 31, Amount*
<S> <C> <C>
1996.................... $47,000,000
1997.................... 53,000,000
1998.................... 57,500,000
1999.................... 60,500,000
2000.................... 63,500,000
2001.................... 66,500,000
2002.................... 69,500,000
2003.................... 72,500,000
2004.................... 75,500,000
2005.................... 78,500,000
2006.................... 81,500,000
</TABLE>
* In the event that STI or any subsidiary sells or disposes of any material
asset or business, the Threshold Amount for each year thereafter shall be
reduced by the amount of EBITDA attributable to such asset or business for
the four fiscal quarters immediately preceding such sale or disposition.
RANKING: STI is not permitted to issue preferred stock ranking senior to the
Special Preferred Stock as to rights on liquidation and as to payment of
dividends without the approval of the holders of at least two-thirds of the
issued and outstanding shares of the Special Preferred Stock. The Special
Preferred Stock will rank junior to the Series C Preferred Stock of STI and on a
parity with the Series D preferred stock and the Convertible Preferred Stock
with regard to the right to receive dividends and amounts distributable upon
liquidation, dissolution or winding up of STI.
VOTING RIGHTS: STI will be entitled to appoint two directors in the aggregate to
the Board of Directors of the Company in addition to other directors to which
STI is entitled (with such additional director(s) to be added in lieu of
existing non-STI directors) in the following circumstances in the event that STI
fails to make four consecutive dividend payments on the Cumulative Convertible
Preferred Stock, STI will be entitled to elect one such additional director, and
if eight consecutive such dividend payments fail to be made, STI will be
entitled to elect a second such additional director. The Special Preferred Stock
has no other voting rights, except as required by law.
CERTAIN RESTRICTIONS: No dividends, distributions, redemptions or repurchases on
junior or parity equity securities shall be permitted if STI has failed to
satisfy its mandatory redemption obligations with respect to the Special
Preferred Stock. STI will not be permitted to create or permit to exist any
contracted restriction which would restrict in any way STI's payment obligations
with respect to the Special Preferred Stock or the Series C Preferred Stock.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 30,
1995, with respect to STI's Common Stock owned by (1) each director of STI, (2)
the executive officer whose total annual salary and bonus exceeded $100,000, (3)
all directors and executive officers of STI as a group, and (4) each person who
is known by STI to own beneficially more than five percent of STI's Common
Stock. Unless otherwise indicated in the footnotes to the table, all stock is
owned of record and beneficially by the persons listed in the table.
<TABLE>
<CAPTION>
Number Percentage
of of
Shares Common
Beneficially Stock
Names and Addresses(1) Owned(2) Outstanding
Directors and Executive Officers
<S> <C> <C>
Anthony D. Autorino............................................ 1,213,169(3) 13.8%
Chairman, President and
Chief Executive Officer
Ronald E. Scott................................................ 309,023(4) 3.6%
Director, Executive Vice President
and Chief Operating Officer
Vincent DiVincenzo............................................. 39,363(5) *
Director, Senior Vice President -
Administration and Finance, Treasurer
and Chief Financial Officer
James D. Rivette............................................... 35,074(6) *
Director and President, Shared Tenant
Services Division
William A. DiBella............................................. 51,663(7) *
Director
Herbert L. Oakes, Jr........................................... 27,886(8) *
Director
Edward J. McCormack, Jr........................................ 106,377(9) 1.3%
Director
Jo McKenzie.................................................... 9,575(10) *
Director
Thomas H. Decker............................................... 14,750(11) *
Director
Lewis M. Rambo................................................. 12,800(12) *
Director (Resigned as of October 10, 1995)
Ajit G. Hutheesing............................................. 316,957(13) 3.6%
Director
All directors and executive officers as
a group (13 persons)......................................... 2,160,236(14) 23.0%
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Principal Stockholders
Zesiger Capital Group LLC...................................... 1,792,325(15) 21.1%
320 Park Avenue
New York, NY 10022
BEA Associates................................................. 845,150(16) 5.0%
153 East 53rd Street
One Citicorp Center
New York, NY 10022
Access Trust,
Stuart M. Crow as Trustee.................................... 498,867 5.9%
2001 Ross Avenue, Suite 3200
Dallas, TX 75201
Wellington Management Company.................................. 418,000 4.9%
75 State Street
Boston, MA 02109
The Kaufmann Fund, Inc......................................... 400,324 4.7%
140 E. 45th Street, 43rd Floor
New York, NY 10017
Wanger Asset Management, L.P................................... 500,000(17) 5.9%
227 West Monroe Street, Suite 3000
Chicago, IL 60606
</TABLE>
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* Less than 1%
(1) The address of each of STI's directors is c/o Shared Technologies Inc.,
100 Great Meadow Road, Suite 104, Wethersfield, Connecticut 06109.
(2) Except as otherwise specifically noted, the number of shares stated as
being owned beneficially includes shares believed to be held
beneficially by spouses and minor children. The inclusion herein of any
shares deemed beneficially owned does not constitute an admission of
beneficial ownership of those shares. Each stockholder possesses sole
voting and investment power with respect to the shares listed opposite
such stockholder's name, except as otherwise indicated.
(3) Includes 214,584 shares currently issuable upon exercise of options
exercisable as of, or within 60 days, after September 30, 1995. Also
includes 98,750 shares owned of record by Mr. Autorino's spouse, as to
which Mr. Autorino disclaims beneficial ownership. Also includes 5,827
shares owned by Mr. Autorino through STI's Savings and Retirement Plan.
Also includes 11,579 shares of Series D Preferred Stock, which are
convertible into 11,579 shares of Common Stock, and 11,500 Common Stock
Purchase Warrants, which are convertible into an additional 11,500
shares of Common Stock. Also, includes 17,368 shares of Series D
Preferred Stock owned of record by Mr. Autorino's spouse and 17,368
Common Stock Purchase Warrants also owned by her, as to which shares
and warrants Mr. Autorino disclaims beneficial ownership.
(4) Includes Common Stock Purchase Warrants which are exercisable for
101,250 shares of Common Stock as of, or within 60 days after September
30, 1995. Includes 140,000 shares of Common Stock which were converted
from Series F Preferred Stock, which such shares are subject to
post-closing adjustments pursuant to STI's purchase of Access
Telecommunication Group, L.P.
(5) Includes 36,667 shares currently issuable upon exercise of options
exercisable as of, or within 60 days after, September 30, 1995. Also
includes 2,244 shares owned by Mr. DiVincenzo through STI's Savings and
Retirement Plan.
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(6) Includes 30,833 shares currently issuable upon exercise of options
exercisable as of, or within 60 days after, September 30, 1995. Also
includes 1,000 shares owned by Mr. Rivette's spouse, as to which Mr.
Rivette disclaims beneficial ownership. Also includes 2,470 shares
owned by Mr. Rivette through STI's Savings and Retirement Plan.
(7) Includes 22,913 shares currently issuable upon exercise of options
exercisable as of, or within 60 days after, September 30, 1995. Also
includes 28,750 shares owned of record by Mr. DiBella's spouse, as to
which Mr. DiBella disclaims beneficial ownership.
(8) Includes 14,575 shares currently issuable upon exercise of options
exercisable as of, or within 60 days after, September 30, 1995. Also
includes 2,625 shares owned of record by Overseas and Foreign Investors
Inc., of which Mr. Oakes is an officer. Also includes 1,687 shares
owned of record by L&H International, Inc., of which Mr. Oakes is an
officer, director and stockholder and 2,187 shares owned of record by
H.L. Oakes & Co., Inc., of which Mr. Oakes is an officer, director and
principal. Also included are 6,812 shares owned of record by Overseas &
Foreign Managers, Inc., of which Mr. Oakes is an officer.
(9) Includes 9,500 shares currently issuable upon exercise of options
exercisable as of, or within 60 days after, September 30, 1995. Also
includes 66,335 shares owned of record by Mr. McCormack's spouse, as to
which Mr. McCormack disclaims beneficial ownership.
(10) Includes 9,575 shares currently issuable upon exercise of options
exercisable as of, or within 60 days after, September 30, 1995.
(11) Includes 8,750 shares currently issuable upon exercise of options
exercisable as of, or within 60 days after, September 30, 1995.
(12) Includes 8,000 shares currently issuable upon exercise of options
exercisable as of, or within 60 days after, September 30, 1995.
(13) Includes 15,000 shares currently issuable upon exercise of options
exercisable as of, or within, 60 days after September 30, 1995. Also
includes a Common Stock Purchase Warrant which is convertible into
298,957 shares of Common Stock as of, or within 60 days, after
September 30, 1995, which is owned of record by International Capital
Partners, Inc., of which Mr. Hutheesing is the Chairman, Chief
Executive Officer and a stockholder.
(14) Includes a total of 387,480 shares which officers and directors of STI
have the right to acquire under outstanding stock options exercisable
as of, or within 60 days after, September 30, 1995. Also includes
29,000 shares of Series D Preferred Stock currently convertible into
29,000 shares of Common Stock and 29,000 Common Stock Purchase
Warrants, as set forth in footnote 3 above. Also includes 298,957
shares of Common Stock issuable upon conversion of a Common Stock
Purchase Warrant, as set forth in footnote 13 above. Also includes
15,494 shares owned by officers and directors through STI's Savings and
Retirement Plan.
(15) Includes warrants to purchase 746,325 sharesof Common Stock exercisable
as of, or within 60 days after, September 30, 1995.
(16) Includes warrants to purchase 422,575 shares of Common Stock as of, or
within 60 days after September 30, 1995.
(17) Wanger Asset Management, L.P. ("WAM") serves as investment advisors
to Acorn Investment Trust, Series Designated Acorn Fund ("Acorn").
Includes 375,000 shares beneficially owned by Acorn. Wanger Asset
Management Ltd. ("WAM LTD") is the general partner of WAM and Ralph
Wanger is the principal stockholder of WAM LTD.
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INFORMATION ABOUT FII
FORMATION, HISTORICAL OPERATIONS AND RECAPITALIZATION
FII is a Delaware corporation and is the subsidiary of RHI Holdings,
Inc. ("RHI"), which, in turn, is the wholly-owned subsidiary of The Fairchild
Corporation ("TFC").
FII is currently operating through its wholly owned subsidiary VSI
Corporation ("VSI") in three business segments: Aerospace Fasteners, Industrial
Products and Communications Services.
The Aerospace Fasteners segment designs, manufactures and markets high
performance, specialty fastening systems, primarily for aerospace applications.
The Industrial Products segment includes (i) D-M-E Company ("DME") which
designs, manufactures and markets tooling and electronic control systems for the
plastic injection molding and die casting industries, (ii) Fairchild Data
Corporation, a supplier of modems, (iii) Convac GmbH, a subsidiary acquired in
June 1994, which is a leading European designer and manufacturer of wet
processing tools, equipment and systems required for the manufacture of
semiconductor chips and related products and for compact and optical storage
disks and flat panel displays, and (iv) Scandinavian Bellyloading Company,
acquired in September 1994, which designs and manufactures patented cargo
loading systems which are installed in the cargo area of commercial aircraft.
On November 13, 1995, FII and Cincinnati Milacron, Inc. ("CM") entered
into a letter agreement setting forth the basic terms and conditions of a
transaction pursuant to which CM will acquire the DME business for approximately
$260,000,000.
Prior to and as a precondition to the Merger which is the subject of
this Proxy Statement, FII, VSI and FII's parent RHI Holdings, Inc. ("RHI") will
undergo a recapitalization to transfer from FII and VSI to RHI all assets other
than those related to the Communications Services business which furnishes
communications services and equipment to tenants of commercial office buildings
and sells, installs and maintains communications systems for business and
government customers. The principal executive offices of FII are located at 300
West Service Road, Chantilly, Virginia 22021-0804.
As part of the recapitalization, FII and VSI are transferring to FII's
immediate parent, RHI, all of their assets and liabilities except for: (i) those
expressly related to FII's telecommunications services and systems business;
(ii) FII's outstanding 12 1/4% Senior Secured Notes due 1999 with an aggregate
face value of $125,000,000 (the "FII Senior Notes"); and (iii) approximately
$55,373,000 of existing bank and other indebtedness. As a pre-condition to the
Merger, FII must secure the consent of holders of a majority in interest of the
FII Senior Notes to the recapitalization and to amend the indenture pursuant to
which the FII Senior Notes were issued to delete all covenants which may be
deleted by a majority. The successful completion of each element in the
foregoing discussion are conditions to the consummation of the other components
of the recapitalization and Merger. On December 22, 1995, FII commenced a tender
offer for and consent solicitation with respect to, the FII Senior Notes.
FII, through Fairchild Communications Services Company ("FCSC") (a
partnership of which the partners are all wholly owned subsidiaries of VSI)
provides telecommunications equipment and services to tenants of commercial
office buildings, under the trade name Telecom 2000(R) Services. As a result of
its acquisition of JWP Telecom, Inc. in the second fiscal quarter of fiscal
1995, FII also sells, installs, and maintains telecommunications systems for
business and government customers, under the name Telecom 2000 Systems.
Fairchild Communications is a distributor for Northern Telecom, NEC, Octel,
Centigram and Active Voice, all leading manufacturers of telephone systems,
voice mail systems and other equipment. As part of the recapitalization, FCSC
will be merged into VSI.
The Communications Business was founded as a start-up venture in 1985
and has grown rapidly through expansions and acquisitions. Sales have grown from
$1,400,000 in Fiscal 1986 to $110,000,000 in
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Fiscal 1995. Approximately $80,000,000 of such increase was attributable to
acquisitions, primarily the acquisition of the telecommunications assets of
Amerisystems and JWP Telecom. The JWP Telecom acquisition contributed sales of
approximately $31,000,000 in Fiscal 1995.
COMMUNICATIONS SERVICES BUSINESS
FII negotiates long-term telecommunications franchises with owners and
developers of office buildings. Under these arrangements, FII installs switching
equipment, cable and telephone equipment, and subsequently contracts directly
with individual tenants in the buildings to provide multi-year,
single-point-of-contact telecommunications services.
Telecom 2000 Services include access to services provided by regulated
communications companies including local, long distance, international and "800"
telephone services. Fairchild Communications also provides telephone switching
equipment and telephones as well as voice mail, telephone calling cards, local
area networks and voice and data cable installation and customized billing
services that assist customers in controlling their telecommunications expense.
FII typically provides its services at rates equal to or below those which
customers could otherwise obtain, in part due to discounts it can obtain as a
high volume purchaser of telephone services.
SYSTEMS: FII's Telecom 2000 Systems business sells telecommunications
equipment directly to end-users and installs, services and maintains the
equipment after the sale. Systems installations include PBX and key telephone
systems, voice mail and automated call distribution systems and entire call
centers. FII's systems business employs a staff of field and design engineers
capable of assisting customers in planning and implementation of all of their
telecommunications plant needs. Customer service options range from basic
business hour response to 24 hours a day, 365 days per year maintenance
contracts. FII will also contract with customers to staff their facilities with
dedicated service personnel under long term contracts.
CUSTOMERS: Telecom 2000 Services' and Systems' customers consist of
small to medium size businesses as well as larger organizations and governmental
agencies. As of June 30, 1995, FII had offices in 15 cities serving over 10,000
customers. Contract terms with Telecom 2000 Services customers typically have a
term of three to five years with provision for automatic renewal. Contracts with
Telecom 2000 Systems customers for maintenance services typically have a term of
one year with provision for automatic renewal.
FII SENIOR NOTES
The FII Senior Notes, aggregate $125,000,000 in face amount bear annual
interest of 12 1/4% payable semiannually in arrears, are payable in full on July
31, 1999, are secured by a pledge of the stock of VSI, FII's wholly owned
subsidiary, and stock of FII and may be redeemed at any time after July 31,
1997, provided, however if redeemed during the period August 1, 1997 through
July 31, 1998 redemption must be made at 102% of the face amount. In accordance
with the Merger Agreement and the terms of the Indenture pursuant to which the
FII Senior Notes were issued, FII will make a tender offer to purchase the FII
Senior Notes, which sale would be consummated by the Surviving Corporation
following the merger. As a condition to the tender offer FII must obtain the
consent of holders of 51% of the FII Senior Notes to amend the terms of the FII
Senior Notes to remove all covenants in the Indenture which may be removed with
the consent of a majority of such holders and to release all collateral held as
security. Such consent is a condition to the consummation to the Merger. If the
merger is consummated, the Surviving Corporation will purchase any tendered FII
Senior Notes and will remain liable to pay the remainder in accordance with
their remaining terms.
LEGAL MATTERS
GOVERNMENT CLAIMS: The Corporate Administrative Contracting Officer (the "ACO"),
based upon the advice of the United States Defense Contract Audit Agency, has
made a determination that FII did not comply with
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Federal Acquisition Regulations and Cost Accounting Standards in accounting for
(i) the 1985 reversion to FII of certain assets of terminated defined benefit
pension plans, and (ii) pension costs upon the closing of segments of FII's
business. The ACO has directed FII to prepare a cost impact proposal relating to
such plan terminations and segment closings and, following receipt of such cost
impact proposal, may seek adjustments to contract prices. The ACO alleges that
substantial amounts will be due if such adjustments are made. FII believes it
has properly accounted for the asset reversions in accordance with applicable
accounting standards. FII has had discussions with the government to attempt to
resolve these pension accounting issues.
ENVIRONMENTAL MATTERS: FII and other aerospace fastener and industrial product
manufacturers are subject to stringent Federal, state and local environmental
laws and regulations concerning, among other things, the discharge of hazardous
materials into the environment and generation, handling, storage, transportation
and disposal of waste and hazardous materials. To date, such laws and
regulations have not had a material effect on the financial conditions of FII,
although FII has expended, and can be expected to expend in the future,
significant amounts for investigation of environmental conditions, installation
of environmental control facilities, remediation of environmental conditions and
other similar matters, particularly in the Aerospace Fasteners segment.
In connection with its plans to dispose of certain real estate, FII
must investigate environmental conditions and may be required to take certain
corrective action prior or pursuant to any such disposition. In addition,
management has identified several areas of potential contamination at or from
other facilities owned, or previously owned, by FII, that may require FII either
to take corrective action or to contribute to a clean-up. FII is also a
defendant in certain lawsuits and proceedings seeking to require FII to pay for
investigation or remediation of environmental matters and has been alleged to be
a potentially responsible party at various "Superfund" sites. Management of FII
believes that it has recorded adequate reserves in its financial statements to
complete such investigation and take any necessary corrective actions or make
any necessary contributions. None of the amounts estimated for FII's
environmental liabilities are related to the Communications Services segment. No
amounts have been recorded as due from third parties, including insurers, or set
off against, any liability of FII, unless such parties are contractually
obligated to contribute and are not disputing such liability.
As of June 30, 1995, the consolidated total recorded liabilities of FII
for environmental matters referred to above totaled $8,601,000. As of June 30,
1995, the estimated probable exposures for these matters was $8,580,000. FII has
reported that it is reasonably possible FII's total exposure for these matters
could be approximately $15,778,000. Based on a review of engineering studies
conducted for FII of claims for known contamination, STI estimates that it is
reasonably possible that the costs resulting from such claims could range from
$8,000,000 to $30,000,000, although further investigation could result in either
a lower or higher estimated cost level. There may be off-sets from third-party
claims or insurance recoveries which would reduce potential liability. STI's
estimates did not include any claims for unknown liabilities for properties not
yet surveyed for environmental contamination which could have occurred as long
ago as thirty years.
OTHER MATTERS: FII is involved in various other claims and lawsuits incidental
to its business, some of which involve substantial amounts. FII, either on its
own or through its insurance carriers, is contesting these matters.
SELECTED FINANCIAL DATA
The selected financial data for the fiscal years 1995, 1994, 1993, 1992
and 1991 were derived from FII's consolidated financial statements which were
audited by Arthur Andersen LLP, independent auditors. The independent auditors'
report related to fiscal years 1995, 1994 and 1993 is included elsewhere in this
Proxy statement. The selected financial data for the three months ended October
1, 1995 and October 2, 1994 were derived from financial statements prepared by
FII without audit. The financial statements include all adjustments which, in
the opinion of FII Management, are required for a fair presentation of such
financial statements.
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The selected financial data should be read in conjunction with "The
Recapitalization," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the audited financial statements and related notes
thereto, and the unaudited pro forma financial statements and related notes
thereto included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30 Three Months Ended
--------------------------- -------------------
October 2, October 1,
1991 1992 1993 1994 1995 1994 1995
---- ---- ---- ---- ---- ---- ----
(dollars in thousands except per share amount)
Income Statement Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Sales $ 48,405 $ 58,662 $ 68,639 $ 74,897 $109,741 $ 20,124 $ 33,138
Operating Income 9,489 12,539 14,420 16,082 18,253 4,350 4,741
Interest expense 19,621 16,049 20,033 19,538 21,280 5,430 5,490
Loss from
continuing operations (10,132) (3,510) (5,613) (3,456) (3,027) (1,080) (749)
Net earnings (loss) 17,890 14,255 (12,257) (33,987) (12,359) 307 394
Preferred stock dividends 4,302 3,724 3,873 3,902 3,902 975 975
Net earnings (loss) after
preferred stock dividends 13,588 10,531 (16,130) (37,889) (16,261) (668) (581)
October 1, 1995
Balance Sheet Data
Working capital $ 41,204 $ 67,334 $ 32,279 $ 23,373 $ 57,342 $ 54,824
Total assets 418,047 432,841 368,084 331,318 351,309 352,326
Total long-term debt and
capital lease obligations 192,858 189,577 186,377 183,259 181,309 181,015
Series A redeemable
preferred stock 50,848 44,238 19,112 19,112 19,112 19,112
Series C cumulative
preferred stock - - 24,015 24,015 24,015 24,015
Total stockholders' equity 164,557 187,985 126,855 93,175 102,347 104,128
- -------------------------
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The communications division of FII was formed in 1985 as a provider of
telecommunication services to commercial occupants of multitenant office
buildings. Since then, FII has focused on a strategy of growth both internally
and through acquisitions. From July 1986 to July 1994, FII completed 17
acquisitions in the telecommunications services business, which added
approximately $48,000,000 of annual revenues. The largest acquisition during
this period was the Amerisystems Partnership in September 1990. Amerisystems
added approximately $23,000,000 of annual revenue to FII and enabled FII to
enter ten additional metropolitan markets, including Chicago and Houston.
In December 1992, FII acquired the assets of Office Networks, Inc.,
which added approximately $6,700,000 of annual revenue and enabled FII to enter
the Indianapolis market. Shortly thereafter, FII completed two additional
acquisitions in Indianapolis, making this metropolitan market one of FII's most
profitable.
In November 1994, FII entered the systems business by acquiring the
assets of JWP Telecom, Inc. ("JWP Telecom"). The addition of telecommunications
equipment will allow FII to achieve cost savings as FII's systems and services
businesses continue to consolidate. FII feels that cross-marketing opportunities
are particularly attractive in those metropolitan markets in which FII presently
has an infrastructure in place for its systems business but currently does not
provide services. These existing infrastructures provide FII a means of entering
such systems markets with little or no incremental expense.
Operating income as a percentage of revenues for FII's systems
businesses is approximately 5% compared to over 20% for the services businesses.
This lower percentage was anticipated by management prior to the JWP Telecom
acquisition and was reflected in the purchase price. As FII is able to realize
cost savings through consolidation of its services and systems business,
management believes operating income as a percentage of revenues from the
systems business will improve, but will never equal the percentage attained in
the services business.
RESULTS OF OPERATIONS
Set forth below are various components of FII's statements of
operations for each of the First Quarters of fiscal years ended September 30,
1995 ("Q1, 1996"), and September 30, 1994 ("Q1, 1995").
<TABLE>
<CAPTION>
Q1, 1996 Q1, 1995
<S> <C> <C>
Sales 100% 100%
Cost of sales 76% 71%
Gross Profit 24% 29%
General & Administrative Expense 9% 7%
Goodwill Amortization 1% 1%
Operating income 14% 21%
</TABLE>
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Set forth below are various components of FII's statements of
operations for each of the fiscal years ended June 30, 1993 ("Fiscal 1993"),
June 30, 1994 ("Fiscal 1994") and June 30, 1995 ("Fiscal 1995"), expressed as a
percentage of sales.
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Sales........................................................................... 100% 100% 100%
Cost of Sales................................................................... 71% 71% 74%
---- ---- ----
Gross Profit.................................................................... 29% 29% 26%
General and administrative expense.............................................. 7% 7% 8%
Goodwill amortization........................................................... 1% 1% 1%
Operating Income................................................................ 21% 21% 17%
=== === ===
</TABLE>
Q1, 1996 V. Q1, 1995:
Revenues: Total revenues in Q1, 1996 increased 64.7% to $33,100,000
from $20,100,000 in Q1, 1995. This increase was mainly the result of an
additional $13,000,000 in system revenues from the acquisition of JWP. Revenue
remained stable from sales to tenants in newly-franchised office buildings, and
sales to tenants in existing office buildings under franchise.
Gross Profit: Gross profit in Q1, 1996 increased 39.2% to $8,100,000
from $5,800,000 in Q1, 1995. This increase was primarily due to increased
revenues and economies of scale from increased volume resulting in part from the
JWP acquisition. Gross profit as a percent of sales decreased 5% primarily due
to the lower margins associated with the systems business acquired from JWP.
This decline was anticipated by management at the time of acquisition.
General and Administrative Expenses: General and Administrative
expenses in Q1, 1996 increased 141.4% to $3,200,000 from $1,300,000 in Q1, 1995.
Approximately $1,400,000 of the increase was due to the acquisition of JWP. The
remainder was due to wage, salary and other increases of $400,000 and increased
amortization of intangible assets other than goodwill of $100,000.
Interest Expense, Net: Interest expense in Q1, 1996 was approximately
equivalent to interest expense in Q1, 1995. There were no significant changes in
rates or borrowing between the two periods that are being compared.
Depreciation and Amortization: Depreciation and amortization in Q1,
1996 increased 18.0% to $2,700,000 from $2,300,000n in Q1, 1995. The increase is
due to the additional depreciation and amortization of approximately $300,000
from the JWP acquisition. In addition, depreciation increased another $100,000
because of significant capital investment in switching equipment installed in
office buildings in the services business.
FISCAL 1995 V. FISCAL 1994:
Revenues: Total revenues in Fiscal 1995 increased 46.5% to $109,700,000
from $74,900,000 in Fiscal 1994. The JWP acquisition represented the primary
increase by contributing $31,000,000 in additional revenue for Fiscal Year 1995.
The remaining increase was a result of an additional $1,700,000 in sales to
tenants in newly-franchised office buildings, an increase of
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$1,600,000 in sales to tenants in existing office buildings already under
franchise and other revenue increases of $500,000 due to acquisitions.
Gross Profit: Gross profit in Fiscal 1995 increased 28.5% to
$28,100,000 from $21,900,000 in Fiscal 1994. This increase was primarily due to
increased revenues above and economies of scale from increased volume resulting
in part from the JWP Telecom acquisition. Gross profit as a percent of sales
decreased 4% primarily due to the lower margins associated with the systems
business acquired from JWP Telecom.
General and Administrative Expenses: General and administrative
expenses in Fiscal 1995 increased 77% to $9,200,000 from $5,200,000 in Fiscal
1994. Approximately $3,600,000 of the increase was due to the acquisition of JWP
and the remainder was due to approximately $100,000 in wage, salary and other
increases and increased amortization of intangible assets other than goodwill of
$300,000.
Interest Expense, Net: Interest expense in Fiscal 1995 increased 9.2%
to $21,300,000 from $19,500,000 in Fiscal 1994. This increase was due primarily
to higher intercompany interest expense and higher interest rates during the
fiscal 1995 period.
Depreciation and Amortization: Depreciation and amortization in Fiscal
1995 increased 15.5% to $10,300,000 from $8,900,000 in Fiscal 1994. This
increase reflects increased depreciation and amortization of $700,000 associated
with the JWP acquisition. In addition, depreciation increased by $700,000
because of significant capital investment in switching equipment installed in
office buildings in the services business.
FISCAL 1994 V. FISCAL 1993:
Revenues: Total revenues in Fiscal 1994 increased 9.1% to $74,900,000
from $68,600,000 in Fiscal 1993. This increase was due primarily to increased
sales of $1,300,000 to customers in new buildings, $4,900,000 in additional
sales in existing
office buildings under franchise and other increases of $100,000 due to
acquisitions.
Gross Profit: Gross profit in Fiscal 1994 increased 11.7% to
$21,900,000 from $19,600,000 in Fiscal 1993. The increase is due primarily to
increased sales to customers in new and existing office buildings and economies
of scale from increased volume.
General and Administrative Expenses: General and administrative
expenses in Fiscal 1994 increased 10.6% to $5,200,000 from $4,700,000 in Fiscal
1993. The increase was due primarily to $300,000 in additional wage and salary
increases and increased amortization of intangible assets other than goodwill of
$200,000 acquired in the last half of Fiscal 1992.
Interest Expense, Net: Interest expense in fiscal 1994 decreased 2.4%
to $19,500,000 from $20,000,000 in Fiscal 1993. The decrease was due primarily
to lower rates on intercompany borrowings in fiscal 1994 compared to Fiscal
1993.
Depreciation and Amortization: Depreciation and amortization in Fiscal
1994 increased 12.7% to $8,900,000 from $7,900,000 in Fiscal 1993. The increase
was due to an acquisition made in the first half of Fiscal 1993 which
contributed $300,000 in depreciation and amortization and because of significant
capital investment in switching equipment installed in office buildings in the
services business which resulted in an additional $700,000 in depreciation.
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LIQUIDITY AND CAPITAL RESOURCES:
Historically, the communications division of the Company has
experienced rapid growth which has required substantial investment in capital
expenditures and intangible assets from acquisitions. Cash requirements needed
to fund these expenditures and assets has come from operating cash flow and
contributions from the Company's parent corporation.
Although the communications division of the Company has grown rapidly,
cash requirements for working capital have been minimal. This is due primarily
to the ability of the Company to negotiate favorable payment terms with its
vendors. In addition, the Company maintains strict collections procedures to
minimize working capital needs in accounts receivable.
Net cash used by investing activities was $4,100,000 and $3,900,000 in
Q1, 1996 and Q1, 1995 respectively. Cash used in acquisition was $600,000 in Q1,
1995 primarily for the purchase of assets from the Eaton and Lauth Telecom
operations. Cash used primarily for purchasing telecommunication assets for
office buildings was $2,200,000 and $1,800,000 in Q1, 1996 and Q1, 1995
respectively. Cash used in operations transferred to RHI was $1,900,000 and
$1,500,000 in Q1, 1996 and Q1, 1995 respectively.
Net cash provided by financing activities was $6,600,000 and $2,300,000
in Q1, 1996 and Q1, 1995 respectively. Proceeds from issuance of preferred stock
in Q1, 1996 was $2,400,000 and in Q1, 1995 was $11,400,000. Cash used in
financing activities for payment of dividends in Q1, 1996 was $1,000,000, and in
Q1, 1995 was $1,000,000. Cash provided by operations transferred to RHI in Q1,
1996 was $5,200,000. Cash used in operations transferred to RHI in Q1, 1995 was
$8,000,000. Capital lease repayments were $200,000 and $400,000 in Q1, 1996 and
Q1, 1995 respectively.
Net cash provided by operating activities was $17,748,000, $10,655,000,
and $17,337,000 in Fiscal 1995, Fiscal 1994, and Fiscal 1993, respectively. The
increase in cash provided by operations was primarily from increased
depreciation and amortization ($1,400,000), and from changes in operations to be
transferred to RHI ($7,900,000). Primarily because of the JWP Telecom
acquisition, billed and unbilled receivables increased by $10,100,000 and
inventory increased by $1,000,000 in Fiscal 1995, but was significantly offset
by an $8,300,000 increase in accounts payable and accrued liabilities.
Net cash used in investing activities was $27,600,000, $14,900,000, and
$19,600,000 in Fiscal 1995, Fiscal 1994 and Fiscal 1993, respectively. Cash used
in acquisitions was $11,600,000 in fiscal 1995 primarily for the JWP Telecom
acquisition and $7,300,000 in Fiscal 1993 primarily for the Office Networks,
Inc. acquisition. Cash used primarily for purchasing telecommunication assets
for office buildings was $10,300,000, $7,800,000, and $5,800,000 in Fiscal 1995,
Fiscal 1994, and Fiscal 1993, respectively. Cash used in operations transferred
to RHI was $5,800,000, $7,100,000 and $6,500,000 in Fiscal 1995, Fiscal 1994,
and Fiscal 1993, respectively.
Net cash provided by financing activities was $11,258,000, $4,258,000
and $2,274,000 in Fiscal 1995, Fiscal 1994, and Fiscal 1993, respectively.
Proceeds from issuances of preferred stock was $24,400,000, $4,000,000, and
$29,000,000 in Fiscal 1995, Fiscal 1994, and Fiscal 1993, respectively. The
purchase/exchange of preferred stock in Fiscal 1993 used $25,100,000 of cash
provided by financing activities. Cash used in financing activities for payment
of dividends was $3,900,000, $3,900,000 and $53,800,000 in Fiscal 1995, Fiscal
1994 and Fiscal 1993, respectively. Capital Lease repayments were $2,000,000,
$3,100,000 and $3,200,000 for fiscal 1995, Fiscal 1994 and Fiscal 1993,
respectively. Cash used in operations transferred to RHI was $8,800,000 in
Fiscal 1995.
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Cash provided by operations transferred to RHI was $6,100,000, and
$59,100,000 in Fiscal 1994 and Fiscal 1993, respectively.
EXPERTS
The consolidated financial statements of Fairchild Industries, Inc.
included in this Proxy Statement to the extent and for the periods indicated in
their reports have been audited by Arthur Andersen LLP, independent public
accountants, and are included herein in reliance upon the authority of said firm
as experts in giving said reports.
-84-
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Unaudited Financial Statements
Consolidated Balance Sheets as of December 31, 1994 and
September 30, 1995 (unaudited)................................................. F-5
Consolidated Statements of Operations for the Nine Month
Periods ended September 30, 1994 and 1995 (unaudited).......................... F-7
Consolidated Statements of Operations for the Three Month
Periods ended September 30, 1994 and 1995 (unaudited).......................... F-8
Consolidated Statements of Cash Flows for the Nine Month
Periods ended September 30, 1994 and 1995 (unaudited).......................... F-9
Consolidated Statement of Stockholders' Equity for the
Period ended September 30, 1995 (unaudited).................................... F-11
Notes to Consolidated Financial Statements
September 30, 1995 (unaudited)................................................. F-14
Audited Financial Statements
Report of Rothstein, Kass & Company, P.C., Independent Auditors..................... F-17
Report of Arthur Andersen LLP, Independent Public Accountants....................... F-18
Consolidated Balance Sheets as of December 31, 1993 and 1994........................ F-19
Consolidated Statements of Operations for the Years Ended
December 31, 1992, 1993 and 1994............................................... F-20
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1992, 1993 and 1994................................... F-21
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1992, 1993 and 1994............................................... F-23
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1992, 1993 and 1994............................................... F-25
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Historical Financial Statements of Significant Entities Acquired
Access Telecommunication Group, L.P.
Audited Financial Statements
Report of Ernst & Young, Independent Auditors ..............................................F -40
Balance Sheets as of December 31, 1991 and 1992.............................................F -41
Statement of Operations for the Years
Ended December 31, 1991 and 1992..........................................................F -43
Statements of Partners' (Deficit) Equity....................................................F -44
Statement of Cash Flows for Years Ended
December 31, 1991 and 1992................................................................F -45
Notes to Financial Statements for the
Years Ended December 31, 1991 and 1992....................................................F -46
Report of Ernst & Young, Independent Auditor................................................F -49
Balance Sheets as of December 31, 1992 and 1993.............................................F -50
Statements of Operations for Years Ended
December 31, 1992 and 1993................................................................F -52
Statements of Partners' Equity (Deficit)....................................................F -53
Statements of Cash Flows for Years Ended
December 31, 1992 and 1993................................................................F -54
Notes to Financial Statements for the Years Ended
December 31, 1992 and 1993................................................................F -55
Unaudited Financial Statements
Balance Sheets as of April 30, 1993 and 1994 (unaudited)....................................F -58
Income Statement for the Four Months Ended
April 30, 1993 and 1994 (unaudited).......................................................F -59
Statement of Cash Flows for the Four Months Ended
April 30, 1993 and 1994 (unaudited).......................................................F -60
Notes to Financial Statements for the Four Months Ended
April 30, 1993 and 1994...................................................................F -61
Road and Show South, Ltd. and Affiliates
Report of Rothstein, Kass & Company, P.C.,
Independent Auditors......................................................................F -62
Audited Combined Balance Sheet as of November 30, 1993......................................F -63
<PAGE>
Audited Combined Statements of Operations for the
period from inception (March 15, 1992)
through December 31, 1992 and the eleven months
ended November 30, 1993...................................................................F -64
Audited Combined Statements of Partners' Capital
for the period from inception (March 15, 1992) through
December 31, 1992 and the eleven months ended
November 30, 1993.........................................................................F -65
Audited Combined Statements of Cash Flows for the
period from inception (March 15, 1992) through
December 31, 1992 and the eleven months ended
November 30, 1993.........................................................................F -66
Notes to Combined Financial Statements......................................................F -67
Road and Show Cellular East, Inc.
Report of Rothstein, Kass & Company, P.C, Independent Auditors..............................F -69
Audited Statement of Net Assets acquired from
Road and Show Cellular East, Inc. for the year
ended December 31, 1992 and the nine months
ended September 30, 1993..................................................................F -70
Audited Statements of Revenues and Direct Expenses of
Road and Show Cellular East, Inc. for the year
ended December 31, 1992 and the nine months
ended September 30, 1993..................................................................F -71
Notes to Financial Statements...............................................................F -72
Cellular Hotline, Inc.
Report of Rothstein, Kass & Company, P.C., Independent Auditors.............................F -74
Audited Balance Sheet
as of December 31, 1993 and 1994..........................................................F -75
Audited Statements of Operations as of December 31, 1993 and 1994...........................F -76
Audited Statements of Stockholders' Deficit
for the Years Ended December 31, 1993 and 1994............................................F -77
Audited Statements of Cash Flows for the Years Ended December 31, 1993 and 1994.............F -78
Notes to Financial Statements...............................................................F -79
Unaudited Balance Sheets for the Periods Ended
April 30, 1994 and April 30, 1995.........................................................F -82
Unaudited Statements of Operations for the Periods Ended
April 30, 1994 and April 30, 1995.........................................................F -83
Unaudited Statements of Cash Flows for the Periods Ended
April 30, 1994 and April 30, 1995.........................................................F -84
Notes to Financial Statements for the Periods Ended
April 30, 1994 and April 30, 1995.........................................................F -85
PTC Cellular, Inc.
Unaudited Balance Sheets for the years ended December 31, 1993 and
1994......................................................................................F -86
Unaudited Statements of Operation and Accumulated Deficit for the
period ended December 31, 1992 from inception and for
the years ended December 31, 1993 and 1994..................................................F -88
Unaudited Statements of Changes in Stockholders' (Deficit) Equity
for the period ended December 31, 1992 from inception and for
the years ended December 31, 1993 and 1994 and for........................................F -89
Unaudited Statements of Cash Flow for the period ended
December 31, 1992 from inception and for the years ended
December 31, 1993 and 1994..................................................................F -90
Notes to Financial Statements, December 31, 1994............................................F -91
Unaudited Balance Sheets for the nine months ended September 30, 1995.....................F -97
Unaudited Statements of Operation for the nine months ended September
30, 1995..................................................................................F -98
Unaudited Statements of Cash Flows for the nine months ended September
30, 1995..................................................................................F -99
Notes to Financial Statements, September 30, 1995...........................................F -100
</TABLE>
F-2
<PAGE>
Shared Technologies Inc.
Consolidated Balance Sheets
December 31, 1994 and September 30, 1995
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1994 1995
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash $172 $1,410
Accounts receivable, less allowance
for doubtful accounts of $ 584
in 1995 and $914 in 1994 8,533 11,588
Other current assets 727 1,345
Deferred income taxes 550 550
--------- ----------
Total current assets 9,982 14,893
--------- ----------
Equipment, at cost:
Telecommunications equipment 26,223 29,500
Office and data processing
equipment 4,995 6,132
--------- ----------
31,218 35,632
Less - Accumulated depreciation 15,473 18,063
--------- ----------
15,745 17,569
--------- ----------
Other Assets 12,198 14,617
--------- ----------
Total Assets $37,925 $47,079
========= ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3
<PAGE>
Shared Technologies Inc.
Consolidated Balance Sheets
December 31, 1994 and September 30, 1995
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1994 1995
---- ----
CURRENT LIABILITIES:
<S> <C> <C>
Notes payable and current portion of
long-term debt and capital lease
obligations $1,840 $2,438
Accounts payable 8,191 10,664
Accrued expenses 2,382 2,666
Advance billings 1,260 1,248
-------- --------
Total current liabilities 13,673 17,016
-------- --------
Long-Term Debt and Capital Lease Obligations less current portion 2,886 4,012
-------- --------
Minority Interest in Net Assets of Subsidiaries 102 1,663
-------- --------
Redeemable Put Warrant 383 416
-------- --------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value:
Series C, authorized 1500 shares,
outstanding 907 shares in 1994 and 1995 9 9
Series D, authorized 1000 shares,
outstanding 457 shares in 1994 and 1995 5 5
Series E, authorized 400
shares, outstanding no shares in
1994 and 400 shares in 1995 4 -
Series F, authorized 700
shares, outstanding 700 shares in
1994 and no shares in 1995 7 -
Common Stock; $.004 par value, 20,000 shares authorized; 6,628 and 8,476 shares
outstanding in 1994 and 1995
respectively 27 34
Additional paid-in capital 41,488 44,647
Accumulated deficit (22,465) (20,723)
Obligations to issue common stock 1,806
---------
Total stockholders' equity 20,881 23,972
--------- --------
Total liabilities and stockholders' equity $37,925 $47,079
========= ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE>
Shared Technologies Inc.
Consolidated Statements of Operations
For the Nine Months Ended
September 30, 1994 and 1995
(unaudited)
(in Thousands Except for Per Share Data)
<TABLE>
<CAPTION>
September 30, September 30,
1994 1995
---- ----
<S> <C> <C>
Revenue:
Shared tenant services $20,450 $25,248
Facility management services 3,444 9,266
Cellular services 7,620 9,160
------ ------
Total Revenue 31,514 43,674
------- ------
Cost of Revenue:
Shared tenant services 11,224 13,934
Facility management services 2,796 7,164
Cellular services 3,970 5,530
------- ------
Total Cost of Revenue 17,990 26,628
------ ------
Gross Margin 13,524 17,046
Selling, General & Administrative Expenses:
Field 8,701 12,659
Corporate 3,059 3,457
------ ------
Operating Income 1,764 930
Gain on sale of subsidiary stock - 1,375
Interest Expense (228) (574)
Interest Income 70 130
Minority Interest in Net (Income)
Loss of Subsidiaries (43) 213
------- ------
Net Income 1,563 2,074
Preferred Stock Dividends (350) (299)
-------- --------
Net Income Applicable to Common Stock $1,213 $1,775
====== ======
Net Income Per Common Share $0.21 $0.20
======== ========
Weighted Average Shares Outstanding 5,699 8,698
======= ======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-5
<PAGE>
Shared Technologies Inc.
Consolidated Statements of Operations
For the Three Months Ended
September 1994 and 1995
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
September 30, 1994 September 30, 1995
------------------ ------------------
<S> <C> <C>
Revenue:
Shared tenant services $8,102 $8,178
Facility management services 2,692 3,917
Cellular services 3,699 3,870
------ ------
Total Revenue 14,493 15,965
------ ------
Cost of Revenue:
Shared tenant services 4,667 4,354
Facility management services 2,138 2,914
Cellular services 1,855 2,452
------ ------
Total Cost of Revenue 8,660 9,720
------ ------
Gross Margin 5,833 6,245
Selling, General & Administrative Expenses:
Field 3,954 4,678
Corporate 1,207 1,314
------ ------
Operating Income 672 253
Interest Expense (101) (245)
Interest Income 32 59
Minority Interest in Net Loss of Subsidiaries - 125
------ ------
Net Income 603 192
------ ------
Preferred Stock Dividends (131) (100)
------ ------
Net Income Applicable to Common Stock $472 $92
====== ======
Net Income Per Common Share $0.07 $0.01
====== ======
Weighted Average Shares Outstanding 6,550 8,751
====== ======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-6
<PAGE>
Shared Technologies Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended
September 30, 1994 and 1995
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
September 30, 1994 September 30, 1995
------------------ ------------------
<S> <C> <C>
Cash Flows Provided by Operating Activities
Net Income $1,563 $2,074
Adjustments:
Gain on sale of subsidiary stock - (1,375)
Depreciation & amortization 2,294 3,266
Minority interest in net income
(loss) of subsidiaries 43 (213)
Change in Assets and Liabilities:
Accounts receivable (2,126) (2,407)
Other current assets (39) (593)
Other assets 44 (310)
Accounts payable 1,047 1,541
Accrued expenses (884) (58)
Advanced billings 17 (47)
------- --------
Net cash provided by operating activities 1,959 1,878
------- --------
Cash Flows used in Investing Activities
Acquisitions (3,780) (2,483)
Capital expenditures (2,521) (3,099)
------- --------
Net cash used in investing activities (6,301) (5,582)
------- --------
Cash Flows From Financing Activities:
Preferred stock dividends (350) (299)
Net proceeds from sale of subsidiary stock 3,274
Purchase of subsidiary treasury stock - (375)
Proceeds from borrowings 2,121 2,929
Repayments of notes payable, long-
term debt and capital lease obligations (1,698) (1,751)
Net proceeds from sales of common and preferred stock 4,712 1,164
------- -------
Net cash provided by financing activities 4,785 4,942
------- -------
Net increase in cash 443 1,238
Cash, Beginning of Period 408 172
------- -------
Cash, End of Period $851 $1,410
====== ======
</TABLE>
F-7
<PAGE>
Shared Technologies Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended
September 30, 1994 and 1995
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
September 30, 1994 September 30, 1995
------------------ ------------------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for -
Interest $228 $569
=========== ==========
Income taxes $25 $74
=========== ==========
Supplemental Disclosures of Noncash Investing and Financing
Activities:
Issuance of common stock in connection with acquisitions - $1,806
=========== ==========
Issuance of preferred stock in connection with acquisition $ 5,000 -
=========== ==========
Dividend accretion on redeemable put warrant - $33
=========== ==========
Issuance of common stock to settle accrued expenses $67 $185
=========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-8
<PAGE>
Shared Technologies Inc.
Consolidated Statement of Stockholders' Equity
For the period ended September 30, 1995
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Series C Preferred Series D Preferred Series E Preferred Series F Preferred
Stock Stock Stock Stock
----- ----- ----- -----
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 907 $9 457 $5 400 $4 700 $7
Issuance of Common Stock
per obligation to issue - - - - - - - -
Conversion of Preferred Stock - - - - (400) ($4) (700) ($7)
Sale of Common Stock - - - - - - - -
Common stock issued in
lieu of compensation and other - - - - - - - -
Net income - - - - - - - -
Dividend accretion of
redeemable put warrant - - - - - - - -
Preferred stock dividends - - - - - - - -
------ ------ ------ ------ ------ ------ ------ ------
Balance, September 30, 1995 907 $9 457 $5 0 $0 0 $0
====== ====== ====== ====== ====== ====== ====== ======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-9
<PAGE>
Shared Technologies Inc.
Consolidated Statement of Stockholders' Equity
For the period ended September 30, 1995
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Common Stock
------------ Additional
Paid-in
Shares Amount Capital
------ ------ -------
<S> <C> <C> <C>
Balance, January 1, 1995 6,628 $27 $41,488
Issuance of Common Stock
per obligation to issue 405 2 1,804
Conversion of Preferred 1,100 4 7
Stock
Sale of Common Stock 316 - 1,229
Common stock issued in
lieu of compensation and 27 - 119
other
Net income - - -
Dividend accretion of
redeemable put warrant - - -
Preferred stock dividends - - -
----- --- -------
Balance, September 30, 1995 8,476 $33 $44,647
===== === =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-10
<PAGE>
Shared Technologies Inc.
Consolidated Statement of Stockholders' Equity
For the period September 30, 1995
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Obligations Total
Accumulated to Issue Stockholders'
Deficit Common Stock Equity
------- ------------ ------
<S> <C> <C> <C>
Balance, January 1, 1995 ($22,465) $1,806 $20,881
Issuance of Common Stock
per obligation to issue - (1,806) (0)
Conversion of Preferred - - (0)
Stock
Sale of Common Stock - - 1,229
Common stock issued in
lieu of compensation and - - 119
other
Net income 2,074 - 2,074
Dividend accretion of
redeemable put warrant (33) - (33)
Preferred stock dividends (299) - (299)
--------- ---- -------
Balance, September 30, 1995 ($20,723) $0 $23,971
========= ==== =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-11
<PAGE>
Shared Technologies Inc.
Notes to Consolidated Financial Statements
September 30, 1995
(Unaudited)
1. Basis of Presentation: The consolidated financial statements included herein
have been prepared by Shared Technologies Inc. (the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission and reflect all
adjustments, consisting only of normal recurring adjustments, which are, in the
opinion of management, necessary to present a fair statement of the results for
interim periods. Certain information and footnote disclosures have been omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these consolidated financial statements be read in conjunction
with the consolidated financial statements and the notes thereto included in the
Company's December 31, 1994 report on Form 10-K. Certain reclassifications to
prior year financial statements were made in order to conform to the 1995
presentation.
2. Acquisitions: In June 1994, the Company acquired all of the partnership
interests in Access Telecommunication Group, L.P. and Access Telemanagement,
Inc. (collectively, "Access"). The purchase price was $9,252,000, of which
$4,252,000 was paid in cash and the balance through the issuance of 400,000
shares of Series E Preferred Stock valued at $3.75 per share and 700,000 shares
of Series F Preferred Stock valued at $5.00 per share.
On June 30, 1995 the Company purchased all of the outstanding capital stock of
Office Telephone Management ("OTM"). OTM provides telecommunication management
services primarily to businesses located in executive office suites. The
purchase price is currently allocated as follows (In thousands):
Goodwill $1,915
Property, Plant & Equipment 1,400
Accounts Receivable, (net) 400
Other current assets 20
Debt (current and long-term) (545)
Accounts Payable (525)
Accrued Expense (530)
------
Net Purchase Price $2,135
======
The purchase price was paid with $1,335,000 of cash and the issuance of a
$800,000 note.
In May and June 1995, the Company's cellular subsidiary Shared Technologies
Cellular, Inc. ("STC") commenced management and subsequently completed its
acquisition of the outstanding capital stock of Cellular Hotline, Inc.
("Hotline") for $617,000. The $617,000 was comprised of $367,000 in cash, paid
at closing, and the issuance of 50,000 shares of STC common stock. At the
discretion of the former Hotline stockholders, STC was required to repurchase
all or a portion of the shares for $5.00 per share, at any time during the
period commencing three months and ending six months after June 19, 1995. The
former Hotline stockholders exercised their put option during that period.
Additionally at closing, STC issued options to purchase 50,000 additional shares
of STC common stock, exercisable at $7.50 per share for three years. The
agreement
F-12
<PAGE>
provides for additional payments based upon attaining certain levels of
activation revenues, as defined, over a one year period.
Unaudited pro forma consolidated statements of operations for the nine-month
period ended September 30, 1994 and 1995 as through the acquisitions of Access,
OTM and Hotline had been made at January 1, 1994 are as follows (In thousands
except for per share data):
1994 1995
--------- ---------
Revenues $40,796 $46,401
Net Income 1,730 1,697
Net Income Per Share 0.23 0.20
Weighted Average Shares 7,488 8,698
3. Gain on sale of subsidiary stock: In April, 1995, the Company's cellular
subsidiary Shared Technologies Cellular, Inc. ("STC") completed its SB-2 filing
with the Securities and Exchange Commission and became a public company. Prior
to this date STC had been an approximately 86% owned subsidiary of the Company.
STC sold 950,000 shares of common stock at $5.25 which generated net proceeds of
approximately $3,274,000, after underwriters' commissions and offering expenses.
These proceeds are intended to be used to finance marketing activities relating
to STC's cellular telephone rental service ($1.15 million), repayment of
indebtedness to the Company ($1.25 million), acquisition of telecommunication
equipment, billing technology management information systems and centralized
reservation systems ($.5 million) and the balance for working capital and
general corporate purposes. The net effect on the consolidated financial
statements for the second quarter was a gain of approximately $1,375,000.
4. Income Taxes: The Company and its subsidiaries file a consolidated federal
income tax return but generally file separate state income tax returns. As of
December 31, 1994, the Company has net operating loss carryforwards for federal
income tax purposes of approximately $22.7 million, which expire, if unused,
from 2001 to 2007.
5. Contingencies: While providing services at the Jacob K. Javits Convention
Center in 1991, the Company licensed the right to provide certain public pay
telephone services at the Center to Tel-A-Booth Communications, Ltd. In 1992,
Tel-A-Booth filed a claim against the New York Convention Center Operating
Corporation and its facilities manager, Ogden Allied Facility Management, and
against the Company seeking $10,000,000 in damages for which no amounts have
been provided in the accompanying consolidated financial statements. While any
litigation contains an element of uncertainty, management is of the opinion
based on the current status of the claim that the ultimate resolution of this
matter should not have a material adverse effect upon either results of
operations, cash flows or financial position of the Company.
The Company's subsidiary, Shared Technologies Cellular, Inc. (STC) has entered
into an agreement for partial settlement of certain litigation arising in
connection with its purchase of certain assets from Road and Show South, Ltd.
("Road and Show") Pursuant to the settlement, STC has been indemnified against a
claim from a former employee of an affiliate of Road and Show, which claim was
dismissed against STC on January 29, 1996. In August 1995, STC delivered 197,089
of the 272,764 shares issuable to Road and Show pursuant to the asset purchase
agreement between Road and Show and STC, retaining 75,675 shares to secure the
indemnification obligations of Road and Show with respect to the litigation.
Final disposition of the dispute between STC and Road and Show shall determine
whether such remaining shares shall
F-13
<PAGE>
be delivered to Road and Show. As between STC and Road and Show, certain claims
exist, which the parties have agreed to attempt to settle through mediation or
arbitration. The Company's management believes that in the event such claims are
resolved against STC that they would not, in the aggregate, have a material
adverse effect on the Company's financial condition, results of operations and
cash flows.
In addition to the above matters, the Company is a party to various legal
actions, the outcome of which, in the opinion of management, will not have a
material adverse effect on the Company's financial condition, results of
operations and cash flows.
6. Subsequent Events: In November 1995 the Company signed an agreement under
which Fairchild Industries Inc. ("FII"), following a reorganization transferring
all non-communications assets to its parent RHI Holding Inc., will merge into
the Company. The company will be called Shared Technologies Fairchild Inc. Under
the proposed merger agreement the Company will issue 6,000,000 shares of common
stock, 1,000,000 shares of convertible preferred stock with a $25,000,000
liquidation preference and 1,000,000 shares of special preferred stock with an
initial $20,000,000 liquidation preference and raise approximately $238,000,000
through senior debt from banks and subordinated debt from the capital markets.
The Company has entered into financing arrangements with CS First Boston which
include a highly confident letter for all of the debt financing for the
transaction.
In November 1995 the Company's cellular subsidiary, STC, commenced management
and subsequently completed its acquisition of certain assets of PTC Cellular,
Inc. ("PTCC"). The purchase price was $3,800,000, comprised of $300,000 in cash,
the assumption of $1,200,000 in assumed accounts payable, a 5-year promissory
note in the principal amount of $2,000,000 and the issuance of 100,000 shares of
STC common stock, $.01 par value. Additionally, the agreement allows for royalty
payments in the amount of three percent (3%) of quarterly revenues generated
from certain of the acquired assets not to exceed an aggregate of $2,500,000.
Also, STC has committed to PTCC to obtain financing in the amount of $7,000,000
within six months of the acquisition date. Pro Forma financial information is
not yet available.
F-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Shared Technologies Inc.
We have audited the accompanying consolidated balance sheets of Shared
Technologies Inc. and Subsidiaries as of December 31, 1993 and 1994 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Shared Technologies
Inc. and Subsidiaries as of December 31, 1993 and 1994, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ROTHSTEIN, KASS & COMPANY, P.C.
Roseland, New Jersey
March 24, 1995, except for Notes 7 and 11
as to which the date is April 11, 1995
F-15
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
------------------------------------------------------------------
To Shared Technologies Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Shared Technologies Inc. (a Delaware
corporation) and subsidiaries for the year ended December 31, 1992. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Shared
Technologies Inc. and subsidiaries for the year ended December 31, 1992 in
conformity with generally accepted accounting principles.
As discussed in Note 14 to the consolidated financial statements, the Company
and others have been named in a lawsuit seeking damages of approximately $10
million, including $1.4 million for equipment purchased, for which no provision
has been made in the accompanying consolidated financial statements. The Company
has filed answers to this complaint denying the material allegations of the
claim. Although the claim is being contested by the Company, the outcome of this
matter is uncertain at this time.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
March 23, 1993 (except with respect to the matter discussed
in the second paragraph of Note 14, as to which the date is
April 14, 1994)
F-16
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1993 and 1994
(In thousands)
<TABLE>
<CAPTION>
1993 1994
---------------- ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 409 $ 172
Accounts receivable, less allowance for doubtful accounts
and discounts of $310 in 1993 and $584 in 1994 4,614 8,533
Other current assets 545 727
Deferred income taxes 550
------------- -------------
Total current assets 5,568 9,982
------------- -------------
EQUIPMENT:
Telecommunications 21,298 26,223
Office and data processing 4,358 4,995
------------- -------------
25,656 31,218
Less accumulated depreciation and amortization 13,545 15,473
------------- -------------
12,111 15,745
------------- -------------
OTHER ASSETS:
Intangible assets 2,348 11,198
Other 574 1,000
------------- -------------
2,922 12,198
------------- -------------
$ 20,601 $ 37,925
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease obligations $ 1,942 $ 1,840
Accounts payable 4,482 8,191
Accrued expenses 2,069 2,382
Advance billings 949 1,260
------------- -------------
Total current liabilities 9,442 13,673
------------- -------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
less current portion 1,777 2,886
------------- -------------
MINORITY INTERESTS IN NET ASSETS OF SUBSIDIARIES 79 102
------------- -------------
REDEEMABLE PUT WARRANT 383
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value:
Series C, authorized 1,500 shares, outstanding
988 shares in 1993 and 907 in 1994 10 9
Series D, authorized 1,000 shares, outstanding
453 shares in 1993 and 457 in 1994 5 5
Series E, authorized no shares in 1993 and 400 shares
in 1994, outstanding 400 shares in 1994 - 4
Series F, authorized no shares in 1993 and 700 shares
in 1994, outstanding 700 shares in 1994 - 7
Common stock, $.004 par value, authorized 20,000
shares, outstanding 5,190 shares in 1993 and
6,628 in 1994 21 27
Capital in excess of par value 31,759 41,488
Accumulated deficit (24,248) (22,465)
Obligations to issue common stock 1,756 1,806
------------- -------------
Total stockholders' equity 9,303 20,881
------------- -------------
$ 20,601 $ 37,925
============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
F-17
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1992, 1993 and 1994
(In Thousands Except for Per Share Data)
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Shared tenant services $ 21,395 $ 21,683 $ 28,667
Facilities management services 1,287 1,543 6,483
Cellular services 1,394 2,200 10,217
------------- ------------- -------------
Total revenues 24,076 25,426 45,367
------------- ------------- -------------
COST OF REVENUES:
Shared tenant services 12,728 11,628 15,717
Facilities management services 1,082 1,282 5,161
Cellular services 1,012 1,604 5,294
------------- ------------- -------------
Total cost of revenues 14,822 14,514 26,172
------------- ------------- -------------
GROSS MARGIN 9,254 10,912 19,195
OPERATING EXPENSES, selling, general and administrative 9,959 10,102 16,972
------------- ------------- -------------
OPERATING INCOME (LOSS) (705) 810 2,223
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense (411) (530) (522)
Interest income 121 92 163
Minority interests in net income of subsidiaries (37) (82) (128)
-------------- ------------- -------------
(327) (520) (487)
-------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAX CREDIT
AND EXTRAORDINARY ITEM (1,032) 290 1,736
INCOME TAX CREDIT 550
-------------- ------------- -------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (1,032) 290 2,286
EXTRAORDINARY ITEM, (loss) gain on restructuring (in 1992, net of restructuring
expenses of $1,361, and income taxes of $45, after extraordinary benefit of
utilizing net operating loss carryforwards of $3,000 3,756 (150) -
------------- ------------- -------------
NET INCOME 2,724 140 2,286
PREFERRED STOCK DIVIDENDS (334) (345) (478)
------------- ------------- -------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 2,390 $ (205) $ 1,808
============= ============= =============
INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item $ (.33) $ (.01) $ .27
Extraordinary item .92 (.03)
------------ ------------- -------------
Net income (loss) $ .59 $ (.04) $ .27
============ ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 4,063 5,132 6,792
============ ============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
F-18
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY Years Ended December 31, 1992,
1993 and 1994
(In Thousands)
<TABLE>
<CAPTION>
Series B Series C Series D
Preferred Stock Preferred Stock Preferred Stock
---------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1992 915 $ 9 - $ - - $ -
Dividends on preferred stock
Conversion of Series A Preferred Stock
to Series C Preferred Stock - - 110 1 - -
Conversion of Series B Preferred Stock
to Series C Preferred Stock (915) (9) 915 9 - -
Conversion of preferred stock dividends
payable to Series C Preferred Stock 82 1 - -
Proceeds from sale of common stock
including subscriptions of $163
collected subsequent to December 31,
1992 and net of expenses of $470
Common stock issued in lieu of
compensation and other
Exercise of common stock options
Exercise of common stock warrants
Net income -----------------------------------------------------------------------
BALANCE, December 31, 1992 1,107 11
Dividends on preferred stock
Proceeds from sale of Series D
Preferred Stock, net of expenses
of $412 453 5
Redemption of Series C Preferred
Stock (119) (1)
Common stock to be issued
for acquisitions
Common stock issued in lieu
of compensation
Common stock issued in lieu
of deferred financing fees
Exercise of common stock options
Net income -----------------------------------------------------------------------
BALANCE, December 31, 1993 988 10 453 5
Preferred stock dividends
Dividend accretion of redeemable put warrant
Exercise of common stock options
and warrants
Proceeds from sale of Series D
Preferred Stock 4
Issuances for acquisitions
Proceeds from sale of common stock, net
of expenses of $371
Common stock issued in lieu of
compensation and conversion of
Series C Preferred Stock and other (81) (1)
Net income ------------------------------------------------------------------------
BALANCE, December 31, 1994 - $ - 907 $ 9 457 $ 5
========== ========= ========= ========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
Obligations
Series E Series F Capital in to Issue Total
Preferred Stock Preferred Stock Common Stock Excess of Accumulated Common Stockholders'
- -------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Par Value Deficit Stock Equity
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- $ - - $ - 3,741 $ 16 $ 23,261 $ (26,433) $ - $ (3,147)
(334) (334)
439 440
327 328
1,250 5 5,775 5,780
32 128 128
54 111 111
15 6 6
2,724 2,724
- -------------------------------------------------------------------------------------------------------------------------------
5,092 21 30,047 (24,043) 6,036
(345) (345)
1,737 1,742
(385) (386)
1,756 1,756
49 228 228
14 50 50
35 82 82
140 140
- -------------------------------------------------------------------------------------------------------------------------------
5,190 21 31,759 (24,248) 1,756 9,303
(478) (478)
(25) (25)
26 71 71
(1) (1)
400,000 4 700,000 7 4,989 5,000
1,329 6 4,556 4,562
83 114 50 163
2,286 2,286
- -------------------------------------------------------------------------------------------------------------------------------
400,000 $ 4 700,000 $ 7 6,628 $ 27 $ 41,488 $ (22,465) $ 1,806 $ 20,881
========== ======== ======== ======== ========== ========= ============ ============= ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
F-20
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1992, 1993 and 1994
(In Thousands)
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,724 $ 140 $ 2,286
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss (gain) on restructuring (5,162) 150
Depreciation and amortization 2,448 2,562 3,702
Provision for doubtful accounts - 253 413
Common stock of subsidiary issued for services - - 16
Stock options and common stock issued
in lieu of compensation and other 128 278 114
Minority interests 37 82 128
Gain on sale of franchise - - (202)
Deferred income taxes - - (550)
Amortization of discount on note - - 52
Change in assets and liabilities:
Accounts receivable (469) (990) (2,147)
Other current assets 123 132 (179)
Other assets (243) (430)
Accounts payable 1,505 964 1,629
Accrued expenses (784) (1,212) (1,707)
Advance billings 22 91 (67)
-------------- -------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 572 2,207 3,058
-------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (2,014) (2,035) (3,223)
Acquisitions of Road and Show South and East - (255)
Acquisition of Access - - (3,948)
Long-term deposits (297) (2)
Proceeds from restricted investments 852 - -
Other investments (95) - -
--------------- -------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (1,554) (2,292) (7,171)
-------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable, long-term debt and
capital lease obligations (3,963) (1,895) (2,409)
Proceeds from borrowings - - 2,315
Proceeds from sales of common and preferred stock 5,734 1,824 4,631
Redemption of preferred stock - (386 -
Preferred stock dividends paid (88) (345) (478)
Deferred registration costs - - (182)
-------------- -------------- -------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,683 (802) 3,877
-------------- -------------- -------------
NET INCREASE (DECREASE) IN CASH 701 (887) (236)
CASH, beginning of year 595 1,296 408
-------------- -------------- -------------
CASH, end of year $ 1,296 $ 408 $ 172
============== ============== =============
See accompanying notes to consolidated financial statements.
</TABLE>
F-21
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1992, 1993 and 1994
(In Thousands)
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION, cash paid during the year for interest $ 401 $ 386 $ 441
============== ============== =============
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 $ - $ 1,756 $ 50
============== ============== =============
Conversion of accounts payable to long-term debt $ 3,288 $ - $ -
============== ============== =============
Conversion of preferred stock dividends payable
to Series C Preferred Stock $ 328 $ - $ -
============== ============== =============
Issuance of preferred stock in connection with acquisition $ - $ - $ 5,000
============== ============== =============
Redeemable put warrant issued in connection with
bank financing $ - $ - $ 358
============== ============== =============
Capital lease obligation incurred for lease of new equipment $ - $ - $ 64
============== ============== =============
Dividend accretion on redeemable put warrant $ - $ - $ 25
============== ============== =============
Costs of intangible assets included in accounts payable $ - $ - $ 203
============== ============== =============
Note received for sale of franchise $ - $ - $ 202
============== ============== =============
</TABLE>
F-22
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND ORGANIZATION:
The Company is in the shared tenant services (STS) and facilities
management services (FMS) industry, providing telecommunications
and office automation services and equipment to tenants of office
buildings. One of the Company's subsidiaries, Shared Technologies
Cellular, Inc. (STC), is a provider of short-term portable
cellular telephone services.
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned and majority-owned
subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION - Revenues are recognized as services are
performed. The Company bills customers monthly in advance for
equipment rentals and local telephone access service and defers
recognition of these revenues until the service is provided.
Enhanced office service revenues (included in both STS and FMS
revenues), which consists primarily of product and equipment
sales, is recognized at the time of shipment.
CASH - The Company maintains its cash in bank deposit accounts,
which, at times, may exceed federally insured limits. The Company
has not experienced any losses in such accounts and believes it is
not subject to any significant credit risk on cash.
EQUIPMENT - Equipment is stated at cost. Depreciation and
amortization is provided using the straight-line method over the
following estimated useful lives:
Telecommunications equipment 8 years
Office and data processing equipment 3-8 years
Effective January 1, 1992, the Company prospectively changed the
estimated depreciable life of telecommunications equipment
purchased prior to January 1, 1991 from five to eight years. The
change resulted in approximately $933,000 ($.23 per common share)
less depreciation expense for the year ended December 31, 1992
than would have been recorded using the previous estimated
depreciable life of five years. Excluding the impact of this
change, the loss before extraordinary item per common share for
1992 would have been $.56.
Major renewals and betterments are capitalized. The cost of
maintenance and repairs which do not materially prolong the useful
life of the assets are charged to expense as incurred.
RENT - Certain leases require escalating base rents or provide for
rent abatements for a period of time. The Company is expensing the
rents on a straight-line basis over the terms of the leases.
F-23
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Intangible Assets:
Goodwill - Goodwill represents the excess of the purchase prices
over the fair values of the net assets of businesses acquired. The
Company monitors the profitability of the acquired businesses to
assess whether any impairment of recorded goodwill has occurred.
Goodwill is amortized over periods ranging from 5 years to 40
years.
Deferred Startup Costs - Costs relating to the startup of
operations in certain new locations have been deferred and
amortized over one to two years upon commencement of the related
operations.
Software Development Costs - In connection with its cellular
subsidiary (SafeCall) operations, the Company has incurred certain
software development costs relating to the "privacy network" and
are amortized over 5 years starting with the implementation of the
related software.
Other Intangible Assets - Other intangible assets are being
amortized over 5 years.
Deferred Registration Costs - The Company has deferred legal fees,
other fees and costs incurred in connection with a proposed public
offering of a subsidiary. These costs will be charged to
operations if the offering is unsuccessful. At December 31, 1994,
approximately $182,000 of these costs are included in other
assets.
INCOME TAXES - Effective January 1, 1993, the Company adopted
Statement of Financial Accounting Standards (SFAS No. 109),
"Accounting for Income Taxes", which requires an asset and
liability approach to financial reporting for income taxes.
Deferred income tax assets and liabilities are computed annually
for differences between financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future, based on enacted tax laws and rates
applicable to the periods in which the differences are expected to
effect taxable income. Valuation allowances are established, when
necessary, to reduce the deferred income tax assets to the amount
expected to be realized. Prior to adopting SFAS No. 109, the
Company accounted for income taxes using the deferral method as
required by Accounting Principles Board Opinion No. 11. The
adoption of SFAS 109 had no material impact on the Company's
financial statements since the Company fully reserved for the tax
benefits flowing from its net operating losses (Note 13).
Income (Loss) Per Common Share - Primary income (loss) per common
share is computed by deducting preferred stock dividends from net
income in order to determine net income applicable to common
stock, which is then divided by the weighted average number of
common shares outstanding including obligations to issue common
stock and preferred stock which is considered a common stock
equivalent and the effect of options and warrants if dilutive.
Fully diluted income (loss) per common share is computed by
dividing net income applicable to common stock by the weighted
average number of common and common equivalent shares and the
effect of preferred stock conversions, if dilutive. Fully diluted
income (loss) per common share is substantially the same as
primary income (loss) per common share for the years ended
December 31, 1992, 1993 and 1994.
F-24
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECLASSIFICATIONS - Certain reclassifications to prior years
financial statements were made in order to conform to the 1994
presentation.
NOTE 3 - RESTRUCTURING:
During 1992, the Company completed a restructuring which resulted
in recording a gain of $5,162,000 before related expenses of
$1,361,000 and income taxes of $45,000. As a result of the
restructuring, approximately $900,000 of vendor payables and
$1,500,000 of capital lease obligations were forgiven and
$3,300,000 of vendor payables were converted into three year
non-interest bearing notes payable (Note 7). Additionally, an
agreement was entered into with the Federal Deposit Insurance
Corporation (FDIC), as receiver for the Company's principal
lender, whereby the Company paid off its term and revolving credit
loans for $2,450,000 and recognized a gain of approximately
$2,700,000. Had interest been accrued, the gain on restructuring
and interest expense would have each increased by approximately
$440,000. In connection with settling his guarantee of these
obligations, the Company's president issued to the FDIC a
non-interest bearing promissory note for $675,000 due in 1997 and
pledged 100,000 shares of his common stock and his options to
purchase 25,000 shares of common stock of the Company as
collateral.
As of December 31, 1993, the Company was negotiating the
settlement of a $600,000 promissory note (Note 7), which was
settled in 1994 by issuance of a $750,000 promissory note.
Accordingly, for the year ended December 31, 1993, the Company
recorded, as an extraordinary item, an expense of $150,000 in
connection with the completion of the restructuring.
In connection with the restructuring, the Company sold common
stock, resulting in net proceeds of approximately $5,780,000
(which included $163,000 of subscriptions receivable as of
December 31, 1992) and entered into agreements with Series A and B
Preferred stockholders to convert their holdings, including
$327,920 of accrued dividends related thereto, into Series C
Preferred Stock.
NOTE 4 - ACQUISITIONS:
In December and October 1993, the Company commenced management of,
and subsequently acquired certain assets and assumed certain
liabilities of Road and Show South, Ltd. (South) and Road and Show
Cellular East, Inc. (East), respectively. The purchase price for
South was $1,261,611, of which $46,111 was paid in cash and the
balance through the issuance of 221,000 shares of the Company's
common stock valued at $1,215,500. The purchase price for East was
$750,245, of which $209,245 was paid in cash and the balance
through the issuance, upon demand, of 108,200 shares of the
Company's common stock valued at $541,000. Pursuant to the
purchase agreements the number of shares of common stock related
to these acquisitions was adjusted on December 1, 1994 based on
the price of the Company's common stock at that date, for which an
aggregate of 64,966 additional shares will be issued and had no
effect on the purchase price of the net assets previously
recorded. As of December 31, 1994, no shares of common stock had
been issued for the East acquisition. The shares in connection
with the South acquisition have been issued, but have not been
delivered pending the outcome of certain claims against, and by,
the former owners of South (Note 16).
F-25
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - ACQUISITIONS (CONTINUED):
In June 1994, the Company acquired all of the partnership
interests in Access Telecommunication Group, L.P. and Access
Telemanagement, Inc. (collectively Access). The purchase price was
$9,252,031, of which $4,252,031 was paid in cash and the balance
through the issuance of 400,000 shares of Series E Preferred Stock
valued at $3.75 per share and 700,000 shares of Series F Preferred
Stock valued at $5.00 per share (Note 9).
The acquisitions were accounted for as purchases, and the purchase
prices were allocated on the basis of the relative fair market
values of the net assets.
The excess of costs over fair value of the net assets acquired is
recorded as goodwill (aggregating approximately $10,289,000) in
the accompanying consolidated financial statements. Amortization
of goodwill approximated $15,000 and $181,000 in 1993 and 1994,
respectively.
Additional payments may be required for the East acquisition based
upon the attainment of certain future revenues of the Company and
will be charged to goodwill when they become earned.
The following unaudited pro forma statements of operations for
1993 and 1994 give effect to the acquisitions, as if they occurred
on January 1 in each year (In thousands except per share amounts):
<TABLE>
<CAPTION>
1993 1994
---- ----
<S> <C> <C>
Revenues $ 47,480 $ 54,548
Cost of revenues 30,775 32,613
---------------- ---------------
Gross margin 16,705 21,935
Selling, general and administrative expenses 16,846 19,573
---------------- ---------------
Operating income (loss) (141) 2,362
Other expense, net (572) (459)
---------------- ---------------
Income (loss) before income tax credit and
extraordinary item (713) 1,903
Income tax credit 550
---------------- ---------------
Income (loss) before extraordinary item (713) 2,453
Extraordinary item (150)
---------------- ---------------
Net income (loss) (863) 2,453
Preferred stock dividends (464) (538)
---------------- ---------------
Net income (loss) applicable to common stock $ (1,327) $ 1,915
================ ===============
Net income (loss) per common share:
Income (loss) before extraordinary item $ (.21) $ (.25)
Extraordinary item (.03)
----------------- ---------------
Net income (loss) $ (.24) $ .25
================ ===============
Weighted average number of common
shares outstanding 5,526 7,753
================ ===============
</TABLE>
F-26
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INTANGIBLE ASSETS:
Intangible assets consist of the following at December 31, 1993
and 1994 (In thousands):
<TABLE>
<CAPTION>
1993 1994
---- ----
<S> <C> <C>
Goodwill $ 2,308 $ 11,186
Deferred startup costs 172 491
Software development costs 68 186
Other 176 198
-------------- ---------------
2,724 12,061
Accumulated amortization 376 863
-------------- ---------------
$ 2,348 $ 11,198
============== ===============
</TABLE>
NOTE 6 - ACCRUED EXPENSES:
Accrued expenses at December 31, 1993 and 1994 consist of the
following (In thousands):
<TABLE>
<CAPTION>
1993 1994
---- ----
<S> <C> <C>
State sales and excise taxes $ 1,195 $ 861
Deferred lease obligations 154 150
Compensation 77 417
Property taxes 72 140
Concession fees 65 102
Other 506 712
-------------- ---------------
$ 2,069 $ 2,382
============== ===============
</TABLE>
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
Long-term debt and capital lease obligations at December 31, 1993
and 1994 consist of the following (table amounts in thousands):
<TABLE>
<CAPTION>
1993 1994
---- ----
<S> <C> <C>
Revolving $4,000,000 credit line, due in monthly installments
of approximately $36,500 commencing March 1995 and bearing
interest at 2% above prime rate (10.5% at
December 31, 1994) (Note 8) $ - $ 1,009
Initial term loan, due in quarterly installments of $50,000
commencing November 24, 1994, with final payment of $700,000
due May 1996 and bearing
interest at 2% above prime rate 950
</TABLE>
F-27
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED):
<TABLE>
<CAPTION>
1993 1994
---- ----
<S> <C> <C>
Notes payable to vendors, non-interest bearing
due in aggregate quarterly installments of
approximately $249,000 through June 1995 1,615 498
Promissory note payable in semi-annual
installments through May 31, 1996 and
bearing interest at 10% per annum (see below) 750 268
Promissory note, $550,000 original face amount discounted at
7.75%, payable in quarterly installments of $25,000 through
March 31, 1999, collateralized by commitment to issue
106,250 shares of
Series C Preferred Stock 428 359
Promissory note, $450,000 original face amount, non-interest
bearing, payable in quarterly installments of $16,071
through
June 30, 1999 353 289
Capital lease obligations, collateralized
by related telecommunications and data
processing equipment and all of the assets
acquired from Access (Note 4) 573 1,353
-------------- ---------------
3,719 4,726
Less current portion 1,942 1,840
-------------- ---------------
$ 1,777 $ 2,886
============== ===============
</TABLE>
In connection with the Company's 1992 restructuring (Note 3),
approximately $3,300,000 of vendor payables were converted to
non-interest bearing notes payable. As part of the restructuring,
the Company also renegotiated the terms of a $450,000 promissory
note. Prior to the restructuring, the note provided for interest
at the prime rate plus 1% and was due in 1990. As of December 31,
1992, the Company was negotiating the settlement of a $600,000
promissory note, which was subsequently settled for a $750,000
promissory note, with interest at 10% per annum. In connection
with the restructuring, approximately $1,500,000 of capital lease
obligations was forgiven. As of December 31, 1992, one settlement
requiring a cash payment of $588,000 had not been completed. A
payment of $588,000 plus penalties and interest of $50,000 was
made in 1993.
F-28
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED):
In May 1994, the Company entered into a $5,000,000 financing
agreement with a bank. The agreement provides for a revolving
credit line for a maximum, as defined, of $4,000,000 to be used
for expansion in the shared tenant services business. Aggregate
drawings on the line convert semi-annually, through May 1996, to
three year term loans. In addition, the agreement provides for a
$1,000,000 term loan. The loans are collateralized by certain
assets of the Company. The agreement provides for, among other
things, the Company to maintain certain financial covenants. As of
December 31, 1994, the Company was in violation of certain of
these covenants and on March 31, 1995 received a waiver of those
covenants for the year ended December 31, 1994. The Company was in
compliance with these covenants at April 11, 1995.
Scheduled aggregate payments on long-term debt and capital lease
obligations are as follows (In thousands):
<TABLE>
<CAPTION>
CAPITAL LEASE
YEAR ENDING DECEMBER 31: LONG-TERM DEBT OBLIGATIONS
-------------- -----------
<S> <C> <C>
1995 $ 1,344 $ 596
1996 1,280 414
1997 500 333
1998 193 190
1999 56 28
--------------- --------------
$ 3,373 1,561
===============
Less amount representing interest 207
Present value of future payments,
including current portion of $497 $ 1,354
==============
</TABLE>
Telecommunications and data processing equipment includes assets
acquired under capital leases with a net book value of
approximately $514,000 and $1,534,000 as of December 31, 1993 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 $500,000 upon
redemption of the warrant, and therefore, has valued the warrant
at the present value of the minimum guarantee discounted at
11.25%. The discount is being amortized on a straight-line basis
over four years, the expected term of the loan.
NOTE 9 - STOCKHOLDERS' EQUITY:
The Company is authorized to issue 10,000,000 shares of preferred
stock, issuable from time to time in one or more series with such
rights, preferences, privileges and restrictions as determined by
the directors. In 1994, the Company increased its authorized
number of shares of common stock to 20,000,000.
F-29
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED):
On August 28, 1992, the Board of Directors approved a one-for-four
reverse stock split of common stock and the par value of common
stock was increased from $.001 to $.004 per share. The applicable
number of common share and per common share information herein
have been retroactively restated to reflect the effect of the
reverse split.
In September 1992, the Company completed a private placement to
sell to certain investors 1,250,000 shares of its common stock at
$5 per share. The Company received $5,780,000, net of
underwriters' commissions of $470,000 and including subscriptions
totalling $162,980 collected subsequent to December 31, 1992. A
commission of $446,750 was paid to a firm, one of whose principals
is a director and stockholder of the Company.
In connection with the 1992 restructuring (Note 3), all Series A
and B Preferred Stock, including $327,920 of accrued dividends,
were converted into Series C Preferred Stock. At that time, Series
A and Series B Preferred Stock were eliminated. Series C Preferred
Stock is entitled to a liquidation value of $4 per share and
dividends of $.32 per share per annum payable quarterly in
arrears, and the shares are non-voting. These shares are
convertible into common stock, at the holder's option, on a one
share of common stock for two shares of Series C Preferred Stock
basis, at any time, subject to certain anti-dilution protection
for the Preferred Stockholders. At the Company's option, the
Series C Preferred Stock is redeemable, in whole or in part, at
any time after June 30, 1993, at $6 per share plus all accrued
dividends.
In December 1993, the Company commenced a private placement to
sell to certain investors units consisting of one share of Series
D Preferred Stock and one warrant to purchase one share of common
stock. As of December 31, 1994, the Company had sold 456,900 units
for net proceeds of $1,739,659, after deducting expenses of
$430,616. Series D Preferred Stock is entitled to dividends of 5%
per annum payable quarterly and may be redeemed for $7 per share,
plus all accrued dividends, at the option of the Company. The
shares are non-voting and are convertible into shares of the
Company's common stock on a one-for-one basis at the holder's
option. The shares rank senior to all shares of the Company's
common stock and junior to Series C Preferred Stock. The common
stock purchase warrants are exercisable at a per share price of
$5.75. In connection with the offering, the investment banking
firm received warrants to purchase 15,600 shares of the Company's
common stock at an exercise price of $5.75 per share. The Company
has the right to require the holder to exercise the warrants, and
if not exercised, they will expire in the event that the Company's
common stock trades at or above $8.50 per share. As of December
31, 1994, no warrants had been exercised.
In May and June 1994, the Company sold, through a private
placement to certain investors, 1,328,700 shares of common stock
and an equal number of warrants, for net proceeds of $4,511,558,
after deducting expenses of $371,067. The warrants are exercisable
prior to June 26, 1999 at a per share price of $4.25, subject to
certain anti-dilution protection. As of December 31, 1994, no
warrants had been exercised. The proceeds from this offering were
used for the Access acquisition (Note 4).
In June 1994, the Company issued 400,000 shares of Series E
Preferred Stock, $.01 par value, and 700,000 shares of Series F
Preferred Stock, $.01 par value, in connection with the Access
acquisition.
F-30
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCKHOLDERS' EQUITY (CONTINUED):
Series E Preferred Stock is entitled to a liquidation value of
$3.75 per share and dividends of $.30 per share per annum,
payable cumulatively in the form of cash or the Company's common
stock, and the shares are non-voting. The shares rank senior to
common stock, junior to Series C Preferred Stock and on par with
Series F Preferred Stock. The Series E Preferred Stock previously
issued was converted into 400,000 shares of common stock in
January 1995. In addition, upon conversion, the holders received
warrants, which expire on December 31, 1999, to purchase 175,000
shares of common stock, at an exercise price of $4.25 per share,
subject to certain anti-dilutive provisions.
Series F Preferred Stock is entitled to a liquidation value of
$5.00 per share and no dividends. The shares are senior to common
stock and junior to Series C Preferred Stock. These shares are
convertible on July 1, 1995 into common stock at the liquidation
value, as adjusted and defined, and subject to certain
anti-dilution adjustments.
Additionally, the Company issued warrants to the sellers of
Access to purchase 225,000 shares of the Company's common stock
at an exercise price of $4.25 per share, subject to certain
anti-dilution adjustments.
The following table summarizes the number of common shares
reserved for issuance as of December 31, 1994. There were no
preferred shares reserved for issuance as of December 31, 1994.
Common stock purchase warrants 2,935,223
Preferred stock 2,134,504
---------
5,069,727
=========
NOTE 10 - RESTATEMENT OF 1993 FINANCIAL STATEMENTS:
The Company has restated its 1993 consolidated financial
statements to reflect the write-off of certain startup costs of
approximately $120,000, previously capitalized, relating to
certain cellular telephone operations (In thousands, except per
share data).
<TABLE>
<S> <C>
Income before extraordinary item:
As previously reported $ 410
As adjusted 290
Net income:
As previously reported 260
As adjusted 140
Net income (loss) per common share before extraordinary
item:
As previously reported .01
As adjusted (.01)
Net loss per common share:
As previously reported (.02)
As adjusted (.04)
Accumulated deficit:
As previously reported 24,128
As adjusted 24,248
</TABLE>
F-31
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - STOCK OPTION PLANS:
The Company has non-qualified stock option plans which provide
for the grant of common stock options to officers, directors,
employees and certain advisors and consultants at the discretion
of the Board of Directors (Committee). All options granted are
exercisable at a minimum price equal to the fair market value of
the Company's common stock at the date of grant, and are
exercisable in accordance with vesting schedules set individually
by the Committee. As of December 31, 1994, as amended on April
11, 1995, 1,157,146 shares of common stock are reserved for
options, including options exercised to date, and the term of the
options granted is from five to ten years. The April 11, 1995
amendment is awaiting stockholder approval. The activity in the
plans was as follows:
<TABLE>
<CAPTION>
Exercise Price Per Share
------------------------
Number of Weighted
Options Range Average
------- ----- -------
<S> <C> <C> <C>
Balance outstanding, January 1, 1992 368,187 $ 1.72-24.50 $ 4.08
Granted 61,375 5.00 5.00
Expired (21,583) 2.84-24.50 17.09
Exercised (53,938) 1.72- 2.84 2.06
------------
Balance outstanding, December 31, 1992 354,041 1.72-12.00 3.77
Granted 173,500 4.00- 5.50 5.32
Expired (28,780) 2.84-12.00 10.19
Exercised (35,000) 1.72- 2.84 2.36
------------
Balance outstanding, December 31, 1993 463,761 1.72-11.00 4.06
Granted 317,000 3.25-4.50 3.60
Expired (59,062) 4.00-5.50 5.43
Exercised (25,000) 2.84 2.84
------------ ------------------- ---------
Balance outstanding, December 31, 1994 696,699 $ 1.72-11.00 $ 3.78
============ =============== =========
</TABLE>
At December 31, 1994, options to purchase 314,695 shares of common
stock were exercisable.
In September 1994, the Board of Directors adopted the 1994 Director
Option Plan (the Director Plan) pursuant to which 250,000 shares of
common stock are reserved for issuance upon the exercise of options
to be granted to non-employee directors of the Company. Under the
Director Plan, an eligible director will automatically receive
non-statutory options to purchase 15,000 shares of common stock at
an exercise price equal to the fair market value of such shares at
the date of the grant. Each option shall vest over a three year
period, but generally may not be exercised more than 90 days after
the date an optionee ceases to serve as a director of the Company,
and expires after ten years from date of grant. As of December 31,
1994, options to purchase 105,000 shares of common stock have been
granted at an exercise price of $4.38. The Plan is awaiting
stockholder approval.
F-32
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - RETIREMENT AND SAVINGS PLAN:
On March 3, 1989, the Company adopted the Shared Technologies
Inc. Savings and Retirement Plan (the Plan). The Plan covers
substantially all of the Company's employees and the Company is
applying for compliance with section 401(k) of the Internal
Revenue Code. Participants in the Plan may elect to make
contributions up to a maximum of 20% of their compensation. For
each participant, the Company will make a matching contribution
of one-half of the participant's before and after tax
contributions up to 5% of the participant's compensation.
Matching contributions may be made in the form of the Company's
common stock. Participants vest in the matching contributions at
the rate of 33% per year. At December 31, 1993 and 1994, the Plan
owned 51,720 and 93,430 shares of the Company's common stock,
respectively.
NOTE 13 - INCOME TAXES:
For 1992, the Company recorded a provision for minimum federal
and state income taxes of $45,000, after the benefit of utilizing
net operating loss (NOL) carryforwards of approximately
$3,000,000. At December 31, 1994, the Company's NOL carryforward
for federal income tax return purposes is approximately
$22,700,000 expiring between 2001 and 2007. NOL's available for
state income tax purposes are less than those for federal
purposes and generally expire earlier than the federal NOL's.
Limitations will apply to the use of NOL's in the event certain
changes in Company ownership occur in the future.
For the years ended December 31, 1993 and 1994, taxes computed at
the statutory federal rate differ from the Company's effective
rate due primarily to the availability of NOL's.
The components of deferred income tax assets (liabilities) as of
December 31, 1993 and 1994 are as follows (In thousands):
<TABLE>
<CAPTION>
1993 1994
<S> <C> <C>
Tax effect of net operating loss carryforwards $ 9,789 $ 9,011
Financial reserves not yet tax deductible 130 233
Equipment (1,114) (1,200)
Goodwill (107)
---------- ----------
Deferred income tax asset 8,805 7,937
Valuation allowance (8,805) (7,387)
---------- ----------
Net deferred tax asset $ - $ 550
========= ==========
</TABLE>
F-33
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - INCOME TAXES (CONTINUED):
At December 31, 1994, the Company's net operating losses of
$22,700,000 are included in the gross deferred income tax asset
of $7,937,000, of which $550,000 was recorded as a deferred tax
asset, and the balance reserved through a valuation allowance of
$7,387,000. The valuation allowance was decreased by $211,000 and
$1,418,000, respectively, for the years ended December 31, 1993
and 1994.
SFAS No. 109, requires that the Company record a valuation
allowance when it is "more likely than not that some portion or
all of the deferred tax asset will not be realized". The ultimate
realization of this deferred tax asset depends on the ability to
generate sufficient taxable income in the future. The Company has
undergone substantial restructuring resulting in a lower and more
competitive cost structure. While management believes that the
total deferred tax asset will be fully realized by future
operating results together with tax planning opportunities, the
losses in recent years and a desire to be conservative make it
appropriate to record a valuation allowance.
NOTE 14 - COMMITMENTS AND CONTINGENCIES:
Contingencies - The Company had been the provider of
telecommunications services at the Jacob K. Javits Convention
Center (the Center) in New York City. Effective January 1, 1992,
as a result of a contractual dispute with the New York Convention
Center Operating Corporation (CCOC), the Company no longer
provided services at the Center. A claim for approximately
$5,400,000 was filed against the Company by CCOC for damages. In
November 1993, the litigation with CCOC was settled and provided
for the Company to pay $25,000 and issue a $550,000 note payable
over five years, with no interest. The present value of the note
was accrued by the Company (Note 7).
While providing services at the Center, the Company licensed the
right to provide certain public pay telephone services at the
Center to Tel-A-Booth Communications, Ltd. (Tel-A-Booth).
Tel-A-Booth has filed a claim against the Company which seeks
$10,000,000 in damages including $1,400,000 for equipment
purchased, for which no amounts have been provided in the
accompanying consolidated financial statements.
Discovery was completed in early 1995 and revealed certain
inconsistencies in plaintiff's claims, which cast in doubt the
bona fides of plaintiff's demand for $10 million on each of its
claims against the Company. Of the $10 million in claimed
damages, all but $1.4 million represents plaintiff's estimation
of lost profits as a result of the Company's alleged breach of
contract. The remaining $1.4 million represents the cost of the
400 telephones which plaintiff purportedly purchased for
installation at The Center, pursuant to the contract, but which
were ultimately not installed.
Furthermore, the Company has asserted that the pertinent contract
between plaintiff and the Company bars plaintiff's recovery of
lost profits. More specifically, the contract provides that "[n]
either party hereto shall be liable, directly or through any
indemnification provision herein, for consequential (including
lost profits) or indirect damages arising in any way out of this
Agreement." Although plaintiff has argued that the language
surrounding this clause limits its application to claims brought
by third parties and thus the clause was not intended to limit
damage claims between plaintiff and the Company, management
believes this is a further defense to the claim.
F-34
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
With respect to the $1.4 million damage claim, discovery has
revealed that plaintiff borrowed this entire amount from a
private lender, using the telephones to be purchased as
collateral. Subsequent to plaintiff's termination at The Center,
the lender took possession of the collateral (which was then
sold) and forgave the entire indebtedness in exchange. Arguably,
plaintiff suffered no direct damage from the alleged breach of
contract since plaintiff was restored to its initial position
following this transaction.
While any litigation contains an element of uncertainty,
management is of the opinion -based on the current status of the
claim - that the ultimate resolution of this matter should not
have a material adverse effect upon either results of operations,
cash flows or financial position of the Company.
The Company's sales and use tax returns in certain jurisdictions
are currently under examination. Management believes these
examinations will not result in a material change from
liabilities provided.
STC is a party to an employment claim which arose prior to STC's
acquisition of South. STC is seeking indemnification from South
(Note 16).
In addition to the above matters, the Company is a party to
various legal actions, the outcome of which, in the opinion of
management, will not have a material adverse effect on the
Company's financial condition, results of operations and cash
flows.
In November 1994, a subsidiary signed a letter of intent with an
investment banking firm for the purpose of underwriting an
initial public offering. If the public offering is successful and
depending on the number of shares sold, the Company's investment
in the subsidiary would be reduced from approximately 85% to
approximately 60%.
Commitments - The Company has entered into operating leases for
the use of office facilities and equipment, which expire through
October 2004. Certain of the leases are subject to escalations
for increases in real estate taxes and other operating expenses.
Rent expense amounted to approximately $1,676,000, $1,700,000 and
$1,856,000 for the years ended December 31, 1992, 1993 and 1994,
respectively.
Aggregate approximate future minimum rental payments under these
operating leases are as follows:
YEAR ENDING DECEMBER 31:
1995 $ 1,863,000
1996 1,483,000
1997 1,150,000
1998 988,000
1999 815,000
Thereafter 1,178,000
-------------
$ 7,477,000
=============
F-35
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
In January 1994, the Company entered into a consulting agreement
for financial and marketing services, which expires in November
1996. The agreement provides for the following compensation;
$30,000 upon signing, $3,000 per month retainer, and $150,000
upon the attainment of a specific financial ratio, which as of
December 31, 1994 had not been attained. In addition, the
consultant was issued a three year warrant to purchase 300,000
shares of the Company's common stock at a purchase price of $5.75
and a five year warrant to purchase 250,000 shares of the
Company's common stock at a purchase price of $7.00 per share.
The consultant may not compete with the Company during the term
of this agreement and for two years thereafter.
The consultant, through its affiliate, acquired from the Company
approximately 1.5% (31,381 shares) of STC's common stock at a
price of $.08 per share.
In connection with the acquisition of East, STC entered into a
three year consulting agreement, providing that during the first
two years of the agreement the former owner is to be paid an
annual consulting fee equal to 3% of STC's total cellular
telephone rental revenues in excess of $4,000,000. In addition,
an annual bonus of $100,000 is payable if total cellular
telephone rental revenues exceed $5,000,000 per annum. The former
owner may not engage in any business competing with STC, within a
certain geographical area. For the year ended December 31, 1994,
approximately $203,000 of fees relating to this agreement were
incurred.
In February 1994, the Company entered into a consulting agreement
with a company controlled by the founder of Road and Show. The
agreement, which was amended effective September 1, 1994 and
expires December 31, 1996, provides for compensation of $205,000
and $200,000 for 1995 and 1996, respectively. In addition, the
original agreement provided for the issuance of 31,381 shares of
STC common stock, with a value ascribed thereto of $2,500 ($.08
per share). During the term of the agreement and for two years
thereafter, the consultant may not compete with STC in the
business of renting cellular telephones anywhere in the United
States, Mexico and Canada. The consultant also received options
to purchase 31,381 shares of STC's common stock at an exercise
price, as amended, of $3.675 per share, pursuant to STC's stock
option plan.
In connection with the Access acquisition, the Company has
entered into two employment agreements with former owners of
Access. Each agreement is for three years expiring in June 1997.
If terminated without cause, the Company shall pay all
compensation due under the agreements for the lesser of eighteen
months or the time remaining in the initial term. Aggregate
minimum payments under the agreements during the years ending
December 31, 1995, 1996 and 1997 are $330,000, $342,500 and
$175,000, respectively. In addition, STI assumed a certain
contract for telecommunication services requiring annual minimal
usage of approximately $4.5 million through October 1998.
F-36
<PAGE>
SHARED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - RELATED PARTY TRANSACTIONS:
In 1992, the Company issued 12,500 shares of common stock to a
Board of Directors member and former shareholder of a Company
acquired (BTC). The shares were issued since the Company was
unable to obtain the release of his guarantee of certain BTC
obligations in connection with the 1992 restructuring (Note 3).
The Company has also agreed to indemnify the individual for any
future amounts incurred by him related to his guarantee. The fair
value of the shares issued was recorded as an expense in 1992.
As of December 31, 1993, approximately $288,000 had been paid for
life insurance premiums made on behalf of the Company's
president, which was to be repaid from the proceeds of a
$2,500,000 face value life insurance policy which was owned by
the president. In January 1994, the beneficiary on the policy was
changed to the Company in order to reduce the premium payments
required by the Company. As of December 31, 1994, the amount due
to the Company for premiums paid exceeded the cash surrender
value of the policy by approximately $135,000. Accordingly, the
President has agreed to reimburse the Company for this amount.
The receivable and cash surrender value are reflected in other
assets in the accompanying consolidated balance sheets.
NOTE 16 - SUBSEQUENT EVENTS:
During January 1995, the Company commenced a private placement to
sell to a certain investor 300,000 shares of common stock at
$4.25 per share, pursuant to Regulation S of the Securities Act
of 1933. In connection with this transaction, the underwriter
received a commission of $120,000 and a five year common stock
purchase warrant to acquire 30,000 shares of the Company's common
stock for $5.00 per share.
On January 17, 1995, STC filed a complaint against South (which
includes its affiliates). The complaint alleges that the failure
by South to disclose a certain claim constituted a breach of the
asset purchase agreement. STC seeks damages and a declaratory
judgement that the payment in the Company's common stock to
South, pursuant to the agreement, should be reduced by the amount
of any damages caused to the Company by such breach. In addition,
the Company seeks indemnification from South, including requiring
South to defend the Company from and against such claim.
On January 27, 1995, South commenced an action against STC
alleging, among other things, that STC's failure to deliver to
South the Company's common stock under the asset purchase
agreement constituted a breach of contract and fraud. South is
seeking unspecified actual and punitive damages of not less than
$10,000,000. STC sought a stay of this action and is considering
depositing the Company's common stock with the Court. Although it
has not received an opinion of counsel with regard to this
matter, STC believes it has meritorious defenses to this action.
In the event of an adverse outcome in this action, the Company
does not believe that damages payable would be material unless
the market value of the Company's common stock materially
decreases prior to delivery thereof.
F-37
<PAGE>
Report of Independent Auditors
The Partners
Access Telecommunications Group, L.P.
Dallas, Texas
We have audited the accompanying balance sheets of Access Telecommunication
Group, L.P. (the Partnership) as of December 31, 1991 and 1992, and the related
statements of operations, partners' equity (deficit), and cash flows for the
years then ended. These financial statements are the responsibility of the
Partnership'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 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 financial statements referred to above present fairly, in
all material respects, the financial position of Access Telecommunication Group,
L.P. at December 31, 1991 and 1992, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
May 12, 1993
F-38
<PAGE>
Access Telecommunication Group, L.P.
Balance Sheets
<TABLE>
<CAPTION>
December 31
1991 1992
----------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 475,939 $ 144,163
Trade accounts receivable, net of allowance for
doubtful accounts of $138,285 in 1991 and
$65,472 in 1992 3,171,114 2,958,048
Current portion of investment in equipment
leased to others (Note 4) 68,789 63,090
Inventories and prepaid expenses 19,275 948,126
------- --------
Total current assets 3,735,117 4,113,427
Investment in subsidiary (Note 1) - 1,000
Advances to affiliate, at cost (Note 7) 142,997 -
Long-term portion of investment in equipment
leased to others (Note 4) 166,807 153,846
Furniture and equipment:
Furniture and equipment (Note 2) 1,320,079 1,472,091
Telecommunication equipment leased pursuant
to capital leases (Note 3) 458,653 1,167,728
-------- ----------
1,778,732 2,639,819
Accumulated depreciation and amortization 1,016,203 1,372,319
--------- ----------
762,529 1,267,500
Organization costs, net of accumulated amortization
of $8,063 in 1991 and $23,090 in 1992 67,070 62,721
------- -------
Total assets $4,874,520 $ 5,598,494
=========== ===========
</TABLE>
F-39
<PAGE>
<TABLE>
<CAPTION>
December 31
1991 1992
----------------------
<S> <C> <C>
Liabilities and Partners' (Deficit) Equity
Current liabilities:
Current portion of notes payable (Note 2) $ 9,995 $ 390,060
Accounts payable and accrued liabilities 3,896,968 4,051,077
Deferred revenue 83,968 169,291
Current portion of capital lease obligations (Note 3) 207,653 323,682
-------- --------
Total current liabilities 4,198,584 4,934,110
Long-term portion of notes payable (Note 2) - 75,588
Long-term portion of capital lease obligations (Note 3) 234,789 651,768
Commitments (Notes 3 and 6)
Partners' (deficit) equity:
General partner (110,260) -
Limited partners' 551,407 (62,972)
-------- ---------
Total partners' (deficit) equity 441,147 (62,972)
-------- ---------
Total liabilities and partners' (deficit) equity $4,874,520 $5,598,494
========== ==========
</TABLE>
See accompanying notes.
F-40
<PAGE>
Access Telecommunication Group, L.P.
Statement of Operations
<TABLE>
<CAPTION>
Year ended December 31
1991 1992
----------------------
<S> <C> <C>
Revenues (Note 5):
Shared tenant services and facilities management $ 5,081,547 $ 5,920,864
System sales 1,343,943 2,281,744
Access plus 7,730,849 6,891,314
Consulting and contract services 393,242 254,151
Other operating revenue 38,958 44,091
------- -------
14,588,539 15,392,164
Costs and expenses:
Shared tenant services and facilities management 3,777,222 4,019,838
System sales 1,160,950 1,917,938
Access plus 6,226,008 5,561,111
Consulting and contract services 149,969 25,248
Selling, general, and administrative 3,305,532 3,991,345
Depreciation and amortization 273,830 369,773
-------- --------
14,893,511 15,885,253
Other income (expense):
Interest income 13,417 30,428
Other income 97,125 32,434
Interest expense (44,705) (73,892)
Loss on investment in affiliate (Note 7) (31,289) -
--------- ---
Net loss $ (270,424) $ (504,119)
=========== ===========
</TABLE>
See accompanying notes.
F-41
<PAGE>
Access Telecommunication Group, L.P.
Statements of Partners' (Deficit) Equity
<TABLE>
<CAPTION>
General General Limited Limited Limited
Partner-1 Partner-2 Partner-1 Partner-2 Partner-3 Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1990 $1,063,557 $ - $ 6,017 $ 3,008 $ - $1,072,672
Reallocation adjustment to
beginning balance - - (30) 30 - -
Distributions (348,517) - (7,711) (4,873) (361,101)
Gross income allocation in
accordance with partnership
agreement (3,469) - 1,634 1,835 - -
Net income through
September 30, 1991 90,966 - - - - 90,966
----------------------------------------------------------------------------------------
Balance at September 30, 1991 802,537 - - - - 802,537
Transfer of interest from general
partner to limited partner due
to amendment of partnership
agreement (802,537) - - - 802,537 -
Net loss for the period from
October 1, 1991 through
December 31, 1991 - (3,614) (70,507) (36,139) (251,130) (361,390)
Reallocation of losses in
accordance with partnership
agreement - (106,646) 70,507 36,139 - -
---------------------------------------------------------------------------------------
Balance at December 31, 1991 - (110,260) - - 551,407 441,147
Gross income allocation in
accordance with partnership
agreement - 110,260 - - (110,260) -
Net loss allocation in
accordance with partnership
agreement - - (45,000) (30,000) (429,119) (504,119)
-----------------------------------------------------------------------------------------
Balance at December 31, 1992 $ - $ - $(45,000) $(30,000) $ 12,028 $ (62,972)
=========================================================================================
</TABLE>
See accompanying notes.
F-42
<PAGE>
Access Telecommunication Group, L.P.
Statement of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1991 1992
----------------------
<S> <C> <C>
Operating Activities
Net loss $ (270,424) $(504,119)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 273,830 369,773
Provision for doubtful acounts 66,046 (72,813)
Changes in operating assets and liabilities:
Trade accounts receivable (542,780) 285,879
Inventories and prepaid expenses 53,452 (928,851)
Payments received on sales-type leases 49,709 80,532
Accounts payable and accrued liabilities 1,714,073 154,109
Deferred revenue 43,968 85,323
----------- ----------
Net cash (used in) provided by operating activities 1,387,874 (530,167)
Investing Activities
Proceeds from disposal of furniture and equipment 208,121 773,105
Purchases of furniture and equipment (569,291) (903,224)
Investment in subsidiary - (1,000)
Investment in and advances to affiliate (24,200) 142,997
Capitalization of organization costs (75,133) (10,678)
------------ ----------
Net cash used in investing activities (460,503) 1,200
Financing Activities
Net increase(decrease) in notes payable (4,227) 455,653
Payments of capital lease obligations (164,331) (258,462)
Partners' distributions (361,101) -
------------ ----------
Net cash provided by (used in) financing activities (529,659) 197,191
------------ ----------
Net decrease in cash 397,712 (331,776)
Cash at beginning of year 78,227 475,939
----------- ----------
Cash at end of year $475,939 $144,163
=========== ==========
Supplemental Disclosure of Cash Flow Information
Interest paid during the year $ 44,705 $ 68,438
=========== ==========
</TABLE>
See accompanying notes.
F-43
<PAGE>
ACCESS TELECOMMUNICATION GROUP, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1991 AND 1992
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Access Telecommunications Group, L.P. (Access or the Partnership) was formed
January 1, 1990, as a Texas limited partnership. The formation of the
Partnership originally resulted from the combination of Access Communication
Management, a Texas partnership, and Martnet, Inc. (Martnet), a Texas
corporation. This combination was accounted for in a manner similar to a pooling
of interests, with Martnet serving as general partner and two officers of Access
serving as limited partners. On October 1, 1991, the partnership agreement was
amended and restated, with Access Telemanagement, Inc. serving as general
partner, and a trust and two officers of Access serving as limited partners. On
April 15, 1993, the partnership agreement was further amended, effective January
1, 1992 to provide for a change in the method of partnership allocations. The
Partnership provides primarily telecommunication services to tenants of office
buildings. Telecommunication services include provision of long distance, sales
of telecommunication systems and equipment, and management of telecommunication
facilities and equipment. The partnership transacts a significant volume of
business with entities that are owned by the Trammel Crow Company, a related
party.
INVESTMENT IN SUBSIDIARY
Access has formed a wholly owned subsidiary, Access Network Services, Inc., for
the primary purpose of providing long distance telecommunication services.
INVESTMENT IN AFFILIATE
Access owns 50% of Access Distribution and Service (ADS), a partnership formed
to obtain contracts to install telecommunications wiring in commercial
facilities. Access accounts for its investment in ADS using the cost method of
accounting.
ALLOCATION OF PROFITS AND LOSSES AND DISTRIBUTION OF CASH FLOW
The partnership agreement provides for the allocation of gross income to the
general partner of an amount equal to a preferred return, which accrues at prime
plus 1% on unreturned priority capital, as defined ($2,811,175 at December 31,
1991 and 1992). Further, an allocation of 80% of any remaining partnership
income will be made until the aggregate amount so allocated equals $989,817. In
accordance with the amendment of the partnership agreement, effective October 1,
1991, the rights to the above allocations were acquired by the trust when it
became a limited partner. The remainder of the Partnership's
F-44
<PAGE>
ACCESS TELECOMMUNICATION GROUP, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
profits or losses are allocated to the partners in proportion to their
respective interests subject to certain limitations with respect to loss
allocations.
The partnership agreement further provides for Access to distribute 80% of
partnership cash flow, as defined, to the general partner or, after October 1,
1991, to the trust serving as limited partner, until both unpaid preferred
returns and unreturned priority capital of $2,811,175 are paid. The remaining
20% of cash flow is to be distributed to the partners in proportion to their
respective interests after target liquidity level, as defined, is achieved.
RISK CONCENTRATION
Financial instruments that potentially subject the Partnership to concentrations
of credit risk are primarily trade accounts receivable. Concentrations of credit
risk with respect to these receivables are limited because of the large number
of customers in the Partnership's customer base and their dispersion across
different geographic areas. The Company maintains an allowance for losses based
upon the expected collectability of all trade accounts receivable.
INVENTORY
Inventory is carried at the lower of cost or market using the first-in,
first-out (FIFO) method.
FURNITURE AND EQUIPMENT
Furniture and equipment include equipment leased under capital lease agreements
and are recorded at cost. Depreciation and amortization are computed using the
straight-line method over the lesser of the estimated useful lives of the assets
or the terms of the leases, generally from three to five years.
REVENUE
Telecommunication revenues are recognized when customers use telecommunication
services. Sales of telecommunication equipment are recognized upon delivery to
the customer.
F-45
<PAGE>
ACCESS TELECOMMUNICATION GROUP, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The results of operations of Access will be included in the income tax returns
of the respective partners; accordingly, no provision for income taxes is
recorded in the accompanying financial statements.
The Partnership's income tax returns are subject to examination by federal and
state taxing authorities. If such examinations result in changes to the
Partnership's income, the taxable income of the partners will be changed
accordingly.
2. NOTES PAYABLE
Notes payable consisted of notes to vendors and a lender with interest rates
ranging from 6% to 14.44%. The notes are collateralized by telecommunications
and computer equipment. Maturities of notes payable at December 31, 1992, are as
follows:
1993 $390,060
1994 37,800
1995 37,788
----------
$465,648
==========
3. LEASE COMMITMENTS
Access leases certain equipment pursuant to both noncancelable operating and
capital lease agreements and leases office space pursuant to operating leases.
The capital leases have terms from two to five years and provide for the
purchase of equipment for a nominal amount or at fair market value at the end of
the lease. The Partnership's operating leases are generally renewable at the end
of the lease terms. The operating leases for equipment provide for the purchase
of the equipment at the end of the lease terms.
Certain of Access' lease agreements for office space are with related parties.
During 1991 and 1992, Access incurred rent expense totaling approximately
$273,000 and $361,000, respectively, for leases with related parties.
F-46
<PAGE>
ACCESS TELECOMMUNICATION GROUP, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. LEASE COMMITMENTS (CONTINUED)
Following is a schedule of future minimum lease payments under both capital and
operating noncancelable leases as of December 31, 1992:
<TABLE>
<CAPTION>
Capital Operating
<S> <C> <C>
1993 $ 390,421 $ 553,870
1994 278,899 484,220
1995 216,080 372,266
1996 147,924 110,672
1997 79,325 13,993
-----------------------------------
1,112,649 $1,535,021
==========
Amount representing interest (137,199)
--------------
Future minimum lease payments $ 975,450
==============
</TABLE>
Total rent expense for operating leases was $712,200 and $802,359 for the years
ended December 31, 1991 and 1992, respectively. Amortization of leased assets is
included in depreciation and amortization expense.
4. NET INVESTMENT IN EQUIPMENT LEASED TO OTHERS
The partnership leases equipment to others under sales-type leases. Certain of
these leases are with related parties. Future minimum lease payments due from
related parties totaled $43,815 and $35,024 as of December 31, 1991 and 1992
respectively.
Following are the future minimum lease payments as of December 31, 1992:
1993 $ 88,438
1994 75,342
1995 59,235
1996 46,880
1997 and thereafter 6,372
----------
276,267
Amount representing interest (59,331)
---------
Net investment in equipment leased to others $216,936
==========
F-47
<PAGE>
ACCESS TELECOMMUNICATION GROUP, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. RELATED PARTY TRANSACTIONS
The Partnership provides telecommunications services to certain related parties,
including entities that are owned by the Trammell Crow Company. Revenues
generated from all related parties during 1991 and 1992 totaled approximately
$3,173,856 and $3,287,214, respectively. (Also, see Notes 1, 2, 3 and 4).
6. COMMITMENT
Under the terms of the Partnership's agreements with some of its primary long
distance usage providers, Access is committed to purchase certain minimum usage
amounts each year from 1993 through 1997.
7. INVESTMENT IN AND ADVANCES TO AFFILIATE
During 1991, the investment in ADS of $31,289 was written off since Access did
not expect to recover its investment. The advances of $142,997 recorded as of
December 1991 were realized during 1992.
8. DEFINED CONTRIBUTION 401(K) PLAN
Access provides a 401(k) plan for all employees, once enrollment requirements
for participation are met. Access matches employee contributions up to a defined
maximum percentage. This plan was initiated during 1991. Approximately $8,700
and $26,433 represent employer matching contributions recognized as expense in
1991 and 1992, respectively.
Report of Independent Auditors
The Partners
Access Telecommunications Group, L.P.
Dallas, Texas
We have audited the accompanying balance sheets of Access Telecommunication
Group, L.P. (the Partnership) as of December 31, 1992 and 1993, and the related
statements of operations, partners' equity (deficit), and cash flows for the
years then ended. These financial statements are the responsibility of the
Partnership'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 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 financial statements referred to above present fairly, in
all material respects, the financial position of Access Telecommunication Group,
L.P. at December 31, 1992 and 1993, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
April 22, 1994
F-48
<PAGE>
Access Telecommunication Group, L.P.
Balance Sheets
<TABLE>
<CAPTION>
December 31
1992 1993
---------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 144,163 $ 76,005
Trade accounts receivable, net of allowance for
doubtful accounts of and $65,472 in 1992
$118,146 in 1993 2,958,048 3,178,635
Current portion of investment in equipment
leased to others (Note 4) 63,090 103,089
Inventories and prepaid expenses 948,126 31,178
Due from affiliate (Note 7) -- 14,455
--- -------
Total current assets 4,113,427 3,403,362
Investment in subsidiary 1,000 1,000
Long-term portion of investment in equipment
leased to others (Note 4) 153,846 282,939
Furniture and equipment:
Furniture and equipment 1,472,091 2,011,455
Telecommunication equipment leased pursuant
to capital leases (Note 3) 1,167,728 1,345,340
---------- ----------
2,639,819 3,356,795
Accumulated depreciation and amortization 1,372,319 1,596,939
---------- ----------
1,267,500 1,759,856
Organization costs, net of accumulated amortization
$23,090 in 1992 of and $40,252 in 1993 62,721 55,659
------- -------
Total assets $ 5,598,494 $ 5,502,816
============ ============
</TABLE>
F-49
<PAGE>
<TABLE>
<CAPTION>
December 31
1992 1993
---------------------
<S> <C> <C>
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable (Note 2) $ 390,060 $ 75,000
Accounts payable 3,551,707 3,073,269
Accrued liabilities 71,085 111,572
Taxes payable 428,285 383,061
Deferred revenue 169,291 444,866
Current portion of capital lease obligations (Note 3) 323,682 451,241
-------- --------
Total current liabilities 4,934,110 4,539,009
Long-term portion of notes payable 75,588 --
Long-term portion of capital lease obligations (Note 3) 651,768 896,269
Commitments (Notes 3 and 6)
Partners' equity (deficit):
General partner -- --
Limited partners' (62,972) 67,538
--------- -------
Total partners' equity (deficit) (62,972) 67,538
--------- -------
Total liabilities and partners' equity (deficit) $ 5,598,494 $ 5,502,816
=========== ===========
</TABLE>
See accompanying notes.
F-50
<PAGE>
Access Telecommunication Group, L.P.
Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1992 1993
---------------------
<S> <C> <C>
Revenues (Note 5):
Shared tenant services $ 5,097,984 $ 6,717,431
System sales 2,334,766 3,918,585
AccessPlus 7,546,121 7,507,254
Consulting and contract services 369,202 390,214
Other operating revenue 44,091 127,022
------- --------
15,392,164 18,660,506
Costs and expenses:
Shared tenant services 3,587,274 4,040,923
Systems sales 1,947,257 3,523,974
AccessPlus 5,952,501 6,061,141
Consulting and contract services 37,103 41,730
Selling, general, and administrative 3,991,345 4,216,811
Depreciation and amortization 369,773 604,116
-------- --------
15,885,253 18,488,695
Other income (expense):
Interest income 30,428 38,758
Other income 32,434 85,019
Interest expense (73,892) (96,160)
Loss on investment in affiliate (Note 7) -- (68,918)
--- --------
Net income (loss) $ (504,119) $ 130,510
========== =========
</TABLE>
See accompanying notes.
F-51
<PAGE>
Access Telecommunication Group, L.P.
Statements of Partners' Equity (Deficit)
<TABLE>
<CAPTION>
GENERAL LIMITED LIMITED LIMITED
PARTNER PARTNER-1 PARTNER-2 PARTNER-3 TOTAL
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1991 $(110,260) $ -- $ -- $ 551,407 $ 441,147
Gross income allocation in
accordance with partnership
agreement 110,260 -- -- (110,260) --
Net loss allocation in
accordance with partnership
agreement -- (45,000) (30,000) (429,119) (504,119)
------------------------------------------------------------------------
Balance at December 31, 1992 -- (45,000) (30,000) 12,028 (62,972)
Net income allocation in
accordance with partnership
agreement -- -- -- 130,510 130,510
-----------------------------------------------------------------------
Balance at December 31, 1993 $ -- $(45,000) $(30,000) $ 142,538 $ 67,538
=======================================================================
</TABLE>
See accompanying notes.
F-52
<PAGE>
Access Telecommunication Group, L.P.
Statement of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1992 1993
-----------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (504,119) $ 130,510
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 369,773 604,116
Provision for doubtful accounts 183,607 138,000
Changes in operating assets and liabilities:
Trade accounts receivable 29,459 (358,587)
Inventories and prepaid expenses (928,851) 916,948
Due from affiliate -- (14,455)
Payments received on sales-type leases 80,532 93,041
Accounts payable and accrued liabilities 154,109 (483,175)
Deferred revenue 85,323 275,575
---------------------------------
Net cash provided by (used in) operating activities (530,162) 1,301,973
INVESTING ACTIVITIES
Proceeds from disposals of furniture and equipment 773,105 859,469
Purchases of furniture and equipment (903,224) (1,400,293)
Investment in subsidiary (1,000) --
Capitalization of organization costs (10,678) (10,100)
Investment in and advances to affiliate 142,997 --
---------------------------------
Net cash used in investing activities (1,200) (550,924)
FINANCING ACTIVITIES
Net (decrease) increase in notes payable 455,653 (390,648)
Payments of capital lease obligations (258,462) (428,559)
-------------- ------------------
Net cash provided by (used in) financing activities 197,191 (819,207)
---------------------------------
Net decrease in cash (331,776) (68,158)
Cash at beginning of year 475,939 144,163
---------------------------------
Cash at end of year $ 144,163 $ 76,005
=================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Capital leases entered into during the year $ 773,105 $ 800,619
=================================
Interest paid during the year $ 68,438 $ 96,585
=================================
</TABLE>
See accompanying notes.
F-53
<PAGE>
Access Telecommunication Group, L.P.
Notes to Financial Statements
December 31, 1992 and 1993
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Access Telecommunication Group, L.P. (Access or the Partnership) was formed
January 1, 1990, as a Texas limited partnership. The formation of the
Partnership originally resulted from the combination of Access Communication
Management, a Texas partnership, and Martnet, Inc. (Martnet), a Texas
corporation. This combination was accounted for in a manner similar to a pooling
of interests, with Martnet serving as general partner and two officers of Access
serving as limited partners. On October 1, 1991, the partnership agreement was
amended and restated, with Access Telemanagement, Inc. serving as general
partner, and a trust and two officers of Access serving as limited partners. On
April 15, 1993, the partnership agreement was further amended, effective January
1, 1992 to provide for a change in the method of partnership allocations. The
Partnership primarily provides telecommunication services to tenants of office
buildings. Telecommunication services include provision of long distance, sales
of telecommunication systems and equipment, and management of telecommunication
facilities and equipment. The Partnership transacts a significant volume of
business with entities that are owned by the Trammel Crow Company, a related
party.
INVESTMENT IN SUBSIDIARY
Access has formed a wholly owned subsidiary, Access Network Services, Inc., for
the primary purpose of providing long distance telecommunication services. This
subsidiary has had no operating activity during 1992 and 1993.
INVESTMENT IN AFFILIATE
Access owns 50% of Access Distribution and Service (ADS), a partnership formed
to obtain contracts to install telecommunications wiring in commercial
facilities. Access accounts for its investment in ADS using the cost method of
accounting (see Note 7).
ALLOCATION OF PROFITS AND LOSSES AND DISTRIBUTION OF CASH FLOW
The partnership agreement provides for the allocation of gross income to the
general partner of an amount equal to a preferred return, which accrues interest
at prime plus 1%, on unreturned priority capital, as defined ($2,788,486 plus
accrued interest of approximately $282,000 and $477,000 at December 31, 1992 and
1993, respectively). Further, an allocation of 80% of any remaining partnership
income will be made until the
F-54
<PAGE>
Access Telecommunication Group, L.P.
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
aggregate amount so allocated equals $989,817. In accordance with the amendment
of the partnership agreement, effective October 1, 1991, the rights to the above
allocations were acquired by the trust when it became a limited partner. The
remainder of the Partnership's profits or losses are allocated to the partners
in proportion to their respective interests subject to certain limitations with
respect to loss allocations.
The partnership agreement further provides for Access to distribute 80% of
partnership cash flow, as defined, to the general partner or, after October 1,
1991, to the trust serving as limited partner, until both unpaid preferred
returns and unreturned priority capital are paid. The remaining 20% of cash flow
is to be distributed to the partners in proportion to their respective interests
after a target liquidity level, as defined, is achieved.
RISK CONCENTRATION
Financial instruments that potentially subject the Partnership to concentrations
of credit risk are primarily trade accounts receivable. Concentrations of credit
risk with respect to these receivables are limited because of the large number
of customers in the Partnership's customer base and their dispersion across
different geographic areas. The Partnership maintains an allowance for losses
based upon the expected collectibility of all trade accounts receivable.
INVENTORY
Inventory is carried at the lower of cost or market using the first-in,
first-out (FIFO) method.
FURNITURE AND EQUIPMENT
Furniture and equipment include equipment leased under capital lease agreements
and are recorded at cost. Depreciation and amortization are computed using the
straight-line method over the lesser of the estimated useful lives of the assets
or the terms of the leases, generally from three to five years.
REVENUE
Telecommunication revenues are recognized when customers use telecommunication
services. Sales of telecommunication equipment are recognized upon delivery to
the customer.
F-55
<PAGE>
Access Telecommunication Group, L.P.
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The results of operations of Access will be included in the income tax returns
of the respective partners; accordingly, no provision for income taxes is
recorded in the accompanying financial statements.
The Partnership's income tax returns are subject to examination by federal and
state taxing authorities. If such examinations result in changes to the
Partnership's income, the taxable income of the partners will be changed
accordingly.
RECLASSIFICATIONS
Certain reclassifications were made to the 1992 financial statements in order to
conform to the current year presentation.
2. NOTES PAYABLE
At December 31, 1993, notes payable consisted of notes to two of the limited
partners. These notes bear interest at 7% per annum and are due in full, with
accrued interest, on July 1, 1994.
At December 31, 1992, notes payable consisted of notes to vendors and a lender
with interest rates ranging from 6% to 14.44%. The notes are collateralized by
telecommunication and computer equipment. During 1993, the vendor notes have
been paid in full and the lender notes have been reclassified as capital lease
obligations.
3. LEASE COMMITMENTS
Access leases certain equipment pursuant to both noncancelable operating and
capital lease agreements and lease office space pursuant to operating leases.
Included in these commitments is financing provided through sale/leaseback
arrangements. During 1992 and 1993, the Partnership sold equipment for
approximately $773,000 and $858,000, respectively, and is leasing it back via
capital leases. Any gains on these transactions have been deferred and are being
recognized over the length of the lease agreements. The capital leases have
terms from two to five years and provide for the purchase of equipment for a
nominal amount or at fair market value at the end of the lease. The
Partnership's operating leases are generally renewable at the end of the lease.
terms. The operating leases for equipment provide for the purchase of the
equipment at the end of the lease terms.
F-56
<PAGE>
Access Telecommunication Group, L.P.
Notes to Financial Statements (continued)
3. LEASE COMMITMENTS (CONTINUED)
Certain of Access' lease agreements for office space are with related parties.
During 1992 and 1993, Access incurred rent expense totaling approximately
$361,000 and $357,000, respectively, for leases with related parties.
Following is a schedule of future minimum lease payments under both capital and
operating noncancelable leases as of December 31, 1993:
Capital Operating
1994 $ 543,449 $ 484,220
1995 427,643 372,266
1996 275,397 110,673
1997 206,798 13,993
1998 90,905 --
---------------------------------
1,544,192 $ 981,152
=============
Amount representing interest (196,682)
--------------
Future minimum lease payments $ 1,347,510
=============
Total rent expense for operating leases was $802,359 and $624,608, for the years
ended December 31, 1992 and 1993, respectively. Amortization of leased assets is
included in depreciation and amortization expense.
4. NET INVESTMENT IN EQUIPMENT LEASED TO OTHERS
The Partnership leases equipment to others under sales-type leases. Certain of
these leases are with related parties. Future minimum lease payments due from
related parties totaled $35,024 and $107,386, as of December 31, 1992 and 1993,
respectively.
Following are the future minimum lease payments due to the Partnership as of
December 31, 1993:
1994 $ 146,358
1995 127,562
1996 110,876
1997 70,367
1998 and thereafter 31,998
-------------
487,161
Amount representing interest (101,133)
--------------
Net investment in equipment leased to others $ 386,028
=============
F-57
<PAGE>
Access Telecommunication Group, L.P.
Notes to Financial Statements (continued)
5. RELATED PARTY TRANSACTIONS
The Partnership provides telecommunications services to certain related parties,
including entities that are owned by the Trammell Crow Company. Revenues
generated from all related parties during 1992 and 1993 totaled approximately
$3,287,214 and $4,260,536, respectively (see Notes 1, 2, 3, and 4).
6. COMMITMENTS
Under the terms of the Partnership's agreements with certain of its primary long
distance usage providers, Access is committed to purchase certain minimum usage
amounts each year from 1994 through 1997.
7. INVESTMENT IN AFFILIATE
The Partnership's investment in ADS was written off in 1991 since Access did not
expect to recover its investment. ADS was inactive during 1992 and 1993. Access
is negotiating with the other 50% partner for the settlement and liquidation of
ADS. Accordingly, Access reported a loss and receivable resulting from the
anticipated settlement and liquidation.
8. DEFINED CONTRIBUTION 401(K) PLAN
Access provides a 401(k) plan for all employees, once enrollment requirements
for participation are met. Access matches employee contributions up to a defined
maximum percentage. This plan was initiated during 1991. Approximately $26,433
and $31,418 represent employer matching contributions recognized as expense in
1992 and 1993, respectively.
F-58
<PAGE>
Access Telecommunication Group, L.P.
Balance Sheets
April 30, 1993 and 1994
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
April 30, 1993 April 30, 1994
CURRENT ASSETS
<S> <C> <C>
Cash $43, 104 (252,880)
Accounts Receivable,
less allowance for doubtful accounts
of $68,565 and $154,831 at April 30, 1993 and 1994 2,751,181 2,997,599
Lease Receivable 214,824 103,562
Prepaid Expenses 3,760 8,527
Inventory 18,981 28,007
Other A/R (10,000) 14,455
------------- -------------
Total Current Assets 3,021,850 2,899,270
============= =============
PROPERTY & EQUIPMENT
Property & Equipment 3,005,935 3,538,471
Accum. Depreciation (1,554,948) (1,807,470)
------------- -------------
OTHER ASSETS
Intangible assets 47,034 49,152
Lease Receivable-Long Term - 248,792
Other 12,890 2,956
------------- --------------
Total Other Assets 59,924 300,900
------------- --------------
TOTAL ASSETS $ 4,532,761 $ 4,931,171
============= ==============
LIABILITIES & EQUITY
CURRENT LIABILITIES
Accounts Payable $ 1,772,317 $ 1,629,467
Phonebills Payable 1,018,220 791,822
Taxes Payable 287,308 412,177
Current Deferred Revenue 340,449 295,772
Current Capital Lease Obligations 277,003 468,075
------------- ------------
TOTAL CURRENT LIABILITIES 3,695,297 3,597,313
LONG TERM LIABILITIES
Long Term Capital Lease 634,149 883,712
Long Term Deferred Revenue 96,710 97,999
Notes Payable 78,207 79,755
------------- ------------
TOTAL LONG TERM LIABILITIES 809,066 1,061,466
PARTNERS' EQUITY
General Partner - -
Limited Partners' 28,398 272,392
------------- ------------
TOTAL PARTNERS' EQUITY 28,398 272,392
------------- ------------
TOTAL LIABILITIES & PARTNERS' EQUITY $ 4,532,761 $ 4,931,171
============= ============
See Accompanying Notes
</TABLE>
F-59
<PAGE>
Access Telecommunication Group, L.P.
Income Statement
For the Four Months Ending April 30, 1993 and 1994
(Unaudited)
<TABLE>
<CAPTION>
REVENUE April 30, 1993 April 30, 1994
<S> <C> <C>
SHARED TENANT SERVICES $ 2,079,769 $ 2,532,515
SYSTEM SALES 1,397,938 768,948
CONTRACT SERVICES 110,385 225,178
ACCESSPLUS 2,519,539 2,305,447
-------------- -------------
TOTAL REVENUE 6,107,631 5,832,088
-------------- -------------
COST OF REVENUE
SHARED TENANT SERVICES 1,308,822 1,471,811
SYSTEM SALES 1,221,931 548,919
CONTRACT SERVICES 8,423 38,089
ACCESSPLUS 2,070,329 1,827,450
MISC COST OF SALES 14,506 10,796
-------------- -------------
TOTAL COST OF REVENUE 4,624,011 3,897,065
-------------- -------------
GROSS MARGIN 1,483,620 1,935,024
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES
SALARIES & RELATED 693,334 821,239
TRAVEL & RELATED 18,320 15,801
GENERAL & ADMIN 469,215 643,657
MISCELLANEOUS 273,975 319,801
-------------- -------------
TOTAL S/G&A EXPENSES 1,454,844 1,800,498
-------------- -------------
OPERATING INCOME 28,776 134,526
NON-OPERATING REVENUE 62,595 70,328
-------------- -------------
NET INCOME $ 91,371 $204,854
-------------- -------------
</TABLE>
F-60
<PAGE>
Access Telecommunication Group, L.P.
Statement of Cash Flows
For The Four Months Ended April 30, 1993 and 1994
(Unaudited)
<TABLE>
April 30, 1993 April 30, 1994
Cash flows from
Operating Activities
<S> <C> <C>
Net Income $91,371 $204,854
Adjustments
Depreciation & amortization 187,638 216,917
Provision for doubtful accounts 32,000 40,000
Changes in assets and liabilities:
Decrease (Increase) in accounts receivable 147,670 141,036
Decrease (Increase) in prepaid expenses and inventories 923,430 (7,311)
Increase (Decrease) in accounts payable and accrued liabilities (973,232) (729,682)
Payments received on sales-type leases 21,069 33,674
Increase(Decrease) in deferred revenue 267,868 (51,095)
----------- -----------
Net cash provided by (used in) operating activities 697,814 (151,607)
Cash flows from Investing Activities
Proceeds from disposals of equipment 116,250 174,623
Capital Expenditures (395,008) (199,139)
Capitalization of organization costs - 121
Net cash used in investing activities (278,758) (24,395)
Cash flows from Financing Activities
Payments received on note receivable 47,874 -
Payments on notes payable (387,441) -
Payments on capital lease obligations (180,548) (152,883)
----------- -----------
Net cash used in financing activities (520,115) (152,883)
Net decrease in cash (101,059) (328,885)
Cash, beginning of period 144,163 76,005
----------- -----------
Cash, end of period $ 43,104 $(252,880)
=========== ===========
</TABLE>
F-61
<PAGE>
ACCESS TELECOMMUNICATION GROUP, L.P.
Notes to Financial Statements
April 30, 1993 and 1994
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Access Telecommunication Group. L.P. (Access Communication) was formed January
1, 1990, as a Texas limited partnership. The Partnership primarily provides
telecommunication services to tenants of office buildings. Telecommunication
services include provision of long distance, sales of telecommunication systems
and equipment, and management of telecommunication facilities and equipment. The
Partnership transacts a significant volume of business with entities that are
owned by the Trammel Crow Company, a related party.
INVENTORY
Inventory is carried at the lower of cost or market using the first-in,
first-out (FIFO) method.
FURNITURE AND EQUIPMENT
Furniture and equipment include equipment leased under capital lease agreements
and are recorded at cost. Depreciation and amortization are computed using the
straight-line method over the lesser of the estimated useful lives of the assets
or the terms of the leases, generally from three to five years.
REVENUE
Telecommunication revenues are recognized when customers use telecommunication
services. Sales of telecommunication equipment are recognized upon delivery to
the customer.
INCOME TAXES
The results of operations of Access are included in the income tax returns of
the respective partners; accordingly, no provision for income taxes is recorded
in the accompanying financial statements.
The Partnership's income tax returns are subject to examination by federal and
state taxing authorities. If such examinations result in changes to the
Partnership's income, the taxable income of the partners will be changed
accordingly.
2. Notes Payable
Notes payable consist of notes to two of the limited partners. These notes bear
interest at 7% per annum and are due in full, with accrued interest, on July 1,
1994.
3. Related Party Transactions
The Partnership provides telecommunications services to certain related parties,
including entities that are owned by the Trammell Crow Company.
4. Commitments
Under the terms of the Partnership's agreements with certain of its primary long
distance usage providers, Access is committed to purchase certain minimum usage
amounts each year from 1994 through 1997.
F-62
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Road and Show South, Ltd. and Affiliates
We have audited the accompanying combined balance sheet of Road
and Show South, Ltd. and Affiliates as of November 30, 1993 and
the related combined statements of operations, partners' capital
and cash flows from March 15, 1992 (date of inception) to
December 31, 1992 and for the eleven months ended November 30,
1993. These combined financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these combined 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 combined financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined
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 combined financial statements referred to
above present fairly, in all material respects, the combined
financial position of Road and Show South, Ltd. and Affiliates as
of November 30, 1993, and the results of its operations and its
cash flows from March 15, 1992 (date of inception) to December
31, 1992 and for the eleven months ended November 30, 1993, in
conformity with generally accepted accounting principles.
ROTHSTEIN, KASS & COMPANY, P.C.
Roseland, New Jersey
October 7, 1994
F-63
<PAGE>
ROAD AND SHOW SOUTH, LTD. AND AFFILIATES
COMBINED BALANCE SHEET
NOVEMBER 30, 1993
ASSETS
Current assets
Cash $168,952
Accounts receivable, less
allowance
for doubtful accounts of
$8,246 32,185
Lease receivable 55,619
Prepaid expenses and
other current assets 14,792
-------
Total current $271,548
assets
Telecommunications and
office equipment,
less accumulated 276,893
depreciation of
$176,206
Other assets
Licensing fees, less
accumulated amortization
of $40,417 459,583
Goodwill, less
accumulated amortization
of $4,979 51,921
Deposits 13,545
--------
525,049
--------
LIABILITIES AND PARTNERS' CAPITAL $1,073,490
----------
----------
Current liabilities
Accounts payable and
other current $255,163
liabilities
Note payable, related
party 50,000
Due to affiliate 36,866
-------
Total current $342,029
liabilities
Commitment
Partners' capital 731,461
--------
$1,073,490
----------
F-64
<PAGE>
ROAD AND SHOW SOUTH, LTD. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
March 15, 1992
(date of inception) Eleven Months
to December 31, Ended November
1992 30, 1993
------------------- --------------
-
Revenues $1,566,370 $2,081,553
Cost of revenues 1,038,721 1,074,405
----------- ----------
Gross margin 527,649 1,007,148
Selling, general and
administrative expenses 1,863,040 1,597,905
------------ ------------
Loss from operations (1,335,391) (590,757)
Interest income (expense), net 32,591 11,018
-------- --------
Net loss $(1,302,800) $(579,739)
-------------- ------------
F-65
<PAGE>
ROAD AND SHOW SOUTH, LTD. AND AFFILIATES
COMBINED STATEMENTS OF PARTNERS' CAPITAL
Partners' contributions, March 15, 1992 through $2,629,000
December 31, 1992
Net loss (1,302,800)
----------------
Partners' capital, December 31, 1992 1,326,200
Partners' contributions 100,000
Partners' withdrawals (115,000)
Net loss (579,739)
----------------
Partners' capital, November 30, 1993 $731,461
---------
---------
F-66
<PAGE>
ROAD AND SHOW SOUTH, LTD AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
March 15,
1992 (date Eleven
of Months
inception) Ended
to December November
31, 1992 30, 1993
------------ -----------
- -
Cash flows from operating activities
Net loss $(1,302,800) $(579,739)
Adjustments to reconcile net loss to
net
cash used in operating activities
Depreciation 118,633 150,906
Amortization 21,449 35,935
Provision for doubtful accounts 44,128 89,405
Increase (decrease) in cash
attributable to changes in
assets
and liabilities
Accounts receivable (146,212) (19,506)
Prepaid expenses and other (59,057) 44,265
current
assets
Accounts payable and other 427,318 (172,155)
current -------- -----------
liabilities
Net cash used in operating activities (896,541) (450,889)
--------- ----------
Cash flows from investing activities
Purchases of equipment (809,922)
Proceeds of assets disposed 263,490
Purchases of intangible assets (568,888)
(Purchase) maturity of (150,000) 150,000
certificates
of deposit
Proceeds from (payments for) (37,960) 24,415
deposits
Advance under financing lease (500,000)
obligations
Collections under financing lease 251,892 192,489
obligations -------- -----------
Net cash provided by (used in) investing (1,814,878) 630,394
activities ----------- ----------
Cash flows from financing activities
Proceeds from notes payable 150,000
Advances from affiliate 36,866
Partners' withdrawals (115,000)
-----------
-
Partners' capital contributions 2,629,000
-----------
Net cash provided by (used in) financing 2,779,000 (78,134)
activities ----------- -----------
Net increase in cash 67,581 101,371
Cash, beginning of period 67,581
-----------
-
Cash, end of period $67,581 $168,952
--------- ---------
Supplemental Schedule of Noncash
Financing Activities
Note payable to partner contributed
to capital $100,000
----------
F-67
<PAGE>
Note 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The combined financial statements include the accounts of Road
and Show South, Ltd. and its affiliates, Road and Show North,
Ltd., Road and Show Denver, Ltd. and Road and Show Hawaii, Ltd.
(collectively the Partnership). These partnerships are under
common control and while their statements have been combined, the
financial position, results of operations and cash flows
presented herein, do not represent those of a single legal
entity. All material intercompany accounts and transactions
have been eliminated in combination.
Line of Business
-----------------
The Partnership provides short-term portable cellular telephone
services in certain regions in the United States.
Telecommunications and Office Equipment
---------------------------------------
Telecommunications and office equipment is stated at cost. The
Partnership records depreciation on the straight line method over
the estimated useful lives of the assets as follows:
Telecommunications equipment 3 years
Office equipment 5 years
Intangible Assets
-----------------
Goodwill represents the excess of cost over the net assets of an
acquired business which is amortized over 20 years from the
acquisition date. The Partnership monitors the profitability of
the acquired operation to assess whether any impairment of
recorded goodwill has occurred.
Licensing fees relate to the costs of acquiring a license for
short-term cellular telephone rental operations within certain
regions of the United States. These costs are amortized over 20
years.
Income Taxes
---------------
Each partnership files separate income tax returns. The taxable
income (loss) of each partnership, which may differ from income
(loss) reported under generally accepted accounting principles,
is includable in the tax returns of the individual partners.
Note 2
TELECOMMUNICATIONS AND OFFICE EQUIPMENT
Telecommunications and office equipment consist of the following
at November 30, 1993:
Telecommunications equipment $301,373
Office equipment 151,726
--------
453,099
Accumulated depreciation 176,206
-------
$276,893
--------
Depreciation expense from March 15, 1992 (date of inception) to
December 31, 1992 and for the eleven months ended November 30,
1993 was $118,633 and $150,906, respectively.
Note 3
LEASE RECEIVABLE
Lease financing consists of direct financing leases. Income on
direct financing leases is recognized by a method which provides
a constant periodic rate of return on the outstanding investment
in the lease.
The Partnership leases cellular telephones to a partner under a
lease which expires in February 1994. Interest income for 1992
and 1993 is approximately $30,000 and $15,000, respectively.
F-68
<PAGE>
Note 4
NOTE PAYABLE, RELATED PARTY
The note payable, to a related party, is due on demand, and bears
interest at 10% per annum. The note was repaid in December 1993.
Note 5
DUE TO AFFILIATE
Amounts due to affiliate are non-interest bearing advances
payable on demand.
Note 6
COMMITMENT
The Partnership leases office facilities in various locations.
The leases expire in various years through May 1997. Future
minimum aggregate annual rental payments as of November 30, 1993
are as follows:
Years ending
November 30,
1994 $84,856
1995 29,710
1996 16,731
1997 8,070
Rent expense from March 15, 1992 (date of inception) to December
31, 1992 and for the eleven months ended November 30, 1993 was
$73,320 and $115,990, respectively.
Note 7
DEPENDENCE UPON KEY RELATIONSHIPS MAJOR CUSTOMERS
Approximately 43% of the Partnership's revenues for the eleven
months ended November 30, 1993 were attributable to cellular
telephone rentals made to customers of a national car rental
company. The Partnership's agreement with the company is
terminable on 90 days notice. The termination of this agreement
would have a material adverse effect on the Partnership.
Note 8
SUBSEQUENT EVENT
On December 1, 1993, the Partnership sold substantially all of
its assets (excluding cash) less liabilities assumed, for
approximately $1,250,000 and ceased operations.
F-69
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Shared Technologies Cellular, Inc.
We have audited the accompanying statement of net assets acquired from
Road and Show Cellular East, Inc. as of October 1, 1993 and the
related statements of revenues and direct expenses for the year ended
December 31, 1992 and the nine months ended September 30, 1993. These
financial statements are the responsibility of 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 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 financial statements referred to above present
fairly, in all material respects, the net assets acquired from Road
and Show Cellular East, Inc. as of October 1, 1993 and the statements
of revenues and direct expenses for the year ended December 31, 1992
and the nine months ended September 30, 1993, in conformity with
generally accepted accounting principals.
ROTHSTEIN, KASS & COMPANY, P.C.
Roseland, New Jersey
October 14, 1994
F-70
<PAGE>
SHARED TECHNOLOGIES CELLULAR, INC.
STATEMENT OF NET ASSETS ACQUIRED FROM ROAD AND SHOW CELLULAR
EAST, INC.
OCTOBER 1, 1993
Assets acquired:
Telecommunications equipment $122,500
Office equipment 100,000
Goodwill 896,541
----------
$1,119,041
Liabilities assumed:
Note payable 86,250
Capital leases payable 282,546
---------
368,796
Net Assets Acquired 750,245
---------
---------
See accompanying notes to financial statements
F-71
<PAGE>
SHARED TECHNOLOGIES CELLULAR, INC.
STATEMENTS OF REVENUES AND DIRECT EXPENSES OF
ROAD AND SHOW CELLULAR EAST, INC.
YEAR ENDED DECEMBER 31, 1992 AND NINE MONTHS
ENDED SEPTEMBER 30, 1993
1992 1993
Revenues:
Telephone usage and related revenue $2,595,366 $1,311,855
License sales 902,500
-------- ---------
3,497,866 1,311,855
Cost of revenues:
Telephone usage costs 1,017,997 527,068
Commissions 373,723 180,945
Supplies 36,248 11,594
Depreciation and amortization 150,000 82,302
--------- --------
1,577,968 801,909
Gross Margin 1,919,898 509,946
Selling, general and administrative expenses 1,544,727 661,390
Operating income (loss) 375,171 (151,444)
Interest expense 51,189 22,185
-------- -------
Income (loss) before income taxes $323,982 $(173,629)
--------- ----------
--------- ----------
See accompanying notes to financial statement
F-72
<PAGE>
SHARED TECHNOLOGIES CELLULAR, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1
BASIS OF PRESENTATION
On October 1, 1993, Shared Technologies Cellular, Inc. (STC)
commenced management of and subsequently acquired the net assets
and assumed certain liabilities of Road and Show Cellular East,
Inc. (East). Prior to the sale of East to STC, East acquired
certain assets of Road and Show Cellular, Inc. (Cellular).
Cellular's accounting records were maintained together with a
related entity, Road and Show Cars, Inc. The combined statements
of revenues and direct expenses include only the revenues and
direct expenses of Cellular and East for the year ended
December 31, 1992 and the nine months ended September 30, 1993.
The statements of revenues and direct expenses include an
allocation of selling, general, and administrative expenses from
Road and Show Cars, Inc., an affiliated company. Allocations of
these expenses are based on the relevant revenues to total
revenues, which management believes is a reasonable basis of
allocation. The revenues and direct expenses specifically
identified to businesses not acquired were not included in the
statements of revenues and direct expenses.
The operating results of Cellular do not include a provision for
income taxes.
No amortization of goodwill is included in the statements of
revenues and direct expenses since the assets were acquired after
September 30, 1993.
Note 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Telecommunications and Office Equipment
---------------------------------------
Telecommunications and office equipment is stated at cost. The
Company records depreciation and amortization on the straight
line method over the estimated useful lives of the assets as
follows:
Telecommunications equipment 3 years
Office equipment 3-5 years
Intangible Assets
-----------------
Goodwill represents the excess of costs over the net assets of
acquired businesses which is amortized over 20 years from the
respective acquisition dates. The Company monitors the
profitability of the acquired operations to assess whether any
impairment of recorded goodwill has occurred.
Revenue Recognition
-------------------
Revenues are recognized as services are performed. The Company
invoices certain customers monthly, in advance, for line charges
and defers recognition of these revenues until the service is
provided. Initial license fee revenue is recognized once all
material services or conditions relating to the sale have been
substantially performed.
Note 3
NOTE PAYABLE
The note payable was due to the former owner of East and was non-
interest bearing. The note was repaid in 1994.
F-73
<PAGE>
Note 4
OBLIGATIONS UNDER CAPITAL LEASES
Obligations under capital leases are as follows:
Office equipment leases due in monthly installments $ 84,334
through December 1996
Telecommunications equipment lease due in monthly 238,250
installments through October 1994 --------
322,584
Less amounts representing interest 40,038
-------
Present value of minimum lease payments $282,546
---------
---------
Future aggregate lease payments are as follows:
Years Ending
September 30,
1994 $267,600
1995 9,738
1996 5,208
F-74
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Cellular Hotline, Inc.
We have audited the accompanying balance sheets of Cellular
Hotline, Inc. as of December 31, 1993 and 1994, and the related
statements of operations and stockholders' deficit, and cash
flows for the years then ended. 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 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 financial statements referred to above
present fairly, in all material respects, the financial position
of Cellular Hotline, Inc. as of December 31, 1993 and 1994, and
the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting
principles.
ROTHSTEIN, KASS & COMPANY, P.C.
Roseland, New Jersey
August 8, 1995
F-75
<PAGE>
<TABLE>
<CAPTION>
CELLULAR HOTLINE, INC.
BALANCE SHEETS
<S> <C> <C>
December 31, 1993 1994
------------- ------ -------
ASSETS
Current assets
Cash $ 3,089 $ 10,525
Accounts receivable 118,029 138,785
Carrier commissions receivable, less
allowance for unearned income of $126,201
in 1993 and $60,368 in 1994 1,276,037 610,378
License fees receivable 300,000 28,950
Other current assets 9,079 23,720
-------- --------
Total current assets 1,706,234 812,358
Furniture, software and equipment, less
accumulated depreciation and amortization of
$216,229 in 1993 and $249,046 in 1994 64,602 50,461
Other assets 8,344 8,344
------- ------
$1,779,180 $871,163
========== =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 58,378 $ 133,360
Accrued expenses and other current 46,626 72,776
liabilities
Carrier commissions payable 1,453,300 656,354
Notes payable 253,757 253,757
-------- ---------
Total current liabilities 1,812,061 1,116,247
---------- ----------
Commitments
Stockholders' deficit
Common stock, $1 par value, authorized
30,000 shares,
issued and outstanding 1,940 shares 1,940 1,940
Capital in excess of par value 186,900 186,900
Accumulated deficit (221,721) (433,924)
--------- ---------
Total stockholders' deficit (32,881) (245,084)
- --------- ---------
$1,779,180 $871,163
=========== =========
See accompanying notes to financial statements
</TABLE>
F-76
<PAGE>
<TABLE>
<CAPTION>
CELLULAR HOTLINE, INC.
STATEMENTS OF OPERATIONS
<S> <C> <C>
Years Ended December 31, 1993 1994
-------- -----
Revenues $ 2,473,518 $ 3,294,957
Cost of revenues 1,483,438 2,525,712
Gross profit 990,080 769,245
Expenses
Payroll 468,962 495,012
Selling 37,590 46,620
General and administrative 318,426 418,648
Total expenses 824,978 960,280
Income (loss) from operations 165,102 (191,035)
Interest expense 26,827 21,168
Net income (loss) $ 138,275 $ (212,203)
See accompanying notes to financial statements.
</TABLE>
F-77
<PAGE>
CELLULAR HOTLINE, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Years Ended December 31, 1993 and 1994
<S> <C> <C> <C> <C>
Capital in
Common Stock Excess of Accumulated
Shares Amount Par Value Deficit
Balances, January 1, 1993 1,940 $ 1,940 $186,900 $(359,996)
Net income
138,275
------- ------- ---------- -------
Balances, December 31, 1993 1,940 1,940 186,900 (221,721)
Net loss (212,203)
------- ------- ---------- ----------
Balances, December 31, 1994 1,940 $ 1,940 $186,900 $(433,924)
====== ======= ========= ==========
See accompanying notes to financial statements.
</TABLE>
F-78
<PAGE>
<TABLE>
<CAPTION>
CELLULAR HOTLINE, INC.
STATEMENTS OF CASH FLOWS
<S> <C> <C>
Years Ended December 31 1993 1994
------- -------
Cash flows from operating activities
Net income (loss) $ 138,275 $ (212,203)
Adjustment to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation 47,293 32,817
Changes in operating assets and
liabilities:
Increase in accounts receivable (3,460) (20,756)
Decrease (increase) in carrier
commissions receivable (8,927) 665,659
Decrease (increase) in license fee (62,480) 271,050
receivable
Increase in other current assets (897) (14,641)
Increase in other assets (5,675) -
Increase (decrease) in accounts payable (52,994) 74,982
Increase (decrease) in accrued expenses
and other current liabilities (57,488) 26,150
Decrease in carrier commissions payable (54,395) (796,946)
--------- ----------
Total adjustments (199,023) 238,315
--------- ----------
Net cash provided by (used in) operating (60,748) 26,112
activities ---------- ---------
Cash flows from investing activities,
payments for furniture, software and
equipment (11,020) (18,676)
--------- ----------
Net increase (decrease) in cash (71,768) 7,436
Cash, beginning of year 74,857 3,089
-------- --------
Cash, end of year $3,089 $10,525
========== ==========
See accompanying notes to financial statements.
</TABLE>
F-79
<PAGE>
CELLULAR HOTLINE, INC.
NOTES TO FINANCIAL STATEMENTS
1 Business Summary Cellular Hotline, Inc. (the Company)
provides nationwide cellular phone
activation services and designs software for
the retail cellular phone industry for sale,
or license to third parties.
2 Summary of
significant
accounting policies Revenue Recognition
Revenues are recognized as services are
performed. Revenues relating to license
fees are recognized once all material
services or conditions relating to the sale
of a license have been substantially
performed.
Capitalized Software Development Costs
Costs of producing product masters,
including significant product enhancements
incurred subsequent to establishing
technological feasibility in the process of
software production are capitalized
according to the principles set forth in
Statement No. 86 of the Financial Accounting
Standards Board. Costs incurred prior to
the establishment of technological
feasibility are charged to research, product
development, and support expenses. All
costs incurred have been charged to
operations, since any costs incurred
subsequent to reaching technological
feasibility were insignificant.
Carrier Commissions Receivable
Carrier commissions receivable represents
amounts due from cellular carriers for
commissions on new cellular phone line
activations. The cellular commission is
earned only after the cellular telephone
user has remained on the cellular telephone
network for a specified period of time. The
Company records a provision for unearned
income equal to 9% of the gross the carrier
commissions receivable relating to the
cancellations of cellular service by the
user prior to the end of the aforementioned
vesting period. Concurrently, the Company
records a commission expense to the
retailer.
Furniture, Software and Equipment
Furniture, software and equipment is stated
at cost. The Company records depreciation
and amortization on the straight-line method
over the estimated useful lives of the
assets ranging from 5 to 7 years.
Income Taxes
The Company adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109),
"Accounting for Income Taxes", effective as
of January 1, 1993. SFAS 109 requires an
asset and liability approach to financial
reporting for income taxes. The adoption of
SFAS 109 had no cumulative effect on the
financial statements for the year ended
December 31, 1993. 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 future taxable or deductible
amounts, 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 tax assets to the amount expected
to be realized.
F-80
<PAGE>
3 Notes payable The following is a summary of
notes payable:
Interest Rate 1993 1994
Note payable to a
stockholder requiring
quarterly payments equal
to a certain percentage of
net cash flows, as
defined. Payments are
applied first to reduce
interest due, then to
reduce principal. Prime Plus 1% $75,000 $75,000
Note payable to a
stockholder requiring
quarterly payments equal
to a certain percentage of
net cash flows, as
defined. Payments are
applied first to reduce
interest due, then to
reduce principal. Prime Plus 1% 37,500 37,500
Convertible note payable
in quarterly payments
through March 1994 equal
to a certain percentage of
net cash flows, as
defined. Payments are
applied first to reduce
interest due, then to
reduce principal. The note
is convertible, at the
noteholder's option, to
common stock at a price of
$647 per share. Prime Plus 1% 141,257 141,257
$253,757 $253,757
========= ==========
4 Commitments The Company leases its Office under a lease
expiring in September 1996, providing for,
among other items, minimum annual rent plus
other operating expenses.
Future minimum aggregate annual rental
payments as of December 31, 1994 are as
follows:
Year ending December 31,
1995 $43,000
1996 32,000
Rent expense for the years ended 1993 and
1994 amounted to $45,005 and $46,287,
respectively.
F-81
<PAGE>
5 Related party
transactions The Company has received loans from
stockholders including accrued interest for
the years ended 1993 and 1994 amounting to
approximately $129,000 and $138,500,
respectively. Interest expense on these
notes for the years ended 1993 and 1994 was
approximately $8,000 and $9,000,
respectively.
The Company incurred expenses for the years
ended December 31, 1993 and 1994 of
approximately $63,000 and $78,000,
respectively from an affiliate to a
stockholder of the Company.
6 Income taxes The Company has recorded a deferred income
tax asset aggregating approximately $110,000
and $200,000 for the years ended December
31, 1993 and 1994, respectively, arising
from the net operating loss carryforwards
and a valuation allowance in the same
amount, since it was more likely than not
that the Company would not realize all of
the tax benefits. At December 31, 1994, the
Company has net operating loss carryforwards
of approximately $540,000 for federal and
state income tax purposes expiring through
2009.
7 Subsequent event In June 1995, the Company's stockholders
sold all of their common stock of the
Company to Shared Technologies Cellular,
Inc. In connection with the sale, the
convertible note payable was repaid and the
remaining notes payable were contributed to
capital in excess of par value.
F-82
<PAGE>
<TABLE>
<CAPTION>
Cellular Hotline, Inc.
Balance Sheets
April 30, 1994 and 1995
(unaudited)
<S> <C> <C>
April 30, April 30,
1994 1995
------------ -----------
ASSETS
Current assets:
Cash $61,966 $19,462
Accounts receivable 236,582 40,472
Carrier Commissions receivable, less
allowance for unearned income of $170,000
and $46,000 at April 30, 1994
and April 30, 1995, respectively 1,549,668 414,567
Other current assets 6,800 21,614
Total current assets 1,855,016 496,115
Furniture, software and equipment, less 64,261 49,274
accumulated depreciation and amortization of
$230,871 and $255,986 at April 30, 1994 and
April 30, 1995, respectively
Other assets 8,344 8,344
Total assets $1,927,621 $553,733
LIABILITIES and STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $36,144 $85,948
Accrued expenses 64,067 79,841
Carrier commissions payable 1,753,131 527,602
Total current liabilities 1,853,342 693,391
Notes payable 253,757 253,757
Stockholders' deficit
Common Stock; $1 par value, authorized 1,940 1,940
30,000 shares issued and outstanding 1,940
shares
Additional paid-in capital 186,900 186,900
Accumulated deficit (368,318) (582,255)
Total stockholders' deficit (179,478) (393,415)
Total liabilities and stockholders' deficit $1,927,621 $553,733
</TABLE>
F-83
<PAGE>
<TABLE>
<CAPTION>
Cellular Hotline, Inc.
Statements of Operations
For the Four Months Ended
April 30, 1994 and 1995
(unaudited)
<S> <C> <C>
April 30, April 30,
1994 1995
Revenues $1,217,831 $925,922
Cost of revenues 1,011,931 767,490
Gross profit 205,900 158,432
Selling, general & administrative expenses: 343,238 298,212
Operating loss (137,338) (139,780)
Interest expense, net (9,259) (8,551)
Net loss ($146,597) ($148,331)
</TABLE>
F-84
<PAGE>
<TABLE>
<CAPTION>
Cellular Hotline, Inc.
Statements of Cash Flows
For the Four Months Ended
April 30, 1994 and 1995
(unaudited)
<S> <C> <C>
April 30, April 30,
1994 1995
Cash Flows Provided by Operating
Activities:
Net Loss ($146,597) ($148,331)
Adjustments:
Depreciation and amortization 13,668 6,940
Change in Assets and Liabilities:
Decrease in accounts receivable 181,447 127,263
Decrease (increase) in carrier commissions (273,631) 195,811
receivable
Decrease in other current assets 2,279 2,106
Decrease in accounts payable (22,234) (47,412)
Increase in accrued expenses 17,441 7,065
Decrease (increase) in carrier commissions 299,831 (128,752)
payable
Net cash provided by operating activities 72,204 14,690
Cash Flows Used in Investing Activities:
Increase in other assets 0 0
Capital expenditures (13,327) (5,753)
Net cash used in investing activities (13,327) (5,753)
Net increase in cash 58,877 8,937
Cash, Beginning of Period 3,089 10,525
Cash, End of Period $61,966 $19,462
</TABLE>
F-85
<PAGE>
Cellular Hotline, Inc.
Notes to Financial Statements
April 30, 1994 and 1995
(unaudited)
1. Significant Accounting Policies
-------------------------------
Organization and Basis of Presentation
--------------------------------------
Cellular Hotline, Inc. (``Hotline'') was formed August 13, 1984,
as a Missouri Corporation. Hotline provides nationwide cellular
phone activation services and designs software for the retail
cellular phone industry for sale or license to third parties.
Revenue Recognition
--------------------
Revenues are recognized as services are performed. Revenues
related to license fees are recognized once all material services
or conditions relating to the sale of a license have been
substantially performed.
Carrier Commissions Receivable
------------------------------
Carrier commissions receivable represents amounts due from
cellular carriers for commissions on new cellular phone line
activations. The cellular commission is earned only after the
cellular telephone user has remained on the cellular telephone
network for a specified period of time (vesting period). The
Company records a provision for unearned income equal to 9% of
the gross carrier commissions receivable relating to the
cancellations of cellular service by the user prior to the end of
the aforementioned vesting period. Concurrently, the Company
records a commission expense to the retailer.
Furniture, Software and Equipment
---------------------------------
Furniture, software and equipment is stated at cost. The Company
records depreciation and amortization on the straight-line method
over the estimated useful lives of the assets ranging from 5 to 7
years.
Income Taxes
-------------
The Company adopted Statement of Financial Accounting Standards
No. 109 (SFAS 109), ``Accounting for Income Taxes'' effective as
of January 1, 1993. SFAS 109 requires an asset and liability
approach to financial reporting for income taxes.
2. Notes Payable
---------------
Notes payable consist of two notes to stockholders and one note
from a major vendor of Hotline. These notes bear interest at
prime plus 1% and require quarterly payments equal to 80% of net
cash flows, as defined.
3. Related Party Transactions
----------------------------
Hotline has received loans from shareholders and a major vendor.
In addition, Hotline incurred fulfillment fees to an affiliated
company of a major shareholder. Fulfillment fees are expenses
for storing, handling and shipping of cellular phones held on
behalf of customers.
4.Commitments
--------------
Hotline leases its office under a lease expiring September 1996,
providing for, among other items, minimum annual rent plus other
operating expenses.
PTC Cellular, Inc.
Balance Sheets
December 31, 1993 and 1994
F-86
<PAGE>
<TABLE>
<CAPTION>
PTC Cellular, Inc.
Balance Sheets
(Unaudited)
December 31
1993 1994
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $49,893 $23,568
Accounts receivable, net of allowance for doubtful
accounts of $246,813 and $285,917 1,067,046 1,185,518
Prepaid expenses and other current assets 57,195 145,010
------ -------
Total current assets 1,174,134 1,354,096
Software and Smart Phone Development - 1,336,505
Property and equipment, net of $911,923 and $1,958,800
accumulated depreciation 6,351,229 5,249,527
Intangible assets, net of $239,935 and $602,262
accumulated amortization 1,316,581 1,040,132
Goodwill, net of $45,600 and $149,724 accumulated
amortization 1,908,089 1,778,691
Deferred income taxes net of valuation allowance of
$0 and $3,291,111 1,113,041 -
Other assets 43,907 252,808
------ -------
Total assets (pledged for parent company
debt, see Note 5) $11,906,981 $11,011,759
=========== ===========
Liabilities and Shareholder's (Deficit) Equity
Current Liabilities
Accounts Payable $1,636,559 $1,804,147
Accrued Expenses $1,424,450 $1,301,730
---------- ----------
Total current liabilities $3,061,009 3,105,877
Payable to Peoples Telephone Company, Inc.
6,986,533 13,457,738
Unearned income -- 67,267
-------- ------
10,047,542 16,630,882
---------------------- ----------------------
Commitments and contingencies - -
Shareholders' (deficit) equity:
Common stock, $.01 par value, 25,000,000 shares
authorized, 100 and 5,000,000 shares issued and
outstanding as of December 31, 1993 and 1994 1 50,000
Capital in excess of par value 4,571,823 4,659,323
Accumulated deficit (2,712,385) (10,278,446)
Note receivable arising from Stock Purchase Agreement - (50,000)
----------- ------------
Total shareholders' (deficit) equity 1,859,439 (5,619,123)
---------------------- ------------------------
Total liabilities and shareholders'
(deficit) equity $11,906,981 $11,011,759
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-87
<PAGE>
PTC Cellular, Inc.
Statements of Operations and Accumulated Deficit
(Unaudited)
<TABLE>
<CAPTION>
Year Ended
From inception, ---------------------------------
April 30, 1992 to December 31, December 31,
December 31, 1992 1993 1994
<S> <C> <C> <C>
Revenues
Cellular $1,498,532 $5,992,594 $11,472,639
Service and other - 33,265 107,981
-------- ------ -------
Total revenues 1,498,532 6,025,859 11,580,620
Cost and expenses:
Telephone charges 434,591 3,414,254 5,867,726
Commissions 270,780 845,790 766,815
Cost of operations 517,959 2,130,635 3,292,712
Depreciation and
amortization 82,628 1,114,830 2,470,362
Selling, general and
administrative 483,464 1,110,097 1,639,910
Provision for bad
debts 14,034 568,040 1,842,929
Allocations from Peoples
Telephone Company, Inc. - 156,968 359,700
Interest on Payable to Peoples Telephone
Company, Inc. - 205,747 782,586
Telephone equipment write-down - - 1,010,900
-------- ------- ----------
Total costs & expenses 1,803,456 9,546,361 18,033,640
--------- --------- ----------
Loss before taxes (304.924) (3,520,502) (6,453,020)
Income tax
(provision)/benefit - 1,113,041 (1,113,041)
------ --------- -----------
Net loss (304,924) (2,407,461) (7,566,061)
Accumulated deficit,
beginning of period - (304,924) (2,712,385)
------ --------- -----------
Accumulated deficit,
end of period $(304,924) $(2,712,385) $(10,278,446)
========== ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-88
<PAGE>
PTC Cellular, Inc.
Statement of Changes in Shareholders' (Deficit) Equity
(Unaudited)
Common Stock
<TABLE>
<CAPTION>
Invested Capital in (Accumulated)
Shares Amount Capital Excess of Par Deficit) Total
<S> <C> <C> <C> <C> <C>
Balance
at January
1, 1992 - - - - - -
Invested Capital
from Peoples
Telephone
Company, Inc. - - $340,000 - $340,000
Net loss - - - - $ (304,924) (304,924)
------------- -------------- ---------------- ---------------- ----------------
Balance at
December 31,
1992 - - 340,000 - (304,924) 35,076
Issuance of
Common Stock 100 $ 1 (340,000) $3,969,470 - 3,629,471
Pushdown of purchase
of 25%
from Nationwide
by Peoples
Telephone
Company, Inc. - - - 602,353 - 602,353
Net loss - - - - (2,407,461) (2,407,461)
------------- -------------- ---------------- ---------------- ----------------
balance at December
31, 1993 100 1 - 4,571,823 (2,712,385) 1,859,439
Issuance of additional shares
of Peoples telephone Company,.
Inc. for no consideration
4,499,900 44,999 - (44,999) - -
Exercise of stock
options 500,000 5,000 - 132,499 - 137,499
Net loss - - -- - (7,566,061) (7,566,061)
------------- -------------- ---------------- ---------------- ----------------
Balance at December
31, 1994 5,000,000 $ 50,000 - $4,659,323 $(10,278,446) $(5,569,123)
============= ============== ================ ================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements
F-89
<PAGE>
PTC Cellular, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the year ended December 31,
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss $(304,924) $(2,407,461) $(7,566,061)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation of property
and equipment 63,776 848,147 2,003,911
Amortization of intangible
assets 18,852 221,083 362,327
Amortization of goodwill - 45,600 104,124
Deferred income taxes - (1,113,041) 1,113,041
Provision for telephone
equipment losses - - 1,010,900
Write-off capitalized fee - - 40,000
Changes in assets and liabilities:
Increase in accounts
receivable (21,320) (817,788) (118,472)
Increase (decrease) in prepaid expenses
and other current (17,509) 59,285 (137,815)
assets
Increase in
accounts payable and 122,043 2,102,595 44,868
accrued expenses
Increase in unearned
income - - 67,267
Expenses Allocated from
Peoples Telephone Company, Inc. - 362,715 1,142,286
Net cash used in operating
activities (139,082) (698,865) (1,933,624)
-------------------- ------------------- ----------------
Cash flows from investing activities:
Acquisition of PCC, net of cash acquired (2,436,922) -
Property and equipment additions (602,082) (5,622,414) (2,033,109)
Software and Smart Phone development - - (1,336,505)
Intangible assets additions (175,000) (825,124) (85,878)
Goodwill deletions (additions) - - 25,274
Proceeds from sale of telephones - - 80,000
Increase in other assets (43,907) (208,901)
----------------------- -------------------- -----------------
Net cash used in investing
activities (777,082) (8,928,367) (3,559,119)
----------------------- ------------------ -----------------
Cash flow from financing activities:
Invested capital 340,000 - -
Issuance of common stock - 3,629,471 137,499
Net borrowing from Peoples Telephone
Company, I Inc. 602,101 6,021,717 5,328,919
------------------------- ----------------- -- ----------------
Net cash provided by financing activities 942,101 9,651,188 5,466,418
------------------------- ----------------- -- ----------------
Net (decrease) increase in cash and cash
equivalents 25,937 23,956 (26,325)
Cash and cash equivalents at beginning
of period - 25,937 49,893
------------------------- ----------------- -- ----------------
Cash and cash equivalents at 25,937 49,893 23,568
end of period ========================= ================= ==================
</TABLE>
The accompanying notes are an integral part of these financial statements
F-90
<PAGE>
PTC Cellular, Inc.
Notes to Financial Statements
December 31, 1994
1. General
Description of business
PTC Cellular, Inc. ("the Company") is a provider of in-car wireless
telephone service to persons who rent cars from certain domestic cart rental
companies. The Company is a 90% owned subsidiary of Peoples Telephone Company,
Inc. ("Peoples"). The Company was developing new car phones known as "smart
phones". It intended
that these smart phones would periodically signal the Company. This signal would
be expected to enable the Company to detect when phones are inoperable. With
this change in technology the Company anticipates less down time for phones.
With the use of smart phones the Company anticipates being able to change the
cellular telephone number without physically being there.
As reflected in the accompanying financial statements, the Company has sustained
losses from operations since inception. As a result, the Company depended
substantially on Peoples for funding. In December 1994 the parent company
approved the divestiture of the cellular telephone operations and reported this
segment of the business as a discontinued operation in its consolidated
financial statements. This was an effort on the part of Peoples to return its
focus to its core public paytelephone business, which resulted in curtailed
financing to the Company. The Company has concentrated its efforts on obtaining
third party financing, and ultimately a purchaser, to sustain operations and to
finance the development and production of the smart phone technology(See Note
10).
Acquisitions
The Company was incorporated on February 11, 1993 to acquire the assets of
Portable Cellular Communications, Inc. ("PCC"). The Company also acquired from
Peoples all of the assets of Carifone Cellular Phone Rentals, Inc. ("Carifone").
These assets were acquired by Peoples in 1992 for $340,000 in cash and the
issuance of 7,500 shares of the Peoples outstanding common stock. This
transaction was accounted for as a purchase as of April 30, 1992 (inception)
and, accordingly, the results of operations of Carifone have been included in
the consolidated financial statements of Peoples from the date of acquisition.
When the Company was incorporated, the assets of Carifone were transferred to
the Company's books at historical cost.
During 1993 the Company acquired the assets of PCC, a majority owned subsidiary
of Nationwide Cellular Services, Inc. ("Nationwide"), for $2.5 million in cash
and the issuance of 25% of the Company's outstanding common stock. This
transaction was accounted for as a purchase as of July 1, 1993 and, accordingly,
the results of operations of the company acquired have been included in the
consolidated financial statements of the Company from the date of acquisition.
The purchase price of PCC was allocated on the basis of the relative fair market
values of net assets acquired as follows:
Cash $63,078
Accounts receivable 227,938
Prepaid expenses and other current assets 98,971
Property and equipment 1,038,656
Intangible assets 556,392
Goodwill 1,351,336
Accounts payable (836,371)
-----------
$2,500,000
===========
In July 1994 Peoples acquired the 25% interest in the Company owned by
Nationwide for $275,000. This transaction was pushed down to the Company by
Peoples, resulting in a $602,353 charge to goodwill. Also, the Company issued
additional stock. The Company originally had 100 shares issued and outstanding,
and, subsequently, the Company issued 4,499,900 additional shares to Peoples for
no additional consideration. Furthermore, the Company issued and sold 500,000
shares (a 10% interest in the Company) to its President for consideration of
$87,500 and a note receivable of $50,000. The note bears interest at 7.5% per
annum, and matures July 18,1995.
The following unaudited consolidated pro forma combined condensed statements of
income for the years ended December 31, 1992 and 1993 have been prepared to
reflect the Carifone and PCC acquisitions by the Company, as
F-91
<PAGE>
if they were consummated as of January 1, 1992, after giving effect to certain
pro-forma adjustments as described below.
<TABLE>
<CAPTION>
For the year ended December 31
1992 1993
------ ------
<S> <C> <C>
Total revenues $5,484,246 $8,027,975
(Loss) before extraordinary item (1,082,287) (2,724,978)
Net (loss) (1,082,287) (2,724,978)
</TABLE>
Pro forma adjustments reflect depreciation of fixed assets, amortization of
intangible assets acquired and accrual for income taxes. There is no adjustment
for interest expense because these was no debt issued in relation to this
purchase.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company defines cash and cash equivalents as those highly liquid investments
purchased with an original maturity of three months or less.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable, and the intercompany debt to the parent company approximate their fair
values.
Software and Smart Phone Development
The smart phone development costs relate to the costs for outside companies to
develop and test the smart phones technology.
The software is also being developed through the use of outside companies, as
well as, consultants. This software will be used in conjunction with the smart
phones to tract the phones both operationally and for usage.
All related costs are capitalized when incurred after feasibility has been
reached. Management has assessed the software and smartphone development to be
feasible. These costs will be amortized over the estimated useful lives once the
smart phones are placed in service.
Property and Equipment
Property and equipment is recorded at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful life of the assets commencing when the equipment is installed or placed
in service. Installation, maintenance and repair costs are charged to expense.
Intangible Assets
Location contracts and intangible assets primarily result from business
combinations and include owner contracts, agreements not to compete and other
identifiable intangible assets. these assets are being amortized on the
straight-line basis over the estimated life, assuming, in some instances,
renewal of the underlying contracts (3 to 6 years). In 1992 Peoples acquired a n
on-compete contract from the founder of Carifone for $175,000. An additional
$214,500 was paid to the founder in 1993 to extend the non-compete agreement
terms. In 1993 the
F-92
<PAGE>
Company acquired from PCC location contracts with an estimated value of
$556,392. Costs of $627,197 related to the acquisition start-up of PCC were
capitalized. The Company paid an additional $69,305 for start-up costs in 1994
which were also capitalized. Amortization expense for 1992, 1993 and 1994 was
$18,852, $221,083 and $362,327, respectively.
Goodwill
Goodwill primarily arising from the PCC acquisition during 1993 is being
amortized on a straight-line basis over 10 years. Amortization expense for 1993
and 1994 was $45,600 and $104,124, respectively.
Revenue Recognition
Revenues are recognized when earned. The Company recognized revenue from the
rental of cellular telephones monthly, as the calls are made.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes.
SFAS 109 requires companies to record deferred tax liabilities or assets for the
deferred tax consequences of all temporary differences and requires ongoing
adjustments for enacted changed in tax rates and regulations. A valuation
allowance reducing the deferred tax asset recognized must be recorded if it is
determined it is more likely than not the asset will not be realized.
Accounts Receivable
Accounts receivable of $1,313,859 and $1,471,435 at December 31, 1993 and 1994,
respectively, consists primarily of amounts due from billings in the ordinary
course of business.
Use of Estimates
The preparation of financial statements in accordance with Generally Accepted
Accounting Principles requires the use of management's estimates.
3. Property and Equipment
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
Estimated useful
December 31, lives
1993 1994 (in years)
---- ----
<S> <C> <C> <C>
Installed telephones and related equipment $6,613,183 $6,353,893 3-5
Furniture, fixtures and office equipment 615,243 818,783 5
Other 34,726 35,651 5
------ ------
7,263,152 7,208,327
Less: Accumulated depreciation 911,923 1,958,800
------- ---------
$6,351,229 $5,249,527
========== ==========
</TABLE>
Depreciation expense of $63,776, $848,147 and $2,003,911 was recognized for
1992, 1993 and 1994, respectively.
4. Accounts payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
F-93
<PAGE>
<TABLE>
<CAPTION>
December 31,
1993 1994
----------------------------------
<S> <C> <C>
Telecommunications Charges $970,680 $1,041,546
Commissions 87,927 52,884
Telephone Equipment Purchased 772,902 762,910
Bill Processing Services - 370,803
Other 1,229,500 877,734
--------- -------
$3,061,009 $3,105,877
</TABLE>
5. Commitments and Contingencies
Lease Commitments
The Company occupies space in Peoples Miami Florida offices and did not have a
written lease agreement and as such has no lease commitment. The Company,
however, is allocated expenses from the parent company, which includes the
payment of rent (see Note 6).
Debt Guarantee
Under the terms of Peoples $125 million credit facility the Company acts as a
guarantor and has pledged certain assets as collateral for this debt. During
July 1995, Peoples completed the sale of $100 million of Senior Notes due 2002
(the "Senior Notes") and the issuance of 150,000 shares of Series C Cumulative
Convertible Preferred Stock (the "Preferred Stock") for $15 million. The net
proceeds of approximately $109.5 million from the Senior Notes and the Preferred
Stock were used to repay the outstanding balance due under Peoples $125 million
credit facility and certain other notes payable of approximately $105.1 million,
in the aggregate. Simultaneously with the sale of the Senior Notes and the
issuance of the Preferred Stock, Peoples executed the Fourth Amended and
Restated Loan and Security Agreement (the "Loan Agreement") with Creditanstalt
Bankverein (the "Bank"). The Loan Agreement provides for a new $40 million
credit facility. The Loan Agreement is secured by substantially all of Peoples
and the Company's assets and contains certain restrictive covenants.
Contingent Liabilities
"Cloning" is an industry term which describes the illegal programming of
cellular telephone numbers into unauthorized telephones so that cloners can sell
airtime which is billed to subscriber or customer of the cellular telephone and
not the actual user of the cloned telephone. Carriers in general provide a
credit for airtime attributable to a cloned telephone provided the Company
complies with that carrier's policy on notification of a cloned telephone;
therefore, the Company excludes the fraudulent calls from its payments to its
carriers and claims a credit for such calls. As of December 31, 1994 the
unrecorded liability for these unapproved credits taken by the Company amounted
to approximately $2,110,000; $650,000 relates to McCaw Cellular Communications
of Florida, Inc. (d/b/a Cellular One); $1,200,000 relates to L.A. Cellular,
which was subsequently credited; and the remaining amount relates to NYNEX and
various other carriers. In connection with cellular cloning fraud disputes
involving Cellular One and NYNEX, Peoples has filed a claim. The insurance
company has preliminarily denied coverage for this claim and Peoples intends to
file suit against insurance company in connection with said denial.
Patent
QuickCall Corporation ("QuickCall") filed suit asserting claims of patent
infringement, alleging that the Company infringed upon patented technology
related to this operation of cellular phones, but without reference to time or
place of that infringement or particular equipment. The Company has filed a
response to QuickCall's Complaint in the form of a motion for more definite
statement, due to the vague nature of QuickCall's allegations. That motion is
still pending before the Court, together with a motion filed on behalf of
Peoples to dismiss QuickCall'
F-94
<PAGE>
claims for failure to state a claim. The Company anticipates that it will
dispute the validity of the patents upon which QuickCall bases its action.
QuickCall has not specified the amount of damages it claims to have incurred due
to any conduct by the Company and has not tendered a settlement demand. Because
of the preliminary nature of the litigation, management and the Company's
outside counsel are unable to predict the outcome of such litigation.
Accordingly, the financial statements do not include any adjustments that might
result from this uncertainty.
Litigation
On March 24, 1995 the Company commenced a lawsuit against Ericsson GE Mobile
Communications, Inc., arising from the purchase of mobile telephones. The
Company alleges that Ericsson breached certain warranties given in connection
with Ericsson's sale of mobile telephones to the Company. The Company has
accrued, as of December 31, 1994, a liability for equipment received from
Ericsson in the approximate amount of $664,000 and has not authorized payment of
these invoices based on Ericsson's alleged breach of warranty and the resulting
damages sustained by the Company. The amount of damages sought by the Company
substantially exceeds the accrued liability.
On September 6, 1995 Peoples, the majority shareholder of the Company, commenced
a lawsuit against Cellular One, a vendor which has provided cellular telephone
services to the Company. The claim involves approximately $800,000 in fraudulent
telephone charges incurred in connection with the Company's telephone rental
operations. Cellular One has demanded payment of the full amount in dispute,
despite the fact that all, or substantially all, of the charges were generated
through unauthorized, improper cloning of the Company's cellular telephone
numbers. In connection with this litigation Cellular One has countersued Peoples
for this amount. The Company does not believe that it is liable for payment of
the fraudulent cloning charges. At this juncture, management and the Company's
outside counsel are unable to evaluate the likelihood of an unfavorable outcome
in this matter.
6. Related Party Transactions
The Company has been substantially dependent upon Peoples to provide sufficient
funding to meet its cash requirements. The Company also relies on certain
functions provided by Peoples such as legal, MIS, Finance and human resources.
During 1993 and 1994 Peoples allocated to the Company administrative expenses of
$156,968 and $359,700, respectively. The allocations to the Company were based
on estimated usage. Employees who worked on Peoples and its subsidiaries were
asked to segregate their estimated time, by division, for the month. These
estimates were updated in mid-1994 and these allocations remained for the year
ended December 31, 1994. Peoples also charges the Company rent expense of
$25,000 per month. Charges by Peoples for provided services are not necessarily
indicative of what would be negotiated with independent third parties.
The payable to Peoples for funding as of December 31, 1993 and 1994 was
$6,986,533 and $13,457,738, respectively. Interest accrues on the intercompany
balance plus overdrafts at a rate of one half percent above Peoples' borrowing
rate (9.75% at December 31, 1994).
Employees of the Company are included in the savings plan under the provisions
of section 401(k) of the Internal Revenue Code and the stock option plan for
Peoples.
7. Income Taxes
The Company has net operating losses of approximately $10 million for financial
reporting purposes and approximately $9.4 million for tax purposes which are
available to reduce future taxable income and income taxes, if any. These
carryforwards expire commencing in 2008 and ending in 2009. The net operating
loss carryforward for financial reporting purposes differs from the tax amount
primarily due to differences in the treatment of reserves (inventory and bad
debt) and depreciation.
F-95
<PAGE>
A valuation allowance reducing the asset recognized must be recorded if it is
determined that it is more likely than not that the asset will not be realized.
In 1993, a deferred tax benefit of $1,113,041 was recorded. In 1994, due to the
uncertainty surrounding realizability of future tax benefits arising from
cumulative losses, a valuation allowance in the amount of $3,291,111, which
represents the full amount of the future tax benefit associated with the
cumulative net operating loss carryforwards, has been established. The result is
a $1,113,041 net tax provision in 1994.
8. Major Contracts
The Company utilizes one main channel of distribution, rental car companies. As
such, the Company has agreements with rental car companies to install cellular
phones in their rental cars.
The Company has a five year contract with Avis Rent A Car System, Inc. (Avis)
effective March 1, 1995. This is an exclusive contract for Avis locations.
Effective October 1995 the Company amended its Avis contract. Under this amended
agreement, the Company must, among other things, have installed 10,000 Ericsson
or smart phones by January 1, 1996 and replace all Ericsson phones so that
10,000 smart phones are installed by December 31, 1996. Additionally, the
contract contains minimum commission payments. About 87% of the Company's
revenues are currently generated through Avis locations.
The Company has a three-year exclusive agreement, effective January 23, 1995,
for several major corporate Budget Rent-A-Car markets across the United States.
The Company has agreed to install phones in 10% of the fleet specified by Budget
in each market. Once a deployment schedule is established, the Company is
obligated under the agreement to deploy the 10% minimum within six months. To
date, no deployment schedule has been set and, therefore, the Company has not
been required to meet the 10% minimum.
9. Bank Loan
In May 1995 the Company signed an agreement with Creditanstalt Corporate
Finance, Inc. for a one year loan for up to $2.5 million, with interest rate
fluctuating daily, equal to the higher of the Creditanstalt prime rate or the
Federal Funds Rate plus l/2 of 1%. This loan is guaranteed by Peoples and is
collateralized by the smart phone.
10. Sale of Certain Assets Subject to Certain Liabilities
On July 21, 1995 the Company sold certain portable cellular phone assets to
Shared Technologies Cellular, Inc. ("STC") for $225,000. On November 13,1995,
Peoples sold certain assets subject to certain liabilities as well as assigned
certain contracts of the Company to Shared Technologies Cellular, Inc. ("STC")
for approximately $6.1 million. Of the $6.1 million, $2.5 million represents
consideration contingent upon future earnings which is not recognizable for
financial reporting purposes at the time of the sale. Accordingly, recognizable
consideration amounted to $3.6 million: $0.3 million in cash; a $2.0 million
promissory note bearing interest at 8.0% per annum, with principal interest
payable semiannually through 2000; STC will pay certain of the Company's
liabilities, net of trade receivables as of November 1, 1995, for a total of
$1.2 million; and 100,000 shares of STC common stock with an adjusted, estimated
value of approximately $100,000.
The sale included the following assets of the Company: The entire in-car phone
fleet of approximately 15,000 Ericsson phones; patents pending on the computer
operating system including the smart phone technology and 1,530 smart phones;
and computer equipment. The Company's contracts with rental car companies (see
Note 8) and with certain carriers were assigned to STC along with manufacturing
and royalty agreements for the smart phone.
Upon the November 13, 1995 sale, the Company ceased its business operations.
Peoples retained all liabilities in excess of $1.2 million assumed by STC,
including any potential liabilities arising from the lawsuits described in Note
5 and the approximate $1.6 million outstanding on the Bank Loan described in
Note 9 at November 13, 1995.
F-96
<PAGE>
During 1995 the Company made significant additional investments in the
development and manufacture of the smart phone. The recognizable consideration
received of $3.6 million (exclusive of the $2.5 million potential revenue earn
out due to its contingent nature) was not sufficient to recoup the carrying
amounts of the long lived assets, as of December 31, 1994 and the significant
subsequent capital additions. As a result the sales transaction resulted in a
loss. Management of the Company is unable to estimate the impact of the loss on
this sale transaction on the long-lived assets of the Company as of December 31,
1994, accordingly no loss has been provided in the accompanying financial
statements.
F-97
<PAGE>
PTC Cellular, Inc.
Balance Sheets
September 30, 1994 and 1995
(unaudited)
<TABLE>
<CAPTION>
September 30, 1994 September 30, 1995
------------------- ------------------
ASSETS
Current assets:
<S> <C>
Cash $213,199 $18,607
Accounts receivable, net of allowance at Sept 30 1994 and 1995 of 864,353 810,449
$1,256,532 and $589,351, respectively.
Pre-Paid Expenses and Other Current Assets (114,180) 405,777
------------------- ------------------
Total current assets 963,372 1,234,833
------------------- ------------------
Property and Equipment, net of allowance at Sept, 30 1994 and 1995 7,261,421 8,609,659
$1,920,299 of and $2,824,081, respectively.
Intangible Assets, net of allowance at Sept 30, 1994 and 1995 of 2,448,250 2,351,673
$635,543 and $881,903, respectively.
Deferred Tax Asset 2,752,229 0
Other Assets 16,574 96,018
------------------- -----------------
Total assets $13,441,846 $12,292,183
=================== ==================
LIABILITIES and STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and Accrued Expenses $2,598,732 $2,370,096
Creditanstalt Note Payable 0 1,600,000
------------------- ----------------
Total current liabilities 2,599,732 3,970,096
------------------- ----------------
Long Term Liabilities:
Payable to PTC 11,645,935 17,142,823
Other Long Term Liabilities 45,310 0
Stockholders' deficit
Common Stock; $.01 par value, 25,000,000 shares authorized,
500,100 and 5,000,000 shares issued and outstanding as of 5,001 50,000
Sept 30, 1994 and 1995.
Additional paid-in capital 4,704,327 4,659,323
Accumulated deficit (5,558,458) (13,530,059)
-------------------- -----------------
Total stockholders' deficit (849,131) (8,820,736)
-------------------- -----------------
Total liabilities and stockholders' deficit $13,441,846 $12,292,183
=================== =================
The accompanying notes are an integral part of these financial statements.
F-98
<PAGE>
PTC Cellular, Inc.
Statements of Operations
For the Nine Months Ended
September 30, 1994 and 1995
(unaudited)
September 30, 1994 September 30, 1995
------------------ ------------------
Revenues $7,272,998 $5,801,328
Cost of revenues 7,342,289 5,297,067
------------------ -------------------
Gross profit (69,291) 504,261
Selling, general & administrative expenses: 2,274,296 2,861,907
------------------ -------------------
Operating loss (2,343,587) (2,357,646)
Interest expense (502,487) (893,967)
------------------ -------------------
Net loss ($2,846,074) ($3,251,613)
=================== ===================
The accompanying notes are an integral part of these financial statements.
F-99
<PAGE>
PTC Cellular, Inc.
Statements of Cash Flows
For the Nine Months Ended
September 30, 1994 and 1995
(unaudited)
September 30, 1994 September 30,1995
------------------- -----------------
Cash Flows Provided by Operating Activities:
Net Loss ($2,846,074) ($3,251,613)
Adjustments:
Depreciation and amortization 1,792,576 1,620,791
Loss on Sale of Portable 0 119,007
Deferred Tax Asset (1,639,188) 0
Change in Assets and Liabilities:
Decrease in accounts receivable 481,654 377,279
Decrease (Increase) in Prepaid expenses and other current assets 171,376 (238,100)
Decrease in Other Assets 27,333 156,790
Decrease in accounts payable and accrued expenses (461,277) (735,781)
Increase (Decrease) in other long term liabilities 45,310 (67,267)
------------------- -----------------
Net cash provided by operating activities (2,418,291) (2,018,894)
------------------- -----------------
Cash Flows Used in Investing Activities:
Increase in Property and Equipment (2,281,717) (3,413,885)
Increase in Intangible Assets (13,588) (82,267)
Proceeds from sale of portable 80,000 225,000
------------------- -----------------
Net cash used in investing activities (2,215,305) (3,271,152)
------------------- -----------------
Cash Flows Provided by Financing Activities:
Loans from PTC 4,659,402 3,685,085
Creditanstalt Note 0 1,600,000
Issuance of common stock 137,500 0
------------------- -----------------
Net cash provided by financing activities 4,796,902 5,285,085
------------------- -----------------
Net increase in cash 163,308 (4,961)
Cash, Beginning of Period 49,893 23,568
------------------- -----------------
Cash, End of Period $213,199 $18,607
=================== =================
=============================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-100
<PAGE>
PTC Cellular, Inc.
Notes to Financial Statements
September 30, 1994 and 1995
(unaudited)
NOTE 1 - GENERAL
Description of business
PTC Cellular, Inc. ("PTCC" or the "Company") is a provider of in-car wireless
telephone service to persons who rent cars from certain domestic car rental
companies. The Company is a 90% owned subsidiary of Peoples Telephone Company,
Inc. ("Peoples").
The Company was developing new car phones known as "smart phones". These smart
phones will periodically signal the Company. This signal enables the Company to
detect when phones are inoperable. With this change in technology the Company
anticipates less down time for phones and ultimately increased revenues.
As reflected in the accompanying financial statements, the Company has sustained
losses from operations. As a result, the Company depended substantially on
Peoples for funding. In December 1994, the parent company approved the
divestiture of the cellular telephone operations and reported this segment of
the business as a discontinued operations in its consolidated financial
statement. This was an effort on the part of Peoples to return its focus to its
core public pay telephone business, which resulted in curtailed financing to the
Company. The Company has concentrated its efforts on obtaining third party
financing,
F-101
<PAGE>
and ultimately a purchaser, to sustain operations and to finance the development
and production of the smart phone technology (see note 9).
Acquisitions
In July 1994 Peoples acquired the 25% interest in the Company owned by
Nationwide Cellular Services, Inc. This transaction was pushed down to the
Company by Peoples, resulting in a $602,353 charge to goodwill. Also, the
Company issued additional stock. The Company originally had 100 shares issued
and outstanding, and, subsequently, the Company recapitalized by issuing
4,499,900 additional shares. Furthermore, the Company issued and sold 500,000
shares (a 10% interest in the Company) to its President for consideration of
$87,500 and a note receivable of $50,000. The note bears interest at 7.5% per
annum, and matures July 18, 1995.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company defines cash and cash equivalents as those highly liquid investments
purchased with an original maturity of three months or less.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalent, accounts receivable, accounts
payable, and the intercompany debt to the parent company approximate their fair
values.
Software and Smart Phone Development
Includes software and developmental costs, for internal use, with a useful life
of over five years, externally developed from scratch after the feasibility of
the projects had been determined. These costs will be amortized over a five year
period when the smart phone becomes operational.
Property and Equipment
Property and equipment is recorded at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets commencing when the equipment is installed or placed
in service. Installation, maintenance and repair costs are charged to expense.
Intangible Assets
Location contracts and intangible assets primarily result from business
combinations and include owner contracts, agreements not to compete and other
identifiable intangible assets. These assets are being amortized on the
straight-line basis over the estimated life,
F-102
<PAGE>
assuming, in some instances, renewal of the underlying contracts (3 to 6
years).Amortization expense for the nine months ended September 30, 1994 and
1995 was $236,602 and $ 235,380, respectively.
Goodwill is being amortized on a straight-line basis over 10 years. Amortization
expense for the nine months ended September 30, 1994 and 1995 was $113,406 and
$144,757, respectively.
Revenue Recognition
Revenues are recognized when earned. The Company recognizes revenue from the
rental of cellular telephones monthly, as the calls are made.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes.
SFAS 109 requires companies to record deferred tax liabilities or assets for the
deferred tax consequences of all temporary differences and requires ongoing
adjustments for enacted changes in tax rates and regulations. A valuation
allowance reducing the deferred tax asset recognized must be recorded if it is
determined it is more likely than not the asset will not be realized.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
September 30, Estimated
1994 1995 Useful Lives
---------- ---------- (in years)
<S> <C> <C> <C>
Installed telephones and related
equipment ........................ 8,398,723 10,536,625 3-5
Furniture, fixtures and office
equipment .................... 748,438 862,556 5
Other ............................ 34,559 34,559 5
---------- ----------
9,181,720 1,433,740
Less: Accumulated depreciation .. 1,920,299 2,824,081
---------- ----------
</TABLE>
F-103
<PAGE>
Depreciation expense of $1,442,568 and $1,240,654, was recognized for the nine
months ended September 30, 1994 and 1995, respectively.
NOTE 4-COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company's offices are located in Miami, Florida. The Company occupies space
in Peoples's offices and did not have a written lease agreement and as such no
lease commitment. The Company, however, is allocated expenses from the parent
company, which include the payment of rent.
Debt Guarantee
Under the terms of Peoples $125 million credit facility, the Company acts as a
guarantor and has pledged certain assets as collateral for this debt. During
July 1995, Peoples completed the sale of $100 million of Senior Notes due 2002
(the "Senior Notes") and the issuance of 150,000 shares of Series C Cumulative
Convertible Stock (the "Preferred Stock") for $1.5 million. The net proceeds of
approximately $109.5 million from the Senior Notes and the Preferred Stock were
used to repay the outstanding balance due under Peoples $125 million credit
facility and certain other notes payable at approximately $105.1 in the
aggregate. Simultaneously with the sale of the Senior Notes and issuance of the
Preferred Stock, Peoples executed the Fourth Amended and Restated Loan and
Security Agreement (the "Loan Agreement") with Creditanstalt Bankverein (the
"Bank"). The Loan Agreement provides for a new $40 million credit facility . The
Loan Agreement is secured by substantially all of Peoples and the Company's
assets and contains certain restrictive covenants.
Contingent Liabilities
"Cloning" is an industry term which describes the illegal programming of
cellular telephone numbers into unauthorized telephones so that cloners can sell
air-time which is billed to the subscriber or customer of the cellular telephone
and not the actual user of the cloned telephone. Carriers in general provide a
credit for air-time attributable to a "cloned telephone" provided the Company
complies with that carrier's policy on
F-104
<PAGE>
notification of a cloned telephone; therefore, the Company excludes the
fraudulent calls from its payments to its carriers and claims a credit for such
calls. As of September 30, 1995 the unrecorded liability for these unapproved
credits taken by the Company amounted to approximately $2,110,000. $650,000
related to Mc Caw Cellular Communications of Florida, Inc (dba Cellular One);
$1,200,000 relates to LA Cellular, which was subsequently credited; and the
remaining amount relates to NYNEX and various other carriers. In connection with
the cellular cloning fraud disputes involving Cellular One and NYNEX, Peoples
has filed a claim. The insurance company has preliminary denied coverage for
this claim and Peoples intends to file suit against the insurance company in
connected with said denial. Patent
QuickCall Corporation ("QuickCall") filed suit asserting claims of patent
infringement, alleging that the Company infringed upon the patent technology
related to this operation of cellular phones, but without reference to time or
place of that infringement or particular equipment. The Company has filed a
response to QuickCall's complaint in the form of a motion for more definite
statement, due to the vague nature of QuickCall's allegations. This motion is
still pending before the court, together with a motion filed on behalf of
Peoples to dismiss QuickCalls' claims for failure to state a claim. The Company
anticipates that it will dispute the validity of the patents upon which
QuickCall bases its action. QuickCall has not specified the amount of damages it
claims to have incurred due to and conduct by the Company and has not tendered a
settlement demand. Because of the preliminary nature of the litigation,
management and the Company's outside council are unable to predict the outcome
of such litigation. Accordingly, the financial statements do not include any
adjustments that might result from this uncertainty.
Litigation
On March 24, 1995 the Company commenced a lawsuit against Ericcson GE Mobile
Communications, Inc., arising from the purchase of mobile telephones. The
Company alleges that Ericcson breached certain warranties given in connection
with Ericcson's sale of mobile telephones to the Company. The Company has
accrued, as of September 30, 1995, a liability for equipment received from
Ericcson in the approximate amount of $ 664,000 and has not authorized payment
of these invoices based on Ericcson's alleged breach of warranty and the
resulting damages sustained by the Company. The amount of damages sought by the
Company substantially exceeds the accrued liability.
On September 6, 1995 Peoples, commenced a lawsuit against Cellular One, a vendor
which has provided cellular telephone services to the Company. The claim
involves approximately $ 800,000 in fraudulent telephone charges incurred in
connection with the Company's telephone rental operations. Cellular One has
demanded payment of the full amount in dispute, despite the fact that all, or
substantially all, of the charges were generated through unauthorized, improper
"cloning" of the Company's cellular
F-105
<PAGE>
telephone numbers. In connection with this litigation, Cellular One has
countersued Peoples for this amount. The Company does not believe that it is
liable for payment of the fraudulent cloning charges. At this juncture,
management and the Company's outside counsel are unable to evaluate the
likelihood of an unfavorable outcome in this matter.
NOTE 5 - RELATED PARTY TRANSACTIONS
The Company has been substantially dependent upon Peoples to provide sufficient
funding to meet its cash requirements. The Company also relies on certain
functions provided by Peoples such as legal MIS, finance, and human resources.
During the nine months ended September 30, 1994 and 1995, Peoples allocated to
the Company administrative expenses of $197,815 and $183,672, respectively.
Charges by Peoples for provided services are not necessarily indicative of what
would be negotiated with independent third parties.
The payable to Peoples for funding as of September 30, 1994 and 1995 was
$11,645,935 and $17,142,823, respectively. Interest accrues on the intercompany
balance plus overdrafts at a rate of one half percent above Peoples' borrowing
rate (9.75% as of December 31, 1994).
Employees of the Company are included in the saving plan under the provisions of
section 401(k) of the Internal revenue Code and the stock option plan for
Peoples.
NOTE 6 - INCOME TAXES
The Company has net operating losses of approximately $10 million for financial
reporting purposes and approximately $9.4 million for tax purposes which are
available to reduce future taxable income and income taxes, if any. These
carryforwards expire commencing in 2008. The net operating loss carryforward for
financial purposes differs from the tax amount primarily due to differences in
the treatment of reserves (inventory and bad debt) and depreciation.
A valuation allowance reducing the asset recognized must be recorded if it is
determined that it is more likely than not that the asset will not be realized.
A valuation allowance in the amount of $3,291,111, which represents the full
amount of the future tax benefit associated with the cumulative new operating
loss carryforwards, has been established. The result is a $1,113,041 new tax
provision in 1994.
NOTE 7 - MAJOR SUPPLIER
F-106
<PAGE>
The Company utilizes one main channel of distribution, rental car companies. As
such, the Company has agreements with rental car companies to install cellular
phones in their rental cars.
The Company has a five year contract with Avis Rent A Car System, Inc. ("Avis")
effective March 1, 1995, amended effective October 1, 1995. This is an exclusive
contract for Avis locations. Under this agreement, the Company must have
installed 10,000 Ericcson or "Smart" phones by January 1, 1996 and 10,000
"Smart" phones by December 31, 1996. About 87% of the Company's sales are
through AVIS locations.
The Company has a three-year exclusive agreement, effective January 23, 1995,
for several major corporate Budget Rent-A-Car markets across the United States.
The Company has agreed to install phones in 10% of the fleet specified by Budget
in each market. Once a deployment schedule is established, the Company is
obligated under the agreement to deploy the 10% minimum within six months. To
date, no deployment schedule has been set and, therefore, the Company has not
been required to meet the 10% minimum.
NOTE 8 - BANK LOANS
In May 1995 the Company signed an agreement with Creditanstalt Corporate
Finance, Inc. for a one year loan up to $2.5 million, with an interest rate
fluctuating daily, equal to the higher of the Creditanstalt prime rate of the
Federal Funds Rate plus 1/2 of 1%. This loan is guaranteed by Peoples and is
collateralized by the Smart Phone.
NOTE 9 - SUBSEQUENT EVENTS
On July 21, 1995 the Company sold certain portable cellular phone assets to
Shared Technologies Cellular, Inc ("STC") for $225,000. On November 13, 1995,
Peoples sold certain assets subject to certain liabilities as well as assigned
certain contracts of the Company to STC for approximately $6.3 million. Of the
$6.3 million, $2.5 million represents consideration contingent upon future
earnings which is not recognizable for financial reporting purposes at the time
of the sale. Accordingly, recognizable consideration amounted to $3.8 million:
$0.3 million in cash; a $2.0 million promissory note bearing interest at 8.0%
per annum, with principal and interest payable semiannually through 2000; STC
will pay certain of the Company's liabilities, net of trade receivables as of
November 1, 1995 for a total of $1.2 million; and 100,000 shares of STC common
stock with an estimated value of approximately $225,000.
The sale included the following assets of the Company; the entire in-car phone
fleet of approximately 15,000 Ericcson phones; patents pending on the computer
operating system including Smart Phone technology and 1,530 Smart Phones; and
computer equipment. The Company's contracts with rental car companies (see Note
7) and with certain carriers were assigned to STC along with manufacturing and
royalty agreements for the Smart Phone.
Upon the November 13, 1995 sale, the Company ceased its business operations.
Peoples retained all liabilities in excess of $1.2 million assumed by STC,
including any potential liabilities arising from the lawsuits described in note
4 and the approximately $1.6 million outstanding on the Bank Loan described in
Note 8 at November 13, 1995
F-107
<PAGE>
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Post-Recapitalization/Merger Financials
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants....................... F-106
Consolidated Balance Sheets as of June 30, 1994 and 1995
and October 1, 1995 (unaudited)................................................ F-107
Consolidated Statements of Income for the Years Ended June 30, 1993,
1994 and 1995 and the three months ended
October 2, 1994 and October 1, 1995 (unaudited)................................ F-109
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended June 30, 1992, 1993, 1994 and 1995 and the three
months ended October 1, 1995 (unaudited)....................................... F-110
Consolidated Statements of Cash Flows for the Years Ended June 30,
1993, 1994 and 1995 and the three months ended
October 1, 1994 and October 2, 1995 (unaudited)................................ F-111
Notes to Consolidated Financial Statements ......................................... F-112
Pre-Recapitalization/Merger Financials
Report of Arthur Andersen LLP, Independent Public Accountants....................... F-124
Consolidated Balance Sheets as of June 30, 1994 and 1995............................ F-125
Consolidated Statements of Earnings - The Three Years Ended
June 30, 1993, 1994, and 1995.................................................. F-127
Consolidated Statements of Stockholders' Equity - The Three
Years Ended June 30, 1992, 1993, and 1994...................................... F-128
Consolidated Statements of Cash Flows - The Three Years
Ended June 30, 1993, 1994, and 1995............................................ F-130
Notes to Consolidated Financial Statements.......................................... F-132
Condensed Consolidated Balance Sheets
As of June 30, 1995 and October 1, 1995 (unaudited)............................ F-150
Consolidated Statements of Earnings for the three months ended
October 2, 1994 and October 1, 1995 (unaudited)................................ F-152
Consolidated Statements of Cash Flows for the three months ended
October 2, 1994 and October 1, 1995 (unaudited)................................ F-153
Notes to Condensed Consolidated Financial Statements................................ F-154
</TABLE>
F-108
<PAGE>
AFTER THE REORGANIZATION TRANSACTIONS DISCUSSED IN NOTE 1 TO FAIRCHILD
INDUSTRIES, INC.'S CONSOLIDATED FINANCIAL STATEMENTS IS EFFECTED, WE EXPECT TO
BE IN A POSITION TO RENDER THE FOLLOWING AUDIT REPORT.
ARTHUR ANDERSEN LLP
JANUARY 9, 1996
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Fairchild Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Fairchild
Industries, Inc. (a Delaware Corporation) as of June 30, 1994 and 1995, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended June 30, 1993, 1994 and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fairchild Industries, Inc. as
of June 30, 1994 and 1995, and the results of its operations and its cash flows
for the years ended June 30, 1993, 1994 and 1995, in conformity with generally
accepted accounting principles.
F-109
<PAGE>
FAIRCHILD INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, OCTOBER 1,
1994 1995 1995
---- ---- ----
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 64 $ 1,469 $ -
Billed accounts receivable - trade, net of allowances of $204,
$254 and $383 6,369 14,429 16,795
Unbilled accounts receivable 3,487 6,218 6,241
Inventories - 1,246 869
Prepaid and other current assets 1,326 2,283 1,904
Net current assets of operations transferred to RHI 25,760 56,876 53,391
------ ------ ------
Total current assets 37,006 82,521 79,200
PROPERTY, PLANT AND EQUIPMENT, at cost:
Buildings and improvements 3,417 3,733 3,802
Equipment and autos 59,455 73,968 77,289
Furniture and fixtures 734 3,097 3,432
------ ------ ------
63,606 80,798 84,523
Accumulated depreciation (23,104) (31,239) (33,513)
------ ------ ------
Property, plant and equipment, net 40,502 49,559 51,010
GOODWILL, less accumulated amortization of $2,389, $3,013 and $3,189 20,686 25,958 25,939
OTHER INTANGIBLE ASSETS, less accumulated amortization of $4,383,
$5,938 and $6,353 6,682 7,589 7,174
DEFERRED LOAN COSTS 5,960 4,561 4,397
PREPAID PENSION COST 216 195 184
NET NON-CURRENT ASSETS OF OPERATIONS TRANSFERRED TO RHI 220,266 180,926 184,422
------- ------- -------
Total assets $331,318 $351,309 $352,326
======== ======== ========
- -------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-110
<PAGE>
FAIRCHILD INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, OCTOBER 1,
1994 1995 1995
---- ---- ----
(unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 6,744 $ 12,780 $ 14,068
Advanced billings - 941 537
Deferred revenue on maintenance contracts 371 3,109 3,044
Accrued liabilities-
Salaries and wages 935 1,986 1,771
Sales, payroll and use taxes 1,254 1,162 1,451
Commissions 297 293 215
Dividends 975 975 975
Other 1,103 3,182 1,801
Current portion of capital lease obligations 1,954 751 514
------ ------ ------
Total current liabilities 13,633 25,179 24,376
12.25% SENIOR SECURED NOTES DUE 1999 125,000 125,000 125,000
BANK CREDIT AGREEMENT 55,373 55,373 55,373
CAPITAL LEASE OBLIGATIONS 932 185 128
POSTRETIREMENT BENEFITS 78 98 104
REDEEMABLE PREFERRED STOCK: $3.60 cumulative Series A Convertible
Preferred Stock, without par value, 424,701 shares authorized,
issued and outstanding at redemption value of $45.00 per share 19,112 19,112 19,112
------ ------ ------
Total liabilities 214,128 224,947 224,093
STOCKHOLDERS' EQUITY:
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
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
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 2,575
Accumulated deficit (111,855) (128,116) (128,697)
-------- -------- --------
Total stockholders' equity 117,190 126,362 128,233
------- ------- -------
Total liabilities and stockholders' equity $331,318 $351,309 $352,326
======== ======== ========
- -------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-111
<PAGE>
FAIRCHILD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
JUNE 30, OCTOBER 2, OCTOBER 1,
1993 1994 1995 1994 1995
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues $ 68,639 $ 74,897 $109,741 $ 20,124 $ 33,138
Cost of revenues 33,735 36,979 58,360 10,038 17,614
------ ------ ------ ------ ------
Gross profit 34,904 37,918 51,381 10,086 15,524
General and administrative expenses 19,944 21,258 32,504 5,590 10,607
Goodwill amortization 540 578 624 146 176
--- --- --- --- ---
OPERATING INCOME 14,420 16,082 18,253 4,350 4,741
Interest expense 20,033 19,538 21,280 5,430 5,490
------ ------ ------ ----- -----
NET LOSS FROM CONTINUING
OPERATIONS BEFORE TAXES (5,613) (3,456) (3,027) (1,080) (749)
Taxes - - - - -
Operating results of operations
transferred to RHI (6,644) (30,531) (9,332) 1,387 1,143
------ ------- ------ ----- -----
NET EARNINGS (LOSS) BEFORE
PREFERRED DIVIDENDS (12,257) (33,987) (12,359) 307 394
Series A preferred dividends 1,713 1,529 1,529 382 382
Series C preferred dividends 2,160 2,373 2,373 593 593
----- ----- ----- --- ---
NET LOSS AFTER PREFERRED
DIVIDENDS $(16,130) $(37,889) $(16,261) $ (668) $ (581)
======== ======== ======== ======= =======
Dividends to RHI Holdings, Inc. (Parent) $ 50,000 $ - $ - $ - $ -
======== ======== ======== ======= =======
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-112
<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 - - - - 394 394
Issuance of Series B Preferred Stock to parent - - 2,400 - - 2,400
Cash dividends to preferred stockholders - - - - (975) (975)
Paid in capital from parent - - - 52 - 52
---- ------ ------- ----- ------ --------
BALANCE, October 1, 1995 (unaudited) $140 $24,015 $230,200 $2,575 $(128,697) $128,233
==== ======= ======== ====== ========= ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-113
<PAGE>
FAIRCHILD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
JUNE 30, OCTOBER 1 OCTOBER 2
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) $(1,080) $ (749)
Adjustments to reconcile net income to net cash
(used in)/provided by operating activities:
Amortization and depreciation 7,935 8,947 10,330 2,289 2,702
(Decrease) increase in advanced billings - - 326 - (404)
Increase in billed accounts receivable (1,086) (251) (8,060) (1,630) (2,366)
(Increase) decrease in unbilled accounts
receivable (666) 277 (2,014) (108) (23)
(Decrease) increase in non-current assets (404) (43) (536) (1,793) 2,257
Increase in inventories - - (1,033) - (377)
(Decrease) increase in prepaid and other (20) (374) (709) 757 379
assets
(Decrease) increase in accrued liabilities 339 406 2,716 (522) (1,385)
(Decrease) increase in deferred revenue 359 (24) (162) (138) (65)
Increase (decrease) in accounts payable (86) (1,325) 5,576 1,288 1,288
Operations transferred to RHI 16,579 6,438 14,341 2,689 (5,182)
------ ----- ------ ----- ------
Net cash (used in)/provided by 17,337 10,655 17,748 1,752 (3,925)
operating activities
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (7,313) - (11,550) (550) -
Purchases of property, plant and equipment (5,769) (7,775) (10,349) (1,815) (2,183)
Proceeds from sales of property, plant and
equipment 8 31 25 - -
Operations transferred to RHI (6,539) (7,105) (5,754) (1,497) (1,930)
------ ------ ------ ------ ------
Net cash used in investing activities (19,613) (14,849) (27,628) (3,862) (4,113)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Issuance of Series B preferred stock 5,000 4,000 24,400 11,400 2,400
Issuance of Series C preferred stock 24,015 - - - -
Purchase/exchange of Series A preferred stock (25,126) - - - -
Payment of dividends (53,782) (3,902) (3,902) (975) (975)
Paid-in capital contribution - 143 88 - 52
Repayments of capital lease obligations (3,200) (3,118) (1,950) (394) (237)
Decrease (increase) in deferred loan cost (3,703) 1,008 1,399 338 164
Operations transferred to RHI 59,070 6,127 (8,750) (8,030) 5,165
------ ----- ------ ------ -----
Net cash provided by financing 2,274 4,258 11,285 2,339 6,569
activities
NET INCREASE (DECREASE) IN CASH (2) 64 1,405 229 (1,469)
CASH, beginning of period/year 2 - 64 64 1,469
CASH, end of period/year $ - $ - $ 1,469 $ 293 $ -
- 64 - - -
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period/year for interest $20,033 $19,538 $21,280 $ 5,430 $ 5,490
======= ======= ======= ======= =======
Cash paid during the period/year for taxes $ - $ - $ - $ - $ -
======= ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-114
<PAGE>
FAIRCHILD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO OCTOBER 1, 1995 AND THE THREE MONTHS ENDED
OCTOBER 1, 1995 AND OCTOBER 2, 1994)
1. ORGANIZATION, MERGER AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Fairchild Industries, Inc. is incorporated in the State of Delaware. As used
herein, the term "Company" refers to Fairchild Industries, Inc. The Company is a
subsidiary of RHI Holdings, Inc. ("RHI") which is in turn a wholly-owned
subsidiary of The Fairchild Corporation ("TFC").
Subsequent to June 30, 1995, TFC announced plans to recapitalize the Company in
order to improve the financial and operating flexibility and strengthen the
financial position of TFC and its subsidiaries (the "Recapitalization"). The
Company's plans to merge into Shared Technologies Inc. ("STI") (the "Merger")
are an integral part of the Recapitalization. Concurrent with the Merger, and as
part of the Recapitalization, the Company is transferring to its immediate
parent, RHI, all of its assets and liabilities except those expressly related to
the Company's telecommunications business (the "Telecommunications Business"),
$125 million principal amount of the Company's 12 1/4% Senior Secured Notes Due
1999 (the "12 1/4% Notes"), and approximately $55.4 million of existing bank
indebtedness. The Merger is contingent on STI obtaining sufficient financing.
In the Merger Agreement, TFC, RHI and FII make representations and warranties
with respect to the Telecommunications Business and the Merger Agreement
provides that STI and TFC on the one hand and RHI on the other hand shall
indemnify each other from losses arising out of any breaches of their respective
representations and warranties in the Merger Agreement to the extent that losses
to a party exceed $4,000,000.
Upon consummation of the Merger, all outstanding shares of FII common stock will
be converted into the right to receive in the aggregate (i) 6,000,000 shares of
STI Common Stock, (ii) shares of STI Cumulative Convertible Preferred Stock
bearing a six percent initial annual dividend and having an aggregate
liquidation preference of $25,000,000 plus an amount equal to the total amount
of dividends the holders would have received if dividends had been paid at the
rate of ten percent, less the amount of dividends actually paid, and (iii)
shares of STI Special Preferred having an aggregate initial liquidation
preference of $20,000,000 (the "Common Consideration"). In connection with the
Merger, all shares of Series A Convertible Preferred Stock and Series C
Cumulative Preferred Stock of FII will be redeemed by STI and canceled in
consideration of the payment of the full liquidation value thereof together with
accrued dividends aggregating approximately $44,000,000 (the "Preferred
Consideration"). RHI is transferring to the Company as a contribution to its
capital all of the outstanding shares of the Company's Series B Preferred Stock.
Prior to the Recapitalization, in addition to the Telecommunications Business,
the Company conducted two other businesses: the Aerospace Fasteners and
Industrial Products businesses. The Aerospace Fasteners business designs,
manufactures and markets high performance, specialty 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
F-115
<PAGE>
accounted for 21.4% of the Company's total combined sales for the three
businesses for the fiscal year ended June 30, 1995. The Telecommunications
Business has no operations or sales outside of the United States of America.
The transaction between STI and FII was structured as a merger. As a result of
this structure, the Surviving Corporation will be liable for all liabilities of
FII with respect to its operations prior to the Effective Time. Prior to the
Merger, and as a precondition of the Merger, FII, RHI, TFC and certain other
subsidiaries of TFC will undergo a recapitalization pursuant to which FII will
divest itself of all assets unrelated to the Telecommunications Business. RHI
will assume all liabilities of FII unrelated to the Telecommunications Business,
including but not limited to: (i) contingent liabilities related to the
Company's alleged failure to comply with certain Federal Acquisition Regulations
and Cost Accounting Standards in accounting for (a) the 1985 reversion to the
Company of certain assets of terminated defined benefit pension plans and (b)
pension costs associated with the discontinuation of certain of its former
operations; (ii) all environmental liabilities except those related to the
Company's Telecommunications Business; (iii) approximately $50,000,000 (at June
30, 1995) of costs associated with postretirement healthcare benefits; (iv) a
secured note payable in an aggregate principal amount of approximately
$3,300,000 at September 30, 1995; and (v) all other accrued and any and all
other unasserted liabilities that do not relate to or arise out of the
Telecommunications Business (which liabilities consist principally of those
related to certain divested businesses).
The Company and RHI will enter into an agreement (the "Indemnification
Agreement") pursuant to which RHI will assume and agree to discharge in full,
and will indemnify the Company from the Assumed Liabilities. Notwithstanding the
Indemnification Agreement, the Company will not be released from its obligations
with respect to the Assumed Liabilities as a matter of law. Accordingly, to the
extent RHI is unable to meet its obligations under the Indemnification
Agreement, the Company will be required to satisfy in full any of the Assumed
Liabilities not satisfied by RHI. RHI is primarily a holding company and,
therefore, any claim by the Company pursuant to the Indemnification Agreement
will be effectively subordinated to the creditors of RHI's subsidiaries. There
is no expiration date with respect to the Indemnification Agreement. All
indemnification obligations are secured by all of the shares of preferred stock
issued by STI to RHI in the Merger. Since the execution of the Merger Agreement,
FII has entered into a letter agreement setting forth the general terms of a
sale of substantially all of the assets of DME Company, its Industrial Products
Segment, which, if consummated, may have an effect on RHI's ability to meet
RHI's indemnification obligations.
With respect to the contingent liabilities described in clause (i) of the second
preceding paragraph, the Corporate Administrative Contracting Officer (the
"ACO") has directed the Company to prepare cost impact proposals relating to
such plan terminations and segment closings and, following receipt of such cost
impact proposals, may seek adjustments to contract prices. The ACO alleges that
substantial amounts will be due if such adjustments are made. The Company
believes it properly accounted for the asset reversions in accordance with
applicable accounting standards. The Company has had discussions with the
government to attempt to resolve these pension accounting issues. However, there
can be no assurance that the Company will be able to satisfactorily resolve
them.
As of June 30, 1995, the consolidated total recorded liabilities of the Company
for the environmental matters referred to above totaled $8,601,000 which was the
estimated probable exposure for these matters. It is reasonably possible that
the total exposure for these matters could be as much as $15,778,000.
F-116
<PAGE>
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:
Buildings and improvements 17 - 40 years
Equipment and autos 3 - 10 years
Furniture and fixtures 10 years
Depreciation expense related to property, plant and equipment amounted to
$6,191,000, $6,998,000 and $8,153,000 for fiscal 1993, 1994 and 1995
respectively.
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-117
<PAGE>
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.
F-118
<PAGE>
INTERIM FINANCIAL STATEMENTS
The accompanying interim consolidated financial statements, as of October 1,
1995 and for the three months ended October 2, 1994 and October 1, 1995, of the
Company have been prepared by the Company without audit. Certain information and
footnote disclosures normally included in financial statements presented in
accordance with generally accepted accounting principles have been omitted from
the accompanying interim statements. The Company believes the disclosures made
are adequate to make the information presented not misleading.
In the opinion of the Company, the accompanying unaudited interim consolidated
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of October 1, 1995 and the results of its operations and its cash
flows for the three months ended October 2, 1994 and October 1, 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 $3,000,000 of liabilities. The
Company recorded $1,610,000 and $5,595,000 in identifiable intangibles and
goodwill, respectively, as a result of this acquisition. JWP is a
telecommunications system integrator, specializing in the distribution,
installation and maintenance of voice and data communications equipment. In the
first quarter of fiscal 1995, the Company acquired all the shared
telecommunications assets of Eaton & Lauth Co., Inc., for approximately
$550,000. The Company recorded $250,000 and $300,000 of the acquisition price as
identifiable intangibles and goodwill, respectively. See Note 12 for the pro
forma information assuming acquisition of JWP at the beginning of fiscal 1995
and at the beginning of fiscal 1994.
In fiscal 1993, the Company acquired all the telecommunications assets of Office
Networks, Inc. for approximately $7,300,000. The Company recorded $2,282,000 and
$2,748,000 in identifiable intangibles and goodwill, respectively, as a result
of this acquisition.
F-119
<PAGE>
3. OPERATIONS BEING TRANSFERRED TO RHI:
The operations being transferred to RHI had the following operating results and
net assets (in thousands).
<TABLE>
<CAPTION>
JUNE 30,
--------
1994 1995
---- ----
<S> <C> <C>
Current assets $173,835 $165,738
Property, plant and equipment, net 116,799 108,632
Goodwill 175,243 170,028
Net assets held for sale 34,515 34,811
Other assets 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>
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
F-120
<PAGE>
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
revolving credit facility and Term Loan VIII, and at 2.75% over LIBOR for Term
Loan VII, respectively. The LIBOR was approximately 6% as of June 30, 1995. The
commitment fee on the unused portion of the revolving credit facility was 1.0%
at June 30, 1995. The Credit Facilities mature March 31, 1997 and are secured by
substantially all the Company's assets. RHI has assumed $94,393,000 and
$84,982,000 of this debt as of June 30, 1994 and 1995, respectively, in
connection with the Merger. The remaining debt related to the continuing
operations will be repaid as part of the Merger and there will be no further
obligation of the Company.
F-121
<PAGE>
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 $ $106
97
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
===== ==== ====
Assumptions used in accounting for the plans were:
1993 1994 1995
---- ---- ----
Discount rate 8.5% 8.5% 8.5%
Expected rate of increase in salaries 4.5% 4.5% 4.5%
Expected long-term rate of return on plan assets 9.0% 9.0% 9.0%
</TABLE>
F-122
<PAGE>
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
F-123
<PAGE>
health care cost trend rate of 8.0% and 7.5% for pre-age-65 and post-age-65
employees, respectively, gradually decreasing to 4.5% and 4.5%, respectively, in
the year 2003 and thereafter.
Increasing the assumed health care cost trend rates by 1% would increase the
accumulated postretirement benefit obligation related to the continuing
operations of the Company as of June 30, 1995, by approximately $29,000, and
increase net periodic postretirement benefit cost by approximately $7,000 for
fiscal 1995.
6. INCOME TAXES:
Effective July 1, 1993, the Company changed its method of accounting for income
taxes from the deferred method to the liability method required by Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income
Taxes".
Under the liability method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities, and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Prior to the adoption of
SFAS No. 109, income tax expense was determined using the deferred method.
Deferred tax expense was based on items of income and expense that were reported
in different years in the financial statements and tax returns and were measured
at the tax rate in effect in the year the difference originated.
As permitted under SFAS No. 109, prior years' financial statements were not
restated. The effect of the accounting change was not material.
There was no provision or benefit for current or deferred income taxes from
continuing operations for 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>
F-124
<PAGE>
The following table is a summary of the significant components of the continuing
operations portion of the Company's deferred tax assets and liabilities as of
June 30, 1994 and 1995.
<TABLE>
<CAPTION>
1994 1995
Deferred Deferred
(Provision) June 30, (Provision) June 30,
Benefit 1994 Benefit 1995
------- ---- ------- ----
(In thousands)
<S> <C> <C> <C> <C>
Deferred tax assets:
Accrued expenses $ (15) $ 72 $ 17 $ 89
Employee compensation and benefits 32 192 45 237
Deferred revenue (9) 130 958 1,088
NOL carryforwards 1,682 12,311 822 13,133
Postretirement benefits 41 135 27 162
Other 58 40 8 48
------- -------- --------- ---------
1,673 12,880 1,877 14,757
Deferred tax liabilities:
Asset basis differences - fixed assets (592) (5,367) - (5,367)
Asset basis differences - intangible assets (143) (1,426) (198) (1,624)
Other (10) (326) - (326)
------- -------- --------- ---------
(745) (7,119) (198) (7,317)
------- -------- --------- ---------
Less- valuation allowance (928) (5,761) (1,679) (7,440)
------- -------- --------- ---------
Net deferred tax liability $ - $ - $ - $ -
========= ========= ========= ========
</TABLE>
For fiscal 1993, prior to the change in method of accounting for taxes,
the deferred income tax component of the income tax provision for continuing
operations consists of the effect of timing differences related to:
1993
(IN THOUSANDS)
Deferred revenue................................... 122
Intangible amortization............................ (386)
Depreciation....................................... (1,346)
Effect of net operating loss....................... 1,610
------
$ -
======
In the opinion of management, adequate provision has been made for all income
taxes and interest, and any tax liability that may arise for prior periods will
not have a material effect on the financial condition or results of operations
of the Company.
The Company has entered into a tax sharing agreement with its parent whereby the
Company is included in the consolidated federal income tax return of TFC. The
Company makes payments to TFC based on the amount of federal income taxes, if
any, it would have paid had it filed a separate federal income tax return.
F-125
<PAGE>
7. REDEEMABLE PREFERRED STOCK:
As part of the Merger discussed in Note 1, the outstanding Series A Preferred
Stock will be redeemed at $45.00 per share. The Series A Preferred Stock is
subject to annual mandatory redemptions and annual dividend payments of $3.60
per share. The Company did not purchase any shares during the past three fiscal
years. Series A Preferred Stock is listed on the New York Stock Exchange
("NYSE").
Holders of the Series A Preferred Stock have general voting rights.
Additionally, in the event of a cumulative arrearage equal to six quarterly
dividends, all Series A Preferred stockholders have the right to elect
separately, as a class, two members to the Board of Directors. No cash dividends
can be declared or paid on any stock junior to the Series A Preferred Stock in
the event of dividend arrearages or a default in the obligation to redeem such
Series A Preferred Stock. Due to the merger of the Company with RHI in August
1989, holders of the Series A Preferred Stock are entitled, at their option, but
subject to compliance with certain covenants under the Company's Credit
Agreement, to redeem their shares for $27.18 in cash.
Annual maturity redemption requirements for redeemable preferred stock as of
June 30, 1995, are as follows: $4,211,000 for 1996, $7,450,000 for 1997, and
$7,450,000 for 1998.
8. EQUITY SECURITIES:
As part of the Merger discussed in Note 1, the Series C Preferred Stock will be
redeemed at redemption value of $45.00 per share. 558,360 shares of Series C
Preferred Stock were authorized, issued and outstanding at June 30, 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 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.
F-126
<PAGE>
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>
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.
F-127
<PAGE>
JUNE 30,
DESCRIPTION 1995
----------- ----
(In thousands)
Building improvements $ 422
Equipment and autos 11,582
Furniture and fixtures 297
Less- Accumulated depreciation (6,446)
------
$5,855
======
Future minimum lease payments:
OPERATING CAPITAL
LEASES LEASES
------ ------
(In thousands)
1996 $ 4,414 $ 812
1997 4,635 189
1998 4,867 8
1999 5,110 -
2000 5,366 -
- ---- -------- -------
$24,392 1,009
=======
Less- Amount representing interest (73)
-------
Present value of capital lease obligations $ 936
=======
Rental expense under all leases amounted to $2,985,000, $3,023,000 and
$4,204,000 for the years ended June 30, 1993, 1994 and 1995, respectively.
OTHER MATTERS
The Company's continuing operations are involved in various claims and lawsuits
incidental to its business. The Company, either on its own or through its
insurance carriers, is contesting these matters. In the opinion of management,
the ultimate resolution of the legal proceedings will not have a material
adverse effect on the financial condition or the future operating results of the
Company. See further discussion of the Assumed Liabilities in Note 1.
F-128
<PAGE>
12. PRO FORMA INFORMATION (UNAUDITED):
As described in Note 2, the Company acquired substantially all of the
telecommunications assets of JWP on November 28, 1994. The following unaudited
pro forma condensed results of operations for the years ended June 30, 1994 and
1995, give effect to the JWP acquisition as if the acquisition had occurred at
the beginning of each year.
UNAUDITED
---------
FISCAL 1994 FISCAL 1995
----------- -----------
(In thousands)
Sales $122,426 $132,716
Cost of sales (86,860) (98,628)
Other 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)
======== ========
F-129
<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-130
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, June 30,
ASSETS 1994 1995
- ---------- -------- --------
<S> <C> <C>
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
======= =======
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
F-131
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1995
- ------------------------------------ -------- --------
<S> <C> <C>
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
-------- --------
F-132
<PAGE>
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
====== ======
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
F-133
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands)
<TABLE>
<CAPTION>
For the years ended June 30,
----------------------------
1993 1994 1995
Revenues: -------- -------- --------
<S> <C> <C> <C>
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
principals (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
-------- -------- --------
F-134
<PAGE>
Loss after Preferred Dividends $ (16,130) (37,889) $(16,261)
====== ===== ======
Dividends to RHI Holdings, Inc.
(Parent) $ 50,000 $ -- $ --
====== ===== =====
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
F-135
<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, July 1, 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
------- ------- ------- ------- -------- ------- -------
F-136
<PAGE>
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
======== ======== ======== ======== ========= ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
F-137
<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
Cash flows from operating activities: -------- -------- --------
<S> <C> <C> <C>
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)
------- -------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
F-138
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In thousands)
<TABLE>
<CAPTION>
For the years ended June 30,
------------------------------
1993 1994 1995
-------- -------- --------
Cash flows from financing activities:
<S> <C> <C> <C>
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
======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
F-139
<PAGE>
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:
(In thousands) 1993 1994 1995
-------- -------- --------
Interest $ 19,129 $ 25,050 $ 29,898
Income taxes 1,171 270 1,867
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>
(In thousands) June 30, June 30,
1994 1995
-------- --------
<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.
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:
F-140
<PAGE>
<TABLE>
<CAPTION>
(In thousands) June 30, June 30,
1994 1995
-------- --------
<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
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.
F-141
<PAGE>
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-142
<PAGE>
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,
(In thousands) 1994 1995
-------- --------
<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
(In thousands) June 30, 1995 Facilities
------------- ----------
<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%.
F-143
<PAGE>
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. 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
F-144
<PAGE>
is to contribute each year the minimum amount required under the Employee
Retirement Income Security Act of 1974.
The following table provides a summary of the components of net
periodic pension cost for the plans:
<TABLE>
<CAPTION>
(In thousands) 1993 1994 1995
---- ---- ----
<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
======= ======= =======
Assumptions used in accounting for the plans were:
1993 1994 1995
---- ---- ----
Discount Rate 8.5% 8.5% 8.5%
Expected rate of increase in salaries 4.5% 4.5% 4.5%
Expected long term rate of return on
plan assets 9.0% 9.0% 9.0%
</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>
(In thousands) 1994 1995
-------- --------
<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)
------- -------
F-145
<PAGE>
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 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>
(In thousands)
1994 1995
------- -------
<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>
F-146
<PAGE>
The following table set forth the funded status for the Company's
postretirement health care benefit plan at June 30, 1994 and 1995:
<TABLE>
<CAPTION>
(In thousands)
1994 1995
------- -------
Accumulated postretirement benefit obligations:
<S> <C> <C>
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.
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.
F-147
<PAGE>
The provision (benefit) for income taxes from continuing operations is
summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
1993 1994 1995
Continuing operations: -------- -------- --------
Current:
<S> <C> <C> <C>
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>
(In thousands) 1993 1994 1995
-------- -------- --------
<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>
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:
F-148
<PAGE>
<TABLE>
<CAPTION>
(In thousands) 1994 1995
Deferred Deferred
June 30, (Provision) June 30, (Provision)
1994 Benefit 1995 Benefit
-------- ---------- -------- ------------
Deferred tax assets:
<S> <C> <C> <C> <C>
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-149
<PAGE>
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:
(In thousands) 1993
--------
Compensation and other wage related $ 813
Pension expense and reversion 200
Depreciation 2,839
Other (2,866)
--------
$ 986
========
F-150
<PAGE>
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.
F-151
<PAGE>
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
Statement of Financial Accounting Standards No. 107 ("SFAS 107"),
"Disclosures about Fair Value of Financial Instruments," requires disclosures of
fair value information about financial instruments, whether or not recognized in
the balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
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:
F-152
<PAGE>
<TABLE>
<CAPTION>
June 30, 1994 June 30, 1995
--------------------- ---------------------
Carrying Fair Carrying Fair
(In Thousands) Amount Value Amount Value
-------- -------- -------- --------
<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>
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>
(In thousands)
SIGNIFICANT COMPONENTS 1993 1994
- ---------------------- ------ ------
<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.
F-153
<PAGE>
(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.
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.
F-154
<PAGE>
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:
(In thousands)
June 30,
Description 1995
----------- ------
Buildings and improvements $ 422
Machinery and equipment 12,688
Furniture and fixtures 297
Less: Accumulated depreciation (7,167)
------
$ 6,240
======
<TABLE>
<CAPTION>
Future minimum lease payments:
Operating Capital
(In thousands) Leases Leases
------ ------
<S> <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 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.
F-155
<PAGE>
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-156
<PAGE>
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:
F-157
<PAGE>
<TABLE>
<CAPTION>
(In thousands) 1993 1994 1995
------- ------- -------
<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
======= ======= =======
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.
F-158
<PAGE>
(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>
(In thousands) 1993 1994 1995
------- ------- -------
<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>
Export sales are defined as sales to customers in foreign countries by
the Company's domestic operations. Export sales amounted to the following:
<TABLE>
<CAPTION>
(In thousands)
1993 1994 1995
<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>
F-159
<PAGE>
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
-------------------------------------------
<TABLE>
<CAPTION>
First Second Third Fourth
(In thousands) Quarter Quarter Quarter Quarter
------- -------- -------- --------
<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-160
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, October 1,
ASSETS 1995 1995
- ------ ------------ ------------
(*) (Unaudited)
Current Assets:
Cash and cash equivalents.................... $ 2,412 $ 6,614
Accounts receivable-trade, less allowances
of $4,478 and $4,373....................... 84,927 87,228
Inventories:
Finished goods............................ 50,963 53,623
Work-in-process........................... 19,976 19,379
Raw materials............................. 17,866 17,114
------- -------
88,805 90,116
Prepaid expenses and other current assets.... 15,239 9,680
------- -------
Total Current Assets......................... 191,383 193,638
Property, plant and equipment, net of
accumulated depreciation of and $110,616
$115,319................................... 158,191 155,312
Net assets held for sale..................... 34,811 35,463
Cost in excess of net assets acquired,
(Goodwill) less accumulated amortization of
$34,707 and $36,178........................ 195,986 194,625
Prepaid pension assets....................... 15,336 14,470
Other assets................................. 20,081 20,623
------- -------
Total Assets................................. $615,788 $614,131
======= =======
*Condensed from audited financial statements.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-161
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, October 1,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1995
- ------------------------------------ ------------ ------------
(*) (Unaudited)
Current Liabilities:
Bank notes payable and current
maturities of long-term debt........... $ 15,352 $ 21,799
Accounts payable......................... 39,124 36,875
Due to affiliated companies.............. 13,759 18,684
Accrued interest......................... 6,647 3,170
Other accrued liabilities................ 59,159 58,286
------- -------
Total Current Liabilities................ 134,041 138,814
Long-term debt, less current maturities.. 249,306 242,861
Other long-term liabilities.............. 13,179 12,852
Retiree health care liabilities.......... 47,567 47,141
Noncurrent income taxes.................. 18,049 18,078
------- -------
Total Liabilities........................ 462,142 459,746
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, 2,302
and 2,278 issued and outstanding;
liquidation value of $100,000 per share 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
Common stock, par value of $100.00 per
share, 1,400 shares authorized,
issued, and outstanding................ 140 140
Paid-in capital.......................... 2,523 2,575
Accumulated deficit...................... (128,116) (128,697)
Cumulative translation adjustment........ 8,172 7,040
------- -------
Total Stockholders' Equity............... 134,534 135,273
------- -------
Total Liabilities and Stockholders'
Equity................................. $615,788 $614,131
======= =======
*Condensed from audited financial statements.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-162
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
(In thousands)
Three Months Ended
October 2, October 1,
1994 1995
------------ ------------
Revenue:
Sales.................................... $114,562 $132,187
Other income, net........................ 569 345
------- -------
115,131 132,532
Costs and Expenses:
Cost of sales............................ 84,386 98,229
Selling, general & administrative........ 18,334 21,908
Research and development................. 968 752
Amortization of goodwill................. 1,464 1,471
------- -------
105,152 122,360
Operating income............................ 9,979 10,172
Interest expense............................ 8,466 9,177
Interest income............................. (26) (46)
------- -------
Net interest expense........................ 8,440 9,131
Investment income........................... 278 --
Equity in earnings of affiliates............ 277 170
Minority interest........................... (67) (38)
------- -------
Earnings from continuing operations
before taxes............................... 2,027 1,173
Income tax provision........................ 1,720 779
------- -------
Net earnings................................ 307 394
Series A Preferred Dividends................ 382 382
Series C Preferred Dividends................ 593 593
------- -------
Net loss after Preferred Dividends.......... $ (668) $ (581)
======= =======
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-163
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Months Ended
October 2, October 1,
1994 1995
------------ ------------
Cash flows provided by (used for) Operations:
Net earnings............................ $ 307 $ 394
Adjustments to reconcile net earnings:
Depreciation and amortization........... 7,878 8,755
Accretion of discount on long-term
liabilities........................... 782 850
Minority interest....................... 67 38
Undistributed earnings of affiliates.... (150) 33
Changes in assets and liabilities....... (7,974) (7,504)
------- -------
Net cash provided by operations......... 910 2,566
Investments:
Purchase of property, plant and equipment (3,443) (3,508)
Acquisitions, net of cash acquired...... (550) --
Other, net.............................. 131 (605)
------- -------
Net cash used for investments........... (3,862) (4,113)
Financing:
Proceeds from issuance of debt.......... 940 7,541
Debt repayments, net.................... (9,364) (2,614)
Issuance of Series B preferred stock.... 11,400 2,400
Payment of dividends.................... (975) (975)
Paid in capital contribution............ -- 53
------- -------
Net cash provided by financing.......... 2,001 6,405
Effect of exchange rate changes on cash..... 684 (656)
Net increase (decrease) in cash............. (267) 4,202
Cash and cash equivalents, beginning of
period.................................. 2,468 2,412
------- -------
Cash and cash equivalents, end of period.... $ 2,201 $ 6,614
======= =======
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-164
<PAGE>
FAIRCHILD INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Financial Statements
The consolidated balance sheet as of October 1, 1995, and the consolidated
statements of earnings and cash flows for the three months ended October 2, 1994
and October 1, 1995 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 October 1, 1995, and for all periods presented have
been made. The balance sheet at June 30, 1995, was condensed 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 October 1, 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 - Acquisitions
On November 28, 1994, Fairchild Communications Services Company ("Fairchild
Communications"), a partnership whose partners are indirect subsidiaries of the
Company, completed the acquisition of substantially all of the
telecommunications assets of JWP Telecom, Inc. ("JWP") for approximately
$11,000,000, plus the assumption of approximately $3,000,000 of liabilities. 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.
Pro forma financial statements are not required for these acquisitions on
an individual basis.
F-165
<PAGE>
Note 3 - 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. There
were 424,701 shares of Series A Preferred Stock authorized, issued and
outstanding at June 30, 1995 and October 1, 1995.
F-166
<PAGE>
Note 4 - 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 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.
F-167
<PAGE>
As of October 1, 1995, the consolidated total recorded liabilities of the
Company for environmental matters referred to above totalled $7,988,000. As of
October 1, 1995, the estimated probable exposures for these matters was
$7,967,000. It is reasonably possible that the Company's total exposure for
these matters could be approximately $15,165,000.
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.
Note 5 - Subsequent Events
On November 9, 1995, the Company announced it has entered into an agreement
to merge with Shared Technologies Inc. ("Shared Technologies"). The agreement
provides that, upon consummation of the merger, Shared Technologies will (1)
assume and repay $180,000,000 of the Company's existing debt, and may redeem its
Series A and Series C preferred stock issues, and (2) issue to the Company's
parent 6,000,000 shares of common stock of Shared Technologies (equal to
approximately 41% of Shared Technologies shares outstanding following the
transaction) and $45,000,000 face amount of newly-issued Shared Technologies
preferred shares, part of which are convertible into additional shares of Shared
Technologies common stock which would increase RHI Holdings, Inc. ("RHI"), the
Company's parent, interest to approximately 42%, on a fully diluted basis. None
of the Company's assets and liabilities other than those relating to the
Communications Services segment and $180,000,000 of the Company's existing debt
will be transferred to Shared Technologies pursuant to the merger. The Company
and Shared Technologies expect to complete this transaction in January, 1996.
On November 13, 1995, the Company signed a letter of intent with Cincinnati
Milacron Inc. ("Cincinnati Milacron") to sell the D-M-E Company ("D-M-E"), a
mold equipment supplier, subject to satifactory completion of due diligence and
definitive documentation, and various approvals of, including the Cincinnati
Milcron Board of Directors, normal regulatory agencies and debt holders of the
Company. The sale price is approximately $260,000,000 for the purchase of the
D-M-E business including assets and liabilities. The Company expects to complete
this transaction early in 1996.
Both transactions will result in significant gains to the Company.
F-168
EXHIBIT INDEX
Exhibit Description Page
A Merger Agreement
A-1 First Amendment to Agreement and Plan of Merger
B Opinion of S.G. Warburg & Co., Inc.
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of November 9, 1995, by
and among Fairchild Industries, Inc., a Delaware corporation ("Fairchild"), RHI
Holdings, Inc., a Delaware corporation ("RHI"), The Fairchild Corporation, a
Delaware corporation ("TFC"), and Shared Technologies Inc., a Delaware
corporation ("Shared Technologies").
W I T N E S S E T H :
WHEREAS, the Boards of Directors of Fairchild and Shared
Technologies have approved the merger of Fairchild with and into Shared
Technologies (the "Merger") upon the terms and subject to the conditions set
forth herein and in accordance with the laws of the State of Delaware;
WHEREAS, RHI, which is a wholly owned subsidiary of TFC, is
the sole owner of all of the outstanding common stock of Fairchild and has
approved the Merger upon the terms and subject to the conditions set forth
herein, and RHI has received an irrevocable proxy from the holder of
approximately 9.84% of Shared Technologies' common stock (based on the shares
outstanding as of the date hereof) agreeing to vote for the Merger;
WHEREAS, Fairchild is the sole owner of 100% of the issued and
outstanding capital stock of VSI Corporation ("VSI");
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and agreements herein contained, the parties hereto, intending
to be legally bound, agree as follows:
ARTICLE I
MERGER
1.1 The Merger. At the Effective Time (as hereinafter
defined), Fairchild shall be merged with and into Shared Technologies as
provided herein. Thereupon, the corporate existence of Shared Technologies, with
all its purposes, powers and objects, shall continue unaffected and unimpaired
by the
<PAGE>
Merger, and the corporate identity and existence, with all the purposes, powers
and objects, of Fairchild shall be merged with and into Shared Technologies and
Shared Technologies as the corporation surviving the Merger shall be fully
vested therewith and shall change its name to "Shared Technologies Fairchild
Inc." The separate existence and corporate organization of Fairchild shall cease
upon the Merger becoming effective as herein provided and thereupon Fairchild
and Shared Technologies shall be a single corporation, Shared Technologies
Fairchild Inc. (herein sometimes called the "Surviving Corporation"). Prior to
the Effective Time, Fairchild and its subsidiaries will undergo a corporate
reorganization (the "Fairchild Reorganization") pursuant to which all the assets
of Fairchild and its subsidiaries (other than certain indebtedness and preferred
stock) will be transferred to, and liabilities of Fairchild and its subsidiaries
will be assumed by, RHI except for the assets and liabilities comprising the
telecommunications systems and service business of Fairchild Communications
Services Company, which as a result of said reorganization, will reside in VSI,
all as described on Schedule 9.1. Except where indicated to the contrary, all
references herein to "Fairchild" shall be deemed to refer to Fairchild as it
will exist following the Fairchild Reorganization and, accordingly, none of the
representations, warranties, restrictions or covenants contained in this
Agreement apply to the businesses, operations, assets or liabilities of
Fairchild Industries, Inc. and its subsidiaries other than as they relate to the
telecommunications systems and service business of Fairchild, and each of TFC,
RHI and Fairchild may operate such other businesses and assets (including
without limitation selling assets and businesses and incurring liabilities) as
it deems appropriate in the exercise of its business judgment.
1.2 Filing. As soon as practicable after the requisite
approval of the Merger by the stockholders of Shared Technologies and the
fulfillment or waiver of the conditions set forth in Sections 9.1, 9.2 and 9.3
or on such later date as may be mutually agreed to between Fairchild and Shared
Technologies, the parties hereto will cause to be filed with the office of the
Secretary of State of the State of Delaware, a certificate of merger (the
"Certificate of Merger"), in such form as required by, and executed in
accordance with, the relevant provisions of the Delaware General Corporation Law
(the "DGCL").
1.3 Effective Time of the Merger. The Merger shall be
effective at the time that the filing of the Certificate of
<PAGE>
Merger with the office of the Secretary of State of the State of Delaware is
completed, or at such later time specified in such Certificate of Merger, which
time is herein sometimes referred to as the "Effective Time" and the date
thereof is herein sometimes referred to as the "Effective Date."
ARTICLE II
CERTIFICATE OF INCORPORATION; BY-LAWS;
SHAREHOLDERS AGREEMENT
2.1 Certificate of Incorporation. The Certificate of
Incorporation of Shared Technologies, as amended in accordance with this
Agreement, shall be the Certificate of Incorporation of the Surviving
Corporation.
2.2 By-Laws. The By-Laws of Shared Technologies, as amended in
accordance with this Agreement, shall be the By-Laws of the Surviving
Corporation until the same shall thereafter be altered, amended or repealed in
accordance with law, the Certificate of Incorporation of the Surviving
Corporation or said By-Laws.
2.3 Shareholders Agreement. At the Effective Time, Shared
Technologies, RHI and Anthony D. Autorino shall enter into a shareholders
agreement in the form of Exhibit A hereto (the "Shareholders Agreement")
providing for the election of directors and officers of the Surviving
Corporation.
ARTICLE III
CONVERSION OF SHARES
3.1 Conversion. At the Effective Time the issued shares of
capital stock of Fairchild shall, by virtue of the Merger and without any action
on the part of the holders thereof, become and be converted as follows: (A) each
outstanding share of Common Stock, $100.00 par value per share, of Fairchild
(the "Fairchild Common Stock") shall be converted into and become the right to
receive a Pro Rata Amount (as defined below) of the Merger Consideration (as
defined below); and (B) each outstanding share of Series A Preferred Stock,
without par value, of Fairchild (the "Series A Preferred Stock") and each
outstanding
<PAGE>
share of Series C Preferred Stock, without par value, of Fairchild (the "Series
C Preferred Stock") shall be converted into the right to receive an amount in
cash equal to $45.00 per share ($44,237,745 in the aggregate for all such shares
of Series A Preferred Stock and Series C Preferred Stock) plus accrued and
unpaid dividends thereon to the Effective Time. "Merger Consideration" means (x)
6,000,000 shares of Common Stock, $.004 par value per share, of Shared
Technologies (the "Technologies Common Stock"), (y) shares of Convertible
Preferred Stock of Shared Technologies (the "Convertible Preferred Stock")
having an initial aggregate liquidation value of $25,000,000 and the other terms
set forth on the attached Schedule 3.1(a) and (z) shares of Special Preferred
Stock of Shared Technologies (the "Special Preferred Stock") having an initial
aggregate liquidation value of $20,000,000 and the other terms set forth on the
attached Schedule 3.1(b). The Convertible Preferred Stock and Special Preferred
Stock are collectively referred to as the "Preferred Stock." With respect to any
share of capital stock, "Pro Rata Amount" means the product of the Merger
Consideration multiplied by a fraction, the numerator of which is one and the
denominator of which is the aggregate number of all issued and outstanding
shares of such capital stock on the Effective Date.
3.2 Preferred Stock Pledge. Immediately after the Effective
Time, RHI shall pledge all of the shares of Preferred Stock then issued to it
(other than shares of Convertible Preferred Stock having an aggregate
liquidation preference of $1,500,000) to secure RHI's and Fairchild's
obligations under the Indemnification Agreement of TFC and RHI (the form of
which is attached as Exhibit B-1 hereto) pursuant to the terms of a Pledge
Agreement (the form of which is attached as Exhibit C hereto) and with a pledge
agent mutually agreed upon by the parties. Such shares will be released from
such pledge on the later to occur of (i) third anniversary of the Effective Time
and (ii) the date on which the consolidated net worth (computed in accordance
with generally accepted accounting principles) of The Fairchild Corporation at
such time (or evidenced by any audited balance sheet) is at least (x) $25
million greater than such net worth at September 30, 1995 (excluding for such
purpose any value attributed to the Preferred Stock on such balance sheet) and
(y) $225 million (including for such purpose the value of the Preferred Stock).
ARTICLE IV
<PAGE>
CERTAIN EFFECTS OF THE MERGER
4.1 Effect of the Merger. On and after the Effective Time and
pursuant to the DGCL, the Surviving Corporation shall possess all the rights,
privileges, immunities, powers, and purposes of each of Fairchild and Shared
Technologies; all the property, real and personal, including subscriptions to
shares, causes of action and every other asset (including books and records) of
Fairchild and Shared Technologies, shall vest in the Surviving Corporation
without further act or deed; and the Surviving Corporation shall assume and be
liable for all the liabilities, obligations and penalties of Fairchild and
Shared Technologies; provided, however, that this shall in no way impair or
affect the indemnification obligations of any party pursuant to indemnification
agreements entered into in connection with this Agreement. No liability or
obligation due or to become due and no claim or demand for any cause existing
against either Fairchild or Shared Technologies, or any stockholder, officer or
director thereof, shall be released or impaired by the Merger, and no action or
proceeding, whether civil or criminal, then pending by or against Fairchild or
Shared Technologies, or any stockholder, officer or director thereof, shall
abate or be discontinued by the Merger, but may be enforced, prosecuted, settled
or compromised as if the Merger had not occurred, and the Surviving Corporation
may be substituted in any such action or proceeding in place of Fairchild or
Shared Technologies.
4.2 Further Assurances. If at any time after the Effective
Time, any further action is necessary or desirable to carry out the purposes of
this Agreement and to vest the Surviving Corporation with full right, title and
possession to all assets, property, rights, privileges, powers and franchises of
either of Fairchild or Shared Technologies, the officers of such corporation are
fully authorized in the name of their corporation or otherwise to take, and
shall take, all such further action and TFC will, and cause each of its
subsidiaries (direct or indirect) to, take all actions reasonably requested by
the Surviving Corporation (at the Surviving Corporation's expense) in
furtherance thereof.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SHARED TECHNOLOGIES
<PAGE>
Shared Technologies represents and warrants to Fairchild that:
5.1 Organization and Qualification. Each of Shared
Technologies and its subsidiaries (which for purposes of this Agreement, unless
indicated to the contrary, shall not include Shared Technologies Cellular, Inc.)
is a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation and has all requisite corporate
power and authority to own, lease and operate its properties and to carry on its
business as now being conducted. Each of Shared Technologies and its
subsidiaries is duly qualified as a foreign corporation to do business, and is
in good standing, in each jurisdiction where the character of its properties
owned or leased or the nature of its activities makes such qualification
necessary, except for failures to be so qualified or in good standing which
would not, individually or in the aggregate, have a material adverse effect on
the general affairs, management, business, operations, condition (financial or
otherwise) or prospects of Shared Technologies and its subsidiaries taken as a
whole (a "Shared Technologies Material Adverse Effect"). Neither Shared
Technologies nor any of its subsidiaries is in violation of any of the
provisions of its Certificate of Incorporation (or other applicable charter
document) or By-Laws. Shared Technologies has delivered to Fairchild accurate
and complete copies of the Certificate of Incorporation (or other applicable
charter document) and By-Laws, as currently in effect, of each of Shared
Technologies and its subsidiaries.
5.2 Capital Stock of Subsidiaries. The only direct or indirect
subsidiaries of Shared Technologies are those listed in Section 5.2 of the
Disclosure Statement previously delivered by Shared Technologies to Fairchild
(the "Disclosure Statement"). Shared Technologies is directly or indirectly the
record (except for directors' qualifying shares) and beneficial owner (including
all qualifying shares owned by directors of such subsidiaries as reflected in
Section 5.2 of the Disclosure Statement) of all of the outstanding shares of
capital stock of each of its subsidiaries, there are no proxies with respect to
such shares, and no equity securities of any of such subsidiaries are or may be
required to be issued by reason of any options, warrants, scrip, rights to
subscribe for, calls or commitments of any character whatsoever relating to, or
securities or rights
<PAGE>
convertible into or exchangeable for, shares of any capital stock of any such
subsidiary, and there are no contracts, commitments, understandings or
arrangements by which any such subsidiary is bound to issue additional shares of
its capital stock or securities convertible into or exchangeable for such
shares. Other than as set forth in Section 5.2 of the Disclosure Statement, all
of such shares so owned by Shared Technologies are validly issued, fully paid
and nonassessable and are owned by it free and clear of any claim, lien or
encumbrance of any kind with respect thereto. Except as disclosed in Section 5.2
of the Disclosure Statement, Shared Technologies does not directly or indirectly
own any interest in any corporation, partnership, joint venture or other
business association or entity.
5.3 Capitalization. The authorized capital stock of Shared
Technologies consists of 20,000,000 shares of Common Stock, par value $.004 per
share, and 10,000,000 shares of Preferred Stock, par value $.01 per share. As of
the date hereof, 8,495,815 shares of Common Stock were issued and outstanding
and 1,527,970 shares of Preferred Stock were issued and outstanding. All of such
issued and outstanding shares are validly issued, fully paid and nonassessable
and free of preemptive rights. As of the date hereof 5,022,083 shares of Common
Stock were reserved for issuance upon exercise of outstanding convertible
securities, warrants, options, and options which may be granted under the stock
option plans of Shared Technologies (the "Stock Option Plans"), all of which
warrants, options and Stock Option Plans are listed and described in Section 5.3
of the Disclosure Statement. Other than the Stock Option Plans, Shared
Technologies has no other plan which provides for the grant of options to
purchase shares of capital stock, stock appreciation or similar rights or stock
awards. Except as set forth above, there are not now, and at the Effective Time,
except for shares of Common Stock issued after the date hereof upon the
conversion of convertible securities and the exercise of warrants and options
outstanding on the date hereof or issued after the date hereof pursuant to the
Stock Option Plans, there will not be, any shares of capital stock of Shared
Technologies issued or outstanding or any subscriptions, options, warrants,
calls, claims, rights (including without limitation any stock appreciation or
similar rights), convertible securities or other agreements or commitments of
any character obligating Shared Technologies to issue, transfer or sell any of
its securities.
<PAGE>
5.4 Authority Relative to This Agreement. Shared Technologies
has full corporate power and authority to execute and deliver this Agreement and
to consummate the Merger and other transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the Merger and
other transactions contemplated hereby have been duly and validly authorized by
the Board of Directors of Shared Technologies and no other corporate proceedings
on the part of Shared Technologies are necessary to authorize this Agreement or
to consummate the Merger or other transactions contemplated hereby (other than,
with respect to the Merger, the approval of Shared Technologies' stockholders
pursuant to Section 251(c) of the DGCL). This Agreement has been duly and
validly executed and delivered by Shared Technologies and, assuming the due
authorization, execution and delivery hereof by Fairchild, constitutes a valid
and binding agreement of Shared Technologies, enforceable against Shared
Technologies in accordance with its terms, except to the extent that its
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws affecting the enforcement of creditors'
rights generally or by general equitable or fiduciary principles.
5.5 No Violations, etc.
(a) Assuming that all filings, permits, authorizations,
consents and approvals or waivers thereof have been duly made or obtained as
contemplated by Section 5.5(b) hereof, except as listed in Section 5.5 of the
Disclosure Statement, neither the execution and delivery of this Agreement by
Shared Technologies nor the consummation of the Merger or other transactions
contemplated hereby nor compliance by Shared Technologies with any of the
provisions hereof will (i) violate, conflict with, or result in a breach of any
provision of, or constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, or result in the termination
or suspension of, or accelerate the performance required by, or result in a
right of termination or acceleration under, or result in the creation of any
lien, security interest, charge or encumbrance upon any of the properties or
assets of Shared Technologies or any of its subsidiaries under, any of the
terms, conditions or provisions of (x) their respective charters or by-laws, (y)
except as set forth in Section 5.5 of the Disclosure Statement, any note, bond,
mortgage, indenture or deed of trust, or (z) any license, lease, agreement or
other instrument or obligation to which Shared Technologies or any such
<PAGE>
subsidiary is a party or to which they or any of their respective properties or
assets may be subject, or (ii) subject to compliance with the statutes and
regulations referred to in the next paragraph, violate any judgment, ruling,
order, writ, injunction, decree, statute, rule or regulation applicable to
Shared Technologies or any of its subsidiaries or any of their respective
properties or assets, except, in the case of clauses (i)(z) and (ii) above, for
such violations, conflicts, breaches, defaults, terminations, suspensions,
accelerations, rights of termination or acceleration or creations of liens,
security interests, charges or encumbrances which would not, individually or in
the aggregate, either have a Shared Technologies Material Adverse Effect or
materially impair Shared Technologies' ability to consummate the Merger or other
transactions contemplated hereby.
(b) No filing or registration with, notification to and no
permit, authorization, consent or approval of any governmental entity is
required by Shared Technologies in connection with the execution and delivery of
this Agreement or the consummation by Shared Technologies of the Merger or other
transactions contemplated hereby, except (i) in connection with the applicable
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), (ii) the filing of the Certificate of Merger with the
Secretary of State of the State of Delaware, (iii) the approval of Shared
Technologies' stockholders pursuant to the DGCL, (iv) filings with applicable
state public utility commissions and (v) such other filings, registrations,
notifications, permits, authorizations, consents or approvals the failure of
which to be obtained, made or given would not, individually or in the aggregate,
either have a Shared Technologies Material Adverse Effect or materially impair
Shared Technologies' ability to consummate the Merger or other transactions
contemplated hereby.
(c) As of the date hereof, Shared Technologies and its
subsidiaries are not in violation of or default under (x) their respective
charter or bylaws, and (y) except as set forth in Section 5.5 of the Disclosure
Statement, any note, bond, mortgage, indenture or deed of trust, or (z) any
license, lease, agreement or other instrument or obligation to which Shared
Technologies or any such subsidiary is a party or to which they or any of their
respective properties or assets may be subject, except, in the case of clauses
(y) and (z) above, for such violations or defaults which would not, individually
or in the
<PAGE>
aggregate, either have a Shared Technologies Material Adverse Effect or
materially impair Shared Technologies' ability to consummate the Merger or other
transactions contemplated hereby.
5.6 Commission Filings; Financial Statements.
(a) Shared Technologies has filed all required forms, reports
and documents during the past three years (collectively, the "SEC Reports") with
the Securities and Exchange Commission (the "SEC"), all of which complied when
filed in all material respects with all applicable requirements of the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder (the "Securities Act") and the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder (the "Exchange
Act"). As of their respective dates the SEC Reports (including all exhibits and
schedules thereto and documents incorporated by reference therein) did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
audited consolidated financial statements and unaudited consolidated interim
financial statements of Shared Technologies and its subsidiaries included or
incorporated by reference in such SEC Reports have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
during the periods involved (except as may be indicated in the notes thereto),
and fairly present the consolidated financial position of Shared Technologies
and its subsidiaries as of the dates thereof and the consolidated results of
operations and consolidated cash flows for the periods then ended (subject, in
the case of any unaudited interim financial statements, to normal year-end
adjustments and to the extent they may not include footnotes or may be condensed
or summary statements).
(b) Shared Technologies will deliver to Fairchild as soon as
they become available true and complete copies of any report or statement mailed
by it to its securityholders generally or filed by it with the SEC, in each case
subsequent to the date hereof and prior to the Effective Time. As of their
respective dates, such reports and statements (excluding any information therein
provided by Fairchild, as to which Shared Technologies makes no representation)
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in
<PAGE>
light of the circumstances under which they are made, not misleading and will
comply in all material respects with all applicable requirements of law. The
audited consolidated financial statements and unaudited consolidated interim
financial statements of Shared Technologies and its subsidiaries to be included
or incorporated by reference in such reports and statements (excluding any
information therein provided by Fairchild, as to which Shared Technologies makes
no representation) will be prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto) and will fairly
present the consolidated financial position of Shared Technologies and its
subsidiaries as of the dates thereof and the consolidated results of operations
and consolidated cash flows for the periods then ended (subject, in the case of
any unaudited interim financial statements, to normal year-end adjustments and
to the extent they may not include footnotes or may be condensed or summary
statements).
5.7 Absence of Changes or Events. Except as set forth in
Shared Technologies' Form 10-K for the fiscal year ended December 31, 1994, as
filed with the SEC, since December 31, 1994:
(a) there has been no material adverse change, or any
development involving a prospective material adverse change, in the general
affairs, management, business, operations, condition (financial or
otherwise) or prospects of Shared Technologies and its subsidiaries taken
as a whole;
(b) there has not been any direct or indirect redemption,
purchase or other acquisition of any shares of capital stock of Shared
Technologies or any of its subsidiaries, or any declaration, setting aside
or payment of any dividend or other distribution by Shared Technologies or
any of its subsidiaries in respect of its capital stock (except for the
distribution of the shares of Shared Technologies Cellular, Inc.);
(c) except in the ordinary course of its business and
consistent with past practice neither Shared Technologies nor any of its
subsidiaries has incurred any indebtedness for borrowed money, or assumed,
guaranteed, endorsed or otherwise as an accommodation become responsible
for the obligations of any other individual, firm or corporation, or
<PAGE>
made any loans or advances to any other individual, firm or corporation;
(d) there has not been any change in accounting methods,
principles or practices of Shared Technologies or its subsidiaries;
(e) except in the ordinary course of business and for amounts
which are not material, there has not been any revaluation by Shared
Technologies or any of its subsidiaries of any of their respective assets,
including, without limitation, writing down the value of inventory or
writing off notes or accounts receivables;
(f) there has not been any damage, destruction or loss,
whether covered by insurance or not, except for such as would not,
individually or in the aggregate, have a Shared Technologies Material
Adverse Effect; and
(g) there has not been any agreement by Shared Technologies or
any of its subsidiaries to (i) do any of the things described in the
preceding clauses (a) through (f) other than as expressly contemplated or
provided for in this Agreement or (ii) take, whether in writing or
otherwise, any action which, if taken prior to the date of this Agreement,
would have made any representation or warranty in this Article V untrue or
incorrect.
5.8 Proxy Statement. None of the information supplied by
Shared Technologies for inclusion in the proxy statement to be sent to the
shareholders of Shared Technologies in connection with the Special Meeting (as
hereinafter defined), including all amendments and supplements thereto (the
"Proxy Statement"), shall on the date the Proxy Statement is first mailed to
shareholders, at the time of the Special Meeting or at the Effective Time, be
false or misleading with respect to any material fact, or omit to state any
material fact required to be stated therein or necessary in order to make the
statements made therein, in light of the circumstances under which they are
made, not misleading or necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Special
Meeting which has become false or misleading. None of the information to be
filed by Fairchild and Shared Technologies with the SEC in connection with the
Merger or in any other documents to be filed with the SEC or any other
regulatory or governmental
<PAGE>
agency or authority in connection with the transactions contemplated hereby,
including any amendments thereto (the "Other Documents"), insofar as such
information was provided or supplied by Shared Technologies, will contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they are made, not misleading. The Proxy Statement
shall comply in all material respects with the requirements of the Exchange Act.
5.9 Litigation. Except as set forth in Section 5.9 of the
Disclosure Statement, there is no (i) claim, action, suit or proceeding pending
or, to the best knowledge of Shared Technologies or any of its subsidiaries,
threatened against or relating to Shared Technologies or any of its subsidiaries
before any court or governmental or regulatory authority or body or arbitration
tribunal, or (ii) outstanding judgment, order, writ, injunction or decree, or
application, request or motion therefor, of any court, governmental agency or
arbitration tribunal in a proceeding to which Shared Technologies, any
subsidiary of Shared Technologies or any of their respective assets was or is a
party except, in the case of clauses (i) and (ii) above, such as would not,
individually or in the aggregate, either have a Shared Technologies Material
Adverse Effect or materially impair Shared Technologies' ability to consummate
the Merger.
5.10 Insurance. Section 5.10 of the Disclosure Statement lists
all insurance policies in force on the date hereof covering the businesses,
properties and assets of Shared Technologies and its subsidiaries, and all such
policies are currently in effect. True and complete copies of all such policies
have been delivered to Fairchild. Except as set forth in Section 5.10 of the
Disclosure Statement, Shared Technologies has not received notice of the
cancellation of any such insurance policy.
5.11 Title to and Condition of Properties. Except as set forth
in Section 5.11 of the Disclosure Statement, Shared Technologies and its
subsidiaries have good title to all of the real property and own outright all of
the personal property (except for leased property or assets) which is reflected
on Shared Technologies' and its subsidiaries' December 31, 1994 audited
consolidated balance sheet contained in Shared Technologies' Form 10-K for the
fiscal year ended December 31, 1994 filed with the SEC (the "Balance Sheet")
except for property
<PAGE>
since sold or otherwise disposed of in the ordinary course of business and
consistent with past practice. Except as set forth in Section 5.11 of the
Disclosure Statement, no such real or personal property is subject to claims,
liens or encumbrances, whether by mortgage, pledge, lien, conditional sale
agreement, charge or otherwise, except for those which would not, individually
or in the aggregate, have a Shared Technologies Material Adverse Effect. Section
5.11 of the Disclosure Statement contains a true and complete list of all real
properties owned by Shared Technologies and its subsidiaries.
5.12 Leases. There has been made available to Fairchild true
and complete copies of each lease requiring the payment of rentals aggregating
at least $35,000 per annum pursuant to which real or personal property is held
under lease by Shared Technologies or any of its subsidiaries, and true and
complete copies of each lease pursuant to which Shared Technologies or any of
its subsidiaries leases real or personal property to others. A true and complete
list of all such leases is set forth in Section 5.12 of the Disclosure
Statement. All of the leases so listed are valid and subsisting and in full
force and effect and are subject to no default with respect to Shared
Technologies or its subsidiaries, as the case may be, and, to Shared
Technologies' knowledge, are in full force and effect and subject to no default
with respect to any other party thereto, and the leased real property is in good
and satisfactory condition.
5.13 Contracts and Commitments. Other than as disclosed in
Section 5.13 of the Disclosure Statement, no existing contract or commitment
contains an agreement with respect to any change of control that would be
triggered by the Merger. Other than as set forth in Section 5.13 of the
Disclosure Statement, neither this Agreement, the Merger nor the other
transactions contemplated hereby will result in any outstanding loans or
borrowings by Shared Technologies or any subsidiary of Shared Technologies
becoming due, going into default or giving the lenders or other holders of debt
instruments the right to require Shared Technologies or any of its subsidiaries
to repay all or a portion of such loans or borrowings.
5.14 Labor Matters. Each of Shared Technologies and its
subsidiaries is in compliance in all material respects with all applicable laws
respecting employment and employment
<PAGE>
practices, terms and conditions of employment and wages and hours, and neither
Shared Technologies nor any of its subsidiaries is engaged in any unfair labor
practice. There is no labor strike, slowdown or stoppage pending (or, to the
best knowledge of Shared Technologies, any labor strike or stoppage threatened)
against or affecting Shared Technologies or any of its subsidiaries. No petition
for certification has been filed and is pending before the National Labor
Relations Board with respect to any employees of Shared Technologies or any of
its subsidiaries who are not currently organized.
5.15 Compliance with Law. Except for matters set forth in the
Disclosure Statement, neither Shared Technologies nor any of its subsidiaries
has violated or failed to comply with any statute, law, ordinance, regulation,
rule or order of any foreign, federal, state or local government or any other
governmental department or agency, or any judgment, decree or order of any
court, applicable to its business or operations, except where any such violation
or failure to comply would not, individually or in the aggregate, have a Shared
Technologies Material Adverse Effect; the conduct of the business of Shared
Technologies and its subsidiaries is in conformity with all foreign, federal,
state and local energy, public utility and health requirements, and all other
foreign, federal, state and local governmental and regulatory requirements,
except where such nonconformities would not, individually or in the aggregate,
have a Shared Technologies Material Adverse Effect. Shared Technologies and its
subsidiaries have all permits, licenses and franchises from governmental
agencies required to conduct their businesses as now being conducted, except for
such permits, licenses and franchises the absence of which would not,
individually or in the aggregate, have a Shared Technologies Material Adverse
Effect.
5.16 Board Recommendation. The Board of Directors of Shared
Technologies has, by a majority vote at a meeting of such Board duly held on, or
by written consent of such Board dated, November 9, 1995, approved and adopted
this Agreement, the Merger and the other transactions contemplated hereby,
determined that the Merger is fair to the holders of shares of Shared
Technologies Common Stock and recommended that the holders of such shares of
Common Stock approve and adopt this Agreement, the Merger and the other
transactions contemplated hereby.
<PAGE>
5.17 Employment and Labor Contracts. Neither Shared
Technologies nor any of its subsidiaries is a party to any employment,
management services, consultation or other similar contract with any past or
present officer, director, employee or other person or, to the best of Shared
Technologies' knowledge, any entity affiliated with any past or present officer,
director or employee or other person other than those set forth in Section 5.17
of the Disclosure Statement and other than those which (x) have a term of less
than one year and (y) involve payments of less than $30,000 per year, in each
case true and complete copies of which contracts have been delivered to
Fairchild, and other than the agreements executed by employees generally, the
forms of which have been delivered to Fairchild.
5.18 Patents and Trademarks. Shared Technologies and its
subsidiaries own or have the right to use all patents, patent applications,
trademarks, trademark applications, trade names, inventions, processes, know-how
and trade secrets necessary to the conduct of their respective businesses,
except for those which the failure to own or have the right to use would not,
individually or in the aggregate, have a Shared Technologies Material Adverse
Effect ("Proprietary Rights"). All issued patents and trademark registrations
and pending patent and trademark applications of the Proprietary Rights have
previously been delivered to Fairchild. No rights or licenses to use Proprietary
Rights have been granted by Shared Technologies or its subsidiaries except those
listed in Section 5.18 of the Disclosure Statement; and no contrary assertion
has been made to Shared Technologies or any of its subsidiaries or notice of
conflict with any asserted right of others has been given by any person except
those which, even if correct, would not, individually or in the aggregate, have
a Shared Technologies Material Adverse Effect. Shared Technologies has not given
notice of any asserted claim or conflict to a third party with respect to Shared
Technologies' Proprietary Rights. True and complete copies of all material
license agreements under which Shared Technologies or any of its subsidiaries is
a licensor or licensee have been delivered to Fairchild.
5.19 Taxes. "Tax" or "Taxes" shall mean all federal, state,
local and foreign taxes, duties, levies, charges and assessments of any nature,
including social security payments and deductibles relating to wages, salaries
and benefits and payments to subcontractors (to the extent required under
applicable Tax law), and also including all interest, penalties and additions
<PAGE>
imposed with respect to such amounts. Except as set forth in Section 5.19 of the
Disclosure Statement: (i) Shared Technologies and its subsidiaries have prepared
and timely filed or will timely file with the appropriate governmental agencies
all franchise, income and all other material Tax returns and reports required to
be filed for any period ending on or before the Effective Time, taking into
account any extension of time to file granted to or obtained on behalf of Shared
Technologies and/or its subsidiaries; (ii) all material Taxes of Shared
Technologies and its subsidiaries in respect of the pre-Merger period have been
paid in full to the proper authorities, other than such Taxes as are being
contested in good faith by appropriate proceedings and/or are adequately
reserved for in accordance with generally accepted accounting principles; (iii)
all deficiencies resulting from Tax examinations of federal, state and foreign
income, sales and franchise and all other material Tax returns filed by Shared
Technologies and its subsidiaries have either been paid or are being contested
in good faith by appropriate proceedings; (iv) to the best knowledge of Shared
Technologies, no deficiency has been asserted or assessed against Shared
Technologies or any of its subsidiaries, and no examination of Shared
Technologies or any of its subsidiaries is pending or threatened for any
material amount of Tax by any taxing authority; (v) no extension of the period
for assessment or collection of any material Tax is currently in effect and no
extension of time within which to file any material Tax return has been
requested, which Tax return has not since been filed; (vi) no material Tax liens
have been filed with respect to any Taxes; (vii) Shared Technologies and each of
its subsidiaries will not make any voluntary adjustment by reason of a change in
their accounting methods for any pre-Merger period that would affect the taxable
income or deductions of Shared Technologies or any of its subsidiaries for any
period ending after the Effective Date; (viii) Shared Technologies and its
subsidiaries have made timely payments of the Taxes required to be deducted and
withheld from the wages paid to their employees; (ix) the Tax Sharing Agreement
under which Shared Technologies or any subsidiary will have any obligation or
liability on or after the Effective Date is attached as Exhibit E; (x) Shared
Technologies has foreign losses as defined in Section 904(f)(2) of the Code
listed in Section 5.19 of the Disclosure Statement; (xi) Shared Technologies and
its subsidiaries have unused foreign tax credits set forth in Section 5.19 of
the Disclosure Statement; and (xii) to the best knowledge of Shared
Technologies, there are no
<PAGE>
transfer pricing agreements made with any taxation authority involving Shared
Technologies and its subsidiaries.
5.20 Employee Benefit Plans; ERISA.
(a) Except as set forth in Section 5.20 of the Disclosure
Statement, there are no "employee pension benefit plans" as defined in Section
3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), covering employees employed in the United States, maintained or
contributed to by Shared Technologies or any of its subsidiaries, or to which
Shared Technologies or any of its subsidiaries contributes or is obligated to
make payments thereunder or otherwise may have any liability ("Pension Benefits
Plans").
(b) Shared Technologies has furnished Fairchild with a true
and complete schedule of all "welfare benefit plans" (as defined in Section 3(1)
of ERISA) covering employees employed in the United States, maintained or
contributed to by Shared Technologies or any of its subsidiaries ("Welfare
Plans"), all multiemployer plans as defined in Section 3(37) of ERISA covering
employees employed in the United States to which Shared Technologies or any of
its subsidiaries is required to make contributions or otherwise may have any
liability, and, to the extent covering employees employed in the United States,
all stock bonus, stock option, restricted stock, stock appreciation right, stock
purchase, bonus, incentive, deferred compensation, severance and vacation plans
maintained or contributed to by Shared Technologies or a subsidiary.
(c) Shared Technologies and each of its subsidiaries, and each
of the Pension Benefit Plans and Welfare Plans, are in compliance with the
applicable provisions of ERISA (the "Code") and other applicable laws except
where the failure to comply would not, individually or in the aggregate, have a
Shared Technologies Material Adverse Effect.
(d) All contributions to, and payments from, the Pension
Benefit Plans which are required to have been made in accordance with the
Pension Benefit Plans and, when applicable, Section 302 of ERISA or Section 412
of the Code have been timely made except where the failure to make such
contributions or payments on a timely basis would not, individually or in the
aggregate, have a Shared Technologies Material Adverse Effect. All contributions
required to have been made in accordance with
<PAGE>
Section 302 of ERISA or Section 412 of the Code to any employee pension benefit
plan (as defined in Section 3(2) of ERISA) maintained by an ERISA Affiliate of
Shared Technologies or any of its subsidiaries have been timely made except
where the failure to make such contributions on a timely basis would not
individually or in the aggregate have a Shared Technologies Material Adverse
Effect. For purposes of this Agreement, "ERISA Affiliate" shall mean any person
(as defined in Section 3(9) of ERISA) that is a member of any group of persons
described in Section 414(b), (c), (m) or (o) of the Code of which Shared
Technologies or a subsidiary is a member.
(e) The Pension Benefit Plans intended to qualify under
Section 401 of the Code are so qualified and have been determined by the
Internal Revenue Service ("IRS") to be so qualified and nothing has occurred
with respect to the operation of such Pension Benefit Plans which would cause
the loss of such qualification or exemption or the imposition of any material
liability, penalty or tax under ERISA or the Code. Such plans have been or will
be, on a timely basis, (i) amended to comply with changes to the Code made by
the Tax Reform Act of 1986, the Unemployment Compensation Amendments of 1992,
the Omnibus Budget Reconciliation Act of 1993, and other applicable legislative,
regulatory or administrative requirements; and (ii) submitted to the Internal
Revenue Service for a determination of their tax qualification, as so amended;
and no such amendment will adversely affect the qualification of such plans.
(f) Each Welfare Plan that is intended to qualify for
exclusion of benefits thereunder from the income of participants or for any
other tax-favored treatment under any provisions of the Code (including, without
limitation, Sections 79, 105, 106, 125 or 129 of the Code) is and has been
maintained in compliance with all pertinent provisions of the Code and Treasury
Regulations thereunder.
(g) Except as disclosed in Shared Technologies' Form 10-K for
the fiscal year ended December 31, 1994, there are (i) no investigations
pending, to the best knowledge of Shared Technologies, by any governmental
entity involving the Pension Benefit Plans or Welfare Plans, (ii) no termination
proceedings involving the Pension Benefit Plans and (iii) no pending or, to the
best of Shared Technologies' knowledge, threatened claims (other than routine
claims for benefits), suits or proceedings against any Pension Benefit or
Welfare Plan, against the assets
<PAGE>
of any of the trusts under any Pension Benefit or Welfare Plan or against any
fiduciary of any Pension Benefit or Welfare Plan with respect to the operation
of such plan or asserting any rights or claims to benefits under any Pension
Benefit or Welfare Plan or against the assets of any trust under such plan,
which would, in the case of clause (i), (ii) or (iii) of this paragraph (f),
give rise to any liability which would, individually or in the aggregate, have a
Shared Technologies Material Adverse Effect, nor, to the best of Shared
Technologies' knowledge, are there any facts which would give rise to any
liability which would, individually or in the aggregate, have a Shared
Technologies Material Adverse Effect in the event of any such investigation,
claim, suit or proceeding.
(h) None of Shared Technologies, any of its subsidiaries or
any employee of the foregoing, nor any trustee, administrator, other fiduciary
or any other "party in interest" or "disqualified person" with respect to the
Pension Benefit Plans or Welfare Plans, has engaged in a "prohibited
transaction" (as such term is defined in Section 4975 of the Code or Section 406
of ERISA) which would be reasonably likely to result in a tax or penalty on
Shared Technologies or any of its subsidiaries under Section 4975 of the Code or
Section 502(i) of ERISA which would, individually or in the aggregate, have a
Shared Technologies Material Adverse Effect.
(i) Neither the Pension Benefit Plans subject to Title IV of
ERISA nor any trust created thereunder has been terminated nor have there been
any "reportable events" (as defined in Section 4043 of ERISA and the regulations
thereunder) with respect to either thereof which would, individually or in the
aggregate, have a Shared Technologies Material Adverse Effect nor has there been
any event with respect to any Pension Benefit Plan requiring disclosure under
Section 4063(a) of ERISA or any event with respect to any Pension Benefit Plan
requiring disclosure under Section 4041(c)(3)(C) of ERISA which would,
individually or in the aggregate, have a Shared Technologies Material Adverse
Effect.
(j) Neither Shared Technologies nor any subsidiary of Shared
Technologies has incurred any currently outstanding liability to the Pension
Benefit Guaranty Corporation (the "PBGC") or to a trustee appointed under
Section 4042(b) or (c) of ERISA other than for the payment of premiums, all of
which have been paid when due. No Pension Benefit Plan has applied for, or
<PAGE>
received, a waiver of the minimum funding standards imposed by Section 412 of
the Code. The information supplied to the actuary by Shared Technologies or any
of its subsidiaries for use in preparing the most recent actuarial report for
Pension Benefit Plans is complete and accurate in all material respects.
(k) Neither Shared Technologies, any of its subsidiaries nor
any of their ERISA Affiliates has any liability (including any contingent
liability under Section 4204 of ERISA) with respect to any multiemployer plan,
within the meaning of Section 3(37) of ERISA, covering employees employed in the
United States.
(l) Except as disclosed in Section 5.20 of the Disclosure
Statement, with respect to each of the Pension Benefit and Welfare Plans, true,
correct and complete copies of the following documents have been delivered to
Fairchild: (i) the current plans and related trust documents, including
amendments thereto, (ii) any current summary plan descriptions, (iii) the most
recent Forms 5500, financial statements and actuarial reports, if applicable,
(iv) the most recent IRS determination letter, if applicable; and (v) if any
application for an IRS determination letter is pending, copies of all such
applications for determination including attachments, exhibits and schedules
thereto.
(m) Neither Shared Technologies, any of its subsidiaries, any
organization to which Shared Technologies is a successor or parent corporation,
within the meaning of Section 4069(b) of ERISA, nor any of their ERISA
Affiliates has engaged in any transaction, within the meaning of Section 4069(a)
of ERISA, the liability for which would, individually or in the aggregate, have
a Shared Technologies Material Adverse Effect.
(n) Except as disclosed in Section 5.20 of the Disclosure
Statement, none of the Welfare Plans maintained by Shared Technologies or any of
its subsidiaries are retiree life or retiree health insurance plans which
provide for continuing benefits or coverage for any participant or any
beneficiary of a participant following termination of employment, except as may
be required under the Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended ("COBRA"), or except at the expense of the participant or the
participant's beneficiary. Shared Technologies and each of its subsidiaries
which maintain a "group health plan" within the meaning of Section 5000(b)(1) of
the Code
<PAGE>
have complied with the notice and continuation requirements of Section 4980B of
the Code, COBRA, Part 6 of Subtitle B of Title I of ERISA and the regulations
thereunder except where the failure to comply would not, individually or in the
aggregate, have a Shared Technologies Material Adverse Effect.
(o) No liability under any Pension Benefit or Welfare Plan has
been funded nor has any such obligation been satisfied with the purchase of a
contract from an insurance company as to which Shared Technologies or any of its
subsidiaries has received notice that such insurance company is in
rehabilitation.
(p) Except pursuant to the agreements listed in Section 5.20
of the Disclosure Statement, the consummation of the transactions contemplated
by this Agreement will not result in an increase in the amount of compensation
or benefits or accelerate the vesting or timing of payment of any benefits or
compensation payable to or in respect of any employee of Shared Technologies or
any of its subsidiaries.
(q) Shared Technologies has disclosed to Fairchild in Section
5.20 of the Disclosure Statement each material Foreign Plan to the extent the
benefits provided thereunder are not mandated by the laws of the applicable
foreign jurisdiction. Shared Technologies and each of its subsidiaries and each
of the Foreign Plans are in compliance with applicable laws and all required
contributions have been made to the Foreign Plans, except where the failure to
comply or make contributions would not, individually or in the aggregate, have a
Shared Technologies Material Adverse Effect. For purposes hereof, the term
"Foreign Plan" shall mean any plan, with respect to benefits voluntarily
provided by Shared Technologies or any subsidiary with respect to employees of
any of them employed outside the United States.
5.21 Environmental Matters.
(a) Except as set forth in Section 5.21 of the Disclosure
Statement:
(i) each of Shared Technologies and its subsidiaries,
and the properties and assets owned by them, and to the actual
knowledge of Shared Technologies, all properties operated, leased,
managed or used by Shared Technologies and its subsidiaries are in
compliance with all applicable Environmental Laws except where the
failure to be
<PAGE>
in compliance would not, individually or in the aggregate, have a
Shared Technologies Material Adverse Effect;
(ii) there is no Environmental Claim that is (1) pending
or threatened against Shared Technologies or any of its subsidiaries or
(2) pending or threatened against any person or entity or any assets
owned by Shared Technologies or its subsidiaries whose liability for
such Environmental Claim has been retained or assumed by contract or
otherwise by Shared Technologies or any of its subsidiaries or can be
imputed or attributed by law to Shared Technologies or any of its
subsidiaries, the effect of any of which would, individually or in the
aggregate, have a Shared Technologies Material Adverse Effect;
(iii) there are no past or present actions, activities,
circumstances, conditions, events or incidents arising out of, based
upon, resulting from or relating to the ownership, operation or use of
any property or assets currently or formerly owned, operated or used by
Shared Technologies or any of its subsidiaries (or any predecessor in
interest of any of them), including, without limitation, the
generation, storage, treatment or transportation of any Hazardous
Materials, or the emission, discharge, disposal or other Release or
threatened Release of any Hazardous Materials into the Environment
which is presently expected to result in an Environmental Claim;
(iv) no lien has been recorded under any Environmental
Law with respect to any material property, facility or asset owned by
Shared Technologies or any of its subsidiaries; and to the actual
knowledge of Shared Technologies, no lien has been recorded under any
Environmental Law with respect to any material property, facility or
asset, operated, leased or managed or used by Shared Technologies or
its subsidiaries and relating to or resulting from Shared Technologies
or its subsidiaries operations, lease, management or use for which
Shared Technologies or its subsidiaries may be legally responsible;
(v) neither Shared Technologies nor any of its
subsidiaries has received notice that it has been identified as a
potentially responsible party or any request for information under the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended
<PAGE>
("CERCLA"), the Resource Conservation and Recovery Act, as amended
("RCRA"), or any comparable state law nor has Shared Technologies or
any of its subsidiaries received any notification that any Hazardous
Materials that it or any of their respective predecessors in interest
has used, generated, stored, treated, handled, transported or disposed
of, or arranged for transport for treatment or disposal of, or arranged
for disposal or treatment of, has been found at any site at which any
person is conducting or plans to conduct an investigation or other
action pursuant to any Environmental Law;
(vi) to the actual knowledge of Shared Technologies,
there has been no Release of Hazardous Materials at, on, upon, under,
from or into any real property in the vicinity of any property
currently or formerly owned by Shared Technologies or any of its
subsidiaries that, through soil, air, surface water or groundwater
migration or contamination, has become located on, in or under such
properties and, to the actual knowledge of Shared Technologies, there
has been no release of Hazardous Materials at, on, upon, under or from
any property currently or formerly operated, leased, managed or used by
Shared Technologies or any of its subsidiaries that through soil, air,
surface water or groundwater migration or contamination has become
located on, in or under such properties as resulting from or relating
to Shared Technologies or any of its subsidiaries operations, lease,
management or use thereof of for which Shared Technologies and any of
its subsidiaries may be legally responsible;
(vii) no asbestos or asbestos containing material or any
polychlorinated biphenyls are contained within products presently
manufactured and, to the best knowledge of Shared Technologies
manufactured at any time by Shared Technologies or any of its
subsidiaries and, to the actual knowledge of Shared Technologies there
is no asbestos or asbestos containing material or any polychlorinated
biphenyl in, on or at any property or any facility or equipment owned,
operated, leased, managed or used by Shared Technologies or any of its
subsidiaries;
(viii) no property owned by Shared Technologies or any of
its subsidiaries and to the actual knowledge of Shared Technologies, no
property operated, leased, managed
<PAGE>
or used by Shared Technologies and any of its subsidiaries is (i)
listed or proposed for listing on the National Priorities List under
CERCLA or (ii) listed in the Comprehensive Environmental Response,
Compensation, Liability Information System List promulgated pursuant to
CERCLA, or on any comparable list published by any governmental
authority;
(ix) no underground storage tank or related piping is
located at, under or on any property owned by Shared Technologies or
any of its subsidiaries or to the actual knowledge of Shared
Technologies, any property operated, leased, managed or used by Shared
Technologies, nor to the actual knowledge of Shared Technologies, has
any such tank or piping been removed or decommissioned from or at such
property;
(x) all environmental investigations, studies, audits,
assessments or reviews conducted of which Shared Technologies has
actual knowledge in relation to the current or prior business or assets
owned, operated, leased, managed or used of Shared Technologies or any
of its subsidiaries or any real property, assets or facility now or
previously owned, operated, leased, managed or used by Shared
Technologies or any of its subsidiaries have been delivered to
Fairchild; and
(xi) each of Shared Technologies and its subsidiaries has
obtained all permits, licenses and other authorizations
("Authorizations") required under any Environmental Law with respect to
the operation of its assets and business and its use, ownership and
operation of any real property, and each such Authorization is in full
force and effect.
(b) For purposes of Section 5.21(a):
(i) "Actual Knowledge of Shared Technologies" means the
actual knowledge of individuals at the corporate management level of
Shared Technologies and its subsidiaries.
(ii) "Environment" means any surface water, ground water,
drinking water supply, land surface or subsurface
<PAGE>
strata, ambient air and including, without limitation, any indoor
location;
(iii) "Environmental Claim" means any notice or claim by
any person alleging potential liability (including, without limitation,
potential liability for investigatory costs, cleanup costs,
governmental costs, or harm, injuries or damages to any person,
property or natural resources, and any fines or penalties) arising out
of, based upon, resulting from or relating to (1) the emission,
discharge, disposal or other release or threatened release in or into
the Environment of any Hazardous Materials or (2) circumstances forming
the basis of any violation, or alleged violation, of any applicable
Environmental Law;
(iv) "Environmental Laws" means all federal, state, and
local laws, codes, and regulations relating to pollution, the
protection of human health, the protection of the Environment or the
emission, discharge, disposal or other release or threatened release of
Hazardous Materials in or into the Environment;
(v) "Hazardous Materials" means pollutants, contaminants
or chemical, industrial, hazardous or toxic materials or wastes, and
includes, without limitation, asbestos or asbestos-containing
materials, PCBs and petroleum, oil or petroleum or oil products,
derivatives or constituents; and
(vi) "Release" means any past or present spilling,
leaking, pumping, pouring, emitting, emptying, discharging, injecting,
escaping, leaching, dumping or disposing of Hazardous Materials into
the Environment or within structures (including the abandonment or
discarding of barrels, containers or other closed receptacles
containing any Hazardous Materials).
5.22 Disclosure. No representation or warranty by Shared
Technologies herein, or in any certificate furnished by or on behalf of Shared
Technologies to Fairchild in connection herewith, contains or will contain any
untrue statement of a material fact or omits or will omit to state a material
fact necessary in order to make the statements herein or therein, in light of
the circumstances under which they were made, not misleading.
<PAGE>
5.23 Absence of Undisclosed Liabilities. Neither Shared
Technologies nor any of its subsidiaries has any liabilities or obligations
(including without limitation any liabilities or obligations related to Shared
Technologies Cellular, Inc.) of any nature, whether absolute, accrued,
unmatured, contingent or otherwise, or any unsatisfied judgments or any leases
of personalty or realty or unusual or extraordinary commitments, except the
liabilities recorded on the Balance Sheet and the notes thereto, and except for
liabilities or obligations incurred in the ordinary course of business and
consistent with past practice since December 31, 1994 that would not
individually or in the aggregate have a Shared Technologies Material Adverse
Effect.
5.24 Finders or Brokers. Except as set forth in Section 5.24
of the Disclosure Statement, none of Shared Technologies, the subsidiaries of
Shared Technologies, the Board of Directors or any member of the Board of
Directors has employed any investment banker, broker, finder or intermediary in
connection with the transactions contemplated hereby who might be entitled to a
fee or any commission in connection with the Merger, and Section 5.24 of the
Disclosure Statement sets forth the maximum consideration (present and future)
agreed to be paid to each such party.
5.25 State Antitakeover Statutes. Shared Technologies has
granted all approvals and taken all other steps necessary to exempt the Merger
and the other transactions contemplated hereby from the requirements and
provisions of Section 203 of the DGCL and any other applicable state
antitakeover statute or regulation such that none of the provisions of such
Section 203 or any other "business combination," "moratorium," "control share"
or other state antitakeover statute or regulation (x) prohibits or restricts
Shared Technologies' ability to perform its obligations under this Agreement or
its ability to consummate the Merger and the other transactions contemplated
hereby, (y) would have the effect of invalidating or voiding this Agreement any
provision hereof, or (z) would subject Fairchild to any material impediment or
condition in connection with the exercise of any of its rights under this
Agreement.
ARTICLE VI
<PAGE>
REPRESENTATIONS AND WARRANTIES OF TFC, RHI AND FAIRCHILD
Each of TFC, RHI and Fairchild represents and warrants to
Shared Technologies that:
6.1 Organization and Qualification. Each of Fairchild and its
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has all
requisite corporate power and authority to own, lease and operate its properties
and to carry on its business as now being conducted. Each of Fairchild and its
subsidiaries is duly qualified as a foreign corporation to do business, and is
in good standing, in each jurisdiction where the character of its properties
owned or leased or the nature of its activities makes such qualification
necessary, except for failures to be so qualified or in good standing which
would not, individually or in the aggregate, have a material adverse effect on
the general affairs, management, business, operations, condition (financial or
otherwise) or prospects of Fairchild and its subsidiaries taken as a whole (a
"Fairchild Material Adverse Effect"). Neither Fairchild nor any of its
subsidiaries is in violation of any of the provisions of its Certificate of
Incorporation (or other applicable charter document) or By-Laws. Fairchild has
delivered to Shared Technologies accurate and complete copies of the Certificate
of Incorporation (or other applicable charter document) and By-Laws, as
currently in effect, of each of Fairchild and its subsidiaries.
6.2 Capital Stock of Subsidiaries. The only direct or indirect
subsidiaries of Fairchild are those listed in Section 6.2 of the Disclosure
Statement previously delivered by Fairchild to Shared Technologies (the
"Disclosure Statement"). Fairchild is directly or indirectly the record (except
for directors' qualifying shares) and beneficial owner (including all qualifying
shares owned by directors of such subsidiaries as reflected in Section 6.2 of
the Disclosure Statement) of all of the outstanding shares of capital stock of
each of its subsidiaries, there are no proxies with respect to such shares, and
no equity securities of any of such subsidiaries are or may be required to be
issued by reason of any options, warrants, scrip, rights to subscribe for, calls
or commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of any capital stock of any such
subsidiary, and there are no contracts, commitments, understandings or
arrangements by which any such subsidiary is
<PAGE>
bound to issue additional shares of its capital stock or securities convertible
into or exchangeable for such shares. Other than as set forth in Section 6.2 of
the Disclosure Statement, all of such shares so owned by Fairchild are validly
issued, fully paid and nonassessable and are owned by it free and clear of any
claim, lien or encumbrance of any kind with respect thereto. Except as disclosed
in Section 6.2 of the Disclosure Statement, Fairchild does not directly or
indirectly own any interest in any corporation, partnership, joint venture or
other business association or entity.
6.3 Capitalization. The authorized capital stock of Fairchild
consists of 1,400 shares of Common Stock, par value $100.00 per share, and
3,000,000 shares of Preferred Stock, without par value. As of the date hereof,
1,400 shares of Common Stock are issued and outstanding (all of which are owned
by RHI), 424,701 shares of Series A Preferred Stock are issued and outstanding,
2,278 shares of Series B Preferred Stock are issued and outstanding (which will
be extinguished immediately prior to the Effective Time) and 558,360 shares of
Series C Preferred Stock are issued and outstanding. All of such issued and
outstanding shares are validly issued, fully paid and nonassessable and free of
preemptive rights. Except as set forth above, there are not now, and at the
Effective Time, there will not be, any shares of capital stock of Fairchild
issued or outstanding or any subscriptions, options, warrants, calls, claims,
rights (including without limitation any stock appreciation or similar rights),
convertible securities or other agreements or commitments of any character
obligating Fairchild to issue, transfer or sell any of its securities.
6.4 Authority Relative to This Agreement. Each of TFC and RHI
is a corporation duly organized, validly existing and in good standing under the
laws of Delaware. Each of TFC, RHI and Fairchild has full corporate power and
authority to execute and deliver this Agreement and to consummate the Merger and
other transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the Merger and other transactions contemplated
hereby have been duly and validly authorized by the Board of Directors of each
of TFC (which owns all of the outstanding common stock of RHI), RHI and
Fairchild and no other corporate proceedings on the part of TFC, RHI or
Fairchild are necessary to authorize this Agreement or to consummate the Merger
or other transactions contemplated hereby. This Agreement has been duly and
validly executed and delivered
<PAGE>
by each of TFC (which owns all of the outstanding common stock of RHI), RHI and
Fairchild and, assuming the due authorization, execution and delivery hereof by
Shared Technologies, constitutes a valid and binding agreement of each of TFC,
RHI and Fairchild, enforceable against each of TFC, RHI and Fairchild in
accordance with its terms, except to the extent that its enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws affecting the enforcement of creditors' rights generally or by
general equitable or fiduciary principles.
6.5 No Violations, etc.
(a) Assuming that all filings, permits, authorizations,
consents and approvals or waivers thereof have been duly made or obtained as
contemplated by Section 6.5(b) hereof, neither the execution and delivery of
this Agreement by TFC, RHI or Fairchild nor the consummation of the Merger or
other transactions contemplated hereby nor compliance by Fairchild with any of
the provisions hereof will (i) violate, conflict with, or result in a breach of
any provision of, or constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under, or result in the
termination or suspension of, or accelerate the performance required by, or
result in a right of termination or acceleration under, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
properties or assets of TFC, RHI or Fairchild or any of their respective
subsidiaries under, any of the terms, conditions or provisions of (x) their
respective charters or by-laws, (y) except as set forth in Section 6.5 of the
Disclosure Statement, any note, bond, mortgage, indenture or deed of trust, or
(z) any license, lease, agreement or other instrument or obligation, to which
TFC, RHI or Fairchild or any such subsidiary is a party or to which they or any
of their respective properties or assets may be subject, or (ii) subject to
compliance with the statutes and regulations referred to in the next paragraph,
violate any judgment, ruling, order, writ, injunction, decree, statute, rule or
regulation applicable to TFC, RHI or Fairchild or any of their respective
subsidiaries or any of their respective properties or assets, except, in the
case of clauses (i)(z) and (ii) above, for such violations, conflicts, breaches,
defaults, terminations, suspensions, accelerations, rights of termination or
acceleration or creations of liens, security interests, charges or encumbrances
which would not, individually or in the aggregate, either have a Fairchild
Material Adverse Effect or materially impair Fairchild's ability
<PAGE>
to consummate the Merger or other transactions contemplated hereby.
(b) No filing or registration with, notification to and no
permit, authorization, consent or approval of any governmental entity is
required by TFC, RHI or Fairchild or any of their respective subsidiaries in
connection with the execution and delivery of this Agreement or the consummation
by Fairchild of the Merger or other transactions contemplated hereby, except (i)
in connection with the applicable requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (ii) the filing
of the Certificate of Merger with the Secretary of State of the State of
Delaware, (iii) filings with applicable state public utility commissions, and
(iv) such other filings, registrations, notifications, permits, authorizations,
consents or approvals the failure of which to be obtained, made or given would
not, individually or in the aggregate, either have a Fairchild Material Adverse
Effect or materially impair Fairchild's ability to consummate the Merger or
other transactions contemplated hereby.
(c) As of the date hereof, Fairchild and its subsidiaries are
not in violation of or default under (x) their respective charter or bylaws, and
(y) except as set forth in Sections 6.5 and 6.9 of the Disclosure Statement, any
note, bond, mortgage, indenture or deed of trust, or (z) any license, lease,
agreement or other instrument or obligation to which Fairchild or any such
subsidiary is a party or to which they or any of their respective properties or
assets may be subject, except, in the case of clauses (y) and (z) above, for
such violations or defaults which would not, individually or in the aggregate,
either have a Fairchild Material Adverse Effect or materially impair Fairchild's
ability to consummate the Merger or other transactions contemplated hereby.
6.6 Commission Filings; Financial Statements.
(a) Fairchild has filed all required forms, reports and
documents during the past three years (collectively, the "SEC Reports") with the
Securities and Exchange Commission (the "SEC"), all of which complied when filed
in all material respects with all applicable requirements of the Securities Act
of 1933, as amended, and the rules and regulations promulgated thereunder (the
"Securities Act") and the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder
<PAGE>
(the "Exchange Act"). As of their respective dates the SEC Reports (including
all exhibits and schedules thereto and documents incorporated by reference
therein) did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The audited consolidated financial statements and unaudited
consolidated interim financial statements of Fairchild and its subsidiaries
included or incorporated by reference in such SEC Reports were prepared in
accordance with generally accepted accounting principles applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto), and fairly presented the consolidated financial position of Fairchild
and its subsidiaries (before giving effect to the Fairchild Reorganization) as
of the dates thereof and the consolidated results of operations and consolidated
cash flows for the periods then ended (subject, in the case of any unaudited
interim financial statements, to normal year-end adjustments and to the extent
they may not include footnotes or may be condensed or summary statements).
(b) Fairchild will deliver to Shared Technologies as soon as
they become available true and complete copies of any report or statement mailed
by it to its securityholders generally or filed by it with the SEC, in each case
subsequent to the date hereof and prior to the Effective Time. As of their
respective dates, such reports and statements (excluding any information therein
provided by Shared Technologies, as to which Fairchild makes no representation)
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they are made, not misleading
and will comply in all material respects with all applicable requirements of
law. The audited consolidated financial statements and unaudited consolidated
interim financial statements of Fairchild and its subsidiaries to be included or
incorporated by reference in such reports and statements (excluding any
information therein provided by Shared Technologies, as to which Fairchild makes
no representation) will be prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto) and will fairly
present the consolidated financial position of Fairchild and its subsidiaries
(before giving effect to the Fairchild Reorganization unless otherwise specified
therein) as
<PAGE>
of the dates thereof and the consolidated results of operations and consolidated
cash flows for the periods then ended (subject, in the case of any unaudited
interim financial statements, to normal year-end adjustments and to the extent
they may not include footnotes or may be condensed or summary statements).
(c) Fairchild has delivered to Shared Technologies audited
financial statements for the three years ended June 30, 1995 (the "Fairchild
Financial Statements") which were prepared in accordance with generally accepted
accounting principles applied on a consistent basis and which fairly present the
consolidated financial position, results of operations and cash flows of
Fairchild and its subsidiaries as if the Fairchild Reorganization had occurred
at the beginning of such three-year period. In addition, Fairchild has delivered
to Shared Technologies an unaudited pro forma balance sheet of each of D-M-E
Inc., Fairchild Fasteners Inc. and RHI as of June 30, 1995 which was prepared in
accordance with generally accepted accounting principles applied on a consistent
basis and which fairly presents the consolidated financial position of such
entities if the Fairchild Reorganization had occurred at such date.
(d) Fairchild will deliver to Shared Technologies within 45
days of the end of each fiscal quarter subsequent to the date hereof and prior
to the Effective Time unaudited consolidated interim financial statements for
such quarter prepared in accordance with generally accepted accounting
principles on the same basis as the Fairchild Financial Statements were
prepared.
6.7 Absence of Changes or Events. Except as set forth in
Fairchild's Form 10-K for the fiscal year ended June 30, 1995, as filed with the
SEC, since June 30, 1995:
(a) there has been no material adverse change, or any
development involving a prospective material adverse change, in the general
affairs, management, business, operations, condition (financial or otherwise) or
prospects of Fairchild and its subsidiaries taken as a whole; (it being
understood that no such material adverse change shall be deemed to have occurred
with respect to Fairchild and VSI, taken as a whole, if the pro forma
consolidated net worth of Fairchild, as evidenced by a pro forma closing date
balance sheet to be delivered to Shared Technologies on the Effective Date, is
at least $80,000,000);
<PAGE>
(b) except as contemplated by Schedule 9.1 and except for
dividends by Fairchild to RHI in an amount not exceeding capital contributions
made to Fairchild by RHI since June 30, 1995 plus $4,000,000, there has not been
any direct or indirect redemption, purchase or other acquisition of any shares
of capital stock of Fairchild or any of its subsidiaries, or any declaration,
setting aside or payment of any dividend or other distribution by Fairchild or
any of its subsidiaries in respect of their capital stock;
(c) except in the ordinary course of its business and
consistent with past practice neither Fairchild nor any of its subsidiaries has
incurred any indebtedness for borrowed money, or assumed, guaranteed, endorsed
or otherwise as an accommodation become responsible for the obligations of any
other individual, firm or corporation, or made any loans or advances to any
other individual, firm or corporation;
(d) there has not been any change in accounting methods,
principles or practices of Fairchild or its subsidiaries;
(e) except in the ordinary course of business and for amounts
which are not material, there has not been any revaluation by Fairchild or any
of its subsidiaries of any of their respective assets, including, without
limitation, writing down the value of inventory or writing off notes or accounts
receivables;
(f) there has not been any damage, destruction or loss,
whether covered by insurance or not, except for such as would not, individually
or in the aggregate, have a Fairchild Material Adverse Effect; and
(g) there has not been any agreement by Fairchild or any of
its subsidiaries to (i) do any of the things described in the preceding clauses
(a) through (f) other than as expressly contemplated or provided for in this
Agreement or (ii) take, whether in writing or otherwise, any action which, if
taken prior to the date of this Agreement, would have made any representation or
warranty in this Article VI untrue or incorrect.
6.8 Proxy Statement. None of the information supplied by
Fairchild or any of its subsidiaries for inclusion in the
<PAGE>
proxy statement to be sent to the shareholders of Shared Technologies in
connection with the Special Meeting (as hereinafter defined), including all
amendments and supplements thereto (the "Proxy Statement"), shall on the date
the Proxy Statement is first mailed to shareholders, and at the time of the
Special Meeting or at the Effective Time, be false or misleading with respect to
any material fact, or omit to state any material fact required to be stated
therein or necessary in order to make the statements made therein, in light of
the circumstances under which they are made, not misleading or necessary to
correct any statement in any earlier communication with respect to the
solicitation of proxies for the Special Meeting which has become false or
misleading. None of the information to be filed by Fairchild and Shared
Technologies with the SEC in connection with the Merger or in any other
documents to be filed with the SEC or any other regulatory or governmental
agency or authority in connection with the transactions contemplated hereby,
including any amendments thereto (the "Other Documents"), insofar as such
information was provided or supplied by Fairchild or any of its subsidiaries,
will contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement shall comply in all material respects with the
requirements of the Exchange Act.
6.9 Litigation. Except as set forth in Section 6.9 of the
Disclosure Statement, there is no (i) claim, action, suit or proceeding pending
or, to the best knowledge of TFC, RHI, Fairchild or any of their subsidiaries,
threatened against or relating to Fairchild or any of its subsidiaries before
any court or governmental or regulatory authority or body or arbitration
tribunal, or (ii) outstanding judgment, order, writ, injunction or decree, or
application, request or motion therefor, of any court, governmental agency or
arbitration tribunal in a proceeding to which Fairchild, any subsidiary of
Fairchild or any of their respective assets was or is a party except, in the
case of clauses (i) and (ii) above, such as would not, individually or in the
aggregate, either have a Fairchild Material Adverse Effect or materially impair
Fairchild's ability to consummate the Merger or other transactions contemplated
hereby.
6.10 Insurance. Section 6.10 of the Disclosure Statement lists
all insurance policies in force on the date hereof covering the businesses,
properties and assets of
<PAGE>
Fairchild and its subsidiaries, and all such policies are currently in effect.
True and complete copies of all such policies have been delivered to Shared
Technologies. Except as set forth in Section 6.10 of the Disclosure Statement,
Fairchild has not received notice of the cancellation of any such insurance
policy.
6.11 Title to and Condition of Properties. Except as set forth
in Section 6.11 of the Disclosure Statement, Fairchild and its subsidiaries have
good title to all of the real property and own outright all of the personal
property (except for leased property or assets) which is reflected on
Fairchild's and its subsidiaries' June 30, 1995 audited consolidated balance
sheet contained in the Fairchild Financial Statements (the "Balance Sheet")
except for property since sold or otherwise disposed of in the ordinary course
of business and consistent with past practice. Except as set forth in Sections
6.9 and 6.11 of the Disclosure Statement, no such real or personal property is
subject to claims, liens or encumbrances, whether by mortgage, pledge, lien,
conditional sale agreement, charge or otherwise, except for those which would
not, individually or in the aggregate, have a Fairchild Material Adverse Effect.
Section 6.11 of the Disclosure Statement contains a true and complete list of
all real properties owned by Fairchild and its subsidiaries.
6.12 Leases. There has been made available to Shared
Technologies true and complete copies of each lease requiring the payment of
rentals aggregating at least $35,000 per annum pursuant to which real or
personal property is held under lease by Fairchild or any of its subsidiaries,
and true and complete copies of each lease pursuant to which Fairchild or any of
its subsidiaries leases real or personal property to others. A true and complete
list of all such leases is set forth in Section 6.12 of the Disclosure
Statement. All of the leases so listed are valid and subsisting and in full
force and effect and subject to no default with respect to Fairchild or its
subsidiaries, as the case may be, and, to Fairchild's knowledge, are in full
force and effect and subject to no default and subject to no default with
respect to any other party thereto, and the leased real property is in good and
satisfactory condition.
6.13 Contracts and Commitments. Other than as disclosed in
Section 6.13 of the Disclosure Statement, no existing contract or commitment
contains an agreement with
<PAGE>
respect to any change of control that would be triggered as a result of the
Merger. Other than as set forth in Section 6.13 of the Disclosure Statement,
neither this Agreement, the Merger nor the other transactions contemplated
hereby will result in any outstanding loans or borrowings by Fairchild or any
subsidiary of Fairchild becoming due, going into default or giving the lenders
or other holders of debt instruments the right to require Fairchild or any of
its subsidiaries to repay all or a portion of such loans or borrowings.
6.14 Labor Matters. Each of Fairchild and its subsidiaries is
in compliance in all material respects with all applicable laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours, and neither Fairchild nor any of its subsidiaries is engaged in
any unfair labor practice. There is no labor strike, slowdown or stoppage
pending (or, to the best knowledge of Fairchild, any labor strike or stoppage
threatened) against or affecting Fairchild or any of its subsidiaries. No
petition for certification has been filed and is pending before the National
Labor Relations Board with respect to any employees of Fairchild or any of its
subsidiaries who are not currently organized.
6.15 Compliance with Law. Except for matters set forth in the
Disclosure Statement, neither Fairchild nor any of its subsidiaries has violated
or failed to comply with any statute, law, ordinance, regulation, rule or order
of any foreign, federal, state or local government or any other governmental
department or agency, or any judgment, decree or order of any court, applicable
to its business or operations, except where any such violation or failure to
comply would not, individually or in the aggregate, have a Fairchild Material
Adverse Effect; the conduct of the business of Fairchild and its subsidiaries is
in conformity with all foreign, federal, state and local energy, public utility
and health requirements, and all other foreign, federal, state and local
governmental and regulatory requirements, except where such nonconformities
would not, individually or in the aggregate, have a Fairchild Material Adverse
Effect. Fairchild and its subsidiaries have all permits, licenses and franchises
from governmental agencies required to conduct their businesses as now being
conducted, except for such permits, licenses and franchises the absence of which
would not, individually or in the aggregate, have a Fairchild Material Adverse
Effect.
<PAGE>
6.16 Board Recommendation. The Board of Directors of Fairchild
has, by a unanimous vote at a meeting of such Board duly held on, or by
unanimous written consent of such Board dated, November 9, 1995, approved and
adopted this Agreement, the Merger and the other transactions contemplated
hereby.
6.17 Employment and Labor Contracts. Neither Fairchild nor any
of its subsidiaries is a party to any employment, management services,
consultation or other similar contract with any past or present officer,
director, employee or other person or, to the best of Fairchild's knowledge, any
entity affiliated with any past or present officer, director or employee or
other person other than those set forth in Section 6.17 of the Disclosure
Statement and other than those which (x) have a term of less than one year and
(y) involve payments of less than $30,000 per year, in each case true and
complete copies of which contracts have been delivered to Shared Technologies,
and other than the agreements executed by employees generally, the forms of
which have been delivered to Shared Technologies.
6.18 Patents and Trademarks. Fairchild and its subsidiaries
own or have the right to use all patents, patent applications, trademarks,
trademark applications, trade names, inventions, processes, know-how and trade
secrets necessary to the conduct of their respective businesses, except for
those which the failure to own or have the right to use would not, individually
or in the aggregate, have a Fairchild Material Adverse Effect ("Proprietary
Rights"). All issued patents and trademark registrations and pending patent and
trademark applications of the Proprietary Rights have previously been delivered
to Shared Technologies. No rights or licenses to use Proprietary Rights have
been granted by Fairchild or its subsidiaries except those listed in Section
6.18 of the Disclosure Statement; and no contrary assertion has been made to
Fairchild or any of its subsidiaries or notice of conflict with any asserted
right of others has been given by any person except those which, even if
correct, would not, individually or in the aggregate, have a Fairchild Material
Adverse Effect. Fairchild has not given notice of any asserted claim or conflict
to a third party with respect to Fairchild's Proprietary Rights. True and
complete copies of all material license agreements under which Fairchild or any
of its subsidiaries is a licensor or licensee have been delivered to Shared
Technologies.
<PAGE>
6.19 Taxes. "Tax" or "Taxes" shall mean all federal, state,
local and foreign taxes, duties, levies, charges and assessments of any nature,
including social security payments and deductibles relating to wages, salaries
and benefits and payments to subcontractors (to the extent required under
applicable Tax law), and also including all interest, penalties and additions
imposed with respect to such amounts. Except as set forth in Sections 6.9 and
6.19 of the Disclosure Statement: (i) Fairchild and its subsidiaries have
prepared and timely filed or will timely file with the appropriate governmental
agencies all franchise, income and all other material Tax returns and reports
required to be filed for any period ending on or before the Effective Time,
taking into account any extension of time to file granted to or obtained on
behalf of Fairchild and/or its subsidiaries; (ii) all material Taxes of
Fairchild and its subsidiaries in respect of the pre-Merger period have been
paid in full to the proper authorities, other than such Taxes as are being
contested in good faith by appropriate proceedings and/or are adequately
reserved for in accordance with generally accepted accounting principles; (iii)
all deficiencies resulting from Tax examinations of federal, state and foreign
income, sales and franchise and all other material Tax returns filed by
Fairchild and its subsidiaries have either been paid or are being contested in
good faith by appropriate proceedings; (iv) to the best knowledge of Fairchild,
no deficiency has been asserted or assessed against Fairchild or any of its
subsidiaries, and no examination of Fairchild or any of its subsidiaries is
pending or threatened for any material amount of Tax by any taxing authority;
(v) no extension of the period for assessment or collection of any material Tax
is currently in effect and no extension of time within which to file any
material Tax return has been requested, which Tax return has not since been
filed; (vi) no material Tax liens have been filed with respect to any Taxes;
(vii) Fairchild and each of its subsidiaries will not make any voluntary
adjustment by reason of a change in their accounting methods for any pre-Merger
period that would affect the taxable income or deductions of Fairchild or any of
its subsidiaries for any period ending after the Effective Date; (viii)
Fairchild and its subsidiaries have made timely payments of the Taxes required
to be deducted and withheld from the wages paid to their employees; (ix) the Tax
Sharing Agreement under which Fairchild or any subsidiary will have any
obligation or liability on or after the Effective Date is attached as Exhibit E;
(x) Fairchild has foreign losses as defined in Section 904(f)(2) of the Code
listed in Section 6.19 of the
<PAGE>
Disclosure Statement; (xi) Fairchild and its subsidiaries have unused foreign
tax credits set forth in Section 6.19 of the Disclosure Statement; and (xii) to
the best knowledge of Fairchild, there are no transfer pricing agreements made
with any taxation authority involving Fairchild and its subsidiaries.
6.20 Employee Benefit Plans; ERISA.
(a) Except as set forth in Section 6.20 of the Disclosure
Statement, there are no "employee pension benefit plans" as defined in Section
3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), covering employees employed in the United States, maintained or
contributed to by Fairchild or any of its subsidiaries, or to which Fairchild or
any of its subsidiaries contributes or is obligated to make payments thereunder
or otherwise may have any liability ("Pension Benefits Plans").
(b) Fairchild has furnished Shared Technologies with a true
and complete schedule of all "welfare benefit plans" (as defined in Section 3(1)
of ERISA) covering employees employed in the United States, maintained or
contributed to by Fairchild or any of its subsidiaries ("Welfare Plans"), all
multiemployer plans as defined in Section 3(37) of ERISA covering employees
employed in the United States to which Fairchild or any of its subsidiaries is
required to make contributions or otherwise may have any liability, and, to the
extent covering employees employed in the United States, all stock bonus, stock
option, restricted stock, stock appreciation right, stock purchase, bonus,
incentive, deferred compensation, severance and vacation plans maintained or
contributed to by Fairchild or a subsidiary.
(c) Fairchild and each of its subsidiaries, and each of the
Pension Benefit Plans and Welfare Plans, are in compliance with the applicable
provisions of ERISA and other applicable laws except where the failure to comply
would not, individually or in the aggregate, have a Fairchild Material Adverse
Effect.
(d) All contributions to, and payments from, the Pension
Benefit Plans which are required to have been made in accordance with the
Pension Benefit Plans and, when applicable, Section 302 of ERISA or Section 412
of the Code have been timely made except where the failure to make such
contributions or payments on a timely basis would not, individually or in the
aggregate, have a Fairchild Material Adverse Effect. All
<PAGE>
contributions required to have been made in accordance with Section 302 of ERISA
or Section 412 of the Code to any employee pension benefit plan (as defined in
Section 3(2) of ERISA) maintained by an ERISA Affiliate of Fairchild or any of
its subsidiaries have been timely made except where the failure to make such
contributions on a timely basis would not individually or in the aggregate have
a Fairchild Material Adverse Effect. For purposes of this Agreement, "ERISA
Affiliate" shall mean any person (as defined in Section 3(9) of ERISA) that is a
member of any group of persons described in Section 414(b), (c), (m) or (o) of
the Code of which Fairchild or a subsidiary is a member.
(e) The Pension Benefit Plans intended to qualify under
Section 401 of the Code are so qualified and have been determined by the
Internal Revenue Service ("IRS") to be so qualified and nothing has occurred
with respect to the operation of such Pension Benefit Plans which would cause
the loss of such qualification or exemption or the imposition of any material
liability, penalty or tax under ERISA or the Code. Such plans have been or will
be, on a timely basis, (i) amended to comply with changes to the Code made by
the Tax Reform Act of 1986, the Unemployment Compensation Amendments of 1992,
the Omnibus Budget Reconciliation Act of 1993, and other applicable legislative,
regulatory or administrative requirements; and (ii) submitted to the Internal
Revenue Service for a determination of their tax qualification, as so amended;
and no such amendment will adversely affect the qualification of such plans.
(f) Each Welfare Plan that is intended to qualify for
exclusion of benefits thereunder from the income of participants or for any
other tax-favored treatment under any provisions of the Code (including, without
limitation, Sections 79, 105, 106, 125, or 129 of the Code) is and has been
maintained in compliance with all pertinent provisions of the Code and Treasury
Regulations thereunder.
(g) Except as disclosed in Fairchild's Form 10-K for the
fiscal year ended June 30, 1995, there are (i) no investigations pending, to the
best knowledge of Fairchild, by any governmental entity involving the Pension
Benefit Plans or Welfare Plans, (ii) no termination proceedings involving the
Pension Benefit Plans and (iii) no pending or, to the best of Fairchild's
knowledge, threatened claims (other than routine claims for benefits), suits or
proceedings against any Pension Benefit or Welfare Plan, against the assets of
any of the trusts
<PAGE>
under any Pension Benefit or Welfare Plan or against any fiduciary of any
Pension Benefit or Welfare Plan with respect to the operation of such plan or
asserting any rights or claims to benefits under any Pension Benefit or Welfare
Plan or against the assets of any trust under such plan, which would, in the
case of clause (i), (ii) or (iii) of this paragraph (f), give rise to any
liability which would, individually or in the aggregate, have a Fairchild
Material Adverse Effect, nor, to the best of Fairchild's knowledge, are there
are any facts which would give rise to any liability which would, individually
or in the aggregate, have a Fairchild Material Adverse Effect in the event of
any such investigation, claim, suit or proceeding.
(h) None of Fairchild, any of its subsidiaries or any employee
of the foregoing, nor any trustee, administrator, other fiduciary or any other
"party in interest" or "disqualified person" with respect to the Pension Benefit
Plans or Welfare Plans, has engaged in a "prohibited transaction" (as such term
is defined in Section 4975 of the Code or Section 406 of ERISA) which would be
reasonably likely to result in a tax or penalty on Fairchild or any of its
subsidiaries under Section 4975 of the Code or Section 502(i) of ERISA which
would, individually or in the aggregate, have a Fairchild Material Adverse
Effect.
(i) Neither the Pension Benefit Plans subject to Title IV of
ERISA nor any trust created thereunder has been terminated nor have there been
any "reportable events" (as defined in Section 4043 of ERISA and the regulations
thereunder) with respect to either thereof which would, individually or in the
aggregate, have a Fairchild Material Adverse Effect nor has there been any event
with respect to any Pension Benefit Plan requiring disclosure under Section
4063(a) of ERISA or any event with respect to any Pension Benefit Plan requiring
disclosure under Section 4041(c)(3)(C) of ERISA which would, individually or in
the aggregate, have a Fairchild Material Adverse Effect.
(j) Neither Fairchild nor any subsidiary of Fairchild has
incurred any currently outstanding liability to the Pension Benefit Guaranty
Corporation (the "PBGC") or to a trustee appointed under Section 4042(b) or (c)
of ERISA other than for the payment of premiums, all of which have been paid
when due. No Pension Benefit Plan has applied for, or received, a waiver of the
minimum funding standards imposed by Section 412 of the Code. The information
supplied to the actuary by Fairchild or any of its subsidiaries for use in
preparing the most recent actuarial
<PAGE>
report for Pension Benefit Plans is complete and accurate in all material
respects.
(k) Except as set forth in Section 6.20 of the Disclosure
Statement, neither Fairchild, any of its subsidiaries nor any of their ERISA
Affiliates has any liability (including any contingent liability under Section
4204 of ERISA) with respect to any multiemployer plan, within the meaning of
Section 3(37) of ERISA, covering employees employed in the United States.
(l) Except as disclosed in Section 6.20 of the Disclosure
Statement, with respect to each of the Pension Benefit and Welfare Plans, true,
correct and complete copies of the following documents have been delivered to
Shared Technologies: (i) the current plans and related trust documents,
including amendments thereto, (ii) any current summary plan descriptions, (iii)
the most recent Forms 5500, financial statements and actuarial reports, if
applicable, (iv) the most recent IRS determination letter, if applicable; and
(v) if any application for an IRS determination letter is pending, copies of all
such applications for determination including attachments, exhibits and
schedules thereto.
(m) Neither Fairchild, any of its subsidiaries, any
organization to which Fairchild is a successor or parent corporation, within the
meaning of Section 4069(b) of ERISA, nor any of their ERISA Affiliates has
engaged in any transaction, within the meaning of Section 4069(a) of ERISA, the
liability for which would, individually or in the aggregate, have a Fairchild
Material Adverse Effect.
(n) Except as disclosed in Section 6.20 of the Disclosure
Statement, none of the Welfare Plans maintained by Fairchild or any of its
subsidiaries are retiree life or retiree health insurance plans which provide
for continuing benefits or coverage for any participant or any beneficiary of a
participant following termination of employment, except as may be required under
the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended
("COBRA"), or except at the expense of the participant or the participant's
beneficiary. Fairchild and each of its subsidiaries which maintain a "group
health plan" within the meaning of Section 5000(b)(1) of the Code have complied
with the notice and continuation requirements of Section 4980B of the Code,
COBRA, Part 6 of Subtitle B of Title I of ERISA and the
<PAGE>
regulations thereunder except where the failure to comply would not,
individually or in the aggregate, have a Fairchild Material Adverse Effect.
(o) No liability under any Pension Benefit or Welfare Plan has
been funded nor has any such obligation been satisfied with the purchase of a
contract from an insurance company as to which Fairchild or any of its
subsidiaries has received notice that such insurance company is in
rehabilitation.
(p) Except pursuant to the agreements listed in Section 6.20
of the Disclosure Statement, the consummation of the transactions contemplated
by this Agreement will not result in an increase in the amount of compensation
or benefits or accelerate the vesting or timing of payment of any benefits or
compensation payable to or in respect of any employee of Fairchild or any of its
subsidiaries.
(q) Fairchild has disclosed to Shared Technologies in Section
6.20 of the Disclosure Statement each material Foreign Plan to the extent the
benefits provided thereunder are not mandated by the laws of the applicable
foreign jurisdiction. Fairchild and each of its subsidiaries and each of the
Foreign Plans are in compliance with applicable laws and all required
contributions have been made to the Foreign Plans, except where the failure to
comply or make contributions would not, individually or in the aggregate, have a
Fairchild Material Adverse Effect. For purposes hereof, the term "Foreign Plan"
shall mean any plan with respect to benefits voluntarily provided by Fairchild
or any subsidiary with respect to employees of any of them employed outside the
United States.
6.21 Environmental Matters.
(a) Except as set forth in Section 6.21 of the Disclosure
Statement:
(i) each of Fairchild and its subsidiaries, and the
properties and assets owned by them, and to the actual knowledge of
Fairchild, all properties operated, leased, managed or used by
Fairchild and its subsidiaries are in compliance with all applicable
Environmental Laws except where the failure to be in compliance would
not, individually or in the aggregate, have a Fairchild Material
Adverse Effect;
<PAGE>
(ii) there is no Environmental Claim that is (1) pending or
threatened against Fairchild or any of its subsidiaries or (2) pending
or threatened against any person or entity or any assets owned by
Fairchild or its subsidiaries whose liability for such Environmental
Claim has been retained or assumed by contract or otherwise by
Fairchild or any of its subsidiaries or can be imputed or attributed by
law to Fairchild or any of its subsidiaries, the effect of any of which
would, individually or in the aggregate, have a Fairchild Material
Adverse Effect;
(iii) there are no past or present actions, activities,
circumstances, conditions, events or incidents arising out of, based
upon, resulting from or relating to the ownership, operation or use of
any property or assets currently or formerly owned, operated or used by
Fairchild or any of its subsidiaries (or any predecessor in interest of
any of them), including, without limitation, the generation, storage,
treatment or transportation of any Hazardous Materials, or the
emission, discharge, disposal or other Release or threatened Release of
any Hazardous Materials into the Environment which is presently
expected to result in an Environmental Claim;
(iv) no lien has been recorded under any Environmental Law
with respect to any material property, facility or asset owned by
Fairchild or any of its subsidiaries, and to the actual knowledge of
Fairchild, no lien has been recorded under any Environmental Law with
respect to any material property, facility or asset, operated, leased
or managed or used by Fairchild or its subsidiaries and relating to or
resulting from Fairchild or its subsidiaries operations, lease,
management or use for which Fairchild or its subsidiaries may be
legally responsible;
(v) neither Fairchild nor any of its subsidiaries has
received notice that it has been identified as a potentially
responsible party or any request for information under the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), the Resource Conservation and Recovery
Act, as amended ("RCRA"), or any comparable state law nor has Fairchild
or any of its subsidiaries received any notification that any Hazardous
<PAGE>
Materials that it or any of their respective predecessors in interest
has used, generated, stored, treated, handled, transported or disposed
of, or arranged for transport for treatment or disposal of, or arranged
for disposal or treatment of, has been found at any site at which any
person is conducting or plans to conduct an investigation or other
action pursuant to any Environmental Law;
(vi) to the actual knowledge of Fairchild, there has been no
Release of Hazardous Materials at, on, upon, under, from or into any
real property in the vicinity of any property currently or formerly
owned by Fairchild or any of its subsidiaries that, through soil, air,
surface water or groundwater migration or contamination, has become
located on, in or under such properties and, to the actual knowledge of
Fairchild, there has been no release of Hazardous Materials at, on,
upon, under or from any property currently or formerly operated,
leased, managed or used by Fairchild or any of its subsidiaries that
through soil, air, surface water or groundwater migration or
contamination has become located on, in or under such properties as
resulting from or relating to Fairchild or any of its subsidiaries
operations, lease, management or use thereof of for which Fairchild and
any of its subsidiaries may be legally responsible;
(vii) no asbestos or asbestos containing material or any
polychlorinated biphenyls are contained within products presently
manufactured and, to the best knowledge of Fairchild manufactured at
any time by Fairchild or any of its subsidiaries and, to the actual
knowledge of Fairchild there is no asbestos or asbestos containing
material or any polychlorinated biphenyl in, on or at any property or
any facility or equipment owned, operated, leased, managed or used by
Fairchild or any of its subsidiaries;
(viii) no property owned by Fairchild or any of its
subsidiaries and to the actual knowledge of Fairchild, no property
operated, leased, managed or used by Fairchild and any of its
subsidiaries is (i) listed or proposed for listing on the National
Priorities List under CERCLA or (ii) listed in the Comprehensive
Environmental Response, Compensation, Liability Information System List
promulgated pursuant to CERCLA, or on any comparable list published by
any governmental authority;
<PAGE>
(ix) no underground storage tank or related piping is located
at, under or on any property owned by Fairchild or any of its
subsidiaries or, to the actual knowledge of Fairchild, any property
operated, leased, managed or used by Fairchild and any of its
subsidiaries, nor, to the actual knowledge of Fairchild, has any such
tank or piping been removed or decommissioned from or at such property;
(x) all environmental investigations, studies, audits,
assessments or reviews conducted of which Fairchild has actual
knowledge in relation to the current or prior business or assets owned,
operated, leased managed or used by Fairchild or any of its
subsidiaries or any real property, assets or facility now or previously
owned operated, managed, leased or used by Fairchild or any of its
subsidiaries have been delivered to Shared Technologies; and
(xi) each of Fairchild and its subsidiaries has obtained all
permits, licenses and other authorizations ("Authorizations") required
under any Environmental Law with respect to the operation of its assets
and business and its use, ownership and operation of any real property,
and each such Authorization is in full force and effect.
(b) For purposes of Section 6.21(a):
(i) "Actual Knowledge of Fairchild" means the actual
knowledge of individuals at the corporate management level of Fairchild
and its subsidiaries.
(ii) "Environment" means any surface water, ground water,
drinking water supply, land surface or subsurface strata, ambient air
and including, without limitation, any indoor location;
(iii) "Environmental Claim" means any notice or claim by any
person alleging potential liability (including, without limitation,
potential liability for investigatory costs, cleanup costs,
governmental costs, or harm, injuries or damages to any person,
property or natural resources, and any fines or penalties) arising out
of, based upon, resulting from or relating to (1) the emission,
discharge, disposal or other release or threatened release in or into
the Environment of any Hazardous Materials or
<PAGE>
(2) circumstances forming the basis of any violation, or alleged
violation, of any applicable Environmental Law;
(iv) "Environmental Laws" means all federal, state and local
laws, codes and regulations relating to pollution, the protection of
human health, the protection of the Environment or the emission,
discharge, disposal or other release or threatened release of Hazardous
Materials in or into the Environment;
(v) "Hazardous Materials" means pollutants, contaminants or
chemical, industrial, hazardous or toxic materials or wastes, and
includes, without limitation, asbestos or asbestos-containing
materials, PCBs and petroleum, oil or petroleum or oil products,
derivatives or constituents; and
(vi) "Release" means any past or present spilling, leaking,
pumping, pouring, emitting, emptying, discharging, injecting, escaping,
leaching, dumping or disposing of Hazardous Materials into the
Environment or within structures (including the abandonment or
discarding of barrels, containers or other closed receptacles
containing any Hazardous Materials).
6.22 Disclosure. No representation or warranty by Fairchild
herein, or in any certificate furnished by or on behalf of Fairchild to Shared
Technologies in connection herewith, contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary in order to make the statements herein or therein, in light of the
circumstances under which they were made, not misleading.
6.23 Absence of Undisclosed Liabilities. Except as set forth
in Section 6.9 of the Disclosure Statement, neither Fairchild nor any of its
subsidiaries has any liabilities or obligations of any nature, whether absolute,
accrued, unmatured, contingent or otherwise, or any unsatisfied judgments or any
leases of personalty or realty or unusual or extraordinary commitments, except
the liabilities recorded on the Balance Sheet and the notes thereto, and except
for liabilities or obligations incurred in the ordinary course of business and
consistent with past practice since June 30, 1995 that would not individually or
in the aggregate have a Fairchild Material Adverse Effect.
<PAGE>
6.24 Finders or Brokers. Except as set forth in Section 6.24
of the Disclosure Statement, none of Fairchild, the subsidiaries of Fairchild,
the Board of Directors or any member of the Board of Directors has employed any
investment banker, broker, finder or intermediary in connection with the
transactions contemplated hereby who might be entitled to a fee or any
commission in connection with of the Merger, and Section 6.24 of the Disclosure
Statement sets forth the maximum consideration (present and future) agreed to be
paid to each such party.
ARTICLE VII
CONDUCT OF BUSINESS OF FAIRCHILD AND
SHARED TECHNOLOGIES PENDING THE MERGER
7.1 Conduct of Business of Fairchild and Shared Technologies
Pending the Merger. Except as contemplated by this Agreement or as expressly
agreed to in writing by Fairchild and Shared Technologies, during the period
from the date of this Agreement to the Effective Time, each of Fairchild and its
subsidiaries and Shared Technologies and its subsidiaries will conduct their
respective operations according to its ordinary course of business consistent
with past practice, and will use all commercially reasonable efforts to preserve
intact its business organization, to keep available the services of its officers
and employees and to maintain satisfactory relationships with suppliers,
distributors, customers and others having business relationships with it and
will take no action which would materially adversely affect the ability of the
parties to consummate the transactions contemplated by this Agreement. Without
limiting the generality of the foregoing, and except as otherwise expressly
provided in this Agreement, prior to the Effective Time, neither Fairchild nor
Shared Technologies will nor will they permit any of their respective
subsidiaries to, without the prior written consent of the other party:
(a) amend its certificate of incorporation or by-laws, except
Shared Technologies may amend its certificate of incorporation and
bylaws as required by the terms of this Agreement;
(b) authorize for issuance, issue, sell, deliver, grant any
options for, or otherwise agree or commit to
<PAGE>
issue, sell or deliver any shares of any class of its capital stock or
any securities convertible into shares of any class of its capital
stock, except (i) pursuant to and in accordance with the terms of
currently outstanding convertible securities, warrants and options, and
(ii) options granted under the Stock Option Plans of Shared
Technologies, in the ordinary course of business consistent with past
practice;
(c) split, combine or reclassify any shares of its capital
stock, declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in
respect of its capital stock or purchase, redeem or otherwise acquire
any shares of its own capital stock or of any of its subsidiaries,
except as otherwise expressly provided in this Agreement (including,
without limitation, Section 6.7(b)) and except for the distribution of
the shares of Shared Technologies Cellular Inc. to the shareholders of
Shared Technologies;
(d) except in the ordinary course of business, consistent with
past practice (i) create, incur, assume, maintain or permit to exist
any long-term debt or any short-term debt for borrowed money other than
under existing lines of credit; (ii) assume, guarantee, endorse or
otherwise become liable or responsible (whether directly, contingently
or otherwise) for the obligations of any other person except its wholly
owned subsidiaries in the ordinary course of business and consistent
with past practices; or (iii) make any loans, advances or capital
contributions to, or investments in, any other person;
(e) except as otherwise expressly contemplated by this
Agreement (including without limitation as set forth in Schedule 6.17
to the Disclosure Statement) or in the ordinary course of business,
consistent with past practice, (i) increase in any manner the
compensation of any of its directors, officers or other employees; (ii)
pay or agree to pay any pension, retirement allowance or other employee
benefit not required, or enter into or agree to enter into any
agreement or arrangement with such director, officer or employee,
whether past or present, relating to any such pension, retirement
allowance or other employee benefit, except as required under currently
existing agreements, plans or arrangements; (iii) grant any severance
or
<PAGE>
termination pay to, or enter into any employment or severance agreement
with, any of its directors, officers or other employees; or (iv) except
as may be required to comply with applicable law, become obligated
(other than pursuant to any new or renewed collective bargaining
agreement) under any new pension plan, welfare plan, multiemployer
plan, employee benefit plan, benefit arrangement, or similar plan or
arrangement, which was not in existence on the date hereof, including
any bonus, incentive, deferred compensation, stock purchase, stock
option, stock appreciation right, group insurance, severance pay,
retirement or other benefit plan, agreement or arrangement, or
employment or consulting agreement with or for the benefit of any
person, or amend any of such plans or any of such agreements in
existence on the date hereof;
(f) except as otherwise expressly contemplated by this
Agreement, enter into any other agreements, commitments or contracts,
except agreements, commitments or contracts for the purchase, sale or
lease of goods or services in the ordinary course of business,
consistent with past practice;
(g) except in the ordinary course of business, consistent with
past practice, or as contemplated by this Agreement, authorize,
recommend, propose or announce an intention to authorize, recommend or
propose, or enter into any agreement in principle or an agreement with
respect to, any plan of liquidation or dissolution, any acquisition of
a material amount of assets or securities, any sale, transfer, lease,
license, pledge, mortgage, or other disposition or encumbrance of a
material amount of assets or securities or any material change in its
capitalization, or any entry into a material contract or any amendment
or modification of any material contract or any release or
relinquishment of any material contract rights; or
(h) agree to do any of the foregoing.
ARTICLE VIII
COVENANTS AND AGREEMENTS
8.1 Approval of Stockholders; SEC and Other Filings.
<PAGE>
(a) Shared Technologies shall cause a special meeting of its
stockholders (the "Special Meeting") to be duly called and held as soon as
reasonably practicable for the purpose of (i) voting on this Agreement, (ii)
authorizing Shared Technologies' Board of Directors, to the extent permitted by
law, to make modifications of or amendments to this Agreement as Shared
Technologies' Board of Directors deems proper without further stockholder
approval and (iii) voting on all other actions contemplated hereby which require
the approval of Shared Technologies' stockholders, including without limitation
any such approval needed to amend Shared Technologies' Certificate of
Incorporation and Bylaws as required by this Agreement. Shared Technologies
shall comply with all applicable legal requirements in connection with the
Special Meeting.
(b) Shared Technologies and Fairchild shall cooperate with
each other and use their best efforts to file with the SEC or other applicable
regulatory or governmental agency or authority, as the case may be, as promptly
as practicable the Proxy Statement and the Other Documents. The parties shall
use their best efforts to have the Proxy Statement cleared by the SEC as
promptly as practicable after filing and, as promptly as practicable after the
Proxy Statement has been so cleared, shall mail the Proxy Statement to the
stockholders of Shared Technologies as of the record date for the Special
Meeting. Subject to the fiduciary obligations of Shared Technologies' Board of
Directors under applicable law as advised by Gadsby & Hannah or other nationally
recognized counsel, the Proxy Statement shall contain the recommendation of the
Board in favor of the Merger and for approval and adoption of this Agreement. In
addition to the irrevocable proxy received from a stockholder of Shared
Technologies prior to the date hereof, Shared Technologies shall use its best
efforts to solicit from stockholders of Shared Technologies proxies or consents
in favor of such approval and to take all other action necessary or, in the
reasonable judgment of Fairchild, helpful to secure the vote of stockholders
required by law to effect the Merger. Shared Technologies and Fairchild each
shall use its best efforts to obtain and furnish the information required to be
included in the Proxy Statement and any Other Document, and Shared Technologies,
after consultation with Fairchild, shall use its best efforts to respond as
promptly as is reasonably practicable to any comments made by the SEC or any
other applicable regulatory or governmental agency or authority with respect to
any of the foregoing (or any preliminary version thereof). Shared
<PAGE>
Technologies will promptly notify Fairchild of the receipt of the comments of
the SEC or any other applicable regulatory or governmental agency or authority,
as the case may be, and of any request by any of the foregoing for amendments or
supplements to the Proxy Statement or any Other Document, as the case may be, or
for additional information, and will supply Fairchild with copies of all
correspondence between Shared Technologies and its representatives, on the one
hand, and the SEC, any other applicable regulatory or governmental agency or
authority or the members of the staff of any of the foregoing, on the other
hand, with respect to the Proxy Statement or any Other Document, as the case may
be. If at any time prior to the Special Meeting any event should occur relating
to Shared Technologies or any of its subsidiaries or Fairchild or any of its
affiliates or associates, or relating to the Financing (as hereinafter defined)
which should be set forth in an amendment of or a supplement to, the Proxy
Statement or any Other Document, Shared Technologies will promptly inform
Fairchild or Fairchild will promptly inform Shared Technologies, as the case may
be. Whenever any event occurs which should be set forth in an amendment of, or a
supplement to, the Proxy Statement or any Other Document, as the case may be,
Fairchild and Shared Technologies will upon learning of such event, cooperate
and promptly prepare, file and mail such amendment or supplement.
(c) Fairchild shall use its best efforts to file with and
obtain from the Internal Revenue Service a favorable ruling to the effect set
forth in Schedule 9.2(d) hereto. Fairchild and Shared Technologies shall
cooperate with each other and use their best efforts to effect a tender offer
and consent solicitation for the outstanding 12 1/4% Senior Notes due 1999 of
Fairchild and, if the Merger is consummated, to retire all such Notes tendered
in such offer.
8.2 Additional Agreements; Cooperation.
(a) Subject to the terms and conditions herein provided, each
of the parties hereto agrees to use its best efforts to take, or cause to be
taken, all action and to do, or cause to be done, all things necessary, proper
or advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement, and to cooperate with each other in
connection with the foregoing, including using its best efforts (i) to obtain
all necessary waivers, consents and approvals from other parties to loan
agreements, leases and
<PAGE>
other contracts that are specified on Schedule 8.2 to the Disclosure Statement,
(ii) to obtain all necessary consents, approvals and authorizations as are
required to be obtained under any federal, state or foreign law or regulations,
(iii) to defend all lawsuits or other legal proceedings challenging this
Agreement or the consummation of the transactions contemplated hereby, (iv) to
lift or rescind any injunction or restraining order or other order adversely
affecting the ability of the parties to consummate the transactions contemplated
hereby, (v) to effect all necessary registrations and filings, including, but
not limited to, filings under the HSR Act and any pre-merger notifications
required in any other country, if any, and submissions of information requested
by governmental authorities, (vi) provide all necessary information for the
Proxy Statement and (vii) to fulfill all conditions to this Agreement. In
addition, Fairchild agrees to use its best efforts (subject to compliance with
all applicable securities laws) to solicit and receive the irrevocable proxies
from shareholders of Shared Technologies contemplated by Section 10.1(b). Shared
Technologies agrees to use its best efforts to cause the distribution to its
shareholders of all shares of capital stock of Shared Technologies Cellular,
Inc. ("STCI") owned by Shared Technologies and its subsidiaries to be completed
prior to the Effective Time and, prior to such distribution to cause STCI, to
enter into an agreement preventing STCI from competing in the telecommunications
systems and service business.
(b) Shared Technologies will supply Fairchild with copies of
all correspondence, filings or communications (or memoranda setting forth the
substance thereof) between Shared Technologies or its representatives, on the
one hand, and the Federal Trade Commission, the Antitrust Division of the United
States Department of Justice, the SEC and any other regulatory or governmental
agency or authority or members of their respective staffs, on the other hand,
with respect to this Agreement, the Merger and the other transactions
contemplated hereby. Each of the parties hereto agrees to furnish to the other
party hereto such necessary information and reasonable assistance as such other
party may request in connection with its preparation of necessary filings or
submissions to any regulatory or governmental agency or authority, including,
without limitation, any filing necessary under the provisions of the HSR Act or
any other applicable Federal or state statute.
<PAGE>
(c) Fairchild will supply Shared Technologies with copies of
all correspondence, filings or communications (or memoranda setting forth the
substance thereof) between Fairchild or its representatives, on the one hand,
and the Federal Trade Commission, the Antitrust Division of the United States
Department of Justice, the SEC or any other regulatory or governmental agency or
authority or members of their respective staffs, on the other hand, with respect
to this Agreement, the Merger and the other transactions contemplated hereby.
8.3 Publicity. Shared Technologies and Fairchild agree to
consult with each other in issuing any press release and with respect to the
general content of other public statements with respect to the transactions
contemplated hereby, and shall not issue any such press release prior to such
consultation, except as may be required by law.
8.4 No Solicitation.
(a) Each of Shared Technologies and Fairchild agrees that,
prior to the Effective Time, it shall not, and shall not authorize or permit any
of its subsidiaries or any of its or its subsidiaries' directors, officers,
employees, agents or representatives to, directly or indirectly, solicit,
initiate, facilitate or encourage (including by way of furnishing or disclosing
non-public information) any inquiries or the making of any proposal with respect
to any merger, consolidation or other business combination involving Shared
Technologies or its subsidiaries or Fairchild or its subsidiaries or acquisition
of any kind of all or substantially all of the assets or capital stock of Shared
Technologies and its subsidiaries taken as a whole or Fairchild and its
subsidiaries taken as a whole (an "Acquisition Transaction") or negotiate,
explore or otherwise communicate in any way with any third party (other than
Shared Technologies or Fairchild, as the case may be) with respect to any
Acquisition Transaction or enter into any agreement, arrangement or
understanding requiring it to abandon, terminate or fail to consummate the
Merger or any other transactions contemplated by this Agreement; provided that
Shared Technologies or Fairchild may, in response to an unsolicited written
proposal with respect to an Acquisition Transaction from a financially capable
third party that contains no financing condition, (i) furnish or disclose
non-public information to such third party and (ii) negotiate, explore or
otherwise communicate with such third party, in each case only if the Board of
Directors of
<PAGE>
such party determines in good faith by a majority vote, after consultation with
its legal and financial advisors, and after receipt of the written opinion of
outside legal counsel of such party that failing to take such action would
constitute a breach of the fiduciary duties of such Board of Directors, that
taking such action is reasonably likely to lead to an Acquisition Transaction
that is more favorable to the stockholders of such party than the Merger and
that failing to take such action would constitute a breach of the Board's
fiduciary duties.
(b) Each of Shared Technologies and Fairchild shall
immediately advise the other in writing of the receipt of any inquiries or
proposals relating to an Acquisition Transaction and any actions taken pursuant
to Section 8.4(a).
8.5 Access to Information.
(a) From the date of this Agreement until the Effective Time,
each of Shared Technologies and Fairchild will give the other party and its
authorized representatives (including counsel, environmental and other
consultants, accountants and auditors) full access during normal business hours
to all facilities, personnel and operations and to all books and records of it
and its subsidiaries, will permit the other party to make such inspections as it
may reasonably require and will cause its officers and those of its subsidiaries
to furnish the other party with such financial and operating data and other
information with respect to its business and properties as such party may from
time to time reasonably request.
(b) Each of the parties hereto will hold and will cause its
consultants and advisors to hold in strict confidence pursuant to the
Confidentiality Agreement dated October 1995 between the parties (the
"Confidentiality Agreement") all documents and information furnished to the
other in connection with the transactions contemplated by this Agreement as if
each such consultant or advisor was a party thereto, and the provisions of the
Confidentiality Agreement shall survive any termination of this Agreement but
will be extinguished at the Effective Time if the Merger occurs.
8.6 Financing. Fairchild will cooperate with Shared
Technologies to assist Shared Technologies in obtaining the financing required
for Shared Technologies to effect the Merger
<PAGE>
(including the funds necessary to repay the indebtedness referred to on Exhibit
9.1 and to pay the amounts owing to the holders of the Series A and Series C
Preferred Stock) (the "Financing"). Immediately prior to the Effective Time,
Fairchild will certify the aggregate amount of accrued and unpaid dividends on
the Series A Preferred Stock and Series C Preferred Stock to be paid by Shared
Technologies pursuant to the Merger.
8.7 Notification of Certain Matters. Shared Technologies or
Fairchild, as the case may be, shall promptly notify the other of (i) its
obtaining of actual knowledge as to the matters set forth in clauses (x) and (y)
below, or (ii) the occurrence, or failure to occur, of any event which
occurrence or failure to occur would be likely to cause (x) any representation
or warranty contained in this Agreement to be untrue or inaccurate in any
material respect at any time from the date hereof to the Effective Time, or (y)
any material failure of Shared Technologies or Fairchild, as the case may be, or
of any officer, director, employee or agent thereof, to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
under this Agreement; provided, however, that no such notification shall affect
the representations or warranties of the parties or the conditions to the
obligations of the parties hereunder.
8.8 Board of Directors of Shared Technologies. The Shared
Technologies Board of Directors shall take such corporate action as may be
necessary to cause the directors comprising its full board to be changed at the
Effective Time to include, subject to the requisite vote of the shareholders of
Shared Technologies, immediately after the Effective Time on the Surviving
Corporation Board of Directors the persons specified pursuant to the
Shareholders Agreement.
8.9 Indemnification.
(a) The Surviving Corporation shall indemnify, defend and hold
harmless the present and former officers, directors, employees and agents of
Fairchild and its subsidiaries against all losses, claims, damages, expenses or
liabilities arising out of actions or omissions or alleged actions or omissions
occurring at or prior to the Effective Time to the same extent and on the same
terms and conditions (including with respect to advancement of expenses)
provided for in Fairchild's Certificate of Incorporation and By-Laws and
agreements in effect at the date
<PAGE>
hereof (to the extent consistent with applicable law); provided that such
actions or omissions or alleged actions or omissions are exclusively related to
the business of the Fairchild Communications Services Company; and, provided,
further, that in no event will this indemnity extend to the transactions
effected pursuant to this Agreement, including but not limited to the Fairchild
Reorganization.
(b) The provisions of this Section 8.9 are intended to be for
the benefit of and shall be enforceable by each indemnified party hereunder, his
or her heirs and his or her representatives.
8.10 Fees and Expenses.
(a) Except as set forth in Section 8.10(b), in the event this
Agreement is terminated, Shared Technologies and Fairchild shall bear their
respective expenses incurred in connection with the Merger, including, without
limitation, the preparation, execution and performance of this Agreement and the
transactions contemplated hereby, and all fees and expenses of investment
bankers, finders, brokers, agents, representatives, counsel and accountants,
except that the fees and expenses of CS First Boston shall be shared equally by
Shared Technologies and Fairchild. If the Merger occurs, then the Surviving
Corporation shall be responsible, and reimburse Fairchild, for all of such
expenses incurred by Shared Technologies and Fairchild in connection with the
Merger (but Fairchild's expenses shall only be borne by the Surviving
Corporation to the extent set forth in Schedule 8.10).
(b) If this Agreement is terminated pursuant to Section
10.1(d), (e) or (h), then Shared Technologies shall promptly, but in no event
later than the next business day after the date of such termination, pay
Fairchild, in immediately available funds, the amount of any and all fees and
expenses incurred by Fairchild (including, but not limited to, fees and expenses
of Fairchild's counsel, investment banking fees and expenses and printing
expenses) in connection with this Agreement, the Merger and the other
transactions contemplated hereby and, in addition, if such termination is
pursuant to Section 10.1(h), a fee of $5,000,000. If this Agreement is
terminated pursuant to Section 10.1(f) or (i) or pursuant to Section 10.1(c)
solely due to the failure of Fairchild to satisfy the condition in Section
9.2(d) or to obtain tenders and
<PAGE>
consents from at least 51% of the outstanding principal amount of Fairchild's 12
1/4% Senior Notes due 1999 as contemplated by Schedule 9.1, then Fairchild shall
promptly, but in no event later than the next business day after the date of
such termination, pay Shared Technologies, in immediately available funds, the
amount of any and all fees and expenses incurred by Shared Technologies
(including, but not limited to, fees and expenses of Shared Technologies'
counsel, investment banking fees and expenses and printing expenses) in
connection with this Agreement, the Merger and the other transactions
contemplated hereby and in addition, if such termination is pursuant to Section
10.1(i), a fee of $5,000,000.
8.11 Post-Merger Cooperation. After the Effective Time, the
Surviving Corporation shall cooperate with RHI and permit RHI to take all
actions (including without limitation the right to endorse checks and enter into
agreements) reasonably required by RHI to allow RHI to assert title (and
prosecute claims against and defend claims brought by third parties), whether in
its own name or in the name of Fairchild, with respect to all assets, claims and
privileges of Fairchild that were owned by it, and defend against all
liabilities and claims attributable to it, in each case, immediately prior to
the Fairchild Reorganization and that did not relate to the telecommunications
systems and service business. After the Effective Time, RHI will cooperate with
the Surviving Corporation and permit the Surviving Corporation to take all
actions (including without limitation the right to endorse checks and enter into
agreements) reasonably required by the Surviving Corporation to allow the
Surviving Corporation to assert title (and prosecute claims against third
parties) whether in its own name or in the name of Fairchild, with respect to
all assets, claims and privileges of Fairchild's telecommunications systems and
service business.
ARTICLE IX
CONDITIONS TO CLOSING
9.1 Conditions to Obligations of Each Party to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the fulfillment or waiver by the Board of Directors of the waiving
party (subject to applicable law) at or prior to the Effective Date of each of
the following conditions:
<PAGE>
(a) Shared Technologies' shareholders shall have duly approved
and adopted the Merger, this Agreement and any other transactions
contemplated hereby which require the approval of such shareholders by
law as required by applicable law;
(b) any waiting period (and any extension thereof) applicable
to the consummation of the Merger under the HSR Act shall have expired
or been terminated;
(c) no order, statute, rule, regulation, executive order,
injunction, stay, decree or restraining order shall have been enacted,
entered, promulgated or enforced by any court of competent jurisdiction
or governmental or regulatory authority or instrumentality that
prohibits the consummation of the Merger or the transactions
contemplated hereby;
(d) all necessary consents and approvals of any United States
or any other governmental authority or any other third party required
for the consummation of the transactions contemplated by this Agreement
shall have been obtained except for such consents and approvals the
failure to obtain which individually or in the aggregate would not have
a material adverse effect on the Surviving Corporation and any waiting
period applicable to the consummation of the Merger under the HSR Act
shall have expired or been terminated;
(e) each of the transactions set forth on the attached
Schedule 9.1 shall have been consummated;
(f) the parties shall have received the written opinion of
Donaldson, Lufkin & Jenrette Securities Corporation or another
investment banking firm of nationally recognized standing selected by
Fairchild that the fair market value of the Preferred Stock is at least
equal to the positive difference between $47.5 million and the value of
the Shared Technologies Common Stock to be received as Merger
Consideration (based upon the closing price thereof on the date
preceding the Effective Time); and
<PAGE>
(g) Mel D. Borer shall have been offered an employment
agreement on terms satisfactory to both Fairchild and Shared
Technologies.
9.2 Additional Conditions to Obligations of Fairchild. The
obligations of Fairchild to effect the Merger shall be subject to the
fulfillment or waiver (subject to applicable law), at or prior to the Effective
Date, of each of the following conditions:
(a) Shared Technologies shall have furnished Fairchild with
certified copies of resolutions duly adopted by its Board of Directors
approving the execution and delivery of this Agreement and the Merger
and all other necessary corporate action to enable Shared Technologies
to comply with the terms of this Agreement;
(b) Shared Technologies shall have performed or complied in
all material respects with all its agreements, obligations and
covenants required by this Agreement to be performed by it on or prior
to the Effective Date, and Shared Technologies shall have delivered to
Fairchild a certificate, dated the Effective Date, of its President and
its Secretary to such effect;
(c) the representations and warranties of Shared Technologies
contained herein shall be true and correct in all material respects on
the date of this Agreement and the Effective Date as though such
representations and warranties were made at and on such date, and
Shared Technologies shall have delivered to Fairchild a certificate,
dated the Effective Date, of its President and its Secretary to such
effect;
(d) Fairchild shall have received a favorable ruling of the
Internal Revenue Service to the effect set forth in Schedule 9.2(d)
hereto;
(e) Shared Technologies shall have amended its Certificate of
Incorporation and Bylaws to the extent set forth in Schedule 9.2(e);
(f) there shall not have occurred since December 31, 1994 any
material adverse change in the business,
<PAGE>
operations, assets, financial condition or results of operations of
Shared Technologies and its subsidiaries taken as a whole;
(g) Shared Technologies shall have executed and delivered a
registration rights agreement in the form of Exhibit D hereto;
(h) Shared Technologies shall have entered into a Tax Sharing
Agreement with RHI in the form of Exhibit E hereto; and
(i) Shared Technologies shall have, prior to the Effective
Time, completed the distribution to its shareholders of all of the
capital stock of Shared Technologies Cellular, Inc. owned by Shared
Technologies and Shared Technologies Cellular, Inc. shall have executed
a non-competition agreement with Shared Technologies, in form and
substance satisfactory to Fairchild.
9.3 Additional Conditions to Obligations of Shared
Technologies. The obligations of Shared Technologies to effect the Merger shall
be subject to the fulfillment or waiver (subject to applicable law), at or prior
to the Effective Date, of each of the following conditions:
(a) Each of TFC, RHI and Fairchild shall have furnished Shared
Technologies with certified copies of resolutions duly adopted by its
Board of Directors approving the execution and delivery of this
Agreement and the Merger and all other necessary corporate action to
enable Fairchild to comply with the terms of this Agreement;
(b) Fairchild shall have performed or complied in all material
respects with all its agreements, obligations and covenants required by
this Agreement to be performed by it on or prior to the Effective Date
and Fairchild shall have delivered to Shared Technologies a
certificate, dated the Effective Date, of its President and its
Secretary to such effect;
(c) the representations and warranties of TFC, RHI and
Fairchild contained herein shall be true and correct in all material
respects on the date of this Agreement and the Effective Date as though
such representations and warranties
<PAGE>
were made at and on such date and Fairchild shall have delivered to
Shared Technologies a certificate, dated the Effective Date, of its
President and its Secretary to such effect;
(d) there shall not have occurred since June 30, 1995 any
material adverse change in the business, operations, assets, financial
condition or results of operations of Fairchild and its wholly owned
subsidiary, VSI, taken as a whole (it being understood that no such
material adverse change shall be deemed to have occurred with respect
to Fairchild and VSI, taken as a whole, if the pro forma consolidated
net worth of Fairchild, as evidenced by a pro forma closing date
balance sheet to be delivered to Shared Technologies on the Effective
Date, is at least $80,000,000); and
(e) RHI, The Fairchild Corporation, D-M-E Inc. and Fairchild
Fasteners Inc. shall have entered into Indemnification Agreements with
Shared Technologies in the forms of Exhibits B1-3 hereto; and RHI shall
have delivered to Shared Technologies an executed Pledge Agreement in
the form of Exhibit C hereto, as well as the Preferred Stock required
to be pledged thereby.
ARTICLE X
TERMINATION
10.1 Termination. This Agreement may be terminated at any
time prior to the Effective Time whether before or after approval by the
stockholders of Shared Technologies:
(a) by mutual written consent of Fairchild and Shared
Technologies;
(b) by Fairchild if RHI has not received within 10 business
days after the date of this Agreement irrevocable proxies from holders
of more than 50% of Shared Technologies common stock (on a fully
diluted basis) agreeing to vote for the Merger; provided, that such
right of termination must be exercised, if at all, within 13 business
days after the date of this Agreement;
<PAGE>
(c) by either Fairchild or Shared Technologies if the
Effective Time has not occurred on or prior to January 31, 1996 unless
the Merger has not occurred at such time solely by reason of the
condition set forth in Section 9.2(d) having not yet been satisfied or
because of the failure of the Securities and Exchange Commission to
give timely approval to the proxy materials for Shared Technologies
shareholders, in which case February 28, 1996 or such other date, if
any, as Fairchild and Shared Technologies shall agree upon, unless the
absence of such occurrence shall be due to the failure of the party
seeking to terminate this Agreement (or its subsidiaries or affiliates)
to perform in all material respects each of its obligations under this
Agreement required to be performed by it at or prior to the Effective
Time;
(d) by either Fairchild or Shared Technologies if, at the
Special Meeting (including any adjournment thereof), the stockholders
of Shared Technologies fail to adopt and approve this Agreement, the
Merger and any of the other transactions contemplated hereby in
accordance with Delaware law;
(e) by Fairchild if Shared Technologies fails to perform in
any material respect any of its obligations under this Agreement;
(f) by Shared Technologies if Fairchild fails to perform in
any material respect any of its obligations under this Agreement;
(g) by Fairchild or Shared Technologies if a court of
competent jurisdiction or a governmental, regulatory or administrative
agency or commission shall have issued an order, decree, or ruling or
taken any other action, in each case permanently restraining, enjoining
or otherwise prohibiting the transactions contemplated by this
Agreement and such order, decree, ruling or other action shall have
become final and nonappealable;
(h) by Shared Technologies if its Board of Directors shall
have withdrawn, modified or amended in an adverse manner its
recommendation of the Merger as a result of its exercise of its
fiduciary duties; or
<PAGE>
(i) by Fairchild if its Board of Directors shall have
withdrawn, modified or amended in an adverse manner its recommendation
of the Merger as a result of its exercise of its fiduciary duties; or
(j) by either Shared Technologies or Fairchild if either of
their respective Board of Directors reasonably determine that market
conditions will not permit the completion of the Financing contemplated
by Section 8.6 in a timely manner or on acceptable terms or it becomes
obvious that the necessary marketing activities or filings necessary
for such Financing have not been completed in a timely manner necessary
to complete the Merger.
10.2 Effect of Termination. In the event of the termination of
this Agreement pursuant to the foregoing provisions of this Article X, this
Agreement shall become void and have no effect, with no liability on the part of
any party or its stockholders or directors or officers in respect thereof except
for agreements which survive the termination of this Agreement and except for
liability that TFC, RHI, Fairchild or Shared Technologies might have arising
from a breach of this Agreement.
ARTICLE XI
SURVIVAL AND INDEMNIFICATION
11.1 Survival of Representations and Warranties. All
representations and warranties made in this Agreement shall survive from the
Effective Time until March 31, 1997 and shall not be extinguished by the Merger
or any investigation made by or on behalf of any party hereto.
11.2 Indemnification by TFC and RHI. Each of TFC and RHI
hereby agrees, jointly and severally, to indemnify and hold harmless Shared
Technologies against any and all losses, liabilities and damages or actions (or
actions or proceedings, whether commenced or threatened) or claims (including,
without limitation, counsel fees and expenses of Shared Technologies in the
event that TFC or RHI fail to assume the defense thereof) in respect thereof
(hereinafter referred to collectively as "Losses") resulting from any breach of
the representations and warranties made by TFC, RHI or Fairchild in this
Agreement;
<PAGE>
provided, however, that TFC's and RHI's obligations under this Section 11.2 is
to the extent that the Losses exceed $4,000,000. Notwithstanding the foregoing,
in no event shall Shared Technologies be entitled to indemnification for, and
the term "Losses" shall not include any consequential damages or damages which
are speculative, remote or conjectural (except to the extent represented by a
successful claim by a third party).
If any action, proceeding or claim shall be brought or
asserted against Shared Technologies by any third party, which action,
proceeding or claim, if determined adversely to the interests of Shared
Technologies would entitle Shared Technologies to indemnity pursuant to this
Agreement, Shared Technologies shall promptly but in no event later than 10 days
from the date Shared Technologies receives written notice of such action,
proceeding or claim, notify TFC and RHI of the same in writing specifying in
detail the basis of such claim and the facts pertaining thereto (but the failure
to give such notice in a timely fashion shall not affect TFC's and RHI's
obligations under this Section 11.2 except to the extent it prejudiced or
damaged their ability to defend, settle or compromise such claim or to pay any
Losses resulting therefrom), and TFC and RHI shall be entitled (but not
obligated) to assume the defense thereof by giving written notice thereof within
10 days after TFC and RHI received notice of the claim from Shared Technologies
to Shared Technologies and have the sole control of defense and settlement
thereof (but only, with respect to any settlement, if such settlement involves
an unconditional release of Shared Technologies and its subsidiaries in respect
of such claim), including the employment of counsel and the payment of all
expenses.
11.3 Indemnification by Shared Technologies. Shared
Technologies hereby agrees to indemnify and hold harmless TFC and RHI against
any and all losses, liabilities and damages or actions (or actions or
proceedings, whether commenced or threatened) or claims (including, without
limitation, counsel fees and expenses of TFC and RHI in the event that Shared
Technologies fails to assume the defense thereof) in respect thereof hereinafter
referred to as the "Shared Technologies' Losses") resulting from the breach of
the representations and warranties made by Shared Technologies in this
Agreement; provided, however, that Shared Technologies' obligation under this
Section 11.3 is to the extent that the Shared Technologies' Losses exceed
$4,000,000. Notwithstanding the foregoing, in no
<PAGE>
event shall TFC or RHI be entitled to indemnification for, and the term "Shared
Technologies' Losses" shall not include any consequential damages or damages
which are speculative, remote or conjectural (except to the extent represented
by a successful claim by a third party).
Shared Technologies at its option may make any indemnification
pursuant to this Section 11.3 in cash or in shares of Common Stock of Shared
Technologies having a fair market value at the time of issuance in an amount
equal to the amount of such loss. In the event that Shared Technologies makes a
payment in cash in fulfillment of its obligation under this Section 11.3, the
term "Shared Technologies' Losses" shall also include the diminution as a result
of such payment in the value of the shares of Common Stock and Preferred Stock
as a result of such payment. In the event that Shared Technologies issues Common
Stock in fulfillment of its obligation under this Section 11.3, the term "Shared
Technologies' Losses" shall also include the diminution as a result of such
issuance in the value of the shares of Common Stock and Preferred Stock of
Shared Technologies owned by RHI prior to such issuance.
If any action, proceeding or claim shall be brought or
asserted against TFC or RHI by any third party, which action, proceeding or
claim, if determined adversely to the interests of TFC or RHI would entitle TFC
or RHI to indemnity pursuant to this Agreement, TFC or RHI shall, promptly but
in no event later than 10 days from the date TFC or RHI receives written notice
of such action, proceeding or claim, notify Shared Technologies of the same in
writing specifying in detail the basis of such claim and the facts pertaining
thereto (but the failure to give such notice in a timely fashion shall not
affect Shared Technologies' obligations under this Section 11.3 except to the
extent it prejudiced or damaged Shared Technologies' ability to defend, settle
or compromise such claim or to pay any Losses resulting therefrom), and Shared
Technologies shall be entitled (but not obligated) to assume the defense thereof
by giving written notice thereof within 10 days after Shared Technologies
received notice of the claim from TFC or RHI to TFC or RHI and have the sole
control of defense and settlement thereof (but only, with respect to any
settlement, if such settlement involves an unconditional release of TFC and RHI
and their respective subsidiaries in respect of such claim), including the
employment of counsel and the payment of all expenses.
<PAGE>
11.4 Set-Off. In the event that either TFC, RHI or Shared
Technologies fails to make any payment required by Section 11.2 or 11.3 hereof,
the party entitled to receive such payment may set off the amount thereof
against any other payments owed by it to the party failing to make such payment.
ARTICLE XII
MISCELLANEOUS
12.1 Closing and Waiver.
(a) Unless this Agreement shall have been terminated in
accordance with the provisions of Section 10.1 hereof, a closing (the "Closing"
and the date and time thereof being the "Closing Date") will be held as soon as
practicable after the conditions set forth in Sections 9.1, 9.2 and 9.3 shall
have been satisfied or waived. The Closing will be held at the offices of Cahill
Gordon & Reindel, 80 Pine Street, New York, New York or at such other places as
the parties may agree. Immediately thereafter, the Certificate of Merger will be
filed.
(b) At any time prior to the Effective Date, any party hereto
may (i) extend the time for the performance of any of the obligations or other
acts of any other party hereto, (ii) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements of any other party or with any conditions to its own obligations
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in writing
duly authorized by and signed on behalf of such party.
12.2 Notices.
(a) Any notice or communication to any party hereto shall be
duly given if in writing and delivered in person or mailed by first class mail
(registered or certified, return receipt requested), facsimile or overnight air
courier guaranteeing next day delivery, to such other party's address.
If to The Fairchild Corporation, RHI Holdings, Inc. or
Fairchild Industries, Inc.:
<PAGE>
300 West Service Road
P.O. Box 10803
Chantilly, VA 22001
Facsimile No.: (703) 888-5674
Attention: Donald Miller, Esq.
with a copy to:
James J. Clark, Esq.
Cahill Gordon & Reindel
80 Pine Street
New York, NY 10005
Facsimile No.: (212) 269-5420
If to Shared Technologies Inc.:
100 Great Meadow Road, Suite 104
Wethersfield, CT 06109
Facsimile No.: (203) 258-2401
Attention: Legal Department
with a copy to:
Walter D. Wekstein, Esq.
Harold J. Carroll, Esq.
Gadsby & Hannah
125 Summer Street
Boston, MA 02110
Facsimile No.: (617) 345-7050
(b) All notices and communications will be deemed to have been
duly given: at the time delivered by hand, if personally delivered; five
business days after being deposited in the mail, if mailed; when sent, if sent
by facsimile; and the next business day after timely delivery to the courier, if
sent by overnight air courier guaranteeing next day delivery.
12.3 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.4 Interpretation. The headings of articles and sections
herein are for convenience of reference, do not
<PAGE>
constitute a part of this Agreement, and shall not be deemed to limit or affect
any of the provisions hereof. As used in this Agreement, "person" means any
individual, corporation, limited or general partnership, joint venture,
association, joint stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof; "subsidiary" of any
person means (i) a corporation more than 50% of the outstanding voting stock of
which is owned, directly or indirectly, by such person or by one or more other
subsidiaries of such person or by such person and one or more subsidiaries
thereof or (ii) any other person (other than a corporation) in which such
person, or one or more other subsidiaries of such person or such person and one
or more other subsidiaries thereof, directly or indirectly, have at least a
majority ownership and voting power relating to the policies, management and
affairs thereof; and "voting stock" of any person means capital stock of such
person which ordinarily has voting power for the election of directors (or
persons performing similar functions) of such person, whether at all times or
only so long as no senior class of securities has such voting power by reason of
any contingency.
12.5 Variations and Amendment. This Agreement may be varied or
amended only by written action of Shared Technologies and Fairchild, before or
after the Special Meeting at any time prior to the Effective Time.
12.6 No Third Party Beneficiaries. Except for the provisions
of Sections 8.9 (which are intended to be for the benefit of the persons
referred to therein, and may be enforced by such persons) and 8.11, nothing in
this Agreement shall confer any rights upon any person or entity which is not a
party or permitted assignee of a party to this Agreement.
12.7 Use of Fairchild Name. RHI hereby grants a royalty free
license in perpetuity to Shared Technologies for the use of the Fairchild name
to Shared Technologies for exclusive use by Shared Technologies as a trade name
in the telecommunications system and services business but not for any other
use. In no event may Shared Technologies assign the right to use the Fairchild
name to any other person.
12.8 Governing Law. Except as the laws of the State of
Delaware are by their terms applicable, this Agreement shall be governed by, and
construed in accordance with, the laws of the
<PAGE>
State of New York without regard to principles of conflicts of laws.
12.9 Entire Agreement. This Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all other prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof.
12.10 No Recourse Against Others. No director, officer or
employee, as such, of Shared Technologies, TFC, RHI or any of their respective
subsidiaries shall have any liability for any obligations of Shared
Technologies, TFC or RHI, respectively, under this Agreement for any claim based
on, in respect of or by reason of such obligations or their creation.
12.11 Validity. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Merger
Agreement to be executed by their duly authorized officers all as of the day and
year first above written.
SHARED TECHNOLOGIES INC.
By: /s/ Anthony D. Autorino
Title: Chairman of the Board,
Chief Executive Officer
and President
FAIRCHILD INDUSTRIES, INC.
By: /s/ Jeffrey J. Steiner
Title: Chairman of the Board,
Chief Executive Officer
and President
THE FAIRCHILD CORPORATION
By: /s/ Jeffrey J. Steiner
Title: Chairman of the Board,
Chief Executive Officer
and President
RHI HOLDINGS, INC.
By: /s/ Jeffrey J. Steiner
Title: Chairman of the Board,
Chief Executive Officer
and President
<PAGE>
Schedule 9.1
The steps comprising the Fairchild Recapitalization are as
follows:
1. Fairchild Industries, Inc., as it exists on the date of the
Merger Agreement ("FII"), will cause Fairchild Communications Services Company,
a Delaware partnership ("FCSC") to merge into FII's wholly owned subsidiary, VSI
Corporation ("VSI").
2. FII will then cause VSI to transfer all of VSI's assets and
liabilities (other than those of the former FCSC, but excluding from those real
estate owned by FCSC, and other than the Assumed Indebtedness described below)
to one or more wholly owned subsidiaries.
3. FII (or Shared Technologies) will make a cash tender offer
to purchase all of the outstanding 12 1/4% Senior Notes due 1999 (the "12 1/4%
Notes") of FII and, in connection therewith, will obtain such Noteholders'
consent (representing at least 51% of the outstanding principal amount of the 12
1/4% Notes) to the transfer by FII of all of the assets of FII (other than the
stock of VSI) to RHI and to amend the indenture under which the 12 1/4% Notes
were issued to remove all covenants which can be amended or deleted by majority
vote. The aggregate amount needed to be paid to consummate such tender offer and
consent solicitation is herein called the "Note Purchase Amount".
4. Prior to the Effective Time, FII will transfer (in one or
more transactions) all of its assets to RHI, and RHI will assume all
liabilities, except for (i) the stock of VSI (which will only have in it the
assets and liabilities of the former FCSC), (ii) the 12 1/4% Senior Notes, (iii)
the Series A and C Preferred Stock and (iv) an amount of bank and other
indebtedness (the "Assumed Indebtedness") equal to $223,500,000 minus (x) the
Note Purchase Amount and (y) $44,237,745 (the aggregate redemption price of the
Series A and C Preferred Stock) plus accrued dividends thereon through the
Effective Time, and RHI will contribute all of the outstanding Series B
Preferred Stock to FII.
5. Concurrently with the consummation of the Merger, the
Surviving Corporation will (i) purchase the 12 1/4% Notes tendered for the Note
Purchase Amount, (ii) repay the Assumed Indebtedness in full and (iii) deposit
in escrow the funds
<PAGE>
necessary to pay the holders of the Series A and Series C Preferred Stock the
amounts owed to them under the Merger Agreement.
<PAGE>
Schedule 9.2(d)
TAX RULINGS REQUESTED BY FAIRCHILD
Fairchild requests the following rulings be issued regarding
the mergers of the three corporate subsidiaries of VSI into VSI:
1. The mergers will qualify as a complete liquidation of each
of the three corporate subsidiaries (FCSII, FCSI, and FCNMC, which are
the partners in FCSC) underss. 332(a) of the Internal Revenue Code of
1986, as amended (the "Code");
2. No gain or loss will be recognized by VSI on its receipt of
the assets from each of the three corporate subsidiaries underss.
332(a);
3. No gain or loss will be recognized by the three corporate
subsidiaries on the distribution of their respective assets to VSI in
complete liquidation underss. 336 andss. 337(a).
Fairchild requests the following rulings regarding the
formation of Subsidiary 1, the distribution of the stock of Subsidiary 1 by VSI
to FII, and the distribution of the stock of Subsidiary 1 by FII to RHI:
4. VSI will recognize no gain or loss on its transfer of
assets (except the Telecommunications business) to Subsidiary 1 in
exchange for common stock of Subsidiary 1 and assumption of liabilities
by Subsidiary 1 (ss.ss. 351 and 357(a) of the Code and Rev. Rul.
77-449, 1977-2 C.B. 110).
VSI's basis in the stock of Subsidiary 1 received in the
transaction will equal the basis of the property transferred in exchange
therefor, reduced by the sum of the liabilities assumed by Subsidiary 1, or to
which assets transferred are taken subject (ss. 358(a) and (d)).
5. Subsidiary 1 will recognize no gain or loss on its transfer
of assets to Subsidiaries 2, 3, 4, 5, 6 and 7 in exchange for the
common stock of Subsidiaries 2, 3, 4, 5, 6 and 7 and the assumption of
liabilities by Subsidiaries 2 to 7 (ss.ss. 351 and 357(a) and Rev. Rul.
77-449).
<PAGE>
Subsidiary 1's basis in the stock of Subsidiaries 2 to 7
received in the transaction will equal the basis of the property transferred to
Subsidiaries 2 to 7, respectively, in exchange therefor, reduced by the sum of
the liabilities assumed by Subsidiaries 2 to 7 or to which assets transferred
are taken subject (ss. 358(a) and (d)).
6. No income, gain or loss will be recognized by Subsidiary 1
upon the receipt of the assets of Fastener and D-M-E businesses, stock
of FDC, plus real estate held for sale in exchange for stock of
Subsidiary 1 and Subsidiary 1's assumption of liabilities (ss.
1032(a)).
7. The basis of the assets received by Subsidiary 1 will be
the same as the basis of such assets in the hands of VSI immediately
prior to the Distribution (ss. 362(b)).
8. No income, gain or loss will be recognized by FII as the
Shareholder of VSI on its receipt of the Subsidiary 1 common stock
pursuant to the Distribution (ss. 355(a)).
9. No income, gain or loss will be recognized by RHI as the
Shareholder of FII on its receipt of Subsidiary 1 common stock pursuant
to the Distribution (ss. 355(a)).
10. No income, gain or loss will be recognized by VSI and FII
upon the distributions to their respective Shareholders of all of the
Subsidiary 1's common stock pursuant to the Distribution (ss. 355(c)).
<PAGE>
Schedule 9.2(e)
The Restated Certificate of Incorporation of Shared
Technologies (the "Certificate") shall be amended in the following manner:
(a) Article Four of the Certificate shall be amended to (i)
increase the authorized common shares of the Corporation, $.004 par value, to
50,000,000 and (ii) to increase the authorized shares of preferred stock of the
Corporation, $.01 par value, to 25,000,000; and
(b) The Certificate shall be amended or a certificate of
designation shall be filed to reflect the terms of the Convertible Preferred
Stock and the [Special] Preferred Stock in form and substance satisfactory to
RHI and consistent with Schedules 3.1 (c) and (b) hereof; and
The Amended and Restated Bylaws of the Corporation (the
"Bylaws") shall be amended in the following manner:
(a) Article II, Section 11 of the Bylaws is deleted in its
entirety and is replaced by the following paragraph:
"No action requiring shareholder approval may be taken without
a meeting of the shareholders entitled to vote thereon."
(b) Article III, Section 1 of the Bylaws shall be amended to
include the following sentences at the end of such section:
"So long as The Fairchild Corporation and its affiliates
(collectively, "TFC") owns 25% or more of the common stock of the Corporation
that TFC owned on the [Date of Merger] TFC shall have the irrevocable right to
appoint four (4) members of the Board of Directors; provided, that so long as
Mel D. Borer is President and a Director of the Corporation, TFC shall only be
entitled to appoint three (3) directors."
"The Board of Directors may not grant any options for, or any
other rights to acquire, common stock of the Corporation, except for options
issued pursuant to a plan approved by the shareholders or in a transaction with
non-affiliates where such party pays cash for such option or right, unless such
transaction is approved by a majority of the shareholders."
<PAGE>
(c) Article III, Section 10 of the Bylaws shall be deleted in
its entirety and replaced with the following paragraph:
"Executive Committee. The Board of Directors of the
Corporation shall have an executive committee consisting of the President, a
director appointed by TFC as long as TFC owns at least 25% of the common stock
of the Corporation that TFC owned on the [Date of Merger], and a third director
appointed by the Board of Directors of the Corporation. All actions taken by the
Executive Committee may only be taken pursuant to a unanimous vote by the
members thereof."
(d) Article III, Sections 11, 12 and 13 shall be amended to
include the following sentence as the second sentence of each such section:
"As long as TFC owns at least 25% of the common stock of the
Corporation, TFC will be entitled to appoint one director to such committee."
(e) Article IV, Section 5 shall be amended to include the
following sentence at the end of such section:
"The Corporation shall have a Vice Chairman of the Board of
Directors who shall have such duties as are designated by the Board of
Directors."
(f) Article IV, Section 6 shall be deleted in its entirety and
replaced with the following paragraph:
"Executive Officers. The Chairman of the Board of the
Corporation shall also be the Chief Executive Officer of the Corporation and
shall be the senior executive of the Corporation and shall have overall
supervision of the affairs of the Corporation. The President of the Corporation
shall also be the Chief Operating Officer of the Company and he shall be
responsible for the day-to-day business operations of the Corporation under the
direction of the Chief Executive Officer. Each of the Chief Executive Officer
and the President shall see that all orders and resolutions of the Board of
Directors of the Corporation are carried into effect, subject, however, to the
right of the Board of Directors to delegate any specific powers, except as may
be exclusively conferred on the President by law, to the Chairman or any other
officer of the Corporation. Each of
<PAGE>
the Chief Executive Officer and the President may execute bonds, mortgages, and
other contracts requiring a signature under the seal of the Corporation.
(g) Article VIII, Section 1 shall be deleted in its entirety
and replaced with the following paragraph:
"By Directors or Shareholders. The bylaws of the Corporation
may be altered, amended or repealed at any validly called and convened meeting
of the shareholders by the affirmative vote of the holders of a majority of the
voting power of shares entitled to vote thereon represented at such meeting in
person or by proxy and at any validly called and convened meeting of the board
of directors by the affirmative vote of at least a majority of the directors
(unless such alteration, amendment or repeal in any way adversely affects the
rights granted to TFC hereunder or in Article II, Section 11, Article III,
Section 10 or Article IV, Section 6 of these bylaws, in which event a vote of
80% of the directors shall be required); provided, however, that the notice of
such meeting shall state that such alteration, amendment or repeal will be
proposed."
<PAGE>
FIRST AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
This FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER dated as of
February 2, 1996 ("First Amendment") is made by and among Fairchild Industries,
Inc., a Delaware corporation ("Fairchild"), RHI Holdings, Inc., a Delaware
corporation ("RHI"), The Fairchild Corporation, a Delaware corporation ("TFC"),
and Shared Technologies Inc., a Delaware corporation ("Shared Technologies"),
amending certain provisions of the Agreement and Plan of Merger dated as of
November 9, 1995, including the exhibits and schedules thereto (the "Merger
Agreement") by and among Fairchild, RHI, TFC and Shared Technologies. Terms not
otherwise defined herein which are defined in the Merger Agreement shall have
the same respective meanings herein as therein.
WHEREAS, Fairchild, RHI, TFC and Shared Technologies have agreed to
modify certain terms and conditions of the Merger Agreement as specifically set
forth in this First Amendment.
NOW THEREFORE, in consideration of the premises and mutual agreements
contained herein and for other good and valuable consideration the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
ARTICLE I
AMENDMENTS TO MERGER AGREEMENT
1.1 References to the distribution of shares of Shared Technologies
Cellular Inc. shall be deleted from sections 5.7(b) and 7.1(c) and in Section
5.5 of the Disclosure Statement.
1.2 Section 6.19 of the Merger Agreement is hereby amended by deleting
the provisions of clause (ii) thereof and by inserting therefor the following:
"(ii) all material Taxes of Fairchild and its subsidiaries in respect
of the pre-Merger period (including but not limited to Taxes
attributable to the Fairchild Reorganization) have been paid in full to
the proper authorities, other than such Taxes as are being contested in
good faith by appropriate proceedings and/or are adequately reserved
for in accordance with generally accepted accounting principles;"
1.3 The first sentence of ss.8.1(c) of the Merger Agreement is hereby
deleted in its entirety.
<PAGE>
1.4 The last sentence of ss.8.2(a) of the Merger Agreement is hereby
deleted in its entirety and replaced with the following:
"Shared Technologies shall cause Shared Technologies Cellular, Inc.
("STCI") to enter into an agreement preventing STCI from competing in
the telecommunications systems and service business."
1.5 Section 9.1(f) shall be amended to state "43.5" in place of "47.5".
1.6 Section 9.1 shall be amended to replace the references to
"Recapitalization" with "Reorganization."
1.7 Section 9.2(d) of the Merger Agreement and Schedule 9.2(d) of the
Merger Agreement shall be deleted in their entirety.
1.8 Schedule 9.2(e) shall be amended by adding to the end thereof the
following:
"(h) Article III, Section 20 shall be amended to include the following
language at the end of such section:
'; provided that in no event shall the board authorize or permit to be
issued any preferred or special class of shares which are entitled to
more than one vote per share or authorize or permit to be issued any
additional shares of the Corporation's Series C Preferred Stock, in
each case without the affirmative vote of 80% of the directors.' "
1.9 Section 9.2(i) is hereby deleted in its entirety and replaced with
the following:
"STCI shall have executed a non-competition agreement with Shared
Technologies in form and substance satisfactory to Fairchild."
1.10 The "and" at the end of ss.9.3(d) of the Merger Agreement shall be
deleted.
1.11 The following is added as new ss.9.3(e) of the Merger Agreement
and existing Section 9.3(e) of the Merger Agreement is renumbered as ss.9.3(f):
"(e) TFC and RHI shall have entered into a Tax Sharing
Agreement with Shared Technologies in the form of Exhibit E hereto; and
1.12 The reference to the entities "D-M-E, Inc." and B-3 and "Fairchild
Fasteners, Inc." in ss.9.3(f) (formerly ss.9.3(e)) of the Merger Agreement shall
be deleted and replaced with the entity "Fairchild Holding Corp." and the
reference to "B-1, B-2 and B-3" shall be replaced by "B-1 and B-2."
1.13 Section 10.1(c) shall be deleted in its entirety and replaced with
the following:
"by either Fairchild or Shared Technologies if the Effective Time has
not occurred on or prior to March 8, 1996 or such other date, if any,
as Fairchild or Shared Technologies shall agree upon, unless the
absence of such occurrence shall be due to the failure of the party
seeking to terminate this Agreement (or its subsidiaries or affiliates)
to perform in all material respects each of its obligations under this
Agreement required to be performed by it at or prior to the Effective
Time."
-2-
<PAGE>
ARTICLE II
AMENDMENTS TO INDEMNIFICATION AGREEMENTS
(EXHIBITS B-1 through B-3)
2.1 The first sentence of Section 1 of the Indemnification Agreement
set forth as Exhibit B-1 to the Merger Agreement is hereby amended by adding the
clause "and including all Taxes (including but not limited to Taxes related to
the Fairchild Reorganization)" after the first reference to "Merger Agreement"
therein.
2.2 The first sentence of Section 1 of the Indemnification Agreement
set forth as Exhibit B-2 to the Merger Agreement is hereby amended by adding the
clause "and including all Taxes (including but not limited to Taxes related to
the Fairchild Reorganization)" after the reference to "Merger Agreement"
therein.
2.3 All references to "Fairchild Recapitalization" in the
Indemnification Agreements set forth as Exhibits B-1 and B-2 to the Merger
Agreement are hereby deleted and replaced with the defined term "Fairchild
Reorganization."
2.4 All references to the entity "Fairchild Fasteners, Inc." in the
Indemnification Agreement set forth as Exhibit B-2 to the Merger Agreement are
hereby deleted and replaced with the entity "Fairchild Holding Corp." and all
references to the defined term "Fasteners" in the Indemnification Agreement set
forth as Exhibit B-2 to the Merger Agreement are hereby deleted and replaced
with the defined term "FHC".
2.5 All references to "Shared Technologies" in ss.1 of the
Indemnification Agreements set forth as Exhibits B-1 and B-2 shall include, and
shall be deemed to include for all purposes set forth in ss.1, all subsidiaries
of Shared Techologies Inc.
2.6 Exhibit B-3 shall be deleted in its entirety.
ARTICLE III
AMENDMENTS TO PLEDGE AGREEMENT
(EXHIBIT C)
3.1 The Pledge Agreement as set forth as Exhibit C to the Merger
Agreement is amended by deleting all references to "D-M-E Inc." and "Fairchild
Fasteners, Inc." and substituting therefor "Fairchild Holding Corp."
ARTICLE IV
AMENDMENTS TO TAX SHARING AGREEMENT
(EXHIBIT E)
4.1 The Tax Sharing Agreement as set forth as Exhibit E to the Merger
Agreement is hereby deleted and the Tax Sharing Agreement as attached hereto as
Exhibit E (Restated) is substituted therefor.
ARTICLE V
PROVISIONS OF GENERAL APPLICATION
5.1 Except as otherwise expressly provided by this First Amendment, all
of the terms, conditions and provisions to the Merger Agreement remain
unaltered. The Merger Agreement and this First Amendment shall be read and
construed as one agreement.
-3-
<PAGE>
5.2 If any of the terms of this First Amendment shall conflict in any
respect with any of the terms of the Merger Agreement, the terms of this First
Amendment shall be controlling.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to be executed by their duly authorized officers all as of the day and year
first above written.
SHARED TECHNOLOGIES INC. THE FAIRCHILD CORPORATION
By:/s/ Vincent DiVincenzo By:/s/ Donald E. Miller
---------------------- --------------------
Vincent DiVincenzo Donald E. Miller
Senior Vice President- Senior Vice President
Finance and Administration,
Treasurer and Chief Financial
Officer
FAIRCHILD INDUSTRIES, INC. RHI HOLDINGS, INC.
By:/s/ Donald E. Miller By:/s/ Donald E. Miller
-------------------- --------------------
Donald E. Miller Donald E. Miller
Vice President Vice President
ACCEPTED AND AGREED TO BY:
FAIRCHILD HOLDING CORP.
By:/s/ Donald E. Miller
--------------------
Donald E. Miller
Vice President
-4-
<PAGE>
EXHIBIT B
S.G. WARBURG S.G. Warburg & Co., Inc.
277 Park Avenue, New York, NY 10172
Telephone: (212) 224-7000
Telex: 170984
Facsimile: (212) 224-7019
November 9, 1995
Board of Directors
Shared Technologies Inc.
100 Great Meadow Road, Suite 104
Wethersfield, Connecticut 06109
Gentlemen and Madam:
We understand that Shared Technologies Inc. ("Shared Technologies" or the
"Company"), The Fairchild Corporation ("TFC"), Fairchild Industries, Inc. and
its wholly owned subsidiary, VSI Corporation, (collectively "Fairchild") and RHI
Holdings Inc. ("RHI") propose to enter into an Agreement and Plan of Merger
dated as of November 9, 1995 (the "Merger Agreement"). The terms of the Merger
Agreement provide, among other things, that Fairchild shall be merged with and
into Shared Technologies (the "Merger") and that Shared Technologies as the
corporation surviving the Merger shall change its name to Shared Technologies
Fairchild Inc. ("Shared Technologies Fairchild"). In consideration for acquiring
the shares of Fairchild: (i) Shared Technologies will issue to RHI $25 million
in convertible preferred shares; (ii) Shared Technologies will issue to RHI 6.0
million common shares; (iii) cash proceeds of $223.5 million will be made
available to Fairchild through the issuance by Shared Technologies Fairchild of
various debt instruments; and, (iv) Shared Technologies will issue to RHI
Special Preferred Stock with an initial liquidation preference of $20 million,
together the "Merger Consideration". The terms and conditions of the merger and
the Merger Consideration are more fully set forth in the Merger Agreement.
You have requested our opinion as to the fairness, from a financial point of
view, to Shared Technologies of the consideration to be paid by Shared
Technologies in exchange for the shares of Fairchild pursuant to the Merger
Agreement.
For purposes of the opinion set forth herein, we have among other things:
(i) reviewed the consolidated financial statements of recent years of The
Fairchild Corporation and
<PAGE>
Fairchild Industries, Inc. as filed with the Securities and Exchange
Commission;
(ii) reviewed certain audited financial statements of Fairchild
Communications Services Company ("FCS") for the three years ended June
30, 1995;
(iii) reviewed certain audited financial statements for Shared Technologies
for the three years ending December 31, 1994 and more recent unaudited
financial information (including that for the six months ended June 30,
1995);
(iv) reviewed certain internal financial statements relating to Shared
Technologies prepared by the management of Shared Technologies and
certain internal financial statements relating to FCS prepared by the
management of FCS;
(v) reviewed certain financial projections of Shared Technologies and FCS
prepared by their respective management;
(vi) discussed the past and current operations and financial condition and
prospects of Shared Technologies and FCS with their respective senior
management;
(vii) analyzed the pro forma impact of the merger on Shared Technologies;
(viii) reviewed certain financial and stock market information of certain
companies we deemed appropriate in analyzing Shared Technologies and
FCS, as well as the financial terms of certain other related
transactions;
(ix) participated in selected discussions and negotiations among
representatives of Shared Technologies and FCS and their respective
advisors;
(x) reviewed the Merger Agreement, the Shareholders' Agreement, the
Registration Rights Agreement and other relevant documentation
concerning the transaction; and
(xi) performed such other financial studies, analyses and examinations and
considered such other factors as we deemed relevant.
We have assumed and relied upon, without independent verification, the accuracy
and completeness of the information reviewed by us for purposes of this opinion.
With respect to
<PAGE>
the financial projections relating to Shared Technologies and FCS used in our
analyses, we have assumed that they have been reasonably prepared on a basis
which reflects the best currently available estimates and judgments of Shared
Technologies' and FCS's management, respectively, as to the future financial
performance of their respective companies. Our opinion also incorporates
management's expectations of the projected synergies to be realized as a result
of the Merger. We have not prepared any independent valuation or appraisal of
the assets of Shared Technologies or FCS.
Our opinion is necessarily based on the economic, market, and other conditions
in effect on, and the information made available to us as of, the date hereof.
Our opinion does not address the matter of indemnification provided to Shared
Technologies by TFC, RHI and their respective affiliates.
S.G. Warburg & Co. Inc. is acting as financial advisor to Shared Technologies in
connection with this transaction and will receive a fee for its services.
Based upon and subject to the foregoing, it is our opinion as investment bankers
that as of the date hereof, the consideration offered to RHI is fair, from a
financial point of view, to Shared Technologies.
Very truly yours,
S.G. WARBURG & CO. INC.
By: By:
/s/ James M. Stewart /s/ David M. Cohen
Name: James M. Stewart Name: David M. Cohen
Title: Managing Director Title: Managing Director
<PAGE>
SHARED TECHNOLOGIES INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
March 4, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Anthony D. Autorino and Vincent DiVincenzo, or
either of them, as proxies, each with the power to appoint his substitute, and
hereby authorizes them to represent and to vote all the shares of common stock,
par value $.004, (the "Common Stock") of Shared Technologies Inc. ("STI") held
of record by the undersigned on February 1, 1996 at the Special Meeting of
Stockholders to be held on March 4,1996 or any adjournment or adjournments
thereof, upon all matters set forth in the Notice of Special Meeting of
Stockholders and Proxy Statement dated February 12, 1996, a copy of which has
been received by the undersigned, as follows:
1. To approve (i) the merger of Fairchild Industries Inc. with and into
STI pursuant to the terms of an Agreement and Plan of Merger, dated as
of November 9, 1995 as amended by that certain Amendment dated February
2, 1996 (the "Merger Agreement") and (ii) amendments to the
Restated Certificate of Incorporation of STI as required by the Merger
Agreement as a condition to the Merger to:
(a) increase the authorized Common Stock, $.004 par value of STI
from 20,000,000 to 50,000,000;
(b) increase the authorized shares of preferred stock, $.01 par
value, of STI from 10,000,000 to 25,000,000; and
(c) change the name of STI to "Shared Technologies Fairchild Inc."
|_| FOR |_| AGAINST |_| ABSTAIN
2. Grant authority to vote upon such other matters as may properly come
before the Special Meeting as Anthony D. Autorino and Vincent
DiVincenzo determine are in the best interest of the Company.
|_| FOR |_| AGAINST |_| ABSTAIN
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of Stockholders and Proxy Statement. Any proxy heretofore given to
vote said Common Stock is hereby revoked. The undersigned hereby ratify and
confirm all that said proxy or any of their substitutes may lawfully do by
virtue hereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED. IF NO DIRECTION IS GIVEN, THIS
PROXY WILL BE VOTED "FOR" EACH OF THE MATTERS STATED.
<PAGE>
Please be sure to complete, sign and date this Proxy and return it in
the enclosed envelope. If acting as an executor, administrator, trustee or
guardian, you should so indicate when signing. If the signer is a
corporation, please sign the full corporate name, by a duly authorized
officer. If Common Stock is held jointly, each Stockholder should sign.
Date:___________________
________________________________ __________________________
SIGNATURE CO-OWNER SIGN HERE
